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Just 3 sectors account for half of corporate Canada’s $600-billion in dead money

These are stories Report on Business is following Monday, March 4, 2013.

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Sitting on cash
Three sectors alone account for half of corporate Canada's almost $600-billion in "dead money," according to CIBC World Markets.

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The debate over "dead money" is also off-base, according to the bank, but more on that later. What's really neat in the findings by CIBC economists Benjamin Tal and Peter Buchanan is that about half of the cash is held by the real estate and construction sector, the manufacturing industry and oil and gas concerns.

Real estate and construction accounts for about 20 per cent on its own.

The "dead money" debate was sparked last year by Bank of Canada Governor Mark Carney, who urged Canadian companies to deploy it either through dividends to shareholders or spending on new equipment.

That took on added urgency last week when the Bank of Canada's annual survey of capital spending plans found that Canadian companies plan to boost spending on construction, machinery and equipment by just 1.7 per cent this year.

By almost any measure, that $600-billion of cash held by corporations outside the financial services industry is at record or near-record levels, the CIBC economists found after scouring the data.

"While these numbers can make many believe in the dead-money theory, in which excessive caution is preventing corporations from spending that cash, the reality is that all the increase in cash since the beginning of the recession can be fully explained by growth in GDP," said Mr. Tal and Mr. Buchanan.

"In fact, in real-terms, and as a share of GDP and corporate assets, cash holdings by corporations are now only back to their pre-recession levels," they said in a report today.

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"So in many ways, corporate Canada has been playing catch-up. Simply put, as opposed to popular belief, the pace of cash accumulation over the past five years does not reveal any abnormal increase in risk aversion. For corporate Canada, cash accumulation over the past few years was nothing more than a continuation of a long-term trend and in line with the prior cycle's normal business practice."

There are reasons for that.

"While businesses have increased the share of assets they hold in cash, they, at the same time, reduced the share allocated to other current assets," the economists said.

"Those largely comprise account receivables and inventories, which have been pared to less costly levels through improved logistics, manufacturing integration and better management information systems."

There are reasons, too, why the three big sectors account for so much.

The construction and real estate industries helped drive the recovery after the financial meltdown and "demand pressures" are now ebbing after the boom.

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"A dearth of pipeline capacity and a wide price differential are the major culprits behind the lack of growth in plans for oil and gas capital spending next year," the CIBC economists added.

"Ironically, the [Bank of Canada] itself is at least partly to blame for the headwinds in another area, manufacturing. Earlier rate hike hints helped push the loonie well above competitive equilibrium, causing some firms to expand elsewhere."

Fitch weighs in on housing market
The Fitch ratings agency puts the overvaluation of Canadian homes at about 20 per cent, The Globe and Mail's Tara Perkins reports.

Fitch today unveiled a new model it plans to use to estimate potential losses on pools of residential mortgages, and estimated that prices "are overvalued by approximated 20 per cent in real terms across Canada, with regional variations."

But, it added, it would take years for prices to fall to "sustainable values," and prices could decline by just 10 per cent.

Japan strikes LNG deal
Japan Petroleum Exploration has struck a deal with Malaysia's Petronas for a 10-per-cent stake in a B.C. natural gas project, a move aimed at securing energy supplies for Japan.

Japex, as it's known, said in a statement today that it will grab a stake in a natural gas development and a similar interest in a liquefied natural gas project on the coast.

This comes after Petronas won approval for the takeover of Canada's Progress Energy Resources Ltd.

Japex will get 1.2 million tonnes of liquefied natural gas, or LNG, which it said equals the 10-per-cent stake, and "with participation in this LNG project, Japex will be able to secure long-term natural gas import from Canada into Japan.

Kuroda vows to fight deflation
The next governor of the Bank of Japan is just itching to get at it.

"If I am confirmed as governor, I will clearly communicate to markets that I am prepared to do whatever it takes to beat deflation," Haruhiko Kuroda told his confirmation hearing today, according to The New York Times.

"The Japanese economy has suffered from deflation for over 10, almost 15 years, which is a global anomaly of the most extreme," he said.

"As prices have fallen, corporate profits and wages have shrunk, depressing consumption and investment and triggering even lower prices in a viscous cycle."

His appointment by Japan's new government comes amid intense pressure on the central bank to spur the economy.

The central bank meets this week, but he won't be in place by then, and so little is expected to happen.

"The weak trend in the [yen] will remain in anticipation of more easing when the dovish Kuroda is expected to assume the helm," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"In fact, Kuroda was already causing some waves overnight with his remarks in a confirmation hearing to the lower house. He said he like to start the open-ended asset purchases this year, and not wait until next year."

Swiss give shareholders pay power
Ever wish you had real input into how much bosses gets paid?

The Swiss voted yesterday to give shareholders the power to do just that. And their decision will be binding.

There are still details to be worked out, but Switzerland voted in a referendum, by a margin of about 68 per cent, to give shareholders a binding vote on executive compensation, bonuses, golden parachutes and severance.

This was a plan put forth by Thomas Minder, a Swiss business leader and senator, and it carries a jail term for those who ignore it.

And it comes after a tremendous fight put up by business and, for that matter, the government, which doesn't want companies pulling up stakes.

It also comes in the wake of an EU-wide plan for a ceiling on bank bonuses, and highlights the frustration in Europe, which is struggling under severely high unemployment and slow or no economic growth.

Switzerland is home to several highly-paid chief executive officers, and the plan could well spread across the region.

Already, opposition politicians in Germany, which heads into elections later this year, are calling for something similar.

Sneak peek at Target
Target Corp. said today its first three test stores will open in Canada tomorrow, in the Ontario centres of Guelph, Milton and Fergus.

"This is obviously a very critical milestone for Target," said the company's Canadian president, Tony Fisher.

The retailer will open 124 outlets this year.

The Globe and Mail's Marina Strauss toured the Guelph store today. Read what she learned.

BCE-Astral, Round 2
Months after announcing a new deal to buy Astral Media Inc. for $3-billion, the details of BCE Inc.'s offer will be made public for the first time this week, The Globe and Mail's Steve Ladurantaye reports.

They're likely to cause a stir in the media industry, considering that BCE's rivals launched a campaign to kill the first deal.

That initial run was rejected by Canada's telecom and broadcast regulator.

Where Buffett put his money
Warren Buffett laments the performance of Berkshire Hathaway Inc. last year, but investors still want to know where he's putting his money.

"When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1-billion would be subpar, in terms of the comparison we present on the facing page," Mr. Buffett said in his annual letter to shareholders late Friday.

"But subpar it was," he said, referring to Berkshire's 14.4-per-cent gain in per-share book value of both classes of shares, versus 16 per cent for the S&P 500.

"For the ninth time in 48 years, Berkshire's percentage increase in book value was less than the S&P's percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15 per cent or more. We do better when the wind is in our face."

Markets always want to know where Mr. Buffett is investing. So, according to a list in the letter for common share investments worth at least $1-billion by the end of 2012, Berkshire held:

  • Almost 152 million shares of American Express Co., or 13.7 per cent of the company, valued at $8.7-billion.
  • Some 400 million of Coca-Cola Co., 8.9 per cent, $14.5-billion.
  • More than 24 million of ConocoPhillips, 2 per cent, $1.4-billion.
  • Almost 23 million shares of DirecTV, 3.8 per cent, $1.15-billion.
  • More than 68 million shares of IBM, 6 per cent, $13-billion.
  • More  than 28 million shares of Moody’s, 12.7 per cent, $1.4-billion.
  • Some 20 million shares of Munich Re, 11.3 per cent, $3.6-billion.
  • Almost 21 million shares of Phillips 66, 3.3 per cent, $1.1-billion.
  • Almost 4 million shares of Posco, 5.1 per cent, $1.3-billion.
  • More than 52 million shares of Procter & Gamble, 1.9 per cent, $3.6-billion.
  • Almost 26 million shares of Sanofi, 2 per cent, $2.4-billion.
  • About 415.5 million shares of Tesco PLC, 5.2 per cent, $2.3-billion.
  • Some 78 million shares of U.S. Bancorp, 4.2 per cent, $2.5-billion.
  • About 54.8 million shares of Wal-Mart Stores, 1.6 per cent, $3.74-billion.
  • More than 456 million shares of Wells Fargo, 8.7 per cent, $15.6-billion.

Mr. Buffett pledged that he and partner Charlie Munger would not "change yardsticks," adding their goal is to boost book value at a faster pace than the increase in the S&P 500.

"If we do so, Berkshire's share price, though unpredictable from year to year, will itself outpace the S&P over time," he said.

"If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund. Charlie and I believe the gain in Berkshire's intrinsic value will over time likely surpass the S&P returns by a small margin."

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