All posts by peter

The Federal Reserve just squashed the possibility of a rate cut

Today the Federal Reserve Chairman indicated that the current low inflationary pressures may only be transitory.

This implies that the US Central Bank has backed away from cutting rates

Recent consensus was calling for a reduction in rates, so this announcement was a surprise to markets

Recent strength in both stock and bond markets can be attributed to an accomodative Central Bank

Possible repercussions from Governor Powell’s remarks are as follows:

Higher US dollar globally

Lower bond and equity prices

Lower commodity prices especially gold and base metals

Equity Sector Beneficiaries : Financial Stocks

Equity Sector Casualties: Gold and base metal stocks, Interest Sensitive sectors like Utilities,Reits and Consumer Staples

 

 

 

Laurentian Bank rate reset preferred H -Avoid

Recently a friend was given very bad advice in regards to this issue.

I wish he had checked with me  first, but he got his advice from someone who was not qualified to give it.

I am only offering objective advice and am not selling product.

I am asking all of you to consult with me first before you make a decision you will regret later

This preferred was issued five years ago at an issue yield of 4.3%

The issue is rated P-3 Low by S&P

The current yield is 6.4%

The shares are callable at$25 on June 25 of this year

The shares are subject to being reset on the same date with a reset spread of 255 basis points plus the 5 year Canada yield of 1.53% to total 4.08%.

My friend was told that this issue will be called at $25, a substantial premium  from the current price of $17

This is very poor advice. There is absolutely no incentive for the company to call this issue. Current yields are higher than the issue yield for the same credits.

The company can purchase shares on the open market at $17 rather than calling the issue at $25

All the company will do is to reset the dividend in June to 4.08%, assuming 5 year Canada yields remain the same as today.

This reset yield of 4.08% is lower than the issue yield of 4.30%.

Conclusion

Rate reset preferreds do not perform well when rates are falling

Very illiquid reset preferreds like this one perform even worse

This issue will not be called.

Avoid this issue.

 

 

 

 

 

 

 

 

 

Always get a Second Opinion

Why do some of us blindly listen  to our doctors telling us we have sleep apnea and need to buy an expensive $5,000 machine?

Why do some of us listen to our eye doctors’ advice suggesting we have expensive laser surgery costing  $5,000 or more?

To our astonishment, some doctors’ opinions are based on profit and not on our health

Why are some of you not questioning your current financial advisers’ recommendations, knowing that they are selling products, not objective advice?

Where is the logic?

Always obtain a second opinion whether it be your finances or your health and make sure that the opinion is an unbiased one.

 

 

Parex Resources

Today Parex reported estimated 1st quarter production of 51,200 barrels per day, up from 49,300 in the 4th quarter of last year

This is the company’s 27th quarterly increase in production

Company expects 2nd Quarter production to reach 52,000 barrels per day

Trailing twelve month Return on Equity is over 36%

Many domestic analysts and portfolio  managers have mistakenly ignored investing in the stock as a result of its energy exposure in Columbia

While Columbia is not Canada, the country has been actively pursuing foreign investment and is very much pro business

The shares continue to outperform most Canadian energy stocks

 

 

 

Canadian Apartment REIT – New Issue provides buying opportunity

Announced a $300 million new issue at $49 per share representing a 3.9% discount from yesterday’s closing price

While the new issue was sold out quickly, the shares are still trading at $49.46 or almost 3%  below yesterday’s close

Concurrently with the new issue announcement, the company announced the acquisition of $182 million of Manufactured Community Housing units.

The acquired properties are located in Atlantic Canada, Ontario and Alberta with an overall occupancy of 95.4%

This purchase is expected to be immediately accretive to their NFFO per unit.

This high quality apartment REIT’s portfolio still has a high concentration in the GTA, the most favourable apartment market in Canada.

Recommendation

Use the current price weakness to add to your positions.

 

 

Inverted Yield Curve – Signal to Raise Cash and take risk off the table

US yield curve turned negative on Friday for the first time since the last recession of 2007.

This has occurred every time before the last eight recessions since 1968

Economic growth continues to fall sharply in both China and Europe

An inverted yield curve where 10 year Treasury rates fall below 3 month Treasury Bills, implies that investors are losing confidence in the economy

If this inverted yield curve persists, banks will materially reduce lending as it becomes unprofitable with a negative spread

US / China trade wars continue without any clear signs of compromise from either side

The probability of an economic recession within the next 12-18 months has increased significantly from last month

Conclusion

While it is still too early to be 100% certain of an impending recession, it is critical to take risk off the table at this time

The recent market rebound has provided us with an opportunity to do so

Raise cash if you have not already done so

Maintain high cash levels. My Income and Growth sample portfolios have 35% and 30% cash respectively

Reduce cyclical equity sector exposure including financials

Increase equity weight to the more defensive sectors including utilities, Reits, consumer staples and telecoms.

Northland Power – Buying opportunity

New secondary offering has taken the share price down by 10%

Current market price of $23.16 is below issue price of $23.35

Secondary issue has no effect on treasury stock – no dilution

Chairman is selling a large chunk of his stock for estate planning purposes

Company has strong projected growth in cash flow and earnings over next two years – better than average of its peers

Stock is attractively priced at current levels relative to peers at 14.25 PE on this year’s eps

Current dividend yield of 4.66% with reasonable payout

 

Parex Resources – Positive Fundamentals

Parex’s share price has been one of the best Canadian energy stocks both year to date and in 2018.

Year to date its total return is up almost 26% vs 7.6% for the iShares XEG ETF.

Even in a bad year last year for energy stocks, Parex only fell 10% vs a 27% decline for the XEG sector benchmark

The company receives the higher Brent crude prices

Parex has a strong balance sheet with no  debt and working capital at the end of last year of $215 million US

Proven and probable reserves rose 27% last year

The company has strong self funded organic production growth

The company is expected to report its quarterly earnings this week.

While the shares are not cheap relative to its peers, the company continues to deliver strong results

 

 

Chartwell Retirement REIT – Headwinds

The long term demographic trend of an aging population remains positive for Chartwell

However the immediate supply / demand outlook is only in balance with no supply shortages anticipated

For Chartwell’s top markets – Ottawa, Durham region of GTA and Calgary, the company is actually experiencing an oversupply of product

As a result of these current headwinds, Chartwell will only be able to increase their dividend distribution modestly

Conclusion: Favour both apartment and industrial / logistic REITS more than retirement homes as they have better industry fundamentals.