Category: Canada

The Canadian markets are still celebrating their holidays and the TSX is closed on Monday.

Posting will resume then, along with the year-end update and predictions for 2011.

It is always good to take a refresher away from research. Keeping your mental batteries charged throughout the year is just as important as making good investment decisions – one leads to the other.

Posting will continue to be light in the final couple weeks of the year. Part of the luxury of not having to be forced to deploy capital is that I can be patient, and this time of year is usually a good time to do anything other than work-related work!

I did manage to unload a few more debentures of a very poorly performing corporation that I have written about in the recent past; this is purely about mitigating potential credit risk in 2011.

Also, I have been investigating the potential usage of cheap leverage given that it is unlikely Canada will be increasing its short term rates soon. This kind of notion is unfortunately a year too late, but there are still options available that would seemingly yield some fairly low-risk return on investment.

As widely anticipated, the Bank of Canada has held the short term interest rate to be steady at 1%. The official statement has the following salient paragraphs:

The global economic recovery is proceeding largely as expected, although risks have increased. As anticipated, private domestic demand in the United States is picking up slowly, while growth in emerging-market economies has begun to ease to a more sustainable, but still robust, pace. In Europe, recent data have been consistent with a modest recovery. At the same time, there is an increased risk that sovereign debt concerns in several countries could trigger renewed strains in global financial markets.

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

The translation to this is simply: “We’re waiting and watching”. The other note is that the elevated value of the Canadian currency, while great for all of us consumers that purchase imported goods, is damaging the economic prospects of exporting companies.

One event coming this week is the December 7 scheduled announcement of the Bank of Canada overnight target rate. It is currently 1% and it is widely expected that it will remain at 1% given the impact of economic news (i.e. growth is moderating from the economic crisis, and that the high Canadian dollar is impairing growth).

Some are even criticizing the decision to raise rates from 0.25% to 1%, but it is important to note that a short term bank rate of 0.25% introduces more risk to the financial system than a slightly higher rate – although banks are trying their hardest to find credit-worthy entities to loan money to (since money is still very cheap at 1%), there is less of an impulse to doing so than at a 0.25% rate.

You will still get the usual yield-chasing as people continually try to earn a return on their capital. The consideration to ensure the return of capital continues to be secondary.