Month: April 2020

Wow, no illustrations today! I can remember the halcyon days of my youth when that was normal!

The US jobs number recorded a big whoopsy today:

The longest stretch of job creation in American history came to a halt last month, the Labor Department reported Friday, another reflection of the coronavirus pandemic that has brought the economy to a virtual standstill.

Compared with the astounding numbers of people recently applying for unemployment benefits — nearly 10 million in the previous two weeks — the figure announced Friday was less striking: a loss of 701,000 jobs. But the data was mostly collected in the first half of the month, before stay-at-home orders began to cover much of the nation. With that, what had been a drip-drip-drip of job losses turned into a deluge.
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The decline in employment last month represents the biggest monthly drop since the depths of the Great Recession in 2008-9. It was paced by a net loss of 459,000 jobs in the leisure and hospitality sector.

The Saudis are attempting to expand the oil cartel:

Saudi Arabia is calling on Canada and other countries to participate in oil-output cuts to help halt the slide in global crude prices that is taking a heavy toll on energy-producing economies already struggling with the COVID-19 crisis.

The official Saudi Press Agency reported that the kingdom urged members of the Organization of Petroleum Exporting Countries, Russia and other countries to seek an agreement to “restore equilibrium” in the oil market. Crude prices shot up 25 per cent on Thursday in response to that and to a comment from U.S. President Donald Trump that Saudi Arabia and Russia could be near a deal to end a price war that has flooded markets around the world.

A source within OPEC+, which comprises the cartel’s membership plus Russia, Mexico and other allied producers, said non-affiliated countries such as Canada and Brazil would need to join in any co-ordinated output cuts.

In the Credit Crunch, there were reports of mortgage servicers being reluctant to give anyone any kind of break on their mortgage, because they were at the end of a long ownership chain, contractually obliged to be tough on deadbeats unless they received instructions from somebody who needed to get instructions … it appears that the US has learned something from that:

The federal financial institution regulatory agencies and the state financial regulators issued a joint policy statement providing needed regulatory flexibility to enable mortgage servicers to work with struggling consumers affected by the Coronavirus Disease (referred to as COVID-19) emergency. The actions announced today by the agencies inform servicers of the agencies’ flexible supervisory and enforcement approach during the COVID-19 pandemic regarding certain communications to consumers required by the mortgage servicing rules. The policy statement and guidance issued today will facilitate mortgage servicers’ ability to place consumers in short-term payment forbearance programs such as the one established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Under the CARES Act, borrowers in a federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID-19 pandemic, may request forbearance by making a request to their mortgage servicer and affirming that they are experiencing a financial hardship during the COVID–19 pandemic. In response, servicers must provide a CARES Act forbearance, that allows borrowers to defer their mortgage payments for up to 180-days and possibly longer.

The policy statement clarifies that the agencies do not intend to take supervisory or enforcement action against mortgage servicers for delays in sending certain early intervention and loss mitigation notices and taking certain actions relating to loss mitigation set out in the mortgage servicing rules, provided that servicers are making good faith efforts to provide these notices and take these actions within a reasonable time.

Cirque de Soliel has been declared in default by S&P:

• We believe Montreal-based theatrical and live entertainment company Cirque Du Soleil Group did not make principal and interest payments due March 31 on its first-lien credit facility, and did not make the interest payment due March 31 on its second-lien credit facility, which constitutes a default under our criteria.
• S&P Global Ratings is therefore lowering the issuer credit rating on the company to ‘D’ from ‘CCC-‘.
• At the same time, we are lowering the issue-level rating on the first-lien debt to ‘D’ from ‘CCC’ to reflect the payment default. We are also lowering the rating on the second-lien debt to ‘D’ from ‘C’ to reflect the payment default.

But the show must go on:

Revenue at Cirque has plummeted to zero as all its 44 shows crashed to a sudden halt. Some 4,700 employees have been laid off. Cash is tight and about US$1-billion of debt sits on the balance sheet.

Still, Cirque’s existence is not in jeopardy, he says. He sees the firm as a global icon with nearly-unmatched ability to draw paying customers, a cultural cornerstone in Quebec that the province’s institutional power brokers will not abandon. Besides, he says, it’s profitable in normal times even if it faces a massive liquidity crunch now.

“We are one of the most amazing brands in the world,” Mr. Lamarre says. “No investor with a straight mind will let it go.”

Negotiations are now under way between shareholders, notably Texas-based private equity firm TPG Capital and pension fund giant Caisse de dépôt et placement du Québec, on a financial restructuring that will satisfy creditors and find a way out. The Quebec government is involved through its investment arm. A bankruptcy protection filing remains a possibility, Mr. Lamarre says. But the firm is also hoping it can soon reopen shows in carefully chosen markets as the pandemic wanes and get revenue flowing again.

It was a good day for oil:

Canada’s main stock index rose on Thursday, led by energy shares as crude prices posted their biggest-one day gains on record on Thursday.

The Toronto Stock Exchange’s S&P/TSX Composite index finished unofficially up 221.39 points, or 1.72%, at 13,097.76.

Nine of the index’s 11 major sectors were higher, led by the energy sector, which climbed 9.3%.
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Crude prices posted their biggest-one day gains on record on Thursday after President Donald Trump said he expects Russia and Saudi Arabia to announce a major oil production cut, and Saudi state media said the kingdom was calling an emergency meeting of producers to deal with the market turmoil.

Trump said he had spoken to Saudi Crown Prince Mohammed bin Salman, and expects Saudi Arabia and Russia to cut oil output by as much as 10 million to 15 million barrels, as the two countries signaled willingness to make a deal.
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Brent soared as much as 47% during the session, its highest intraday percentage gain ever. WTI jumped as much as 35%, its second highest ever, after an intraday gain of 36% on March 19.

Oil prices pulled back from those highs as traders questioned whether Russia and Saudi Arabia could actually agree on such a big production cut.

A senior administration official told Reuters the United States does not know formal details of Saudi Arabian and Russian plans to reduce oil supply yet and will not ask U.S. domestic oil producers to chip in with their own cuts.

An article in the Globe is titled Why Canada’s banks have no plans to suspend dividends despite a global trend of cuts which has been a hot topic lately:

Canadian bank CEOs insist they will keep paying dividends, even as banks around the world have axed payouts under pressure from regulators to preserve capital within the banking system.
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On Wednesday, the United Kingdom’s largest banks bowed to pressure from Britain’s financial regulator and suspended dividend payments. Several large European Banks, including Italy’s UniCredit and Dutch bank ING Group have also halted after a request from the European Banking Authority, and Mexico’s financial regulator followed suit on Thursday, saying that “it’s impossible to estimate how deep and how long the economic effects of the pandemic will be.”

Canada’s Office of the Superintendent of Financial Institutions, has told domestic banks not to increase dividends or buy back shares, but has made no effort to reduce payouts. And so far, bank executives are telling investors not to worry.
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Banks are facing significant pressure from an anticipated spike in loan losses in the long run, as well as widespread demand from companies to draw down funds on credit lines immediately. But bankers and regulators are keenly aware that bank stocks are widely held by millions of Canadians, some of whom depend on them as retirement income. Some worry that cutting off dividends could worsen the economic hardship from the crisis.

“About 77 [per cent] to 80 per cent of our shareholders are Canadian, either institutional or retail, so the construct of our shareholder base is very different than would be a European bank,” said Bank of Nova Scotia CEO Brian Porter on Tuesday. Mr. Porter and Bank of Montreal CEO Darryl White both said they have no plans to slash their banks’ dividends.
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And Canadian banks are in a different position politically, after some British banks needed government bailouts in the last crisis, said Laurence Booth, professor of finance at the University of Toronto’s Rotman School of Management.

“The Canadian banks do not have the bad reputation that the European and the U.K. banks have got, so it’s not like the government can lean on them and say, ‘Look, we’ve bailed you out, you’re bad guys, do what we say, you’ve got to rebuild your reputation,'” Mr. Booth said. “So that moral suasion component is missing in Canada.”

For what it’s worth, here was my response to a client inquiry:

I don’t think a governmentally requested suspension of bank dividends is in the cards.

Firstly, I don’t really see a good reason for it.

Secondly, bank stocks are the bedrock of a great many retirement portfolios and conniving at a suspension of the income would bring the government a great deal of grief.

Thirdly, the TSX/S&P index is about 32% Financials (see LINK ) compared to about 20% for the FTSE (see LINK ), a paltry 1.6% (!) in NZ, and 9.4% banks in Europe (with an additional 5.9% in insurance; see LINK ). You have probably read some of my rants about the harmful effects on Canada of having such a bloated financial sector … there’s a global comparison for you! And in this instance, bank dividends are ‘too big to fail’!

I’m not going to say it won’t ever happen. But I will say that we are not even close to the point where the possibility of mass suspension needs to be taken seriously.

I forgot to give him the link for the New Zealand data; such is life. I believe that in New Zealand they settle payments with sacks of wool and quarts of milk (“That’ll be three sacks and two quarts, ma’am”), but I may be wrong on that.

TXPR closed at 463.03, up 1.07% on the day. Volume today was 3.26-million, low in the context of the past thirty days but highest since March 26.

CPD closed at 9.21, up 2.22% on the day. Volume was 93,827, second-lowest of the past 30 trading days and only slightly more than the low set on April 1.

ZPR closed at 7.25, up 2.84% on the day. Volume of 364,785 was fourth-lowest of the past 30 trading days.

Five-year Canada yields were up 4bp to 0.58% today.

Well, now that the horrors of March are done with, I’m sure we’re all very happy to start off a bright and shiny new … well, never mind:

Faced with grim new projections of the potential scale and economic ramifications of the coronavirus pandemic, investors dumped stocks on Wednesday. The S&P 500 fell more than 4 percent, bringing its decline over two days to 6 percent.

The drop, which followed a sell-off in Europe and Asia, came after President Trump said at a news conference on Tuesday that the United States would face a “very, very painful two weeks.” U.S. government scientists projected that the outbreak could kill up to 240,000 people in the country. On Wednesday, the United Nations warned of “enhanced instability, enhanced unrest and enhanced conflict.”
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Airlines were the worst performing sector in the S&P 500 as government data showed a staggering drop in passenger traffic through airports. United Airlines fell 19 percent, and American Airlines dropped 12 percent.

Cruise operator Carnival was the worst performing stock in the S&P 500, with a decline of 33 percent, while rival Royal Caribbean fell 20 percent.

And in Canada:

The S&P/TSX Composite Index fell about 22 per cent in the first quarter, its biggest decline since 2008, but had showed some signs of steadying in recent days.

On Wednesday, the index closed down 3.8 per cent at 12,876.37, in a broad-based selloff that left only the gold sector with gains, as investors fled to the perceived safety of assets such as bullion, bonds and the U.S. dollar. Canadian banks were down about 5 per cent, with shares of security software company BlackBerry Ltd falling nearly 18 per cent after dismal quarterly results.
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Automakers also reported sharp drops in U.S. sales for March, including a 43% plunge for Hyundai. Mortgage applications tumbled 24% from year-ago levels as open houses are all but shut down.
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On this side of the border, the IHS Markit Canada Manufacturing Purchasing Managers’ index (PMI) fell to a seasonally adjusted 46.1 in March, the lowest in at least nine years. It indicated a contraction in factory activity.

The rugged free-marketers of Texas, well-known for their aversion to anything that smacks of socialism are clamouring for production quotas:

The U.S. shale industry is more worried about its future than ever. The unprecedented demand from the Texan companies to curtail production says as much. They have good reason to be fearful, because this downturn is not like the last one. Of course, prices will reverse course once economies reopen, but anyone betting on a quick leap to US$65 oil – the price before the COVID-19 crisis started – might be in for a rude shock.

There are very interesting real-estate negotiations going on:

Commercial property landlords are balking at requests for rent relief from big companies, saying they need to focus on helping vulnerable smaller tenants such as independent restaurants, clothing stores and barbershops that may not survive the huge losses from the coronavirus pandemic.
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But many commercial landlords object strongly to those sort of requests from large tenants. “When a company that is well capitalized that has a legal obligation to pay rent, doesn’t pay rent, I think it is bad behaviour,” said Michael Cooper, chief executive with Dream Office REIT, which owns 32 office properties, mostly in Toronto.

“They hurt landlords’ ability to be able to help people that need it the most. If companies have the money, they have the legal obligation,” Mr. Cooper said. “If they don’t pay the rent, they are taking advantage of people in a very dire situation and that really is unseemly.”

Canadian Tire and other big names are able to flex their muscle because they are considered top tenants that can withstand economic downturns. Their tenancy often makes it easier for property owners to get lower mortgage rates and they can make a shopping centre more desirable because they draw more traffic to the property.

In return, landlords often ask for less rent and give into their demands, which they do not do with smaller businesses.

Speaking of Canadian Tire, they got downgraded by S&P yesterday:

• S&P Global Ratings’ economists believe that due to the COVID-19 pandemic, a global and Canadian recession in 2020 is likely and, therefore, we expect consumer discretionary spending to slow.
• As a result, at Toronto-based general merchandiser Canadian Tire Corp Ltd. (CTC), the COVID-19 pandemic is directly responsible for current store closures (except Canadian Tire Retail where store hours are curtailed) and government-mandated social distancing, which we believe will negatively affect revenue and EBITDA.
• Therefore, S&P Global Ratings lowered its long-term issuer and issue-level ratings on CTC to ‘BBB’ from ‘BBB+’. At the same time, it affirmed the ‘A-2’ commercial paper rating on the company.
• We also lowered our issuer credit rating on CT Real Estate Investment Trust (REIT) to ‘BBB’ from ‘BBB+’.
• Finally, we forecast the company’s leverage to deteriorate close to 3.5x for the next 18-24 months, and have revised our financial risk profile on CTC to significant from intermediate.
• The negative outlook reflects our expectation that, despite management’s steps to reduce costs and protect its balance sheet, there is increased risk that the company’s debt-to-EBITDA deteriorates above 3.5x, which we consider weak for our ratings, over the next 18-24 months.

But everybody with a business should be going after that government lolly:

Canada’s banks are preparing to start offering government-backed loans to small businesses as soon as next week amid a flood of requests for relief from business owners.

Banks have been rushing to roll out a program by which the federal government will guarantee loans of up to $40,000 interest-free until the end of 2022.
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The federal government has promised $25-billion to guarantee the loans, removing the risk for banks. One quarter of each loan, up to $10,000, will be forgiven if businesses repay their balance before Dec. 31, 2022. If the loans aren’t repaid by that date, they can be converted into three-year term loans charging 5-per-cent interest, according to a CIBC statement.

TXPR closed at 458.15, down 2.25% on the day. Volume today was 2.25-million, lowest of the past thirty days, just a little lower than March 5.

CPD closed at 9.01, down 3.84% on the day. Volume was 89,774, lowest of the past 30 trading days and significantly lower than the previous low of March 5.

ZPR closed at 7.05, down 3.29% on the day. Volume of 203,971 was lowest of the past 30 trading days much lower than second place March 5.

Five-year Canada yields were down 5bp at 0.54% today.

PerpetualDiscounts now yield 6.92%, equivalent to 9.00% interest (!) at the standard equivalency factor of 1.3x. Long corporates continue to yield 3.87%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 515bp from the 500bp reported March 25. But we’re still way over the old record set 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.

Assiduous Reader Carrie will be pleased to note that the “Premium” indices are no longer populated!