Verdmont Capital

Friday, November 14, 2014

Active vs. Passive Investment Management - Not Good

At Verdmont Capital, our wealth management platform employs the use of both active and passive investment funds. There are some interesting articles on the comparison of these investment styles included below.

In our managed accounts, we employ a total return approach to investing, meaning that we typically offer our clients a portfolio diversified by asset class. This means a given client may have exposure to equities, fixed income securities, commodities and alternative investments. We are generally afforded the flexibility to adjust the allocation towards each of these segments as our view on the market changes. In addition to the relative calls we make on a given asset class, we also make tactical decisions within each segment of the market. For example, within the equity allocation, we will overweight certain regions to the expense of others, while also making calls on sector exposure.

When expressing an investment view for a given client, we utilize both passive and active investment management.  For those unfamiliar with these terms, active management is a traditional mutual fund approach, where the manager makes active decisions in an attempt to add value. Passive investment management is just that, “passive”, in that the manager will only try to replicate the performance of an underlying benchmark.

The reason we use both approaches is that active managers rarely perform as hoped. You often pay significant fees to underperform the market. Traditional mutual fund management is essentially a well-oiled marketing machine. It leverages off of the large financial institutions that can afford the 100 page glossy brochures that ultimately say nothing. Clients find comfort in getting advice from the big banks, who are more than happy to steer them towards very costly and underperforming investment products. Why investors listen to the same crew that pitched them mortgage backed securities we will never know.

Sure, there is a whiff of cynicism in the above comments, but it isn’t cynicism if it is the truth. We have forwarded the below articles in support of our view. The numbers continuously point to the underperformance of active management to that of passive investment management. It is one of the few businesses that we can think of where consumers continue to line up for a product that hasn’t delivered for decades.

This first article discusses the performance of active equity management to that of just buying an index ETF. The numbers are shockingly bad. Note how only 1 in 70 active mutual fund managers in the US beat the S&P 500 over the past 3 years.

Active fixed income management is abysmal over the short term, but slightly better over the long term. That is why we do have an allocation to select active managers in our fixed income portfolios. For example, the Pimco Total Return Bond Fund has justified its fees over the long term and is worthy of investment in our opinion. It is worth nothing however, that the odds of finding an outperforming bond fund manager are still slim.

Please contact your Verdmont Representative to discuss the attractive elements of our wealth management platform. We are also free to discuss any existing investment portfolios you may have, to determine if they are truly structured with your best interests at heart.

Wednesday, November 12, 2014

Trican Well Service : TCW.T:C$9.93 - Our Long Call is Hanging on by a Thread

Our short term trading call to buy TCW.T is hanging on by a thread.

We took a decent swing at it, with the logic that oil was in an interim bottoming process, the dollar was looking toppy over the short term, the euro was due for a bounce and other growth assets are going higher (including Chinese stocks). Also, oil service stocks, especially the frackers, should see some support after the US election results.

A supporting thought was, even if we were wrong on it, because oil had sold off so much and TCW.T  so beaten up, we would not get smoked on the trade. We are long $10.30, so we are already underwater on the call.

Oil vs. S&P 500 – 5 Years (check out the bell curve)

TCW.T is also trading at book value. We believe these are quality assets factored into the equation, so book value is relevant in this sector. Book value is where it was during the 2008 crash. The market is far more supportive now vs. then in our opinion i.e. oil fell to $40/bbl during the acute stages of the 2008 crisis.

TCW.T vs. Book Value – 10 Years

Both oil and TCW.T are hanging on by a thread though, which rattles the nerves a tad.

WTI Oil – 1 Year

TCW.T – 1 Year

On a positive note, oil services stocks in general have been forming a tentative bottom.

OIH – 1 Year

If oil manages to go over $80/bbl on a snapback rally, we could get $2 out of TCW.T easy. That’s the punt.  If oil services stocks breakdown anew, WTI oil goes sub $70/bbl and/or the US dollar goes to new highs, we will have to exit the trade.

Please call with questions.

Tuesday, November 11, 2014

Verdmont Capital - Recommended Mutual Funds - November 2014

Verdmont Capital's recommended offshore mutual funds for November can be viewed by clicking here.

Verdmont Capital has access to all of the world’s top mutual fund families. We are also able to provide recommendations for those clients looking for an investment strategy that is not included on our recommended list.

We have vast experience in mutual funds and are able to offer advice that we believe is far superior to any of our competitors. Mutual funds have many hidden fees and rarely perform as sales teams indicate. Given that we are not a bank and do not have a mandate to slog internal products, we are able to be more open in our assessment of any given fund. We know the tricks of the trade and know how to ascertain if a given fund offers true value. We are confident that we can provide our clients with the best offshore mutual fund for a given investment objective, at highly competitive rates.

Please note that our structure for holding and transacting in mutual funds is also rock solid. We hold mutual funds on behalf of our clients with Fundsettle, which is Euroclear’s mutual fund platform. Euroclear is one of the top global custodians and indicative of the quality organizations that Verdmont Capital works with behind the scenes.

We are always available to discuss our mutual fund offerings and provide one off suggestions if need be.

Monday, November 10, 2014

Oil Stocks (TCW.T:C$9.92), Oil, Great Article on Putin Getting Squeeeeeeezed

We have been trying to time a bounce in oil. We own oil services companies, with a sizeable allocation to the drillers, specifically to Trican Well Services (TCW.T: C$9.92). These names should get a decent pop if oil makes an interim floor.

We have discussed our oil view at length in the past. Long story short, we have welcomed the selloff in oil as we found prices north of $100/bbl unrealistic in light of the shale boom and choppy Chinese economic growth.

We were also concerned that oil had been piggybacking the risk on trade, following the equity market to levels that were becoming unhinged from reality. The sizeable correction in oil, in comparison to US equities that are reaching new highs, has made oil and related plays extremely attractive from a relative value standpoint.

WTI Oil vs. S&P 500 (top), Ratio of WTI Oil / S&P 500 (bottom) – 10 Years

We believe that oil has already priced in a barrage of negative news, whereas other segments of the market move higher on rosy assumptions and lofty multiples. We are also of the mindset that US dollar strength, and corresponding euro weakness, is becoming long in the tooth. An interim correction in the US dollar, which is arguably overdue, would lend support to the oversold oil complex.

US Dollar – 5 Years

We have to admit, we are biting our nails a tad with this trade. That said, we believe the disparity between stock market performance and that of oil related equities will prove short term in nature. If oil fails to hold recent lows of around $77/bbl, we will exit our short term trades like TCW.T. As you can see below, our call for a pop in beat up oil names is being severely tested as oil hangs on by a thread.

WTI Oil – 1 Year

We came across a great article today written by  Mohamed A. El-Erian. It discusses the potential for an outright economic collapse in Russia. We have to admit, we love seeing Putin squeezed as he is one of the biggest slime balls to operate on the global stage in our lifetime. It’s nice to see him reminded of how insignificant he is and watch his cronies scatter for the exits when his policies begin to pinch their wallets. To view the Bloomberg article, please click on the following link:

Friday, November 7, 2014

Junior Gold Stocks - Covering our Short Position (GDXJ:$24.58)

We initiated a short in junior gold stocks at the start of October, in anticipation that gold bullion would break crucial support at $1,200/oz.

Gold has subsequently followed other key commodities, such as oil and silver, lower. Bullion is now trading at $1,150/oz.

Gold, WTI Oil, Silver – 3 Years

Truth be told, we would have thought that the selloff in bullion would have been more pronounced. For example, the correction in oil and silver have been far greater in percentage terms. You also had the US Dollar break to new highs, which we thought would have supercharged the gold correction. All things considered, gold has actually hung in there pretty well.

US Dollar – 3 Years

That said, we did see the price action we were hoping for in the junior gold stocks, where you had another wave of selling on renewed despair. Gold stocks have been getting crushed as the “$1,200/oz  marginal cost of production floor” thesis gets tested and various gold indices break support in their own right.

Gold Stocks (top), Junior Gold Stocks (bottom) – 1 Year

Given that our main call has played out, gold breaking $1,200/oz, we are covering our gold stock short. If you are lucky enough to make money on the short side, it typically does not pay to become overly greedy on the downside. With stocks so oversold, a snap back rally cannot be ruled out.

The rate of change in US dollar strength has been technically significant, and the corresponding collapse in the euro equally so. With these trends becoming exhausted over the short term, along with commodity stocks in general taking a significant thumping, its best to take the money and run.

US Dollar – 3 Years

The Euro – 3 Years

Please call your Verdmont Representative for further information on our current commodity view.

Thursday, October 30, 2014

VC Commodity Comment : Oil Prices and Oil Stocks (OIH, CFW.T, TCW.T, PD.T) : Gold and Gold Stocks (GDXJ, NES.V, 1051.H) : Gold Stock Hedging

The Oil Market

Good article on Bloomberg today that sums up the current forces driving the price of oil. Please have a read here:

The premise of the article is that OPEC is to blame for the current rout in oil prices. This is a tad misleading, as we would argue that cheating by OPEC members is only one factor driving the selloff in prices. Our view has been explained in prior notes, but in a nutshell, oil prices are selling off as risk assets correct and global economic fears reverberate through the economy. More importantly, oil prices were arguably too high north of $100/bbl. given a shaky Chinese economy and a surge in global oil supplies on the back of the US shale boom.

We don’t know definitely if oil holds here. People a lot smarter than us are saying oil may go to $70/bbl. before it finds a floor. This could very well be true as the pinch point for oil production in the US is around that level, and OPEC may come out with stronger measures to shore up global prices.

As we have said previously, we welcome the current sell off in oil prices. It is a sector that has amongst the best earnings visibility out there as demand is inelastic and supply will ultimately be crimped if prices fall far enough. We have wanted to own various oil names, but have been hesitant to chase the complex higher when the strength in oil prices did not make complete sense to us.

In concert with buying low and selling high, we would argue that you don’t want to become more bearish on oil as it is going to new lows. Unlike some other high flying sectors in the market, oil does have defensive qualities if its sell off becomes too precipitous. The relationship of the WTI oil price to the S&P 500 is at 10 year lows. This is a good indication that oil has discounted a large chunk of the current risk off trade and is pricing in the potential for slower global economic growth.

WTI Oil vs. S&P 500 – 10 Years

We may not be at the bottom for prices, but we feel a lot better owning quality oil plays that have corrected substantially when the broad equity market is still close to all-time highs. We like the oil service companies (OIH:$44.12), the drillers (CFW.T:C$13.48, TCW.T:C$10.25, PD.T:C$9.34). It is worth noting, that if we have a full on collapse in the markets, these names will get punished as well. But under such a scenario, they should do better on a relative basis given what has already been a sizeable correction.

Gold and Gold Stocks

We have waxed on a great length about the gold complex in the past. We have maintained a cautious stance towards precious metal plays. Attempting to play the large swings where possible, with the view that longer term trend is to the downside.

From a fundamental standpoint, all of the variables that drive gold and silver are working against them at the present time: the rate of change in central bank stimulus measures, real rates, inflation expectations, broad market strength and the US dollar. Maintaining a bullish view on gold and silver over the past couple of years has been based on dogma, or alternatively, underpinned by the belief that the equivalent to a financial system boogeyman will jump out at any time and drive gold up $2,000 in a day.

We completely understand all of the arguments that support the bullish position as it relates to gold. They are well-known. We will be there again, with both feet, when the trend changes. Hopefully anyway.

For the time being, we are seeing more of the same, which  hasn’t worked for gold. Most importantly, real rates in the US are due to move higher as inflation remains tame and interest rates normalize from historically low levels. This feeds into US dollar strength, which continues to surprise to the upside. You don’t  have to like US dollar strength, or believe it is fundamentally sound, but you have to respect it none-the-less. It is what it is - until it isn’t.

Gold Bullion vs. US Real Rate – 20 Years (Monthly)

Over the short term, from a trading standpoint, recent strength in gold has been encouraging. Gold has managed to hold the critical $1,200/oz level. This despite the fact that other commodities have broken their long term trends and going to new lows. This relative strength is worth taking note of.

Gold Bullion – 5 Years

Note how silver, platinum and oil have all had a big wash-out and broken their well-established trends.

Silver – 5 Years

Platinum – 5 Years

WTI Oil – 5 Years

So, gold has held up pretty well in light of US dollar strength and a significant correction in other key commodities. This is a bullish signal from a trading standpoint, if you are looking to trade a bounce. That said, we think the risk / reward of playing a bounce in-here is poor. If gold doesn’t hold, you could see a large sell-off in the metal as a technical break would open it up to another wave of selling.

Ideally, we would like to see the US dollar make an interim top and other headline commodities stabilize before taking another swing at gold and related stocks. If the US dollar moves to new highs, this will certainly push gold over the edge. US dollar strength has caught the market largely by surprise and there is no reason to suggest it can’t continue to do so. It is technically overbought over the short term, so if it fails to definitively break to new highs, we will be sniffing around the gold complex for trading ideas.

US Dollar – 5 Years

As a group, we do have select names in the precious metals complex that we like from a bottom up standpoint. Names where you have solid assets and identifiable catalysts in the pipeline. These include G-Resources Group (1051.H:HKD$0.192) and Newstrike Capital Inc. (NES.V:C$1.01). Given that we have been nervous about the strength of the overall gold market, we have complemented these ideas by going short a basket of junior mining gold stocks via the Market Vectors Jr Gold Miner Index (GDXJ:$27.08). This essentially removes gold market risk, which helps us sleep at night given the heightened risk in the complex.

The short call has worked out quite well, but we have to admit, we are getting nervous about being short a market that is as oversold as it is. So, we will be looking to remove this short over the next couple of weeks if we see US dollar strength moderate, gold bullion definitely hold $1,200/oz or some dovish comments from the Fed.

GDXJ – 3 Years

As always, please call your Verdmont Representative for more detail on our current commodity view and themes we see playing out in the complex. We can also provide trade ideas if you are looking to exploit any of these themes.

Tuesday, October 28, 2014

Slyce Inc. (SLC.V:C$0.78) - Partnering with Neiman Marcus to Provide Visual Search Technology - "Snap.Find.Shop."

Slyce has partnered with Neiman Marcus to provide visual search technology, enabling Neiman Marcus customers to snap pictures of items with their smartphone and instantly shop for these items on the company’s website. An overview of the transaction and the new relationship can be found in the following news release:

We do not want to make a habit of inundating our clients with company specific news releases - we know intimately how annoying this can be. Rather, we are forwarding today’s news about Slyce because we believe it is a transformative development for the company as it is a “rubber hitting the road” moment.

Some key takeaways from todays announcement as we see it:

  • For a company like Neiman Marcus, its brand is the lifeblood of its high end retail model. Neiman Marcus would not enter into a business relationship with a company like Slyce if it thought it would cheapen its customers shopping experience in any way. This is a huge vote of confidence in the SLC.V business model.
  • We would imagine the Neiman Marcus relationship has been in development for months. There is a long lead time in getting retailers up and running on the Slyce platform. The process involves a hefty amount of due diligence on SLC.V as a company and the rigidity of its underlying value proposition given that both are completely new. Once a retailer is interested, the onboarding process is lengthy as each individual product a company wishes to sell needs to be digitally stored and various elements of its technology merged into the Slyce platform.
  • When an industry leader like Neiman Marcus offers its clients an enhanced shopping experience, you can bet that its competitors are pouring over todays announcement and asking themselves, “who the hell is Slyce?”
  • Given the length of time in setting up a relationship, we would assume that there are numerous companies in the onboarding process at the present time. This suggests that there will be multiple announcements about new partnerships into the foreseeable future.  
  • New partnerships will enable the market to extrapolate the potential profitability of Slyce moving forward. It is still early days, and hard numbers are scant, but Slyce’s revenue model is highly attractive. Each new relationship entails a licensing fee and generally represents a contractual agreement which can span a few years. A company typically pays to have each individual item digitized and pays Slyce each time a customer clicks on a given item, regardless if they purchase it or not. Finally, if a shopper ultimately chooses to purchase a select item, SLC.V is paid on the transaction. Slyce essentially draws 4 different revenue lines from 1 underlying relationship, which should prove very profitable with time.

Please have a look at some of the links in the news release to get a better idea about the transaction and Slyce in general. As an aside, a girl in our office noticed the words “handbags and shoes” in the release – surprise, surprise. She immediately downloaded the Neiman Marcus App from the App Store on her iPhone. She then took a picture of her Michael Kors handbag, which is like sooooo to die for by the way, and within a few seconds was able to view options to buy on the Neiman Marcus website. Cool stuff.

We are owners of SLC.V. As we have said, Slyce could fundamentally change the way in which consumers shop and how retailers interact with customers. This is of course a lofty goal, and by extension, investing in Slyce is fraught with risk. That said, we continue to believe that the Slyce story is just getting going and todays announcement serves to bolster that view.

Please call your Verdmont Representative for more information on Slyce.