Being A Risk Manager Isn’t Easy


Grant cartoon
Source: The Insurance Observer , June 1994



Legacy of Benjamin Graham

The Heilbrunn Center for Graham and Dodd Investing created a video titled ‘Legacy of Ben Graham,’ which contains bytes from some of his students, such as Warren Buffett and Irving Kahn, on how Graham’s teachings changed their lives.

The Demand for Income Will Only Get More Acute

The demand for income will only get more acute if Citi credit Matt King’s forecast is correct. In a June 27 report called The Power of Doves, Mr. King wrote,

“secular stagnation is a real phenomenon … the bursting of [asset] bubbles has caused the last few recessions, but in each case the bubble was ultimately resolved by the taking on of still more debt. That each bubble ultimately proved vulnerable at successively lower levels of real interest rates is therefore not a bug, but a feature. .. it seems highly likely that the next recession will also be caused by a sell-off in asset prices, conceivably at an even lower level of interest rates still – and probably long before inflation has risen to reach [developed market] central banks’ targets.”

The low productivity growth inherent in secular stagnation, along with occasional asset bubbles and low inflation, is a recipe for lower and lower interest rates as North American populations age and need reliable cash flows.

Terra Incognita

Fall is around the corner and I hope everyone had a great summer. I’m taking this opportunity to re-connect and share with you a short missive.

If you are trying to make sense of this economic environment and you can’t, welcome to the club. I don’t have forty year plus of experience behind the belt and when I talk to people who do, they are clueless. The environment we are in is terra incognita. Sure we can go back in history to study the cause and effect of certain specific policy, but any attempts feel useless when applied to today’s climate. I don’t remember being tested on negative interest rate in university. We never lived in a time with so much global central bank intervention. Their collective action is distorting the “normal” course of action, if we assume there’s any meaning left to the word normal. We have over $16 trillion in negative interest rate bonds. I’m not a macroeconomics expert, but common sense dictates that when things are so out of whack, it’s not going to end well.

The dreaded over-used expression “this time is different” comes to mind. Basically we claim that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. There’s the sentiment that the important lessons from history to show us how much–or how little–we have learned don’t apply anymore. Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. We just had a major generational financial crash just ten years ago. Yet, that harsh lesson seems like distant history. Total global debt levels have reached a whopping $246 trillion as of Q1-2019 – up from $164 trillion in January 2009, the time of the last financial crisis. This level of debt represents almost 320% of global GDP. The “time” might be different, but the outcome might be similar.

Here are some economic and financial topics that are just mind numbing. Feel free to reach out to discuss any.

  • We are apparently living in a period of “strong” economic growth, though it has been slowing down a little bit lately. Still we are at full employment and wages are rising. Normally during good economic times the government might call for a budgetary surplus. This is, basically, standard Keynesianism. But instead governments are running major deficits like they are trying to get out of a major recession. This situation raised three important questions that I don’t see anybody talk about:
    1. What will governments do to stimulate the economy when a real recession hits? The classic economic 101 textbook response is more stimulus/deficit/debt.
    2. This led to question #2: How are we going to pay for these deficits? Of course we can’t raise taxes of 1) it won’t help the economy and 2) Good luck getting re-elected. So it has to be more money printing and monetary stimulus.
    3. I don’t see any politicians, or financial media being alarmed with the ever growing deficit. There are long term consequences to this type of action. The deficit problem is not urgent right now but if we don’t address the problem, the problem will eventually address us and that’s not good. We are perpetually “kicking the can down road” until the can becomes a massive iron wrecking ball that is stuck in the middle of the road. Any attempt to kick it will break your foot. Worse, it might roll back and crush us.
    4. I asked a leading economist in Canada these questions and his answer was: “Good questions”.
  • If the economy is so “strong”, why can’t it handle interest rates north of 2.5%. Really, 2.5%, it’s not much. To be relative, the rates were at 19.5% in 1981. Imagine buying your house on a credit card. To be fair, homes were a fraction of today’s cost (a prolong period of low rates led to very expensive housing). Now the Fed has lowered its rate in July and has indicated that it might go lower. Actually they have clearly indicated that they don’t know what they are doing to do. Read: Fed’s George: It’s ‘too soon’ to judge next move on rates.
  • Then there’s M.M.T. that is gaining a lot of traction. Politicians on the left and economists are talking about M.M.T., which sounds like the street name of a new drug. M.M.T. actually stands for Modern Monetary Theory, which is pushed by Bernie Sanders adviser Stephanie Kelton. Mrs. Kelton, the face of M.M.T., believes the government should just print more money. When asked “How will we pay for it?” she says that it shouldn’t be a central question in American politics. Simply printing more money is always the answer. When I first heard of M.M.T. it sounded like a joke an economist would tell. But economists are not known for their sense of humour and the joke got picked up by politicians and the media and M.M.T. is now a real “serious” discussion topic. How does it pass the common sense test? But the problem is by asking that question we are assuming there’s common sense left out there. M.M.T. is a polarizing idea. Kelton has been described as an economist with an idea “that will either solve the world’s problems or send it into ruin!” Didn’t Zimbabwe and Germany, among many others, went down that road in the past? Historically speaking, printing too much money led to hyperinflation. But I guess this time is different. Kelton is working on a book, “The Deficit Myth” which will come out next year. It will be in the accounting & finance section, not fiction.
  • The puzzle of negative interest rates. Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose. What if I said I wanted to borrow $100 from you and pay you back $98 five years later? Would you do it? Sounds absurd, but increasingly that’s the global bond market these days. There are currently more than $16 trillion (30%, and counting, of the global tradable bond universe, according to JPMorgan) in negative yielding debt around the world as central banks try to ease monetary conditions to sustain the global economy. This is possible because Denmark, as well as Sweden and Switzerland, has seen rates in money markets drop to levels that turn banking upside-down. Swiss banks in particular, where interest rates are negative at -0.75 per cent, have been passing on these rates to clients with high cash balances. Credit Suisse and UBS had held fire, but recently said they would have to start passing them on, too. Jyske Bank will effectively pay borrowers 0.5% a year to take out a loan. How? Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers. Negative rates are counterintuitive, unprecedented — and to my mind — mind-bendingly insane and downright scary. They are like a parallel universe where everything you’ve ever learned about finance and human behavior is turned upside down. Worse, negative rates are being normalized by economists, bankers, and commentators. Worse, I have a funny feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets; an anomaly growing in scale which seemingly came out of nowhere that is under-recognized, poorly understood and dismissed as not consequential. I’m not sure what form the ugliness will take or, more vexing, what we should do about it.
  • A lot of people think cash is the safest bet in a world of negative interest rates….there’s a cost: inflation and referring to investors who have stayed on the sidelines and missed out on the great bull run in equities. Yet perception of risk is an emotional thing. If people feel comfortable paying extra money in the form of negative rates for the known loss they will suffer on cash versus the unknown and potentially larger loss on riskier assets, it can be hard for wealth managers to talk them out of it.
  • Brexit is a full-on terra incognita. That’s a storm nobody has figured out how to navigate. The Americans and English have a thing for turning politics into awesome theatrics performance. How is this the real world?
  • The WeWork IPO is being sold as the holy grail of investments…The mission of WeWork is to elevate the world’s consciousness. That’s very nobel for an office space rental business. The company disclosed last month of net losses of more than $900 million for the first six months of 2019 on revenues of $1.54 billion. It will achieve 5-star status when the losses are higher than the revenues. WeWork has long-term lease obligations at $17.9 billion that is financed by short-term assets, a recipe of disaster when the next downturn comes. Basically the short-term assets melts and you are stuck with the debt. This stock screams “buy” when the CEO and co-founder cashed out of more than $700 million from his company ahead of its IPO. But at least he returned around $5.9 million worth of stock to the company, which he had originally received in exchange for the “We” trademarks. I’m not making this stuff up. Maybe the trademark “I” is my ticket into the sun. Yet, despite the tons of red flags in their S1, WeWork is expected to be valued around $47 billion because WeWork consider themselves as a “platform tech” in the “space as a service” segment instead of where it should be: real estate. Who is buying this stuff? What I noticed is that stocks listed on the stock market are either trading at 10x P/E or 100x P/E.

To conclude, governments and central banks are acting like they are in a recession with big budget deficit and excessive monetary stimulus policy. Any attempt to normalize the situation has encountered hiccups, like the tamper tantrum (a bout of panic selling after Federal Reserve hinted at a reduction in stimulus) and the December 2018 mini-correction.

For investors, attempting to figure out how to play these developments is a crazy game. Just don’t. Add in a dose of trade war, political circus, political uncertainty, Twitter and you have an instant aging formula.

Happy fall,


The Story of a Great Monopoly

I found this great read while doing some research. It’s from The Atlantic’s archive. It was published by H.D. Lloyd on March 1881. The article grabs the climate of the time on railroads, Standard Oil, Rockefeller, the Vanderbilt, corruption and politics.  The article address the “railroad problem” of the time and the power of monopolies. It’s a big article and it will take a while to read. If you read the book Titan, you will like this article.

Currier & Ives - Library of Congress
Currier & Ives – Library of Congress

The Story of a Great Monopoly

Repost from The Atlantic
By H.D. Lloyd

”These incidents in railroad history show most of the points where we fail … to maintain the equities of ‘government’—and employment—‘of the people, by the people, for the people.’”

Continue reading “The Story of a Great Monopoly”

SNC-Lavalin: Buy A Highway, Get The E&C For Cheap

This is my most recent research piece on SNC-Lavalin Group published on Seeking Alpha: SNC-Lavalin: Buy A Highway, Get The E&C For Cheap.

Unfortunately the publication of my article corresponded with a significant press release from SNC and a public statement from the CDPQ . On the news the stock went from $25 to $21 per share. That’s my timing for you.

Of course nobody wants to see bad news but I believe this is the news that we were looking for. I see the recent announcements as positives.  It’s like a doctor telling you that you are getting brain surgery to remove a tumor. It’s not good news but that’s what needed. Short-term pain for a better future.

In the article I said that I wouldn’t be surprised that the new CEO takes the quarter as an opportunity to ditch guidance and dump more bad news and that’s exactly what happened. SNC took a $1.9b impairment charge link to its oil and gas division, Kentz. They already took a $1.2b impairment charge back in February. SNC bought Kentz for $2.1b back in 2014. The CDPQ, the largest shareholder with 19.9%, publicly came out against the deterioration of SNC performance. Back in the spring the CDPQ said they will “be a rock” for SNC, I guess they are losing patience like everyone else.

SNC is facing many headwinds, operationally, financially, politically, reputationally…let’s quickly address them:

  • SNC has been having operational issues. SNC some good assets and bad assets. The recent restructure announced will have SNC focus on its strong points. SNC is still in business. They are still winning contracts. SNC is walking away from Turnkey lump sump projects, the key source of its problems. Exit: O&G, mining, and construction which are its least profitable activities.They will focus on design, nuclear, engineering services “EDPM”.  They will be less risky and more cash-flow predictable. More details on the new strategy is expected in the fall. The future SNC might look like more of a WSP Global or Stantec.
  • Finance: SNC took on a lot of debt for its WS Atkins acquisition of $3.6b in 2017. Despite paying a big price for Atkins, it’s one of the strong points of SNC today. To deal with the debt SNC is selling part of their private highway, cut the dividend, and is engaged on a cost cutting program. Once the sale is completed SNC debt’s level should be back to their historical norm of low debt. SNC also has $13.87 (post-H407 sale) of net assets in their Capital Investment Portfolio.
  • Politics: Unfortunately SNC was in the middle of a political scandal for the Trudeau’s Liberal government. SNC was also a victim of a diplomatic spat between Saudi Arabia and Canada. There’s not much in SNC’s control at the moment. Hopefully after the election the government will finally find a solution to SNC’s legal problems.
  • Reputation: SNC didn’t murder anybody but you would think they did. Their reputation is not good. It’s affecting employee morale and departures. The public perception of the company is toxic. SNC is managing a PR crisis. SNC, a 100+ year old company, has its brand; a once valued intangible asset is now in the garbage bin. You can change a reputation. Merck’s Vioxx is responsible for the death of 38,000 people and the company is still around. With SNC it will take time. I don’t expect anything before the Canadian Federal election in October. Plus they have to Libya bribery court case they have to deal with. It will take a lot of time, a string of good news/quarters, and communications to deal its reputation.

With the recent announcements, SNC has a market cap of $3.6 billion, the same price they bought WS Atkins in 2017. Atkins is one of the most respected planning and project management firm in the world. The stock is cheap and very attractive for a competitor looking to expand. The CDPQ has ~20% and RBC recently built a 16.6%. I understand this is a difficult stock to hold or even buy. It’s not supposed to be easy. I believe SNC will eventually emerged a better company.

I suggest to read the article for a more in-depth analysis.

GameStop – Hard Reality Ahead

I’ve been following the retailer GameStop (GME) on and off for a couple years now. It’s trading at $4.80 a share with a market cap of $490m. The stock has been in free fall for a couple years now.  It did stabilize for a bit last year when they were shopping the company around but they ended up not doing anything.


They recently slashed the dividend that had a yield of over 10%. The move will save them $157 million a year. When you see a juicy 10% dividend yield, it usually means that it’s too good to be truth. The large majority of times it means that the company is not healthy and I’m not surprised they cut it. They have a failing business with $468m in debt plus $550m in operating leases.

I’m looking at it for a shorting point of view. Shorting is very risky even though GameStop gives you the vibe that it’s the next Blockbusters. People are playing videogames more than ever. It’s just they are not buying their games at GameStop like they used too.

GME might survive, in a different form. They have a collectible business that is growing but very small. Somebody might take them private. They just announced a Dutch Auction buyback. Maybe its a zero. They have enough cash to pay their bills for a while. They have Net Operating Losses (NOL) which could be attractive to another retailer. Shorting is a hard game to play. Plus betting on a retailer going to zero is not a game I’m comfortable with. That’s why I don’t short.

They operate 5,800 stores in 14 countries. I don’t know what’s going with They bought the company in 2015 for $140m and I know they took some impairment charges on the brand name.

The reality is that the long-term outlook of their core business doesn’t look good. They are in the wrong line of business at the wrong time. Sure the next generation of consoles (PS5 and Xbox) might give them a short-term boost (or hurt them because people are delaying their game purchase), but the hard reality is that all the games are going over the cloud. It’s much more convenient and more profitable. They are cutting out the middle men by going directly to the consumer (digital delivery). This is a pattern we have seen with music, video, and now video games. It’s just taking longer for video games because of the more demanding hardware/software/Internet requirements. We have the technology today. When was the last time you bought a music CD or a DVD? Video games are going the same way.

A hobby retailer that seems to be doing well is Games Workshop (GAW.l), which is the company behind Warhammer. Maybe GameStop with their collectibles and reach can emulate the good side of that business. But it would have to be on a smaller scale on cheap rent real estate. That’s probably not what investor want to hear.

Ironically, GameStop was once a streaming video game innovator. It bought Spawn Labs in 2011 to create a kind of Netflix for video games. But it was too early: The technology wasn’t quite ready, and GameStop shut down Spawn Labs in 2014.

The competing landscape is also changing. Google is getting into gaming with Stadia, a cloud gaming streaming service. Apple is getting in the business too. Nintendo is pushing their games on the mobile. And Sony and Microsoft are working on the next generation of console.

I don’t know what happened in the board room when they were looking to sell the company around. Maybe the offer wasn’t good enough (I bet it looks great in hindsight now). The business of selling new and used console is a dying one. The business would be good in the hands of independent retailer or a private owner that has the patience to work things out.

Keeping Your Dividend Edge

Keeping Your Dividend Edge
Available here.

Before I get to the book I want to share a little story. Something positive actually happened on Twitter. It turns out that Twitter doesn’t have to be carnage pit filled with trolls. There’s a nice guy on it and his name is Todd Wenning (@ToddWenning).

A while back I read Harriman’s New Book of Investing Rules. The book is 500 pages of wisdom by some great investors.  There are some well-known names and less familiar names like Todd. The investors profiled range in style and strategies. One of the articles in the book was written by Todd Wenning (@ToddWenning). I really enjoyed Todd’s piece and I reached out to him on Twitter to let him know. 

ToddWenning Book Twitter

Todd was a man of his tweet. I did received his book, Keeping Your Dividend Edge, and I was more than happy to read it. See, something positive came out of Twitter.

I like Todd’s philosophy on investing and dividends. His thinking really resonated with me. Invest like you are buying a business. Study the business, study the fundamentals, figure out the competitive advantage, and can you make a reasonable assumption that the company will be able to maintain its success for a decade or more to come. Focus on the long-term and get paid in growing dividends and capital appreciation.

Todd’s book is about dividend investing. It’s a short read with approximately 120 pages. There’s nothing wrong with a small read. It’s actually refreshing. The book doesn’t waste your time. It’s delivers on content. It goes straight to the point. It’s concise and clear. Just the plain blue cover signals no b.s., no hype.

You will become a better investor if you read this book and actually apply it’s principles. You will. Todd didn’t reinvent the wheel here. Dividend investing has been a staple strategy. But what Todd did is to remind us of the art of dividend investing.

I feel that dividend investing is a lost art. Or investing for income in general. Most income investors are doing it wrong. It’s like health. Everybody wants to be fit and healthy but they are doing it wrong by buying into trends and taking short-cuts. I feel it’s the same with income/dividend investing. People are approaching it the wrong way.

Investors are turned off by blue chips dividend payers because of the low ~2% yield so they chase high-yield stocks. We live in a world where investors are buying bonds for capital gains. The world has turned upside down. The most probable cause is the 10-year plus of ultra low interest rates is distorting financial markets. It’s been a tough stretch for savers in need of yield. Another cause is buybacks as the preferred way to return money to investors.

You can’t just invest for the dividend. If you don’t do your homework it could led to trouble. Dividends should be part of a grander strategy. A good strategy should include dividends as a part of total performance. It’s a key component of long-term share price movements. You can’t guarantee a dividend because a company doesn’t have to pay one, but with the right analysis you can have pretty good idea if they will pay one and raise it over time. If you aim for let’s say a conservative 6% to 7% annual return (S&P Index has returned 10%+ in the last ten years). With a 3% yield you have accomplished half your returns. One aspect of dividends I like is that it’s a tangible returns. It’s a real return. It’s real cash that you receive. And I like cash because it allows me to allocate more capital.

Dividend investing is about patience. Focus on the long-term. Focus on the business. Focus on the fundamentals. Focus on the cash flow because that’s where dividends are from. Dividends need to come from cash produced by the company (not accounting earnings).

Dividends are not a magic pill. A company can’t guarantee a dividend because unlike a bond, there’s no obligation to pay. Dividends can be cut. We have seen blue chips like GE, Pfizer, and more recently Vodafone slash their dividends. A company might take on too much debt and get in trouble. The share price of the company you invested in can languish, or worse disappear. Taxes could be an issue if not handle properly. Todd’s book has a whole chapter on avoiding dividend cuts. Usually the main reason is the lack of sustainable free cash flow.  If a company can’t covert a dividend with free cash flow, they need to fund the payouts with cash on hand, debt, or asset sales. Expect trouble if that happens.

The holy-grail of dividend investing success is the compounding effect. The combination of the increased in value of your stock (capital gain), dividends, and growing dividends reinvested that creates bigger dividends, that gets reinvested can turn your investment into a snowball what creates wealth.

In case it wasn’t clear by now Todd makes the case for smart dividend investing. In case you need to read it again, if you want success in the stock market you need a long-term patient approach. Dividends helps you focus on the business. It helps you focus on the fundamentals of the business. It helps you forget about the daily gyrations of the stock market. I have no clue what the stock market is going to do, so it would be more profitable to forget it and concentrate on trying to find the right stock to buy. Dividends also help you take hit. If you have an investment that is down 15% (because it happens) and the business is sound, you have your dividends coming in and an opportunity to buy the business 15% cheaper.

Long-term thinking, patience, and persistence are qualities which should pertain to investors. Dividends delivers on these fronts. Keeping Your Dividend Edge deserved a place on your investing book shelf.



The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First

The Extra 2%I enjoyed reading The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First by financial journalist and sportswriter Jonah Keri (@jonahkeri)Keri has a podcast and is also the author of a book on the Expos. He’s active on Twitter and a great guy to follow.

The Extra 2%  is a mix of many interests of mine like sports, finance, and business. With the NHL and the NBA finished for the year, it’s time for summer sports and summer reading. Baseball holds a special place. Maybe it’s because I played it when I was a kid. Maybe it’s because of the 1994 Expos and their possible come back. Or maybe I played too much Ken Griffey jr. the video game. Or maybe it’s because baseball is such a different sport from all the other major sports. There’s no clock; you go home after 27 outs. Or the real reason is probably because it’s so goddamn much fun to hit a ball with a bat.

The book documents the turnaround of the Tampa Bay Rays by three financial wiz kids from possibly one of the worst run franchises to a team that’s making the mighty Red Sox and Yankees sweat. And that’s with a tiny fraction of their budget. If the Rays considers spending $8 million on a closer, it’s a huge decision with many implications. If the Red Sox or Yankees spend $8m on a closer and it doesn’t work out, it’s a rounding error.

It’s the classic David vs Goliath story. The only difference in this story is that the large majority of fans are cheering for the two Goliaths. Since the Rays can’t compete on financial ground, they need to find another way to win games. They have to find an edge else where. They have to do things differently. They have to be creative. This is a good follow up book on Michael Lewis’ Moneyball. It’s a similar play. Both the A’s and the Rays are a small payroll team that was willing to discard old baseball wisdom. If you dare going against 100 years of conventional wisdom, you better make sure you are right.

The book is a great case study. Stuart Sternberg, Matt Silverman and Andrew Friedman accomplished so much in so little time. They turned a perennial loser into a contender. They are lessons to learned. The title, the extra 2%, reminds of something Anthony Robbins said (I think it was him). He said something like if you only try to improve 1%, it can make a huge difference in the long run. You might not noticed it at first, but that 1% will add up. Just think of what happened to a golf ball when it you hit it a couple degrees off. It matters.

In a way, the book could have been published now. Stuart Sternberg is still the owner. The Rays are still fighting the mighty Red Sox and Yankees. The Rays are still hustling for a division title. They are still a low budget team. They still don’t have anybody watching them. And they still don’t have stadium deal. Also I should mention that Mark Cuban, owner of the Dallas Mavericks, wrote the forewords.

I don’t really care about the Rays but I pay attention to them from a distance, that is their stadium saga. Rumors in Montreal is that if the Rays can’t get a stadium, Montreal is waiting in the wings to welcome them. Montreal first need to built a stadium and there’s a team of investors working on that. Despite the success of the Rays, Tropicana Field is empty. Tropicana Field is awful and the Rays have a lease until 2027. Is Montreal going to wait another 9 years for a team?

I don’t blame the fans in Tampa or surround areas. I think it’s a Florida problem in general. Most major sports franchise in Florida are not major hits. It’s a college state (and Nascar). Floridians love their college sports. People in Tampa are baseball fans, but they are Cubs fan, Red Sox fans, and Yankees fans. Most Floridians are from there and cheers for their former home club.

To conclude, it would be interest to hear an update from Jonah on the Tampa Bay situation.

Tampa Bays Rays Season results
Regular season results. Source Baseball-Reference.