PrefBlog

Equities had another lousy day:

A brief semblance of stability in stock markets melted away on Friday, ending a disastrous week for North American equities, as the signs of economic carnage wrought by the fight against the coronavirus pandemic started to come into view.

The S&P/TSX Composite Index ended the trading day down 2.6 per cent, while the S&P 500 index dropped by 4.3 per cent, capping off the worst week for Canadian and U.S. stocks since 2008, each having lost 14 to 15 per cent.
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Canadian energy stocks initially led a market rally on Friday morning after reports that the federal government is preparing a $15-billion support package for the sector, which has been decimated by the twin spectres of the COVID-19 crisis and plunging crude oil prices.

But the global oil market resumed its descent on Friday afternoon, as West Texas Intermediate dropped by 11 per cent on the day to settle at US$22.53 per barrel.

Crude futures have now declined by 64 per cent since their January peak.
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The collapse of crude prices has devastated the energy component of the Toronto Stock Exchange, which has declined by 70 per cent just since the start of the year. Going back to the sector’s last major peak in 2014, the S&P/TSX Capped Energy Index has lost more than 85 per cent of its market value.
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Friday was the one-month mark since the Canadian stock market last registered a record high on Feb. 20. In the chaotic month that followed, the domestic benchmark index dropped by 34 per cent, wiping out more than $1-trillion in market capitalization.
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The containment measures required to flatten the curve on coronavirus infections ensure that a severe economic slowdown is taking hold. U.S. GDP growth is expected to fall by 8 per cent in the second quarter, while in Canada the decline will be closer to 11 per cent, Mr. [Jean-François] Perrault [chief economist at Scotiabank] said.

You might as well get sick if there are no jobs:

Prime Minister Justin Trudeau says the federal government has received 500,000 applications for employment insurance, compared to just 27,000 for the same week last year.

In fact, maybe you should get sick now and beat the rush:

A new study by some of Ontario’s leading medical researchers paints an alarming picture of the strain on the health-care system as the number of COVID-19 cases continues to rise, suggesting the province will run out of intensive-care beds and ventilators in just 37 days, even if it manages to cut current infection rates in half.
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The study authors acknowledge their modelling is based on a number of key assumptions:

They begin with a starting point of 250 cases, which Ontario hit Thursday.
They assume that 19 per cent of cases will require hospitalization.
They assume that 26 per cent of hospitalized patients will require an ICU bed.
They assume an average ICU stay will be eight days long.
With those assumptions in mind, they predict the following outcomes:

If Ontario can free up 25 per cent of ICU beds for COVID-19 patients, resources will be depleted in 37 days.
If 75 per cent of ICU beds can be allocated to COVID-19 patients, resources can last 52 days.
If, on top of 75 percent of ICU beds, Ontario can make available some 2,000 more beds and 600 additional ventilators, resources can last 60 days.

S&P downgraded Air Canada:

• The effect COVID-19 is having on air travel is much worse than we expected earlier this year, with many countries around the world, including Canada, temporarily restricting non-essential cross-border travel.
• We believe the steep drop in air traffic at Air Canada stemming from the COVID-19 outbreak will contribute to credit metrics that are meaningfully weaker than we previously expected, including a decline in adjusted EBITDA of about two-thirds and adjusted funds from operations (FFO)-to-debt of about 10% in 2020.
• As a result, S&P Global Ratings lowered most of its ratings on Air Canada by one notch, including its issuer credit rating on the company to ‘BB’ from ‘BB+’ and placed all the ratings on CreditWatch with negative implications.
• As of now, we expect traffic to begin to recover in late 2020, but also recognize there is a high degree of uncertainty in the timing of a recovery that, if pushed out later than we expect, is likely to result in another downgrade.
• We expect to resolve the CreditWatch when the effects of the outbreak on Air Canada’s financial position and timing of a recovery become more apparent.

TXPR closed at 425.75, up 3.78% on the day. Volume today was 6.05-million, second-highest of the past 30 trading days, behind only March 18.

Today’s rally means the total return version of this index is down only 10.05% from last Friday, so that’s a pretty good week, eh?

CPD closed at 8.57, up 4.26% on the day. Volume of 244,986 was above the average of the past 30 trading days.

ZPR closed at 6.55, up 2.66% on the day. Volume of 1,763,758 was second-highest of the past 30 trading days, behind only March 9.

Five-year Canada yields were down 10bp to 0.75% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

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Brace yourself for staggering unemployment numbers:

Numbers released on Thursday by the Labor Department — as well as a preliminary analysis of even more recent data — provide the first hard confirmation that the new coronavirus is bringing the United States economy to a shuddering halt. The government reported that the number of initial unemployment claims rose to 281,000 last week, a sharp rise from 211,000 the previous week. This rise in initial claims of 70,000 is larger than any week-to-week movement that occurred during (or since) the 2008 financial crisis.

But even these numbers understate the economy’s free fall, as they reflect the state of the economy last week. Based on preliminary news reports this week from 15 states, it’s already clear that initial claims will skyrocket next week, most likely to levels never seen before.
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Although Washington has not revealed the most recent official figures, state officials said that claims increased 150 percent last week and that the state was seeing an “even more dramatic increase this week.” They also mentioned that call volume surged more than eightfold on Tuesday.

As the accompanying charts show, jobless claims rose sharply in the vast majority of states. These figures come from state unemployment insurance offices tallying up the number of people newly applying for unemployment benefits.

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DBRS downgraded Alberta:

DBRS Morningstar downgraded the Province of Alberta’s Issuer Rating and Long-Term Debt rating to AA (low) from AA and its Short-Term Debt rating to R-1 (middle) from R-1 (high). In addition, DBRS Morningstar changed the trend on the Province of Alberta’s Short-Term Debt to Stable from Negative. DBRS Morningstar also downgraded the Alberta Capital Finance Authority’s Long-Term Obligations rating to AA (low). The trends on all Issuer Rating and Long-Term Debt ratings are Negative.
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DBRS Morningstar believes that Alberta’s credit profile is no longer consistent with a AA rating and that risks remain firmly tilted toward the downside; as a result, DBRS Morningstar has maintained the Negative trend on Alberta’s Issuer Rating and Long-Term debt rating. Current economic conditions and actions taken by Saudi Arabian and Russian governments suggest that oil prices will be under pressure for the foreseeable future, which will have a significant and adverse impact on Alberta’s economic activity and government revenue. This will likely drive debt ratios significantly higher in the near to medium term.

DBRS Morningstar has estimated possible impacts using Alberta’s 2020 Budget, released in late February 2020. DBRS Morningstar estimates that the 2020–21 deficit (on an adjusted basis) may exceed 4.0% of GDP and that the adjusted debt-to-GDP ratio may rise above 30% in 2020–21 alone. Notwithstanding these estimates, there is uncertainty with respect to the current situation and Alberta has yet to outline a full fiscal policy response.

Yesterday I mentioned the problem of bond ETFs and inverted liquidity and, right on cue, I got a call from a client worried about his holdings in VCSH – Vanguard Short-Term Corporate Bond ETF. Holy smokes, look at that price chart!

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When I looked into this, I found another Reuters article with a bit more colour:

For the iShares iBoxx Investment Grade Corporate Bond ETF , that has created the widest gap between the price at which it trades and the underlying value of the assets – known as net asset value. LQD on Thursday traded at a nearly 5% discount to its net asset value, the widest spread since 2008.
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That has meant that corporate bonds are traded less, and when they are, the difference between bid and ask prices are wider. But the ETFs that track those bonds have had less trouble trading. The harder the asset is to trade, the greater the price dislocation.

The problem seems to be in investment grade debt at the moment rather than in high yield. Two major high-yield bond ETFs saw spreads between their trade price and net asset value widen, but far less dramatically than in LQD. (Reporting by Kate Duguid Editing by Marguerita Choy)

Fortunately, I was able to refer my client to the VCSH website which contained the information that although VCSH closed 3/19 at 71.75, down 2.55 (!), its NAVPU as of 3/18 was 77.79, implying it was trading at a 4.5% discount to NAV. Incredible.

What’s more, I understand this fund is actually bringing in money:

Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel, one standout is the Vanguard Short-Term Corporate Bond ETF (Symbol: VCSH) where we have detected an approximate $408.0 million dollar inflow — that’s a 1.8% increase week over week in outstanding units (from 303,016,326 to 308,330,856).

… but its growth is an exception:

BlackRock’s exchange-traded fund focused on investment-grade corporate bonds has seen big price declines. The net asset value of iShares iBoxx $ Investment Grade Corporate Bond ETF, which trades under the ticker LQD, dropped 5 percent on March 18. Its shares continued to fall Thursday.

The steep price declines of the ETF over the past few days resemble the massive drop seen in a similarly short period during the financial crisis, the Bank of America report shows. A downward spiraling effect is at play, with investors fearing corporate cash flows will dwindle as the escalating coronavirus crisis halts economic activity.
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The billions of dollars in outflows from U.S. investment-grade corporate debt funds and ETFs in each of the past few days reached record levels, according to the Bank of America report. During the financial crisis, investment-grade bond funds and ETFs lost 3.7 percent of assets over two months, which the strategists estimated would be $133 billion based on today’s assets under management.

The VCSH fact sheet indicates that all the bonds are investment grade – although I bet that a few downgrades are pending!

Fortunately for shareholders, the fund’s prospectus indicates:

ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units), typically in exchange for baskets of securities.

… which offers some measure of protection for shareholders … the fund doesn’t have to sell securities at garbage prices to fund redemptions, all that risk is borne by the market-makers who, presumably, are currently having a hell of a time right now.

It’s a wild world; I fear that are a lot of people making some very bad decisions right now; although the nature of markets demands that other people are making some very good ones, as the rich get richer.

TXPR closed at 410.23, up 1.96% on the day. Volume today was 5.35-million, fourth-highest of the past 30 trading days.

Today’s rally means the total return version of this index is down only 13.33% from last Friday, so it looks like a pretty good week!

CPD closed at 8.22, up 3.27% on the day. Volume of 183,495 was … oh, I don’t know, around the median of the past 30 trading days.

ZPR closed at 6.38, up 1.59% on the day. Volume of 764,911 was pretty low in the context of the past two weeks.

Five-year Canada yields were down 6bp to 0.86% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

It’s raining money in Washington!

Economists fear that by the time the coronavirus pandemic subsides and economic activity resumes, entire industries could be wiped out, proprietors across the country could lose their businesses and millions of workers could find themselves jobless.

To blunt the fallout, Washington is weighing proposals that could easily top $2 trillion, a staggering jump from the initial $8.3 billion virus response bill lawmakers approved this month. That includes a $1 trillion request President Trump floated with Congress on Wednesday, which would provide direct payments to individuals and small businesses, along with aid for airlines and other affected industries.

Mr. Trump and Republicans are also weighing a separate proposal that would potentially extend $1 trillion in assistance to small businesses, to keep them afloat during the outbreak and keep workers on their payrolls.

The scope of the business crisis could be seen on Wednesday. Detroit automakers said they would temporarily shutter production to try to contain the spread of virus, a decision that will ripple through hundreds of suppliers and millions of workers who depend on a vibrant auto industry.

And it’s raining money in Ottawa!

Prime Minister Justin Trudeau unveiled a sweeping emergency-aid package Wednesday aimed at helping Canadian workers and businesses survive the severe economic downturn caused by the new coronavirus pandemic.

The stimulus package – which includes $27-billion in emergency aid for workers and businesses and $55-billion in tax deferrals – will inject billions of dollars into businesses to help with their cash flow and to keep workers on the payroll, even if they have been sent home, while bolstering federal benefits and support programs for people who have lost their jobs.
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The government announced two entirely new programs: The first – a $10-billion Emergency Care Benefit – will provide $450 a week for 15 weeks for workers who are quarantined or sick, or for parents who must stay at home to care for their children owing to school closings; and the second – a $5-billion Emergency Support Benefit – will provide funding to recently unemployed Canadians who do not qualify for EI.
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In addition, small-business owners will receive a temporary wage subsidy from Ottawa that will be equal to 10 per cent of salary paid to employees for a period of three months. The measure is estimated to cost $3.8-billion.
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The government will place a six-month moratorium on repayment of student loans, provide $157.5-million for homelessness programs and more than $300-million for Indigenous communities.
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Last week, Ottawa pledged $1-billion in funding for health research and aid to the provinces, as well as $10-billion in new credits to backstop businesses.

Some were unimpressed:

Financial markets reeled again on Wednesday, as the coronavirus continued its relentless spread, governments ramped up efforts to contain it and investors waited for lawmakers in Washington to take action on proposals to bolster the American economy.

The selling reflected another extreme swing in sentiment on Wall Street. Stocks jumped on Tuesday as the White House called for urgent action to pump $1 trillion into the economy.

Stocks did recoup some losses late in the day Wednesday, as the Senate began to vote on a bill to provide sick leave, jobless benefits, free coronavirus testing and other aid. President Trump is expected to sign it. But when all was said and done, the S&P 500 fell about 5 percent, stocks in Europe were sharply lower and oil prices cratered.
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The American oil benchmark, West Texas Intermediate, dropped 24 percent to just over $20 a barrel, the lowest price since 2003. The global Brent benchmark fell to just above $25 a barrel, a level just below January 2016. Oil prices are more than 60 percent below where they were at the beginning of the year.

… and in Canada:

Canada’s main stock market fell to a near seven-year low and the loonie declined by as much as 3.1 per cent on Wednesday as investors priced in a coronavirus-driven global recession into stock and commodity markets even as Ottawa rolled out economic stimulus.

The Toronto Stock Exchange Composite Index closed down 7.6 per cent at 11,721.42, having hit its lowest intraday level since July 2012 at 11,384.06. The index has fallen about 35 per cent from its Feb. 28 peak.
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The sector with the biggest decline on the TSX was energy, down 12.5 per cent, as the price of oil, one of Canada’s major exports, extended its recent slide. U.S. crude oil futures plunged to a 18-year low, settling with a decline of 24.4 per cent at $20.37 a barrel.
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The Canadian dollar touched its weakest intraday level since January 2016 at 1.4650 per U.S. dollar. It was last at 1.4459, down 1.8 per cent.

Canada’s annual inflation rate dropped to 2.2 per cent in February on moderating gasoline prices, Statistics Canada said, with some analysts saying it was unlikely stay above the central bank’s 2 per cent target.

Canadian government bond yields were higher across a steeper yield curve in sympathy with U.S. Treasuries as investors braced for increased fiscal spending. The 10-year yield was up 8.8 basis points at 1.044 per cent.

So let’s pretend that it’s not happening!

The unprecedented intensity of the continuing global market crash is fuelling calls in the United States and Canada for a rarely used provision – shutting down stock exchanges to prevent markets from collapsing entirely.

On Wednesday, pandemic fear gripped financial markets once again, twice triggering market-wide trading halts in the U.S. and Canada for the fourth day out of the past eight.

Trillions of dollars of investor money are evaporating at stunning speed, as markets grapple with the potential economic cost of the outbreak.

“If the market is so dislocated that the purpose of the market isn’t functioning, in terms of trading and being able to manage risk, why is it open?” said Jason Mann, chief investment officer at Toronto-based Edgehill Partners.

On the bright side, fodder for future learned articles was provided by the inverted liquidity of the Bond/ETF market:

A rush to sell global bonds in the past week has now rippled into the world of exchange-traded funds with some of the most actively traded seeing the most bulging gaps relative to the value of underlying holdings in years.

Exchange-traded funds offer liquidity in different asset classes and have become in recent years a one-stop shop for investors and traders to access different markets and get trading liquidity in previous illiquid parts of the market.
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With liquidity drying up across the board, funds trying to offload any sizeable holdings are having to sell at lower prices than quoted on trading platforms, market players said.

“There is massive selling pressure on bond ETFs and funds – when you provide NAV on an over-the-counter product with very little bids similar to what you are currently seeing in the bond market, it becomes a stampede to get out,” said a portfolio manager at a European fund in Hong Kong.

Hmmm … sorta reminds you of the Canadian preferred share market, eh?

Speaking of the Canadian preferred share market …

TXPR closed at 402.36, down 6.58% on the day. Volume today was a stunning 7.86-million, highest of the past 30 trading days and well ahead of second-place March 17.

CPD closed at 7.96, down 8.82% on the day. Volume of 134,559 was the lowest since March 6.

ZPR closed at 6.28, down 6.69% on the day. Volume of 760,460 was the lowest since March 6

Five-year Canada yields were up 11bp to 0.92% today.

PerpetualDiscounts now yield 7.10%, equivalent to 9.23% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.54%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically to 570bp from the 445bp reported March 11. Today’s figure blows the old record right out of the water: on November 26, 2008 when trouble with the BCE buyout caused a short-lived spike in PerpetualDiscount bid yields, moving the Seniority Spread to 445bp.

Again, not going to check suspicious quotes today, there are too many of them!

After an extremely slow start, Trump has apparently decided that his re-election prospects depend on largesse:

The Trump administration called on Tuesday for urgent action to speed $1 trillion into the economy, including sending $250 billion worth of checks to millions of Americans, as the government prepared its most powerful tools to fight the coronavirus pandemic and an almost certain recession.
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During lunch on Capitol Hill not long after, Mr. Mnuchin privately told Republican senators that he envisioned the direct payments covering two weeks of pay and going out by the end of April, according to three people familiar with the discussion who described it on the condition of anonymity. Additional checks would be possible if the national emergency persists, Mr. Mnuchin told the group.

The tone of the lunch conversation was grim. Mr. Mnuchin warned darkly that without forceful government intervention, the unemployment rate could rise to nearly 20 percent, according to people familiar with the session, who described his comments on the condition of anonymity. A Treasury spokesperson said that Mr. Mnuchin was just using a mathematical example and that he did not believe the jobless rate would get that high.

Helicopter money, indeed! All this had an effect:

After suffering their worst day in decades, stocks bounced back on Tuesday as Washington policymakers talked up plans to try to cushion an economy careening toward a deep recession driven by the coronavirus outbreak.

The S&P 500 rose 6 percent, rebounding from a 12 percent collapse on Monday, which was its steepest drop since 1987.

Early trading was unsteady, and stocks briefly fell into negative territory. They then surged after the Federal Reserve said it would use its emergency lending powers to try to keep credit flowing to households and businesses in the United States by buying up commercial paper. Shares in Europe also recovered from early losses to end higher.
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On Tuesday, economists from S&P Global Ratings wrote that they expected the United States’ economy to shrink by 1 percent in the first quarter, and 6 percent in the second quarter, putting the country in recession. That 6 percent drop would be the sharpest falloff in economic activity since 2008.

Meanwhile, in the frozen north:

The federal government will unveil nearly $30-billion of emergency financial aid on Wednesday to help struggling Canadians and businesses cope with the economic fallout from the new coronavirus crisis, sources say.

Prime Minister Justin Trudeau and Finance Minister Bill Morneau will announce immediate financial assistance to Canadians who have been left without a job because of business closings, including self-employed and part-time workers unable to collect regular employment-insurance benefits, according to the sources.

The package will include immediate financial relief, but part of the almost $30-billion will be set aside to boost the economy toward the end of the crisis, insiders say. Further measures are also planned to target hard-hit sectors of the economy in the coming weeks, the sources said.
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Because the EI system can be slow to adjust to an economic shock, Prof. [Miles] Corak [an economics professor with the Graduate Center of the City University of New York who served as economist in residence in 2017 with the Canadian federal department responsible for Employment Insurance and social policy] said Ottawa should consider the idea of “helicopter” payments, in which money is sent directly to all or many Canadians.

He said the tradeoff in terms of failing to target the money to those most in need is worth the benefit of speed in this case.
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“We expect business investment and exports to post substantial declines and consumer spending to ease. As a result, economic growth will contract by a projected 2.7 per cent in the second quarter,” said Matthew Stewart, the director of national forecast at the Conference Board of Canada. “However, due to the unpredictability of the coronavirus, there are still huge downside risks to the outlook.”

… and in Canadian markets:

The Toronto Stock Exchange’s S&P/TSX composite index was unofficially up 324.81 points, or 2.63%, at 12,685,21. On Monday, the index had plummeted nearly 10%.
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Materials stocks jumped 9.2%, while industrials rose 3.4% and the heavyweight financial sector increased 1.9%.

The energy sector dropped 9.2%, facing continued pressure from weak oil prices following a shock crash last week.
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An early rebound in European markets was wiped out as the region’s battered airline and travel stocks suffered a drubbing.

Data showed German investor morale at lows last seen in the 2008 financial crisis, and rating agency S&P Global warned the inevitable global recession this year would lead to a spike in defaults.
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Brent crude futures slid $1.32 to settle at $28.73 a barrel and West Texas Intermediate crude futures fell $1.75 to settle at $26.95 a barrel. The U.S. benchmark has slumped more than 50% since Jan. 2.
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He said the tradeoff in terms of failing to target the money to those most in need is worth the benefit of speed in this case.

So there’s a bunch of interesting things going on here: first of all, helicopter money is supposed to fuel inflation; I don’t know if a mere trillion will be enough to do that. The comment about defaults is interesting. I think that ultimately the coronavirus outbreak will not have long-term effects for investment-grade investors. Junk, however, might get hammered due to defaults; and those individuals who have extended themselves to the limit to buy large houses might soon wish they hadn’t. There wasn’t much evidence of preferred share pricing reflecting differential credit quality this as of last Friday, but we shall see how things work out moving forward, one way or another.

But inflation? The Canada 5-Year Yield was up 19bp today to 0.80%, while the 30-year was up 16bp to 1.41%, which is the highest yield since February 20 when this mess got going. Sixteen Basis Points on a long Canada? That’s like, at least two and a half bucks price change (per $100 par value) on long bonds, given that the duration of ZFL, the BMO Long Federal Bond Index ETF is reported as 16.80 (I don’t know if they mean Modified or Macaulay Duration). Fortunes were made and lost today. Fortunes!

Husky has announced a $1-billion reduction in planned 2020 spending:

Husky Energy is taking a series of actions to fortify its business in response to challenging global market conditions.

These initiatives reflect the Company’s commitment to capital discipline, which includes maintaining the strength of its balance sheet while protecting value in an extended low commodity price environment. Husky’s drive to improve process and occupational safety is unaffected and remains a top priority.

“Husky has three important advantages: a strong balance sheet, an Integrated Corridor which includes a sizeable downstream and midstream segment, and Offshore operations that include long-term gas contracts in the Asia Pacific region not linked to the price of oil,” said CEO Rob Peabody.

Given current market conditions Husky will commence the safe and orderly reduction, or shut-in, of production where it is cash negative on a variable cost basis at current prices.

Strong Balance Sheet and Liquidity

Total liquidity is $4.9 billion, comprised of $1.4 billion in cash and $3.5 billion in unused credit facilities. In line with its committed credit facilities, Husky is required to maintain debt to capital of no more than 65%, and is well below this threshold with a ratio of 27% with no long-term debt maturities until 2022.

2020 Capital Program Reduced by $900 Million; Further Cost Reductions of $100 Million …