These are stories Report on Business is following Thursday, May 9, 2013.
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Eisman frets about Canada
A hedge fund manager who made a killing betting against the U.S. housing market is now publicly fretting about Canadian real estate.
Steven Eisman's comments on Canada are arguably more important than those of other observers given that he put his money where his mouth was in the run-up to the U.S. meltdown, gaining renown and, eventually, becoming one of the players noted in The Big Short, the book by Michael Lewis.
Most observers believe that Canada's housing market, while cooling rapidly, is in a soft landing, with the exception of Vancouver. Canada's finance minister has moved several times to prevent a burst bubble and tame the mortgage market amid record levels of consumer debt.
At a conference in New York yesterday, Mr. Eisman, who founded Emrys Partners, noted the exceptional run-up in prices for Canada homes, deemed by the Economist as the most overvalued in the world.
He pointed specifically to Canada Mortgage and Housing Corp., according to published reports, warning that it's closing in on a $600-billion ceiling for its portfolio.
"When something gets that big, even governments get nervous," Mr. Eisman said, according to The New York Times, which covered yesterday's annual Sohn Investment Conference.
The nation's banks, he added, aren't protected enough should housing collapse.
The hedge fund chief also cited Home Capital Group, which, among other things, is a non-prime lender, as a possible trouble spot.
Just yesterday, Toronto-listed Home Capital posted a jump in quarterly profit to $59.7-million, or $1.72 a share, from $52.5-million, or $1.50, a year earlier, and said it believes Canada's housing markets are "in balanced territory" and still healthy.
"While the company experienced overall originations below the last quarter of 2012, the activity was within management's expectations given seasonality and the slower start to the spring housing market this year," it said.
"The company continues to observe good demand for its traditional mortgage products from customers with strong credit profiles and originations in this product were up over the same period last year. The company anticipates that demand for its traditional products to continue to be robust, but recognizes that over all markets have softened and demand could be reduced in future quarters. Management is prepared to adjust its strategy in such a situation."
While the housing market has cooled, most, though not all, economists say there's no crash in the offing.
"Tougher mortgage rules, high household debt and reduced affordability in some regions have taken the wind out of the housing market's sales, though most signs point to a soft rather than hard landing," BMO Nesbitt Burns says in a new forecast, citing the 15-per-cent in drop in existing home sales in March from a year earlier, but "milder declines" in some regions last month.
"That's not a bad outcome after a 10-year boom that took ownership rates to record highs and house prices up two-fold," BMO added.
"Builders have responded to softer demand by slowing construction in line with household formations."
The key measure of household debt to disposable income in Canada stands at about 165 per cent, and the Bank of Canada sees it stabilizing there.
While Canadians are holding the line, credit growth is still outpacing income gains.
In the first quarter of the year, for example, growth in mortgage debt from a year earlier was at its slowest pace since late 2001.
- Jacqueline Nelson in Streetwise (for subscribers): Home Capital confident of housing market
- Canadians still borrowing more, but at a much slower pace
- Tara Perkins in Economy Lab: Housing starts fall 3.5% in April as market faces ‘new reality’
- Peter Munk’s contrarian bet on Toronto’s condo market
- Housing a concern, but those fearing crash in for 'pleasant surprise'
- Billionaire investors take aim at U.S. Fed's policies
Canadian Tire to spin off real estate
Canadian Tire Corp. is taking a page from Loblaw Cos. Ltd.'s books, unveiled plans to spin off most of its property holdings into a real estate investment trust.
The REIT would own the Canadian chain's portfolio of some 250 properties, roughly 18 million square feet worth $3.5-billion, the company announced today.
Canadian Tire would hold 80 per cent to 90 per cent of the REIT, with the rest going to investors through an initial public offering planned for the fall, The Globe and Mail's Marina Strauss reports.
The company holds more than that going into the REIT, but stores under scrutiny for replacement, development or relocation wouldn't be included.
"We are executing a strategy that reinforces the strength of our Company while pursuing new growth opportunities organically and through acquisition," said chief executive officer Stephen Wetmore.
"Today's announcement regarding a REIT would increase CTC's financial flexibility, providing us with the ability to access funds at an attractive cost of capital as we continue to invest in and grow our business," he said, referring to the company by its stock symbol.
Plans for the REIT came as Canadian Tire posted a 2.9-per-cent jump in first-quarter profit to $73-million, or 90 cents a share, from $71-million or 87 cents a year earlier. Revenue climbed 1.7 per cent to $2.48-billion from $2.44-billion.
"We had a great start for the first 70 days of the quarter but that shifted dramatically in the last two weeks as a result of last March's early spring temperatures combined with this March's cold, wintry weather," Mr. Wetmore said.
"That said, the first quarter is our smallest for the retail segment."
- Canadian Tire plans $3.5-billion REIT with IPO in the fall
- Tim Kiladze in Streetwise (for subscribers): Just what we need - another REIT
Loonie near parity, yen sinks
The Canadian dollar is back to levels just shy of parity with the greenback, though down slightly today. The yen, on the other hand, is at a four-year low.
"It's very strong," chief currency strategist Camilla Sutton of Bank of Nova Scotia said of the Canadian currency. "It's flirting with parity. We just can't get there yet."
The strength of the currency is a headache not only for the country's exporters, but also for those who've been betting against Canada.
The currency, said chief economist David Rosenberg of Gluskin Sheff + Associates, has strengthened even amid the uncertainty related to the appointment of the next Bank of Canada governor, "defying the plethora of skeptics along the way."
Mr. Rosenberg noted how currency speculators have been betting heavily against the loonie, as the dollar coin is known in Canada, citing the shift to huge short positions on the Chicago Mercantile Exchange.
"The level of speculative net shorts on the Canadian dollar on the CME at nearly 70,000 contracts (a massive swing from net longs totaling 63,166 contracts at the end of 2012) is near its highest level ever," he said.
"In other words, the sellers of the loonie have totally exhausted themselves and the bears on Canada are hurting real bad," he added in his research note.
Mr. Rosenberg added that he had "a good chuckle" reading a Wall Street Journal story yesterday on the bearish sentiment.
"The last time the sharks on the CME thought they smelled loonie blood on the CME to this extent was back in July 2007," he said.
"The result - the mother of all short coverings which sent the [Canadian dollar] surging 7 per cent in the ensuing three months."
Today, the U.S. dollar topped the ¥100 mark for the first time in four years.
"The yen fell nearly 2 per cent to four-year lows against a generally strong greenback following better-than-expected U.S. jobless claims figures on Thursday," said Sal Guatieri of BMO Nesbitt Burns. The currency has lost 14 per cent of its value so far this year."
- U.S. dollar smashes through 100-yen barrier
- Kevin Carmichael in Economy Lab: Loonie's strength will be Stephen Poloz's first dilemma
- Canadian dollar to sink to 90 cents by early 2014: TD
- 10 reasons we're not losers (despite what 'short-Canada' crowd says)
- Meet the man who’s selling Canada short
- Sean Silcoff in ROB Insight (for subscribers): A bet against Canada is not so far-fetched
- Speculative bets against Canadian dollar mount
Oliver backs down
Canada's natural resources minister is playing down suggestions of his government launching a trade battle with the European Union over its proposal to label oil sands crude as dirty, The Globe and Mail's Paul Waldie reports from London.
In Brussels yesterday, Joe Oliver said Canada would consider a complaint with the World Trade Organization, which would come amid talks between Ottawa and the European Union over a trade deal.
But in London today, he pulled back.
"We have always kept, and will continue to keep separate, the issue of the trade negotiations and the fuel quality directive," he said. "That's something which the Europeans also want to do. So there is no issue."
BCE profit climbs
BCE Inc. posted a jump of almost 7 per cent in first-quarter profit as its wireless customers rose by almost 4 per cent to stand at 7.8 million.
TV subscribers rose 5 per cent, and Internet customers 1.3 per cent.
The Canadian telecommunications giant earned $566-million or 73 cents a share, compared to $531-million or 69 cents a year earlier.
"Our wireless and wireline operations have a positive profile and are well complemented by Bell Media, which continues to deliver solid profitability," said chief financial officer Siim Vanaselja.
"With a good start to the year across all our operating segments and no fundamental changes in outlook, our 2013 financial plan is on track as we reconfirm today all our guidance targets for the year."
Telus boosts dividend
Like BCE, Telus Corp. also posted a better quarter today, at the same time hiking its quarterly dividend by 11.5 per cent to 34 cents and unveiling a $500-million share buyback this year.
In fact, the carrier said it would hold that buyback target until 2016, for a total $2-billion.
Telus posted a first-quarter profit of $362-million or 56 cents a share, compared to $319-million or 49 cents a year earlier.
Revenue rose to $2.76-billion from $2.63-billion.
Telus said it added 59,000 postpaid wireless users, 34,000 TV customers and 16,000 on the Internet, while it lost some prepaid wireless and some wireline users.
Bombardier revenue climbs
Bombardier Inc. got a boost in revenue in the first quarter thanks to a strong performance in its aerospace division, The Globe and Mail's Bertrand Marotte reports.
The Montreal-based plane and train maker said today tat first-quarter revenue totalled $4.3-billion (U.S.), up from $3.5-billion a year earlier.
Bombardier profit dipped to $148-million or 8 cents a share from $155-million, also 8 cents.
Profit on an adjusted basis was $156-million or 8 cents per share, compared with $150-million or 8 cents in the same period last year.
"We had a good first quarter, with an overall increase in revenues of 25 per cent," said chief executive officer Pierre Beaudoin.
"Aerospace is showing increased deliveries, revenues and EBIT, and the CSeries tests are progressing well with first flight next month."
Cineplex profit dips
Shareholders of Cineplex Inc. got a 6.7-per-cent dividend increase today, but don't thank Iron Man, who was just a bit too late to the game.
As The Globe and Mail's Steve Ladurantaye reports, the Canadian movie chain boosted its dividend to $1.44 a year, even amid a 41-per-cent drop in first-quarter profit.
Cineplex earned $8.8-million or 14 cents a share, compared to 26 cents a year earlier.
Revenue was flat at $248-million.
That's because of a 5.5-per-cent drop in attendance and eroding box office revenues hit by a lack of blockbusters.
Iron Man 3 opened just last week. Just sayin'.
Streetwise (for subscribers)
Economy Lab
- Canadian dollar to sink to 90 cents by early 2014: TD
- An effective green policy needs sound economics
- Loonie's strength will be Stephen Poloz's first dilemma
ROB Insight (for subscribers)
Business ticker
- Microsoft moots $1-billion Nook purchase, Barnes & Noble shares leap
- Halifax's DHX Media snags deal as YouTube launches paid channels
- U.S. jobless claims fall to lowest level in more than 5 years
- Agrium profit slips, unveils share buyback
- China inflation quickens, highlights central bank policy dilemma
- Sony bid to revive electronics to hinge on smartphones
- Bank of England leaves policy unchanged