Trading on margin may force you to sell low

I’ve been investing with margin. In my account, I used all the cash to buy stocks. Then, I applied for the bank to extend me margin in my account. As an example, I bought 1000 shares of Artis REIT (AX.UN) with cash. Then, I was able to buy another 3000 shares of Artis REIT (although it could have been any shares with an equal dollar value) on margin, because I only need to provide cash for 30% of the share purchase (of TSX-listed shares over $5.00).

The market has been volatile over the past couple weeks. I bought another stock that cost around $7.00 per share. And to be safe, I didn’t use all my margin. But the problem was that the stock fell in price. When stocks fall, there is less margin available, which could result in a margin call (a requirement to deposit more cash). But worse yet, the shares fell below $5.00, at which point I need to provide 50% of the value in cash (not just 30%).

Suppose I had invested $49,000 in a $7.00 stock by buying 7000 shares. I deposit $15,000 and make the purchase, using $34,000 margin. If the shares fall in price to $6.00, I have $42,000 of stocks, but my $15,000 (that I deposited in cash) is now worth only $12,857. The proportion remains the same, so there’s no margin call, unless I also had other stocks fluctuating. But if the stock falls to $4.00, the “cash” portion is only worth $8,571 and the shares only qualify for 50% margin, so I can only own $17,142. However, I would hold $28,000, so I either need to deposit another $10,858 or sell shares at a loss.

A margin call can either be triggered by shares of a single company losing value within a portfolio, or by share prices descending below $5.00 (on the TSX) and not providing as much marginable value. The same could happen for shares that are de-listed from the TSX and moved to the TSX-Venture.

Market Outlook November 17, 2014

It’s been a frustrating week for me in the market, and I don’t mind admitting that it’s got me down.

Looking at the market objectively, as a whole, stocks had a decent week and appear to be solidly in place ahead of bonds. While the outlook is never certain, it seems that the worst may be behinds and with some luck, we may experience a “Santa Claus rally.” US stocks still seem to be top of the heap, with large caps (SPY) edging ahead of small caps (IWM).

That’s all I’m going to say for now. I have to decide on trades to place in my accounts to try and right this ship.


Investment Ideas

Canadian Stocks

BlackBerry (BB) is a maker of electronic devices (that’s still around). It has a market cap of $6.6 billion. It has cash on its balance sheet, so it has a positive price/book of 1.79, but it is losing money (negative profit), so there’s no PE. It also has debt, with a debt/equity ratio of 43.4%.

Agrium (AGU) is a crop, seed and agronomics company with worldwide operations. It has a market cap of $16 billion, a PE of 20.5, price/book of 2.24 and debt/equity ratio of 71.5%. I sold Canadian Tire to buy Agrium this week.

US Stocks

Amgen (AMGN) is a biotechnology company that develops human therapeutics. It trades on the NASDAQ and presently has strong momentum. The stock came out of the recent correction really well. It has a market cap of $123 billion, a PE of 25.5, price/book of 4.81 and debt/equity of 130%.

VISA (V) is a well-known credit card and electronic payments company. It has good momentum, although it may have been just a recovery from the correction and it may go no further, but it has better momentum than other US large caps with the exception of Amgen. It’s larger, with a market cap of $154 billion, a PE of 35.2 (less room for price growth), price/book of 7.2 (same problem) and no debt (very good for stability).

General Dynamics (GD) is an aerospace and defence company. In short, they build missiles and I won’t invest in this type of company (but that’s my personal choice). Market cap of $46.77 billion (larger than most Canadian companies), a PE of 21, price/book of 3.57 and debt/equity of 30%. Based on these statistics, it looks more attractive than Amgen.

Texas Instruments (TXN) is the one that I’ve bought for this week (based on momentum). Its momentum put it ahead of Gilead, which I sold. Its market cap is $54.4 billion and its PE is 22.7 with price/book of 5.1. I calculated debt/equity ratio of 70%.

Market Outlook November 10, 2014

The stock market barely moved over the past week, while bonds produced some positive growth. That is a little surprising, seeing as interest rates are unchanged from a week ago. But as a result, stocks and bonds have roughly equivalent momentum.

What I’ve noticed in my portfolios is that large caps have done okay, but small caps have still not recovered from the market correction, and continue to have reduced prices. If anyone is shopping for sales, look at Canadian small cap stocks.

Amongst the asset classes / markets that I compare, US small caps (IWM) and US large caps (SPY) continue to lead. Canada continues to trail and Brazil is a basket-case.

Market Outlook November 3, 2014

Bonds fell back slightly over the past week, while stocks made some progress. As a result, the narrow advantage the stocks enjoyed in momentum over bonds, has now improved somewhat. It appears to be a good time to invest in stocks, and to shift portfolio weightings to favour stocks.

Another indicator that stocks are poised to do well is the positive performance of US stocks. Small caps (IWM) have particularly good momentum, compared to other asset classes, with large caps (SPY) not too far behind. Most other asset classes are now neutral or slightly positive, with the notable exceptions of Canadian small caps and gold.

Over the coming week, I will continue to own Gilead (GILD-US), which has served me well. However, General Dynamics  (GD) and Amgen (AMGN) both may warrant a look. In Canadian stocks, Agrium (AGU) looks attractive.

Market Outlook October 27, 2014

I’m satisfied that the market correction is over. From the top to bottom, the TSX composite fell by almost 11%. It is very normal to experience a correction of this magnitude every year or two. (And very normal for it to arrive in October, for whatever reason.) Stocks have regained their momentum, although not universally across market segments. Real estate seems to have the advantage at present, which is a defensive stance.

The positive week that stocks experienced, gaining 2.56%, doesn’t undo the damage of the correction. That makes it a good time to buy, as everything is (likely) on sale. In a balanced portfolio, stocks should be target-weighted, compared to bonds, for the present.

Real estate stocks (XRE) have the best momentum among asset classes that I track. Only Hong Kong stocks (EWH) and bonds (XBB) also have positive momentum, and they are roughly equal at this point. As a side note, Brazil stocks are in the toilet. How do you say “Sorry, guys” in Portuguese?

Among individual stocks, Gilead (GILD) in the US continues to appear attractive. I sold it for cash during the correction, but that turns out to have been a mistake. I initially bought it at $90.40 (in mid-July), then sold at $102.06 on Oct 17, when it was clear that markets were correcting. I avoided the bottom ($96.16), but I also missed the rebound and it closed at $110.71. Not only did I miss out on 8.5% growth, I also paid a transaction fee to get out, and I’ll pay another to get back in. In this case, buy-and-hold would have served me better.

Market Outlook October 20, 2014

Bond yields fell last week, meaning that bond prices rose (very slightly). As you might expect during a market correction, gold also rose. Stocks, however, were basically flat for the week. That means very little has changed since last week, and bonds continue to enjoy a slight advantage over stocks. I’m not going to go so far as to predict that the correction is behind us. That remains to be seen, but the market has fallen 9% from it’s (weekly close) high, which is a pretty normal correction. Often, each calendar year produces at least one market correction, of 5% – 10% in 1/3 of cases and of 10% – 15% in another 1/4 of cases; 1/10 of the time it’s less severe, and the other 1/3 of the time it’s worse.

Comparing momentum between asset classes, bonds have given up the lead to gold (IGT). Bonds and gold are only slightly positive, and they are the only two asset classes with positive momentum at all (unless you include cash). Both would make suitable, defensive holdings for the coming week.

In my accounts, I sold my momentum holdings for cash last week. I’m not looking to jump back in at this point, and plan to wait for a better opportunity to re-enter the market.

Market Outlook October 13, 2014

Happy Thanksgiving. Canadian exchanges are closed today, but US exchanges remain open.

I’m at the point where I’m selling some of my stocks (that I bought based on momentum) for cash. I don’t know that things are going to get worse, but I don’t know that they’ll get better, either, and I’m willing to sit on the sidelines for a bit. I will continue to hold my dividend-paying stocks.

Stocks had the worst week in quite a while, dropping 3.64%. Bond rose is value (0.55%), although interest rates are little moved. Comparing the momentum between stocks and bonds, the advantage goes to bonds, for the first time in a year and a half (May 2013). This does not bode well. A balanced portfolio should now overweight bonds, and very nervous investors may do well to move out of stocks (although it’s impossible to tell in advance if the transaction costs will be offset by avoiding value loss).

Even if I compare a number of asset classes, bonds still show the most potential. Given how low interest rates are, that’s quite a feat. I’m not optimistic about the next couple weeks for stock investors.

Market Outlook October 6, 2014

The stock market is well and truly in a mini-correction. Over the past three weeks, the stock market has fallen by 5.24%. In mid-September, I was hoping this would be a year where we could look and September and October and say: “See? There’s nothing spooky about these two months in the market. It’s all just superstition.” But it looks now like a reasonable tradition, and I’m not prepared to bet that the correction is ending. The short term outlook is risky.

Stocks and bonds have roughly equal momentum (or lack thereof), which indicates that a balanced portfolio should return to target weightings; it no longer looks profitable to be overweight stocks. In fact, comparing asset class momentum, bonds are the only one to present positive momentum. It’s time for investors to look for safety and take risk off the table.

Very few individual stocks have any positive momentum. This correction is not confined to a single or a couple sectors, but appears to be affecting the majority of stocks. A couple exceptions (disclosure: I own some of these) are Gilead (GILD) and Nike (NKE) in the US and CP (CP) and Valeant (VRX) in Canada.

Market Outlook September 29, 2014

Last week, stocks underwent another correction of -1.6%. At least a minor correction seems typical for this time of year. Over the past two weeks, the stock market has given up 4% of its value. Compared to the 14.5% it had grown since Jan 2014 (until two weeks ago), that doesn’t seem so bad. While stocks fell over the past week, bonds rose, as would be expected. Even so, stocks continue to have a momentum advantage over bonds, albeit a shrinking one. To be blunt, the next four weeks probably won’t be much fun for investors who own stocks.

The outlook for stocks is not rosy. Hong Kong stocks (EWH) have negative momentum, Brazil stocks (EWZ) have massively negative momentum, Chinese stocks (FXI) have barely positive momentum, gold (IGT) has negative momentum, US small caps (IWM) have negative momentum, US large caps (SPY) have a little positive momentum, bonds (XBB) have a little negative momentum, Canadian small caps (XCS) have very negative momentum, Canadian large caps (XIU) have a little negative momentum, emerging market stocks (XEM) have slightly negative momentum, real estate (XRE) has negative momentum and, the big winner, European stocks (XIN) has somewhat positive momentum. In a nutshell: there’s nowhere to hide at the moment. As a comparison to stocks, bonds grew in value by just 3.23% from Jan 2014 until two weeks ago.

A few individual stocks show promise. Right now, CP Rail (CP) is working for me. It’s gained 8% over the six weeks that I’ve owned it, and it appears poised to continue. In the US, Gilead Sciences (GILD) has served me well for the past ten weeks and is really the only US large cap stock (from the S&P 100) that looks promising.