Category: Market Action

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TXPR closed at 534.55, up 0.77% on the day. Volume today was 1.82-million, about the median of the past thirty days.

CPD closed at 10.65, up 0.95% on the day. Volume was 65,080, near the lows of the past 30 trading days.

ZPR closed at 8.32, up 1.09% on the day. Volume of 584,299 was second-highest of the past 30 trading days, behind only June 30.

Five-year Canada yields were up 1bp at 0.38% today.

Jobs, jobs, jobs!

Employers brought back millions more workers in June as businesses began to reopen across the country. But the recent surge in coronavirus cases is threatening to stall the economic recovery long before it has reached most of the people who lost their jobs.

U.S. payrolls grew by 4.8 million in June, the Labor Department said Thursday. It was the second month of strong gains after April’s huge losses, when businesses laid off or furloughed tens of millions of workers as the pandemic put a large swath of economic activity on ice.
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But the thaw is far from complete. There were still nearly 15 million fewer jobs in June than in February, before the pandemic forced businesses to close. The unemployment rate fell to 11.1 percent in June, down from a peak of 14.7 percent in April but still higher than in any previous period since World War II. The rate would have been about one percentage point higher, the Labor Department said, had it not been for persistent data-collection problems.

There was another American figure of interest:

More than 50,000 new coronavirus infections were reported across the United States on Thursday, according to a New York Times database, as the country set a new daily case record for the sixth time in nine days. The alarming new milestone came as some of the country’s most populous states reported major surges, and as public health officials scrambled to limit the damage. At least seven states reported single-day case records on Thursday: Alaska, Arkansas, Florida, Georgia, Montana, South Carolina and Tennessee.

Thursday’s reported total was an 87 percent increase in daily cases from two weeks ago, when states were reopening after extensive lockdowns eased the outbreak, particularly in the hard-hit Northeast.

But the market appeared to consider the former more important than the latter:

Wall Street closed higher and the Nasdaq reached an all-time closing high on Thursday as investors headed into their long holiday weekend buoyed by a record surge in payrolls, which provided assurance that the U.S. economic recovery was well under way.

All three major U.S. stock averages advanced, with the benchmark S&P 500 posting its fourth straight daily gain. The TSX also rose Thursday, for its third straight trading day of gains. U.S. markets are closed Friday for the Fourth of July holiday.
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The Dow Jones Industrial Average rose 92.39 points, or 0.36%, to 25,827.36, the S&P 500 gained 14.15 points, or 0.45%, to 3,130.01 and the Nasdaq Composite added 53.00 points, or 0.52%, to 10,207.63.

The S&P/TSX Composite Index rose 107.18 points, or 0.69%, at 15,622.40. Sector performance was mixed, with the Canadian Real Estate Index gaining 2.84%, and tech rising 3.67% thanks to a 8.36% jump in shares of Shopify to a new record high. Materials and industrials were lower.

Fitch downgraded Alberta:

Alberta’s credit rating was downgraded Tuesday, hours after the province released a multibillion-dollar economic recovery plan in an attempt to climb out of the economic wreckage caused by the COVID-19 pandemic and a collapse in world oil prices.

Fitch Ratings downgraded Alberta to a double-A-minus from double-A, citing higher provincial borrowing during the pandemic-driven economic crisis and a debt burden relative to GDP that is “incompatible” with a double-A rating.

The New York-based agency also pointed to the lack of details from the government about the extent of damage to Alberta’s bottom line, and the fact the province has no planned path toward economic recovery.

Tuesday’s downgrade is the third for Alberta since December, when Moody’s Investors Service changed the province’s rating to Aa2 from Aa1, citing continued weakness in the provincial economy and its reliance on non-renewable resources. In March, DBRS Morningstar downgraded Alberta to double-A (low) from double-A.

GWO is making a major investment in US wealth management:

Canadian insurer Great-West Lifeco Inc. is boosting its presence in the United States and broadening its retail wealth management with the US$1-billion purchase of Personal Capital Corp.

On Monday, Great-West’s subsidiary Empower Retirement agreed to acquire Personal Capital for an initial US$825-million, with the potential to add up to US$175-million if certain growth metrics are met. The upfront payment is expected to be funded with cash on hand and $500-million in debt financing.

Based in Denver, Empower Retirement administers US$656-billion in assets for more than 9.7 million investors enrolled in defined contribution pension plans. Upon closing the deal, Empower will combine its retirement services, which include 401(k) group benefit plans, with Personal Capital’s online financial planning capabilities to expand into the U.S. retail wealth management sector.

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TXPR closed at 528.61, down 0.55% on the day. Volume today was 1.49-million, near the lows of the past thirty days.

CPD closed at 10.525, down 0.43% on the day. Volume was 135,867, a little above the median of the past 30 trading days.

ZPR closed at 8.185, down 1.50% on the day. Volume of 301,200 was near the median the context of the past 30 trading days.

Five-year Canada yields were down 2bp at 0.36% today.

The carnage has been attributed to a familiar villain:

Wall Street’s major indexes tumbled more than 2% on Friday as several U.S. states imposed business restrictions in response to a surge in coronavirus cases. The TSX lost 1.66%, with both energy and financial sectors losing more than 2.5%.

Some U.S. states that were spared the brunt of the initial coronavirus outbreak or moved early to lift restrictions are seeing a resurgence in new infections. On Friday, Texas and Florida ordered bars to close down again.
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A Wall Street Journal report that the Phase 1 U.S.-China trade deal could be at risk placed additional pressure on U.S. stocks. According to that report, Chinese officials warned that “meddling” in Hong Kong and Taiwan could lead Beijing to back away from its commitment to purchase U.S. farm goods.
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Among sectors, financial, communication services and energy shares outpaced the broader S&P 500 in declines. S&P 500 bank shares plummeted 6.1% after the Federal Reserve limited dividend payments and barred share repurchases until at least the fourth quarter following its annual stress test.

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TXPR closed at 533.89, down 0.58% on the day. Volume today was 1.89-million, near the median of the past thirty days.

CPD closed at 10.68, down 0.65% on the day. Volume was 66,270, low in the context of the past 30 trading days.

ZPR closed at 8.37, down 0.48% on the day. Volume of 161,796 was very low in the context of the past 30 trading days.

Five-year Canada yields were down 2bp at 0.38% today.

Markets got whacked today, which was attributed to renewed coronavirus fears:

Wall Street’s three major indexes suffered their biggest daily percentage drop in almost two weeks on Wednesday as a surge in U.S. coronavirus cases intensified fears of another round of government lockdowns and worsening economic damage.

The TSX also closed lower, led by a 3.84% decline in the energy sector, with investors largely shrugging off a downgrade of Canada’s debt rating by Fitch Ratings.
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The United States has recorded the second-largest rise in infections since the health crisis began, with a flare-up of cases in states where restrictions meant to contain the disease were lifted early.

Highlighting the seriousness of the resurgence in cases for many investors, the governors of New York, New Jersey and Connecticut announced that visitors from states with high coronavirus infection rates must self-quarantine for 14 days on arrival.

And, as noted above, Fitch downgraded Canada:

Fitch Ratings has downgraded Canada’s triple-A credit rating to double-A-plus in light of “much expanded” 2020 deficits due to billions in emergency spending during the novel coronavirus pandemic.

The decision reflects growing public debt at both the federal and provincial levels.
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“The rating downgrade reflects the deterioration of Canada’s public finances in 2020 resulting from the coronavirus pandemic,” the agency stated. Wednesday’s announcement says Canada’s rating outlook is stable.

Fitch expects the coronavirus response to raise Canada’s consolidated gross general government debt to 115.1 per cent of GDP, up from 88.3 per cent of GDP in 2019.

“Canada has a track record of fiscal adjustment during the 1990s. However, the structure of Canada’s decentralized fiscal framework increases the complexity of any fiscal adjustment,” the agency said. “The pandemic has caused several provinces to pause deficit-reduction plans, and some premiers have urged greater direct federal financial support to the provinces.”

“Federal borrowing for crown corporations also increases debt,” Fitch said. “The federal minority Liberal government, which was returned to office in October 2019, has already loosened fiscal policy relative to the first term and postponed a pledge to stabilize net federal government debt in order to address the priorities of allied minority parties.”

PerpetualDiscounts now yield 5.71%, equivalent to 7.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 440bp from the 435bp reported June 17.

I wonder if any of the perpetuals listed today will last as long as this long bond:

YaleNews revealed that a water bond dating as far back as 1648 still contractually binds the obligated parties to pay annual interest today. Upon its discovery and subsequent analysis of its terms and agreements, reports indicate that at the time of its execution, the bond operated as a perpetual bond.

The original clauses of the agreement bound the payer to “5 percent interest in perpetuity,” a rate which was later lowered to 3.5 percent and then 2.5 percent respectively in the 1600s. At the time, physical notations of interest payments were inscribed on the bond as they were made as a means of recording them. Being of Dutch-origin and made out of goatskin, when the bond was issued, it was apparently made out to Mr. Niclaes de Meijer, a man who was ordered to pay the “sum of 1000 Carolus Guilders of 20 Stuivers a piece.”

The manuscript was filed at Yale’s Beinecke Rare Book & Manuscript Library in 2003 after Yale managed to come into possession of it. After Timothy Young, the curator of Modern Books and Manuscripts at the library, conferred with a Dutch water authority named Stichtse Rijnlanden, not only did he discover that this bond was only one of five ever found, all five of them were administered by the Hoogheemraadschap Lekdijk Bovendams.
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In 2015, when Timothy Young returned from meeting with the relevant Dutch authority, he also brought back with him 12 years of back interest which was owed on the bond, a total which amounted to approximately 136.20 euros. Prior to 2015, the last time that the bond payments were collected was in 2003 when Yale first acquired it. At that time, as the reports states, “Geert Rouwenhorst, professor of corporate finance and deputy director of the International Center for Finance, took the bond back to the Netherlands to collect 26 years of back interest.”

Here’s a bit more sleaze from the Pace Credit Union Scandal discussed on June 18, from the extracts from the Pace Financial Offering Memorandum included in the First Report of the Liquidator obtained via the Receiver’s website:

The Issuer expects to pay fees to the Manager at standard rates common in the industry for those services – namely, asset management fees of 0.25% per month (3.0% per annum) calculated on the value of the Portfolio from time to time plus performance fees equal to 50% of profits earned provided that, in the event that the Issuer has a deficit (i.e. no profits or inadequate profits to provide for base dividends on the Preference Shares) for any particular quarter-yearly period, the asset management fees or performance fees will be reduced to the extent necessary to enable the Issuer to meet its dividend obligations, if possible, or, if not possible, waived for such period and, to those extents, will be payable in such reduced amount or will not be payable, as the case may be.

An extortionate (not “standard”!) 3% management fee per annum (the Manager is Pace Securities Corp), plus a 50% cut of profits, plus full ownership at no cost of all the common. It’s nice work, if you can get it.

It is regrettable that the Offering Memorandum is not published in its entirety; page 10 of the OM ends with:

3.1 Compensation and Securities Held
The following table provides specified information about each director, officer and promoter of the Issuer and each person who

… and pages 11 and 12 are missing. What a pity! It would have given me great pleasure to prominently display the names of the officers, directors and promoters of an issue such as this.

And finally, I cannot resist republishing the following comic SMBC Comics:

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A bit more on the PACE Savings and Credit Union preferred share scandal, mentioned yesterday, from the IIROC Notice of Hearing and Statement of Allegations against Joseph Anthony Thomson and Gerald Douglas McRae:

14. By Confidential Offering Memorandum (the “PFL OM”) dated June 27, 2017, PFL offered Series A 5% Cumulative Redeemable Retractable Non-voting Term Preference Shares (the “PFL Preference Shares”) as an exempt distribution without a prospectus. PFL had no capital other than the proceeds of sale from the PFL Preference Shares.
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28. FHHI’s founding capital was $10,001 and its only other assets were the proceeds of sale from the FHHI Preference Shares.
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85. The PFL OM did not disclose the use of leverage or options. McRae signed leverage and options agreements for PFL and was aware it used those strategies, yet he never raised the issue or evidenced any supervision concerning whether their use was consistent with
the PFL OM.

86. The FHHI OMs did not disclose the use of options, other than for hedging purposes, yet McRae signed options agreements for FHHI and was aware of options use in the account. He never raised the issue or evidenced any supervision concerning whether options use was consistent with the FHHI OMs.

So, capped returns on a go-go fund, with (essentially) no junior capital to take a first loss.

Wow, looks like PACE picked some real prizewinners to run their securities subsidiary. I find it very difficult to comprehend how anybody, anywhere, could recommend these securities to anybody.

There is a new data point for the collection of Seniority Spreads by Issuer! ELF came out with a new 30-year note (on June 17):

E-L Financial Corporation Limited (TSX :ELF) (TSX: ELF.PR.F) (TSX: ELF.PR.G) (TSX: ELF.PR.H) (the “Company”) announced today that it intends to issue in Canada, by way of private placement, $200 million principal amount of 4.000% senior unsecured notes due June 22, 2050 (the “Notes”).

The offering is expected to close June 22, 2020. The net proceeds of the issue will be used for general corporate purposes.

The Notes will mature on June 22, 2050 and will bear interest at an annual rate of 4.000% calculated and payable semi-annually in arrears on June 22 and December 22 of each year commencing December 22, 2020 and ending June 22, 2050. It is a condition of the closing of the offering that the Notes be assigned a rating of at least “A” by S&P Global Ratings.

The issue will be offered on an agency basis by a syndicate of dealers, co-led by Scotia Capital Inc. and CIBC World Markets Inc., and which includes BMO Nesbitt Burns Inc., National Bank Financial Inc., RBC Dominion Securities Inc. and TD Securities Inc.

ELF has three series of PerpetualDiscounts trading to yield about 5.85% as of the close June 17; equivalent to 7.60% interest, implying a Seniority Spread for this issuer of 360bp, significantly narrower than the overall average of 435bp reported June 17.

Assiduous Reader JD writes in and suggests that I write something about the PACE Savings and Credit Union preferred share scandal:

PACE Savings and Credit Union is launching an investigation into whether a subsidiary improperly sold risky investment products that lost up to 86 per cent of their value when the coronavirus pandemic upended financial markets.

The credit union, based north of Toronto, is trying to rebuild its battered reputation after allegations of fraud and self-dealing involving former top executives who have since been fired. A provincial regulator seized control of PACE in the fall of 2018 to protect its members and deposits, and has overhauled the management and board of directors.
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The new issue became apparent when some clients received letters dated April 28, saying the value of preferred shares purchased through Pace Securities, which paid generous annual dividends of 5 per cent to 7 per cent annually, had fallen from $10 a piece to $1.62 and $1.44, respectively. Individual investments that were initially worth tens or hundreds of thousands of dollars each had been mostly wiped out, and any hope that they might recover was lost with the decision to shut down Pace Securities.
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The preferred shares – which have characteristics of both stocks and bonds – were in two companies and sold through advisers at Pace Securities. One firm was Pace Financial Ltd., a subsidiary of the dealer, and the other was First Hamilton Holdings Inc. The CEO of Pace Securities, Joseph Thomson, was also CEO of First Hamilton, which lists former Ontario premier Ernie Eves as its chairman.
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Pace Financial and First Hamilton both sold preferred shares to investors to raise funds, borrowed more against those funds, and invested in corporate debt to generate returns. As the pandemic crisis unfolded, and share prices plunged, the bank that had allowed Pace Financial and First Hamilton to borrow money to leverage investments through a margin account, Laurentian Bank Securities, pulled its support. That meant Pace Securities needed to raise alternate funds, but it wasn’t able to.
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A 2018 offering memorandum describes First Hamilton’s preferred shares as “a risky investment” that is “suitable for investors … who can afford a total loss of their investment.” According to financial statements from February, 2019, obtained by The Globe, all of the bonds First Hamilton invested in were rated below investment grade. Of those, 71 per cent carried ratings that qualify them as “highly speculative,” and another 18 per cent were rated lower still.
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Retired Toronto transit worker Elaine Gurney, 63, visited a PACE branch in Etobicoke, Ont., to reinvest $100,000 after a guaranteed investment certificate (GIC) expired. After being directed to speak with an adviser, she walked out with preferred shares in Pace Financial Ltd.

IIROC’s finally gotten involved, scheduling a disciplinary hearing:

The discipline hearing concerns allegations that:

(a) Between June 2017 and June 2019, Mr. Thomson, the Ultimate Designated Person (the “UDP”) of PSC, failed to identify and address existing and potential material conflicts of interest in a fair, equitable and transparent manner, and consistent with the best interests of PSC’s clients, contrary to Dealer Member Rule 42;

(b) Between June 2017 and June 2019, Mr. Thomson failed to ensure that investments in two proprietary products, Pace Financial Ltd. and First Hamilton Holdings Inc., for which he was the portfolio manager, were made in accordance with the objectives set out in the applicable Offering Memorandum, contrary to Consolidated Rule 1400;

(c) Between June 2017 and June 2019, Mr. Thomson, as UDP, failed to supervise the activities of PSC to ensure compliance with IIROC requirements and failed to use due diligence to ensure that orders accepted and recommendations made were suitable for clients and within the bounds of good business practice, contrary to Dealer Member Rules 38.5(c), 1300.1(a), (o), (p), (q) and (s); and

(d) Between June 2017 and June 2019, Mr. McRae, as the Chief Compliance Officer failed to monitor and assess compliance by PSC with the Dealer Member Rules and failed to adequately supervise Mr. Thomson’s securities-related activities, contrary to Dealer Member Rule 38.7.

The whole thing stinks. PACE exploited the trust that customers will normally have in their credit unions – which, I venture to speculate, will normally be even greater than that held for banks – to provide referrals to their securities subsidiary. Nothing wrong with that, or at least not much; but I am firmly in favour of total separation of deposit-taking institutions from securities dealers; and, yes, Big Banks, that includes you.

But these horrible securities that were advised! Numbers are lacking in the story, as are details of the holdings of Pace Financial, but basically at least one of the ultimate investment companies was levered up to hell ‘n’ gone to buy … junk bonds. And, I will note that I take issue with the Globe’s characterization of the dividends paid on the preferreds:

preferred shares purchased through Pace Securities, which paid generous annual dividends of 5 per cent to 7 per cent annually

As of June 30, 2017, I reported a median YTW of 5.08% on PerpetualDiscounts and 5.28% on December 29, 2017. As of June 29, 2018 I reported a median YTW of 5.48% on PerpetualDiscounts and 5.88% on December 31, 2018. The June 28, 2019 figure was 5.62%, while December 31, 2019 came in at 5.37%. And these figures are for exchange-traded issues with prospectuses; rated investment-grade by DBRS and with a (modest) minimum liquidity.

Five to seven percent, with no further upside (since they are preferred shares, not actual equity) in what appears to be an extremely aggressive and undiversified hedge fund, sold to unsophisticated grannies who wanted a GIC … well, I don’t want to make (too many!) judgments in advance of the facts. But it stinks, it stinks to high heaven.

There is a very long, very angry thread on the Canadian High Interest Savings Forum about this mess. To my surprise, Financial Wisdom Forum has only a a single bewildered and unanswered query about the matter – which to me simply supports the idea that the investors were even less sophisticated than usual.