Bad news for Canada: the commodity complex has crumbled

Your top financial and economic news for Nov. 5


Top of the morning

At the Aleph Blog, David Merkel makes the case that investors ought to ignore the results of the midterm elections south of the border, and shouldn’t put too much stock in the idea of the presidential cycle:

Many argue that we are heading into a good time for the markets in the third and fourth year of a presidential term. Too many are arguing this in my opinion, and even if there is some real impact from presidential terms, perhaps the market is anticipating this as well. After all, the bad part of the presidential cycle looked pretty good this time around.

Add in that again we are working with the law of small numbers — the presidential cycle could just be due to randomness. Some part of the presidential cycle had to look better. Is it so much better than any other subset could have been?…

I leave you with this: don’t make too much out of the election results, the presidential cycle, the “sell in May and go away” phenomenon, etc. The world is complex, with many people trying to anticipate market reactions. Untangling them is close to impossible, so stay calm, and pursue the ordinary strategies that you always do. For me, I will continue my value investing.

On the homefront

Commodity stocks got crushed on Tuesday, sending the TSX down by triple digits as WTI crude dipped to a three-year low and gold lingered near a four-year low. Some of the biggest losers included Talisman Energy (TLM), Surge Energy (SGY), Teck Resources (TCK.B), Barrick Gold (ABX), and Eldorado Gold (ELD). WTI Crude has since recovered marginally, but remains well below $80 per barrel. If that’s the new normal for oil prices, Canadians should be worried that business investment in the oil patch – which accounts for roughly half of the growth in capital spending since 2009 – is liable to hit the skids. Meanwhile, the shiny metal moved another leg lower while North American slept, breaking below 1,150 USD/oz. A sustained low-gold environment will certainly cripple some of the junior names in the space that are listed on the TSX Venture; the heavyweights won’t be immune from the pressure on margins, either. Nonetheless, TSX 60 futures are firmly in positive territory ahead of the open.


The Canadian dollar has tumbled to a fresh five-year low of 0.8721 against the greenback this morning.


TransCanada (TRP) managed to buck the trend on Tuesday despite rather lackluster earnings on hopes that the balance of power in the United States Senate was on the verge of shifting. It won’t surprise most readers to learn that the Republicans have signalled much more enthusiasm for Keystone XL than the Democrats; calls for its approval will likely spike in short order. TransCanada indicated that this project would cost $8 billion, up from its previous projection of $5.4 billion. The pipeline company’s revenues, it should be noted, aren’t subject to fluctuate along with the price of crude. However, if some oil sands developments become unviable due to the drop-off in prices, this will reduce the need for an expansion of infrastructure to get the product to market.


A big win for Valeant. A federal court judge in California denied Allergan’s request to block Pershing Square, the hedge fund that supports Valeant Pharmaceuticals’ (VRX) hostile takeover bid, from voting at an upcoming special meeting of shareholders. So long as the Pershing Square and the Canadian pharma giant make additional disclosures in their proxy, the hedge fund controlled by Bill Ackman will be able to use its near 10-percent stake in the Botox maker to help oust members of the board of directors on December 18. Allergan, it should be noted, plans to appeal this ruling.


Earnings season is in full swing. Tim Hortons (THI), Enbridge (ENB), and Magna (MG) are slated to release their latest quarterly results before the market opens, while a few of the bigger names reporting after stocks end the day include Kinross Gold (K), Genworth (MIC), Home Capital Group (HCG), and Sun Life Financial (SLF).


Senior monetary policymaker voices concern over taxpayers’ exposure to the mortgage market. Lawrence Schembri, deputy governor of the Bank of Canada, has written an article in the November edition of the National Institute Economic Review in which he makes the case that Canada has a better approach to mortgage finance than the United States. However, he also suggests that the private sector needs to take more risk when in this space. “The government has become more exposed to the Canadian housing market via its guarantees on mortgage insurance and mortgage securitisation,” he writes. “This trend is not sustainable.”

Daily dispatches

The Republicans regained control of the United States Senate for the first time in eight years. The result that was widely expected, but the margin of victory was perhaps more convincing than many observers predicted.


The protests in Hong Kong hurt the economy. “October data signalled a marked deterioration in operating conditions faced by Hong Kong private sector businesses that was widely attributed by panellists to ongoing political protests in the centre of the region,” per the press release for the HSBC Hong Kong PMI. This index declined to its lowest level in three years in October, falling to 47.7 from 49.8.


Retail sales in the euro zone fell by far more than economists expected in September, posting a decline of 1.3 percent month-over-month. The previous advance in August was also revised lower.


The dovish dissenter speaks. Narayana Kocherlakota of the Minneapolis Fed is scheduled to give a speech in Virginia this morning. At the last meeting of U.S. monetary policymakers, he dissented, arguing that the Fed should maintain the size of asset purchasing program rather than ending it, and called upon the central bank to explicitly outline a commitment to keep rates at their current level until inflation expectations picked up.

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