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Gal^Stad
Investments Inc.

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Year in Review

2019 in Perspective,
from the January 2020 issue

What a fabulous year for stocks. North American benchmarks notched record highs, international markets did well, and momentum was strong.

But if you thought this signified that the overall sentiment was just tickety-boo, you’d be mistaken. The headlines suggested economic uncertainty, with talk of China–US trade tensions, the Trump impeachment, Brexit, climate change and fears of a recession predominating.

Perhaps the best word to summarize 2019 was “unrest.” The world seems angry. Swedish climate activist Greta Thunberg was Time’s Person of the Year, and violent rallies have rocked Hong Kong, France, Chile, Russia, India, Iran, Catalonia, Bolivia, etc.

At the ballot box, the Brits rallied behind Brexit diehard Boris Johnson&nsbp;— despite a counter trend that saw nationalist parties sweep Scotland and win a majority of seats in Northern Ireland. Voters in Hong Kong used their municipal election to voice support for the pro-democracy movement.

Here at home, Alberta and Saskatchewan shut out the governing Liberals, helping reduce them to minority status. “Wexit” joined the political vocabulary, with a western separatist party seeking to run candidates in the next election.

Debts and deficits have been rocketing higher, and not only in Canada and the US: the global debt-to-GDP ratio hit 322 percent. At the same time, central banks cut interest rates to levels once considered impossible.

Consequently, bond markets have gone kerflooey, with yields hitting record lows. In Germany, 30-year bonds went below zero for the first time ever, and in August it was estimated that one-fourth of all government bonds were in negative territory.

Where this strange trend leads is a big question. What are the long-term implications of negative rates? How long will it take to recognize and address those consequences?

It’s clear that, among other issues, the system penalizes savers, supports companies that might otherwise collapse and inflates property bubbles. Could a recession be calling? Canada’s inverted yield curve suggests as much.

Commodities had a great year. Gold was up roughly 18.5 percent, its best outing since 2010. Silver wasn’t messing around, either, with a 15.8 percent run.

Oil and gas remain in a tough spot; the world is well supplied and demand forecasts aren’t matching expectations. So, even though WTI had its strongest showing since 2016, with a 31 percent increase, it remains well off pre-2014 levels.

Meanwhile, natural gas dropped 27.7 percent. Great for your furnace, bad for your portfolio if you’re invested in that sector.

But let’s stay positive, shall we? The American indices certainly did; the Dow and S&P 500 were up 25.3 and 28.9 percent, respectively. Not to be too severely outdone, the S&P/TSX Composite kicked it up by 19.4 percent&nsbp;— the index’s greatest annual growth since oil prices collapsed&nsbp;— and hit new all-time highs.

Perhaps the continent’s most significant economic news was the passage in Congress of USMCA (or CUSMA, or NAFTA 2.0, or whatever the heck the kids are calling it these days).

The Canadian bill to implement the agreement, which had passed its second reading, was scuppered when the 2019 election was called. New legislation must be introduced when Parliament resumes sitting. Here’s hoping the second time’s the charm.

Overseas markets were solid. According to MSCI, the global benchmark improved 25.2 percent. The biggest winners were Russia, China and Greece, all of which topped 40 percent. Greece’s performance was particularly heartening, given the VPP’s chunk of GREK.

By contrast, the biggest losers were Chile and Argentina, which fell 18.6 and 22.6 percent respectively.

The loonie was rangebound between 74 and 77 cents. As for Bitcoin, it surged 88 percent in 2019&nsbp;— but, true to its ever-volatile nature, the 52-week range was between $3,371 and $13,814. Stability, thy name is not cryptocurrency.

As for our little corner of the investing world, the President’s Portfolio clocked in at 15.5 percent. The 10-year figure is 18.4, while over the last 20 years, the annualized return is 16.3 percent.

The Vice-President’s Portfolio was up 14.5 percent on the year, and is up an annualized 10 percent since it was launched a decade ago (really?!). In the words of Willie Nelson, ain’t it funny how time slips away?

Alacer was a huge winner. Benj sold one-third for a 225 percent gain, while Ben scored a 232 percent bump on half his stack. Another fruitful investment was Bank of America, which rewarded the PP with a 399 percent gain.

The VPP’s Kiwi combo of Spark New Zealand and Chorus churned out more in dividends than the entire purchase price and generated a total gain of 242 percent. Patience can pay.

Unfortunately, there were losers. Reitmans shares were tendered at $3.00, well below the purchase prices, but way higher than the current buck or so. Obsidian was purchased twice, making for losses of 88.5 percent and 69.9 percent.

After a long denouement, Bellatrix filed for creditor protection, wiping out shareholders. Carbo Ceramics is crippled and could go bust. Cathedral Energy is hurting too.

Notwithstanding the modest wins with Trinidad Drilling and Enesco, to call our forays into the post-2014 energy sector depressing would be an understatement.

Other big losers included AgJunction and Stuart Olson, which were off more than 50 percent. Fortunately, FUNC, Flex, Hibbett and TransAlta were all up by more than half.

Parking money in “high-interest” accounts generates a little return on the idle capital, but doesn’t do much to help overall results in a bull market.

That said, should the markets pull a 180, the ready cash will cushion the blow and make it easier to go on the offensive in a beaten-up environment.

For the first time ever, the PP has gone two years without a takeover. Fortunately, the VPP remains in the merger and acquisitions game with CTG now in play.

So, what will the future bring? Benj is on record as predicting a recession by the end of 2021. Phil and Ben are less sure, but can see where he is coming from.

Besides the issues with debt, deficits and wonky yield curves, the current stock market rally is the longest ever. If this were 1999, they would call it a “new paradigm.” We will simply call it “bizarre” and wish governments luck in dealing with the possible fallout.

To put it succinctly, today’s investing environment is challenging. Our analysis is generating few candidates for enthusiastic purchases. Though offence is more fun (just ask the Toronto Maple Leafs), we are not rushing to put money to work.

Behind the scenes, Contra’s merry little world continues to turn. Benj is still going strong on BNN-Bloomberg and writing for the Globe and Mail and Canadian MoneySaver. He is also semi-active on Twitter (@BenjContra), as is Phil via the @ContratheHeard handle.

Phil started writing for Seeking Alpha in February and has a Contra Facebook page as well. Look at us, entering the 21st century!

Ben is the glue guy, as always, when not trying to outmanoeuvre his opponents on the curling rink. Other than that, as Contra moves past its 26th anniversary, our principled pursuit of value continues.


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