Category: Market Action

The FOMC issued its statement:

Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. 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. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, 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.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

Scott Barlow in the Globe picks up on a piece by Barry Ritholtz on Bloomberg about financial literacy:

This is well-meaning, but without a radical break from how financial literacy is taught, it is destined to be ineffective … There are some potential solutions for these issues:

No. 1. Hands-on education: Teaching finance is not well-served by the standard format of classroom lectures. Instead, if we want to make students proficient in budgeting, help them understand credit and teach them about investing, a better approach would be a learning experience from real life. Student-run businesses on campus, and internships at local businesses, or actual jobs in finance do better at showing students how to do these tasks than the lecture-and-test approach.

Student-run businesses on campus? How many door-to-door chocolate bar salesmen can the country actually support, anyway? As far as hands-on experience goes … most people have a job. If they’re not interested in how that business works, why are they going to seek out some heavily subsidized student pretend-business?

No. 2. Repetition: Unless financial literacy is constantly reinforced, as we noted above, it fades pretty fast. Core concepts need to be repeated and reinforced after graduation. It is not realistic for us to expect high schools to be able to accomplish this.

Some of the burden for repetition and reinforcement must fall on the private sector, particularly the financial industry itself. More firms need to make a commitment to integrate financial literacy in their client-services operations. The key is keep the basic concepts of compounding, cost drag, valuations, diversification and cyclicality in front of customers, ensuring that they understand and are familiar with the terms and concepts.

Sure. Right. If people were financially literate, at least 75% of the financial industry would go bankrupt. Where’s the incentive for teaching? And where are all these paragons of wisdom and virtue going to come from, anyway? Most financial professionals know nothing about finance, beyond a few platitudes about mumble-mumble risk and [unintelligible] expected returns – they’re salesmen who happen to be selling investments.

No. 3 … A complement to the real-life experiences (above) is a more Socratic method of instruction. Rather than mere lecturing, instructors should lead students on a guided hunt for information. Let the students figure out the ideas for themselves, with the instructor as the pilot. This sort of approach leads to harder-won knowledge, which tends to be more durable.

Rather than teaching a body of information to remember, education also needs to give students the skills to think critically, to puzzle through problems, to be skeptical, to ask questions. Unfortunately, this broader approach to problem solving and independent thinking is rarely on the curriculum, no matter the subject being taught.

That’s a pretty broad issue, given that critical thinking is supposed to be the whole point of education, the more so the further you progress. But people – in general – don’t want to think critically. They want to find something quickly that will confirm their bias and then they want to sit down and watch The Price is Right.

I’m not sure there is a good solution for The Financial Literacy Problem. In the first place, it’s not really all that important a problem: the only financial literacy most people need is:

• Work Hard
• Don’t blow your money on dumb stuff
• Pay off your mortgage (or, if you’re renting, just stick the $3.98 per week that’s left over in the bank).

Bang. Done. Ninety percent of the population is now as financially literate as they need to be. That wasn’t very hard, was it?

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.78%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 335bp, unchanged from that reported April 24.

CPX has acquired a generation facility:

Capital Power Corporation (Capital Power or the Company) (TSX: CPX) announced today that it has entered into an agreement to acquire Goreway Power Station Holdings Inc., which owns the Goreway Power Station, an 875 megawatt (MW) natural gas combined cycle generation facility. Goreway Power Station Holdings Inc. is jointly owned by JERA Co. Inc., and Toyota Tsusho Corporation. The purchase price is $387 million in total cash consideration, subject to working capital and other closing adjustments, and the assumption of $590 million of project level debt (the Acquisition). The Acquisition is expected to close in the second quarter of 2019 and is subject to regulatory approvals and other customary closing conditions.

DBRS comments:

The Acquisition is expected to result in a modest improvement in CPC’s business risk profile by increasing (1) diversification out of the volatile Alberta market, (2) contracted revenues and (3) average contract length. DBRS views CPC’s financing plan for the Acquisition as having a neutral effect on the Company’s financial metrics. Overall, DBRS believes that the Acquisition will have a neutral impact on CPC’s credit assessment if the following occurs: (1) CPC effectively integrates the Facility into its portfolio; (2) the Acquisition is funded as planned at the announced transaction price; (3) the Facility is able to distribute cash to CPC as expected and (4) the project-level debt is non-recourse to CPC. DBRS notes that future material acquisitions by CPC without the issuance of additional common equity could negatively affect its financial metrics, which could result in DBRS taking a negative rating action.

There was a nice little pop in TXPR at the close today, but nothing special in the great scheme of things:

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There were a lot of MOC Imbalances, but very few of them were for more than 100 shares. I have no idea what that might have been about … the only thing that occurs to me is ‘software testing’.

Assiduous Reader AB passes on his latest collection of derivative notes based on preferred shares:

• BMO JHN12319, based on Evolve Active Canadian Preferred Share ETF, closing 2019-4-26
• BMO JHN12313, based on ZPR
• NBC NBC23348, based on ZPR
• BMO JHN12327, based on ZPR
• BMO JHN12328, based on ZPR

…to which I will add

• NBC NBC23354, based on ZPR, which I found through the NBC Structured Solution web-page
• TD Coupon Notes, series 329, linked to ZPR, which I found through the TD structured notes search page

The BMO ‘Principal at Risk’ Notes page is here.

The TD Structured notes page is here. Search for the product class ‘Principal at Risk Notes’ with the keyword ZPR.

So were notes like this responsible for BMO’s buying bout of ZPR at the close today?

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I didn’t look carefully at all the details for all the notes, but I got the impression that a selling commission of 2.5% applied to these notes. Nice work, if you can get it!

The Bank of Canada rate announcement was today:

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Global economic growth has slowed by more than the Bank forecast in its January Monetary Policy Report (MPR). Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries. In response, many central banks have signalled a slower pace of monetary policy normalization. Financial conditions and market sentiment have improved as a result, pushing up prices for oil and other commodities.

Global economic activity is expected to pick up during 2019 and average 3 ¼ per cent over the projection period, supported by accommodative financial conditions and as a number of temporary factors weighing on growth fade. This is roughly in line with the global economy’s potential and a modest downgrade to the Bank’s January projection.

In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January. Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector. Investment and exports outside the energy sector, meanwhile, have been negatively affected by trade policy uncertainty and the global slowdown. Weaker-than-anticipated housing and consumption also contributed to slower growth.

The Bank expects growth to pick up, starting in the second quarter of this year. Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved global financial conditions. Consumption will be underpinned by strong growth in employment income. Outside of the oil and gas sector, investment will be supported by high rates of capacity utilization and exports will expand with strengthening global demand. Meanwhile, the contribution to growth from government spending has been revised down in light of Ontario’s new budget.

Overall, the Bank projects real GDP growth of 1.2 per cent in 2019 and around 2 per cent in 2020 and 2021. This forecast implies a modest widening of the output gap, which will be absorbed over the projection period.

CPI and measures of core inflation are all close to 2 per cent. CPI inflation will likely dip in the third quarter, largely because of the dynamics of gasoline prices, before returning to about 2 per cent by year end. Taking into account the effects of the new carbon pollution charge, as well as modest excess capacity, the Bank expects inflation to remain around 2 per cent through 2020 and 2021.

Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.

As usual, there was no reporting of the vote or of dissenting opinions because our illustrious masters do not feel any need for accountability.

The dovish stance hurt the loonie:

The Canadian dollar fell to a nearly four-month low against its broadly stronger U.S. counterpart on Wednesday, as investors raised bets on a Bank of Canada interest rate cut this year after the central bank slashed its economic growth outlook.

Canada’s central bank held its benchmark interest rate steady at 1.75 per cent as expected but removed wording about the need for future rate hikes and lowered its growth forecast for 2019 to 1.2 per cent from 1.7 per cent.
…
Chances of an interest rate cut by December rose to 65 per cent from 57 per cent before the policy announcement, data from the overnight index swaps market showed.

At 4:03 p.m., the Canadian dollar was trading 0.5 per cent lower at 1.3484 to the greenback, or 74.16 U.S. cents. The currency touched its weakest intraday level since Jan. 3 at 1.3522.

… and the GOC five-year yield dropped 7bp to 1.50%.

PerpetualDiscounts now yield 5.49%, equivalent to 7.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.78%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 335bp, a significant widening from the 325bp reported April 17.

It was another busy day for the MOC facility, with 68 preferred share issues listed on the imbalances, many of them in lots of 5,000 shares.

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FAIR Canada, that superannuation scheme for tired old regulatory hacks, is in some well-deserved trouble:

The primary advocacy group for Canadian investors is losing money, looking for an executive director – and struggling to survive.
…
FAIR Canada has survived in large part in recent years on a $2-million gift from Stephen Jarislowsky, the founder of investment firm Jarislowsky Fraser Ltd., and an additional $2-million contribution from the Ontario Securities Commission, which used money collected in settlements and from fines.

Mr. Jarislowsky’s 2014 gift was conditional on FAIR finding $4-million in matching gifts, but outside of the OSC money, it has fallen far short, Mr. Pascutto said. Mr. Jarislowsky has extended a deadline for the match several times, most recently agreeing to postpone it to this coming September from March 31.
…
The Investment Industry Regulatory Organization of Canada (IIROC), which provided the initial funding for FAIR Canada, has given a total of $4.9-million over the years, including a $250,000 grant in the fall of 2018 from its restricted fund that comes from fines and settlements, spokeswoman Andrea Zviedris said in an e-mailed statement.

On March 28 I highlighted an issue of structured notes from TD. Assiduous Reader AB writes in and provides me with a link to the National Bank Structured Solutions Group page, who issued five separate notes “linked to a Canadian preferred share ETF” between April 10 and April 18.

There was a disorderly close in the market today, as TXPR lost 49bp in the last five minutes to close down 28bp from yesterday on high volume of over 4-million shares.

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One of the hard-working geniuses who are such a feature of Canadian investment management made extensive use of the Market-on-Close facility, which I assume helped him leave early for the long weekend.

On March 18 I reported:

Assiduous Readers will remember that Manulife was bailed out by the regulators again after a hedge fund claimed the terms of its contract with the firm allowed it to deposit unlimited funds with the firm at a guaranteed rate of up to 5%.

It turns out the bail-out was unnecessary! Manulife won the court case

‘Not so fast!’ scream the plaintiffs:

A pivotal court ruling that dismissed three lawsuits against Canadian life insurers has been formally appealed, extending a battle between the companies and three investment funds over the fine print of decades-old contracts.
…
This week the funds appealed all three cases, arguing that the core argument made by Justice Brian Scherman of the Court of Queen’s Bench for Saskatchewan when dismissing the lawsuits is incorrect. Justice Scherman ruled that the contracts were designed to be used for insurance purposes only, and that “in the some 30 years since universal life insurance policies have been sold, there is no judicial record of these policies being used in the manner proposed” by the investment funds.

In its appeal of the ruling that related to Manulife, Mosten Investment LP argued “the learned Chambers Judge erred in law in his interpretation of the contract.”

There is a fascinating chart made available in the OECD release of its publication “Taxing Wages”:

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Of course, this just refers to taxes on wages; it does not include things like sales tax and property tax. In the interest of avoiding vitriolic attacks by worshippers of the Awesome and Holy United States of Free America, I will also publish a chart more favourable to that glorious nation:

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Of course, neither chart includes the cost of health insurance, which is a big ticket item in the Awesome and Holy United States of Free America, but that’s because health insurance is FREE ENTERPRISE, dammit, and any free citizen has a CHOICE between between buying Health Insurance, dying, or being bankrupted by medical bills.

Reasonable people can argue all day and all night regarding whether a single-payer system like Canada’s is better or worse than the US system. Each has its own advantages and disadvantages. But to take tax rates as a straight-up, single-number meaningful comparison of anything at all is simply ridiculous and annoys me.

PerpetualDiscounts now yield 5.45%, equivalent to 7.08% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.82%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, unchanged from the figure reported April 10.