January 28, 2015 Comments

Wednesday was not a good day in the markets. The S&P 500 was down 1.4% and Toronto was down 1.6%.

Notable decliners included Constellation Software, down 4.7%, Canadian Western Bank down 2.9%, and Bank of America down 2.8%.

The preferred shares that I monitor mostly declined today and have done so in recent days as well. This despite lower interest rates. This indicates a higher perception of risk.

Stocks gaining today included Couche-Tard, up 1.2% (Part of that is likely due to the currency move due to its large U.S. operations), Bombardier up 2.9% and the oils sands ETF, CLO up 1.2%. Actually all three of these benefit from a lower Canadian dollar.

I saw a Statistics Canada report today that rail traffic in Canada was down about 7% in November and that bulk rail car traffic was the main reason as it was down 8%. Inter-modal (container) traffic was also down 2%. Perhaps the lower bulk traffic had to do with lower oil shipments. Rail traffic can be a good indicator of economic activity. (In this case weaker activity)

There seemed to be some confusion created by Statistics Canada’s labour force survey today. Some reports indicated that Stats Can had lowered the job growth estimate in 2014 from about 186,000 down to 121,000. But Stats Can seemed to be trying to explain it was due to updated census data (moving from 2006 census to 2011 census). There were a couple of reports from Stats Can and it all seemed quite confusing. Some parts looked like good news. They said that the Canadian unemployment rate if measured on the same basis that the U.S. measures their’s was only 5.7%. But the market took it as decidedly bad news and sent the Canadian dollar down. Labour Force participation was down, but only because all seniors of all ages are counted as available to be in the labour force and the population has aged and a higher percentage are seniors and not as likely to want to participate in the labour force. It seems to me that Statistics Canada released a confusing message.

If the higher rated stocks on my list continue to decline, I will find myself in a buying mood. But right now I am holding off from deploying the modest percentage amount of cash I have left. I have plenty of exposure to these stocks already if they should rise.

We are in the middle of the U.S. year-end earnings reporting season and various reports could send the market in one direction or the other in the next week or two. The Canadian year-end earnings reporting season has started but is not in full swing yet.

Interest rates continue to decline. With the 30-year government of Canada bond rate under 2%, this is hugely negative for the solvency positions of pension plans.

Few would agree, but the simplest explanation for low interest rates is that the world is awash in savings (not debt). This is due to demographics. Many seniors have money to invest (i.e. lend) and there are not enough young people coming up to borrow all that money unless rates are lowered. Simple supply and demand. Rates went lower to bring up the demand for borrowing and down the supply of lending. I have stated this many times overt the past few years. Central Bank policies also have surely had an impact, particularly when they buy long term bonds. But even without that, interest rates would be low due to demographics and a huge supply of money to lend. Yesterday I saw a report from Michael Walker of the Fraser Institute saying just this.

http://www.fraserinstitute.org/research-news/news/display.aspx?id=22171

The bottom line seems to be, don’t hold your breath waiting for interest rates to rise much.