John Potter @livinginacity
At Inukshuk Capital Management, our focus is on building lasting relationships rooted in trust and collaboration. By focusing on active risk management and long-term value creation, we help families and institutions achieve financial sustainability.
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In this issue:
- Global Equity Market Performance
- Not So Private Credit
- Tricolor, First Brands and Jefferies
- Propel Holdings
- November So Far
- Wrapping Up
Global Equity Market Performance
The S&P/TSX 60 couldn’t extend its streak of S&P 500-beating performance to three months. While it was up 1.0% the S&P 500 bettered that at plus 2.7%. MSCI EAFE put in a solid month, with a 2.0% gain. MSCI Emerging Markets was once again the star, adding 5.2% onto the 7.5% rally in September. For perspective, it’s now back to where it was in the summer of 2021.
As of this writing—the second week of November—our systems are indicating positive momentum in all four equity markets.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here.
This letter will outline some risks we are seeing in the underlying plumbing of the financial system and how private markets are connected to public ones.
Not So Private Credit
In the summer of 2024, we wrote about private credit—right after Ninepoint Partners, a Canadian alternative investment manager, gated three of their private credit funds that had roughly $2 billion in assets under management.
Gating is like a bank closing its doors to prevent a run.
We had no idea if this was indicative of future broader problems and figured all there was to do was wait and watch. These things take time to play out.
The Global Financial Crisis (GFC) had many triggers. One of them was the packaging and repackaging of mortgage debt into opaque securities with shaky ratings and just as shaky valuations.
Banks tightened lending standards after the GFC. This had the effect of driving more deals to non-bank lenders.
Private credit, once just for wealthy investors and institutions, has become increasingly accessible to retail investors.
Non-bank entities, like private credit funds, create loans that are somewhat opaque, hard to value and priced by the fund managers themselves. Individual investors, the public, are now enthusiastically taking risks they may not understand.
And business has been booming.
This matters now—recent events in the U.S. and Canada suggest things below the surface don’t seem to be going all that well. And it seems to be percolating up into public markets.
Tricolor, First Brands and Jefferies
Tricolor Holdings filed for Chapter 7 bankruptcy in September. They were operating a subprime auto sales platform with in-house financing. The company primarily served underbanked borrowers, many of whom lacked credit scores.
Subprime and underbanked. Sounds familiar. But it’s not houses this time, it’s cars.
Reuters reported Tricolor had $1 billion in liabilities, with more than 25,000 creditors. Two of the big-name creditors are public companies, JP Morgan and Fifth Third Bank.
First Brands filed for Chapter 11 bankruptcy at the end of September. They are in the business of aftermarket automotive parts.
According to Reuters, First Brands had liabilities exceeding $10 billion. They reported: More than a dozen companies affiliated with First Brands, including Carnaby Capital Holdings, filed for bankruptcy protection last week…
Tricolor and First Brands are private. That means the private equity market is also involved. We won’t go down that rabbit hole at this time.
One of the most noticeable public market victims of First Brands was Jefferies Financial Group.
It fell by as much as 25% in October. That’s more than $3 billion in public losses. It’s not clear what they will eventually write off, however they were a significant lender to First Brands.
In these cases, banks, non-bank lenders, private credit and equity funds are all in the mix. That means a significant number of individual investors are as well.
The opacity of private debt hides the full damage. It’s difficult to determine how much was lost. What we can see—public markets are taking significant hits.
Will this spread further? No one knows.
Propel Holdings
Not to be left out, Canada has its own difficulties in the credit arena.
Propel Holdings — a public company in the private-credit game — says it’s: Facilitating access to credit for underserved consumers. Translation: subprime loans for people banks won’t touch.
Through brands like CreditFresh, MoneyKey, Fora Credit and Quid Market it operates in the U.S., Canada and the U.K.
As we know, lenders set their own marks. Until recently, theirs said: Everything’s fine. Then came earnings. The stock plunged up to 17% the next day — erasing over $150 million.
So far this year the stock is down roughly 40%.
Subprime is now readily and directly accessible to anyone with a stock trading app.
Stay tuned.
November So Far
On November 4, the government produced its budget branded “Canada Strong” with a projected deficit of $78 billion. That is much stronger than the prior deficit of $61 billion.
On the same day, True Exposure Investments Inc.’s Exogenous Risk Pool ETF (TERP) was listed on the Toronto Stock Exchange. Inukshuk Capital is the portfolio manager of this liquid-alternative fund. It is designed to preserve capital and protect against outside (exogenous) shocks to financial markets. The date was a coincidence.
On November 10, the Bank of Canada published its third quarter Market Participants Survey. It reported the median response to the question of whether Canada is in a recession or about to enter one within the next six months was 35%.
Wrapping Up
Single stock risk is one of the reasons we invest in index fund ETFs. They make diversifying within equities simple and cost effective. If one company in the S&P/TSX 60 has a bad year, the other 59 might not.
Another thing we do is diversify across strategies. We have our proprietary in-house risk systems that help us manage long term asset allocation. We also invest in TERP, which is similar but different.
Layering diversification — within assets, across them, and through strategies — is how we manage market risk.
What we know is human behaviour rarely changes. And that behaviour is what drives prices. And prices are what we rely on to manage money.
“Warning Sign” is a song written 47 years ago by David Byrne of Talking Heads. It’s about recognizing human behaviour.
Warning sign of things to come
It happened before, it will happen again
We’ll watch the signs, the signals, and let the music play—until it doesn’t.
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Challenging the status quo of the Canadian investment industry.
