Weekly Capital Strategy – March 11, 2016

March 11, 2016

Frankfurt Helicopter Drop Gets Larger
(Andrew Pyle, Senior Advisor and Portfolio Manager)

Central banks are definitely grabbing the market’s attention this month, for better or for worse. As I commented earlier this week the Bank of Canada shed its gloomy spin from January and adopted a more constructive view towards both Canada’s and the world economy. Where economists and market pundits were falling over themselves a few weeks ago about the prospects for negative interest rates in this country, Governor Poloz again did the wise thing and kept rates unchanged. Some may think that this was a curious about face given that this morning’s Canadian employment figures were less than impressive (more in the next section). Still, the combination of improved stability in global financial markets and oil prices has convinced the Bank that Canada no longer needs additional stimulus.

Not so in Europe. After failing to satisfy the market’s desire for more dough back in December, the European Central Bank (ECB) brought out the proverbial monetary bazooka this week. With Eurozone inflation still barely visible amidst continued economic strain, ECB President Draghi delivered a handful of stimulative measures. Let’s start with the interest rate that the ECB pays financial institutions for their deposits at the Bank. Oops, I meant the rate that these institutions have to pay the ECB. The ‘deposit facility’ rate was pushed down to minus 0.4% from minus 0.3%. Two years ago this rate was zero and the hope has been that the series of cuts since the first move in June 2014 would prompt financial institutions to lend more to businesses and consumers.


Euro Stoxx 50 March 2016


In addition to the ECB’s journey deeper into negative territory on the deposit side, it also cut its ‘main refinancing rate’ to zero, from .05%.  Two years ago it stood at 0.25%. Unlike the deposit rate, the main refinancing rate is which is charged financial institutions on what they borrow from the ECB for liquidity purposes. While the media will tend to focus on the headline negative rate for deposits, this rate has the largest impact on other market rates and getting it to zero was still relevant, even though it was such a small move.

Lower rates are fine, but there is no substitute from the ECB’s perspective for real cash. Back in January 2015 the ECB announced a quantitative easing (bond buying) program where it would purchase 60 billion euros worth of bonds each month until September 2016. The end date for this program was later extended, however, this week Mr. Draghi upped the ante with an expansion in the program to 80 billion euros per month. To date the ECB has already bought close to 800 billion euros in government bonds and is now set to add close to a trillion euros to its balance sheet this year. On top of the monthly increase the ECB has also expanded the breadth of the program to include corporate bonds. Some even wonder if eventually it will buy equities. If this is sounding familiar, it should given that Japan has gone down this road already.

The question for investors is whether this really changes things? True, there has been a lift to global markets following Thursday’s ECB announcement, though not an entirely smooth one. The program will help keep longer-term borrowing costs down for companies, especially with corporate bonds added to the mix. Yet, the big problem has been the unwillingness of banks to lend in an environment of uncertainty. Whether it is slower growth in emerging markets or the fiscal pressures from absorption of refugees, the ECB may find it is in a “pushing on the string” dilemma. I will say though that this is likely the last big move from the ECB and its comments regarding the need for governments to step up fiscal stimulus suggest the baton has been passed. I am still constructive on European stocks and believe they offer value, especially against Canada (Euro Stoxx index down 6% this year versus a 3.5% gain for the TSX). Don’t expect a smooth ride though.


Surprise, Surprise – Another Unexplainable Jobs Report
(Andrew Pyle, Senior Advisor and Portfolio Manager)

The unreliability of economic statistics has long been a problem for economists and investors and I’m not just talking about China. Canada’s labour force reports have often thrown us a curve ball and monthly forecasting has basically been reduced to a dart throw. Following last week’s healthy report on US payrolls most believed that Canada’s employment situation in February would be somewhat positive. Economists were predicting a 10K increase in employment on the month and no change in the national unemployment rate of 7.2%. Instead, we learned this morning that jobs fell a net 2.3K last month and the unemployment rate rose to 7.3%. This might now seem like a major deviation from forecasts, but the details were certainly a surprise.


CDA full time Mar 2016


Full-time employment in February fell by 51.8K after a modest 5.6K gain in January.  If we don’t see a rebound in March this quarter will be the worst performance since the fourth quarter of 2013. Towards the end of last year it looked as though labour force conditions were improving after another surprise drop in full-time payrolls in September. The last three months are suggesting something different and perhaps the lead-up to more sluggish growth. That is if we can believe the numbers.

While Alberta continued to display weakness in employment (unemployment rate shot up half a percent to 7.9%), it was Ontario that really stood out with an 11.2K drop in overall payrolls. That is curious given that construction employment in Canada rose 34K last month and manufacturing staged a partial recovery from January’s decline with a 7.6K increase. So where did the drag stem from? Services.  Health care employment in Canada fell by 19.6K on the month, followed by a 16.9K decrease in education. To the best of our knowledge there were no announcements of significant job cuts in either of these sectors, although we did see strong gains in both back in December and health care racked up another double-digit gain in January.  In other words this morning’s data may simply have been a statistical correction from over-estimates in the prior months. Remember that unlike the US employment figures, where the previous few months are revised with each new release, Canada does not revise prior months (except for the major multi-year revisions it comes out with periodically). Since this can cause embedded revisions in the current month you can end up with greater volatility in Canadian figures versus the US.


CDA vs US unemployment Mar 2016


Rather than get caught up in the month-month unpredictability of Canadian employment data, we need to look at the bigger picture. Here are the general observations. First, the drop in oil prices down below $30/barrel earlier this year has caused even more damage to the energy patch and we might be witnessing the spill-over effects into other sectors and regions. Second, the weaker CAD dollar has created a shift in household budgets away from discretionary items to more expensive consumables (like groceries), even though cheaper gasoline has helped offset this. There is evidence of this from the employment data on accommodation and food establishments. Payrolls in this group dropped by 11.2K in February, marking the fourth consecutive decline. Economists had once predicted that the weaker CAD dollar would bolster foreign travel to Canada and keep more Canadians at home, which should have led to strong demand for hotel/motel rooms and restaurants. Unless the accommodation and tourism industry has become incredibly more productive, the employment stats suggest the reduced purchasing power among Canadians is offsetting the benefits of increased foreign visitors. The broader picture is that Canada is once again in the midst of an employment growth slump. The year-over-year increase reached 1.1% as Canada emerged from its technical recession last Spring, but is now back to only 0.7%. Even if we added 20K new jobs a month for the next three months, growth would still fall to 0.6%. That doesn’t bode well for GDP growth, nor consumer stocks.


The Executor’s Job Has Gotten Tougher
(Natalie Warren, Investment Associate)

An executor is the person appointed to administer the estate of a person who had died leaving a will which nominates that person. A Harris/Decima poll shows that 84% of Canadians will appoint a family member or friend to be their executor. Based on the regular duties of the executor, some key attributes of the executor should include trustworthiness, a responsible and organized individual, someone willing to do the job and who knows when and how to get professional advice.

It is recommended that there be more than one executor or an alternate in the event that one of the executors is not willing or able to carry out their duties. Limiting the number of executors to two (2) is preferred to simplify the process. With co-executors, the responsibilities can be shared, taking some of the burden from either individual, one of whom may also be emotionally drained from dealing with the loss of a spouse for instance. One disadvantage of having co-executors is when a conflict arises between them. To mitigate conflicts, one solution may be to include a method of conflict resolution in your will.

Some of the duties of the executor include obtaining probate, valuations, preparing an inventory of assets and liabilities, notifying all relevant authorities e.g. health and pension providers, paying debts, reviewing contracts and agreements and filing tax returns.  Just from this brief and incomplete list, it is clear that the duties of the executor are arduous and time-consuming. The average estate administration can take anywhere between 12 to 18 months to be completed. Executor liability is a reality that may occur if the administration of the estate is mismanaged or improperly implemented and the well-meaning executor may find themselves in the middle of a family dispute. Personal liability may arise from a breach of trust, losses from incorrect management of assets or losses from errors in tax reporting.

The “Executor’s Year” is a guideline. It refers to the fact that most estates should be wrapped up within a year of the executor getting a Grant of Probate (including payments to beneficiaries). After this time, beneficiaries may be able to take action against the executor for preventable delays. Another source of personal liability is the distribution of the estate before the expiration of the applicable claim periods as in the case of individuals who may have certain “inheritance rights” under provincial law. In making the decision about who should be your executor or if you need help in executing your executor duties, a corporate executor may be viable option. Choosing an executor or accepting the duties of an executor should be given careful consideration, professional advice when making either decision would be wise.


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