January 2019 Newsletter
Corrections are so painful when we are going through them, and we have been through quite a difficult one. December was the worst month in the markets since 1931, and October and November felt just as bad!
We were having a good year in performance up until October, and then markets behaved like they were falling off a cliff. 2 of the 10 worst months in the past decade occurred this past quarter. Yet, I find it interesting that in October, Warren Buffet invested more money in the market than he ever has in his career.
In my opinion, one of the reasons why volatility is so staggering is because of computer based trading programs that buy or sell ETF’s based on algorithms.
Months ago, President Trump said his biggest threat was the Federal Reserve. In early October Fed Chair Powell said that QE tightening was on auto pilot and they planned for 1 rate increase in December and 3 additional increases in 2019. To me, this was the beginning of the correction. Add to this the angst over Trump’s Trade War with China there was panic to get to cash and safe havens like Bonds and U.S. dollars.
Still, companies are doing well. This correction was not brought on by poor revenues or earnings, nor did a recession bring on this correction. We do not have a Banking or Liquidity Crisis like we did in 2008.
Here is an interesting recap on Canadian Banks. In 2018 The Big Six Bank stocks fell by an average of 12 percent (not including dividends). The group delivered strong profit growth of 13 percent, and they increased their dividends by an average of 7.9%.
I think you will agree that it doesn't make sense given this strong financial performance their share prices should decrease by an average of 12 percent. Seems like these Canadian Bank stocks are on sale.
In the U.S. in 2018, one half a Trillion dollars was repatriated because of the tax changes. Tax rates in the U.S. have been lowered.
When companies are doing well, delivering higher revenue and earnings, we would expect their share prices to increase. A crisis in confidence, such as we have recently experienced, provides an opportunity to buy shares in these companies at a discounted price.
Examples of companies on sale now are:
Apple was $237, now trading near $157
Netflix was $415, now trading near $267
Amazon was $2,039, now trading near $1,546
Google was $1,285, now trading near $1,044
GE was $19, now trading near $8.
Canopy was $72, now trading near $40
Royal Bank was $104, now trading near $93
TD Bank was $79, now trading near $68
I was recently reading about Tony Robbins the motivational speaker, and he said that his role model was Sir John Templeton. One of Mr. Templeton’s pieces of advice was:
“You should sell when everyone else is greedily buying and buy when everyone else is despondently selling.”
To put this advice into practice is exceedingly hard because it takes a crisis to cause despondent selling, and the thought of investing more money is enough to make you sick.
Imagine that today’s current market conditions are similar to Boxing Day Sales Event. It is a limited time sale, and we just don’t know when the sale will be over. When it is over, the media headlines will be preaching about the huge recovery in stock prices.
I had the privilege of investing large amounts of money for clients during this past quarter. Long term Investors look at short term drops in share prices as opportunities to add to their Investments at very attractive prices. Short term investors look at drops in share prices, such as we have just experienced, as permanent losses of capital. Just as if they were going to sell at the low price and crystallize their loss.
Both medical and recreational cannabis are now legal in Canada. However, the rollout for recreational has been bumpy as governments figure out how best to do it and suppliers try to satisfy demand. It looks to me like it is going to take quite a while before Ontario has its retail store plan implemented and working well. The supply shortages are also going to take time to sort out.
In the United States the Farm Act Bill has just been passed. This makes it legal to grow hemp, which produces CBD. I think it is a matter of time before legislation is passed that further legalizes cannabis, both medical and recreational. This will allow U.S. based companies to Bank and raise money in their own markets so they don’t have to come to Canada and our CSE Index.
If you would like to invest in this industry, I’d like to suggest The Ninepoint Alternative Health Fund. I have included a one pager on this product and if you have any interest, we should arrange to speak on the phone to see if it is suitable for you.
We are proud to work with you and appreciate your confidence. I appreciate this past quarter has been difficult and has negatively affected our annual performance. I am at your disposal if you would to talk about your Investment Portfolios.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.