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GreensKeeper: The Red Dragon And King Canute

The Red Dragon And King Canute by Michael McCloskey, Founder & President of GreensKeeper Asset Management

The GreensKeeper Value Fund is up +1.8% (after all fees1 and expenses) in 2015 as of July 31. Our strategy of not hedging our US dollar exposure continues to benefit the portfolio.

As August draws to a close, the recent market correction and increased volatility is on everyone’s mind. We thought it the perfect time to explain why down markets are actually welcomed as good news at GreensKeeper. This may sound counterintuitive but if you stay with us for a few pages, it will all become clear.

Needless to say our defensive positioning is serving us well and we put a material amount of our formerly idle cash to work in August. In addition to adding to a few existing positions, we also added a few new stocks to the portfolio.

Several stocks that we own are worth discussing briefly. AT&T completed its acquisition of DirecTV in July after receiving final regulatory approvals. We realized a gain of over 67% on our position in DTV including foreign currency gains. As part of the transaction we now hold a small position in AT&T as the consideration received included both cash and shares.

Home Capital Group (TSX:HCG) recently disclosed some operational challenges in its business. It seems that a number of Home Capital’s mortgage broker partners were doing some naughty things. As a result, the stock sold off 40%. After we spoke with management, a few competitors and others in the industry, we concluded that the company is making the right moves to protect its franchise and that the market has overreacted. Given Home Capital’s historical track record of success and the fact that the stock is selling at less than 7 times 2015 earnings, we loaded up on HCG shares for the portfolio. Time will tell if our analysis is correct, but we like our odds.

The Chinese Equity Markets

China’s economic miracle continues its forward progress, despite a few stops and starts. The country’s citizens are gradually getting wealthier as a result of the authorities’ slow but steady embrace of a market economy (albeit with Chinese characteristics). Capitalism can be a messy business at times and China’s frothy stock markets and gambling culture combined in early 2015 to draw in new retail investors. And by investors, we mean speculators.

By the summer, valuations escalated to the point that the price?to?earnings multiple of the main Chinese equity index surpassed 75. With everyone seemingly making money, margin lending and volumes peaked and, predictably, it ended badly in a 40% market collapse.

Valuing stability, China’s leaders panicked and tried to prop up the equity markets by any and all means necessary. Companies were strongly “encouraged” to suspend trading of their shares and large shareholders dissuaded from selling. Pension funds were suddenly permitted to invest in equities and state controlled enterprises threw $200 billion into the market. Even Chinese journalists were harassed by police for their "irresponsible and inaccurate" reporting on the stock market. It worked for a few days but ultimately the selloff continued unabated. Which brings us to the tale of King Canute.

King Canute the Great was an 11th Century king of Denmark, England, Norway and parts of Sweden. Like most powerful people, those around him praised his greatness and swore that he was all powerful. Growing tired of the incessant flattery all around him, legend has it that King Canute had his throne carried down to the seashore and commanded the incoming tide to halt. When the tide failed to obey and soaked his feet and royal robes the king leapt backwards, saying: “Let all men know how empty and worthless is the power of kings. For there is none worthy of...


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