Category: Market Action

PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.42%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 385bp, a slight (and perhaps spurious) narrowing from the 390bp reported June 19.

The federal NDP released its platform:

NDP leader Jagmeet Singh said his party would raise corporate taxes to 18% (from 15%) and tax capital gains at a [inclusion] rate of 75%.
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The party would maintain the current small business tax rate of 9%.

The NDP would also increase the top marginal tax rate for those making more than $210,000 to 35% from 33%, and implement a 1% wealth tax on “super-rich multi-millionaires with wealth over $20 million.”
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Other tax components of the NDP platform include:

A 15% foreign buyers tax on purchases of residential property by foreign corporations or people who are not citizens or permanent residents.
Doubling the Home Buyer’s Tax Credit to a maximum credit of $1,500 from $750.
Allowing income tax averaging for artists and cultural workers.
Ending the stock option deduction.
Ending “the unfair tax treatment of family farm transfers.”
Making the Canada Caregiver Tax Credit refundable.
Expanding the Volunteer Firefighters Tax Credit.

Changing the capital gains inclusion rate is a silly idea; it will simply provide even more encouragement for investors to retain their holdings forever and pay taxes only after death. I have long advocated a change whereby the capital gains and dividends are taxed the same way they are now, but with a cap: allocations into this bucket capped at some high figure, non-cumulative, annually. Say, $1-million a year. This won’t affect Joe Lunchbucket in the slightest, but – in addition to being a more effective tax on the super-rich than a wealth tax – will have the salutary effect of encouraging the super-rich to realize capital gains, in order to fill up their bucket every year of their lives, rather than grossly exceeding the cap upon death.

However, I was pleased to see that they are afraid to propose fiddling with the Dividend Tax credit and Gross-Up!

Two articles I saw in succession have triggered a urge to rant about low interest rates.

The first was about the effect of AirBNB on Canada’s rental market:

More than 31,000 homes across the country were rented out so often on Airbnb in 2018 that they were likely removed from the long-term rental supply, according to a groundbreaking study by McGill University researchers.
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Those 31,000 homes are equal to about 1.5 per cent of residences across the country that have been built for the rental market.
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In New York, for instance, Airbnb directly accounted for a US$380 increase in median annual rent costs, according to a separate report from Prof. Wachsmuth last year that was funded, in part, by a hotel-industry organization. “The more Airbnb activity you see in a city, the higher housing prices and the higher rents are going to get,” he said. “There’s no question that [Canadian] cities are now past that point.”

Within Canada, short-term rental activity is highly concentrated in a few cities. The Montreal, Toronto and Vancouver areas accounted for close to half of Canada’s average daily listings in 2018, and hosts there brought in $710-million, up 27 per cent from 2017. They’re also where the most rental supply is under threat: Forty per cent of the roughly 31,000 homes that were frequently rented last year were found in those cities, amounting to more than 12,000 “lost” housing units. Hosts of those units brought in $374-million, up 30 per cent from 2017.
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Nearly half of all Canadian Airbnb revenue in 2018 was generated by commercial operators, or those who manage multiple listings, the McGill report said. Their share of sales increased from 2017 in nearly all metro areas. Among this group, there are some hosts that vastly eclipse the competition: Fifteen managed at least 100 active listings apiece in the past year, the report said, and nearly 60 hosts earned more than $1-million in 2018.

And a NYT article about the US housing market:

A confluence of factors — rising construction costs, restrictive zoning rules and shifting consumer preferences, among others — has already led to a scarcity of affordably priced housing in many big cities. Investors, fueled by Wall Street capital, are snapping up much of what remains.
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For decades, single-family homes were an investment primarily for people who wanted to live in them. Real estate investors were around, but they were mostly individuals or small partnerships. That changed with the Great Recession and its aftermath, when investors bought at least two million homes, and almost certainly far more than that, with prices depressed. Large-scale institutional investors bought tens of thousands of homes for less than they cost to build.

At first, the flood of capital seemed like a one-time opportunity arising from the collapse of the residential real estate market. Once the bargains dried up, the investors were expected to stop buying.

Except they didn’t stop. Last year, investors bought about one in five starter homes in the United States (defined as priced in the bottom third of the local market), according to CoreLogic. That was even higher than in the early years after the Great Recession and about double the level of two decades ago. In the most frenzied markets, investors bought close to half of the most affordable homes sold last year, and as much as a quarter of all single-family homes.
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What is happening in Atlanta is partly a familiar story of gentrification pushing up prices and driving out longtime residents. But those trends are being spurred by a fast-growing industry that promotes investment in single-family homes: lenders who provide the capital, brokers who handle transactions, wholesalers who buy homes by the dozens and sell them before they even take possession.
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Ms. Caban is a real estate agent. But she avoids working with the big investors who she says are tearing neighborhoods apart — like the ones who evict existing tenants so they can raise rents, or who leave homes vacant, sometimes for years, while waiting for values to appreciate. Driving through one neighborhood recently, she pointed to a number of boarded-up homes — all, she said, with corporate owners.

All these problems with housing prices may be attributed to low interest rates; the current low rate environment is causing a lot of distortion in asset prices and the reckoning will be paid eventually – the only question is whether this will happen quickly or slowly.

Low interest rates are supposed to stimulate investment in productive assets and the fact that so many people are instead taking advantage of the low cost of carry to invest in non-productive assets such as enormous houses and empty apartments is causing policy-makers a lot of headaches, which they are attempting to resolve via special taxes and intrusive regulations; this represents another distortion of the free market and is also accumulating a reckoning that will be paid eventually.

It would make a lot more sense to hike property taxes across the board.

The FOMC statement was of interest:

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
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The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.
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Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.

In an implementation note they stated:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

This represents a change from the previous implementation note:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

So ‘Quantitative Tightening’ has been loosened! The NYT notes:

The decision to hold rates steady came despite ongoing pressure from President Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move toward easing rates.

Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent.
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The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for lifting rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.

“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”

A Fed spokesperson noted that the chairman can only be removed “for cause.” Mr. Powell said in a “60 Minutes” interview earlier this year that “the law is clear that I have a four-year term. And I fully intend to serve it.”

Canadian headline inflation jumped:

Canadians may be feeling a price pinch as inflation rose to 2.4 per cent in May from the same month one year ago, led by higher prices for food.

That compares to a rise of two per cent in April, according to Statistics Canada’s consumer price index (CPI) released Wednesday.

Year-over-year prices rose in all eight categories of the index, with notable increases in food prices, up four per cent in the 12 months leading up to May 2019 after increasing three per cent in April.
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But that headline inflation number is notoriously volatile, easily skewed by individual factors. So the data agency also comes up with a so-called “core” inflation rate by tabulating the average of three other sub-rates with a lot of sectors stripped out.

The core inflation rate came in at 2.1 per cent, the highest on record since 2012.

Despite this, the Five-Year Canada Yield was down 1bp to 1.31%; but preferreds had a good day. Fergal Smith writes in the Globe:

At 4:07 p.m., the Canadian dollar was trading 0.7 per cent higher at 1.3281 to the greenback, or 75.30 U.S. cents.

The currency, which was boosted on Tuesday by the revival of trade talks between the United States and China, touched its strongest level since June 12 at 1.3282.

The price of oil, one of Canada’s major exports, fell despite a larger-than-expected decline in U.S. crude inventories. U.S. crude oil futures settled 0.3 per cent lower at $53.76 a barrel.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 1 cent to yield 1.408 per cent and the 10-year falling 11 cents to yield 1.435 per cent.

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.44%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now an incredible 390bp, a widening from the 380bp reported June 12.

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TXPR closed at 593.02, down 0.50% on the day. Volume was 1.59-million, about average in the context of the past thirty days.

CPD closed at 11.87, down 0.50% on the day. Volume of 59,896 was on the low side in the context of the past thirty days.

ZPR closed at 9.50, down 0.73% on the day. Volume of 224,350 was high, but not exceptional in the context of the past thirty days.

Five-year Canada yields were up 1bp to 1.34% today.

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It was a wild day, with new 52-week lows all over the place, but the cavalry arrived at 3:40pm to stave off disaster.

TXPR closed at 596.46, down 0.34% on the day after touching a new 52-week low of 593.67 (down 80bp). Volume was 3.12-million, the highest of the past thirty days.

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CPD closed at 11.915, down 0.46% on the day, after hitting a new 52-week low of 11.85. Volume of 231,500 was the second-highest of the past thirty days – eclipsed only by yesterday.

ZPR closed at 9.565, down 0.16% on the day, after hitting a new 52-week low of 9.47. Volume of 254,264 was the third-highest of the past thirty days, eclipsed only by yesterday and (just barely) May 31.

Five-year Canada yields were down 4bp to 1.30% today.

Bond strength (lowering yields) has been attributed to a poor US jobs outlook:

U.S. private employers added 27,000 jobs in May, well below economists’ expectations and the smallest monthly gain in more than nine years, a report by a payrolls processor showed on Wednesday.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 180,000 jobs, with estimates ranging from 123,000 to 230,000.
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May’s increase was the smallest since March 2010.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.60%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 365bp, a sharp widening from the 345bp reported May 29.

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TXPR closed at 598.47, down 0.63% on the day. Volume was 2.39-million, high but nothing special in the context of the past thirty days.

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A mid-afternoon wave of selling changed a sub-par day into a bad one. Note that TXPR’s 52-week low is 596.56 – that’s not too far off!

CPD closed at 11.97, down 0.25% on the day. Volume of 351,301 was by far the highest of the past thirty days – second place belongs to May 13 with 168,630.

ZPR closed at 9.58, down 0.62% on the day, hitting a new 52-week low. Volume of 261,689 was the highest of the past thirty days, edging May 31 and its volume of 254,910

Five-year Canada yields were up 5bp to 1.34% today, but the increase didn’t help the Canadian preferred share market! Where are the GIC refugees?

Meanwhile, Powell suggested policy rates might ease:

The Federal Reserve chairman, Jerome H. Powell, said on Tuesday that the central bank was prepared to act to sustain the economic expansion if President Trump’s trade war weakened the economy. His remarks sent stocks soaring as investors predicted a cut in interest rates.

“We do not know how or when these issues will be resolved,” Mr. Powell said of the United States’ trade disputes with Mexico, China and other nations. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Mr. Powell did not explicitly say that the Fed would cut interest rates, but his comments sent a signal that the central bank was watching Mr. Trump’s trade wars warily, ready to fend off any economic damage. While the Fed has been closely monitoring the effects of Mr. Trump’s trade war on the economy, Mr. Powell’s comments were his first since the president escalated his dispute by threatening tariffs on all Mexican goods.
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The rebound in stock markets coaxed some investors out of the safety of government bonds, pushing prices down and yields — which move in the opposite direction — up. The rise in yields reversed some of a sharp decline in recent days that had reflected growing investor concern about the outlook for economic growth and inflation. The yield on the 10-year Treasury note was 2.12 percent at 3 p.m., according to Bloomberg data.

But in signaling that it is prepared to limit economic damage from the trade war, the Fed could perpetuate the feedback loop that has developed among financial markets, the central bank and Mr. Trump — and could embolden the president to continue his fight.

Bullard of the St. Louis Fed said much the same thing yesterday.

However, Senate Republicans took up a collection today and were able to scrape together a pair of balls:

Mr. Trump’s latest threat — 5 percent tariffs on all goods imported from Mexico, rising to as high as 25 percent until the Mexican government stems the flow of migrants — has riled Republican senators who fear its impact on the economy and their home states. They emerged from a closed-door lunch in the Capitol angered by the briefing they received from a deputy White House counsel, Patrick F. Philbin, and Assistant Attorney General Steven A. Engel on the legal basis for imposing new tariffs by declaring a national emergency.
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Senator Ron Johnson, Republican of Wisconsin, said he warned the lawyers that the Senate could muster an overwhelming majority to beat back the tariffs, even if Mr. Trump were to veto a resolution disapproving them. Republicans may be broadly supportive of Mr. Trump’s push to build a wall and secure the border, he said, but they are almost uniformly opposed to the imposition of tariffs on Mexico.

There was some good drone news today:

Shares of Drone Delivery Canada Corp. surged as much as 18 per cent in trading Tuesday after the company announced a 10-year contract with Air Canada that sees the cargo division of the country’s largest airline market and sell the Toronto-based company’s drone delivery services in Canada.

Analysts and investors say the agreement adds credibility to the pre-revenue startup company, known as DDC, which has developed a system for autonomous cargo delivery through unmanned aerial vehicles, known as drones.

I want to order pizza at 4am and I want to do it yesterday!