Category: Canada

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.

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.

The Bank of Canada continues to hold its short term target rate steady at 1%. The salient quotation:

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

My own metric, the spread between the short term rate and the 10-year government bond, is at a 2.48% spread as of present. If this goes higher then the Bank of Canada might consider raising rates. BAX futures still imply a rate increase is on the horizon before year’s end. 3-month corporate paper is yielding 1.18%.

Canadians will be subject to relentless federal election advertising over the next 5 weeks as the major parties try to win seats in the House of Commons.

The big financial question will be: Can the Conservative government achieve a majority government? The House of Commons has 308 seats and thus 155 seats are required for a majority. The Conservatives were able to win 143 seats in the prior election.

If the Conservatives do not win a majority, it is more likely than not that the Liberals, NDP and Bloc Quebecois will try to form a coalition government. One of the first items on their legislative agenda will be to raise corporate income taxes, which will have a negative effect on valuations of profitable Canadian companies, in addition to causing capital outflows.

This uncertainty will have some indirect impact on the Canadian markets, and the Canadian currency. In essence, some proxy bets can be made on the outcome of this election. Now that the UBC Election Stock Market is unfortunately not open to allow people to take direct bets on the election, there will only be a limited way for investors to speculate on the outcome.

Just as a word of warning for readers – I do have heavy political involvement and because of this my writing will slow down considerably until the beginning of May (when I presumably will have recovered). There is zero chance of me finding suitable investment candidates in the meantime!