Category: Market Action

There is concern about real wages in Canada:

Yet while wages for Canadian workers appear to be rising – average hourly pay climbed 3.3 per cent in April from the year before – that’s before soaring consumer prices take their bite. In real (inflation-adjusted) terms, wages in April were down more than 3 per cent from the same period a year ago.

Explanations for the wage lag vary. Some argue real wage stagnation is because of a delay in employment contracts reflecting the rise in consumer prices. Businesses that rely on low-paid workers may also have been holding off raising wages in anticipation that Ottawa would ease access to temporary foreign workers, which it did last month in a move that critics warned could suppress wages.

This is well illustrated by a 2015 OECD publication:

Nevertheless, the picture that emerges from focusing on the private sector is rather similar to the results obtained for the whole economy (Figure 4). The cross-country average labour share in the private sector, excluding agriculture, mining, fuel and real estate, was 69.8 per cent in the G20 countries for which data are available in the early 1990s and 65.9 per cent in 2007. On average the contraction over the period was 0.24 percentage points per year. None of the countries for which data are available experienced a significant trend increase. By contrast, the labour share contracted significantly in more than three-quarters of the countries. Very large falls in the labour share were observed in Australia, Canada and Italy where the decline in the private sector labour share exceeded 5 percentage points. The implication is that, in these countries, labour is obtaining an increasingly smaller share of the priate-sector’s pre-tax revenue.

I’ve mentioned in the past – but can’t find it – that the increase in capital’s share of GDP relative to labour is thought to have boosted stock market returns considerably since 1970. If this reverses, that will be a stiff headwind indeed for the next few decades of equity market returns.

I mentioned a new LRCN issued by iA Financial yesterday, but had no further information. A press release has been issued; Assiduous Reader skeptical has kindly provided the text.

The LRCN is a FixedReset, 6.611%+400, paid as interest, which is the equivalent of a dividend paying FixedReset, 5.085%+308 240. That’s a wider spread than the soon to be redeemed IAF.PR.G, which had been scheduled to reset at +285; but on the other hand it moves the liability to higher up on the capital structure (to the holdco from the opco) as well as diversifying the firm’s funding base … and issuers like to diversify their funders as much as funders like to diversify their issuers!

Of course, in the present case, a lot of the new funders will have been put in that position by sleazy or ignorant portfolio management firms, eager to stuff preferred shares (there is no meaningful difference between a preferred share and a LRCN – only technicalities of tax law, which won’t help much when the shit hits the fan) into a bond portfolio, thanks to the naivety of gullible clients with a badly written mandate … but who cares? OSFI wants gullible bond investors to take unsuspected risks, because, um, Canada.

TXPR closed at 635.45, up 0.96% on the day. Volume today was 2.22-million, third-highest of the past 21 trading days.

CPD closed at 12.45, up 0.24% on the day. Volume was 34,180, lowest of the past 21 trading days.

ZPR closed at 10.47 up 0.48% on the day. Volume of 129,610 was below the median of the past 21 trading days.

Five-year Canada yields were down to 2.65% today.

The SEC is proposing a new rule on fund names:

The Securities and Exchange Commission (the “Commission”) is proposing to amend the rule under the Investment Company Act of 1940 (the “Investment Company Act” or the “Act”) that addresses certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks. The proposed amendments to this rule are designed to increase investor protection by improving and clarifying the requirement for certain funds to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests, updating the rule’s notice requirements, and establishing recordkeeping requirements. The Commission also is proposing enhanced prospectus disclosure requirements for terminology used in fund names, and additional requirements for funds to report information on Form N-PORT regarding compliance with the proposed names-related regulatory requirements.

As far as I can tell though, hedge funds will not be required to change their names to ‘levered up to hell ‘n’ gone’ funds.

In the Frozen North, Blake’s provides Ten Securities Law Fun Facts:

Unlike in the U.S., it is still the case in Canada that posting of material information to an issuer’s website “will not, by itself, be likely to satisfy the “generally disclosed requirement”, meaning that material information should always be first published by way of a press release issued over a newswire (which can be much more expensive than a posting on a company’s own website). Further to National Policy 51-201 Disclosure Standards, as currently drafted: “Investors’ access to the Internet is not yet sufficiently widespread such that a Web site posting alone would be a means of dissemination ‘calculated to effectively reach the marketplace’” and “As technology evolves and as more investors gain access to the Internet, it may be that postings to certain companies’ Web sites alone could satisfy the ‘generally disclosed’ requirement.”
…
The Ontario securities law compendium text colloquially known as the “blue book” weighed 4.0lbs in 2004, while the current edition weighs 7.8lbs. Also, while on the topic of “blue”, there is scientific evidence that, until modern times, humans did not actually see the colour blue, meaning that from an anthropocentric perspective, blue did not exist.

We can hope that at some time, enough investors will have gained access to the Internet to allow website posts to meet the ‘generally disclosed’ requirement. But it may take a while, given the expense highlighted by MobileSyrup.com:

The study examined the cost for 135 countries and based life expectancy on the global average of 72 years. Canada lands at 103 on the list, which shows residents will spend an average of $67 a month on the service. Out of the countries examined, only 32 countries charge residents more for internet access.

DBRS has rated some new LRCNs, but I have no further information:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to iA Financial Corporation Inc.’s (iA or the Company) Limited Recourse Capital Notes Series 2022-1 and a provisional rating of Pfd-2 with a Stable trend to the Company’s Non-Cumulative Preferred Shares Series A.

PerpetualDiscounts now yield 5.84%, equivalent to 7.59% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 260bp from the 270bp reported May 18.

Canadian inflation hit a new 31-year high:

The Consumer Price Index rose 6.8 per cent in April from a year earlier, Statistics Canada said Wednesday, edging up from 6.7 per cent the previous month. It was the latest in a string of troublesome reports: Also on Wednesday, Britain said its inflation rate hit a 40-year high of 9 per cent, while in the United States it hit 8.3 per cent last week.

On a monthly basis, consumer prices rose 0.6 per cent. The average of the Bank of Canada’s core measures of inflation – which strip out volatile items, such as gasoline, and give a better sense of underlying price pressures – jumped to 4.2 per cent from 3.9 per cent.

The inflationary surge is a financial stress for many households. In April, the average hourly wage rose 3.3 per cent on an annual basis, or much lower than inflation – meaning, the average worker is seeing their purchasing power decline, a trend in place for several months.
…
Households paid nearly 10 per cent more for groceries, the steepest annual gain since 1981. Statscan noted that gains are “broad-based, with consumers paying more for nearly everything at the grocery store.” Over the past year, the price of pasta has risen nearly 20 per cent, fresh fruit by 10 per cent and coffee by around 14 per cent.

Housing was another source of pain. Shelter costs rose 7.4 per cent on an annual basis, the highest in nearly four decades. In part, that was due to sharply higher prices for energy to heat homes. Rents rose 4.5 per cent, with larger gains in Ontario and British Columbia.

Gasoline prices fell slightly in April, although were up 36 per cent from a year earlier. With the average price of gas soaring above $2 a litre this week in Canada, energy should continue to put upward pressure on inflation, which could hit 7 per cent shortly, Mr. Mendes said.

In Britain, energy was the culprit:

UK inflation, the rate at which prices rise, jumped to 9% in the 12 months to April, up from 7% in March.

The surge came as millions of people saw an unprecedented £700-a-year increase in energy costs last month.

Higher fuel and food prices, driven by the Ukraine war, are also pushing the cost of living up, with inflation expected to continue to rise this year.

Citizens Advice said “the warning lights could not be flashing brighter” for the government to offer more support for households, and debt charities urged anyone finding it difficult to pay bills to seek help earlier rather than later in the year.

Around three quarters of the rise in inflation in April came from higher electricity and gas bills, according to the Office for National Statistics (ONS).

PerpetualDiscounts now yield 5.89%, equivalent to 7.66% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 270bp from the 280bp reported May 11.

TXPR closed at 628.86, up 0.83% on the day. Volume today was 2.26-million, above the median of the past 21 trading days.

CPD closed at 12.59, up 1.21% on the day. Volume was 53,630, lowest of the past 21 trading days.

ZPR closed at 10.46 up 0.67% on the day. Volume of 86,110 was the lowest of the past 21 trading days.

Five-year Canada yields were up to 2.89% today.

S&P commented on the BAM Spinout Plan:

Brookfield Asset Management (BAM) announced definitive plans to spin off its asset management business in the form of a tax-free special distribution to shareholders, creating a new listed entity. This separation is expected to close by year-end 2022.

The asset management business (“spinco”) will be publicly traded on the New York and Toronto stock exchanges. BAM will maintain 75% ownership of spinco.

We affirmed our ratings on Brookfield Asset Management Inc. because we continue to view BAM’s business position as strong and its leverage and cash flow as unchanged, since we believe growth in other BAM businesses will offset BAM’s lower proportion of spinco’s earnings.

At the same time, we affirmed our ‘A-‘ issue rating on the firm’s senior notes, ‘BBB’ issue rating on the firm’s junior subordinated notes, and ‘BBB’ and ‘P-2’ (Canadian scale) issue ratings on the firm’s preferred stock. We also affirmed our short-term issuer rating and commercial paper rating at ‘A-1’, and our Canadian scale commercial paper rating at ‘A-1 (mid)’.

The stable outlook reflects our expectation for BAM’s fee-bearing capital and earnings to continue to grow as the company maintains leverage of 2x-3x post-spin.

We view this transaction as strategically consistent with BAM’s previous launches of its renewables, infrastructure, real estate, and private equity platforms into separately managed businesses over the past 15 years. That said, this pending spin-off modestly weakens our view of BAM as an asset manager due to the resulting dilution in earnings contribution from the asset management business. Furthermore, we may view it negatively if BAM were to spin off a larger portion (more than 25%) of its investment in the asset manager, thereby further reducing spinco’s earnings contribution to BAM.

We consider BAM’s post-spin financial risk as largely unchanged from our current assessment because we expect growth in BAM’s other businesses to offset the lower earnings contribution from asset management. We expect BAM’s weighted leverage to remain 2x-3x over the next two years, and we weight our pro forma debt-to-EBITDA metric 50% for 2023 and 50% for 2024 to fully reflect the post spin-off view.

DBRS has commented on the proposed BAM restructuring:

According to DBRS Morningstar’s analysis, with a reduction of 25% in the FFO from the AMB, the Restructuring is expected to have a modestly negative impact on BAM’s credit metrics such as the FFO-to-debt and cash flow-to-debt ratios. However, DBRS Morningstar views the impact as manageable because BAM’s credit metrics are currently strong for the ratings. Moreover, the metrics will remain supported by growing fee-bearing capital and the incremental FFO from Real Estate as a result of last year’s acquisition of the 38% interest in Brookfield Property Partners LP that BAM did not already own. From a business risk profile perspective, the Restructuring is expected to only have a modestly negative impact on BAM’s risk profile as the relative importance of the asset management business, which is viewed as being of higher credit quality relative to BAM’s other business pillars, will decline somewhat. However, DBRS Morningstar notes that the other major business pillars (such as Real Estate, Renewable, Infrastructure, and Private Equity) continue to benefit from sound fundamentals, providing superior business diversification to BAM. Furthermore, the reduction in the AMB FFO only partially offset the significant increases in AUM and fee-bearing capital in recent years.

DBRS Morningstar believes if the Restructuring is implemented as currently planned, there will be no rating impact on BAM and its guaranteed subsidiaries. However, DBRS Morningstar could take a negative rating action if (1) the Company’s credit metrics weaken materially from the level as required by DBRS Morningstar on a sustained basis; or (2) its business risk profile post Restructuring deteriorates significantly. DBRS Morningstar currently considers these scenarios unlikely.

TXPR closed at 622.93, up 0.90% on the day. Volume today was 1.26-million, third-lowest of the past 21 trading days.

CPD closed at 12.40, up 0.90% on the day. Volume was 92,050, ahead of only May 12 in the past 21 trading days.

ZPR closed at 10.36 up 1.07% on the day. Volume of 165,670 was below the median of the past 21 trading days.

Five-year Canada yields were up to 2.80% today.