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Stocks continue to push higher with global shares, looking like they will extend their winning streak to 9 days this morning. Markets are higher in Europe and Asia and futures are looking green across the board for North America. The market appears to be on autopilot, weaving its way effortlessly through the economic ills. Jerome Powell took a pessimistic tone yesterday in his speech to the Economic Club of New York noting the fragile economy needs continued support from the Fed, and society must focus getting employment numbers back on the right track.
Betting on continued U.S. dollar weakness was one of the most crowded trades heading into 2021. Net dollar future contracts were deep into short territory, and after a painful start to the year it appears as if some are throwing in the towel. Still, while that’s put a slight dent in short positions, most have stayed the course, hoping the dollar’s recent strength will be short-lived. It’s beginning to turn around again, and the dollar is weaker this morning, but the counterargument is simple, ‘American Exceptionalism’. The U.S. is doing a better job than many other countries with the vaccine roll-out, and this may lead to relative economic strength.
The Canadian Health Care sector has been on fire recently. With the Reddit crowd moving on from GME and AMC, they have focused their attention on pot stocks. Yesterday, Aphria was the third most mentioned stock on the r/wallstreetbets board. The volatility is also creating a lot of opportunities and potential risks for the merger arbitrage crowd, given the set stock terms in the announced Tilray acquisition of Aphria which is expected to close mid-year. The combined market cap of Aphria and Canopy now exceeds $37 billion. This is staggering and to put it into perspective those two companies combined are now worth more than Suncor, as seen in the chart below.
Some years it really pays to be tactical, and 2020 was certainly one of those years with multiple all-time highs and a very deep multi-year low. Of course the hard part is how to be tactical. The Purpose Tactical Asset Allocation Fund / ETF is a quantitative rules-based portfolio best used as a sidecar strategy to add a tactical component to a portfolio. The main goal of Tactical is to get defensive quickly when markets turn negative, providing a stabilizer for the overall portfolio, while still capturing reasonable upside in rising markets. The asset allocation can range from 100% equity to 100% fixed income / cash. In the Primer we share our models, sensitivities, how and why we developed the strategy, analytics on what kind of market it works best, and what kind of market it does not work as well.
To learn more about how Tactical Asset Allocation can help your business please enjoy our most recent Tactical Primer authored by Craig Basinger.
Company news
Telus narrowly beat analysts revenue expectations, growing the top line by 5.2% to $4.06bb. They added 87,000 net new cell subscribers in the quarter. Molson Coors shares are down more than 5% in premarket trading as shuttered pubs, a delayed start to the NHL season and covid lockdowns weighed on demand. They also took a $1.5bb goodwill impairment charge; appears there is just not as much value in those frosted Rocky Mountains. PepsiCo is announcing the rebranding of Aunt Jemima syrup to Pearl Milling co. as they fulfill their pledge to rebrand the division because of racial stereotypes. Pinterest is up 5% after rumors surfaced that they might be taken out by Microsoft, which would expand their addressable market in advertising and social media. Bombardier is going to stop making the LearJet and shed 1,600 jobs as part of a plan to boost profitability. They are hoping to save $400mm annually by 2023.
Commodities
The positive streak for oil prices looks to be coming to an end today. At the time of writing NYM WTI Crude futures are down -0.6% to US$58.33/bbl. ICE Brent Crude futures are down -0.7% to US$61.04/bbl. The Energy Information Administration confirmed the crude draw reported by API, although it was much deeper. The EIA reported a total draw of 6.6 million barrels last week. The International Energy Agency believes that OPEC+ will start to reduce their output cuts in the second half of the year as they believe demand will have a rapid recovery in that time. The new variants of the virus do continue to weigh on demand expectations for now until we have more information. Gold Spot Price is once again flat this morning as the yellow metal continues to wait for a decision on the US stimulus. With the US dollar levelling out this morning and the data not showing much inflation, gold continues to trade in a trough.
Fixed income and economics
Long bonds appear to have put in a near term top in yields. After taking a run at 2.00% earlier this week, yesterday’s weaker than expected consumer price index along with comments from Fed officials reiterating a commitment to continued monetary stimulus saw the US 30-year benchmark rally back to 1.90% overnight. The recent cheapening and steepening of the yield curve did have longer bonds in a technically oversold condition, so the rally over the past few days has provided some respite. Nonetheless, consensus forecasts do continue to call for yields to continue to rise over the next 12 to 18 months, and as such we continue to have a negative view towards returns from fixed income over that time period.
Earlier this week Empire Life Insurance Co. became the first insurer to issue Limited Recourse Capital Notes (LRCNs) in the Canadian domestic marketplace. Their 60-year issue carries an initial coupon of 3.625%. If not called, the coupon will reset in 5-years at a spread of +3.082% over 5-year Canada bonds for another 5-year period, after which investor face another call or coupon reset. This type of issuance is a cheaper source of financing for companies than preferred shares, and we expect will continue to be used to refinance older rate-reset preferred shares that have high reset spreads and are coming up on call dates in the next few years. This has helped the performance of preferred shares over the past twelve months, not only due to the increased likelihood of call of many issues, but also by decreasing the outstanding supply and expectations for any increase in new issuance. Despite the strong rally, preferred shares remain relatively cheap in comparison to corporate bonds, and hence remain an attractive alternative for income investors, especially in taxable accounts.