Greek Tragedy returns

I write back in May 2012 about Greece’s debt problems, its political problems, the potential for these driving Greece out of the Euro. Well, three years later and that fear is back. Greece missed a repayment to the IMF and, while this is not technically a bankruptcy, it is close. Emergency talks are taking place in Europe to cobble together a bailout but many of the major European countries are playing hardball with Greece. All of this is roiling the markets. My EAFE ETF is worst hit, down over 6% in a month.

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Taking a position in Barrick Gold

Gold is down 4% today and the Gold Miners down even more.  The sell-off was initiated by stories out of Europe that Cyprus would be forrced to sell 40t of gold to fund its bailout, and that other European countries might follow suit.  Barrick Gold (ABX.TO) is down 7.6% today.  I am betting on a reversal and think that this is a good entry point.

  • BUY ABX.TO @ $23.10

POSTMORTEM

Writing today, 15th April, this has been a terrible trade.  ABX.TO has been down up to 12% this morning.  Normally I would sell a speculative stock if it fell by 5% since purchase but there was no such opportunity here as ABX.TO opened down 7%.  I sold at an 11% loss.

  • SELL ABX.TO @ $20.57

UPDATE

Writing a month later, on 17th May, selling this stock was a good move.  The stock closed at %18.58 today.

The Fiscal Cliff

A new monster is stalking Wall Street: The “Fiscal Cliff”!  Run!!

I’ve heard it said that the boom-bust nature of financial markets and economies is a symptom of the human condition: people get greedy and then they get scared.  Well it seems that politicians have their own cycle, not boom-bust but crisis-solution.

The latest incarnation of this is the Fiscal Cliff, an entirely man-made crisis in which US politicians created a economic poison pill to persuade themselves to reduce the national debt through increases in taxes and/or reduction in government spending.  Did I mention that they did this to themselves?

After Barack Obama won the US presidential election on 4th November the markets fell on “Fiscal Cliff fears”.  Today, Obama met with senior Republican John Boehner and, because the meeting seemed to be cordial, markets are up.  It’s crazy, and it feels manufactured.

Running an economy is pretty simple: don’t spend more than you earn.  And never forget that borrowing creates more costs.

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Taking profit on Power Corporation and topping up on Apple

Power Corp. (POW.TO) is up 8% since I topped up in July at $22.82.  Coincidentally, Apple is down around 9.6% since I took profits at $650.01 in August.  This offers a great opportunity to take profits on Power Corp. and use the funds to top up on Apple.  Normally I would prefer to wait until these stocks has risen/fallen by 10 %, rather than 8 and 9.6%, but this convergence of advance and decline is too useful to ignore and might not last for long.

  • SELL POW.TO @ $24.64
  • BUY AAPL @ $587.49

The main risk to this trade is that Apple will fall further and that I’m buying too high.  I discussed the technical issues that drive this risk yesterday.  I don’t normally do a postmortem when I trade around (I normally do a “one month later” postmortem on core position trades) but this trade is interesting and is worth validating in a week or so.

POSTMORTEM

Wow!  What a week.  Apple closed today, Friday 9th, at $547, down $40 (or 6.8%) since I topped up last week.  There are a few factors:

  • Apple went ex-dividend on 7th November, which should have reduced it’s value by ~0.5%
  • There are doubts about Apple’s product roadmap and the success of the recently introduced iPad mini
  • The re-election of Barack Obama has lead investors to become concerned about a possible increase in capital gains taxes caused by the US’ Fiscal Cliff*, which has caused investors to take their capitals gains now, while taxes are lower

Power Corp closed today at $24.65; basically the same price at which I sold it.  Overall, this was a bad call.  I should have waited for Apple to go lower before buying.  I did identify this as the main risk of the trade, but I failed to be patient.

*The Fiscal Cliff issue relates to the solution to the debt crisis of 2011.  The solution in 2011 was to kick the can down the road until after the 2012 presidential election, and now it raises its ugly head again.

UPDATE

Another wild week!  On Friday 16th, Apple saw an intra-day low of $505.75 (down 14%) before closing at $527.68.  Writing this morning, on Monday 19th, the stock is up to $559 (up 11% since Friday’s low, but still down 5% from this trade).  Buying Apple at $587.49 was premature and expensive, but it might still prove to be a profitable trade.

Power Corp is at $24.30, down 1.4% since I sold it on 2nd November.  So that part of the trade is looking OK.

Moving into Europe

I currently have around 20% of my portfolio invested in an S&P500 fund.  The fund is doing well and I expect it to do well through the end of the year.  However, European and other global indices have lagged the US this year by a large margin: US  stocks are up around 16.7% while Europe, Australia and Far East (EAFE) stocks are up only around 8.6% (see chart).

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I think that fears about a Euro-zone meltdown are receding now and we can expect some acceleration in European and other global stock markets.  Accordingly I am moving half of my S&P fund holdings to a EAFE fund to gain exposure to non-US stocks.

  • SELL S&P Fund @ $119.6038
  • BUY EAFE Fund @ $86.5027

The EAFE fund’s top holdings are:

  • Nestle
  • HSBC Holdings PLC
  • Vodafone Ag
  • Novartis AG
  • BP
  • Royal Dutch Shell PLC
  • Roche Holding AG
  • GlaxoSmithKline PLC
  • Toyota Motor Corp
  • Total SA

POSTMORTEM

Writing today, 14th October, this looks like a good call.  The EAFE fund is at $85.9862 (down 0.6%) while the S&P fund is at $117.6261 (down 1.7%).  Moving money from the S&P fund to the EAFE fund has preserved more capital (1.1% more).

Greek Tragedy

Here we go again.  Europe’s debt problems (spending more money that you earn) caused significant problems in North American markets last year.  Many American and Canadian banks and insurers have investments either directly in European sovereign debt, or in European banks and other companies with such exposure.  The problem was acute in the fall of 2011 but seemed to subside in January 2012.  A deal was struck for investors in Greek bonds to take a haircut, and an austerity program was agreed with European lenders to rebalance Greece’s deficit over the next few years.

Now there are more problems.  Well, actually it’s the same problem really.  On 6th May, Greek electors threw their Government out (as did France) and voted for a mosaic of parties, including extreme left and right wing parties.  Some of these parties are opposed to the austerity program.   This mosaic has been unable to form a Government.  There is now open speculation that Greece will need to leave the Euro.

North American markets are down on these developments.  When markets closed on the Friday before the election the TSX (^GSPTSE) was at 11,871.23.  When markets closed the following Friday the TSX was at 11,694.67: down 1.5%.  Selling in May and going away is looking like a smart move for a third year in a row.

Raising Cash – Sell in May and Go Away

In the past two years the market has performed well in the first three months of the year, and poorly in the summer. This is referred to as sell in May and go away. I discussed this in May 2011, but did not act upon it. In the first 3 months of 2012 we have seen the TSX rise by 3.8% and the DOW by 7.6%. These are heathy gains.

In both 2010 and 2011 the market turned down in mid to late April. I want to reduce my exposure now by selling stocks and raising cash. So, which stocks should I sell?

I began my assessment with two basic principles (based upon my investment policy):

  • Fundamentals: I assessed earnings and earning growth (based upon analyst estimates for 2012-2014), dividend yield and coverage, PE Ratio, PEG Ratio and the Gordon Return.
  • Diversification: I don’t want to hold too many stocks in one sector, e.g. Finance (Banking and Insurance), Energy (Oil and Pipeline), Telco, etc.

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Assessment of Energy Stocks:

  • Enerplus looks good. Dividend yield is strong at 9.6% (with coverage of 141%). HOLD
  • Canadian Oil Sands looks OK, but earnings growth is quite low (less than 6%) and the dividend is smaller than Enerplus’ dividend. HOLD
  • TransCanada has marginal earnings growth of around 7%, a high PE Ratio of 18.2, and a high PEG Ratio of 2.6. It looks overpriced. SELL

Assessment of Financial Stocks:

  • PowerCorp has great growth of around 12%, a decent dividend of 4.4% and a PEG under 0.9. It looks good. HOLD
  • Sun Life has low earnings growth of 5%, and a PEG of 1.8. Power is better in every measure. SELL
  • Royal Bank has a low dividend (under 4%, but with excellent coverage over 200% – needs to pay out more), marginal growth around 7%, and a high PEG of 1.6. SELL

Assessment of Telcos:

  • Telus has decent growth of over 9% and the other fundamentals are good (PEG is a bit high). HOLD
  • BCE has low growth of under 4% and a PEG of 3.3, which is highest in the portfolio. SELL

Other Stocks:

  • Shaw is another low growth (5%) and high PEG (2.38) stock, like BCE. It will lose revenue as people switch from cable TV to internet TV (e.g., Netflix, AppleTV, other internet TV services) but should compensate with its cable-based high-speed internet services and telephone. HOLD
  • TransAlta is the only stock with a dividend coverage of under 100% (it’s 95%) but it has decent earnings growth of 9%. Price is down recently, making it good value at this point. HOLD
  • Apple is scary due to high price increase, but fundamentals are good: 14% growth, PEG under 1, and a dividend announced. HOLD but watch for price to fall back into long-term channel.

Other assets:

  • Gold is around 5.7% of the portfolio. This is fine. HOLD

After discussion with my financial advisor I decided to sell TransCanada Pipeline, Royal Bank, Sun Life and BCE.

  • Sell SLF.TO @ $23.78
  • Sell RY.TO @ $58.13
  • Sell BCE.TO @ $40.00
  • Sell TRP.TO @ $43.00

Note: Three of these four sell orders were processed on 29th March. The TRP order did not process until 2nd April (it was a limit order). So, TRP appears in the March month-end holdings.

I also decided to increase my holdings of TransAlta. The business is very stable and the dividend yield is over 6%, making this a better place to park my cash than in cash. This purchase also happened after the month end.

  • Buy TA.TO @ $18.45

The net result of these trades is that my asset allocation will be:

  • 25% cash
  • 30% bonds
  • 6% gold
  • 39% stocks

POSTMORTEM

Writing one month later, on 27th April 2012, this trade has seen mixed results. Since selling on 29th March the TSX (^GSPTSE) has gone down 1.5%, so my call was good.

But the stocks I sold are up 0.2% on average, so my call was bad?  Let’s wait to see how things go over the summer before we make a final judgement.

Ticker Sell price Current price Change
TRP.TO $43 $43.19 0.44%
SLF.TO $23.78 $24.36 2.44%
BCE.TO $40 $39.93 -0.18%
RY.TO $58.13 $57.03 -1.89%
Average 0.20%

I also bought more TransAlta (TA.TO) stock, which is down 12% during the month. This was a bad call!  Very candidly, I did not want to buy more TransAlta but was persuaded to do so by my financial adviser.  I need to listen to my intuition more, and push back.

UPDATE

Writing today, 28th May, the decision to raise cash is looking better and better.  North American markets continue lower on European Debt worries.  The stocks I sold are now down an average of 6.34%, led by financials.

Ticker Sell price Current price Change
TRP.TO $43 42.01 -2.30%
SLF.TO $23.78 21.15 -11.06%
BCE.TO $40 40.5 1.25%
RY.TO $58.13 50.43 -13.25%
Average -6.34%

UPDATE

Writing today, 10th July, this decision is still looking good.  The stocks are still down an average of 2.22% and I think there could be more trouble ahead (August was horrible last year).

Ticker Sell price Current price Change
TRP.TO $43 43.34 0.79%
SLF.TO $23.78 22.14 -6.90%
BCE.TO $40 42.64 6.60%
RY.TO $58.13 52.69 -9.36%
-2.22%