For all you Canadians and investors interested in the Canadian markets this a great blog to read. Titled The Greater Fool founder Garth Turner has some outlooks that I agree with and find interesting. Here is his latest post on the Canadian markets after the election on Monday.
Click here to visit his website for regular updates worth reading.
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Who knew our new prime minister would stimulate investments as much as he does females? So just imagine if you’re a chick with a balanced and diversified portfolio. Awesome. Now you can economically justify that new screensaver!
It’s been four days since the red tide washed in, during which time Canadian markets have swollen like a patriotic beaver. The TSX popped, bond yields plumped and all that Trudeau stimulus played a role in keeping the Bank of Canada rate from going flaccid on us again. But fewer things have erupted more than those unloved preferred shares.
As you know, prefs are a hybrid between stocks and bonds. Like stocks, they pay dividends (while bonds pay interest). Like bonds, the payments are fixed. They’re generally less volatile than common stocks, and their dividends are safer, since a company must always pay pref owners before stockholders. Meanwhile the income has been great – currently about 5%, which beats the poop out of a GIC. Plus you can claim the dividend tax credit, which pushes the effective yield even higher.
So preferreds are considered ‘fixed-income’ assets, kinda like sexed-up bonds. They normally form about half of the 40% of safe stuff in a balanced portfolio, and add mightily to the yield investors collect.
Alas, but pre-Trudeau, preferred shares disappointed many people by losing capital value (the dividend stream continued undiminished). One of the most popular exchange-traded funds holding prefs, called CPD, tumbled 10%, then 14% and finally almost 20%. This caused unabated wailing, moaning and blubbering among investors who think every asset they own should go up at the same time, regardless of why they bought it (like collecting sweet income).
Why did this happen?
First, the economy has sucked fairly hard, thanks to the collapse in commodity prices and especially oil. That deflationary push dropped Government of Canada bond yields, particularly on the five-year notes. They form the benchmark for preferred shares, two-thirds of which are now ‘rate reset’ which means their performance is tied to bond yields.
Second, the poodles at the Bank of Canada cut the key national rate twice this year, once in January and again in July, which helped to crater things further, sending preferred values lower. So securities owning prefs, like CPD, took the hit.
This, you might recall, was when I wrote about preferreds, said they were stupid cheap and you might wish to buy some – especially since it’s evident US rates will be rising in the months ahead, and our bond market follows theirs 95% of the time. When rates rise, rate-reset preferreds bloat right along with them.
Well, enter the just-not-ready, nice-hair-though kid with his crazy ideas about spending up a storm, stimulating everything in sight and creating a majority selfie administration. Now look what happened to CPD.
As you can see, anyone smart enough to buy good assets when they’re unwanted has reaped a reward already – a capital gain of over 10% in the last few days, while enjoying a 5.11% annual distribution. Why has this happened and what comes next?
Things are getting better for the economy in general. Positive growth in June and July appears to be continuing into the autumn, meaning that much-publicized recession is history. (Robust consumer sales data out on Thursday was the latest indicator.) Second, there’s been some improvement in commodity prices and the value of a barrel of oil. Crude tumbled through the $40 mark in late August when the Chinese whacked us and has since moved into the $45-50 range. Bond yields have gone along for the ride, up about a quarter of a point (a big deal), fueling the preferred recovery.
Then, as I mentioned, preferred shares got too cheap to ignore. Investors looking for great long-term assets paying handsomely just to own them (some as much as 8%) couldn’t resist. Several financial advisory outlets (including this pathetic blog) shone a light on prefs, and the bottom was suddenly in. Finally, of course, there’s the Justin factor.
The majority Liberal government which arrived Monday night guarantees that Canada is about to enshrine stimulation. Ottawa will be spending at least $10 billion more a year than it takes in, throwing five billion annually at shovel-ready infrastructure projects, showering kid-laden families with money to spend on Netflix and iPhones, and (we’re told) trimming taxes for middle-class families – plus doing everything from restoring CBC funding (and you wondered why Justin got such great coverage) to shoveling cash into health care.
With all that spending, the big bank doesn’t need to goose things with cheaper rates. A lack of goosing, apparently, will be the least of our concerns. What a relief.
So, there ya go. Stand up for Canada.