Viking
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Posts posted by Viking
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14% return for the year; currently 65% cash and 35% invested (WFC, FFH, GIL and a sprinkling of forestry stocks). The Trump win was the big event for me; my portfolio was down about 5% before the US election as I was very heavy with US financial stocks.
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My best idea right now (as of Dec 30, 2016) is US cash. I think it is highly likely we get a significant correction in the stock market at some point in Q1 (similar to last year). Should this happen I will likely be buying lots of stocks.
Looking at this thread a year later it may look like cash was a terrible idea.
Similar to what we have seen over the past 8 weeks I think what Trump does will heavily influence the stock market. The difference is what he does after he is sworn in in January will matter and the stakes will be much, much higher. Markets hate uncertainly and I think Trump is so all over the board that he is going to create a lot of volatility. Having some US cash on hand is my answer.
And I say US$ cash because I think the CAN$ is in trouble (I am Canadian so currency matters). The Softwood Lumber deal has ended and duties of 25-40% will likely be put in place on Canadian softwood lumber. Trump wants to renegotiate NAFTA (this is a priority) which will not be good for Canada. Housing in Canada is a bubble looking for a reason to pop. My guess is the Can$ takes it on the chin in Q1.
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I have started following (once again) a couple of Canadian (BC) based lumber companies. Residential house construction in the US looks to have a long runway ahead. As home construction continues to increase in the coming years this will continue to stoke demand for lumber. Lumber prices are currently at pretty decent levels and if they move higher into the spring this will be very good for lumber companies.
The Canada US Softwood Lumber Agreement has also expired. This is always a very messy negotiation. There is little visibility as to how this agreement will shake out. Bottom line, Canadian producers in Eastern Canada are most at risk as they are high cost producers (Fairfax owned Resolute Forest Products). We could get some fireworks happening in January and February as a new deal gets hammered out. This could lead to a sell of of Canadian lumber companies.
I am following two Canadian companies:
1.) West Fraser (WFT): low cost producer; 40% of production is in US
2.) Interfor (IFP): 70% of production is in US; only 15% of production goes from Canada to US
I owned these companies back in 2012; since that time they have all undertaken very aggressive expansion plans of buying forestry assets in the US. A key reason is as a hedge to counter the risk of implementation of a negative Softwood Lumber Agreement. Very smart.
These are very volatile stocks (up and down). I would love to see:
1.) a big sell off of Canadian lumber companies in January and February (on negative press due to SLA)
2.) lumber pricing moving higher due to higher demand from housing construction
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This is the thread each year where I give thanks to Sanjeev and the many great posters from years past. I moved to Toronto for business reasons about 15 years ago and discovered this board and Fairfax as an investment. Good advice from many others on this board, good decisions, dumb luck and time all combined over many years to put me in a position financially that I was able to quit my day job and spend quality time with my young family (10 years now and counting). I have since moved back to Vancouver and in hindsight one of the greatest gifts of taking the job in Toronto was that I discovered this board and Fairfax; a great example of unintended positive consequences. I have no doubt that if I had not discovered this board and FFH I would still be working for someone else (when asked, I tell people that I am a financial planner with one client... my family). Thank you to Sanjeev, bsilly, cardboard and ericopoly to name just a very few; many more have helped me. I will always be very thankful.
To all posters: thank you. By taking the time to post your thoughts you give others the opportunity to learn and benefit financially. Have a great holiday and a prosperous new year!
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KinAlberta, the main difference I see between Watsa and Buffet is I find Prem's comments much more promotional and self serving in nature. This is likely due to the fact that FFH employs a crazy complicated process when it comes to how it invests its assets. These investments tend to be very large and non-traditional and bring lots of questions that are difficult if not impossible to answer consistently over time.
Buffett comments are also promotional and self serving but he buys much higher quality companies so has less to explain. It is much easier to follow Buffett's logic.
This is not to say that both companies are not great companies in their own right. I find as I age that I do not like surprises in my portfolio. This makes it much harder for me to own FFH and easier to own BRK.
Currently I only own FFH having just bought it at US$460; at that price it was cheap enough to put up with all the complexity and poor investment returns of the past 5 years. Will it be a long term hold? No.
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Tx, I agree with everything you have said. Trump seems to want to pick a fight with China and I am not sure how this ends well. I am happy that FFH is moving on from an investing standpoint. IF inflation is indeed picking up and the US economy continues to improve then FFH will benefit.
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Prem has had a close long term relationship with Wilbur Ross; given his role in the new Trump administration I wonder if this is providing Prem with a little more conviction regarding what will likely be happening in the US in the next couple of years.
A couple of comments from the conference call held earlier today:
1.) perception that Prem underpaid; will be interesting to see if another competitor enters with a competing bid
2.) likely Fairfax gets significant cash infusions from outside investors to cover a majority of the shares required (similar to Brit transaction); this would allow the cash part of the offer to increase significantly
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From one of the quotes above, it looks like Fairfax is in the process of doing a complete 180 in terms of positioning of the investment portfolio. My guess is what remaining equity hedges they had may have been sold and it would not surprise me to see them scale back they deflation hedge.
Fairfax has underperformed the past 5 years primarily because their hedging has not worked out and this has led to poor returns in their investments. The good news is they are performing well with underwriting. If they can once again start generating decent investment returns then earnings have lots of upside.
What they do with the investment portfolio of Allied will be key. Prem has lost credibility the past 5 or 6 years due to decisions made in the investment portfolio. Can they get their investing mojo back?
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Here are a couple of interesting quotes from Prem regarding the rational for the purchase:
“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”
Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”
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Could the driver to do a deal today be the paradigm shift we are seeing in US interest rates/bond yields? Back in June we saw 10 years treasury yields fall to 1.35% Tough environment for insurance companies' earnings.
Today bond yields are spiking. The 10 years is now at 2.6% and some pretty smart people like Gundlach are suggesting yields may continue to move up significantly in the coming years. If this happens then earnings for insurance companies should benefit. It would make sense that stock prices would also move higher.
Perhaps Fairfax feels that as bond yields continue to increase over the next year insurance companies will get repriced higher by mr market; hence, the decision to buy now even though their own shares are trading near 52 week lows.
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Fairfax over the past 30 years has a very good track record when it comes to investment results. The past 5 years or so have been poor. They have continued to increase investments per share. The quote below is from Prem's letter to shareholders in the 2015 Annual report.
"At the end of 2015, we had $769 per share in float. Together with our book value of $403 per share and $134 per share in net debt, you have approximately $1,306 in investments per share working for your long term benefit – about 5.6% higher than at the end of 2014."
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Fairfax has underperformed for the past 5 years. BV per share (US$) has grown but modestly. Share price (in US dollars) is also up a small amount. 15 years ago when I first invested in Fairfax they were considered very good investors and below average underwriters. Reading RBC's most recent report it is now the opposite: good underwriters and poor investors. My guess is they will get the investing thing figured out over time. Good underwriting plus good investing will result in a much higher share price.
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So recently Fairfax exits long dated US treasuries and reduces equity hedges. Then Trump is elected and long bond yields spike and stock markets go to all the highs. And Fairfax sells off. I hope it continues to sell off...i have not owned shares in many ears and would be happy to own them again.
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For those looking to better understand what is going on today Gundlach certainly has some thoughts. His most recent presentation is about an hour long and provides what looks like a pretty decent review of what has happened the past 6 months and why. He also provides some thoughts on what may come in the next couple of months. (There is also lots of self promotion etc; however, there is also lots to chew on and that is what I like...). Sorry if someone has already linked to this presentation. :-)
http://www.doublelinefunds.com/webcasts/
A couple of my key takeaways (looking out to mid 2017):
1.) inflation in US will be going higher, especially with oil trading today at $50 (Jan of 2015 it was at $26)
2.) US interest rates are going higher; after basing for a while at 2.35% US 10 year will begin the next up leg
3.) US$ is going higher
4.) volatility will increase (buckle your seat belts)
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I find listening to Jeff Gundlach and Stanley Druckenmiller fascinating. Both are of the opinion that we may have seen the bottom in long bond yields. They see 2.35% as a key level on the 10 year, with another leg up very possible. Watsa sold all of his long bonds and also reduced equity hedges 50%.
My read was we are in a bond bubble. Trump getting elected perhaps simply provided the final nail in the coffin for the bond market (as his policies are perceived as being more negative for bonds than Clinton). When 10 year US Treasuries dropped to 1.4% earlier this year everyone who wanted to own long dated government bonds likely had bought.
The interesting thing is where we go from here. Should yields on the US 10 years move meaningfully higher from current levels (of 2.35%) then the bond bear market may be officially on. And then what higher yields do to the US economy etc, etc will be fascinating to watch.
Investment portfolios will be turned on their heads. Bonds have gone up for 30 years (as yields have fallen). Hard to see stock averages going up a great deal from current levels (PE's are already elevated). Perhaps we will have 5 years of a sideways market... Stock selection will likely be key moving forward (similar to when Lynch was running Magellan back in the '80's).
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He has over delivered to expectations since the election. Lets hope it continues :-)
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My read is many, many people in the US are VERY upset with the status quo. The media needs to spend some time fleshing this out. People voted for change. Everyone is fixated on Trump and that is stopping them from understanding what is really happening tonight.
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Performance Sports have made some decisions that have failed in a big way. They overpaid big time for Easton (and funded it largely with debt). Opening stand alone Bauer stores alienated their long term retail partners; at one of the the largest hockey shops in Vancouver Bauer skates have gone from 80% of the facings to 50% (with CCM being the big winner). They also had a couple of their largest US customers declare bankruptcy. And hockey and baseball markets are stagnant to declining (overall). Mix it all together and you have a perfect storm. Will Bauer and Easton brands survive? Of course. Will they regain market share they had in hockey and baseball a couple of years ago? Not likely.
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I think a key factor is your outlook for interest rates. My pick today is C. However, if interest rates were to move materially higher then I would favour BAC.
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Looks like there is lots of blood in the streets.... Usually a good time to buy.
Crazy, crazy situation... But one that will get dealt with over an extended period; UK and Europe will muddle through. Hard to see how this makes UK and Europe stronger. On balance, looks to me like strong, big US multinational companies will be the winners.
Regarding the big banks, looks to me like the big US banks will be winners (over the next few years). Who will want to deal with the big UK or Europe banks moving forward (I am thinking big companies or very wealthy individuals)? Who will want to work for them? Too much uncertainty.
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The big US banks have sold off the past couple of weeks (with some down 6-8%) so part of the big move today may be because they were oversold. Regardless, they are still quite cheap. At current prices my favourite is Citi; they trade way below tangible book value and have a PE of about 9 (current year earnings). They are over capitalized and capital is growing faster than earnings (as they utilize their sizable DTA). Capital return will increase nicely this year. The next catalyst to the shares should be CCAR announcements in June. Hopefully Citi will be approved to return 12-15 billion over the next 12 months; if so, I expect the shares to pop.
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Agreed that well researched stats are in short supply. I also agree that crazy low interest rates are the fundamental factor driving the market higher (although I am not sure that explains the 30% increase in prices we are seeing year over year as I think interest rates have been roughly flat over this period).
On my street in Langley (30 minutes outside of Vancouver) 5 houses have sold in the last 24 months; 4 buyers were new to Canada from China. My neighbour who listed his house earlier this year had 40 people come through in 24 hours and told me 'the vast majority' were Chinese buyers. It may be that my neighbourhood is being targeted (as it has a reputation for having very good schools). Bottom line, I do think Chinese buyers are goosing prices in certain neighbourhoods in Greater Vancouver. Unfortunately, it is all happening 5 years too early for me (if my kids were out of the house I would be happy to sell, pocket the gains and rent or downsize (to a townhouse).
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I think a key cause of the real estate popping in the US was they ran out of fresh meat. By 2007 if you had a pulse you 'owned' a home. Income did not matter. Job did not matter. The market simply exhausted itself.
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I think it is pretty straight forward to identify a bubble. I think it is near impossible to predict when it will pop and what the cause of the 'pop' will be.
It looks to me like Vancouver is in a housing bubble. Living here, it is taking on the feel of a game of monopoly. Prices up 20% over the last year in some neighbourhoods? Prices up 50% in 5 years? My neighbours sound like they are intoxicated when they talk about real estate.
The one caveat I have is China. If demand from China continues at current levels (people wanting to get their money out) then the Vancouver market could stay elevated. It could even continue to go higher. Bizarre....
How will a Trump presidency impact financial markets after Jan 20?
in General Discussion
Posted
I think most people are underestimating the impact Trump is going to have on financial markets when he becomes president January 20. He has stated very clearly that he is going to renegotiate trade deals (TPP, NAFTA) so they are much more favourable to the US. This puts the US on a collision course with other economies (Canada, Mexico, China, Germany etc). For Trump to get concessions he is going to have to show a very strong hand so I expect him to hammer frequently and hard. Speed: Trump will want to move fast given these sorts of things can take a long time to get done. Social Media: Trump will be looking for maximum coverage using twitter to demonstrate his awesomeness. I just do not see how this ends well for financial markets. Thoughts? Please post any articles you come across that cover this topic.
Here is an example. If I was Trump and I wanted to get Apple to move iPhone production back to the US I would poke China in the eye. China likely retaliates by poking Apple in the eye. I would be surprised if Apple Has not given this a lot of thought.
Here is an interesting article from Michael Pettis: http://carnegieendowment.org/chinafinancialmarkets/66485
LEADERSHIP HAS A COST: And there is no longer any question for some Americans that mercantilism has indeed been a policy response by many of its trade partners to slow growth. While China is usually singled out for its policies, other countries have behaved more irresponsibly, most notably rich Germany, whose surpluses, the largest in history, were built primarily on an undervalued currency, after the creation of the euro, and on weak wage growth, after the 2003–05 labor reforms.
Growing opposition to trade, particularly among Americans most vulnerable to unemployment and consumer debt, was probably inevitable, and for the reasons listed in the Guardian article referred to above. But if an American retreat really is about to take place, rather than reorganize under Beijing’s leadership and around the surpluses China requires, it is far more likely that the world’s economies would be forced into domestic adjustments of various levels of difficulty, and respond with a mélange of industrial and trade policies aimed at easing the adjustment. To the extent that these policies force adjustment costs abroad, other economies will be forced to respond, and over time global trade will become unstable and increasingly contentious—and especially difficult for today’s surplus countries—in a way that is in fact closer to the historical norm than the anomalous stability of the four decades before 1914 and the six decades after 1945.
A U.S. retreat from trade, in other words, will be damaging to global prospects. Many economists argue that it will also necessarily damage U.S. prospects, but they are almost certainly wrong. While there is no doubt that clumsily designed and implemented policy interventions can be disruptive for the U.S. economy, there is historical evidence that intervention can easily benefit diversified economies with large, persistent trade deficits, especially when these deficits are driven at least partly by distortions abroad. The case that most resembles that of the United States today is probably Britain in the 1920s, when its trade account was adversely affected by large foreign purchases of sterling for reserve and investment purposes. The British economy significantly underperformed that of both the United States and its continental rivals, with nearly a decade of unemployment in excess of 1 million insured workers.