From time to time, we intend to make postings to our Straight Talk Blog when we have something important to say. All three partners will be contributing authors. We'll alert you by e-mail when we make a new posting.
We'd be delighted to hear back from you, so please feel free to send us your comments in the form provided.
Sep 6, 2016 1:14 PM Heathbridge Capital Management
We are pleased to tell you that Dennis Ly, the latest addition to our team, has been granted his Certified Financial Planner® designation from the Financial Planning Standards Council. Dennis will work extensively with our clients to ensure that account information is up to date. Most importantly, he will work with the Portfolio Managers to ensure that portfolios are appropriately structured to meet individual requirements and risk tolerance. He will develop financial plans for our clients and create Investment Policy Statements for their accounts.
Dennis is also broadening his experience at Heathbridge, helping to develop financial models and assisting with selective research projects.
Please contact Dennis if your circumstances have changed or if you feel you would like to update your financial plan. In the meantime, Dennis may be in touch with you if he feels that your information and investment profile need updating.
Feb 1, 2016 12:51 PM Heathbridge Capital Management
Dear Valued Client,
We apologize for sending out information like this by email “blasts”. We hope it doesn’t seem too impersonal but our purpose is to get these messages out as quickly as possible. We hope that you will contact us if there are any aspects of any of the correspondence that you would like to discuss further. We would be more than happy to take your call.
Even though January finished its last ten days with a bit of a flourish, portfolio values in the month still declined as a result of the breathtaking market drop of the first three weeks. We certainly didn’t expect this. In fact the trading in December looked to us like conditions were ripe for the usual “January Effect”, which describes the tendency for stock prices, particularly of small capitalization companies, to rise after tax loss selling late in the previous year.
One consequence of monetary stimulus is that there is lots of cash available for all kinds of market operations, including short selling. When uncertainty reigns, short sellers have greater traction and prices go down more than you might normally expect. Given the not-bad outlook that eminent institutions like the Federal Reserve have for the economy, the price erosion was greater than we expected because of this short selling activity. It also disproportionately affected some of our investments like Hudbay Mining. Even though our over-all exposure in the commodity sector is small compared to the indices, the shorting of Hudbay hurt because we had a full position in this company, which we felt was best-in-class.
Also unusual was the simultaneous decline of the over-all market and oil prices. Many economic models have equated a $10 drop in the price of oil with a ½ percent growth in the real economy. In other words, the drop in the price of oil should have been very stimulative for business and the consumer. However, the over-all market movement was very highly correlated with the downward price of oil, which caught most observers, including us, by surprise.
Finally, the stocks that were affected most in the market were the so-called value stocks and others that have gone up the most over the past four or five years. In our portfolios, they had become heavily weighted by the virtue of their success. These proved to be the easiest for the market to sell in the time of uncertainty, and so our portfolios did worse than the indices for most of the downdraft.
So, where does that leave us?
As you know, we don’t like to trade out of good companies in anticipation of downdrafts such as have just occurred, for the primary reason that we don’t know when they are going to happen. However, we do tend to trim when they achieve pre-determined prices or become too large a weighting in our portfolios by virtue of appreciation. This happened over the past two years and by mid-January, we had a reasonable amount of cash to take advantage of the bargain prices that were presented to us. We were net buyers throughout the month, which tended to hurt us in the short term but which will be beneficial in the long term. Nevertheless, we still have good reserves of buying power.
We believe that the supply of certain commodities, particularly oil, will remain high, but also believe that the US dollar is close to its peak. A drop in the US dollar will be good for the price of gold, industrial commodities, European stocks, Canadian stocks, and business in general as companies deploy large cash positions that have been building at the corporate level. We believe that the price of oil and the general stock market will again diverge.
Most importantly, we believe that this correction, while it may have further to run, will at some point get tired and that the share prices of the companies that we follow will again start to track their value creation. In other words, in spite of its severity and relentlessness, this correction will be like most others.
Please don’t hesitate to call us if this letter raises further concerns.
Jan 15, 2016 1:05 PM Heathbridge Capital Management
We have often said that about one in thirteen or fourteen of our stock “picks” will turn out to be mistakes. If HudBay isn’t a mistake, it is certainly acting like one.
The thesis behind our investment in HudBay was that it had world class assets with low production costs. In theory, low cost production means that the mine could continue to operate at the bottom of the copper cycle while others had to shut down. Copper, while it is declining in price as inventory builds up and China slows down, is not subject to massive sources of new supply as oil is, and the trajectory for price recovery can be more easily imagined. We had great confidence in the President, David Garofalo. While the company had large debt, its source of capital expenditure requirements, the Constancia mine in Peru, was about to come on stream, reducing spending requirements and increasing cash flow to pay down the debt. It was, we felt, best of breed in the mining sector.
A Series of Unfortunate Events worthy of Lemony Snicket has befallen HudBay. The decline in copper price, even as exacerbated by fears of slowdown in China, was the start, but was not unusual. The bad environment for the stock market, which made it easier for short sellers to make money, augmented the downward trend, but this was also not out of the realm of expectations. The threat that the stock might drop under $5 was of concern, because at this level, the shares become less eligible for margin in brokerage accounts, giving the short sellers more traction. The culminating event, though, was the departure of President David Garofalo for Goldcorp when the price hovered just over $5, giving the short sellers the leverage they needed to make HudBay’s low price work for them. Given that HudBay’s operations are about cash flow neutral at current copper prices, the company’s debt becomes a concern given the low share price and makes it difficult for the stock to find support in the face of the selling.
What to do now?
We are loathe to sell the shares at current prices. HudBay’s asset value was estimated by some analysts at $25 per share not so long ago. David Garofalo confided to us after he left that he believed the shares could eventually appreciate by 6 times - from the then price of over $5 per share! – and that he is not selling any of his HudBay stock even though he no longer works there. David left behind a stable of excellent managers, one of whom, Alan Hair, has been made President. He is not only very competent in operations, he is very conservative. With the shares now trading at under $3, the company starts to become an easy takeover target, particularly for a company with enough resources to give comfort to HudBay’s debt holders.
So, for better or worse, we think the correct strategy is to hold on, which we intend to do.
Please don’t hesitate to call if you have any questions.
Jan 11, 2016 1:58 PM Heathbridge Capital Management
It is worth elaborating on a few of the points in our email message from last week.
We mentioned that we fall into the camp of those who believe that a slowdown in the Chinese economy will have less effect on the Western economies than is currently feared. China is a net supplier to the world, and its economic decline will affect the cost side of developed economies more favorably than it will affect the demand side unfavorably. We also believe that the Shanghai and, to a lesser extent, the Hong Kong stock markets are not interconnected enough with Western markets to drag them down in a collapse. The upward ‘spike” in the Chinese stock markets that started in 2014 was seen by many as artificial and a complete reversal to “normal” prior levels seems likely.
However, as we mentioned, China will continue to have a profound effect on commodities, particularly oil and copper. The price collapse in these two commodities will have obvious effects on the economies of Canada’s western provinces. However, they may also trigger a reversal of the speculative house price boom, particularly in British Columbia. Should the Renminbi weaken relative to the Canadian dollar, reversing its five year trend, or if China enforces capital controls, the BC housing market could generate significant real estate loan losses. It is not well known that uninsured mortgages in Alberta are non-recourse, an unusual legal circumstance that can lead to large write-offs for banks that have originated such loans. While most banks are at or close to their required equity ratios, and are planning to maintain or increase them through earnings retention, loan write-offs in oil and gas and mortgage lending categories could require them to raise more equity at adverse times in the market. We presented last year on the risks of new regulations on issues of bank obligations, and indeed the banks’ cost of capital has been rising for reasons that include these new restrictions. This may push banks to issue equity capital rather than subordinated debt. Many students of the market feel that there is no good part of a stock market when the bank stocks are weak. This may or may not be so, but we can at least affirm our significant underweighting in bank and resource stocks. Our cash holdings are higher than we indicated to you in our last message at roughly 13 to 15 percent.
It takes toughness to hold on to good companies in bad markets, but that is our strategy and we have the cash reserves to take advantage of a “crash” should this downdraft get worse.
Jan 7, 2016 12:38 PM Heathbridge Capital Management
Once again, the news is churning all of our markets – and all of our stomachs! The chartists are pointing to “breakdowns” and the momentum players are having them.
There have been three main themes to the market volatility – the threat of an economic slowdown in China and related collapse of the Chinese stock markets; threat of a wider war in the middle east; and a nuclear detonation in North Korea.
The question of the degree to which China will slow down is a matter of divided opinion amongst economists. If in fact there is a significant slowdown, we think it will have only a minor effect on the Western economies over all others, but there could be significant impact in the resource sectors, particular oil and copper. Declines in commodity prices are stimulative to other parts of the economy. In the opinion of the Federal Reserve, the US economy is still on an upward trajectory. There appears to be a minor economic correction happening that can be attributable to the effects of an economy-wide inventory build-up earlier in 2015. We expect that this effect will wear off in 2016. Europe’s recovery from the economic horrors of 2008 has been slower than that of the US. Its environment for business formation is less favourable but there is no good reason that we have seen that leads us to believe that Europe is not going to steadily recover. Within the companies that we follow, business has slowed a little but most managements we talk to are planning for continued growth in sales. With this market correction, some share prices are becoming very attractive.
As they do with their economy, the Chinese government is tinkering with their stock markets, buying stocks to hold up prices and shutting down exchanges when they drop too much. These actions will only exacerbate the downward trends, so the collapse of the Shanghai and Hong Kong markets is likely to continue. While fear of contagion is pushing share prices down elsewhere for the moment at least, we think that in time the Western markets will become inured to region-specific gyrations.
The latter two headlines are in the nature of “geopolitical risk”. The market reaction to such news almost always generates an opportunity. The worst of these types of headlines in history was the bombing of Pearl Harbor. Within nine months of that news, the stock market recovered past previous peaks. The sabre rattlings in Saudi Arabia, Iran, and North Korea are hissy fits in comparison.
Just as we built cash as stocks reached our trim targets in the past two years, we are taking advantage of the current malaise to deploy a small part of it. We still hold cash balances in excess of 10 percent on average and are staying vigilant for opportunities.
As is often true in these corrections, it is best to keep calm and carry on!
Please don’t hesitate to call any of the “Rs” if you have any questions.
Sep 8, 2015 3:13 PM Heathbridge Capital Management
Most Canadians realize how lucky they are to live in Canada. Canada has an international reputation for welcoming newcomers and refugees. However, it is time we all did more.
Resettled refugees with private sponsorship have the greatest record of success. Heathbridge has decided to become a sponsor of a refugee family, in addition to a family that will be sponsored by one of our partners.
Over the weekend, we were in touch with one of the sponsoring organizations and an individual who this year alone has put the wheels in motion for 600 people from persecuted minorities, with the majority being from Syria and Iraq. He will be going to Amman, Jordan in three weeks to select the next batch of refugees. We hope to sponsor a family as soon as he can arrange it. It is not widely known that Canada has dramatically shrunk processing time for refugees over the past four years, and we hope that we might welcome this family soon.
We hope to make a brighter future for at least one family in desperate need.
Aug 22, 2015 6:21 AM Heathbridge Capital Management
It never fails! The market has had another crisis in August, when nobody is around to take care of it. Actually, come to think of it, that is why such crises often happen in August. With very little volume and few decision-makers about, it is easy for prevailing emotions to create large swings, sometimes up, more often down.
The main cause of concern in the summer of 2015 has been the eminent collapse of the Chinese miracle. To some extent, this was bound to happen. A managed economy cannot sustain fairy-tale growth forever. Furthermore, when eventually the piper must be paid, a managed economy will not have the flexibility to recover quickly. This is in contrast to the resilience of, for example, the United States economy after the 2008 financial crisis. In fact, it is the flexibility of the western economies that make them unlikely to be dragged down with China into the morass. While undoubtedly there will be some diminishment in demand because of China, which stocks like Magna and ADP are reflecting, the steady progress being made in the US and now Europe is likely to continue even if there is a brief pause. Even Japan, so close to China, is starting to see domestic demand pick up even with the Chinese slowdown. After 25 years of stagnation, Japan is increasingly likely to experience the “spontaneous recovery” that Alan Greenspan wrote about.
China is more a supplier to the world than a customer. The greatest consequence of a prolonged period of low Chinese growth – or even, God forbid, of decline – is likely to be a prolonged stagnation in the commodities that China consumes in its own right. Copper has been a notable victim of the Chinese collapse and oil now faces weak demand on top of swelling supply. This is likely to weigh on commodity stocks and, in turn, the Canadian economy and its market. Our diversification strategy at Heathbridge means that we really only have two or three stocks in this area, and as a consequence, our portfolios have been much less affected than most. Some commodity stocks are approaching compelling valuations and we might even add to some of the best companies in the not too distant future, although we would expect it to be a long time before such investments again hit their stride.
Generally, we have cash in the portfolios to take advantage of these downturns and are fairly confident that the world markets in due course will get used to China’s slow decline.
A secondary development in the market over the summer has had a greater impact on Heathbridge portfolios. The Netflix phenomenon has finally been recognized in the prices of media companies, particularly those that rely most heavily on the advertising market. The TV broadcasters are most affected as advertising continues its secular decline. The stock in our portfolio that was most affected by this was Corus Entertainment, which we sold in two stages, half near its peak at $25 and the rest at $16 ½. However, one of our favorite stocks, The Walt Disney Company, owns ESPN, a company that supplies live sports broadcasting to the TV networks. It too has been dragged down by the group, even though most of its product is content that benefits from the new over-the-top competition. With further price declines, we would eagerly buy more. Other media like stocks in our portfolios, like the cable companies, have also been affected.
Our portfolios are generally lower than their last quarter end values by perhaps 5 or 6 percent. We would consider this normal variation. Our expectation is that at some point the stocks that are falling because of fear of economic contagion – like Magna and ADP in your portfolio – will start to be snapped up when markets resume their normal activity and returning investors take advantage of the bargains.
Jun 30, 2015 8:34 AM Heathbridge Capital Management
For a country with so little economic output in the global context, Greece has had a surprisingly large political and stock market impact since May 2010.
The latest saga has resulted in a nerve wracking Greek government referendum on Sunday July 5th regarding the recent EU bailout conditions, as well as an immediate closure of banks and the stock market. For the average Greek, this is terrifying. For Europe as a whole, the impact will likely be small.
In the short term we will see market volatility. The longer term economic impact for the rest of the world from Greece leaving the EU will likely be negligible. However, the political impact for the EU is not as negative as people perceive. A withdrawal imposes fiscal discipline on the other members of the EU and demonstrates the consequences for not doing so.
How does this impact your portfolio? Global stocks markets are down and bond markets are up. For the moment your portfolio is down slightly compared to March 31st. The businesses we own have little if any exposure to Greece. There is a disconnect between their economic fundamentals and the current market decline. In 2011, Greece caused six months of turmoil in the markets amid fears of bank weakness and contagion. This was followed by 3 1/2 years of impressive stock market appreciation. With the banks and other European countries much more sound now, we believe even more strongly this is the time to stay the course. Our cash levels have been rising over the last year, not as a market call but simply as a function of our investment process finding fewer attractive investments. This cash will serve us well should this downturn be prolonged and give us ammunition to capitalize on opportunities.
If you have any questions, please do not hesitate to contact us,
Apr 1, 2015 10:35 AM Heathbridge Capital Management
Effective today, the management fee for the Heathbridge Checkmark Equity Pooled Fund will be reduced from 1.55% to 1.50%. This comes on the heels of earlier reductions of from 1.75% to 1.65% on January 1st, 2011 and from 1.65% to 1.55% on April 1st, 2013.
The pooled fund is now larger than $100 million. As before, we are pleased to share the benefit of the economies of scale with our clients.
This policy contrasts with the large bank-controlled mutual funds whose fees have actually gone up as their funds have grown (Rob Carrick highlighted on April 25, 2014 that the management expense ratio rose over the past 5 years for 9 of the largest 12 mutual funds in Canada. This included every bank-run mutual fund on the list) – and consumers trust the banks! Perhaps that is the April Fools’ joke.
The fees on our larger segregated accounts continue at 1.25%.
Heathbridge began managing money for our earliest clients 19 years ago and we have had a great partnership with them ever since.
We look forward to many more years together in the future. Thank you for your ongoing trust.
Jan 21, 2015 9:05 AM Heathbridge Capital Management
“Pleasure is none, if not diversified.”
John Donne, Elegy XVIII
John Donne was undoubtedly talking about something else. On the other hand, pleasure was none for portfolios that were not diversified in the last half of 2014.
In all periods ended December 31, 2014, Heathbridge portfolios experienced returns that, in general, were better than 95 percent of our measurable competitors. In the recent time frames, this was not because of magical stock picking on our part, but rather because our portfolio diversification strategies minimized the impact of the commodity price collapses that undermined a huge portion of the Canadian stock market. The industry tends to manage with reference to index weightings, and many managers were caught with investments in oil and gas and metal stocks, that, in retrospect, proved to be too heavy. Our more balanced portfolios pulled their loads well.
Dec 10, 2014 9:38 PM Heathbridge Capital Management
Or at least you were as of the end of today.
The precipitous drop in oil prices is having a calamitous effect on confidence on world markets, particularly in Canada, where oil is a heavily weighted staple in most portfolios. Some natural gas stocks like Encana (which we don’t own) are down 50 percent from their levels in the summer of this year! Railroads, which have benefitted from the transport of oil in a time of pipeline constraint, are down sharply and even bank stocks are being hit because of their loans to the oil patch. The headlines are horrifying.
Our recent presentations in December focused on the value of diversification and balance through international exposure. As a consequence of this policy, our average equity portfolio is higher than at the end of September and October. We are in a position to watch these developments with interest and maybe even excitement if there is a panic sell off in the next few weeks. We are in a position to buy.
While it is likely you will experience some value erosion in the next little while, you are still in pretty good shape. We know that the markets can be nerve-wracking and would welcome your call if you need some comfort.
The Team at Heathbridge
Dec 10, 2014 9:37 PM Heathbridge Capital Management
Nov 28, 2014 4:09 PM Heathbridge Capital Management
We are all aware that in the last two days, the price of oil has had an historic collapse, dropping over 10 percent in two trading sessions. There has been a considerable impact on oil and gas shares, and shares of companies deemed to be related – including railroads (which we have been watching but don’t own).
You have about a 4 percent weighting in one oil stock – Suncor – which dropped 8 percent in two days and at least one gas stock, Nuvista, which dropped 15 percent in the same time frame. Your total weighting in these stocks is about 6 percent, compared to the index weighting of about 19 percent.
Even though the market seems to be betting on further declines, we will not sell into the torrent. Our next activity will likely be on the buy side if it looks like the market is entering a stage of manic panic. The drop in oil prices actually triggered price gains in sectors of the market deemed to benefit from lower energy prices. Magna rose, as did our investment in japan (Mitsubishi UFJ). So while the energy part of your portfolio is likely to decline for a while, the oil price collapse will not be of itself a major impairment to your total portfolio value and may well be the source of our next opportunity.
All in all, the price movements of the past two days have vindicated our diversification strategies.
If you have any questions, please don’t hesitate to call. We will look forward to seeing many of you at our Seasonal Celebration on Monday night.
Oct 15, 2014 5:15 PM Heathbridge Capital Management
You may be disappointed in our answer.
Not much on the sell side.
The correction that we are experiencing is a normal phenomenon. They always cause anxiety, as we are feeling now. But the markets still manage to return 9 percent per year in spite of them, on average of course. That means that if the market goes up 50 percent over two years, some declines must be expected in some future year. The trouble is, you can’t tell when that will be and there is no strategy that works to take advantage of this phenomenon.
We have written before that markets trade below some previous peak about 70 percent of the time. That means that, if the level reached on September 3 of this year was a peak, it will be some time before markets get back through this level. But, it is as inevitable as anything in the market can be that they will eventually exceed the September 3 top. In the meantime, almost all the stocks in our portfolio universe pay dividends and their collective yield is 2.3 percent, so we will be paid to wait.
We are not seeing distress in the world economic news. The US is strong and Europe will follow suit in due course. The societal rules in Europe are less conducive to business formation than they are in North America, and some delay should not be surprising. We have also had unaccustomed geopolitical shock in that region which has undermined confidence. In time, both factors will give way to a least moderate growth. We think we are closer to an intermediate bottom than not.
Our system tends to generate cash, not always a lot, near market peaks as our investments hit trim targets. This happened to enough of the stocks that we own that we ended the third quarter with over two “positions“ in funds that can take advantage of the recent market declines. We have been steadily adding to existing stocks of industry leaders where we had become underweighted with the decline, including some this week. When good stocks are on sale, it is a good time to buy.
Nevertheless, we expect that in time they will prove to be profitable buys.
As long as you don’t sell your good company shares, you haven’t lost money. Once you have sold, however, their future potential is lost. Holding on has always been the best strategy.
Oct 9, 2014 3:41 PM Heathbridge Capital Management
Markets are collapsing around the world even as economic indicators in the US are getting stronger and stronger. Fears of softness in Europe and China are causing weakness in commodities and strength in the US dollar.
Your portfolios are declining in value but we don’t have the excessive concentration in the resource stocks that many Canadian portfolios have. Some of the weakness in our foreign stocks is being offset by declines in the Canadian dollar. Diversification is working.
In the meantime, we are definitely not in a selling mode. We have cash to deploy and are looking at the recent trends as a potential opportunity.
If you are nervous. Please don’t hesitate to call.