The chase by Frances Horodelski:
It’s tough out there. The oil trade is falling apart (and taking the Canadian banks and the Canadian dollar with it) as the amount of oil sloshing around is at record levels (see below for more oil details). All 59 components of the TSX energy sub-sector were lower (led by Paramount down 23%, with Enbridge taking the most points off the index) and all 40 components of the S&P 500 energy sub-sector were also lower (led by Consol Energy down 15%). This morning we have a modest respite as oil prices are bouncing very modestly but global equity markets are lower everywhere. Some will cite weak Chinese export (-3.7%) and import (-5.6%) data although the latter was better than expected. But these are momentum trades now combined with end of year tax loss selling and positioning (don’t under estimate the impact ETFs are having on this).
Japan reported better than expected Q3 GDP numbers (revised to positive from negative) although as always with these things details and math are important to know as capital spending, for example, has been rising at the fastest pace in eight years (according to Scotia Capital) and that number was known before today’s revision. All of these tick-by-tick numbers are likely noise. Global growth is soft but generally positive. The U.S. growth trajectory is soft compared to previous cycles, but trending okay. The Fed, unless something really crazy happens, will be raising rates next week. The unknowable knock-on-effects from the end to ZIRP against a back ground of central bank divergence will make for tricky trading – and investing too.
Some energy details from Yardeni Research this morning include this nugget “a cartel that can’t control the production of its members isn’t a cartel.” True enough. According to Oil Market Intelligence OPEC production in October was a near record pace of 38.8mbpd with Non-OPEC at 57.2mbpd. The former figure is a bit of an aberration and the estimated average for the year is closer to 32-33mbd. Although consumption is rising (+2.2% to a record high in October), it isn’t enough to cause a supply constraint. And of course, Iran is coming. Oil producers have seen a huge decline in revenues – about 56% from last year’s peak or $2.1 trillion from last year’s annualized rate of $3.8 trillion. Yikes. We’ll be talking energy ratings with S&P’s analyst on the liquidity constraints for many Canadian companies – who is in good shape and who isn’t.
Today, the stories will focus on takeovers. For example, CP Rail will be holding a conference call for investors to highlight their arguments for its multi-billion dollar offer for Norfolk Southern and to refute NSC’s charges of the offer being grossly inadequate and substantially undervaluing the company. The WSJ is reporting that CP will be revising its bid offering less cash and more stock – but the cash will come sooner (May 2016) and with a temporary trust structure until the regulatory bodies approve a merger (which would take upwards of two years). Note that NSC has hired two former Surface Transportation Board officials who advise that approval is “highly unlikely to be approved.” The new offer (based on unnamed sources) is worth $91.71 U.S. (based on last night’s closes) versus $92.13 for the previous offer. Conference call begins at 9 am.
In other takeover activity (which is running at record levels), note that Staples is going to fight with the FTC over its denial of approval for its takeover of Office Depot. Nasdaq to buy Canada’s Chi-X for an undisclosed amount.
In corporate news, Home Capital Group announced a reduction in its long term ROE target to 16%+ versus 20%+ previously although its earnings growth range 8-13%) is unchanged. The company argues that its substantial equity cushion is the reason for the ROE target reduction. The Street has been modelling something close to 17% for next year and the consensus earnings growth for 2015-2017 is 2%, 5% and 8%, respectively. In Canadian economics, housing starts came in better than expected at 211,900 annualized. Housing remains a strong point.
The problem with market routs is that we all tend to get paralyzed. The babies get thrown out with the bathwater (join us for that discussion at 9 am ET this morning). I think 2016 will be a challenging year but it doesn’t mean that there aren’t some good companies that should be bought at good prices. Have a shopping list, check your numbers and make sure that you step up when the gift is given. But a plan helps.
If you’ve been using the TFSA to save, please visit http://bnn.ca for a review of the proposed changes by the new Liberal government on this savings plan which include a roll-back to $5500 for an annual contribution (from $10,000) effective January 1 2016. Contributions will be indexed to inflation. We also have an interview with Finance Minister Bill Morneau for a full discussion.
Finally, the governor of the Bank of Canada will be giving a speech today. Might be useful to get a sense of his thoughts for 2016 although the topic is on the evolution of unconventional monetary policy.
Right now the Dow futures are now some 186 points. The opening might be miserable – 2064 could be one place to watch for the S&P 500. For the S&P/TSX the 13000 level isn’t far away but may be important.
Head’s up trading.
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