THE LAUNCH PAD Daily market commentary

THE LAUNCH PAD  Daily market commentary

THE LAUNCH PAD Daily market commentary by ConnectedWealth

Wednesday, May 18th, 2016


Mohnish Pabrai On Value Investing, Missed Opportunities and Autobiographies

Mohnish PabraiIn August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More


Results are mixed mid-week with shares in Australia and Asia turning around from gains earlier this week.  Futures are pointing to a mixed opening, as are the markets in Europe defensive stocks are offsetting losses in financials and materials.

For a YTD check-in, the ASX is still holding on to small gains year-to-date, making it one of the few gainers in the eastern hemisphere after Thailand and Indonesia.  Chinese stocks are the big losers as we cross through the halfway point in May, followed by Euro stocks.  Meanwhile, outside of the tech-heavy NASDAQ, North America is doing quite well – in particular, Canada which is leading the global pack right behind Brazil which has rebounded strongly from a disastrous back half of 2015.

We could see some chop in rate and currency markets this afternoon when the Federal Open Market Committee releases the minutes from its most recent rate-setting meeting.  As we have mentioned before, they are being released into the flattest yield curve environment in over 8 years.

Grab a coin, and flip it. Heads the Fed hikes by September, and tails they hold steady. Those are the same odds that the market is pricing in. Expectations are being pulled forward however, just last week a hike had only a 30% likelihood. The higher than expected inflation from yesterday was just the latest data point to sway more traders to not count the Fed out just yet.

The Canada Mortgage and Housing Corporation released its Q2 housing market outlook.  It sees MLS sales growing for 2016 after digesting the energy-related slowdown before falling back somewhat in 2017.  The summary can be found here, with a link to the full report and the regional sub-reports.

Time to break out the sake, and celebrate. Japan is not in a recession! Growth has returned albeit extremely moderate growth (+0.4%) for Q1. The Nikkei doesn’t seem to care though, it’s down just a little overnight.

BOJ loves their ETFs
Japan’s fund management industry is launching 3 “physical and human capital” ETFs catered to the Bank of Japan. The BOJ has already bought more than 50% of Japan’s ¥15 plain vanilla market. According to the FT, “The BOJ is restricted to holding 50% of any ETFs.” As such, it is running out of things to buy.

The new ETFs will invest in companies that are increasing capital spending and wages. This is in line with Prime Minister Abe’s growth programme. The potential for inclusion in these ETFs could provide companies with an incentive to spend instead of save, which would benefit the Japanese economy. Even so, some market participants are concerned that the hand of the BOJ is distorting Japan’s equity markets. More from the FT here.

Even before Trump takes office (j/k, I hope) a protectionist mentality is gaining ground in the U.S. The U.S. has just increased import duties on Chinese steel by over 500%, it was rumoured to be in the works previously. Both the U.S. and Europe have been vocal about the problems with China flooding the market with subsidized steel since their domestic production has tremendous excess capacity

Looks like the PC bros are now working at the World Bank, as they are eliminating the term“developing country” from its data vocabulary. What’s in a word anyways, each agency has their own definition.mktdata

The International Monetary Fund says its own distinction between advanced and emerging market economies “is not based on strict criteria, economic or otherwise.” The United Nations doesn’t have an official definition of a developing country, despite slapping the label on 159 nations. And the World Bank itself had previously simply lumped countries in the bottom two-thirds of gross national income (GNI) into the category, but even that comparatively strict cut-off wasn’t very useful.

The differences in the ‘developing’ bucket were so large that it really doesn’t make sense to group them all into one.

Diversion:  An electric-vehicle future seems likely, but what about the trucks?  This Nikola One looks like it should be on the set of Demolition Man 2.



Volkswagen is reducing executive pay in an attempted to improve profitability. This is part of their “Strategy 2025” which will refocus strategy to tackle challenges of digitally connect cars.Emera is selling the majority of their stake in Algonquin Power for $544mm to fund their takeover of TECO Energy. Emera still owns about 5% of Algonquin. Valeant is weighing the option of selling their pharmaceutical and cosmetic assets to pay down some of their massive debt load.  The assets could raise as much as $1bb, however, the process is still in the early stages. Tervita is the latest Canadian exploration and production company to miss a bond payment. The company has 30 days to pay the interest before going into default. This is just another energy company that is struggling to survive despite the recent rally in oil prices.



Oil prices are flat this morning unable to break through $50 a barrel. A change in weather conditions have further delayed the start of Canadian oil sand operations. Suncor was preparing to restart three facilities before having to evacuate workers again this week. API reported that inventories fell by over 1mm barrels last week nationally, however inventories at Cushing continue to build up over 500,000 last week. Gold prices are lower for the first time in four trading sessions as the chances of a FED rate hike have increased. This comes as inflation data in April rose by the most in three years. There is a rare earth metal that is gaining some attention lately. Niobium, named after a Greek goddess, is used in producing stronger and lighter steel for industrial applications used in air parts and construction. The metal is worth almost eight times as much as copper and has Chinese miners paying exuberant amounts for mines that hold the rare earth metal.



The yield curve flattened further overnight, following yesterday’s move where the short end sold off in response to higher than expected CPI data and the continued rise in oil prices. Further weighing on the short end were comments from Federal Reserve Bank of Atlanta President Dennis Lockhart and Federal Reserve Bank of San Francisco John Williams who both said at least two rate increases may be warranted this year as the economy picks up. That leaves focus for today squarely on the release to the minutes of the previous FOMC meeting at 2:00 PM EST.

Domestic bond markets have been focused this week on a busy new issue calendar. After a quiet start to the month, this week we have seen over $1.5 billion price so far this week, with CT REIT, 407 International, and Peel Region raising a combined total of nearly $900 million on Monday, and BMW Canada Auto Trust issuing $500 million of asset backed securities yesterday. We have at least another $3.25 billion to add to the tally today, as Canada Housing Trust is scheduled to price $2.25 billion of new 10-year bonds and a minimum $1.0 billion of 5-year floating rate notes.

There were two deals of interest yesterday from a relative value perspective to highlight. First, the wholesale market continues to put a premium on stable industrial credits, in comparison to financial and resource names. Gaz Métro inc. raised $100 million yesterday of 1.52% notes due May 25, 2020 at 99.965/1.53%, for a spread of just +0.92% over Government of Canada bonds. In comparison, bank deposit notes were yielding in the 1.55% area, while subordinated NVCC fixed floaters yield in the 2.85% area, Enbridge Inc. 4-year bonds were offered at 2.30%, and the top rate available on CDIC insured 4-year GICs on our board yesterday for individual investors was 2.60%.

Second, the Regional Municipality of York came to market with a new issue of $150 million 2.50% bonds due June 2, 2026 at 99.965/2.50%, for a spread of +122 basis points over Canada bonds. This was +0.28% more than the yield on 10-year Province of Ontario bonds, but is actually flat to where the Province of New Brunswick trades and 0.23% LESS than the Province of Newfoundland.  This is somewhat surprising, given the lower liquidity in municipal markets and the fact that municipalities have less taxing authority. For institutional investors, however, the fact the Regional Municipality of York has higher credit ratings than these two eastern provinces, has a growing and diversified economy, and in fact has a larger population than the two provinces but a much lower debt load, all support the acceptance of a lower return over the next decade.






Some people die at 25 and aren’t buried until 75.
– Benjamin Franklin


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