PrefBlog

PerpetualDiscounts now yield 6.70%, equivalent to 8.71% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.32%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 340bp from the 310bp reported November 16. However, I suspect that the “Weighted Average Yield to Maturity” reported by BMO on their ZLC page is not kept current; anything to withhold information from the masses is good business for the banks! I’ve sent an inquiry; we’ll just see what kind of answer I get! So far, I’ve simply gotten the run-around, since BMO is of course a bank, which means their staff is not only completely untrained, but is left hanging out to dry when they yell for help. My guy’s trying hard, but I may have to write a letter for them to file after sending me a soothing response.

Assiduous Reader KC has, however eMailed me to suggest an alternative: the ICE BofA 10+ Year Canada Corporate Index (F9C0). This is under serious consideration.

So apparently, the Powers That Be are annoyed at brokers encouraging stupid trading:

Gamification is the practice of incentivizing users to trade more frequently or in larger amounts by adding game-like features to trading platforms. Competitive features such as leaderboards, which display the names of users who do the most trades per day, or images of badges or bursts of confetti that reward a first trade in a margin account or a family referral, are encouraging investors to trade more often.

As well, the OSC found investors who were shown lists of “top-traded” or “most popular” stocks were 14 per cent more likely to buy and sell the company shares that they are nudged toward. Top-stock lists promote “herding” behaviour – where a person follows what others are doing rather than deciding independently.

Herding can result in “significantly poorer” returns for investors, the report said, citing a separate study that showed an average 20-day return of minus 4.7 per cent for top stocks purchased each day. That’s because herding increases trading frequency, and can shift investors into higher-risk securities.

I’ll take this initiative seriously when they start cracking down on brokers encouraging stop-loss orders and making market orders the default.

TXPR closed at 546.09, down 1.02% on the day after setting a new 52-week low. Volume today was 1.87-million, fourth-highest of the past 21 trading days.

CPD closed at 10.91, up 0.18% on the day after setting a new 52-week low. Volume was 135,330, third-highest of the past 21 trading days.

ZPR closed at 9.14, unchanged on the day after setting a new 52-week low. Volume was 197,240, near the median of the past 21 trading days.

Five-year Canada yields were off a touch to 3.30% today.

Poor equity performance was attributed to weak retailers:

Wall Street’s main indexes ended lower on Wednesday as a grim outlook from Target spurred fresh concerns about retailers heading into the crucial holiday season, while semiconductor shares slid after Micron’s supply cut. The TSX also ended lower, pressured by declines in the energy and materials sectors, as investors took in the latest Canadian inflation data.

Shares of Target Corp tumbled 13.1% after the big-box retailer forecast a surprise drop in holiday-quarter sales.

Retail stocks slumped broadly, including declines of over 8% in shares of Macy’s Inc and Best Buy Co Inc and a 7% drop for Foot Locker. The S&P 500 consumer discretionary sector shed 1.5%.

Micron Technology shares dropped 6.7% after the company said it would reduce memory chip supply and make more cuts to its capital spending plan. The S&P 500 information technology sector fell 1.4% and the Philadelphia SE Semiconductor index sank 4.3%.
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Fed Governor Christopher Waller, an early and outspoken inflation hawk, said he is now “more comfortable” with smaller rate increases going forward after data showed price increases slowing.

Target’s number is fascinating because:

Target stores are getting looted, and it’s taking a huge bite out of profits.

The discount retailer told reporters on a call to discuss its third quarter earnings results that inventory shrinkage — or the disappearance of merchandise — has reduced its gross profit margin by $400 million so far in 2022 compared to 2021.

“At Target, year-to-date, incremental shortage has already reduced our gross margin by more than $400 million vs. last year,” Target CFO Michael Fiddelke said on the earnings call, “and we expect it will reduce our gross margin by more than $600 million for the full year.”

Fiddelke detailed how there are “a handful of things that can drive shrink in our business and theft is certainly a key driver. We know we’re not alone across retail in seeing a trend that I think has gotten increasingly worse over the last 12 to 18 months. So we’re taking the right actions in our stores to help curb that trend where we can, but that becomes an increasing headwind on our business and we know the business of others.”

A Target spokesperson told Yahoo Finance via email after the call the shrinkage was mostly specifically attributed to “organized retail crime.”

Canadian inflation was steady:

Canada’s inflation rate held steady in October at elevated levels, snapping a three-month streak of deceleration that was heavily influenced by rising costs at gas stations.

The consumer price index rose 6.9 per cent in October from a year earlier, matching the inflation rate in September, Statistics Canada said Wednesday. Excluding food and energy, prices rose 5.3 per cent in October on an annual basis, slowing from 5.4 per cent in September.
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Food prices rose 10.1 per cent in October on an annual basis, down slightly from 10.3 per cent in September. Still, grocery costs are rising near multi-decade highs, and the increases are hefty for some products. Over the past year, pasta prices are up 45 per cent, lettuce by 30 per cent and soup by 18 per cent.

UK inflation was more exciting:

Britain’s cost-of-living crisis deepened in October, as consumer prices surged 11.1 percent from a year earlier, the highest in more than 40 years, granting no relief to households struggling to keep up with large increases in the price of food, heating and gas.

The increase, which was higher than expected, came after the annual inflation rate had reached 10.1 percent in September. On a month-to-month basis, the Consumer Prices Index rose 2 percent from September to October.
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Wages in Britain increased 5.7 percent in the third quarter, their fastest pace in 20 years, as people re-entered the work force following the end of Britain’s pandemic lockdowns. But inflation is rising so fast that it is outstripping those gains, leaving households struggling to keep up.

And some of the employment gains mask an underlying precariousness, with many people re-entering the labor market as self-employed workers. When adjusted for rising prices, wages overall fell by 2.7 percent in September.

PerpetualDiscounts now yield 6.75%, equivalent to 8.78% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.66%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 310bp from the 340bp reported November 9. However, I suspect that the “Weighted Average Yield to Maturity” reported by BMO on their ZLC page is not kept current; anything to withhold information from the masses is good business for the banks! I’ve sent an inquiry; we’ll just see what kind of answer I get! So far, I’ve simply gotten the run-around.

TXPR closed at 551.73, up 0.72% on the day. Volume today was 2.24-million, second-highest of the past 21 trading days.

CPD closed at 10.89, down 0.28% on the day. Volume was 165,340, highest of the past 21 trading days by a wide margin.

ZPR closed at 9.14, down 0.44% on the day. Volume was 287,130, second-highest of the past 21 trading days.

Five-year Canada yields were off a touch to 3.32% today.

Equities had a good day, attributed to the US PPI number:

U.S. and Canadian main stock indexes gained on Tuesday, shaking off an unconfirmed report of Russian missiles crossing into Poland that sparked volatility, as investors seized on softer-than-expected inflation data that raised hopes of a pullback in rate hikes by the U.S. Federal Reserve. Energy and tech stocks led the advance in Toronto.

Equities were boosted by Tuesday’s inflation report that showed producer prices rising 8% in the 12 months through October against an estimated 8.3% rise.

The gains built on a rally that kicked off late last week by a cooler-than-expected report on consumer prices.

Criticism of COVID spending is mounting, together with that of loose fiscal policy:

The most important source of Canada’s inflation is simple: Starting in 2020, the government borrowed more than $700-billion, and mostly handed it out. People spent it, driving up prices.

It was, of course, proper for the government to help people and businesses gravely hurt during the COVID-19 pandemic. And debts and deficits do not automatically cause inflation – Canada can borrow an immense amount without an impact on the price level if the government has a believable plan for repayment.

But the government had gone too far in borrowing and spending, without such a plan. People try to get rid of public debt, pushing up prices until its real value is back to what people think the government will repay.

Fiscal and monetary policy are related. The key to untangling the current mess is acknowledging that the government cannot borrow more without causing more inflation.

The COVID boost in bank deposits will be remembered:

Some of Canada’s major banks have pegged excess savings over the past two years – that is, savings above typical levels – at roughly $300-billion.
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But there’s a difference between excess savings and available cash. The latter sum is much smaller. After all, people have put large chunks of their savings to work in various ways. Some of the money has gone toward reducing non-mortgage debt, some toward homes that have soared in price, and some toward stocks that, until recently, were also riding a dizzying rally.

Where the leftover money will be spent, and how quickly, is anyone’s guess. The Bank of Canada estimates that $40-billion in excess savings will be spent by the end of 2024, but doesn’t attach much confidence to that forecast. There is undeniable upside to higher spending, but also risk. For instance, if Canadians splash out in the coming months, that could give an unhelpful boost to inflation, already running at a three-decade high.

But housing continues to cool:

The number of resales rose 1.3 per cent from September to October, according to the Canadian Real Estate Association (CREA). That was the first rise in monthly sales since February, when Canada’s central bank was about to embark on its campaign to slash the supply of cheap money.

At the same time, the national home price index fell 1.2 per cent to $777,200 from September to October after removing seasonal influences, according to CREA. That was the smallest monthly drop since June, though the eighth consecutive month of price declines.

Over all, October’s activity was 15 per cent below the prepandemic monthly average.

It’s tough to make money nowadays! Even the ability to print money ain’t what it used to be:

The Bank of Canada will report its first financial loss in its 87-year history in the coming weeks, a development that risks further denting the central bank’s reputation and inviting more political scrutiny over its purchases of government bonds during the COVID-19 pandemic.

In recent months, the bank’s aggressive push to increase interest rates has created a mismatch on its balance sheet. It is now paying a higher interest rate on its liabilities – mostly deposits by Bay Street banks held at the central bank – than it is earning on its assets. That’s generating net interest losses, which will begin showing up in the bank’s third-quarter financial statements, expected later this month.

The central bank is expecting total losses of between $5-billion and $6-billion over the next few years, spokesperson Paul Badertscher said in an e-mail. “Roughly estimated, the bank should return to positive net interest income sometime in 2024 or 2025,” he added.
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In the spring of 2020, the Bank of Canada began buying massive quantities of government bonds from investors, first to help shore up financial markets, then as part of a QE program aimed at lowering interest rates to stimulate the economy during the pandemic.

It paid for these assets, previously owned by commercial banks and other investors, by creating “settlement balances” – a type of electronic money similar to reserves in other central banking systems. These settlement balances are essentially deposits that belong to commercial banks, and the Bank of Canada pays interest on them equal to its benchmark overnight rate.

These transactions radically transformed the bank’s balance sheet. At first the arrangement was profitable. The bank was bringing in revenue from its expanded bond holdings while only paying 0.25 per cent to commercial banks on their deposits. It made around $4.7-billion in profit over the past two fiscal years, which it sent to the federal government.

However, the calculus changed dramatically as the bank increased its overnight rate to fight inflation. It is now paying an overnight rate of 3.75 per cent on roughly $200-billion worth of settlement balances. Meanwhile, the weighted-average yield of government bonds the bank bought during the pandemic is only 0.65 per cent, according to Mr. Badertscher. That’s a money-losing formula.

And the New York Fed’s Center for Microeconomic Data published the Quarterly Report on Household Debt and Credit:

Total household debt rose by $351 billion, or 2.2 percent, to reach $16.51 billion in the third quarter of 2022, according to the latest Quarterly Report on Household Debt and Credit. Mortgage balances—the largest component of household debt—climbed by $282 billion and stood at $11.67 trillion at the end of September. The 15 percent year-over-year increase in credit card balances marked the largest in more than twenty years. The share of current debt transitioning into delinquency increased for nearly all debt types, following two years of historically low delinquency transitions.

Mortgage balances shown on consumer credit reports increased by $282 billion during the third quarter of 2022 and stood at $11.67 trillion at the end of September, up by $1 trillion since the previous year. Balances on home equity lines of credit (HELOC) increased by $3 billion, the second consecutive quarterly increase after years of declining balances; the outstanding HELOC balance stands at $322 billion. Credit card balances saw a $38 billion increase since the second quarter, a 15% year-over-year increase marked the largest in more than 20 years. Credit card balances are nearing their pre-pandemic levels, after sharp declines in the first year of the pandemic. Auto loan balances increased by $22 billion in the third quarter, continuing the upward trajectory that has been in place since 2011. Other balances, which include retail cards and other consumer loans, increased by $21 billion, following the $25 billion increase last quarter. Offsetting these increases, student loan balances contracted slightly, and now stand at $1.57 trillion, down from the second quarter of 2022. In total, non-housing balances grew by $66 billion.

I expected some entertainment value from the Musk takeover of Twitter, but reality is surpassing expectations!:

Mr. Musk’s team was asked to comb through messages in Twitter’s internal chat platform and make a list of employees who were insubordinate, people briefed on the plan said. They also sorted through employees’ tweets, looking for criticism. Those deemed rule breakers received emails around 1:30 a.m. Pacific time on Tuesday, notifying them that they were fired, according to emails viewed by The Times.

Several Twitter employees who shared news of Mr. Frohnhoefer’s firing in internal chats were cut, said six people familiar with events. They were told that they had been terminated for “violating company policy,” according to emails seen by The Times.

TXPR closed at 547.78, down 1.14% on the day. Volume today was 1.51-million, above the median of the past 21 trading days.

CPD closed at 10.92, down 1.09% on the day. Volume was 57,530, third-lowest of the past 21 trading days.

ZPR closed at 9.18, down 1.40% on the day. Volume was 231,860, well above the median of the past 21 trading days.

Five-year Canada yields were fairly steady at 3.35% today.

There doesn’t appear to be an obvious trigger for this, but the pundits tried:

Wall Street’s main indexes ended lower on Monday, with real estate and discretionary sectors leading broad declines, as investors digested comments from U.S. Federal Reserve officials about plans for interest rate hikes and looked for next catalysts after last week’s big stock market rally. Canada’s main stock index also closed down, pulling back from its highest level in more than 11 weeks, as lower oil prices weighed on energy shares.

Losses accelerated toward the end of the up-and-down session, with focus turning to Tuesday’s U.S. producer price index report and what it may say about the inflation picture.

Earlier on Monday, Fed Vice Chair Lael Brainard signaled that the central bank would will likely soon slow its interest rates hikes. Her comments somewhat buoyed sentiment for equities that had been dampened after Federal Reserve Gov. Christopher Waller on Sunday said the Fed may consider slowing the pace of increases at its next meeting but that should not be seen as a “softening” in its commitment to lower inflation.

The New York Fed published the Survey of Consumer Expectations:

Median one- and three-year-ahead inflation expectations increased to 5.9 percent and 3.1 percent from 5.4 percent and 2.9 percent, respectively. The median five-year-ahead inflation expectations, meanwhile, rose by 0.2 percentage point to 2.4 percent. Household income growth expectations touched a series high of 4.3 percent, up from 3.5 percent in September, while households’ expectations about credit access one year from now worsened. Median home price growth expectations were unchanged at 2.0 percent, the measure’s lowest reading since July 2020. Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased to its highest reading since April 2020 of 42.9 percent.

But, you might well ask, what’s that got to do with the price of lettuce?:

The cost of lettuce is spiking amid a shortage that’s leading some restaurants to temporarily stop offering leafy greens on their menus.

Wholesale produce distributors say demand is exceeding supply of iceberg and romaine lettuce, and pricing pressures are expected to continue throughout the month.

Restaurants Canada COO Kelly Higginson said a major lettuce-growing area in California was hit by some kind of virus, after a year that’s already been rife with difficulties thanks to heat and drought.
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That’s because not only is lettuce in short supply, but the available product has in some cases quadrupled in price, she said.