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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Back into Equities, using ETFs

At the end of March I decided to sell some of my equities and raise cash, also referred to as sell in May and go away.  Summer is over and I think it’s time to buy equities again.  But what to buy?

In May I assessed the performance of my investments during the prior 12 months.  The (rather unsatisfactory) conclusion was that my portfolio had under-performed a simple portfolio of four ETFs: US equities; Canadian equities; bonds and gold.  Accordingly, as I get back into equities I have decided to augment my existing stocks with two iShares ETFs: iShares Core S&P 500 ETF (IVV) and iShares S&P/TSX 60 Index Fund (XIU.TO).

  • BUY IVV @ $147.10
  • BUY XIU.TO @ $17.95

Let’s see if they outperform my equities, which remain:

  • Apple
  • Intel
  • BMO
  • Power Corp
  • Canadian Oil Sands
  • Telus

POSTMORTEM

Writing today, 21st October, this trade looks like a bad call.  IVV is $143.86 (down 2.2%) and XIU.TO is at $17.82 (down 0.7%).

As can be seen in the chart (below) it has been a very volatile month for these ETFs.

Nasty Start to June

The TSX (^GSPTSE) closed at 11,513 at the end of May.  Since then it has fallen 2.7% in one and a half days of trading to 11,212.

The causes are reported as:

  • Weak May 2012 jobs report; and
  • Continued debt issues in Europe (the focus is moving from Greece to Spain).

Oil prices have slumped, gold is up, and stocks are down around the world.  This Summer is starting to feel like 2012.  Again, selling in May is looking good.

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Portfolio Update – Down 0.8% in May 2012

My portfolio balances at close of trading on 31st May were:

Ticker Price (C$) Price Change Percentage Industry
T.TO $ 60.12 1.37% 6.1% Telecommunications
COS.TO $ 20.09 -7.97% 4.4% Energy
PHY-U.TO $ 13.72 -2.19% 5.4% Gold
POW.TO $ 22.92 -16.20% 4.0% Financials
SJR-B.TO $ 19.75 -3.00% 3.7% Consumer Discretionary
TA.TO $ 16.85 2.87% 8.1% Utilities
AAPL $ 596.83 3.40% 5.6% Information Technology
S&P Fund $ 113.34 -1.47% 18.8% US Equity Fund
Bond Fund $ 221.45 2.12% 25.4% Bond Fund
Cash 18.5% Cash
Total 100.0%

Overall my portfolio is down 0.12% since last month, including cash contributions. Without these cash contributions the portfolio would be down 0.80%.  For comparison my TI Index is down 4.13%, the DOW is down 6.21% and the TSX is down 6.34%.

My investments have done very well compared with the TI Index, the TSX, and the DOW.  Winners this month include TransAlta (TA.TO) and bonds. Losers were Power Corp (POW.TO), Canadian Oil Sands (COS.TO) and Shaw (SJR-B.TO).

My bond holdings are at 25.4%, which is acceptably close to my target of 25%. No rebalancing is required this month.

My cash is at 18.5%, which is lower than my target of 25%.  This is because I purchased Apple (AAPL) today.  I am OK with this level of cash (i.e. I don’t want to sell anything right now) and I expect to put most of this cash to work after the summer (sell in May and…).

Sell in May and Run Away!

The first half of this month has been terrible: sell in May and run away!  The Dow (^DJI) is down 5% and the TSX (^GSPTSE) is down a whopping 8% in only 13 days of trading.

My portfolio has fared quite well.  It is down only 1.4% at this point.  I owe my capital preservation to my bonds (up 1%) and my well chosen stocks.

I sold Apple (AAPL) and Enerplus (ERF.TO) last month.  They are down 12% and 22% respectively since I sold them.  Those might be the best two trades I have made yet, netting me an avoided loss of an average of 17% in just a month!  I will do a more detailed analysis of winners and losers at the end of the month.

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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%