The US Department of Energy releases a weekly bulletin on energy, and this week they chose to look at the Canadian energy exports to the USA, and the impact of a pipeline blockage.
The oil sands is a huge strategic advantage, especially as fossil fuel mining becomes progressively more difficult. In particular, transport fuels are going to face huge demand pressures as China and India continue their very high economic growth.
The Governor of the Bank of Canada, Mark Carney, made a speech today. Although the media is reporting otherwise, Carney is still keeping his options open:
Since the spring, the Bank has unwound the last of our exceptional liquidity measures, removed the conditional commitment, and raised the overnight rate to 1 per cent. Following these actions, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of still significant excess supply in Canada and the demand headwinds described earlier. While Canada’s circumstances and the discipline of the inflation target dictate a different policy stance than in the United States, there are limits to this divergence.
At this time of transition in the global recovery, with risks of a renewed U.S. slowdown, with constraints beginning to bind growth in emerging economies, and with domestic considerations that will slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered. The unusual uncertainty surrounding the outlook warrants caution.
Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks. Aside from monetary policy, Canadian authorities will need to remain as vigilant as they have been in the past to the possibility of financial imbalances developing in an environment of still low interest rates and relative price stability.
If you read the context of the rest of the speech, essentially he is saying the economy cannot be solved with monetary policy alone, which is correct.
Also, 3-month banker’s acceptance futures (the proxy for the overnight rate projection) are not moving as a reaction to this speech.
I have had this ongoing theory that the market is bidding up yield-bearing assets beyond what is rational.
Nothing is as good an example as today when a small asset management firm, Integrated Asset Management (TSX: IAM) announced that they were resuming an annual dividend – 4 cents a share.
IAM is a very illiquid company, but I have had the advantage of considering them as an investment candidate a couple years ago, but never invested because of valuation (too high). This turned out to be a money-saving decision (notwithstanding the economic crisis!). They had previously given out 4 cent dividends on a semi-annual basis (which was unsustainable), but in order to build up their equity they suspended dividends in early 2009.
Their balance sheet otherwise is quite clean – they have a small cash cushion (about 36 cents a share) and no debt.
Yesterday, the company closed trading at 62 cents a share on 1,500 shares of volume (that is about CAD$930 that traded hands, which is about half of its historical daily volume). Today, they are presently trading at 90 cents a share, and I see about 135,000 shares that have changed hands.
Suffice to say, a 45% price increase because of a dividend announcement is a good indication that the market is valuing yield above everything else.
In terms of actual valuation, it was my belief that before this announcement that IAM was trading at the lower end of my valuation range, but not quite at “buy” territory. In addition, the illiquidity would have made it prohibitive to accumulate a position with any speed and thus illiquidity translates into a lower valuation.
The company itself is an asset manager – they claim to deal with “alternative assets”. At the end of their last quarterly report, they reported nearly $2 billion of assets under management. Their year ends on September and 2009 was a very poor year for them, but it was also the case with every other financial institution. In a more “regular” year, the company should be earning around 6 to 7 cents a share, so their dividend payout schedule will be around 2/3rds of their income.
The dividend announcement shouldn’t change what the company earns, so it is puzzling to see it rise so much after the announcement. It also makes you wonder how many other yielding securities have their prices elevated strictly due to dividends and income distributions, rather than earning economic profits through their operations.
An astute trader can also try to time these announcements in other securities. I will leave this to an exercise for the reader.
Shaw Cable services most of Western Canada and they have been steadily escalating their prices each year. I only use them for cable internet services and subscribe to the high speed service.
The bill has had the following escalation curve, with sales taxes included (12%):
January 2008: $45.87
May 2009: $46.99 (+2.4% from previous)
September 2009: $49.23 (+4.8% from 4 months ago)
September 2010: $52.64 (+6.9% from 12 months ago)
Total since January 2008: +14.8%
While I have had few issues with my service, I do not believe that these price increases are “inflationary” in nature, and rather reflect economic elasticity – customers are likely not to go through the hassle of canceling and getting the alternative service (TELUS’ ADSL) to save a few dollars.
The standard corporate line is likely “We have to do this to make improvements to our network”, but the service itself has not changed since getting it – anecdotally, it feels slower, but this could just be because there is more garbage that gets sent through the internet these days.
The price increases are getting to the point where I am examining options. TELUS’ high speed internet service (without bundling) is $37/mo pre-tax, compared to Shaw’s new price of $47/mo pre-tax. Is one service better than the other? Is switching a seamless process (i.e. will I have loss of service)? It is these types of questions/risks that make me wonder whether it is worth $134/year to make a switch decision.
It is clear that the companies are only competing against each other for marginal customers, and will not engage in price competition for their existing customers.
In terms of publicly traded stocks, while it is clear that Shaw (TSX: SJR) and TELUS (TSX: T) will not double their equity valuations overnight, they do represent a store of value assuming that no other companies will be able to disrupt the wireline broadband marketplace. The same holds true for equivalent companies on the eastern side of the country (to name some: Bell, Videotron, Rogers). TELUS also has diversification in their wireless marketplace, but this is being chipped away by the deep-pocketed Orascom subsidiary, Wind Mobile.
Via James Hymas, Fairfax Financial is issuing $250M in preferred shares, with a 5% yield, and 2.85% above 5-year government bond rates thereafter, and the (holder’s) option to convert to preferreds yielding a floating rate of 2.85% above 3-month government treasury bill rates every five years.
5-year government rates were 2.16% on September 24, and the 3-month note rates were at 0.90%.
Cheap, cheap financing. As issuers start to pound away on the fixed income side (due to heavy demand), it makes you wonder when the party will end. My strong impression is that companies should be extending maturities and securing their debt financing since rates right now are about as good as they will get due to such voracious demand for fixed income securities.
I have spent many hours, spread over about a week, understanding and performing a valuation on Manulife Financial (TSX: MFC).
Readers that track TSX 60 stocks should know that Manulife (and its chief peers, Sun-Life, and to a lesser degree Great West) has gotten hammered over the past year (-40%) and two year (-65%) interval.
Lower equity valuation is not a sign that the stock is worth purchasing – it could perhaps reflect the fact that the equity was over-valued in the first place. Or maybe it is a signal to purchase.
Unfortunately, I have done enough work on the matter that I won’t be giving too much away (i.e. what my “price range” would be for the equity), but I would suggest to people that get into a similar endeavor to realize that Manulife is not solely in the insurance business.
The other point that people should be aware of is that accounting treatment is crucial in properly understanding the line items listed on the consolidated and segment data. This may make comparisons to US-based businesses not an apples-to-apples procedure.
Finally, investors should realize what implicit “macroeconomic” assumptions they are making before investing in the equity. It is similar to making an implicit bet on the price of oil when you purchase shares in Suncor – obviously you won’t be investing in oil companies if you believe the price of oil is going down.
I notice that the Banker’s Acceptances have dropped (implying future rate increases) over the past week. Current quotations are as follows:
| Month / Strike | Bid Price | Ask Price | Settl. Price | Net Change | Vol. |
| + 10 OC | 0.000 | 0.000 | 98.640 | 0.000 | 0 |
| + 10 NO | 0.000 | 0.000 | 98.630 | 0.000 | 0 |
| + 10 DE | 98.615 | 98.620 | 98.650 | -0.030 | 12401 |
| + 11 MR | 98.450 | 98.460 | 98.520 | -0.060 | 21511 |
| + 11 JN | 98.380 | 98.390 | 98.450 | -0.070 | 6701 |
| + 11 SE | 98.310 | 98.320 | 98.380 | -0.060 | 2617 |
| + 11 DE | 98.250 | 98.260 | 98.310 | -0.050 | 1526 |
| + 12 MR | 98.190 | 98.220 | 98.240 | -0.040 | 99 |
| + 12 JN | 98.090 | 98.130 | 98.150 | -0.030 | 7 |
Look at the December contract – implied pricing of 1.39%. On September 8th, this was 1.14%.
Three-month corporate paper is currently trading at 1.14%, which implies that we could be seeing one more rate hike (of 0.25%) before year’s end. The next Bank of Canada scheduled rate announcements are October 19 and December 7.
The Ministry of Finance in Canada has released the July 2010 fiscal update.
The noticeable highlights for the four months ending July 31, 2010 vs. July 31, 2009 include:
- Bottom-line deficit down to $7.7 billion ($23.1 annualized) vs. $18.3 billion ($54.9 annualized)
- Corporate income tax collection up 1.7%, despite a 5.3% drop in the rate (from 19% to 18% effective January 1, 2010).
- GST collections up 34% (indicating a significant increase in consumer spending);
- EI benefit payments down 7% (implying expiry of previous benefits and/or people finding employment)
As the government’s stimulus package is due to end on March 31, 2011, it remains quite conceivable that they will be able to balance the budget in a couple years. This bodes well for Canada because a zero deficit number will signal to the marketplace that tax increases are not imminent.
The other factor I will keep mentioning is that the corporate tax rate is due to decline from 18% to 15% by January 1, 2012. If the government does not fall between now and then, the big winners of this will be investors in profitable Canadian firms.
I don’t like calling tops and bottoms – it is nearly impossible to get the exact time correct, but it is possible to get close. The way you take advantage is by scaling in your orders and waiting for the executions.
Trends in the marketplace go on further than anybody usually expects. Fixed income securities (especially bonds) appear to be quite pricey at the moment. Also, I have been noticing a lot more sentiment on the retail side toward dividend-bearing equities, and doing a cursory scan on that side of the marketplace leads me to believe that performing screens on non-income bearing securities would bear more fruit at the moment.
Portfolio movement has been mainly selling securities and raising cash, due to lack of research time. In particular, there is quite a bit of US currency available for deployment, and it is has been nearly a year and a half since I have invested in US equities.
Yield is now down, but I am very liquid.
I notice that Susan Brunner is doing a brief on Cinram (TSX: CRW.UN). It is in the very boring and low-margin business of printing and distributing physical media such as CDs and DVDs.
I did some fairly serious research on this company earlier this year, and came to the conclusion that while they were likely to continue to be cash flow positive, there was no way that they would overcome their debt situation without a significant recapitalization.
The primary hit in the past year was on February 1, 2010 when 28% of their revenue stream announced they were terminating a contract. The units dove about 2/3rds and got my attention when I did research.
Their big problem is that the company, as of June 30, 2010 has a $379 million bank loan (secured) and only $125 million in cash, with a business that is not generating a whole lot of cash. The bank credit facility expires on May 5, 2011. It is more than likely that the secured creditors will take over the equity, which implies that the current value of $1.00 per unit (total market capitalization about $54 million) is vastly overpriced.
I would only start looking at the company more seriously if they traded below 20 cents, and with the recognition that the catalyst for an equity purchase would be a bank giving them a sweetheart extension deal that wasn’t too punitive to unitholders. At this point you are really gambling as opposed to investing, which is why I am not really going to look at Cinram in the future other than as a curiousity to see how their story resolves.