November 5, 2018

On Monday, the S&P 500 and Toronto were each up about 0.6%.

Berkshire Hathaway surged 4.7%, Toll Brothers was up 2.4%, TFI International was up 2.1%, Costco was up 1.9% and Canadian Western Bank was up 1.8%. Most stocks were up but Linamar was down 1.8%.

The Governor of the Bank of Canada has made it even more clear that he intends to move interest rates higher. The Bank’s overnight policy rate which he has already increased from lows of 0.50% to a present 1.75% is expected to move to a neutral (non-stimulative) level of between 2.5% to 3.5%. Higher interest rates act as a gravitational force on stock prices. Actual and/or expected earnings growth is a buoyancy force but will be hard-pressed to overcome this gravitational force in many cases.

Lowe’s is closing 31 of its 630 Canadian stores. These are mostly or perhaps all small stores under the Rona and other brand names that they purchased in 2016. I did not see any indication that any of the newer large stores under the Lowe’s brand name would close. This looks more like a continuation of past trends of small stores losing out to much larger stores than any failing of the Canadian economy.

The news that a large Potash mine in New Brunswick that was more or less mothballed in 2016 is to be permanently shutdown is unfortunate. I mentioned this back on January 21, 2016 as a failure of both competition regulation and of the executives involved. The mine is owned by Nutrien which was formed after Agrium merged with Potash Corporation of Saskatchewan I said then:

“The news of the Potash mine closure in New Brunswick is troubling for several reasons. One, is that Potash [Corporation of Saskatchewan] appears to have significant market power and even belongs to a price-fixing cartel called CANPOTEX. Potash may be favoring its Saskatchewan operations and I wonder why one company was allowed to have so much market power. Second, this New Brunswick mine is very new and Potash invested $2.2 billion in it and who knows what government assistance was provided. Meanwhile, executives were no doubt paid millions to make the decision to invest in that mine. Presumably they were caught off guard by the commodity price decline. No one can be expected to accurately predict the future. Nevertheless, it appears a huge mistake was made here. New Brunswick and the employees will suffer greatly. Shareholder money has been wasted. But what price will the executives pay?” 

Subsequent to that, the two and only large Potash producers in Canada were inexplicably allowed to merge by what is supposed to be the Canadian competition watchdog. I mentioned my skepticism that the deal would be approved back on August 30 and September 12 2016. But the deal, which clearly decreased competition in the Potash market was nevertheless approved. Well, at least the two major producers would no longer need fear being accused of collusion on prices after the merger since there would be basically no one left to collude with in Canada.

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