Investment Activity Review - December 2015

After a lack of activity in November, I managed to put a few trades through in December to take advantage of the negative sentiment on oil and other commodities that continues to permeate the market.

Added to short position on S&P 500 via HSD

In December the Federal Reserve finallydecided to do something and raised its Fed Funds rate ¼ of a percentage point. Hazahh!! The age of near zero interest rates is coming to an end! Risk will now be a consideration when evaluating investments. Finally, stocks will begin to get priced to reflect their mediocre wealth creating capacity!

Hold on now.

The narrative of rising interest rates implies that stock prices should pull back, but for this to happen rising interest rates need to….keep rising. The comments coming out of the Federal Reserve implied that rates will increase gradually which means they could wait another5 years before raising them again which could be enough to keep pushing paper assets upward.  Conversely we could be seeing the beginning of the end of soaring stock prices, to which keeping a short position on US stocks may not seem like a bad idea.  So where do I stand on this?

My Big Short

Well, I go back to first principles and that is I believe strongly that asset prices which includes stocks are overpriced and even if it takes a gradual increase in interest rates, at some point, the market is going to wake up and say we cannot pay these prices for companies that are generating meagre nor non-existent profits. It’s been an extremely painful position to take and my portfolio has taken many body blows because of it. At the end I feel confident that mind mapping of these first principles is going to play out either in a big crash or a series of small cuts. With that I decided to continue my program of averaging down my short position in the S&P 500 index every few months. In my personal portfolio, the short position represents almost 40 percent of my portfolio. I’m down roughly 20 percent and this would normally be my trigger to sell to control the loss but so far I’ve refrained. It’s my own version of the Big Short.

Added to position in Potash Corporation (POT)

Potash continues to be the classic unloved, hated stock and if you’ve been following my musings, you’ll know that I’m always on the lookout for these creatures.  In December the stock fell to the $23 level down from my initial purchase price of $26.18 in October 2015. The company continued to come under pressure from falling potash prices and overall commodity prices which were driven by excess supply of commodities and a very strong US dollar. Fundamentally nothing has changed with the company other than they abandoned their takeover attempt of K+S AG.  Simply put potash prices are weak and there is little short term demand.  The stock is out of favour right now. At some point this dynamic will shift as the reality is there is a growing population that is moving up the food consumption chain and with that a demand for agriculture products that will maximize crop yields.  I have no idea when the pendulum will shift. The wild card with the company is the dividend which is paying a crazy 9.42 percent yield.  There are rumblings that the company will at some point cut the dividend to preserve capital.  It could happen and if it did, it could take the stock down further.  Dividend yields though is not the primary reason I buy stocks. It’s about capital appreciation as a result of management efficiently allocating its scarce capital. All I know is that Potash is a best of breed agricultural company that has the financial resources and management discipline to manage the current market. It’s a stock that could likely experience  duress, but I think over the long term it can be a solid performing stock and I’m willing to bank the 9 percent to wait or even 4 percent if they cut the dividend. With my position down about 10 percent, I decided to buy some more stock to lower my average cost. Should it fall a bit further I would consider buying more if the fundamentals of the business are still intact.

Added to position in Imperial Oil (IMO)

Another out of favour stock. Well actually any oil or commodity stock could be considered out of favour with good reason. Imperial continues to get hit as a result of falling oil prices which now have touched the mid $30’s per barrel range. A year ago it was in the $70’s. The stock had a look at the low $40’s in December and so I decided to buy some more stock to lower my average cost which has now hit about $46, down from my initial purchase price of $50.50 in December 2014. The pendulum has indeed hit the extremes and the narrative has a good chance of staying in the same position as long as there is an oversupply of oil and waning demand for it as well as the US$ maintains its strength. Sounds like a carbon copy of Potash? You bet and like Potash at some point the pendulum may not swing all the way back but it will start a process. When it does, companies like Imperial which has demonstrated that they can still create tangible wealth in a depressed market, will benefit. I continue to maintain that in my experience analyzing and researching stocks that oil companies are some of the best managed companies out there in terms of preserving and allocating capital. In the quality quotient, they are pretty high. Imperial Oil which is owned by Exxon Mobil, which is among the gold standards in the oil industry has a good pedigree and I think can ride through this down patch.

So as the stock market ends the year with a bit of indigestion, I have slow began resumption of building long term positions in out of favour yet high quality stocks. I have a feeling you’ll be hearing harp on this them a fair bit going forward into 2016.