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Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

April 29, 2021

Commodity Bull Rages

Market Recap & Boxscore

Gains were achieved in April across most global markets. The S&P 500 lead the way, up 5.9%, followed by the MSCI World at 5.4%, while the TSX lagged at 2.7%. The Energy sector was the primary headwind for the Canadian market. It is worth noting that these impressive results were registered despite Archegos’s large-scale blow-up (discussed below), global Covid re-emergence, and rum...

Gains were achieved in April across most global markets. The S&P 500 lead the way, up 5.9%, followed by the MSCI World at 5.4%, while the TSX lagged at 2.7%. The Energy sector was the primary headwind for the Canadian market. It is worth noting that these impressive results were registered despite Archegos’s large-scale blow-up (discussed below), global Covid re-emergence, and rumours of the US Fed tapering faster than expected.

In fixed income, yields backed-off of their 2021 highs. The US 10-Year fell from 1.71% to 1.54% but has recovered to 1.63% as the month wound down. However, Canadian long-term yields diverged and continued to rise as the Canadian central bank bucked the global trend of accommodative policy. We anticipate that inflation readings will reflect the economic re-opening, structural shortages and supply chain de-globalization.  As a result, the upward momentum in US yields should eventually resume, but our positioning will be tactical and data dependent.

Likely related to falling yields, gold caught a bid in April, rising 5.3% to $1,775.  This will be the first monthly gain for the yellow metal in 2021.  The gold price faltered in the first quarter as US Treasury Yields gained, the economic outlook brightened and  speculative money chased crypto currencies and other risky assets.

The commodity price rally is widespread, from grains and meats to industrial metals. Our readers are familiar with lumber headlines. In April 2020, lumber was priced under US$260 per board foot. It will close this month near US$1,500. Certainly, accelerating commodity prices are attributed to expectations of a post-COVID demand recovery that outstrips supply after years of underinvestment in capacity. But it is hard to ignore the simultaneous fall in the US Dollar, which is sharply down over 9% on the year.  Similarly, the Canadian Dollar continues its torrid pace, up 2.2% in April despite energy weakness, and 14.5% year-over-year. The big move came on 21-Apr-21 when the Bank of Canada became the first central bank to announce tapering of their quantitative easing program, reducing their bond buying program to $3Bn per week (from $4Bn), while also signalling their intention to pull forward interest rate hikes to the first half of 2022. Canada’s ties to commodity prices may have spooked the Bank into believing a more harmful inflation threat was imminent.  Alternatively, the Bank may be attempting to cool the red-hot housing market. Regardless, it is difficult to comprehend Canada’s willingness to act first, especially following an extremely accommodative budget, which is sure to leave the country with excess debt to service. Obviously, recent history lessons suggest that any announcement of tightening should be taken with a grain of salt, but in the meantime CAD currency is buying it.

Earlier in April, the frontpage belonged to Archegos Capital Management, run by Bill Hwang. On 26-Mar-21, rumours started to swirl of large-scale forced sales of companies from Chinese tech to Viacom and Discovery, previously boring telecom giants that had run up between 150%-160% in 2021 alone by 20-Mar-21. It later became evident that both the run-up and fall were driven through bank-provided leverage on behalf of their prime brokerage units, whereby the bank provides exposure to the gains or losses of the security in exchange for a set rate, called a Total Return Swap (TRS). This allows the investor to gain exposure to a name without putting up the capital to buy it outright or require ownership to be reported. While TRS is not unique, providing a family office as much as 10x leverage to gain equity exposure of up to $100 billion is nothing short of reckless. Even more so when the office is run by a convicted fraudster. At least eight banks were guilty of the careless loans. Credit Suisse accepted first prize for the greatest misconduct. It reported a loss of $5.5 billion associated with Archegos. Nomura ($2.3Bn), Morgan Stanley ($991MM) and UBS ($774MM) were runners-up. As with any blow-up on Wall Street, more details will become public over time. Some have speculated that Hwang was one of the primary players involved in GameStop and other high short-interest stocks originally attributed to Reddit. 2021 has seen no shortage of ‘interesting’ stock movements so we curiously wait for the craziness to be properly chronicled, while monitoring for any associated risks.

April 27, 2021

Protecting Athletes from Cyber Criminals

Smart Money

The long list of athletes who were scammed by financial advisors grows annually. But dishonourable business managers are only one threat, players need to be increasingly aware of cyber risks. Breaches or hacks on systems that contain confidential information can lead to financial, mental and physical hardships. GAVIN is hosting a webinar in collaboration with Blackcloak, a Concierge C...

The long list of athletes who were scammed by financial advisors grows annually. But dishonourable business managers are only one threat, players need to be increasingly aware of cyber risks. Breaches or hacks on systems that contain confidential information can lead to financial, mental and physical hardships. GAVIN is hosting a webinar in collaboration with Blackcloak, a Concierge Cybersecurity & Privacy Platform that helps protect your reputation, your finances, and your family. Dr. Chris Pierson, Founder & CEO, of Blackcloak, will share the top threats to your security and the defenses to protect yourself. Chris’s remarkable career in cybersecurity includes positions with the FBI and the department of Homeland Security.

Register for the Webinar

April 15, 2021

BIG GAINS & BIG BLOW UPS

First Quarter 2021 Newsletter

One-Year Equity Performance Overshadows Bond Losses – It is difficult to pry one’s eyes away from the one-year equity performance as the year-over-year laps the near bottom that formed in March 2020. The liquidity induced surge that began last April continued into the first quarter of 2021. With the markets focused on a re-opening of the economy, the impressive vaccine roll-out in the...

One-Year Equity Performance Overshadows Bond Losses – It is difficult to pry one’s eyes away from the one-year equity performance as the year-over-year laps the near bottom that formed in March 2020. The liquidity induced surge that began last April continued into the first quarter of 2021. With the markets focused on a re-opening of the economy, the impressive vaccine roll-out in the United States helped to push indices higher. Commodities and commodity-linked companies have been generating outsized returns over the last few quarters. Lumber, in particular, continues to make new all-time highs as the influx of first-time homebuyers combined with lower mortgages rates have overwhelmed supply.

Interest rates in the United States rose roughly 76 basis points (0.76%) during the quarter. Strong economic data and supportive monetary regimes from the big three Central Banks lifted long-dated bond yields globally.

When Crowded Trades Go Bust – Grabbing headlines early in the quarter, the GameStop saga highlighted the repercussions of one-sided, leveraged trades. The fact that many retail traders benefitted from the short squeeze, at the expense of Wall Street professionals, sits well with us. Melvin Capital was at the centre of the GameStop saga and it required a $2.8 billion bailout to survive its reckless use of leverage. Overuse of leverage also played a roll in the forced liquidation of Archegos Capital Management.

GameStop is a specialty electronic hardware and software retailer. With the shift to online gaming, fundamentals were declining for nearly 10 years. The COVID pandemic forced a large portion of their locations to shutdown and it placed the company’s balance sheet into question. However, these factors should have been recognized as “known-knowns”. Formerly a $60 stock, the price traded below $4, short interest was at 150% and the valuation was 3.5x normalized earnings.

However, the company’s fundamentals showed improvements due to a normal course cyclical rebound. Additionally, the board received a face lift, activists intervened and a strategy shift induced more optimism. Nevertheless, professional investors continued to borrow more shares than were available to sell short. Once the price began moving higher, a tidal wave of short-covering (buying back the shares that were borrowed) occurred as GameStop moved from $14 a share in December to over $300 at the end of January. The lack of due diligence and adherence to basic investing guidelines leaves us searching for a reason to show compassion for those on the wrong side of this position.

GameStop is a clear example of focusing only on price action and ignoring shifting fundamentals. The obviousness of it is embedded in the most often repeated rule of short selling – “avoid crowded shorts”. Conversely, for long-only investors, there is no single measuring stick for over-crowded ownership of a stock. However, the Archegos Capital’s liquidation helps explain the perils of over exposure.

Archegos was a $20 billion fund that borrowed heavily and took big, concentrated positions in companies. One of its largest holdings was Viacom. Shares of Viacom tripled in the first two and a half months of the year. However, Viacom’s stock started to weaken at the same time as other significant holdings, including Baidu and Farfetch. The fund had multiple lenders who were apparently unaware of its leverage, which was reportedly 4-times. When the underlying stocks started falling, the lenders began selling massive blocks of shares, which accelerated the losses. The forced liquidation caused Archegos to collapse and it hacked-off approximately $35 billion of value from several US media and Chinese firms in one day.

The early cracks that often appear near the end of a bull market run are starting to pile up. Melvin and Archegos may seem somewhat isolated but we can also point to the Wirecard and Greensill bankruptcies in Europe. These are all very reminiscent of past scandals that marked prior peaks. While we maintain an allocation to growth assets that is near the mid-point of its range, we anticipate that suitable risk-adjusted returns will not be achieved without bumps, ruts and potholes along the way. Accordingly, we are employing more private assets to gain alternative sources of income, diversification, and excess returns.

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Gavin Hockey Wealth Specialists
Air Canada Centre, 50 Bay Street, Suite 1444, Toronto M5J 3A5
416-861-1998