<![CDATA[High Rock Capital Management - Paul's Blog]]>Wed, 21 Mar 2018 09:10:47 -0700Weebly<![CDATA[The Balance of Payments and Canada's Constant Need for Foreign Capital]]>Fri, 09 Mar 2018 13:35:42 GMThttp://highrockcapital.ca/pauls-blog/the-balance-of-payments-and-canadas-constant-need-for-foreign-capitalI promised at the end of yesterday's blog to talk about why I think it somewhat economically foolish for the cities of Toronto and Vancouver to, independently of all other parts of our great country, push away foreign capital.  Here's why and this is not just economic theory - it is a reality.

In an open/flexible/floating currency system (like almost all of the developed world), there is a system to track how money flows in and out of a country.  This Balance of Payments is comprised of two types of "accounts" on the federal government's books: the Current Account and the Capital Account.  The Current Account tracks goods and services that are bought and sold with other nations (commonly referred to as "trade surpluses and deficits" but they do include services too, not just hard goods).  The Capital Account on the other  hand tracks capital flows between residents and non-residents (things like investments, loans and yes, real estate).

The economic theory/reality is that there must be Current Account/Capital Account Parity.  That is to say, if a country runs a Current Account Deficit, it must run an equal Capital Account Surplus to offset that Current Account Deficit.  The two must "balance" out at the end the day.  

And according to studies like that of the CIA World Factbook 2017, here are the top countries running Current Account Surpluses (those exporting more goods/services than they import):​
  1. Germany (simply because the Euro is artificially weak vs what a German Deutsche Mark would be if the Euro fell apart.  This currency weakness propels massive export trade.  This, in my opinion, is the sole reason why Germany cannot afford to have the Euro Monetary system fail)
  2. Japan
  3. China
  4. South Korea
And here are the top 4 countries running Current Account Deficits according to the same study:
  1. USA
  2. UK
  3. Canada
  4. Turkey

Interesting.  So for countries like the USA and Canada, which run high Current Account deficits, there is an equal and offsetting requirement for them to run Capital Account Surpluses.  That is to say that they need to attract foreign capital each and every day to fund that Current Account Deficit. 

And how do you attract capital to fund your Current Account Deficit?  You keep interest rates high (Note German 10yr bonds yield .64% while US 10yr bonds yield 2.89%), you create incentives for foreign investors to invest in your country and yes, you allow those foreigners to buy real estate.  Any readers own a place in FLA?  

So what is so bad about running Current Account deficits?  Well, for starters, you need to keep interest rates high to attract capital and high interest rates put a bit of a stranglehold on economic growth.   It also means you are beholden to foreign capital flows (Saudi Arabia, China and Japan are all massive holders of US Treasury bonds which helps fund the US's Current Account deficit).  

In the USA, we are seeing the Trump Administration follow through on their campaign promise to "bring back manufacturing jobs to the USA".  It is highly unlikely that Trump is going to go out and say he wants to shrink the Current Account Deficit but, in fact, that is exactly what he is trying to accomplish.   Last week, we had a well-read client ask about the US$ going into free-fall.  If Trump has success over the next 3 years in shrinking the Current Account deficit in the USA, there is the potential that the Capital Account surplus will shrink as well which may mean the need to attract foreign capital will lessen.  Not sure it will lead to a free-fall of the US$ but it could maintain its recent weakness.  

In Canada, we are in much the same boat as the USA.  We run a very stout Current Account deficit so we need to equalize that every day with a Capital Account surplus.   Again, this balance of payments situation means we need to attract in foreign capital every day.  So I find it rather stunning that the mayors of the two largest cities in our country, unilaterally, decide to push that much-needed foreign capital away (or at least attempt to).   Any idea how that affects our country's balance of payments on the whole?  We need that foreign capital.  And I do realize there is a question that some foreign money (the press talks a lot about Chinese investors) may be buying houses with ill-gotten gains but it is the responsibility of the Canadian Real Estate Board to vet all foreign buyers and report to FINTRAC (watchdog for anti-money laundering).  Wouldn't it be better to properly vet the money rather than refuse it?   Can you imagine if you simply were not allowed to buy a house in the State of Florida?  (I could go on about relative value in the global residential real estate market, the principles of property ownership in a democratic society etc, but this is about the economic reality of Current Account/Capital Account parity).

Anyway, this is the reality of the state of our natural and constant demand for foreign capital in Canada.  

<![CDATA[City of Toronto Real Estate and The Royal Bank of Canada]]>Thu, 08 Mar 2018 17:43:35 GMThttp://highrockcapital.ca/pauls-blog/city-of-toronto-real-estate-and-the-royal-bank-of-canadaThe title may seem odd so let me explain.  First I will give a recap of the February data (apologies if I missed Jan but I have been jammed at work) for the City of Toronto's real estate market and then I will make a comment about the Royal Bank  of Canada (and its CEO's most recent comments).  I wrote much more extensively about the Canadian housing market last June which you can read here: highrockcapital.ca/pauls-blog/archives/06-2017

Here is the recap for February's data.  Remember, we are only looking at the City of Toronto (not the GTA) and only for Detached, Semis and Condos.  YOY (year over year) and MOM (month over month) are reflected.

Active Listings - 1,453, +14% mom, +121% yoy
New Listings - 1,134, +36% mom, +2% yoy
Sales - 524, +39% mom, -34% yoy
Avg Sales Price - $1,282,240, 0% mom, -19% yoy
Months Supply  - 2.8 months, -18% mom, +235% yoy

Active Listings - 247, +13% mom, +101% yoy
New Listings - 244, +31% mom, -4% yoy
Sales - 146, +55% mom, -27% yoy
Avg Sales Price - $985,902, +5% mom, -9% yoy
Months Supply - 1.7 months, -27% mom, +174% yoy

Active Listings - 1,767, +7% mom, +36% yoy
New Listings - 1,687, +12% mom, -10% yoy
Sales - 1,142, +27% mom, -30% yoy
Avg Sales Price - $570,276 +5% mom, +11% yoy
Months Supply - 1.5 months, -16% mom, +94% yoy

As you can see, the trend continues for demand to back the lowest-cost type of housing (condos and, to a lesser degree, semis).   The fact of the matter is that new OSFI Mortgage Qualification rules (B-20) are having a bit of an affect on the amount of housing buyers can afford.  If you want to own a house, but can only afford a condo, given how you qualify under B-20, then a condo you buy.  Also, demographically speaking, the two largest buckets of people are millenials and baby boomers and both create demand for condos - millennials because that is all they qualify for and baby boomers because they want to down-size (and take out some cash to retire). 

I still think that over a longer period of time than 2-5 years that detached houses are where the real value is.  As the city grows (110,000 immigrants into the GTA each year) the supply will come from condos while detached housing is locked up.  It's all about land value and what will soon be scarcity value. Condo Supply vs Detached Demand.  

Now onto the Royal Bank (RBC).  I have show this before but for different reasons...just sort of ironic that the CEO of RBC made a comment yesterday at a speech in NYC about how foreigners are using Canadian houses as a "piggy bank".  More on that in a minute and maybe even more tomorrow.  For today, I want to show the Total Return of the City of Toronto Detached and Condo Housing market (Avg Sales Price) for the past 20 years and compare that to the RBC stock over the same period ending Feb 28, 2018.   Keep in mind that on the housing side, the price appreciation does not show all of the costs of running the property (utilities, insurance, property taxes, renovations, etc), all of which can add significant value to a house over 20 years but, to be fair, it also does not take into account that if you did not own your own house, you would have to rent.  And the RBC stock includes dividends paid by RBC and re-invested back into RBC stock.  

Detached - Feb 28, 1998 at $225,000 to Feb 28, 2018 at $1,282,240 for a 20 year compound annual return (CAGR) of 9.1% or a Total Return of 470% (again, this excludes any renos over 20 years which would dramatically change the CAGR, even if we added rent back).
Condos - Feb 28, 1998 at $124,000 to Feb 28, 2018 at $570,275 for a 20 year CAGR of 7.9% and a Total Return of 357%. 
RBC Stock - Feb 28, 1998  at $49.39 (adjusted for splits) to Feb 28, 2018 at $101.09 for a 20 year CAGR of 12% and a Total Return  of 874%.  

So, Mr McKay (RBC President/CEO), why is it that the City of Toronto housing market is so expensive?   

What really gets me is this notion that our housing market in Canada is all being driven by foreign money (and the assumption that most/all of that foreign money is from ill-gotten gains...maybe some is, I am not privy but the real estate boards across the country are supposed to have Anti Money Laundering systems in place, as we do as an asset management firm.  And anecdotally, I can say that there is no foreign money in my neighbourhood and that new neighbours moving in are all domestic families. I will have more to say on this notion of foreign capital tomorrow and it will be purely from an economic perspective.  

For now, there is your snapshot of the state of the housing market and just one relative value gut-check on two separate asset classes and how they have performed over the past 20 years.  
<![CDATA[Canadian Marijuana Stocks and Why We Don't Own Them]]>Wed, 28 Feb 2018 15:10:19 GMThttp://highrockcapital.ca/pauls-blog/canadian-marijuana-stocks-and-why-we-dont-own-themWhen a group of stocks (sector) or an asset (Bitcoin) goes through the roof, we usually take a few inbound emails from clients asking if we own them or if we are going to participate in them.   Canadian marijuana stocks were one such group where we were questioned.

My answer over the past six months or so has been "we only invest in cash flowing companies".  That is to say, when investing in corporate bonds and equities, what we are really buying is a stream of cash flows.  There are many ways of valuing what that stream is worth (the tricky part) but investing in businesses that have zero cash flow adds a second derivative...ie...will the business even survive?  Marijuana stocks certainly fall into this category.  Heck, the federal bill has yet to pass through the Senate and receive Royal Assent as of yet (I would be pretty sure that will happen however).    

I must admit that I haven't spent time looking at the sector from a fundamental research perspective (and may never) but I do have some close associates who have.  Their conclusion over the past month or so has not been a positive one, that is for sure (it pays to have smart associates to share research with).  

And, as usual, right they were.   I have been watching from afar and have noted that some of these stocks have sold off a fair bit.  Today, I thought I would look at what they have done in general over the past month.  A quick look at the Canadian Marijuana Index of 24 Canadian Marijuana public stocks reveals the following chart: 
The peak was Jan 9th at a value of 1,045 and today it is at 615.5.  That is a 59% Decline in value over about 7 weeks.  Killer for a portfolio if an investor had a large weight to the sector.  To be sure, I have no idea if this thing will pop right back up.  It very well may but a 59% cut is a big move.  

What is driving this massive decline?  An educated guess might put forth the following:
  1. Speculators all looking to take profits at the same time.  And it is probably fair to say that this entire investor population is entirely built around speculators
  2. No Cash Flow to properly value the companies
  3. Corrupt management teams (yesterday a stock was halted and the management group fired - Maricann (MARI)) - something about the management team personally selling their own stock the day before a bought deal to issue new stock...if you can believe the audacity of it all?  As Warren Buffet says, "you have to watch out for cockroaches" in other businesses in the sector. 

And the bottom line is - Scott and I are investing our own money exactly the same as our client money.  We are doing so prudently and with the proper fiduciary duty that we owe ourselves, our families who we invest for and, most importantly, our clients.   Sure it would have been nice to have made some dough on the way up on these marijuana stocks but we  see that as gambling, not investing and it could, arguably, violate our fiduciary duty to our clients.   

If you want your money manager to "gamble" your hard-earned after-tax (and tax rates don't look like they are going down after yesterday's Federal Budget) dollars then I would suggest you: a) go to Vegas and/or b) find a Broker at Canaccord who is way smarter at gambling on marijuana stocks than I am.   

If you want your money manager to create a well-diversified portfolio by using an investment process that has been in place for decades, attempts to create superior risk-adjusted returns, allows you and your family to sleep at night and, ultimately, over time, meet your future financial goals, then High Rock might be right for you.  If so, give us a call...you have nothing to lose and maybe something to gain.

NB - Past performance is no guarantee of future performance. 
<![CDATA[Quote in a Bloomberg/Globe and Mail Article]]>Thu, 22 Feb 2018 16:44:20 GMThttp://highrockcapital.ca/pauls-blog/quote-in-a-bloombergglobe-and-mail-articleI was asked to give some comments to a Bloomberg journalist last week on my views on the state of the energy markets in Canada.   Good timing as I have written about it before and most recently as Feb 15th (highrockcapital.ca/pauls-blog/taking-stock).

Here is the link to the Bloomberg/Globe article I was (mis) quoted in:  www.theglobeandmail.com/globe-investor/investment-ideas/investors-bail-on-landlocked-canadian-oil-as-pipeline-woes-deepen/article38047446/

A couple of corrections to the article:
  1. Although I did found High Rock, I am the  Portfolio Manager and technically we do have some "hedge fund-like" mandates for some small corporations and some individuals, we are not a "hedge fund" per se
  2. She didn't mention that along with rising taxes, rising regulations and trapped hydrocarbons, this country is also blessed with massive consumer leverage (debt) which, in fact, is the biggest reason the country has seen strong Gross Domestic Product (GDP) in the 1H17.  It has all been the consumer  (and a weak C$ as well).  Not sure it has been the federal government's spending on their social agenda that has been driving growth
  3. I am not looking to add US energy names in here.  If I had a gun to my head, I would rather own US energy than Canadian energy but...I do not have a gun to my head and have moved on and away from hydrocarbon risk in aggregate

And I do not disagree with what the other Portfolio Manager said in this article.  I do however disagree with what the federal government says in the article...these pipelines are not going to get built in time for hydrocarbons to still be relevant.  There will be way too many special interest groups who will oppose pipelines (and rail) as a form of transporting hydrocarbons out of Western Canada.  

<![CDATA[Taking Stock]]>Thu, 15 Feb 2018 16:09:09 GMThttp://highrockcapital.ca/pauls-blog/taking-stockThere has obviously been a lot of volatility the past two weeks in all capital markets so I thought I might take just a moment to look at the stock market returns around the world (in C$, although it looks pretty much the same in U$) on a year-to-date (YTD) basis.  

I have shown this page (taken from Bloomberg) before in a blog back in Sept/17: highrockcapital.ca/pauls-blog/things-i-wonder-about-my-shortest-blog-ever and today will be the same...short.   

Without delay, here are some major stock market indices around the world with their return (excluding dividends so not Total Return) for the YTD and in C$ in the last column on the right side:
Notice anything here?   You don't need a CFA to find the outlier.  That's right, the Canadian stock market is fairly deep in the red after only 6 weeks.   The question of "why" is one I will answer with very little detail:
  1. Canadian Taxes going in the opposite direction of our closest neighbour and trading partner
  2. Canadian Regulations going in the opposite direction of our closest neighbour and trading partner 
  3. And mostly because of 2 above, we have trapped hydrocarbons (oil and gas) in Canada and the pain being felt in the equities of these Canadian oil and gas companies is staggering

Here at High Rock, we have continued to limit our exposure to Canadian oil and gas stocks even in the face of what look like cheap/tempting valuations.  Disciplined Investing.  We are also being extremely selective with our Canadian equity investing in other industry sectors as well for fear that overall economic damage is being done that could lead to real economic weakness, which will continue to lead to further economic pain in Canadian stocks. 

More red, less green is not what we are looking for.  

<![CDATA[Mind the Gap]]>Thu, 01 Feb 2018 18:18:44 GMThttp://highrockcapital.ca/pauls-blog/mind-the-gapI am terribly uncreative with titles on blogs but this may be one of my best (sad as it is).   

​Expanding on Scott's blog on Tues Jan 30th (highrockcapital.ca/scotts-blog/big-drop-in-stock-market-and-uptick-in-volatility-should-you-be-worried) I thought I would show a chart of the Dow on a daily basis so it is easier to see.  Below is the Dow for the past four days (Monday Jan 29th thru to today). 
On the far left, Monday represented the all-time high (until we make another all-time high because that is what US stocks do at least on a weekly, if not daily, basis!!) but Tuesday saw a big "gap" down where the Dow fell upwards of  ~400 points during the day.  And what Scott was referring to in his blog was whether or not the market will be able to "fill in that gap".  

It is not uncommon for any market to "retrace" or partially fill in big gaps after big gap down days.  So here we are on the second/third day after Tuesday's big gap down day.  As you can see above, yesterday the market attempted right at the open to fill in that gap.  Didn't quite fill it in but did so partially.  And today it has tried again hitting about the same high as Wednesday but again not able (so far) to fill in the gap.  

Filling in the gap is important because it demonstrates the strength of the overall market.  And if you go back and look at Scott's longer-term chart, you will see that this is the biggest gap down we have had over the past six months.  And if you look back even further, you will find this is the biggest gap down we have had since before the Great Recession (it is hard to see on a chart but I did look) other than a small (much smaller than this past week) gap down in May 2017.  

So that is why it so important to see, at these high levels and after such enormous strength, if US stocks can "stabilize" at these slightly lower levels, recharge and shoot up higher and fill the gap.  Or are they tired and the market has run out of buyers.  Time will tell but we will mind the gap each day.

<![CDATA[Time to Buy US Treasury Bonds (no I haven't lost my mind)]]>Tue, 30 Jan 2018 21:08:05 GMThttp://highrockcapital.ca/pauls-blog/time-to-buy-us-treasury-bonds-no-i-havent-lost-my-mindGov't bond yields have pretty much gone straight up since Sept/17 with US 10yr Treasury Bonds (10yrs) at 2.00% in Sept/17 to today at 2.72%.  And on days like today, with stocks getting pasted, gov't bond yields continued to climb showing a correlation that does not work in the balanced portfolio investor's favour (stocks down, bond prices down).  So why on earth would I want to buy US Treasury Bonds?

First, 2yr bonds are unchanged on the day.   This means the curve is actually steepening.  When stocks get hit hard, the curve tends to do that as there is a "flight to quality" which means money flows into the front end of the yield curve (2yrs).  And if stocks continue to get hammered, we will see the curve steepen a fair bit more.  These 2yrs are the US treasury Bonds I will buy for us as they are the most protective in nature.  

Second, 2yrs have also been hammered pretty hard lately rising in yield from 1.25% in Sept/17 to the current levels of 2.12%. And as I wrote in early Jan in a blog (highrockcapital.ca/pauls-blog/this-hasnt-happened-in-ten-years) we haven't seen this spread between the 2yr yield and the S+P 500 dividend yield this wide in 10yrs.  Also, we are as close to the bull market trendline (goes back even further to 1981) in 2yrs as "damn is to swearing".   And as I said in that previous blog, massive pension funds rotating out of stocks and into fixed income securities will be key.  Hard to monitor  this but a friend of mine at major Wall St firm tells me they estimate that about $70bln rotated out of stocks and into bonds over the last few sessions (month-end rebalancing).  Also hearing that inflows into fixed income mutual funds and ETF's the past week has been the highest in 8yrs.  See below S+P dividend yield (red) vs 2yr bond yield (green) again below:
Third, I just looked at a chart of US 10yr Treasury non-commercial (hedge fund types only) short interest.  I have shown this before but basically what it reflects is the amount of contracts that are short in the US 10yr bond.  Being short is a negative bet (sell at a high price with the expectation of buying it back at a lower price in the future).  But the thing of it is, the market has not been this short 10yrs in over a year and before that...never.  That is to say, last year at this time was the shortest 10yrs have ever been...ever.  And the result was a quick move from 2.65% to 2.15% (yields down, bond prices up) in short order.  So all those folks who were short got "their faces ripped off" (old trader-speak).   See the 10yr non-commercial short interest below:
Fourth, Bob Farrell's (former Merrill Lynch's former Chief Market Strategist when I worked there) Rule #9 of Investing - "When all the experts and forecasts agree, something else is going to happen".  Contrarian.  If everyone is lined up positioned one way, who will be there to take the other side? 

Time to buy some portfolio protection and, at the right time and the right ones, gov't bonds provide the most elegant, cheapest and easiest form of  protection I can think of.  
<![CDATA[The Fed's Balance Sheet vs S+P, High Yield and Gov't Bonds]]>Mon, 29 Jan 2018 16:27:28 GMThttp://highrockcapital.ca/pauls-blog/the-feds-balance-sheet-vs-sp-high-yield-and-govt-bondsThe pattern of all assets going up because the Federal Reserve Board (the Fed) has been increasing it's balance sheet since the credit crisis in 2008 from ~$800bln to ~$4.5tln continues to this day...for most assets.  Stocks, investment grade and high yield corporate bonds and government bonds (and everything in between) has tracked the Fed's balance sheet higher since 2009.   But something may be changing.

The Fed's Balance Sheet 101
The Fed (and just about every other central bank the world over) began this program of Quantitative Easing (QE) in 2009 as a way to stabilize financial markets.  QE effectively consists of buying up bonds (and in the case of the central banks of Japan and Switzerland buying stocks as well) and other assorted fixed income instruments like mortgage backed securities, government-guaranteed mortgage bonds, government bonds, etc.   The overall effect of these programs was to: 1) stabilize financial markets by being the buyer of last resort and 2) to lower (and keep low) interest rates  (gov't bond yields) which help the economy by providing cheap money for borrowers.  Goal met.   The effect of all this QE is that the balance sheets of the Fed (and all other central banks) grew massively but so did all of the assets they were buying.  Cause and Effect.   And don't forget, the size of any central bank balance sheet is infinite...so much so that there is an old adage out there that states, "don't fight the Fed"...which simply means...they have a lot of bullets to get what they want!  

The new news is that the Fed has now said, loudly and clearly, that their balance sheet will start to gradually reduce in size.  This will occur with the Fed simply not reinvesting proceeds from bonds that mature or from coupon payments they get paid on from the bonds they own being reinvested.  The overall effect will be a shrinking Fed balance sheet.  How will risk assets (and non-risk assets like gov't bonds) respond to this gradual reduction in liquidity? 

So far, risk assets have largely tracked the Fed's balance sheet higher.  To be sure, there are lots of reasons for some risk assets like stocks to be moving higher the past year, such as: US tax reform, lower regulations, increasing earnings, synchronized global growth, a weaker US$, etc.   But at the end of the day, we know that bonds lead all financial markets so it behooves us to figure out what bonds are saying with regards to a shrinking Fed balance sheet.

Gov't bonds prices (green line) began falling (yields rising) late 2016 on the back of the Trump election win.  Stocks up/Bonds down - makes sense but are gov't bonds acting as a harbinger of things to come?   And if we look at credit (high yield bonds in purple) we can see that high yield prices have climbed steadily for the past two years when oil hitting $26bbl knocked the stuffing out of all risk assets.  HY bonds haven't started to roll over as of yet so still a positive sign for risk assets in general.  Which leaves us to stocks (S+P in orange) and it sort of looks like a rocket ship taking off for Mars.  The white line is the Fed's balance sheet which has been stuck around that ~$4.5tln mark for three years.  As you look at this chart, keep in mind that I have "normalized" it so all of these asset classes and the Fed's balance sheet start 5 years ago at an Index starting point of "100".   

So the keys to watch here are gov't bonds prices/yields for further erosion in price or rise in yields.  It hasn't been a pretty 15 months or so for gov't bonds but again, it really depends where on the yield curve you are invested with 30yr bonds (which High Rock clients own) actually seeing their yields lower year over year.  And then credit where we will watch high yield like a hawk (something I do every day anyway given we manage a high yield fund for Scotiabank).   Remember - bonds lead.  

You never know what an event will be that will sideswipe risk assets (if we did, everyone would know and it would all be priced into the market).  The only thing we can do is predict the state of the market and how it will respond to positive or, in this case, negative news. 

We get lots of folks asking, "when will this US stock market sell-off?"   The answer is simple:  "when it gets some positive news and doesn't respond positively".   Simple eh?

<![CDATA[It's Official - High Rock-Sponsored Athlete Darren Gardner is Going to the Winter Olympics!]]>Thu, 25 Jan 2018 20:36:50 GMThttp://highrockcapital.ca/pauls-blog/its-official-high-rock-sponsored-athlete-darren-gardner-is-going-to-the-winter-olympicsHigh Rock Capital is extremely proud to announce that one of our sponsored athletes, Darren Gardner (from my hometown of Burlington , Ont), is on his way to South Korea to the 2018 Olympic Winter Games for Alpine Snowboard PGS!

First a word about exactly what this sport is because not many people know.  Alpine Snowboard racing consists of riding a long, narrow board with a super heavy "plate" screwed into the top of it (hence some people call them "plateboards") and minimalist bindings that lock the heel in and snap down over the toe.  The boots are made of hardshell plastic (just like a ski boot) but with a slight tilt forward.  This looks nothing like a "softboard" that you would find recreational riders on or those who compete in Freestyle in the terrain park (the difference between Alpine and Freestyle is like comparing F1 to Nascar auto racing).   As for the actual racing, they compete in two disciplines (although the IOC, in its infinite wisdom, did away with PSL for these games): Parallel Giant Slalom (PGS) and Parallel Slalom (PSL) where two racers go at once through a red course and a blue course and then for the second run they swap courses.  PGS has the gates spaced further apart than PSL and so the racers use longer board for PGS and a shorter board for PSL.  Racers need to go around "gates" that are "flag-shaped" without missing a gate or "busting" through a gate which would lead to a  Disqualification (DQ...not to be confused with my favourite summer-time after-dinner dessert...shameless plug #1 for Warren Buffet and my brother-in-law Tim Scott who is in charge of Int'l Marketing for DQ).  This is a timed sport (love events with a clock) and the top 30 combined times "make the cut" and go on to the "elimination" round which ultimately lead to the Final Four for a Big Final (Gold and Silver) and a Small Final (Bronze and 4th Place).  It is all very exciting to watch.  (Shameless plug #2  - my youngest son, Nicholas, is in his final year of highschool but has been racing competitively in this discipline since he was knee-high to a grasshopper so this is where my basic knowledge of Alpine Board racing comes from.  Nicholas races in the NorAm Cup Series against these grown men, Olympians and athletes from as far away as Korea, Japan, China and Australia and so a couple of times each season he gets to race against Darren  in a NorAm Cup race.  I am obviously very proud of Nicholas but our family jokes that if he races against Darren that Darren has time to stop, eat a cheeseburger, and still beat Nicholas...that is how fast Darren is).   And now armed with that basic knowledge, I hope you watch Darren compete in the Alpine Snowboard PGS event next month. 

Darren's successes are too many to list but a few highlights are the fact that he has been Canadian Champion the last few years, the overall North American Champion the last 7 years and is now on his way to the 2018 Winter Olympics to see if he can reach the podium.  You can learn more about Darren and all of his palmares here:  darrengardner.ca/

Besides my son Nicholas being involved in the sport (and looking up to Darren in a pretty big way), you may ask why on earth we sponsor Darren given this is such a fringe sport that most people don't even know exists?  First, the Wilkinsons/Gardners are old family friends from Burlington that now stretch three generations.  Darren's mother Donna is a High Rock client of ours and his father Bruce is my Dentist (www.gardnerdentalgroup.com/) (shameless plug #3).  Second, Darren, coming from good stock, is a great guy.  Third, this fringe sport is brutal for funding/sponsorship.  Given how fringe it is and how terribly uneconomic it is for the manufacturers and retailers (you can't go into Canadian Tire and buy this type of equipment) athletes like Darren don't even get free equipment from the manufacturers.   And from personal experience, I can tell you that all of this specialized equipment is very expensive!   Fourth, Darren has real potential here to do something special at the Olympics.  Anything can happen but with the right focus and some cheering from Burlington, he has as good a shot as any racer coming out of the start gate.  So adding all that up, High Rock decided a number of years ago to chip in and help Darren out with his significant expenses as he pursues his goal of reaching the Olympics.  We couldn't be more excited and proud of his achievements so far.  

I hope you are able to watch Darren compete (it might be at some unGodly hour given the time differential so maybe set the PVR).  In the meantime, check out the slideshow of some very cool pictures of Darren (ok, shameless plug #4, I threw in 2 of Nicholas at the end from a couple of years ago as well.   Nicholas's sole sponsors are: Mom and Dad) racing and training all over the world.

Go Darren Go!!  
<![CDATA[The Problem With Canadian Energy Stocks]]>Mon, 22 Jan 2018 15:11:28 GMThttp://highrockcapital.ca/pauls-blog/the-problem-with-canadian-energy-stocksI have written a little bit (in our YE17 Letter to Clients and in blogs) and have also spoken briefly about it in some Weekly Videos (highrockcapital.ca/weekly-video.html) about why Canadian Energy stocks are suffering a lot more than US Energy stocks. 

The bottom line is that there are serious headwinds at work that range from NDP governments in both Alberta and BC, First Nations, Environmentalists and the National Energy Board (NEB).   I have no idea which of these forces provide the strongest headwinds but they all seem to contribute to the fact that our great country is increasingly stranding our hydrocarbons (oil and natural gas) inside our country where it is unable to be exported to other countries which would pay a significant premium for those hydrocarbons.  All due to the fact, if this continues, that we will not have any new pipelines and LNG (liquefied natural gas) plants built in the foreseeable future.  This lack of infrastructure leads to serious transportation problems for those hydrocarbons - hence, they become stranded where they were extracted.  

First and foremost, I am not suggesting there be rampant development of oil and gas that go unchecked.  Surely there is a happy median where development and the environment exist in harmony?  

Second,  StatsCan doesn't really say what percentage of our Gross Domestic Product (GDP) is related to Energy but estimates have it around ~23%.  That is a big number.  

As an example of just how dramatically the natural resources business has changed in Canada over the past two years, have a read here: business.financialpost.com/commodities/energy/b-c-is-now-the-worst-destination-in-canada-for-oil-and-gas-investors-and-among-the-worst-in-the-world-survey.  It was just two short years ago when we would only look at investments in BC and Alberta believing them to be some of the best jurisdictions in the world for the development of natural resources.  Not so much today.   Shocking that so much damage can be done in such a short period of time. 

So you get the picture...lots of headwinds in the face of energy development in Canada.  So what is the result?  Not so good.  Below is a chart of the difference between WTI (US oil) and WCS (Western Canadian Select oil): 
Top half - the orange line is WTI and the white line is WCS
Bottom half - the yellow line is the differential between WTI less WCS

The big gap up in the 4Q17 shows that WTI has risen pretty substantially the last few months but WCS has lagged in a major way showing the gap now out to $25 from $10 last Sept/17.  The effect of this means that our oil and gas exploration and production companies (E+P) and all of the oilfield services companies (OFS - companies that offer E+P cos services like drilling. drilling fluids, waste management, transportation etc) suffer.  Here is why - if producers can't sell their products at a higher price, they are unlikely to spend more capital on exploration (drilling) and production.  So both the E+P companies and the OFS companies get hurt.  

As you can see from the chart, there have been periods where the spread was higher but those were periods when there were "temporary transportation" issues.  This seems different and the stocks of all these Canada E+P and OFS companies reflect as much.  I think this spread can get a lot wider in the coming year.   Not good for Canadian Energy stocks and not good for our overall economy.

This ain't good and this is a big part of the reason why we are shying away from Canadian hydrocarbon equity risk right now and for the foreseeable future.