Category: Market Action

Well – it’s a day late and it’s just the bare bones. But it’s here:

DBRS greeted news of Husky’s divestment programme with marked restraint:

DBRS views the impact on Husky’s business risk profile as marginally negative due to a lessening in the integration and diversification of the Company’s asset base. The midstream segment has provided a source of stable cash flow partially offsetting the significant erosion in cash flow from oil and gas production activities. DBRS also notes that the Transaction will result in a minor negative impact on Husky’s cash flow (expected 2016 EBITDA contribution from the assets is approximately $180 million; however, Husky will retain a 35% share of EBITDA). However, more importantly, the impact on the Company’s financial risk profile is positive. The Company plans to use the proceeds from the sale to strengthen the Company’s financial position and enhance liquidity. At March 31, 2016, Husky’s total debt was $6.98 billion and the Company had no cash on the balance sheet. For the past 12 month ended March 31, 2016, the Company’s total debt-to-cash flow ratio was 2.90 times (x; up from 2.42x at end of 2015) and total debt in the capital structure was 30.2%. On a pro forma basis, assuming proceeds (before transaction costs) of $1.7 billion are applied to debt reduction, DBRS estimates a total debt-to-cash flow ratio of 2.31x and a ratio of total debt in the capital structure of approximately 24.7%. The Transaction on a stand-alone basis has no immediate impact on the Company’s Issuer Rating and Senior Unsecured Notes and Debentures rating of A (low), the Commercial Paper rating of R-1 (low) and the Preferred Shares – Cumulative rating of Pfd-2 (low).
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DBRS at this time maintains a Negative trend on Husky’s ratings as the low oil pricing environment continues to weigh on the Company’s cash flow generation and key credit metrics. However, if the Company successfully completes the asset sale program and/or if oil prices recovery materially, DBRS will review the rating and likely change the trend back to Stable.

The FOMC release kept policy hikes on hold:

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
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Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
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Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

This has been interpreted as dovish:

Treasuries trimmed losses from earlier in April after the central bank’s policy-setting Federal Open Market Committee finished a meeting this week by opting against raising interest rates. The statement suggested officials are still looking for the signs of growth, inflation and global stability to justify a move.

“We read the April FOMC statement as slightly dovish,” according to a report Morgan Stanley issued Thursday by analysts including Matthew Hornbach, the head of global interest-rate strategy in New York. “We see it increasingly unlikely that the Fed will be able to deliver a rate hike at the June FOMC meeting.”

… and the US economy is no great shakes:

The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.

Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.

Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost seven years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.

Bare bones!

Bare Bones!

Bare bones!

Bare bones!

On April 15 I mentioned the Lortie attack on unbundled fees; now Rob Carrick of the Globe pens an essay attacking the report’s conclusions:

Investors, you’ll be fine. Already, a new generation of advisers is emerging to serve clients of any wealth level, rich or not, experienced investor or beginner. These online advisers, also called robo-advisers, provide an effective retirement savings foundation. First, they find an appropriate mix of stocks, bonds and cash for your needs, then they build a simple portfolio using exchange-traded funds. Fees are clearly displayed and paid upfront by investors.
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The early narrative on online advisers was that they were primarily something for millennials. However, some firms operating in the Canadian market say their average client age is between 40 and 50. Online advisers themselves are diverse – some are simply about helping you invest intelligently, while at least one is building a specialty in retirement income planning.

This repeats the assumption of the unbundlers that every small investor now served by an advisor will, after such a change is enacted, rush right out and sign up with an on-line service. I’m not convinced of that. Remember the adage ‘mutual funds are sold, not bought’? There’s a lot of truth in that.

There is a great swath of people who don’t decide that they’ve got to do something about their savings plan and then do it. I suggest that there is a huge population of (mainly) small investors, who are aware they ought to be doing something (this is a result of all the generic advertising done by the fund and advice companies) and finally decide … ‘Frank at the club does stocks and bonds. I’ll talk to Frank next time I see him.’ So he talks to Frank and Frank gets another little client and the client gets an equity allocation in his portfolio that wouldn’t have been there otherwise.

With unbundling, a lot of that generic advertising is going to disappear (unless the selfless population of self-styled investor advocates puts some actual time and money on the table to pick up the slack. Ha-ha.) and Frank at the club will go start driving for Uber instead. The money will remain in a package of GICs at the bank; the banks, of course, have no problem with this change because guess what? They’ve got a full time captive sales force and distribution channels out the wazoo! So the change will be a competitive advantage for the banks, which is why the regulators are promoting the idea.

OK, so maybe I’m wrong on this. I’m not an investor advocate, I’m willing to accept that sometimes my gut reaction might be wrong. But that gets us to what really bothers me about the whole deal: it’s not necessary. Fee bundling has been banned in the UK and market adjustments are proceeding there. Why don’t we just put this idea on the back burner for ten years and see what happens in Britain?

Such an approach involves things like ‘evidence’, however, and the regulators don’t like that sort of crap.

On another note, OSFI Deputy Superintendent Mark Zelmer gave a speech titled A New Chapter in Life Insurance Capital Requirements:

I will then briefly explain how the draft LICAT guideline compares at a high level with the Solvency II insurance capital framework recently introduced in Europe, and the new international capital standard that is currently under construction by the International Association of Insurance Supervisors (IAIS).
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When the MCCSR was first introduced it was an international pioneer in many respects in applying a risk-based solvency framework to life insurers. Newer frameworks like Solvency II in Europe have gone further in this respect, and our development of the draft LICAT guideline has certainly benefitted from lessons learned in the construction of those frameworks. Indeed, newer insurance capital frameworks around the world are generally converging towards more sophisticated risk-based frameworks. Thus, it is no surprise that the LICAT is largely consistent with Solvency II and the proposed new Insurance Capital Standard (ICS) currently being developed by the IAIS.

Important differences remain. Nowhere is that more apparent than in how different capital frameworks handle the current environment of exceptionally low interest rates and interest rate volatility more generally. One notable approach is the US capital framework, where Pillar 1 regulatory capital requirements and available capital only adjust to interest rate movements when insurance liabilities and their supporting assets mature and are replaced with new assets and liabilities. Another important point of reference is Solvency II, where initial versions of that regulatory capital framework were very sensitive to interest rates due to their heavier reliance on fair-valuation of cash flows on both sides of the balance sheet. However, more recent versions now include several measures that serve to mitigate excessive volatility in regulatory capital positions.

The parallels with Solvency II are important – Solvency II imposes the NVCC rule on insurers!

And here’s another bare-bones market report. I’m sorry about this, guys, but I’m really busy!