PrefBlog

The Canadian jobs report was ho-hum:

The Canadian economy added 11,200 jobs in October on higher full-time hiring, and the unemployment rate dipped to 5.8 per cent, although wage growth was sluggish, Statistics Canada data indicated on Friday.
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Although full-time jobs rose by 33,900 compared to a loss of 22,600 part-time positions, the labour participation rate dropped to 65.2 per cent, its lowest since October, 1998.

And the average year-over-year wage growth of permanent employees – a figure closely watched by the Bank of Canada – fell to just 1.9 per cent, the lowest since the 1.7 per cent recorded in August 2017.

Meanwhile, in the States:

• ■ 250,000 jobs were added last month.
• ■ The unemployment rate was unchanged at 3.7 percent, a nearly 50-year low.
• ■ Average earnings rose by 0.2 percent and are up 3.1 percent over the past year.
• ■ The number of people working or looking for a job increased by 711,000, nudging the labor force participation rate up to 62.9 percent, from 62.7 percent in September.

But so much for the rally!

A steep decline in shares of Apple Inc. further weighed on sentiment in the U.S. stock market after the iPhone maker warned that sales during the crucial holiday quarter would likely miss expectations.

White House economic adviser Larry Kudlow told CNBC that while President Donald Trump plans to meet China President Xi Jinping later this month, he has not asked U.S. officials to draw up a proposed trade plan, contradicting a report earlier in the day that had buoyed hopes of a trade dispute resolution.

That erased early gains in U.S. stocks and curtailed a rally in global markets that had lifted emerging market stocks by their largest daily gain since 2016.
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The Dow Jones Industrial Average fell 111.34 points, or 0.44 per cent, to 25,269.4, the S&P 500 lost 17.6 points, or 0.64 per cent, to 2,722.77 and the Nasdaq Composite dropped 77.06 points, or 1.04 per cent, to 7,356.99.

Apple’s shares tumbled nearly 7 per cent, taking its market value below $1-trillion, after the company said sales for the final quarter would likely miss expectations.

In Toronto, Canada’s main stock index also erased early gains on Friday.

The Toronto Stock Exchange’s S&P/TSX composite index unofficially closed down 0.2 per cent, or 30.87 points, at 15,119.28.

No cashiers here!

Think of it as the ultimate self check-out experience. Instead of waiting for someone to ring up your grocery items, customers can now simply pick out what they need, scan an app and walk out of the store.

Amazon started it first with its cashier-less Amazon Go store, but now Sam’s Club (owned by Walmart) is following suit with its Sam’s Club Now store, which will open in Dallas next month.

It’s a relatively simple concept that requires zero cashiers. Customers use the Sam’s Club Scan & Go app to add products to their receipt as they shop. When they’re done shopping, customers pay through the app with a single click and just walk out of the store. Instead of traditional checkout lines, there are 700 cameras to keep customers honest and monitor inventory.

Fortunately, Canadian retailers don’t have to worry about all this technology guff – we’ve got cheap labour! Productivity, schmoductivity!

There haven’t been too many good days this month, but we’re closing on a good note!

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The TXPR price index was up 1.69% today after six straight trading days of losses; it was only the sixth gain in the month and most of the other five were pretty skimpy!

PerpetualDiscounts now yield 5.80%, equivalent to 7.54% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 340bp, a slight (and perhaps spurious) widening from the 335bp reported October 24.

The equity markets did well today:

Broad gains in the U.S. equity market boosted a measure of global stock markets on Tuesday after President Donald Trump said a “great deal” could be struck with China that would relieve fears of a growing trade war between the world’s two largest economies.

MSCI’s gauge of stocks across the globe gained 1 per cent. Still, the index is down nearly 9 per cent for the month.
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Trump said during an interview with Fox News late on Monday that he thought there could be an agreement with China on trade. But he also said he had billions of dollars worth of new tariffs ready to be imposed if a deal was not possible.

The Dow Jones Industrial Average rose 431.96 points, or 1.77 per cent, to 24,874.88, the S&P 500 gained 41.39 points, or 1.57 per cent, to 2,682.64 and the Nasdaq Composite added 111.36 points, or 1.58 per cent, to 7,161.65.

The gains were broad in the U.S., with all 11 sectors of the benchmark S&P index up for the day. Trade-sensitive industrial shares rose 2 per cent.

Correlation is not causation and I’m pretty skeptical of the claim that suddenly kindled trade hopes were at the bottom of this. But then, I’m not a talking head with a desperate need to make everything sound clear and logical!

Somebody forgot to tell the preferred market about the wonderful news: TXPR was down 0.66%, touching a new 52-week low of 669.90 … it spend a good chunk of the day near that level, down 1.25% or so; volume, at 3.81-million (constituent) shares, was the second-highest for the month; CPD hit a new low of 13.37, with about $3.6-million worth being traded, the highest volume of the month by far; and ZPR hit a new 52-week low of 11.005 on its second-highest volume of the month, which was only a little more than half of yesterday’s volume.

I’ve been getting a few inquiries regarding what the hell is going on in the Canadian preferred share lately – here’s my best answer:

I ascribe the downturn to uncertainty.

Perpetual Discounts now yield 5.78%, equivalent to 7.51% interest at the standard conversion factor of 1.3x. Long-Term corporate bonds now yield a little over 4.10%, so the pre-tax interest-equivalent spread is now about 340bp, an enormous widening from the 315bp reported on September 26 that has been achieved entirely through the increase in PerpetualDiscount yields – the long term corporate bond yield has not changed noticeably.

At the same time, we’re seeing comparable weakness in FixedResets, which really should stay relatively stable regardless of the overall level of interest rates , but which should be expected to continue to recover from the lows of 2014-16 with an increase in yields.

It is possible that this is being driven by funds like CPD – as units are created and destroyed, individual issues are bought and sold in lockstep, regardless of their characteristics – but I’m not sure that this is the case; and while this would explain the correlation between the two sub-classes, it wouldn’t explain why the units are being created and destroyed in the first place.

It seems to me that investors in both subsectors are fearing the worst, regardless of the fact that their worst fears are of opposite environments. I suggest that this may be due to uncertainties regarding the global economy; we’re seeing the IMF cut its growth forecasts due to trade concerns; Trump trying to pick a fight with the Fed (I think this is probably because he wants some political cover in case a US slowdown does occur to a noticeable degree); and, of course, the approaching US mid-term elections.

Due to the retail nature of preferred share investors, the sector is prone to episodes like this, in which the market behaves irrationally for a while until people take a deep breath and look at the comparable after-tax yields. I just wish there was some way of predicting the outbreak and duration of such events!

My second-best answer (because it’s rather dated, but is still generally applicable) is Shut Up and Clip Your Coupons! I mean, what else are you going to put your money into that will pay such a high rate of after-tax income while providing first-loss protection?

In the equity markets today:

All sectors on the TSX lost ground on Monday, led by cannabis-heavy health care which was down more than 10 per cent. Aphria Inc. closed down 17.35 per cent, Canopy Growth Corp. 14.12 per cent and Aurora Cannabis 16.10 per cent.

Since Canada legalized recreational marijuana use Oct. 17, pot stocks have lost up to about 45 per cent of their value.

The energy sector closed off more than three cent as the price of crude oil continued to fall as investors remained concerned about slowing global demand led by weakness in China
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In New York, the Dow Jones industrial average was down 245.39 to 24,442.92. The S&P 500 index was off 17.44 points to 2,641.25, while the Nasdaq composite lost 116.92 points to 7,050.29.

U.S. markets sustained sharp losses late in the day on reports that Trump is planning new tariffs on all remaining imports from China if the two sides don’t make progress in trade talks next month.

As an aside, I don’t agree with Andrew Jackson (Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute) very often – but sometimes he has things right:

Further, cuts to the corporate-tax rate are costly since most of the benefit goes to existing firms making profits from past investments, rather than to new firms or those thinking about expansion. A cut in the tax rate is also irrelevant to companies earning so-called rents or above-average profits compared to the international norm. For example, during the resource-boom companies would have invested in the oil sands even if the corporate-tax rate had been much higher, since expected profits were very high.

Canadian banks, utilities, airlines, railways, retailers and cultural industries among others all have to operate mainly in Canada to serve the Canadian market, so they are not very responsive to changes in tax rates compared to other countries.

If the politicians want to make Canada more competitive, they will break up the banks. Let them bank; don’t let them do much else. The enormous size of the heavily protected Canadian banking sector soaks up talent, soaks up capital, soaks up real-estate and soaks up political attention – for what? Second-rate (or, at best, plain vanilla) products made very cheaply as a consequence of scale and sold on the basis of the brand name. That not the basis of a competitive economy – that’s the basis of rentier economy, which is what we got.

I’ve rearranged my data collection routines in an effort that will eventually improve the attribution analysis I’ve been working on. Here are some spot results that some might find of interest:

Note that issues may be relegated to “Scraps” on either credit or volume concerns.

All of which is by way of introducing a snapshot of today’s preferred share market action:

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