Possibility of a rate increase before year’s end?

I notice that the Banker’s Acceptances have dropped (implying future rate increases) over the past week. Current quotations are as follows:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 10 OC 0.000 0.000 98.640 0.000 0
+ 10 NO 0.000 0.000 98.630 0.000 0
+ 10 DE 98.615 98.620 98.650 -0.030 12401
+ 11 MR 98.450 98.460 98.520 -0.060 21511
+ 11 JN 98.380 98.390 98.450 -0.070 6701
+ 11 SE 98.310 98.320 98.380 -0.060 2617
+ 11 DE 98.250 98.260 98.310 -0.050 1526
+ 12 MR 98.190 98.220 98.240 -0.040 99
+ 12 JN 98.090 98.130 98.150 -0.030 7

Look at the December contract – implied pricing of 1.39%. On September 8th, this was 1.14%.

Three-month corporate paper is currently trading at 1.14%, which implies that we could be seeing one more rate hike (of 0.25%) before year’s end. The next Bank of Canada scheduled rate announcements are October 19 and December 7.

Canada Fiscal Monitor – July 2010

The Ministry of Finance in Canada has released the July 2010 fiscal update.

The noticeable highlights for the four months ending July 31, 2010 vs. July 31, 2009 include:

– Bottom-line deficit down to $7.7 billion ($23.1 annualized) vs. $18.3 billion ($54.9 annualized)
– Corporate income tax collection up 1.7%, despite a 5.3% drop in the rate (from 19% to 18% effective January 1, 2010).
– GST collections up 34% (indicating a significant increase in consumer spending);
– EI benefit payments down 7% (implying expiry of previous benefits and/or people finding employment)

As the government’s stimulus package is due to end on March 31, 2011, it remains quite conceivable that they will be able to balance the budget in a couple years. This bodes well for Canada because a zero deficit number will signal to the marketplace that tax increases are not imminent.

The other factor I will keep mentioning is that the corporate tax rate is due to decline from 18% to 15% by January 1, 2012. If the government does not fall between now and then, the big winners of this will be investors in profitable Canadian firms.

A top to fixed income securities?

I don’t like calling tops and bottoms – it is nearly impossible to get the exact time correct, but it is possible to get close. The way you take advantage is by scaling in your orders and waiting for the executions.

Trends in the marketplace go on further than anybody usually expects. Fixed income securities (especially bonds) appear to be quite pricey at the moment. Also, I have been noticing a lot more sentiment on the retail side toward dividend-bearing equities, and doing a cursory scan on that side of the marketplace leads me to believe that performing screens on non-income bearing securities would bear more fruit at the moment.

Portfolio movement has been mainly selling securities and raising cash, due to lack of research time. In particular, there is quite a bit of US currency available for deployment, and it is has been nearly a year and a half since I have invested in US equities.

Yield is now down, but I am very liquid.

Cinram International Valuation

I notice that Susan Brunner is doing a brief on Cinram (TSX: CRW.UN). It is in the very boring and low-margin business of printing and distributing physical media such as CDs and DVDs.

I did some fairly serious research on this company earlier this year, and came to the conclusion that while they were likely to continue to be cash flow positive, there was no way that they would overcome their debt situation without a significant recapitalization.

The primary hit in the past year was on February 1, 2010 when 28% of their revenue stream announced they were terminating a contract. The units dove about 2/3rds and got my attention when I did research.

Their big problem is that the company, as of June 30, 2010 has a $379 million bank loan (secured) and only $125 million in cash, with a business that is not generating a whole lot of cash. The bank credit facility expires on May 5, 2011. It is more than likely that the secured creditors will take over the equity, which implies that the current value of $1.00 per unit (total market capitalization about $54 million) is vastly overpriced.

I would only start looking at the company more seriously if they traded below 20 cents, and with the recognition that the catalyst for an equity purchase would be a bank giving them a sweetheart extension deal that wasn’t too punitive to unitholders. At this point you are really gambling as opposed to investing, which is why I am not really going to look at Cinram in the future other than as a curiousity to see how their story resolves.

Technical analysis of gold

Here is a chart of spot gold prices over the past 6 months. I have added in three “trendlines” to the chart, which was a rough hack job:

For technical analysis fans, here are some questions:

1. Is it a foregone conclusion that gold will continue rising, or at least no lower than $1260, plus a few dollars each day?
2. If so, what is the proper trendline to use?

Technical analysis also suggests that if the trendline “breaks” that you can no longer assume the trendline exists, and that there is some other trend that is occurring. How do you figure this stuff out without using the chart as a retrospective explanation?

The only reason why I look at charts is a measure of sentiment over time, rather than trying to derive future prices from chart movement.