Investment Activity Review - February 2016

The carnage in stock prices continued into the early part of February and I used the fear factor to add to some of my existing holdings to average down my costs. I also made one investment decision, that one could construe as puzzling and a bit weird and something I wouldn’t suggest anyone do.

Added to position in iShares Europe ETF (XEH)

European shares had a stretch in February where they fell on 7 consecutive days. If that isn’t out of favour I don’t know what is. With this sentiment entrenched I thought it would be a good time to add to my existing Europe exposure via the iShares ETF. I originally bought it because I was expecting the European Central Bank (ECB) to go more aggressive on printing money which would be a stimulus to Euro stocks, much in the same way the Federal Reserve in the US did to goose US stock prices. Unlike the US, Europe doesn’t seem to be in any hurry to remove their stimulus so the potential is there for stocks to rise meaningfully in the short/medium term. I could easily look at individual companies but right now I just couldn’t be bothered so I’ll pay for some broader exposure. Update: Since writing this, the ECB went all in on another round of stimulus that featured lowering interest rates and increasing its purchases of German Bund bonds and also musing about expanding bond purchases to include corporate debt. It is very reminiscent of the Japan’s recent throw everything and the kitchen sink monetary policy strategy. It hasn’t panned out for the economy but it may give a short-medium term boost to stock prices.

 

Added to position in VISA (V)

This position is in my son’s RESP portfolio. The stock went down almost 7 percent in one day on no real material news. That day the broader market was down significantly so I thought that perhaps this is a baby getting thrown out with the bathwater moment. I still think the fundamentals of the business are rock solid, so I used the pullback as a buying opportunity to buy a great company . Perhaps there is uneasiness that if the global economy is slowing down that people will be using credit less. On the other hand recently VISA announced they had signed an agreement with China UnionPay to get greater access into the China market. The Government recently announced that they would be opening the credit card market to foreign vendors.  Long term this could be a major source of growth for VISA. Net-net I was still even on the position.

Added to position in Potash Corporation of Saskatchewan (POT)

The stock dropped to $21 range in February and so I decided to buy more to average down my costs which are now at $23.66. The stock took a hit as their latest earnings came out and they were not that great. More significantly to investors but not surprising as I’ve commented on this in the past is that the company decided to cut their dividend. At one point the dividend yield was almost 10 percent which is just too high. The cut though was not as high as people thought. Perhaps they are going to lower it gradually instead of one big cut. On the business side, potash prices continue to come under heavy pressure like all other commodities. India recently announced that they were not going to accept any additional potash imports until late spring as drought has had a bad impact on the upcoming year’s crops. Not a very popular stock to be around these days. I still hold the position that the pendulum will eventually swing back to the middle and prices will track back up. As usual I have no idea when that will occur.

Opened position in iShares Gold Bullion ETF-Hedged (CGL)

This move goes far away from my normal practice as my motives in opening this position are very different and you might say quite a bit of a reach, but I still wanted to share it with you. I bought into gold not because I think the metal has some untapped value or that it is cheap. My motives were more to use the position to hedge some US$ currency exposure that I have in my portfolios. Right now I am holding a fair amount of US stocks and ETF’s. When the Canadian dollar was at parody, I was doing my own version of cross border shopping and picking up US stocks on the cheap. As the Loonie started its rapid decent, my US$ positions caught a nice tail wind and juiced up my returns. This trend I thoughtseemed entrenched as long as commodity prices kept falling (said another way, as long as the US$ keeps rising). In December when the Federal Reserve made the decision to increase interest rates, it marked a signal that the US$ could potentially rise further which would further benefit my US$ holdings. However, the messaging from the Fed in the past few months has been leaning more to keeping interest rates where they are. A lot of money has gone into holding US$ and if interest rates stay locked in, it could potentially take some air out of the US$, which would then cause the value of my US$ stocks to fall. I don’t want that to happen so I have been trying to figure out a way to hedge the potential loss in value because of currency appreciation.

There used to be an Canadian ETF that allowed you to take long or short positions on the US$, but it was wound down about a year ago. There are some US$ ETF’s that do the same thing but that is counter intuitive to invest in an ETF in US$ that is meant to go short in US$. Didn’t make sense double my currency risk.  Then I thought about possible indirect ways to hedge. I thought about gold. Traditionally gold and other commodities tend to trade inversely to the value of the US$. If the US$ goes up, commodity prices tend to trend down and vice versa. I came across this iShares gold bullion ETF that was currency hedged and I thought this might be a crude back door way of protecting some of my gains I’ve achieved in my portfolio. Because it is currency hedged, it will trade purely on the price of gold and if I buy gold, and it goes up (i.e. the US$ goes down) then I can make some gains that will offset the losses on the Canadian dollar currency appreciation. Conversely, if the Federal Reserve continues to increase interest rates, my gold ETF will likely fall, however my US$ stocks will continue to benefit and portfolio in a round-about way is getting partially hedged.

By no means is this a perfect strategy. It is far from clean and I repeat: I personally would not tell someone to do this. (My disclaimer) This is something a hedge fund would do.  I made a decision to try to hedge about 25 percent of my US$ positions to start. In a way it’s an interesting experiment. So far the paradigm has held up as the Canadian dollar has risen from $0.69 to $0.75. The ETF has gone up almost 5 percent and so have covered up some of my depreciation in my portfolio because of the strengthening Loonie.

The market has shown some signs of life again. Commodities have gained some traction and there are rumblings that interest rates will continue to track at generational lows.  If so it could provide some nice movement in my recent purchases over the past few months.