Canadian Finance, Economics and Fiscal Analysis
The S&P 500 is up about 5% year-to-date, even including Apple’s fall from the stratosphere (which was its largest weighted component).
Although I don’t see signs presently of a speculative euphoria on equities quite yet, the moment that I start seeing publications like the Drudge Report or equivalent reporting on the rise of the stock markets will probably be the best signal to start scaling exit positions and building cash reserves.
The Bank of Canada announced they were leaving interest rates unchanged. The salient paragraph was the last one:
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.
This basically means that short term rates are not going to increase for at least half a year, but likely for the rest of 2013. BAX quotes reflect a slight expectation of higher rates approaching the end of 2013:
| Month / Strike | Bid price | Ask price | Settl. price | Net change | Open int. | Vol. |
|---|---|---|---|---|---|---|
| Open interest: 543,666 | Volume: 171,501 | |||||
| 13 FEB | 0 | 0 | 98.745 | 0 | 0 | 0 |
| 13 MAR | 98.710 | 98.715 | 98.710 | 0 | 101,834 | 14,761 |
| 13 APR | 0 | 0 | 98.695 | 0 | 0 | 0 |
| 13 JUN | 98.710 | 98.720 | 98.720 | -0.010 | 119,478 | 45,715 |
| 13 SEP | 98.680 | 98.690 | 98.690 | -0.010 | 113,065 | 42,119 |
| 13 DEC | 98.640 | 98.650 | 98.660 | -0.010 | 90,020 | 34,371 |
| 14 MAR | 98.590 | 98.600 | 98.610 | -0.010 | 56,655 | 19,399 |
| 14 JUN | 98.540 | 98.550 | 98.550 | -0.010 | 31,336 | 9,242 |
| 14 SEP | 98.480 | 98.490 | 98.490 | 0 | 14,456 | 3,892 |
| 14 DEC | 98.410 | 98.430 | 98.430 | -0.010 | 9,608 | 1,602 |
| 15 MAR | 98.350 | 98.370 | 98.370 | 0.070 | 4,925 | 94 |
| 15 JUN | 98.280 | 98.300 | 98.300 | 0.080 | 1,185 | 17 |
| 15 SEP | 98.220 | 98.240 | 98.240 | 0.070 | 754 | 182 |
| 15 DEC | 98.150 | 98.170 | 98.170 | 0.060 | 350 | 107 |
The important figure is the 10-year government bond and its yield has not gone anywhere over the past year:
The implications here is that if there are going to be disruptive changes in asset prices, it is unlikely to result from interest rate changes. This would suggest that the REIT market and other yield-driven markets will continue to receive demand as investors clamour for yield. I also suspect that real estate asset prices will continue to exhibit a slow deflation rather than a bubble popping.
Genworth Financial (NYSE: GNW) is up about 9% today on news that it will be implementing a plan to re-arrange the capital structure behind its US mortgage insurance units in such a manner that will basically leave the parent company with less “blow-up” risk concerning that business. This is assuming they receive regulatory approval, but this announcement surely would not have been announced had it not been floated by regulators first.
The implication for its majority-owned Canadian mortgage insurance subsidiary (TSX: MIC) is that there will be no requirement for a fire-sale of the MIC asset to raise capital for GNW.
MIC is up approximately 35% from its lows in July and August when I started to accumulate shares and GNW is up about 80% from the $5 baseline it was sitting at for the past year before this recent run-up. I guess I should have put money into GNW in addition to MIC, but I couldn’t make heads or tails out of GNW’s statements to a firm enough clarity for my own satisfaction.
At this point I am awfully curious whether GNW is still shopping around their Canadian mortgage insurance subsidiary or whether they’re just going to keep their ownership stake and collect dividend cheques. Genworth owns 57% of MIC and this represents $65.3 million in dividend income for them – 13 cents a share.
There are heavy rumours that Dell is seeking to go private. The mechanism will likely be through a leveraged buy-out assisted with some other capital partners.
The necessary condition for this to occur is shareholder approval, and since Michael Dell still owns a substantial portion of the company (about 14% according to the last DEF14 filing) there would likely be enough sway to ensure that it happens.
Business-wise, it is probably better for the company because it can then make strategic decisions that would otherwise not be possible if they were a reporting entity. Dell’s core business is clearly stagnating and going private will probably be the way for the financing firms to figure out how to carve out the various businesses within Dell and try to recapture some value in the marketplace.
Looking at raw cash flows in relation to a $10/share valuation, one can see where this thought process would proceed forward, especially if you can float some ultra-cheap debt financing in a yield-hungry bond market.