A very brief primer on Canada-US petroleum trade
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.
Bank of Canada chief speaks
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.
Market places a premium on yield
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 bill escalating
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.