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.
Apr 15, 2013 7:57 PM Heathbridge Capital Management
The price of Gold is falling. Copper is falling. Oil is falling. The sky is falling! What’s going on?
Commodities may be selling off because of weak economic news. Gold may be selling off because the Cyprus Central Bank will have to sell some of its gold reserves to meet its EU bank bailout commitments. On the other hand, they all may be selling off just because the commodity boom is over for this cycle.
So why didn’t we see this coming? The answer is we partially did. It has certainly been one of the likely probabilities after so long and strong a rally. On the other hand, with the Central Banks printing so much money, monetary debasement is also a high possibility and some gold in the portfolio seems prudent. Our gold strategy is deployed through Goldcorp, a company with one of the strongest financial positions and the best growth profile in the industry. Recognizing the risks, though, we hold just a small position.
Suncor has excellent cash flow and dividend growth prospects, even with a lower price of oil, and so we continue to hold a full position even though lower prices for the commodity and for the stock seem likely for the moment.
Hudbay Minerals is our third resource play. It has the best growth profile in the mining industry, which could hurt it if metals prices continue to collapse. Fortunately, we trimmed a small amount in February, and so it represents less than a full position now.
In total, our commitment to resources is only about ten percent compared with forty percent for the S&P/TSX Index. Better relative performance is small comfort, but in truth, our exposure isn’t huge. We continue to monitor the situation closely.
Mar 26, 2013 8:57 AM Heathbridge Capital Management
The returns from the Heathbridge Checkmark Equity Pooled Fund have been strong and its assets have hit the $50 million mark. Our fixed costs have proportionally diminished as a result. We are happy to share the benefits of scale with our clients and will reduce our management fee from 1.65% to 1.55% effective April 1st. This follows a similar reduction of 0.10% we made in January 2011.
For our clients who have sub accounts greater than $300,000, the fee remains low at 1.25% as it is for their larger segregated portfolios.
We have also reduced the fee in the Heathbridge Foreign Equity Pooled Fund (formerly the Heathbridge US Pooled Fund) by 0.10% from 0.50% to 0.40%, effective February 1st when the fund grew through $12 million. This fund is designed specifically for clients managing US estate tax exposure. The fee is designed to be inexpensive protection in this regard and we have been managing this account on a breakeven basis as a service to such clients.
Jan 26, 2012 3:41 PM Heathbridge Capital Management
This week marked the beginning of the Year of the Dragon in the Chinese calendar, the most auspicious and powerful of their twelve signs, one associated with high energy, respect and prosperity. So far in 2012, these attributes also apply to your portfolio.
As of yesterday, our average 3-ranked equity accounts (regular equity accounts) were up 6% since the beginning of the year and our 4-ranked equity accounts (our “businessman’s risk" accounts) were up 10%. This compares with around 5% for both the Canadian market (S&P/TSX) and the US market (S&P 500 in C$). We know it is early days and storm clouds remain in Europe but our companies continue to march ahead.
The strong start to the year has been fueled by the laggards of 2011 that we highlighted in our year end quiz, including Magna and Life Technologies, both up over 25%. The dramatic outperformance of the 4-ranked accounts was largely due to the 130% increase in the share price of Gennum after a takeover announcement Monday evening (January 23). Gennum was also a name in the Heathbridge Checkmark Equity Pooled Fund. We sold the shares to lock in the gain and eliminate any deal risk.
Perhaps the greatest service that an investment manager can offer to its clients is to persuade them to stay the course. Our last blogs were sent in August and September, urging calm and recommending that investment positions be held. Since those times, equity account values have increased by 10 to 15 percent.
It can never be said for certainty that the worst is over and we will undoubtedly have further ebbs and flows in the pricing environment for stocks. However, we like the investments you own and are confident that these securities will eventually provide you with good returns.
Feel free to call with any questions you may have.
Oct 5, 2011 11:31 AM Heathbridge Capital Management
Tumbling markets continue to create anxiety for our clients. However, there is much underlying strength and good news that the markets are not pricing in. For this reason, buying is the better course of action than selling. Indeed, the prospective benefits of selling have rarely been lower. We believe that there are good reasons for investors to discipline their emotions and stay the course.
After a week of good economic indicators in North America, the percentage chances of a recession/depression are actually diminishing. Yet markets continue to tumble, pricing in recession as if it were a certainty. The downward course in the market has been caused as much by buyer timidity as by rapacious selling. Momentum speculators take advantage of this trend and exacerbate it.
Your September statements will arrive shortly and their equity components will show a 3 to 5 percent decline for the month. The major indices, in comparison, have declined 8 to 9 percent. Many of the companies in your portfolio have reported favourable business trends and are in exemplary financial condition. They have the strength to weather the current storms and to increase their dividends.
It is important to bear in mind that it is impossible to predict when the markets will turn upwards again. Reversals can happen suddenly and missing them is costly. The most dangerous position right now, as we see it, is to be out of the market.
Sep 16, 2011 4:55 PM Heathbridge Capital Management
The month of August saw extraordinary trading activity in our accounts. Some eyebrows have been raised and we thought it would be worthwhile to review this activity in a blog even though it will be covered in our October quarterly report.
We find we are most active at extreme points of the market. Sudden price movements tend to vary in their strengths security by security and present opportunities for rebalancing. The August markets proved to be no exception.
The rebalancing incurred higher than normal settlement costs for the period. It is worthwhile to point out that we do not receive any benefit from trade commissions and it is in our best interests as well as yours to minimize the all-in cost of each transaction. Overall, the activity had no material impact on the value of your portfolio.
Our trades focused on trimming securities whose price more closely approximated what we determined to be their intrinsic value in order to add to securities where significant price-to-value gaps had emerged. Often we had to trim 2 or more securities to add to one.
We also replaced Kraft Foods with Comcast. Kraft Foods has proposed a split of its businesses that does not make compelling sense but which activist investor Carl Icahn feels will “unlock value”. We don’t like financial engineering to manipulate a stock price and took advantage of Kraft’s initial price rise to dispose of our position. We owned Comcast before and bought it again to replace Kraft in our US portfolio. Kraft was up and Comcast was down, so this was a good exchange.
In September, taxable accounts will see another double trade. We realized a tax loss in Encana. Not wanting to be out of the natural gas market at a very low point in the cycle, we bought Talisman to replace it for the period that Encana must remain out of the portfolio. When sufficient time has passed we will likely reverse the trade.
These matters will be examined in greater detail in our quarterly letter but we wanted to discuss them now while the topic is fresh in your mind.
As always we welcome your questions about your accounts.
Sep 12, 2011 9:40 AM Heathbridge Capital Management
At the risk of over-communicating, we are blogging again on the topic of the investment environment. We appreciate the concerns that market downdrafts and headline news are creating for you and want to err on the side of staying well in touch.
Your statement for the end of August will show a decline in value that was greater than that of the markets. This is unusual for us. For the most part, good companies that went up a lot for us in the past quickly gave up gains as sentiment reversed. Many names in your portfolio have actually gone up in the past three weeks – Viterra, Cogeco and Goldcorp, for examples – which is evidence that good diversification is one tool for managing volatility. In most instances (but not in this most recent instance), the gains in such securities will offset the declines in other securities.
There is no question that the markets are more volatile now than before. The cause of this is not so much that times are unusual as that huge volumes of money printed by central banks are being used both to buy the market and to short it, causing extreme up-and-down price movements.
What is the best way to manage volatility? The first is not to take it as a signal that you are going to lose money. Volatility makes investors nervous but it does not make them lose money if the stocks held are not sold at their weak points. Good companies are the safest bet in most times of tribulation, even if, as “equities”, they carry a connotation of risk. Volatile downsides are very often followed by volatile upsides.
It is important to remember that volatility causes the most dangerous of future outcomes to loom larger than they merit. The large, well funded companies we follow are doing well. Those that are reporting some softness are those that have corporate customers which are holding back on purchases in fear that policies of over-active governments will hurt their businesses. They are not seeing a collapse in end markets. While 9.7 percent of US workers are unemployed, 90 percent are still working. We think that there is a good chance of a strong market recovery in 2012 in a period of just moderate economic activity. We side with those economists who feel that the chances of a depression are small.
At some point the “bear” will simply get tired. The timing of this turn is hard to predict. History suggests that the safest course now is just to hold on.
Please call to clarify any part of this discussion or if you are just worried and would like to chat.
Sep 7, 2011 8:37 AM Heathbridge Capital Management
The stock market turmoil this quarter has created a great deal of anxiety. The
headline news has been far worse than the positive trends being experienced by
many companies. There has not been a better time to invest new money since
March 2009. If you have been thinking about adding funds to your account, this is
a great time to do so.
As we grow, we will be careful not to dilute our high standard of service for
our existing clients. To this end, we will raise our minimum account size for new
relationships to $750,000 starting in January 2012. We want to give you notice in case you had friends or relatives that you were thinking of introducing to our style of management.
We would welcome the opportunity to discuss the market, your account and the
implications of the new minimum at any time. Please don’t hesitate to call.
Aug 19, 2011 12:23 PM Heathbridge Capital Management
The markets continue to deliver surprises. Most surprising are the number of foolish, panic- inducing statements that world leaders are making, which are serving to exacerbate the situation.
Account values at this point are 10 to 15 percent lower than at last quarter end. While it is possible that the market could continue to drop further, we think the better course of action right now is to buy rather than sell.
Gold has gone “parabolic”, as have bond prices. The final point in a parabolic up-movement is hard to predict, but at this stage the end is often not far away.
The best of the banks are in a very different position than they were in 2008: now they are well positioned to weather a liquidity crunch. In addition, the economic and corporate data are simply not bad enough to warrant the current level of concern.
As the world, particularly Europe, gets back to business after the summer holidays, we expect to see substantial reversals of the equity mix in portfolios, moving from the current T-bills and gold towards stocks.
We know this situation is unnerving, but we believe the best thing to do right now is to wait it out.
Aug 4, 2011 7:00 PM Heathbridge Capital Management
The world is revelling in a full-fledged market panic. Ironically, the topic of greatest concern one week ago was the possibility of a US default. Our blog of last Friday argued that it would be wrong to sell on that account. But within days, that commentary became irrelevant as the world skipped right over that issue to dwell on a double-dip recession on account of European defaults.
Economists’ views of the likelihood of a double dip recession seem to rest on whether or not they believe that government spending is a source of economic activity or not. Equivalently, views that we will have a second recession depend on the notion that European economies will slow down as government expenditures are cut back to accommodate tight finances. Most corporations are seeing little derivative effect from cut backs in government expenditure, although certain sectors which are very dependent on subsidies, like renewable energy, are suffering drastically. In fact, the interest rates on corporate debt are falling precipitously as investors shun government debt to invest in the (supposedly) safer corporate sector.
This premium on corporate debt is at odds with the sell-off in corporate equities. The huge flow of funds created by monetary stimulus is a double-edged sword. The funds can be used to short as well as to invest. At the moment, shorting the panic is the easiest route.
It was our belief that economic activity was bound to slow as corporations trod carefully, given the news that was dominating the headlines. Slowdown in China also seems likely, but this would not in itself be a killer for the US economy. The caution taken by corporations has, in many instances, created great balance sheets. We believe that the economy will resume recovery as corporations start to invest in capital goods and inventory once again.
When things are going well, people will use any reason to buy. We are experiencing the opposite right now, with people anxious to sell. Volumes in the summer tend to be light and it doesn't take much selling to cause the market to drop.
Over the medium term, the pressures for governments to get themselves into balance is a positive influence just as the financial system was forced to get into balance after the 2008-2009 crisis.
We believe that this spasm is creating wonderful opportunities and continue to believe that selling now would be ill-advised.
Jul 29, 2011 1:03 PM Heathbridge Capital Management
The US debt crisis is rattling the markets and causing angst around the world. We have seen this before - the US government shut down under presidents Clinton, Bush Sr. and Reagan. The US economy is more vulnerable now due to high debt levels and a slow recovery from the financial crisis. But we do not foresee a re-run of the banking crisis of 2008 as there is no crisis of confidence of bank counterparties. The August 2nd deadline is looming after being postponed from March. Governments only seem to react when there is a crisis. This also brings memories of alarming deadlines on Y2K that came and went.
There are US debt maturities and Social Security payments due next week, hence the specific date. If a solution is found this can be finessed but ultimately the US government is being forced to ponder the long-term deficit challenge it keeps ignoring. The difference between Greece and the US is that Greece can’t pay it back and the US won’t pay it back. At some point, there will be a solution found in the US and its credit rating will stabilize. In the meantime, all of this is good for good fiscal governance in the long run. In our recent quarterly letter we quoted Winston Churchill:
“The United States invariably does the right thing, after having exhausted every other alternative.”
The Debt crisis is hurting some of our stocks specifically. Magna for one is easy to short if you are economically bearish and could still be a star for the quarter. Thomson Reuters is going through some specific problems but it is easy to hate it when there is a financial crisis. The financials in Canada and the US have been lagging the indices for about a year now and will rebound as the financial stress dissipates. Our roster of leading, Darwinian companies will adapt whatever the circumstances and we think it imprudent to sell out of good companies due to alarming headlines as we highlighted in our recent “Sell Discipline of Checkmark Investing” report. Selling now would be a mistake.
Apr 25, 2011 1:32 PM Heathbridge Capital Management
Today (April 25, 2011) American Barrick announced its intended acquisition of Equinox Minerals for $8.15 per share, topping the previous bid by the Chinese state mining company, Minmetals. Equinox is mainly a copper company, not gold, and its assets are located primarily in Africa and Saudi Arabia, increasing Barrick’s risk profile.
Many investors wonder why Barrick is diversifying into copper at this time, and worry that it signals the company’s opinion that the peak in gold price is near. We are equally concerned, given the discussion by management in a conference call this morning about the never-ending attractiveness of copper, that it could also portend the near-peak in price for the red metal as well.
Aaron Regent, the President of Barrick, sounds eerily like Don Lindsay, the President of Teck Corporation, when he announced Teck’s acquisition of Fording Coal at the peak of the commodity market in 2007. Interestingly, both presidents are young and were in previous lives successful investment bankers.
We believe that this acquisition attempt—even if it is not successful—indicates that Barrick’s eye is off the strategy ball and is focused on growth for its own sake. Copper tends to reduce a gold company’s multiple in the marketplace and the Equinox acquisition would take Barrick’s non-gold production to over 20 percent, the proportion that analysts used to say would affect a company’s share price.
It is part of our investment philosophy that, as soon as it becomes evident that our assumptions about one of our investments are no longer valid, we will sell the shares. This is the case with Barrick and we sold our position this morning immediately after the announcement. The shares had nearly doubled from our initial cost price.
We have been tracking alternative investments in the gold category and are watching for our opportunity to pull the trigger. Given the run-up in gold in recent weeks, this may not be soon.
Mar 14, 2011 6:51 AM Heathbridge Capital Management
For the last few days, the world has watched in horror the impact of the enormous earthquake and resulting tsunami which devastated parts of Japan. Our hearts go out to those with friends and family wrestling with the shock, pain and aftermath.
In the financial markets, there have been aftershocks as well. The explosions at the nuclear power plants in Northeast Japan have exposed the Achilles’ heel of the nuclear power industry and raised questions about the global nuclear renaissance. In the best case scenario, many governments will pause and slow down their expansion of nuclear plants. Already governments from the US to Europe to Thailand have pushed for a freeze. Should this freeze thaw, costs will still rise and approval time lines will lengthen. Bulls would argue that:
China, the world’s biggest builder of nuclear plants, plans to march ahead. The nuclear plants did withstand the fifth largest earthquake in the last 100 years (it was the tsunami that shut down the backup generators).
However, before the disaster, the price of uranium and of producers such as Cameco clearly reflected dramatic future growth (Cameco planned to double production over the next 10 years).
This growth will slow and will be far from certain.
We pride ourselves that our stable of investments is “ethical” and have decided to sit on the sidelines until the safety of the nuclear industry is demonstrable. We therefore sold all our shares of Cameco. The average investor would have realized a slight loss although it will be a profitable trade for clients that have signed on in the past 3 years or so.
It is likely that natural gas will be seen by many nations as the safest and cleanest alternative to nuclear power and we used the proceeds of our Cameco sale to double up to a full weighting in Encana, one of North America’s largest natural gas producers. While natural gas prices remain low, Encana is a low cost producer. It will benefit from the rising long term demand of this relatively green fuel. Demand from international markets may increasingly be met by exports of liquefied natural gas (“LNG”) which will help drain the currently saturated North American markets.
Despite the turmoil in the Middle East, the devastation in Japan and the adjustments governments face in the West, our companies continue to march ahead and we remain confident that they will continue to grow your capital over time.
As Heathbridge Capital Management has grown, we have attained certain economies of scale that we are pleased to share with our clients.
Our Pooled Fund has grown considerably beyond our initial expectations. Its returns have been good, the fund is very convenient from a tracking point of view, and its fees are considerably below those of the average mutual fund. It has returned 19% percent after all charges since the beginning of 2010. Our fixed costs have diminished as a percentage of pooled revenues and we are therefore pleased to be able to reduce the management fee from 1.75 percent to 1.65 percent, starting in January of the New Year.
Also starting in January 2011, the “DAP” (Delivery Against Payment) fee charged by TD Waterhouse will drop from $30 to $23 per transaction. As you may recall, TD Waterhouse does not charge you a custodial fee. However, they do charge a fee for breaking up our block trades with institutional trading desks into your individual accounts. This will now be $23, and will be charged for each transaction whether you receive 100 shares, 1,000 or 10,000 shares. Given that TD does not charge a custodial fee for your account and that the DAP fee provides for more service than is offered by a discount brokerage, this is good value.
The minimum commission per transaction for trades done directly into your account through the TD Waterhouse discount brokerage arm will also be reduced to $23.
As our volumes have grown, economies of scale for TD Waterhouse have permitted us to negotiate these more favourable rates on your behalf. We are pleased to share the benefits of our good progress with you, and we wish you and your family a very happy New Year.
Pessimistic forecasts created panic in the summer of 2010 and many investors cashed out their portfolios. Surprisingly, this happened not at the climax of a stock-market crash but rather at the mid-point of a recovery. This time, those rushing for the door weren’t retirees but rather stock market experts – traders, economists, bankers – who read the business section daily as part of their professional routine and drink each other’s bathwater.
Forecasters profess to know the unknowable. We should keep in mind that these modern day soothsayers make a living by being heard. Audiences still shaken by the events of 2008/09 were quite prepared to believe that further gloom lay ahead.
Why did the crescendo of doom peak in the summer of 2010? At this time of the year, the deck is stacked in favour of the Cassandras. As illustrated in the chart below − which tracks 75 years of the US equity markets − markets reliably decline in September and October, so dire predictions made in the summer have good odds of being validated by stock market declines in the fall. Proclamations of peril had a very good chance of appearing to be right.
75 years of monthly % change of US Equity Markets
Fortunately for investors, the forecasters got it wrong. The markets did not follow their usual course this September. Prices didn’t decline. To date, September is actually UP, as the following chart shows (with our pooled fund results given alongside for affirmation).
September 1st to September 22nd 2010
In fact, in spite of the concerns expressed about impending deflation and depression, the market recovery really hasn’t paused at all.
The thing about dire predictions is that they always have a chance of being right. However, we shouldn’t jump to the conclusion that the best strategy is to be out of the market. Even though we may well have deflation ahead, it isn’t a foregone conclusion that deflation will usher in a depression. Indeed, generally speaking, corporations have never been in better financial shape and are likely to survive even the most severe downturn. With huge increases in money supply looking for a home, even the worst case scenarios would not necessarily bring a stock market crash like that of the 1930s. It is almost never a good thing to be on the sidelines, and the experience of this summer proves the point.