Still figuring out what to harvest but deployed some of our cash today to opportunistically buy 2000 shares of Parkland Fuel as well as opening a position in Power Financial with 1000 shares.
Update on the rest of the rebalance coming soon.
So it would appear we’ve been on a rather unlikely run since our New Year’s hangover wore off. Though I generally believe that the market’s good humour will persist through to 2014, I’m wont to disbelieve its going to be a straight walk down the yellow brick road. We’re in the midst of a rebalancing and are looking at way more energy and resource companies than I would have anticipated. Also have to admit that Johnny pointed out PKI to me in May. Will probably see it guest starring in the portfolio this spring. Also had my eye on WJX for the August rebalance but I’m starting to see that many of these under-covered, under-loved gems (looking at you High Arctic Oil Services!) really need the credibility of a few large PMs buying in before they soar. That necessary critical mass of buyers that causes an inflection in valuation parameters is extremely difficult to time. That said, I believe we’re going to have a handful that will make a good showing.
In the meantime, we’re raising cash and selling stock. Goodbye to our entire positions in Bombardier, New Look, Canfor, Cineplex (great buy, great sell), Data Group (stupidest purchase ever), Colabor, Nordion (second stupidest purchase ever), Noranda Income Fund, Pengrowth & InnVest. We’re at 10% cash and will probably be bumping that up to about 15% and waiting for a retreat in prices before committing to our rebalance in the next week or so. 
The JML fund was ripped from its summer slumber this afternoon–After effectively sidelining the fund for most of the summer, we’ve got a play we’re happy to call our own:
The complacency is palpable. Its our opinion that we’ve exceeded merely having a rift between steadily appreciating equity prices and smoothly evaporating volatility on the options side; we’re in the uncanny valley.
We have a simple solution for this: we’ve just bought 100 December contracts to call VXX US @ $12 for $1.70 (Total Cost $17,000 plus 40 bps commission). To compound our terror over the next few months, we’ve gone short 4 December S&P 500 E-Mini Futures at 1405 (We provided $20,000 to meet our initial margin requirements of $4,375 per contract–the position has a notional value of -$280,000).
We’ll go through our reasoning over the next few days as there are some other things on our minds (i.e. CPA rebalancing is requiring some harder decisions than originally anticipated)…
Trade Tickets:
As I alluded when writing Into the Fog back in May, we positioned JML to sit on a bloated chunk of cash in order to ride out the ‘doldrums’ we anticipated hitting over the summer–for similar reasons we left CPA exactly as it was; figuring that its low beta to the TSX and charming ability to collect dividends would be rewarded in an otherwise volatile, yet aimless market.
Over the last two weeks however, this summer’s nail biting market driver (i.e. whether ‘Super Mario’ has had or has not had a bowel movement this morning) elegantly concealed what appears to be a marked uptick in confidence. The sentiment was best captured by a brief headline I caught on CNBC the other day: we’ve experienced a stealth rally and its perhaps time to pay attention.
Like any doting parent that wants to step back and watch as their progeny stands on its own two feet, I’ve felt compelled to let the Canadian Passive Alpha fund ride since its last rebalancing on the 24th of January. Though its easy to say in retrospect, I think we felt very comfortable early on with the low-volatility, value-driven, equity-income approach we took. Though we feel that the equity income style is currently in vogue due to historically low fixed-income yields, we’ve been pleasantly surprised to discover that the market has agreed with us on the value part of the equation. This, unfortunately, has brought my first ever feeling of discomfort with the composition of CPA. The run, especially in the last two weeks has been too good. Johnny and I are decent, common-sense stock pickers but many of our picks, gems though they may be, have become significantly expensive. I’m starting to feel like ‘poor’ Steven Krohn must have felt last week when one of his curators brought him the terribly good news that they had discovered a Picasso in the basement of their Indiana Museum. A few quick calls to Lloyds of London is all it took; they couldn’t afford their own good fortune; neither can we. Its time for us to pass on our good fortune to some hungry buyers and in turn create a new assemblage of under-loved equities.
Following the same recipe that brought us here in the first place, we’ve spent a decent part of the last week working our way through what we could still afford to keep and then set on a quest to find the right candidates to replace many of our shining stars and beaten dogs.
Suffice it say, I’ve probably contributed a few bps to Japan’s current account over the last few days. Finally though, the master list has been pencilled in; financials have been pored over, sentiment has been gauged, fundamentals, technicals and everything in between that could serve as some sort of input for our mental latticeworks to arrive at an appropriate conclusion has been as close to satisfied as we can reasonably get.
We’ve found some 68 suitable candidates from a universe of about 800 to take the roughly 20 places that will be opening up in CPA; an honest 7 of these 68 have really pulled at our heart strings for both quantifiable and subjective reasons–three of them we’re cautiously optimistic are going have some real star power. The last few days have have now been dedicated to a balance of both the mechanics of creating a beautiful blend that should stand the test of time (and hopefully have similar behaviour to the current CPA) as well as the more nuanced considerations of how we feel about the direction of certain sectors in terms of CPA‘s longer-term, lower-turnover mandate (incorporating what we have learned since inception from both our leaders and laggards in the energy sector, for example).
Most of our actual trading should take place on Thursday and Friday, weather permitting. Expect to see the final holdings report at some point Friday evening.
Anyway, thanks for following us on the CPA ride thus far–we hope to keep it as passive and unsurprising as possible going forward. Here’s an update of where its at since inception: Being long-only, Canadian-only, with no leverage, derivatives or significant portfolio turnover, we’ve returned 16.372% after fees, before taxes, versus 1.795% for our benchmark, the S&P TSX Composite Net Total Return Index since inception on October 24th, 2011.
Under no stretch of the imagination can we reasonably expect to repeat these returns. Notwithstanding, we will do our very best to maintain a portfolio beta close to 0.5 while maximizing alpha into what should prove to be a rough autumn fall–double entendre very intended.
Maybe I’m a bit concerned with work and my upcoming CFA exam but I feel eerily out of touch. I’m no guru by any stretch of the imagination but honestly, I feel we’re at an inflection point–which could be really great, but I have absolutely no feel or vision for what’s coming next. I sold half of the volatility paper today after it too went on a schizophrenic ride. Check out the TSX over the last month and notice the green and red bars below the line graph; they’re an old-school fear/greed indicator–I’ve got some back-testing to do but based on spot checks, I can’t find a time in the last two years where such extremes were reached in such a short period. While this speaks to the larger narrative of global uncertainty we’re going through–I’m really thinking about what the potential pivot out of this situation looks like… And at present I genuinely can’t see one. I can’t see a driver for growth or for catastrophic collapse (Canadian real-estate correction is going to be a relative blip; presuming low inflation & rates not bouncing up too much more than 100 bps)–so there we have it. It’s official. We’re in the doldrums. A trader’s paradise. Not necessarily my favorite type of medium-term swing environment but whatevs, I’ll adjust.
