It is Sunday so enjoy a little bit relaxing post on investment ideas.
Canadians have their own buffett - he is called Prem Watsa and runs Fairfax Financial Holdings. Americans have Warren Buffett and Berkshire Hathaway.
It is quite interesting to look at the long-term price performance of Fairfax and Berkshire:
The chart evidences that since 2002 Fairfax delivered higher return than Berkshire Hathaway. However, since middle 2011 Berkshire took the lead.
Now it looks like the situation may change. Since middle 2013 both companies have been delivering similar returns so, if historical patterns repeat, Fairfax should return to its over performance against Berkshire soon..
July was another month when my precious metals portfolio delivered a positive return. This time its value increased by 18.7%:
What is more - as usual, the portfolio delivered better results than the broad precious metals stock market, represented by GDX (an increase of 10.4%).
I think it is the best evidence that Fresnillo, B2 Gold, Newmarket Gold, Fortuna Silver and Richmont Mines are the best in class miners.
Further, the chart below shows the way the portfolio and its peers performed since inception:
Well, my picks returned 106.7 basis points more than GDX. The broad stock market, represented by S&P 500 returned nearly nothing. It is clear what works at the moment and what does not.
Another interesting chart - it seems that since inception all stocks, apart from Fresnillo, delivered more or less similar returns (around 250%):
Of all my picks only Newmarket Gold released its 2Q 2016 results (I am going to present an update on this company soon) - they were excellent.
However, one thing was especially clear - the whole Newmarket story is about its Fosterville mine; the other two operations are becoming nearly negligible, which is definitely not a positive factor in the long-term.
Now the soybean trade is in my favor:
Pivots
1. - downtrend line broken
2. - the price did not go below the bottom at around 973.75
3. - resistance broken (green line)
Today Fairfax Financial Holdings (FFH:TO) released its 1H 2016 results. It is not my aim to provide a detailed analysis of this insurer but Prem Watsa's (the company's CEO) approach to financial markets and economy in general may be, in my opinion, a good lesson for all investors.
To remind my readers, Prem Watsa is well-known for his contrarian investment approach. For example, for many years his company has been betting on major world deflation.
Apart from that, since around 2011 the Fairfax CEO has been negative on US and Canadian stock markets. Therefore, since 2011 he has been using various hedging strategies to hedge his company against the risk of a major stock market downturn.
The current 1H 2016 report discloses that Mr. Watsa did not change his mind:
Fairfax hedge against a major stock market downturn
The chart below shows Fairfax net equity exposure. It is calculated in the following way:
net equity exposure = long positions in equities less short positions held in equity derivatives
As the chart shows, at the end of June 2016 the net position in equities was short of $969 million. It means that the company's exposure in common stocks, preferred stocks, preferred bonds, investments in associates etc. was totally hedged by short positions held in equity total return swaps, index total return swaps etc. What is more, the total short position held in various derivatives was higher than the company's equity exposure (by $969 million). It means that any stock market slump would be profitable for Fairfax.
Note: in 2Q 2016 Fairfax increased its net short position in equity related issues (from $474 million at the end of 1Q 2016 to $969 million at the end of 2Q 2016).
Summing up - Fairfax is well hedged against any stock market slump. If that is a case and US or Canadian stocks go down, Fairfax will make money (and vice versa - if stocks continue their march up, the company will lose money).
CPI-linked derivatives
It is the biggest Fairfax bet. Prem Watsa believes that in the coming years the developed economies will encounter major deflation. To make money on this economic event a few years ago Fairfax opened a huge position in CPI-linked derivative contracts.
The company writes:
"At June 30, 2016 the company owned $112.4 billion notional amount of CPI-linked derivative contracts with an original cost of $668.2 million, a market value of $227.3 million, and a remaining weighted average life of 6.1 years. The majority of the contracts are based on the underlying United States CPI index (52.8%) or the European Union CPI index (40.2%)"
For the time being Fairfax has lost $440.9 million on that deal (this amount is accounted for as "unrealized losses"). What is more, the results delivered by these instrument are very volatile:
As the chart shows, between 2011 and 2013 Fairfax was booking high losses on CPI-linked derivatives but since 2014 the situation seems to be turning in favor of the company.
Well, Mr. Watsa is a long-term player so during the next 6.1 years many things may happen.
Finally, one question. I wonder why Mr. Watsa has no position in gold?
Any suggestions?
Last but not least - Fairfax share prices action:
source: www.stockcharts.com
It looks like Fairfax is an excellent long-term play. No matter whether US stocks go up or down (look at red lines) - Fairfax slowly goes up.
A few big mining companies have just released their 1H 2016 reports.
Quite interestingly, in my opinion, these results are not too impressive. Although it is too early to present a full analysis of these reports but, for the time being, let me show the EBITDAs reported by a few miners (Barrick, Newmont, Kinross and Agnico Eagle):
source: Simple Digressions
As the table shows, the results are mixed. The biggest negative surprise is Goldcorp - due to much lower production figures, in 1H 2016 the company delivered much lower EBITDA than in 1H 2015.
On the other hand Kinross looks better now but I think that there are still many obstacles ahead of this company.
Summarizing - I think that many investors, seeing higher gold prices, are betting on much better financial results across the board.
I do not share this optimism - after many years of a bear market in gold it is too early to claim a radical improvement. I think that apart from a few really excellent miners, the overall results reported in 1H 2016 should be just decent .
It looks like there is something in the theory of a possible takeover of Wesdome Gold Mines by Kirkland Lake. Yesterday Rolly Uloth, Wesdome's CEO, was replaced by Duncan Middlemiss.
Mr. Middlemiss is a former CEO of St. Andrew Goldfields, a company acquired by Kirkland Lake early this year.
It seems that Kirkland Lake and particularly Eric Sprott, a notable Canadian investor and the director of Kirkland, are standing behind this nomination - now they have their man in Wesdome's management team, which makes the acquisition much easier.
The chart below shows the last price action of Wesdome shares:
source: www.stockcharts.com
A few days ago I initiated a small trade in soybean futures. This deal now looks a little bit better:
As the chart shows, the short - term downward trend in soybean prices was broken - it is the first indication that something is changing.
Today the FED holds its July meeting so big fluctuations in asset prices are expected.
Soybeans are no exception - FED statement is 15 minutes to the close of soybean trading so everything may happen...
