The bank of Canada today cut its Economic outlook. Here's the just of it
“Uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment, leaving the level of economic activity lower than the bank had been expecting".
They downgraded their outlook for Canadian and US growth next year. They said the threat of deflation is now greater than inflation and Canada would not be operating at full production untill the end of 2015 which is another way of saying they don't seen any inflationary pressures building. As a result they dropped the "were gonna raise interest rates soon" threat they had been making for over a year, which I and probably a lot of others knew was bogus as they are pretty much handcuffed until the US moves first.
This BOC statement says a lot. It's LT bullish for the market for it shows that we are nowhere close to seeing the classic signs of peak. Towards the end of an economic expansion and thus bull market, the outlook from central banks and people in general is rosy, not sour like this. More importantly, near the peak we start to see signs of "overheating" which results in rising inflation to the point where it becomes a concern for central banks and they respond by tightening interest rates. When they tighten to the point where the yield curve gets inverted it sows the seeds for the next recession. We are nowhere close to overheating as there remains a large output gap as BOC noted and money is far from being tight - it's at the opposite extreme.
Now, just because monetary and economic conditions are still bull market friendly does not mean the market can't have serious corrections. We saw such in 2010 and 2011. What it does mean is that you should continue to be a LT optimist and continue to look for long opportunities while ignoring the doom and gloomers. Of course, you should be mindful of corrections and not get greedy after the market has had such a large run. After all, big corrections do hurt and there's no guarantee that the bull market can't end until monetary conditions are tight. Trim into strength, raise cash, hedge if you must but don't put yourself in a position where you are net short. Always remember though that trends will always surprise people in their strength and duration and so very, very few people fully capitalize as they tend to get out too early. Even those broken clock bears who were right in being negative in 2008 did not come close to fully profiting from the collapse as most covered shorts around 1100 (according to my anecdotes).
Wednesday, October 23, 2013
Monday, October 21, 2013
The main purpose of the stock market is...
Surprise, surprise, the fear mongering over the government shutdown and debt ceiling turned out to be yet another non-event. I'll refrain from saying I told you so....oops I just did. Despite a "crisis" being avoided and the market hitting a fresh all time high, there is no joy out there. The media dismisses this deal as a band-aid solution and is hand wringing about how we will have to face the same political bickering early next year.
I've been involved in the stock market (at various degrees) for about 15 years now and I think I can say I've seen it all. From extreme euphoria in 2000 to extreme pessimism in 2009 and everything in between. I have learned a great deal during these 15 years both from experience and the wisdom of others. One of the most important lessons/truisms I've learned about the market is the motto of this blog. Take for instance this bull market we've been in. Over the past few years how many books, experts, articles in the business section, ect, suggested that you be an optimist about equities and load up? Instead, all the focus was on sovereign debt worries, slow economic growth, high unemployment, fed manipulation, ect, all of which suggested you stay away from equities. How profitable was it to listen to this message? And yet despite the market hitting all time highs, there is still a considerable resistance towards embracing any LT optimistic posture. The doomsdayer herd is still in denial, in fact, I'd say they are outright delusional at this point. How can you not concede defeat when the market has moved against you by such a humiliating amount for years now?
We have once again seen a spike in inflows and bullishness has sharply risen as per AAII and NAAIM, but I wouldn't say the bullishness is off the charts. The current situation in the market is tricky. You always have to respect price action when something makes new all time highs for it tends to signal great strength but the market is ST overbought again and there's been a surge in bullishness as mentioned which suggest the market is vulnerable again for another pullback, but I get the distinct feeling that a lot of "pros" even those who have been generally bullish, have been caught off guard by this market all year and have badly lagged the index. This to me suggests pullbacks will be relatively mild for the remainder of the year unless there's some really big negative surprise. I think the best course of action is maintain core positions and perhaps trim into this strength those positions that have not lived up to expectations. I have done that with CDH last week. I meant to discuss this company but after having a discussion with a former O&G CEO in Western Canada, I decided to sell it and was fortunate to get out at a marginal gain.
Update: I just read an article in the NP and I saw this comment
This comment shows the type of thinking that a lot of Main St. Joe Schmoes have about the economy. It's not a one off because I've seen many comments that are similar. If there's another major lesson I've learned over the years, and I've said this more than a few times before, is that you have to fade Main St when they are in opposition of the market's trend (but be aware that this is not a ST market timing indicator).
I've been involved in the stock market (at various degrees) for about 15 years now and I think I can say I've seen it all. From extreme euphoria in 2000 to extreme pessimism in 2009 and everything in between. I have learned a great deal during these 15 years both from experience and the wisdom of others. One of the most important lessons/truisms I've learned about the market is the motto of this blog. Take for instance this bull market we've been in. Over the past few years how many books, experts, articles in the business section, ect, suggested that you be an optimist about equities and load up? Instead, all the focus was on sovereign debt worries, slow economic growth, high unemployment, fed manipulation, ect, all of which suggested you stay away from equities. How profitable was it to listen to this message? And yet despite the market hitting all time highs, there is still a considerable resistance towards embracing any LT optimistic posture. The doomsdayer herd is still in denial, in fact, I'd say they are outright delusional at this point. How can you not concede defeat when the market has moved against you by such a humiliating amount for years now?
We have once again seen a spike in inflows and bullishness has sharply risen as per AAII and NAAIM, but I wouldn't say the bullishness is off the charts. The current situation in the market is tricky. You always have to respect price action when something makes new all time highs for it tends to signal great strength but the market is ST overbought again and there's been a surge in bullishness as mentioned which suggest the market is vulnerable again for another pullback, but I get the distinct feeling that a lot of "pros" even those who have been generally bullish, have been caught off guard by this market all year and have badly lagged the index. This to me suggests pullbacks will be relatively mild for the remainder of the year unless there's some really big negative surprise. I think the best course of action is maintain core positions and perhaps trim into this strength those positions that have not lived up to expectations. I have done that with CDH last week. I meant to discuss this company but after having a discussion with a former O&G CEO in Western Canada, I decided to sell it and was fortunate to get out at a marginal gain.
Update: I just read an article in the NP and I saw this comment
"The US just nearly averted the catastrophe last week by increasing the level of debt they can accumulate, allowing them to print more paper money which will buy them time (no pun..) before the next major deadline hits.
Everybody knows that its just a matter of time before the US economy, and most likely worldwide again, crashes face-first into the ground. Only THEN will things start to show signs of improvement. We still have to hit rock bottom before that happens though."
This comment shows the type of thinking that a lot of Main St. Joe Schmoes have about the economy. It's not a one off because I've seen many comments that are similar. If there's another major lesson I've learned over the years, and I've said this more than a few times before, is that you have to fade Main St when they are in opposition of the market's trend (but be aware that this is not a ST market timing indicator).
Monday, October 7, 2013
Greenstar: The (almost) perfect investment opportunity
If someone asked me what would be the perfect investment opportunity I would say it would be a company that had a very stable, predictable business, more specifically a non-cyclical business that would deliver consistent profits in good or bad times and has a product that is not at risk of being obsolete - the types of companies Warren Buffet likes to own. I would require that there be significant upside potential for earnings growth and a clean balance sheet with plenty of cash to fund such growth. I would also want the company to be operating in a politically stable and business friendly country like Canada or the US. Finally and most critical, I want to be able to buy at a steep discount to fair value. Such a list is wishful thinking. It's like searching for a girlfriend who looks like Angelina Jolie, has a perfect personality, is single and is willing to go out with you. But I may have just found the perfect investment specimen in my top holding Greenstar (GRE) for it meets all the aforementioned criteria with the exception on one item.
GRE sells fresh produce, canned fruits and canned tomato paste which are always in demand rain or shine and will never go obsolete and while there may be fluctuations in pricing, their margins are so wide that they have delivered profits every single quarter for at least the past 4 years. The company has shown solid growth during recent years and has positioned itself for further growth going forward. It has an immaculate balance sheet flush with cash and it trades at only trades at 2.5 times 2013 earnings and 70% of net assets - a ridiculous discount. The only ""flaw""you can point out is that it's based in China and in addition to political risks, the stock may be trading at such a huge discount because of some frauds in recent years such as Sino Forrest. If GRE operated in Canada or the US then it would indeed be the perfect investment but here's the thing - the company would not be able to get the type of margins and growth they have been getting if they were in North America. Being in China is what allows them to be the cashflow machine that they are and so the operational advantage of being in China should offset a large portion, if not all, of the political risk of being in China. As far as the "fraud discount" goes, it is completely unwarranted for GRE to be painted with this brush and that's where rational investors can take advantage. GRE is legitimate. Their assets have been extensively verified by Canadian auditors who have visited their facilities and their bank branch in China. The business is also very simple and straightforward and therefore easy to verify. The main assets GRE has is leased farmland which has been additionally verified by an independent surveyor.
As a result of their operational success, GRE recently announced a 50% hike in their dividend starting next year (which gives the stock about a 6% yield ) and intends to acquire a tomato pulp producer (tomato pulp is the raw material they use to manufacture tomato paste). The company also rejected the proposed acquisition of another tomato pulp producer in which they signed a letter of intent back in May due to concerns discovered while conducting their DD. This rejected acquisition would have added significantly to GRE's q4 results. With this new acquisition, GRE won't see a significant impact to earnings until late next year which will probably result in about 25% growth. The advantage of this new acquisition over the other one is that it has 45% more capacity and so GRE will have the potential to double its tomato paste production and do so with better margins. Since tomato paste production accounts for 50% of revenue, GRE therefore has the potential to increase total revenues by 50% from current levels with this acquisition. This probably won't happen until 2015 as GRE's processing facilities are running at full capacity and so they will need to expand them but as mentioned, the acquisition will still result in about 25% growth in 2014 although it will be back end loaded.
Despite all of this good news, the stock has not made any progress. This situation reminds me of hwo back in the summer when they announced a dividend hike and share buy buyback and the stock did nothing and languished near $2 because there was a supply overhang pressuring the stock. There are a couple of large sellers in GRE who are eager to sell large quantities at current prices and this is suppressing the price. I have a hunch as to where this supply is coming from and I think a good portion of the overhang has been gobbled up but these sellers still lurk. Overhangs like this can be frustrating and cause you to second guess yourself but there is no way I will be because the fundamentals are too strong and the valuation too cheap for me to be unhinged by any declines caused by this.
I have never come across a situation like this where the market gives you an opportunity to make what is as close as you can get to a sure profit if you can just have some patience and let time work in your favor. Imagine if this was a private company and you had the opportunity to buy it knowing that in just 2 years time you will have earned in profits an amount that will cover your cost of investment, not to mention you will be entitled to a pile of cash the company already has in the bank which can finance 40% of your investment cost. It would be the no brainier of century and the person who is selling you the business at this price is beyond an idiot. When it comes to making an "investment" you have to look at it this way. You have to be willing to buy shares without the need to sell to some greater fool in order to make money.
The main risk I see with GRE is if China has some sort of collapse which causes the value of the yaun to plummet vs the loonie. I see the odds of that happening quite low in the next few years although I'm sure guys like Jim Chanos feel otherwise. As far at the Sino Forrest effect goes, that will fade if the company continues to produce the types of results it has been producing and keeps increasing the dividend. Given the performance in the stock this year so far, people are indeed starting to slowly warm up to GRE but I think this is only just the beginning.
GRE sells fresh produce, canned fruits and canned tomato paste which are always in demand rain or shine and will never go obsolete and while there may be fluctuations in pricing, their margins are so wide that they have delivered profits every single quarter for at least the past 4 years. The company has shown solid growth during recent years and has positioned itself for further growth going forward. It has an immaculate balance sheet flush with cash and it trades at only trades at 2.5 times 2013 earnings and 70% of net assets - a ridiculous discount. The only ""flaw""you can point out is that it's based in China and in addition to political risks, the stock may be trading at such a huge discount because of some frauds in recent years such as Sino Forrest. If GRE operated in Canada or the US then it would indeed be the perfect investment but here's the thing - the company would not be able to get the type of margins and growth they have been getting if they were in North America. Being in China is what allows them to be the cashflow machine that they are and so the operational advantage of being in China should offset a large portion, if not all, of the political risk of being in China. As far as the "fraud discount" goes, it is completely unwarranted for GRE to be painted with this brush and that's where rational investors can take advantage. GRE is legitimate. Their assets have been extensively verified by Canadian auditors who have visited their facilities and their bank branch in China. The business is also very simple and straightforward and therefore easy to verify. The main assets GRE has is leased farmland which has been additionally verified by an independent surveyor.
As a result of their operational success, GRE recently announced a 50% hike in their dividend starting next year (which gives the stock about a 6% yield ) and intends to acquire a tomato pulp producer (tomato pulp is the raw material they use to manufacture tomato paste). The company also rejected the proposed acquisition of another tomato pulp producer in which they signed a letter of intent back in May due to concerns discovered while conducting their DD. This rejected acquisition would have added significantly to GRE's q4 results. With this new acquisition, GRE won't see a significant impact to earnings until late next year which will probably result in about 25% growth. The advantage of this new acquisition over the other one is that it has 45% more capacity and so GRE will have the potential to double its tomato paste production and do so with better margins. Since tomato paste production accounts for 50% of revenue, GRE therefore has the potential to increase total revenues by 50% from current levels with this acquisition. This probably won't happen until 2015 as GRE's processing facilities are running at full capacity and so they will need to expand them but as mentioned, the acquisition will still result in about 25% growth in 2014 although it will be back end loaded.
Despite all of this good news, the stock has not made any progress. This situation reminds me of hwo back in the summer when they announced a dividend hike and share buy buyback and the stock did nothing and languished near $2 because there was a supply overhang pressuring the stock. There are a couple of large sellers in GRE who are eager to sell large quantities at current prices and this is suppressing the price. I have a hunch as to where this supply is coming from and I think a good portion of the overhang has been gobbled up but these sellers still lurk. Overhangs like this can be frustrating and cause you to second guess yourself but there is no way I will be because the fundamentals are too strong and the valuation too cheap for me to be unhinged by any declines caused by this.
I have never come across a situation like this where the market gives you an opportunity to make what is as close as you can get to a sure profit if you can just have some patience and let time work in your favor. Imagine if this was a private company and you had the opportunity to buy it knowing that in just 2 years time you will have earned in profits an amount that will cover your cost of investment, not to mention you will be entitled to a pile of cash the company already has in the bank which can finance 40% of your investment cost. It would be the no brainier of century and the person who is selling you the business at this price is beyond an idiot. When it comes to making an "investment" you have to look at it this way. You have to be willing to buy shares without the need to sell to some greater fool in order to make money.
The main risk I see with GRE is if China has some sort of collapse which causes the value of the yaun to plummet vs the loonie. I see the odds of that happening quite low in the next few years although I'm sure guys like Jim Chanos feel otherwise. As far at the Sino Forrest effect goes, that will fade if the company continues to produce the types of results it has been producing and keeps increasing the dividend. Given the performance in the stock this year so far, people are indeed starting to slowly warm up to GRE but I think this is only just the beginning.
Wednesday, October 2, 2013
Red Herrings
We've gone from fixating about Syria and tapering to the government shutdown and debt ceiling. I've been saying here starting with the outbreak of the pig flu, that these types of one offs never end up derailing the market's current LT trend. They may cause ST declines but that's about it. Even the 911 attack which occurred in the midst of a major bear market only had a temporary impact as the market was able to recover those losses and more in 3 months. The reason why these things tend not to be important is because they don't have any significant or lasting impact on the economy and any economic contraction they may cause will quickly be recovered once the issue is resolved. Also, fear motivates the authorities to take action and diffuse the problem especially in this post 2008 world. We've had so many of these types of worries in the past few years and all of them turned out to be Red Herrings.
After the no taper rally the market got overbought again and we saw quite a large surge in inflows. That to me is the main reason we have seen the market pull back for when you have such a situation, the market becomes vulnerable no matter what the news flow is like. If history is any guide, pessimism will be quick to build in the coming days/weeks and the market will be in a better condition to make a rally attempt. Let's keep in mind here folks that the market has had one hell of a run this year and so some sort of a correction/consolidation would not be unusual. Of course, we never want to get complacent about such things, but like I've been saying for some time, the classic conditions for a bull market peak have not been seen and until such happens, be skeptical of the bear case but be mindful that scary corrections can indeed still occur.
After the no taper rally the market got overbought again and we saw quite a large surge in inflows. That to me is the main reason we have seen the market pull back for when you have such a situation, the market becomes vulnerable no matter what the news flow is like. If history is any guide, pessimism will be quick to build in the coming days/weeks and the market will be in a better condition to make a rally attempt. Let's keep in mind here folks that the market has had one hell of a run this year and so some sort of a correction/consolidation would not be unusual. Of course, we never want to get complacent about such things, but like I've been saying for some time, the classic conditions for a bull market peak have not been seen and until such happens, be skeptical of the bear case but be mindful that scary corrections can indeed still occur.
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