{"id":45272,"date":"2023-05-15T19:45:17","date_gmt":"2023-05-16T00:45:17","guid":{"rendered":"https:\/\/prefblog.com\/?p=45272"},"modified":"2023-05-15T19:45:17","modified_gmt":"2023-05-16T00:45:17","slug":"may-15-2023","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=45272","title":{"rendered":"May 15, 2023"},"content":{"rendered":"

On May 11<\/a> I unwisely remarked on the “fine price” CI got for a chunk of its US operation. Oops! I forgot that when the Bay Street Smiley Boys start bragging, it’s time to run<\/a>:<\/p>\n

In a regulatory filing Thursday, CI said that if a future IPO doesn\u2019t meet certain conditions, including size, the company has guaranteed the buyers of the preferred shares a new, higher value for them.<\/p>\n

That value increases over time, giving CI an incentive to take the U.S. wealth business public sooner. In three years, the new \u201cstated\u201d price of the preferred shares will jump to 150 per cent of their original price \u2013 or a total of $2-billion. It will continue to grow after that, and in six years, it will be 225 per cent of the original price, or $3-billion.<\/p>\n

That means the new capital could cost CI at least 14 per cent annually, each year it remains in place.<\/p>\n

The buyers of the debt also have the right to force an IPO or sale of the U.S. wealth business within five years and nine months after the closing.<\/p><\/blockquote>\n

So, people are running<\/a>:<\/p>\n

As Thursday\u2019s trading continued, however, the share price began to slide, and it collapsed Friday to nearly the predeal levels. The swoon in CI\u2019s share price has left its shares shockingly cheap: According to S&P Global Market Intelligence, the stock trades at less than four times the estimate of the company\u2019s next 12 months\u2019 earnings per share, and a little more than six times its EBITDA, or earnings before interest, taxes, depreciation and amortization.<\/p><\/blockquote>\n

I don’t have an interest, even at three times EBITDA. When a company starts crap like this, you know their back’s up against the wall.<\/p>\n

Real estate has started bubbling again<\/a>:<\/p>\n

National home sales jumped by 11.3 per cent between March and April as the real estate market picked up again, but supply remained at a 20 year-low, the Canadian Real Estate Association said Monday.<\/p>\n

Seasonally-adjusted sales for the month totalled 38,164 compared with 34,277 in March.<\/p>\n

The actual number of homes sold last month amounted to 44,059, down 19.5 per cent from a year prior.<\/p>\n

The year-over-year sales decline was markedly smaller than the drops reported in recent months, the association said, attributing the return of sales to home prices, which many feel have bottomed out in recent months as interest rates climbed eight times over the last year.
\n…<\/b>
\nThose who waded into the market last month found last month\u2019s seasonally-adjusted average price hit $695,887, up 5.7 per cent from March.<\/p>\n

The actual average home price was roughly $716,000 in April, down 3.9 per cent from April 2022, but up $103,500 from January 2023.<\/p>\n

CREA attributed the gains seen since January to \u201coutsized sales rebounds\u201d in the Greater Toronto Area (GTA) and B.C.\u2019s Lower Mainland, which tend to be hot markets.<\/p>\n

Excluding the GTA and Greater Vancouver from the calculation cuts more than $144,000 from the actual national average price, CREA said.<\/p><\/blockquote>\n

The BoC has released<\/a> a Staff Discussion Paper by Toni Gravelle, Ron Morrow and Jonathan Witmer titled (deep breath) Reviewing Canada\u2019s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?<\/a>:<\/p>\n

At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank’s quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation.
\n…<\/b>
\nEngert, Gravelle and Howard (2008) describe the corridor system used by the Bank.<\/p>\n

In a corridor system, the central bank needs to carefully judge the amount reserves needed to incentivize trading near its target for the overnight interest rate. This can be seen in Figure 1 (panel a), where the demand curve is inelastic around the target interest rate. That is, relatively small changes in the supply of reserves (or small shifts in the demand curve, holding supply constant) can cause a large change in the overnight market rate, given the steepness of the demand curve near the target interest rate. Because of this, the effective implementation of a corridor system (i.e., overnight rate trading near target) requires a central bank to have a good ability to forecast demand and the capacity to adjust the supply of reserves in a precise and timely way. The central bank adjusts the supply of reserves in a corridor system through its fine-tuning operations. In Canada, before the COVID-19 pandemic, the amount of settlement balances needed to keep the overnight market rate near the target rate was quite low, roughly $250 million.<\/p>\n

In a floor system, the overnight market rate trades at or close to the central bank\u2019s deposit rate (the interest rate for deposited reserves at the central bank). This is because the supply of reserves is more than enough to satisfy financial institutions\u2019 demand for these reserves. Figure 1 (panel b) illustrates how a sufficiently large supply of reserves will cross the lower, elastic part of the demand curve, causing the overnight market rate to be equal to the deposit rate. Financial institutions that participate in the wholesale payments system (i.e., they can earn the deposit rate on their excess reserves) lend out their excess reserves, which lowers the overnight market rate until it is at or near the deposit rate\u2014the so-called floor of the corridor.2 The simple demand curve above assumes that access to the central bank deposit facility is broad and that overnight trading is unsecured. We explain in section 4.1 how these factors may result in a leaky floor where the overnight market rate trades below the deposit rate.
\n…<\/b>
\nBindseil (2016) and others have advanced several criteria for evaluating different operational frameworks
\nfor monetary policy. Drawing on this work, we believe the following criteria capture the key characteristics
\nthat are desirable in an operational framework:<\/p>\n