Category: Market Action

Some of the sleazier types in this business don’t even try to look honest:

An Ontario judge has ordered a receiver to oversee Toronto’s StableView Asset Management Inc. after a regulatory probe found investors’ money had been overconcentrated in a penny stock that paid cash consulting fees of more than $100,000 to the wealth manager.

StableView, which was founded and is solely owned by Colin Fisher, manages about $30-million on behalf of 135 clients and states on its website that its “primary concern is capital preservation.” A review by the Ontario Securities Commission found that StableView poured money into a Clarocity Corp., a thinly traded real estate valuation technology company, putting StableView in breach of diversification and liquidity requirements for its funds, court records allege.

The OSC alleges that, from late 2017 to late 2018, one of the company’s funds, StableView Yield and Growth Fund, increased the concentration of its investment in Clarocity from 45 per cent of the fund’s assets to 83 per cent. Over the same period, Clarocity went from 43 per cent of the holdings in StableView’s Progressive Growth Fund to 72 per cent, court records show.

The OSC also found that StableView received fees from Clarocity in the form of cash, common shares and debentures as part of a consulting agreement. StableView received cash payments totalling $105,000 from Clarocity, which Mr. Fisher withdrew from StableView “for his own personal use,” Sherry Brown, an OSC senior forensic accountant, said in an affidavit. The OSC has alleged the fees created a conflict of interest that was not sufficiently disclosed to StableView investors.
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In its application for the receivership, the OSC also raised doubts about how StableView valued its stake in Clarocity, much of which was in debentures. In 2018, StableView recorded the debentures at cost, despite disclosures from Clarocity that its financial position was “substantially deteriorating” – something Mr. Fisher was aware of, the OSC alleges.

But on the other hand, I don’t understand how the big guys run their businesses:

The survey of 300 global asset management firms, which was carried out by WBR Insights in the first quarter of 2020, found that controlling costs was the top priority for 87% of respondents over the next two years.
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To that end, the survey also found that firms are looking to outsourcing and technology to help meet their goals.

For instance, Norther Trust reported that 85% of respondents have outsourced their trading desk or are considering doing so.

I don’t get it, I don’t get it at all. Trading is an absolutely integral part of portfolio management; even separating the function within the firm is a crazy thing to do. I have contempt for firms that use particular brokers in order to use their algorithms – what’s the matter, are margins on investment management so skinny you can’t afford to develop your own algorithms? Outsourcing the desk completely is totally crazy.

Fortunately, however, a firm doesn’t need too many “1%” clients to stay afloat:

The concentration of wealth among Canada’s richest 1 per cent is deeper than previously believed, according to a federal government report based on a new modelling approach.

The top one per cent of Canada’s families hold about 25.6 per cent of the wealth – roughly $3-trillion – up from 13.7 per cent estimated under previous methodology, says the report from the Office of the Parliamentary Budget Officer.
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The amount of money held by Canadian families would total $11.7-trillion if they liquidated all assets and paid off all liabilities, about five times larger than Canada’s annual gross domestic product, the report notes.

Real estate at $5.8-trillion and mortgages at $1.5-trillion are the single largest asset and liabilities categories.

The report adds that the top 0.5 per cent of Canadian families hold 20.5 per cent or $2.4-trillion of the wealth, up from the previous estimate of 9.2 per cent.

I’ve often wondered just how stable the constitution of the “1%” (by income) is. Sure, it seems clear that the 0.5% who hold 20.5% of all Canadian wealth are always going to be part of the 1%, at least in terms of income alone before any horrifying capital losses that might get realized every now and then. But it also seems clear that since the threshold of 1% status (by employment income) was “merely” $225,409 in 2015, it seems to me that there will be plenty of people who bounce in and out of the group on a regular basis, depending on the size of their bonuses.

But yeah, these figures suggest to me that I’m on the right track when suggesting that favourable tax treatment for dividend and interest income be capped; for one thing, valuing real-estate for wealth-tax purposes is too hard; for another, somebody with $6.1-million in the kitty (according to Table 4-2 of the PBO report used as a source by the article) doesn’t really need to be incentivized to save for retirement.

PerpetualDiscounts now yield 5.74%, equivalent to 7.46% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.09%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened significantly to 435bp from the 415bp reported June 10.

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TXPR closed at 533.62, up 1.14% on the day. Volume today was 2.27-million, near the median of the past thirty days.

CPD closed at 10.655, up 0.52% on the day. Volume was 70,852, very low in the context of the past 30 trading days.

ZPR closed at 8.31, up 0.97% on the day. Volume of 208,882 was about at the median of the past 30 trading days.

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

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TXPR closed at 528.14, up 0.82% on the day. Volume today was 1.57-million, third-lowest of the past thirty days, ahead of only May 19 and May 21.

CPD closed at 10.59, up 1.34% on the day. Volume was 157,697, above the median of the past 30 trading days.

ZPR closed at 8.22, up 0.74% on the day. Volume of 318,788 was above the median of the past 30 trading days.

Five-year Canada yields were unchanged at 0.37% today.

DBRS downgraded Cenovus:

DBRS Limited (DBRS Morningstar) downgraded Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt rating to BBB (low) from BBB and removed the ratings from Under Review with Negative Implications, where they were placed on March 26, 2020. Both trends are Negative. On March 26, 2020, DBRS Morningstar placed Cenovus’s ratings Under Review with Negative Implications in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil-price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions to factor in (1) the impact of the coronavirus pandemic on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, and (3) the impact of production cuts recently implemented by OPEC +. The downgrade follows DBRS Morningstar’s expectation that the Company’s key credit metrics will remain below the threshold for a BBB rating over the next three years under the revised commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary titled “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”). The Negative trend reflects the dependence of the key credit metrics on higher commodity prices, especially in 2022 to support the current rating.

And now it’s time for PrefLetter!

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TXPR closed at 523.86, down 2.37% on the day. Volume today was 2.88-million, second-highest of the past thirty days, behind only June 5.

CPD closed at 10.45, down 2.06% on the day. Volume was 403,246, highest of the past 30 trading days and well ahead of second-place June 9.

ZPR closed at 8.16, down 2.16% on the day. Volume of 3,559,908 was by far the highest of the past 30 trading days, over three times the volume of second-place June 5.

Five-year Canada yields were down 2bp at 0.37% today.

Tim Shufelt comments in the Globe:

Global stock markets buckled on Thursday amid fears of a resurgence of COVID-19 infections in the United States, which could put the budding economic recovery in peril.

It was the worst day for North American stocks since the depths of the market crash in March, with the S&P/TSX Composite Index losing 4.1 per cent on the day, while the S&P 500 index dropped 5.9 per cent.

The dip followed a sobering reminder from the U.S. Federal Reserve on Wednesday about the monumental economic challenges that lie ahead, particularly as several U.S. states brace for the pandemic’s potential second wave.
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The latest outlooks for the global economy are also distinctly negative. This week, the OECD said it expects a 6-per-cent drop in global GDP in 2020, and an 8-per-cent decline in the Canadian economy, exceeding in severity economists’ consensus for the recession on both counts.

In keeping with heightened growth fears, economically sensitive stocks were dealt a heavy blow on Thursday. The S&P/TSX Capped Energy Index dropped by 9.8 per cent, effectively wiping out the gains realized through a solid run in early June.
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On Wednesday, the U.S. hit two million confirmed COVID-19 cases, according to Johns Hopkins University. In nearly half of U.S. states, many of which were among the earliest to reopen their economies, infections are on the rise, according to an Associated Press analysis.

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TXPR closed at 536.59, down 0.62% on the day. Volume today was 2.36-million, well above the median of the past thirty days

CPD closed at 10.67, down 0.56% on the day. Volume was 223,221, fourth-highest of the past 30 trading days.

ZPR closed at 8.34, down 0.83% on the day. Volume of 559,175 was second-highest of the past 30 trading days, behind only June 5.

Five-year Canada yields were down 6bp at 0.39% today.

The Fed released its FOMC Statement:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Of interest is the dot plot of expectations:

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… and the related projection of a slow recovery:

In their first economic projections this year, Fed officials indicated that they expected the unemployment rate to end 2020 at 9.3 percent and remain elevated for years, coming in at 5.5 percent in 2022, The New York Times’s Jeanna Smialek reports. Output is expected to be 6.5 percent lower at the end of this year than it was in the final quarter of 2019.

“Nearly 20 million jobs have been lost on net since February,” the Fed chair, Jerome H. Powell, said at a news conference following the release of the forecast, and noted that the figure probably understates the extent of unemployment. “The downturn has not fallen equally on all Americans.”

The new forecasts predict a much slower path back to economic strength than the Trump administration — and perhaps the stock market — seems to expect as the economy climbs out of a virus-spurred downturn. The Fed skipped its quarterly economic summary in March as the pandemic gripped the United States, sowing uncertainty as business activity came to a near standstill.

PerpetualDiscounts now yield 5.25% 5.72%, equivalent to 6.82% 7.44% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.28%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed dramatically significantly to 355bp 415bp from the 430bp reported June 3.

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TXPR closed at 541.69, up 1.52% on the day. Volume today was 2.65-million, fourth-highest of the past thirty days

CPD closed at 10.81, up 1.31% on the day. Volume was 111,836, above average in the context of the past 30 trading days.

ZPR closed at 8.42, up 1.32% on the day. Volume of 472,927 was third-highest of the past 30 trading days, behind only June 2 and June 5.

Five-year Canada yields were down 4bp at 0.48% today.

The S&P 500 is now even for the year to date:

Stocks on Wall Street erased their losses for the year, a remarkable milestone for a market that was reeling just a few months ago as investors feared the damage caused by the coronavirus pandemic.

The S&P 500 rose more than 1 percent on Monday, adding to a weekslong rebound that has been fueled by hopes for a quick economic recovery, significant intervention by the Federal Reserve and a disregard for the serious risks that businesses and consumers still face.
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According to data compiled by The New York Times, new infections are still increasing in more than a third of states. Public officials are also wary of a surge in new cases as thousands of protesters across the country demonstrate against police brutality after the death of George Floyd.