Canada's New Energy 
The chase by Frances Horodelski:

I believe, I hope not naively, that the world is a better place than the events in Paris on Fridaynight. Let’s start the week with solemnity but hope for peace and light to overcome.

After a nasty week (S&P down 3.6%, TSX down 3.5%, Nasdaq down 4.3% while oil dropped 6%), the markets are stable in Europe and the U.S. futures are modestly higher. Bond prices are a little higher. Most commodities are a little stronger while currencies (except the U.S. dollar) are weak-ish. Despite concerns that the after-close announcement of the doubling of margin requirements in China would sink stocks there, the Shenzhen popped 2% The Hang Seng that trades as much with the west as the east did close 1.72% lower.

This week on BNN will be the week-long look at Canada’s New Energy beginning today. Watch for special items all week including a focus on the changes in Fort McMurray.

Here’s the results of a peripatetic walk through the blogs and the papers on the weekend. First, according to ModernGraham.com, the most undervalued of Dow stocks based on analysis of “intrinsic value” are Wal-Mart (70% of that value), Apple (45%), Travelers (43.5%) and IBM (39%). The most expensive stock: Merck (666% of intrinsic value). For those watching, with the Fed, the economic data points that justify a December rate hike, here are a few – November jobs number was the highest in a year and 100,000 jobs about the six year average, U.S. auto sales are rising at the quickest pace in a decade, housing markets are growing at the fastest pace in 15 years and the 2.5% rise in earnings is at a six year high. Rising non-market risk events could result in a “blink” but the fundamentals don’t justify it. For the stock market, from oversold to overbought to oversold again, here are some points. The ratio of highs to lows is now moving back to levels seen when the market was oversold in August/September. And the number of markets trading above their respective 200-day moving averages dropped to zero. Some use these as decent “oversold indicators”. But if you want to be bearish – look at charts of art sales (off the charts), U.S. corporate debt levels (2x levels prior to the financial crisis), corporate spreads are widening. And finally, from a New York Times article on oil (which totally erred on the inventory levels), a market pundit noted “the market isn’t pricing in any risk, geopolitical risk, for oil.”

From Barron’s (which yells “Trump is wrong” on its cover), items of note: 70% of Chinese companies missed earnings expectations in the most recent quarter (versus 75% beating in North America); Bonds bulls are at an anemic 58% (some technicians are saying bonds should be bought), the biggest big board shorts are in General Electric, Corning and Synchrony (the first and third of these connected through a tender offer), Tempur Sealy (highlighted bullishly in the magazine) has 10,000 stock keeping units (SKUs). 10,000! Mattresses! For every 1% move in interest rates, Bank of America revenue changes by $4.5 billion (or 5%). Other bullish stories include Emerson and Genesee & Wyoming Railroad.

This week, items of note include the continuation of retail earnings (Home Depot, Walmart, Lowes in the U.S., Loblaws and Metro in Canada as well as Canadian retail sales at the end of the week), IPO prices for hot deals like Square and Match.com (Wednesday), Kelloggs meets with analysts on Friday (I like the new Special K commercial), Cisco’s new CEO meets with analysts on Thursday), CPR’s President and COO speaks at a conference in Toronto on Tuesday (and BNN will be speaking with him too), The annual Robin Hood conference starts today in New York – Bill Ackman and Jamie Dimon will be there. Today, we’ll have an indepth look at 13F activity. For reference, there were lots of sales and lots of purchases in Valeant during the quarter – some stand outs include initiation of positions at Teachers, Arrow Street, Point 72 and Iguana Health. Sequoia Fund added 2 million shares. For Suncor, William Blair Investment Management initiated a position with 8.3 million shares and Findlay Park almost tripled its position to 6.1 million from 2.1 million shares. We’ll speak to the CEO of DHX Media. We’ll talk energy, we’ll speak to a trillion dollar titan and get lots of Canadian perspective and ideas. Big hotel deal today with Marriott buying Starwood for more than $12 billion. The week begins.

Finally, don’t trust what you read and check the facts. There was a Facebook post circling the globe about the nasty events that closed last week – and nasty it was – Paris, Beirut, Baghdad, Mexico, Japan (the latter were earthquakes). But the conclusion was that 115,000 people had died in all these horrible events. Each life lost is precious – don’t worsen that loss by over-estimating death tolls. Heartless.

Short seller accuses drug giant Valeant of fraud

Price of Valeant shares swelled by 2,631 per cent before plunge wiped out $50 billion in value

 

The share-price meltdown at Montreal-based Valeant Pharmaceuticals International Inc. serves at least one useful purpose. It’s a primer on stocks to avoid.

Valeant, the largest Canadian drugmaker, has been a stock-market darling, its shares skyrocketing in price by 2,631 per cent between 2008 and August of this year.

But the stock has plummeted since reaching its peak value of $263.52 (U.S.) per share in August to its current $111.51. That’s a two-thirds plunge, wiping out close to $50 billion in shareholder value.

No fewer than six U.S. government probes are underway into alleged Valeant price-gouging; unusual accounting and acquisition practices; and alleged bilking of Medicaid, the U.S. program that provides assistance to the poor and elderly.

Valeant stock began to soar after Valeant appointed as its turnaround CEO one J. Michael Pearson, 54, a London, Ont., native and son of a phone installer. Pearson propelled himself from a lower-middle-class upbringing to a 23-year career at management consulting firm McKinsey & Co. Pearson eventually headed McKinsey’s global pharmaceutical practice.

A troubled Valeant, then based in California, was so impressed with Pearson, its McKinsey consultant, that it hired him as CEO in 2008. Pearson’s business plan at Valeant hasn’t changed since Day One. 

 
He cut the company’s R&D budget to less than 5 per cent of revenues. (Pfizer Inc., by comparison, spends the industry norm of 14 per cent.) He began buying scores of small, run-down drugmakers that possessed one or two potentially lucrative drugs in their otherwise dustgathering product lines.

Quebec-based Valeant’s business model of buying drugmakers and hiking prices on their products created unsustainable growth, David Olive writes.

Pearson immediately hiked the prices of those selected drugs by as much as 500 per cent, while laying off many of the acquired companies’ employees.

In 2010, Pearson engineered a reverse takeover of Montreal-based Biovail Corp. Valeant inherited Biovail’s lingering legal woes, including the recent U.S. probe into possible Medicaid fraud. But in acquiring Biovail, Pearson was able to domicile Valeant outside the U.S., in a corporate-friendly Canada where Valeant’s tax rate dropped to 5 per cent.

Valeant isn’t alone in the drug industry’s relatively new practice of imposing outrageous price hikes. But, as the New York Times recently noted, “the company leading the pack in drug-price increases is Canada-based Valeant.” Fair enough. Between 2011 and 2015, Valeant raised prices on its drugs by 20 per cent at least 122 times.

Why haven’t prospective buyers balked at Valeant’s apparent pricegouging? Some have.

Express Scripts and CVS Health, the two biggest U.S. drug benefit managers, said this year that they would no longer pay for drugs whose sticker shock was not accompanied by any improvement. That describes most of the products peddled by Valeant, Horizon Pharma, Mallinckrodt PLC and other firms in this unattractive niche.

Pearson has snapped up obscure drugs that are used by small patient populations, are life-saving drugs and for which there are few if any alternatives. On Feb. 10, for instance, Valeant bought the rights to two life-saving heart drugs, Nitropress and Isuprel. That same day, Valeant hiked their prices by 525 per cent and 212 per cent, respectively, without doing a thing to improve their efficacy.

These two drugs have been around for decades. Isuprel is used in treating heart-rhythm abnormalities, and Nitropress is administered in emergencies when a patient’s blood pressure has increased to lifethreatening levels. Doctors insist there are few reliable alternatives to these drugs.

But baked into the Valeant business model are dangers. Acquisition targets with hidden gems might dry up. And eventually there could be pushback on spectacular pricehikes, from the U.S. medical community and consumer-rights regulators such as the U.S. Federal Trade Commission.

That backlash has indeed begun, with several drugmakers this summer rolling back triple-digit price hikes within days of trying to impose them.

Where does that leave Valeant, whose M.O. is to maintain its shareprice momentum purely through nosebleed pricing of highly specialized medications? With financial engineering, claims Citron Research, a short seller based in Beverly Hills, Calif.

Short sellers have a bias. They are trying to drive down the price of a stock.

That said, the “shorts” are often right in calling out bad corporate actors.

On Oct. 19, Citron accused Valeant of engaging in fraud, saying it has been propping up its reported sales figures by making “phantom sales” to a network of shell companies. That is a commonplace, if dubious, practice known as “channel stuffing.”

Valeant denies the Citron allegations, which Pearson says are “completely untrue.”

Just the same, an already declining Valeant share price fell off a cliff the day Citron’s allegations were released. And there’s plenty more downside risk to Valeant’s current $111.51 share price, given the U.S. government probes and the likelihood of class-action lawsuits against Valeant.

Do investors really need reminding to stay clear of stocks like Valeant? Yes, obviously.

Valeant has a debt load of about $30 billion resulting from its scores of junk-bond-financed acquisitions. The peak $90-billion valuation that credulous investors placed on a company with a debt-equity ratio so radically out of whack was a triumph of hope — or greed — over experience.

That same lofty stock valuation was placed on a Valeant that lost a staggering total of $1 billion in 2012 and 2013, on sales that, to that point, hadn’t surpassed $6 billion. Any enterprise losing $1 for every $6 it takes in is flirting with a one-way trip to the bone yard.

Growth exclusively by acquisition is a sign that a company can’t or doesn’t care to manage its existing operations. That kind of growth is unsustainable.

Valeant’s revenue growth has exceeded profit growth by a wide margin. Any dealmaker can add sales growth by simply buying another company. A dealmaker CEO always has dozens of deals in his head, and hasn’t the time to properly manage the companies he has bought.

Don’t buy a stock because the “smart money” is doing so. Among the many prominent investors in Valeant are funds controlled by U.S. activist investor Bill Ackman, which have taken a $9.3-billion paper loss on the company.

And don’t expect your broker to save you. On Oct. 22, BMO Capital Markets, an erstwhile cheerleader of Valeant’s “limited R&D and aggressive M&A-driven strategy,” downgraded Valeant stock, saying “we cannot defend” Valeant’s business model.

By that point, Valeant shares had already lost close to 60 per cent of their value.

 

Bear or bull trap?

Bear or bull trap?
The chase by Frances Horodelski:

Bear trap. This is a misnomer according to Sam Stovall at S&P Capital IQ. If you look to trap a mouse – it’s called a mouse trap, not a human trap. Therefore, a bear-trap should actually be a bull trap – because you want to trap the bull. Interesting.

They’re coming out swinging. This morning Canadian Oil Sands released its letter to shareholders highlighting 15 reasons why shareholders should reject Suncor’s offering of 0.25 shares of SU per COS share that highlight how that offer is undervalued, opportunistic and exploitive. The President and CEO of Canadian Oil Sands, Ryan Kubik, will join BNN at 9:35this morning highlighting these reasons. We will also provide Suncor’s response when received. COS also provided an updated outlook for the year including an increase in cost savings although mid-point of 95 million barrels of production in 2015 is below September’s low end of a 96-107 million range.

Here’s what matters today: China’s GDP, while continuing to soften (6.9%) came in slightly above expectations as did retail sales. Valeant reported Q3 results that came in ahead of expectations on both the earnings and revenue line. Merger Monday is true today with at least two deals – Microsemi upping Skyworks offer for PMC-Sierra (to $11.50 stock and cash), while Diebold has offered $1.8 billion for Germany’s Wincor Nixdorf (the stock is up 16% in Frankfurt trading). Earnings will also take centre stage. According to Thomson Reuters, 116 S&P 500 companies with report results including today’s reports from Halliburton, Hasbro, Morgan Stanley and IBM. The blended earnings results for Q3 (actual and estimates) are running at -4% with 71% of companies reporting results above expectations on earnings. TD (following what seems like a trend in the Canadian banking industry) is reducing cost through head-count reduction. We’ll focus in on this story. We’re also following Bombardier as the street discussions the options for the company (who will they deal with, when are orders coming, what about the voting-block of the Beaudoin family, and earnings are coming on October 29).

It is a big week for Canada. We have the election today, the Bank of Canada on Wednesdaywill release its rates statement, monetary policy report and press conference (no rate cut is currently expected and some expect the Bank to raise its growth forecast). Retail sales areThursday and CPI is on Friday. U.S. data will be loaded with housing related information. The ECB releases its rate announcement on Thursday. On the Canadian election, according to work done by RBC’s technical analytical team, the best performance, one year out from the election for the TSX has been when there has been a minority government. Caveats include the fact that there are only 15 data points since 1921 and that usually, what happens in the U.S. markets has a greater influence on the TSX than election results.

The Bulls Are Running Worldwide

The bulls are running 
The chase by Frances Horodelski:

The bulls are running
The chase by Frances Horodelski:

“Whatever you paid to watch this game, it wasn't enough.” – Cathal Kelly (In case you didn’t know, Jays won the ALDS and move on to the ALCS).

Who’s winning today? Stocks are, as enthusiasm for central banks takes another step into the spotlight. The Euro is down as investors anticipate ECB action (or at least continued action) as disinflationary/deflationary pressures continue to cause heartburn. Two dovish comments over the past couple of days (from Brainard and Tarullo) for holding an “easing” rather than “tightening” bias have added to the enthusiasm as well as a San Francisco Fed academic paper that argues that the Fed is actually running a “tight” policy and some concluding that the implications of that is more QE might be needed. And for stocks, if you look at the relationship between the Fed’s balance sheet and the stock market, the fit is quite tight with the balance sheet and stocks rising hand-in-hand. The balance sheet peaked in January of 2015 and is down about 0.7% from that level although still huge at $4.49 trillion

If you just want to hang our hat on the Fed, good on you. But the bearish view (thank you Zacks) points these items of concern: Chinese weak inflation, U.S. retail sales, Wal-Mart’s dismal outlook, Atlanta Fed’s GDPNow estimating just 0.9% for Q3 growth and the Beige Book that highlighted weakness in the factory sector and decelerating growth in more regions than in the past. And others call this whole rally a head-fake! We’ll talk to bulls and bears today to balance the discussion.

The bulls point to earnings (outside of Wal-Mart) which aren’t bad, the technical picture, the sentiment, the cash, the M&A, the easiness, the lack of alternatives, dividend yields above the 10-year, the benefit of lower energy prices, the price/earnings multiple below the 15 year average and the list goes on.
As for Wal-Mart, the company is being squeezed by online and by new entrants such as Aldi and Lidl that are Germany global supermarket chains with better prices and fresher products that are entering the U.S. market and elsewhere. There is also the demographic angle. There are millennials than boomers with the former preferring an experience and shopping somewhere other than their parents’ WalMart. The average target on the street is now in the high $50s. A company with almost half a trillion in revenue doesn’t turn easily – time and the right strategy will be needed.

News-wise, there is an acquisition by Linamar, Goldman Sachs earnings, Alamos buying Carlisle Goldfields for stock, we’re awaiting Canadian housing data for September, and inflation and jobless claims from the U.S, Brookfield seems to be having some difficulty with its Australian ports acquisition, and Concordia provides another update on its AMCo acquisition and financing. I see an upgrade on Canadian Tire from Credit Suisse to hold from sell ($116 target), Mead Johnson also upgraded at BMO to buy with a new $89 target. Goldman Sachs missed the bottom line estimate ($2.64 versus $3 estimate) and AB Inbev is doing a $55 billion debt deal to pay for SABMiller. China’s lending and money supply numbers came in higher than expected.
Worldwide markets are up (Chinese markets also on a roll). The bulls are running.