Viking

BAM, GOOG, AMZN

@Dean Fortis is on my watch list… i will likely add it to my collection if it sells off another 10% from here. In the past month 4% bond yields look like they are causing a sell off in the ‘utility type’ (higher dividend yield) part of the stock market. Makes sense. But what i have learned over the years is what looks obvious to me can take weeks or months to actually play out in financial markets (markets are reasonably efficient but it can take big funds a considerable amount of time to reconfigure their portfolios). If bond yields continue higher i expect my basket of stocks listed above to also sell off. So i am keeping my weighting such that i can add on weakness. ————— In terms or portfolio strategy, we sold our house last year (big tax free gain). And i had my best year ever return wise with my portfolio (thank you Fairfax). So my portfolio is about 3 times the size it was 18 months ago. As a result, i have decided my old way of investing no longer fits my current life situation. Bottom line i have decided to keep 1/3 of my portfolio and invest as per usual (perhaps concentrate with stocks like Fairfax etc). And take the other 2/3 of what i have and create my own ETF (collection of stocks). Most have been purchased over the past week. I am about 1/2 done and will continue adding to current positions on weakness and starting new positions that make sense. So much stuff is on sale. And i may get lucky and we might see one more big swoosh down (who knows). 1.) Bond substitute (listed above) 2.) Energy: CNQ, SU, CVE 2.) Tech: GOOG, AMZN, MSFT, META, SOXX 3.) US Financials: BAC, JPM, C, BAM 4.) Misc: NKE, LEVI, DIS, UPS, FIH ————— I did something similar in March 2020 but sold when they popped and then watched them scream higher. @dealraker ‘s posts on the ‘is the bottom here?’ thread have certainly resonated with me And my life situation is also quite different now (all of my financial assets are now ‘paper’).

Pepsi released results today. Volume was down 1.5%. Revenue was up 16%. Can anyone say super-sized ‘price increase’. I wonder if that will be inflationary? ————— Also of interest. What do Starbucks, Apple and Amazon all have in common? Workers attempting to unionize (and not just in the US but globally). 1970’s all over again? I wonder if this will be inflationary? ————— In Canada, companies are getting very creative. Campbell’s soup redesign their popular Chunky soup line… new can (taller) is 515ml vs the old one that was 540ml. Same list price. And less discounting. Inflationary? ————— Getting the inflation genie back in the bottle without a severe recession is looking increasingly unlikely. Perhaps inflation is transitory. I really have no idea. But it looks to me like either ‘path’ is possible (transitory vs persistently high).

Put about 15% of my portfolio the last couple of days into what i loosely call ‘Canadian bond substitutes’. Most stocks are trading near 5 year lows (lower band of trading range). The average yield on the portfolio of holdings is around 5.5%. - Canadian banks: RY, BNS, TD, CIBC (regulated oligopoly) - Canadian telco’s: Telus, BCE, Rogers (regulated oligopoly) - Pipelines: ENB, TRP - Life Insurance: SLF, GWO - Utilities: AQN i have weighted the holdings based on companies i like more. For banks, RY is my biggest weighting. For Telco’s i have Telus as my biggest weighting. I decided to do a basket approach to get exposure to each of the sectors. i will be adding a few more names. For Canadians on the board what companies am i missing? I am after companies with +4% dividend with reasonable prospect it will grow in future years. ————— i also own BAC, JPM, C (US financials) and CNQ, SU (energy). There are a very large universe of companies out there who pay very large dividends and have solid prospects to grow earnings (as we get through the current snow storm). It reminds me a little of 1995-2005 before and after the dot com bust. Old economy stuff was dirt cheap.

Great discussion of where financial markets are at today. Harley Bassman is one smart dude (sounds like he grew up in the late ‘60’s). Joseph is solid, as usual.

The big story today is the spike in bond yields in Europe/UK. In the UK the 30 year is up 30 basis points. Bond yields are up across the curve. The UK and Europe are a mess. What is the solution? Much lower currencies. Pound at parity to the US$ and the Euro at 0.9 is probably the optimistic scenario in the next 3-4 months. The UK economic/fiscal/currency situation now resembles that of an emerging market: 1.) exit Euro: kill your economy 2.) bad long term public policy around energy: energy prices through the roof 3.) political system in disarray: increasingly desperate measures by governments leading to deterioration of confidence in financial markets What is the end result? A slow moving train wreck. The next 6 months things could really get ugly. Europe is in better shape than the EU. But not by much. ————— The ‘winner’? The US. And Canada to a lesser extent. ————— i was joking with my nephew who lives in France that the Canadian $ might hit parity with the Euro in 1H of 2023. Needless to say, he was not amused (at some point i do expect the oil/energy angle to push the Can$ higher).

During the GFC, Warren Buffet’s big purchase was a railroad stock. The reasons to buy railroad stocks is likely stronger today than when Buffett bought BNSF in 2009. 1.) railroads have a strong moat - i think we can safely say another railroad will never get built. 2.) railroads offer growth: US economy looks strongest of all major global economies; in 2009 it was the weakest by far. With deglobalization and cheap energy the future of the US economy looks brighter than major competitors. 3.) railroads are profitable - putting more business over an existing fixed cost infrastructure is good for profitability (revenue increases faster than costs). - Oligopoly helps: with Buffett now owning one of the major players, likely we will see continued focus on profitability not market share. Very important in an inflationary environment = pricing power. 4.) ESG approved: railroads are one of the most fuel-efficient means of transporting freight by land. - if oil prices stay high (or go higher) it will keep fuel prices elevated hurting the competitiveness of trucking 5.) stocks are available at a fair price. Is the debt burden a big problem in a higher interest rate environment? Living in Canada, i am looking at CN and CP. US based companies also look interesting. Does anyone have a strong opinion of who the top one or two operators are? Of course perhaps the easy decision is to simply buy Berkshire Hathaway. ————— Investing in Railroad Stocks A guide to the businesses that keep America rolling. https://www.fool.com/investing/stock-market/market-sectors/industrials/transportation-stocks/railroad-stocks/

i agree 100% with your statement: “War is bad and we should all want it to end.” I agree, my mention of Hitler in a previous post was not well done. To be more clear, what i tried to get across is some people are not interested in negotiating. That is my read of Putin. And to try and get a deal at all cost with someone like that will likely not end well. Yes, just my opinion as Putin has not divulged to me his thoughts on the matter My analogy to what was tried, and not tried, during WW2 was a bad example.

The main point with my post was not try and compare and contrast Putin and Hitler as people, leaders and their impact on Europe and the world. Hard to do that in a few lines of text. Also, you are correct, i have no idea what Putin might want to do.

How do you negotiate with someone who doesn’t want to negotiate? Just imagine if Churchill had decided the best course of action was to negotiate with Hitler (and sue for peace)? Yes, the war would have been over much earlier. And the world would look very different today, especially in Europe. Looking with hindsight, i think Churchill made the right decision.

Ukraine is fighting being invaded by a foreign aggressor, Russia. The West is supporting the local population. The lesson from Afghanistan is the local population, if motivated and well armed, is eventually able to push the aggressor out. And that is what we are seeing play out in Ukraine (just much quicker than anyone thought).

It looks like Russia will view this as an escalation of the war by Ukraine. In this game of chess, what will be Putin’s next move? ————— Impact of Kerch bridge blast will be felt all the way to the Kremlin - https://www.theguardian.com/world/2022/oct/08/impact-of-kerch-bridge-blast-will-be-felt-all-the-way-to-the-kremli …..When the Russian president opened its road span on 15 May 2018, driving an orange Kamaz truck across the bridge, he boasted of its significance. “In different historical epochs, even under the tsar priests, people dreamed of building this bridge. Then they returned to this [idea] in the 1930s, the 40s, the 50s. And finally, thanks to your work and your talent, the miracle has happened.” … How Moscow responds is the big question, but one that had been looming ever more powerfully as Ukraine has successfully pressed its counteroffensive in recent weeks amid mounting disquiet among Russian elites and commentators over the conduct of Putin’s war. In April, Dmitry Medvedev, former Russian president and prime minister, and currently deputy chair of the Security Council of Russia, said: “One of the Ukrainian generals talked about the need to strike at the Crimean Bridge. I hope he understands what the retaliatory target will be.” At the very least it is a huge propaganda victory for Kyiv that will be held up as a sign that not only is it unafraid of Putin’s nuclear threats but that it believes it is winning the war.

The Ukraine war has been a disaster for Russia. The longer it goes on the weaker Russia becomes. The weaker Russia becomes the less influence it has in the former Soviet sphere. China is licking its chops. Ukraine, with its success dramatically weakening Russia’s military, is now helping China grow its influence. (Makes one wonder why China is not sending Ukraine weapons :-) As this becomes more obvious, got to wonder when Russian’s wake up to the reality of what is going on. Putin invaded Ukraine to re-establish Russia’s former empire/influence/glory. It is becoming more and more clear he is achieving the opposite: Russia’s standing in its former empire is deteriorating badly. The decline in its influence is accelerating. And glory has been replaced with defeat and shame. I am starting to wonder how long the war can continue along its current trajectory… ————— A Distracted Russia Is Losing Its Grip on Its Old Soviet Sphere - https://www.nytimes.com/2022/10/08/world/asia/russia-putin-soviet.html Russia’s domination of Central Asia and the Caucasus region is unraveling as the Kremlin focuses on the war in Ukraine — and border violence is flaring. … “Until Ukraine, China and Russia were not interested in open competition in Central Asia,” said Asel Doolotkeldieva, a senior lecturer at the OSCE Academy in Bishkek, a center for postgraduate studies focused on security issues. “There was a tacit division of labor: security for Russia, economics for China. But Russia is not doing its job anymore. It has shown that it is unable, or unwilling, to protect the region.” ….. “Putin is no longer the great invincible leader that everyone wants to meet,” said Emil Dzhuraev, a researcher in Bishkek with Crossroads Central Asia, a research group. “He has lost his aura.” By contrast, Mr. Xi has become more assertive. On a visit to Kazakhstan last month, he pledged to “resolutely support Kazakhstan in the defense of its independence, sovereignty and territorial integrity,” a remark widely interpreted as a warning to Moscow not to try anything.”

When you look at the various asset classes, so far in 2022, bonds (@-20%) and stocks (@-30%) have gotten absolutely crushed. The clear winner - and its not even close - has been cash. With an average duration of 1.2 years at Dec 31 and still the same at June 30, Fairfax’s $35 billion bond portfolio is as close to cash as an insurance company can get. This positioning is shaping up to be a massive winner for future Fairfax shareholders. There were costs to moving to this very low duration. 1.) Interest income was much lower than it otherwise would have been in past years. But this cost was largely borne by past shareholders. 2.) Fairfax in 2022 is reporting large mark to market losses as its bond portfolio is revalued as yields across the curve move to much higher levels. This cost is being borne by current Fairfax shareholders. There are big benefits of the move to very low duration. 1.) Fairfax is immediately able to earn much higher interest income on its very large cash balances. And as bonds mature the bonds will be reinvested at much higher yields (with 1.2 year average duration lots of bonds can be reinvested each quarter). 2.) in the future, if bond yields fall, Fairfax will record large mark to market gains on its bond portfolio. These benefits will be reaped by Fairfax shareholders in future quarters and years. How big will the benefits be? Well, that will depend on a number of factors: 1.) how high do interest rates go? 2.) do spreads widen? 3.) does Fairfax extend duration? 4.) does Fairfax shift into higher yielding munis/corporates etc. The math of the impact of higher interest rates on interest income on a $35 billion bond portfolio is pretty compelling. (For reference, interest income was less than $500 million in 2021.) 1.) 3% = $1.05 billion = $44/share (pre-tax) 2.) 3.5% = $1.23 billion = $52/share 3.) 4% = $1.4 billion = $59/share 4.) 4.5% = $1.58 million = $66/share My guess is Fairfax’s run rate yield on their bond portfolio will be over 3% at the end of Q3 and perhaps approaching 3.5% by year end 2022 (setting them up Jan 1 to be on track to earn $1.2 billion in interest income in 2023). ————— The Fed is telegraphing the terminal Fed funds rate to go to 4.5% and stay there until late 2023. If this happens, both bonds and stocks will likely continue to sell off and cash will continue to outperform.

I use sell offs as an input. If a stock i own goes down and i: 1.) get worried (my gut) it usually means my understanding/thesis is weak. 2.) want to but more (my gut) it usually means i am on to something.

Time to take a closer look at Teck Resources? Coal and copper (with a big copper mine coming on stream shortly)…

So what did we learn today? 1.) we are in a new geopolitical world. And the middle east is either neutral (and simply looking out for its own interests) or aligned more closely with the pro-authoritarian block (Russia/China) than the West. Biden’s calling out of the Saudi prince is having serious economic consequences. Not a surprise. 2.) OPEC wants $100 oil (average). I think it will get it. And as we come out of this economic ‘gully’ and the global economy expands, $150 oil is looking pretty likely to me. (Also because Western governments/ESG will not allow supply to increase materially.) 3.) as oil prices stick at $100, and move higher on signs of economic strength ($150), inflation will continue to remain elevated. 4.) central banks will need to keep interest rates higher for longer. —————- I am starting to drink the Kool-Aid that high inflation (4-5% on average) might be with us for years. With lots of volatility. Up to 8% (now). Maybe down to 3 or 4% in a year (mild recession). And than back up to 5 or 6% in 2024 (as the global economy picks up). I think the Fed’s target of 2% is a pipe-dream right now - unless we get a severe global recession. —————- Fed seems committed to positive real interest rates across the curve. If inflation stays elevated for years then interest rates likely also remain elevated for years. The question is how does all that cheap debt get rolled over at much higher rates (US government i am looking at you)? —————- Persistently high inflation. And historically high debt to GDP levels in most Western countries. Financial repression like we saw in the late 1940’s? Not what the Fed is saying today… The super interesting thing today is how out of step the Fed is from other Western central banks (Europe, Japan, Australia) where i think they view financial repression as the preferred policy option (let high inflation rip and keep interest rates low for as long as it takes to bring real debt to GDP levels into line).

@maxthetrade i agree entirely. The ‘problem’ i am having is i am learning old habits are hard to change (especially when they have worked well for +20 years).

Well it certainly looks like the air is coming out of the greater Vancouver real estate market. Unit sales are at something like a 30 year low; which is telling given significant population growth. Inventory is growing. And, as expected, prices are coming down (much more in the suburbs). But benchmark prices are still up 4% from a year ago. The problem today is sellers remain anchored to Feb/March bubble highs. And because of much higher interest rates, what buyers can pay has dropped considerably. So we have a bit of a staring contest going on between sellers and buyers. I was wondering if we were going to see buyers step up in Sept and we now have our answer (a resounding no). ————— it is fascinating to compare US and Canadian mortgage markets. In Canada today a regular 5 year fixed or variable can be had for around 5%; much lower than the US which i think is closer to 7% (30 year fixed). That is a big spread. That has a very big impact on house prices (affordability). ————— i am beginning to wonder if we do not see the Bank of Canada follow Australia and pivot dovish. Australia also has a property bubble like Canada - and i think like Canada mortgages are short term in nature (5 years or less). Short term mortgages become a huge problem if we see years of much higher mortgage rates. So i am wondering if the Canadian $ is not the sacrificial lamb. I was thinking Canada’s oil/resource position would support a stronger C$. But weakness in housing likely trumps strength in resources. ————— - https://members.rebgv.org/news/REBGV-Stats-Pkg-Sept-2022.pdf - https://www.fvreb.bc.ca/statistics/fraser-valley-real-estate-market-continues-to-stabilize-heading-into-fall-season/

Great topic. Super important And severely under-appreciated by most investors. The financial services industry cannot suggest an investor should concentrate their portfolio. They will likely get sued / fired / disbarred if an investor blows up their portfolio (lots likely would given enough time). And so we are all taught that concentrating is dumb, stupid, idiotic, gambling… I love Druckenmiller’s thinking on position sizing. This is from the ‘Stanley Druckenmiller interview (2018)’ thread: ————— Great interview with Druckenmiller from June 9, 2022 (link at bottom). Some thoughts: 1.) to do what Druckenmiller does (in terms of strategy) you pretty much need to be a full time investor; at a minimum very committed/focused. That is my (Viking’s) opinion. 2.) where are we now? 6 months into bear market that has some more room to run. - there is no historical analogue for the situation today - he is trying to be open minded about all the possible outcomes 3.) what are you doing today? Waiting for a fat pitch. - low conviction now - had been aggressively shorting - owns some oil 4.) general strategy: - looks out 12-18 months - develops high conviction idea 3-4 times per year - put all eggs in one basket; watch very closely 5.) lesson from Soros: sizing is 70-80% of the equation - its not whether you are right or wrong - its how much you make when you are right - and how much you lose when you are wrong 6.) are you on a hot or cold streak (like a batter in baseball)? - know the difference; size positions accordingly 7.) actual mechanics when you find an opportunity - intuition says yes; also fits macro view - buy - then do the analysis - get out if it doesn’t pan out - if you wait to but you may miss the first big move 8.) current set up: - high oil prices - rising interest rates - rising US$ - has ALWAYS BEEN TERRIBLE for corporate earnings looking forward 9.) advice for new investor - DO NOT INVEST IN PRESENT - envision the world in 12-18 months and what will drive security prices - focus on what will move the stock (learned this from his original mentor); what will be the catalyst - how are people going to think differently in 18-24 months about the security from what they are thinking today; it is change that moves the security. 10.) macro investors perform best in bear markets - perhaps that is why so many macro people are so bearish

The important point is what is being discussed on another thread: position sizing. What matters is not if Druckenmiller is ‘right’ or ‘wrong’ at any point in time (like what he thinks the day he is interviewed). What matters is how much you make when you are right and how much you lose when you are wrong. All Druckenmiller is saying is right now he does not have the conviction to make a big bet. Given the set up i outlined above that sounds pretty rational to me. ————— Now if the data quickly turns then a rational investor would also pivot. Perhaps on Friday we learn the US job market has stalled out and unemployment is rising. Or global economic data gets much worse. Or something breaks in global financial plumbing - causing the Fed to pivot back to QE. That ‘be open minded’ thing…

We have: 1.) spiking interest rates - thank you Fed 2.) spiking US$ 3.) rising oil prices - thank you OPEC 4.) persistently high inflation - increasingly driven by persistently strong labour market (check out the multi-year increase rail workers just got…). What do you think happens to corporate profits with this set up? Drukenmiller is not a dummy.

Here is a quote of Druckenmiller’s from the CNBC Seeking Alpha conference just held: STANLEY DRUCKENMILLER: …. But right now, I like everything I’m hearing out of the Fed, and I hope they finish the job. They made a big mistake. They seem to have owned it, but it’s easy to own it when employment is strong. Let’s see what happens if we get a hard landing. I just hope they stick to their guns because this stuff was terrible in the ’70s. You have to slay the dragon. And the chair is right. You’re probably going to have some pain. ————— The Fed is in the Disney phase of tightening - employment is strong. Can the Fed continue to do what is necessary to slay inflation when the economy turns down hard and employment weakens a great deal? We should have our answer by the end of 2023. Given this Feds track record i am not optimistic - but i remain open minded (to steal one of Druckenmiller’s favourite lines.

@Parsad i think you are far too optimistic with your suggestions of what the Fed should do. Most people seem to think inflationary pressures are magically going to disappear… like the ending of a Disney movie. As soon as financial markets get a whiff the Fed might be slowing increases (or done) they will rip much, much higher. Stocks will pop. Bond yields will come down (further out on the curve). Credit spreads will tighten. The US$ will sell off. In short financial conditions will ease. (We saw this movie play out mid-June to mid-August.) And the Fed will be screwed. History teaches us there is likely only one way to solve an embedded inflation problem (like we have now). And that is a Paul Volker type of tightening that last much longer than 6 months and that likely causes a more than mild recession. Has a recession happened? No. Is it coming? Given the strong employment reports, no. The fever has not broke yet. ————— The dilemma the Fed has today is the rest of the world cannot handle what the US is executing. So something will likely break (like what almost happened in Japan 2 weeks ago and the UK last week). If the plumbing of the financial system breaks the Fed will have to pivot. And then inflation will likely roar again. And then Powell likely looks for a new job. ————— Commodities will rip higher at the first sign of an economic expansion. Because production is supply constrained. And that will fuel inflation. Oil, steel and lumber are all on my watch list for when we get to the next expansion. Jeff Currie has an interesting theory about the inflation of the 1970’s… he said perhaps one of the reasons it lasted so long because it took 7-8 years to solve the significant supply constraints that existed at the beginning of the 1970’s. i wonder if we do not have a similar set up today. This means It wasn’t just Volker that slayed the 1970’s inflation dragon. If that is true, then we could see persistently high inflation for many years (because ESG/government policy will ensure new supply capacity does not get built out on the scale needed to happen).

What we are learning is how well positioned the US is today. The country is economically positioned much better than any other major economy in the world. And it is not even close. - China? Property bubble is popping. Xi is returning country to its communist roots. Globalization is dead. Zero covid is a joke. Its like the guy running North Korea has a long lost brother who we discover is now running China (for life). Happy thought for the day. - Western Europe: without cheap energy you are screwed. Will take years to fix. Higher interest rates will kill southern Europe. The ECB is screwed. - Japan: economy can only function if interest rates remain at zero. Good luck with that if inflation remains elevated for years. - Canada: housing bubble is popping. Only question is how hard is the landing. Immigration, resources and having US as neighbour will get country through the tough period coming.