Canada – Page 25

Interest rates show nothing exciting

Government 10-year bond yields are sitting at 2.95%:

December BAX Futures are at 98.61; with the current 3-month banker acceptances at 1.20% (98.80), there is a moderate expectation of a 0.25% rate increase. However, I do not believe this will come to fruition and it is highly likely the Bank of Canada will continue to keep the short term target rate at 1% until such time that 10-year yields rise above 3.5%.

Since the markets are awash in liquidity and credit is very cheap, investors will continue to chase yield. When will this party stop? If I gave you a million dollars for 10 years at 2.95%, do you think you can do better? I’d take all the money I could at that rate and fixed term.

James Hymas On Yellow Media

James Hymas would be a popular political commentator if he branched off from finance. However, I don’t think he would like the increased exposure.

Some of his quotes on his PrefBlog are just golden. When commenting on the recent price plunge (which he has been actively looking at over the past couple weeks) on Yellow Media’s (TSX: YLO) preferred shares:

Mean Joe Green used to crash through offensive lines. Mean Joe Yellow offensively crashes through your portfolio.

This, in addition to many other quips (not to mention his market analysis) is why I enjoy reading him.

Reviewing track record of IPOs and other matters

Now that I have been thinking about some IPOs that I have covered in the past, we have the following:

Whistler Blackcomb (TSX: WB) – I stated in an earlier article that this is one to avoid and I might think about it at $5.30/share and so far nothing has changed this assessment.

Athabasca Oil Sands (TSX: ATH) I did not have a firm valuation opinion other than that the shares seemed to be overpriced at the offering price ($18/share) and stated the following (previous post):

Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.

If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.

While the valuation pop from the IPO did not materialize (unlike for LinkedIn investors!) the rest of the analysis was essentially correct – investors had the opportunity to pick up shares well below the IPO price (it bottomed out at nearly $10/share in the second half of 2010), although I don’t know whether the company represents a good value at that price or not. I didn’t particularly care because Athabasca Oil Sands has some other baggage that made it un-investable (in my not-so-humble opinion).

While I am reviewing my track record on this site, one of my other predictions dealt with BP, Transocean and Noble Drilling, that:

Over the course of the next 2 years, $10,000 invested in BP (NYSE: BP) at the closing price of June 16, 2010 will under-perform $10,000 evenly invested in Transocean (NYSE: RIG) and Noble (NYSE: NE). Assume dividends are not reinvested and remains as zero-yield cash.

At present, BP would have returned US$14,392.46 to investors, while RIG and NE would have returned US$14,198.52. If I had the ability to close this bet for a mild loss, I would – the political risk for the three companies in question have completely gravitated toward the “status quo” once again after the Gulf of Mexico drilling accident. Drilling capacity is likely to rise, depressing the value of the contractors and favouring BP in this particular bet.

Parking Canadian Cash

Retail Canadian investors these days don’t have much option for their cash, assuming they want it available at a moment’s notice – one optimal route is putting it in Ally and getting your 2% on a perfectly liquid balance. There are also other competing services that are CDIC insured that give similar returns.

Anything more and you have to work your way up the risk and term spectrum. In terms of term, you can get GICs that give larger rates, but it is at the cost of yield in case if you want your cash to be liquid (e.g. a 5-year term deposit has a break penalty becomes progressively more expensive as you approach maturity).

When you increase risk, the corporate debt market is the next logical step up – there are some short term maturities out there of companies that are virtually guaranteed to pay off their debt giving out yields that are about 300 basis points better than what you can get with Ally. The cost is the “virtual” part in terms of the guarantee of repayment and also liquidity risk dealing with the term – you generally want to wait until maturity or you will have to pay the bid-ask spread.

Investors generally get trapped aiming for yield, but I am finding it difficult to not tweak the portfolio to shift idle cash balances into something earning a bit more, with nearly equivalent safety. I do not think this will burn me and is a suitable way of earning a little more on cash until I can decide what to invest it in. When I think of how many pizzas this can purchase at the end of the day, it becomes a little more meaningful.

Best ways of playing the Federal Election

I am neck deep in the federal election, hence my very infrequent writing in April.

With the surge of the NDP in Canada, there is a distinct possibility that the NDP will be a very significant partner in any coalition government against the Conservatives. Economically, one of the promises all the other parties have had is an increase in the corporate tax rate. In particular, banks and oil companies have been singled out by the NDP. Whether they would take action upon them in government or not is another matter, but the corporate tax rate increase is something they would likely implement.

In terms of making a trade based on the projection of the election, I would suspect that selling/shorting profitable large-cap companies on the TSX would be the best way of betting against a Conservative majority government. You would close the position on May 3rd.

In the event that the Conservatives are quite short of a majority government (e.g. a status quo situation), there is likely going to be a few months of major uncertainty before the House of Commons sits for its throne speech. Although the writs are going to be returned sometime in the later part of May, the Prime Minister has the option of not convening Parliament until after the summer break, in September. This is probable if there is another minority government.

This uncertainty only leads in one direction – equity price decreases in Canada.