PrefBlog

I’ve never really understood the stock market excitement about marijuana. Sure, there will be some good money to be made in branding and retailing, but at its core the business is about farming. Now it’s even more about farming:

However, new regulations the federal government is expected to unveil this week will open the door to commercial outdoor cultivation. While it is too late in the production cycle in most of the country to start outdoor cultivation this year, the new rules will be in place for next year’s production season.

“Our decision to allow outdoor grow under strict rules is the result of extensive consultations and will contribute to creating a diverse and competitive legal cannabis industry with the ultimate goal of displacing the illegal market,” said Thierry Bélair, a spokesman for Health Minister Ginette Petitpas Taylor.

Nothing wrong with farming and a lot of people earn their daily bread by farming … but it’s not a business that gushes money. Now, if we can only convince the politicians that it cannot be infinitely taxed, we might even be able to squeeze organized crime out of the picture.

I indulged myself on February 26, complaining about sales competition from Mortgage Investment Corporations:

I have a great personal interest in this matter, as every now and then a prospective client sneers at the pathetic yield offered by preferred shares and condescendingly informs me that he can get 8%, no problem, from a mortgage investment corporation. I don’t think these guys know about risk … but then, they don’t have to! Every one I’ve ever talked to is smart enough that he’ll get out before problems become apparent to the hoi polloi.

So I’m following the Fortress receivership with great interest:

Syndicated mortgage loans for real estate projects developed by Fortress Real Developments Inc. are “under considerable stress,” and lenders could face “significant losses,” according to a new report from a court-appointed receiver.

In its first update since it was appointed in April, FAAN Mortgage Administrators Inc. said some of the largest loans provided for Fortress projects are at risk because senior mortgage lenders are moving to foreclose on the properties.
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FAAN said it needs more time and money to do more appraisals of the projects to find the best potential outcomes for the syndicated lenders, whose loans often rank in third place or lower to those of other lenders.
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FAAN’s update also said about 35 per cent of the money raised from syndicated lenders was used to pay “development consultant fees,” about half going to the brokers who raised the funds from individual investors, and the other half paid to BDMC in its capacity as the borrowers’ broker and to Fortress.

It’s hard to make money when 35% of your investment pays up-front brokerage fees!

FAAN is communicating well, with links to relevant material prominently displayed on the index page of their website. There are a few juicy bits in the Report of the Receiver:

Moreover, many Investors agreed to terms that permit repayment “waterfalls” that, at least in some instances, appear to permit owners of the real estate (including the borrowers and owners of the borrowers) to recover some of the amounts they invested in the developments in priority to the amounts loaned by the Investors.
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The Trustee has been advised that many of the projects need further funding to permit developments to continue and that such funding is only available if the security interests granted to BDMC are further postponed and subordinated to new financing.

Professional fees appear to be $150,000 monthly, according to Paragraph 53 of the report. Oh, it’s a great business!

Manulife is exiting the fixed annuities business:

Toronto-based Manulife Financial Corp.‘s decision to discontinue external sales of individual fixed annuities will mean there are fewer options in an already limited annuities marketplace for clients who are seeking a guaranteed income stream during retirement.
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Manulife became one of the largest providers of annuities in Canada following its acquisition of Montreal-based Standard Life Assurance Co. of Canada in 2015, the latter of which offered a “full spectrum of products,” according to Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont.

Manulife’s exit from the annuities business leaves a big gap. In fact, Geller says, there are “fewer and fewer” insurers offering annuities.
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In 2011, Manulife’s U.S. subsidiary, Boston-based John Hancock Financial, discontinued several annuities lines because of low interest rates and volatile equities markets. That year, Manulife’s income statement took a hit of $900 million triggered by John Hancock’s annuities-related losses.

Then, in 2013, Toronto-based Sun Life Financial Inc. sold its U.S. annuities business following earlier losses for reasons similar to those suffered by John Hancock, which forced Sun Life to beef up its reserves.
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Although Manulife is exiting this space, other big insurers, such as Toronto-based Canada Life Assurance Co., Winnipeg-based Great-West Life Assurance Co. and Sun Life, continue to offer fixed annuities in Canada.

The Canada Five-Year yield dropped below 2% today (1.97%, to be precise), the first time it’s been there in a while. But the preferred share market had a good day anyway. So go figure …

In a rare outbreak of common sense, the Canadian Securities Administrators have decided not to ban trailer fees, but spoiled it by adding a lot more paperwork:

The Canadian Securities Administrators (CSA) has decided not to ban embedded commissions after all. Instead, the group of provincial and territorial regulators have proposed new rules for dealers and financial advisors to address any potential conflicts of interest in clients’ best interest or avoid them altogether, as well as to eliminate all forms of deferred sales charges (DSCs).

In addition, the CSA has decided to prohibit dealers that don’t make a suitability determination when selling mutual funds, such as discount brokerages, from receiving trailing commissions.

The long-awaited decisions were delivered on Thursday in a staff notice outlining these measures and in a 120-day comment period proposing amendments to registrant conduct provisions. (The CSA stated in the staff notice that it anticipates publishing a notice and request for comment in September.)

Although the CSA’s staff notice points out that “regulatory action is required to mitigate the inherent conflicts of interest associated with embedded compensation and to ensure the investor’s interest is paramount,” the regulators are instead proposing enhanced conflict of interest mitigation rules and guidance for dealers and advisors on all securities because these conflicts “are not unique to mutual funds.”

Thus, as part of the proposed amendments to the registrant conduct provisions, dealers and advisors will be required to: address conflicts of interest in clients’ best interest, including those resulting from compensation arrangements and incentive practices; put clients’ interests first when making a suitability determination; and do more to clarify for clients what they should expect from registrants.

Trade politics are complicating projections of Canadian interest rates:

The gap between September 2018 and December 2018 bankers’ acceptance futures narrowed to 14.5 basis points Tuesday amid record two-day volumes in the spread. Market participants are now pricing in just 41 basis points of additional policy tightening by year-end, down from more than 60 basis points as recently as last month. The Canadian dollar has declined in tandem, sliding 2.6 per cent against the greenback since the start of June.

Expectations for future BOC rate hikes are waning as the outlook for North American Free Trade Agreement negotiations grows increasingly fraught.
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The odds of a rate increase at the BOC’s July 11 meeting have dwindled to about 67 percent, according to overnight index swap pricing, from roughly 80 percent in the aftermath of the bank’s May 30 meeting.

The Canadian dollar has tumbled more than 5 per cent versus the greenback in 2018, making the loonie the second-worst performing Group-of-10 currency in the span.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.80%, so the pre-tax interest-equivalent spread is now about 340bp, a significant widening from the 330bp reported June 13.