Canadian Finance and Economics
The Canadian bond market is exhibiting a very minor instance of an inverted yield curve between short term and 2-year money. You can view interest rates here.
This is a good an indication as any that we’re going to touch upon a zero GDP growth cycle coming later in 2015 and perhaps negative. Pull out the textbooks to see what industries are good to invest in a recessionary climate.
The Canadian dollar crossed the USD/CAD 0.8 (reciprocal 1.25) mark for the first time since the economic crisis. Part of this was a sudden reaction down to the US Federal Reserve’s statement basically saying they are waiting and seeing.
Eventually there will be a time to shift out of US currency and into Canadian dollars, but now does not feel like the right time.
While not as dramatic as the recent decision by the Swiss Bank to forgo keeping its currency at a lower than market value level, the Canadian dollar was the recent victim of a central bank action when the Bank of Canada decided to drop interest rates by 0.25%. The Canadian dollar is down 2 cents to about 80.7 cents USD (or about 1.24 CAD/USD).
BAX Futures were not anticipating this decrease – today, they are are all trading up about 0.3% as a result of the Bank of Canada’s actions.
My general thought is that the Fairfax theory of the global economy is showing itself to be true – deflationary forces are forcing export-driven economies to devalue their currency. The next leg to drop will be the European Union officially announcing their version of quantitative easing, of which has already had negative implications to their own currency. Japan has already been in this mode for a couple years (Abenomics).
The remaining leg will be when/if the US federal reserve decides to implement interest rate hikes. On today’s decision by the Bank of Canada, federal funds futures are relatively unchanged; they anticipate the US federal reserve will raise rates a quarter-point by the end of the year.
This will also create an interesting dilemma for the Chinese government – their economy is highly export oriented and their competitive position continues to be eroded by the macroeconomic decisions of other countries. Whether they choose to slowly deflate the Yuan in reaction to this remains to be seen.
While the cause of the Bank of Canada’s decision is related to the very sudden decline in the oil market, I am wondering whether the country is simply getting carried away in the geopolitical currents that seem to be affecting every developed country at the moment.
Right now I am over 50% exposed to US currency (the rest of it being Canadian), so I am not minding this trend. What I am regretful for, however, is that this will have a material impact on my willingness to go down to the USA for recreational purposes.
I have been intensely researching the oil and gas sector, and specifically looking for companies that have decent metrics and enough fortitude to not be operationally taken down due to financial impacts of low commodity prices. I also have been trying to find collateral damage, typical cases of the baby thrown out with the proverbial bathwater.
There are many, many “hits” on my screens which makes the research very slow going. Specifically I want to know about hedging, and financial covenants and their financial structure in general in addition to the usual metrics. Dredging this stuff is very slow going.
There is a lot of high-yield out there which is trading at quite distressed levels, some of which seems very alluring. But high yield of course comes with risk.
A simple example: Do you want to lend your money to Russia for 10 years even though you are compensated with a 13% yield to maturity? I’d actually gamble that their large cap companies (NYSE: RSX is their ETF) would fare better than an investment in their sovereign debt at the moment.
Here’s a more specific example: Do you want to be a HERO? Specifically (Nasdaq: HERO) Hercules Offshore is a third-tier deepwater drilling firm, which is of a lower tier than Seadrill (Nasdaq: SDRL), Diamond Offshore (NYSE: DO), Transocean (NYSE: RIG), etc. All of the drillers have gotten killed over the past couple months simply due to the fact that nobody wants to drill into expensive ocean when you can’t even make money on the shale inland.
In HERO’s case, their equity is trading as if the company is already dead, while the bond market is placing their 2019 debt issue at a yield to maturity of about 28%. So, what is more risky: Investing in Vladimir Putin, or Hercules Offshore?
Seadrill, however, is comparable to Russia – roughly 11.5% yield to maturity on 6 year debt vs. 13% for 10-year Russian debt.
The following is a table of tax-loss selling candidates for TSX-issued companies that have a market cap of at least $100 million and revenues of at least $50 million. All of these companies have lost 30% of their stock price year-to-date and one would assume active fund managers would not want to have the embarrassment of having these in their portfolios by the Canadian tax loss selling deadline of December 24, 2014.
| Company | Symbol | Last | 52wkHigh | 52wkLow | MktCap | QtrRev | QtrInc |
|---|---|---|---|---|---|---|---|
| Ainsworth Lumber Co. | ANS-T | 2.7 | 4.22 | 2.24 | 650 | 129.7 | 12.8 |
| Alamos Gold | AGI-T | 8.59 | 13.92 | 7.75 | 1075 | 39.3 | -2.2 |
| Argonaut Gold | AR-T | 2.29 | 6.65 | 1.91 | 358 | 44.8 | 2.2 |
| Athabasca Oil | ATH-T | 3 | 8.84 | 2.78 | 1233 | 32.3 | -56.8 |
| Atlantic Power | ATP-T | 2.54 | 4.44 | 2.14 | 297 | 156.7 | -64.6 |
| Avigilon Corp. | AVO-T | 17.91 | 34.5 | 13.15 | 834 | 75.4 | 11.6 |
| Black Diamond Group | BDI-T | 20.31 | 35.99 | 16.63 | 880 | 88.4 | 9.6 |
| Canacol Energy | CNE-T | 3.58 | 8.77 | 3.44 | 409 | 71.9 | -2.3 |
| Capstone Mining | CS-T | 2.12 | 3.35 | 1.91 | 786 | 222 | 0.3 |
| Cathedral Energy Services | CET-T | 3.39 | 5.23 | 2.85 | 121 | 58.2 | 0.3 |
| Chesswood Group | CHW-T | 11.89 | 19.44 | 11.28 | 120 | 28.1 | 2.8 |
| Essential Energy Services Ltd. | ESN-T | 1.92 | 3.19 | 1.86 | 245 | 52.8 | -5.4 |
| First Majestic Silver | FR-T | 5.56 | 13.74 | 5.23 | 653 | 95.6 | 8.3 |
| Horizon North Logistics | HNL-T | 3.26 | 10.05 | 2.77 | 371 | 123.6 | 8.1 |
| Imperial Metals Corp. | III-T | 9.15 | 18.63 | 7.92 | 690 | 58.7 | 15.2 |
| Ithaca Energy | IAE-T | 1.41 | 2.95 | 1.29 | 476 | 90.9 | 0.7 |
| Kinross Gold | K-T | 3.33 | 5.99 | 2.27 | 3605 | 915.6 | 44.1 |
| Labrador Iron Ore Royalty | LIF-T | 18.21 | 34.87 | 17.75 | 1183 | 52 | 35.9 |
| Legacy Oil + Gas | LEG-T | 3.95 | 10.03 | 3.9 | 716 | 169.3 | 18.8 |
| Lightstream Resources | LTS-T | 3.5 | 9.09 | 2.28 | 750 | 314.8 | 3.9 |
| Long Run Exploration | LRE-T | 2.85 | 6.09 | 2.7 | 432 | 156.8 | 20.8 |
| Pengrowth Energy | PGF-T | 4.48 | 7.78 | 4.17 | 2343 | 476.9 | 52.2 |
| Penn West Petroleum | PWT-T | 5.05 | 11 | 4.54 | 2527 | 719 | 143 |
| Points International | PTS-T | 14.9 | 35.5 | 14.59 | 232 | 76.8 | 1.3 |
| Redknee Solutions | RKN-T | 3.82 | 7.82 | 3.15 | 436 | 70.7 | -7.5 |
| Savanna Energy Services | SVY-T | 5.26 | 9.31 | 5.2 | 474 | 201.1 | -24.4 |
| Serinus Energy Inc. | SEN-T | 2.03 | 4.88 | 1.4 | 160 | 41.9 | 8.7 |
| Sirius XM Canada Holdings | XSR-T | 5.2 | 10.5 | 5.01 | 688 | 77.3 | 4.4 |
| SMART Technologies | SMA-T | 1.48 | 5.9 | 1.41 | 176 | 142.7 | 12.1 |
| TAG Oil Ltd | TAO-T | 1.8 | 3.64 | 1.47 | 121 | 15.4 | 4.1 |
| Talisman Energy | TLM-T | 6.53 | 13.13 | 6.01 | 6976 | 1742.3 | 462.5 |
| Teck Resources | TCK.B-T | 19.2 | 29.1 | 16.87 | 10969 | 2251 | 84 |
| Transat A.T. | TRZ.B-T | 8.66 | 14.7 | 7.65 | 340 | 943.5 | 25.8 |
| TransGlobe Energy | TGL-T | 4.17 | 10 | 4.18 | 322 | 155.5 | 26.2 |
| Trilogy Energy Corp. | TET-T | 13.59 | 32.3 | 12.23 | 1724 | 171.1 | 28.2 |
| Trinidad Drilling | TDG-T | 6.32 | 12.89 | 6.07 | 900 | 170.6 | -24.8 |
| Twin Butte Energy | TBE-T | 1.42 | 2.5 | 1.35 | 499 | 152.6 | 7.2 |
| Westport Innovations | WPT-T | 6.12 | 24.11 | 5.97 | 396 | 33.4 | -27.7 |
| Yamana Gold Inc. | YRI-T | 4.72 | 11.86 | 3.93 | 4043 | 516.5 | -1023.3 |
Some obvious conclusions:
– Gold and energy are not liked.
– Energy service companies are also not liked.
– Was a little surprised at Transat considering Air Canada and Westjet’s relative performance.