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(B)(N) Canada First – Infrastructure & Growth Pains

February 7, 2017
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Canada Infrastructure Investments

Drama. The Canada Pension Plan Investment Board (CPPIB) is cautious or has declined to invest in new Canadian infrastructure projects (for example, the fund owns the Ontario Highway 407 Toll Road) or the proposed Canada Infrastructure Bank (The Globe and Mail, November 1, 2016, CPPIB head cautious on Canadian infrastructure) and it’s required to distance itself from the enthusiasms of the Government of the day.

However, despite that discretion and chartered purpose, there’s no hope that the Plan will ever make a significant contribution to income security for Canadians which even at the present time has a permanent government budget of about $40 billion a year that the government itself finds to be not enough.

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Figure 1 Poof!

The reason for that failure is possibly counter-intuitive (although it is also a result of the Theory of the Firm in more concrete terms) but, basically and sensibly, we should not expect large amounts of money to earn an income that is in excess of the growth of the economy in which it’s invested and “large” already means about $100 billion or so in today’s economies (please see below) and that’s just a small fraction of the $10 trillion of paper money that is currently deposited in the US and Canadian public and private pension plans alone and some of it is looking for an income in India, Mexico, and Brazil.

For example, the CPPIB cannot pay us an income of $12 billion a year and continue to earn only 4% real or about 8% nominal in its investment returns on the roughly $300 billion that it manages without bankrupting itself within a few years nor is that amount of money more than just helpful in the public dole; please see the illustration in Figure 1 on the right.

Moreover, larger and just as carefully managed investment funds and sovereign wealth funds have already encountered that problem and we cannot expect to earn and spend, for example, $40 billion per year on investments of the order of $1 trillion which is just more “money” looking for an income in a very crowded market in the World economy.

canada-savings-bondHowever, there is a solution to that dismal equation that doesn’t require just taxing the people more (the usual “solution”) and we’ll illustrate it below with our investments in the depressed Canadian infrastructure industry.

And we’ll make the further discovery that investing only in “good” companies doesn’t make for “good” investors and this portfolio has already produced an average return of 33% per year for us in the last  five years since 2012 – that’s real money, found on the street, so to speak – and we can reasonably expect an investment return of 30% this year with no risk at all and, obviously, investment returns of $30 billion or 30% or more on just the first $100 billion goes a long way towards solving our income problem on the whole $1 trillion.

Growth Pains

Our World Trade Portfolio has over 1,600 companies in it and last year those companies paid USD$1.1 trillion in dividends and they earned $1.9 trillion net of their losses ($315 billion) and they are currently trading with an aggregate market value of $46 trillion which means that they paid-out 59% of their earnings to the shareholders for a 2.5% dividend yield and that they have a [P/E]-multiple of 24× and, therefore, a “market yield” of 4.2% (the inverse of the [P/E]-multiple) on our money.

But it also means, in round numbers, that for us to earn $40 billion in dividends every year, we need to invest about $2 trillion today which is about 5% of that market and we’re far from alone with that ambition; moreover, the net worth or ownership of these companies is only $21 trillion and the earnings return on the ownership is only 9% per year and we cannot buy it at that price.

In order to do more with less, we need to invest defensively in the whole market which includes not only the companies in it but their investors and how much money they have to spend on their ideas and it also includes the “market float” which they create every day in their hunt for an income (risk seeking investors who are buying and holding) offset by their need for liquidity (risk averse investors who are selling or waiting and willing to buy at lower prices) and the float is about $2 trillion every day or 5% of the aggregate market value in both the buying and selling of stocks in the combined long and short portfolio.

Moreover, we don’t care whether the company that we’re investing in by buying and selling its common stock is “good” or “bad” by any standard, even in insolvency and pending bankruptcy, but only whether the market for its stock is “good” – that is, it’s an active, volatile, and uncertain market because that’s where the money is  – it’s in the bank accounts and pockets of other investors, insurance companies, banks, mutual funds, pension plans of all sorts, and sovereign wealth funds, for example, all of which are trying to obtain an income from their money without undue risk of loss but they don’t actually know how to do that (there is no solution to the risk/reward equation) nor do they know how to avoid a surprise loss in the double digits every now and then.

The Canadian infrastructure market is a really “bad” market with a Free Market Yield of only (-0.724%), a depression, and an expected annual volatility of 14.2% in the next year but it is “good” for our purposes as “investors in investors” (as above) and the market that they create through new investments in new or old infrastructure projects such as roads, bridges, canals, schools, libraries, hospitals, and so forth, will engage the Canadian materials industries and so we’re almost fully loaded in that market and those companies in that market, despite the turmoil of the last few years, have provided us with an average return of +33% per year for the last five years in the long and the short portfolio with no risk of loss at all and, as we noted above, we expect a return of about 30% on that portfolio this year if we manage it in the (B)-class portfolio; please see Exhibit 1 below for more details (and click on it and again to make it larger as required).

Exhibit 1: Canada First – Growth Pains – The Cash Flow Summaryexhibit-1-bn-canada-first-cash-flow-summary

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Figure 1.1: THO Tahoe Resources Limited (N)-Class

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Figure 1.2: LUC Lucara Diamond Corporation (N)-Class

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Figure 1.3: SJ Stella-Jones Incorporated (N)-Class

tgx-dgc-detour-gold-corporation

Figure 1.4: DGC Detour Gold Corporation (N)-Class

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Figure 1.5: IVN Ivanhoe Mines Limited Class A (B+)

arbitrage

Arbitrage

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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