China is the world’s second largest global economy and the major producer of global exports. When the Chinese economy is growing or shrinking, it follows the strength and health of the global economy. Over the last several quarters, the Chinese economy has struggled to generate growth and for the first time in 23 months, the Chinese Finance Ministry failed to sell all of the debt offered at auction, primarily due to the cash squeeze that threatens to slow the economy. Within China, banks are hoarding money to meet quarter-end capital requirements while at the same time when capital inflows are easing. The global stock markets have retraced their gains due to the possibility that the Federal Reserve will taper its bond buying program. The decline in the markets combined with the worsening outlook for the economy has forced many banks to reign in their lending and take a more conservative stance in order to protect their capital. The impending cash crunch has eliminated the domestic appetite for bonds as the finance ministry was only able to sell 9.53 billion Yuan (approximately $1.55 billion USD) compared to the target of 15 billion Yuan. The Agricultural Development Bank of China Co. raised only 11.51 billion Yuan which fell well short of its 20 billion Yuan goal. The lack of liquidity and fear to buy bonds may force the central bank to inject capital into the market, which may be what the market/economy needs to move forward, but, could lead to an inflationary bubble forming within the domestic markets, especially the housing sector.
The health of the global economy is dependent on the health of the Chinese economy because they export a wide variety of goods all throughout the globe, not just to North America alone. China has deep economic ties with Africa and South America but their role in purchasing US Treasury debt cannot be understated. Without the ability to buy US Debt, the US may not be able to refinance their debt and could lose its AAA credit rating from other ratings agencies besides the S&P. A healthy Chinese economy helps boost the natural resource market because they tend to buy massive amounts of natural resources, many of which come from Canada. However, due to globalization, the Chinese economy requires strength from advanced economies to purchase their goods. The US and Canadian economies are growing but at a very slow rate, Europe has not seen real economic growth in several years due to the impact of the Eurozone debt crisis, and Japan has been mired in an economic slump since the recession and has seen its economy falter even further due to the massive earthquake and tsunami. Advanced economies are struggling to generate any economic growth above 1%, in fact, growth above 1% has been celebrated too heavily by the markets.
In terms of the TSX, the lack of growth in China and the fear to buy bonds domestically does not have a direct impact on whether or not the TSX rises or falls. However, China is one of Canada’s major trading partners and it is a major partner of the US. If the country’s economy weakens, the aftershocks will be felt in the US and in Canada and since the US is Canada’s largest trading partner, anything that affects the US economy either positively or negatively will impact Canada’s economy in the exact same way. As investors we need to ensure that we understand the impact that the Chinese economy has on the Canadian economy’s ability to generate growth because if Canada’s growth falters, there will be a contraction on the TSX.
Apr 23/13 : How can we explain gold dropping into the $1,300 level in less than a week?
Here are some of the factors:
George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the “printing” may not cause as much dollar debasement.
On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
The lackluster price movement since September 2011 fatigued some speculators and trend followers.
Cyprus was rumored to need to sell some 400 million euros’ worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.
Opinion: they are not big enough by themselves to have created such a large disruption in the gold market.
III. CIBC
Symbol:
CM
Exchange(s):
Toronto Stock Exchange, New York Stock Exchange
Industry:
Financial Services (Banks)
CORPORATE OVERVIEW. Canadian Imperial Bank of Commerce provides financial products and services to individual, small business, commercial, corporate and institutional clients in Canada and internationally. CM operates through three major strategic business units — Retail and Business Banking, Wealth Management, and Wholesale Banking.
Retail and Business Banking provides clients across Canada with financial products, advice and services, telephone banking, and online and mobile banking. It provides personal and business banking products and services.
Wealth Management includes asset management, retail brokerage, and private wealth management businesses. It provides a suite of investment and relationship-based advisory services to institutional, retail and high net worth clients.
Wholesale Banking provides credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail investment clients in Canada and internationally. It also conducts treasury execution activities.
CM operates a full-service platform that originates commercial mortgages to mid-market clients under four programs in the U.S. The construction program offers floating-rate financing to properties under construction. The interim program offers fixed and floating-rate financing, with average terms of one to three years for properties that are leased or with leasing or renovation yet to be done. In addition, the interim program provides operating lines to borrowers. These programs provide feeder product for the permanent fixed-rate loan program. The company has a joint venture agreement with a private equity firm that originates a pool of fixed-rate first mortgages secured by commercial real estate in the U.S.
CM securitizes credit card receivables through its Cards II Trust. It also securitizes commercial mortgages through a pass-through structure that results in ownership certificates held by various investors. CM’s international banking operations consist primarily of CIBC First Caribbean; and strategic investments in the CIBC Mellon joint ventures and The Bank of N.T. Butterfield & Son Limited. CM securitizes fixed and variable rate residential mortgages through the creation of National Housing Act (NHA) mortgage-backed securities (MBS). It sells MBS to a securitization trust and directly to Canada Mortgage and Housing Corporation under the Government of Canada NHA MBS auction process. Under the Canada mortgage bond program, the MBS are sold to a government-sponsored securitization trust that issues securities to investors. CM also securitizes Canadian insured prime mortgages and uninsured near prime and Alt-A mortgages to a trust.
IMPACT OF MAJOR DEVELOPMENTS. CM has made nine acquisitions and five divestitures in the past three years. Among them are the following: In August 2011, CM acquired a minority interest in American Century Investments, a U.S. asset management firm, for US$848 million. In September 2010, CM closed the acquisition of Citigroup’s (C) Canadian MasterCard portfolio for C$1.0 billion. In April 2010, CM completed the acquisition of CIT Business Credit Canada for C$306 million. In March 2010, CIBC Mellon Trust Company, a 50/50 joint venture between CM and The Bank of New York Mellon (BK) sold its Issuer Services business (stock transfer and employee share purchase plan services).
FINANCIAL TRENDS. CM’s income from continuing operations in the first quarter of FY 13 was C$798 million, down 4.4% from C$835 million a year earlier. Net income to common shares, after preferred dividends and minority interests, was C$771 million, down 0.6% from C$776 million a year ago. EPS from continuing operations, on a fully diluted basis, was C$1.91, down 1.0% from C$1.93 a year ago. Total net revenues rose 0.8% from a year ago, but non-interest expenses rose 10.9%, hurting earnings growth. Provisions for credit losses fell 22%, but not enough to help profit growth. Net interest income rose 0.7%, on 0.3% growth of interest-earning assets, and a narrower net interest spread. Total non-interest income rose 0.8%, on mutual fund fees, credit fees, and realized gains on available for sale securities, partly offset by lower trading revenues.
Retail and Business Banking profits rose 7.8%, to C$611 million. Wealth Management profits fell 10% from year ago results, which included large gains. Even though Wholesale Banking revenues rose 28.5% from a year ago, while provisions fell nearly 62%, profits fell nearly 32% from a year ago, due to performance-based compensation. CM’s income from continuing operations in FY 12 was C$3.339 billion, up 16.0% from C$2.878 billion in FY 11. FY 12 net income to common shares, after preferred dividends and non-controlling interests, was C$3.173 billion, up 18.0% from C$2.690 billion in FY 11. FY 12 EPS from continuing operations, on a fully diluted basis, was C$7.85, up 17.0% from C$6.71 in FY 11. Total net revenues rose 0.9%, on a 6.1% increase in net interest income, partly offset by a 5.9% decrease in noninterest income. Noninterest expenses fell 3.6%, boosting earnings. Retail and Business Banking reported profits of C$2.286 billion, up 4.7% from a year earlier. Wealth Management profit rose 21.5%, to C$339.0 million. Wholesale Banking profits rose 12.9%, to C$613million.
Annual Financials
Oct 31,2012
12 Months, C$
Oct 31,2011
12 Months, C$
Oct 31,2010
12 Months, C$
3Yr. Growth
Total Revenue ($000):
17,130,000
17,406,000
14,976,000
7.39
Earnings before Interest & Tax ($000):
4,994,000
4,933,000
4,711,000
23.62
Profit/Loss ($000):
3,339,000
2,878,000
2,452,000
41.68
Earnings per Share:
7.86
6.79
5.89
43.67
Total Assets ($000):
393,385,000
383,758,000
352,040,000
5.40
Dividends Per Share
3.64
3.51
3.48
Dividend Yield:
4.63
4.67
4.45
Return on Com. Equity:
22.40
20.89
19.22
Employees:
42,595
42,239
42,354
Company Information
Report on Business Magazine Top 1000 Ranking
Profit: 0008
Revenue: 0025
Assets: 0006
SUGGESTION- May Bonus trade: BUY @ $ 77/78 and SELL $ 80/81 500 shares = $ 1,000 gain ($ 2.00 profit per share)
With his last interest rate policy decision, Bank of Canada governor Mark Carney did the unspectacular and held the bank’s overnight lending rate at 1%, as it has been since September 2010. Carney also kept the same policy line proclaiming that eventually the next interest rate move would be a hike instead of a cut. According to the bank, “With continued slack in the Canadian economy, the muted look for inflation and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time”1. Basically what they are claiming is that despite the lack of real growth, the Bank of Canada is willing to rest on its laurels until the economy surges forwards or drops significantly. In its quarterly Monetary Policy Report that was released in March, the Bank believes that growth will reach 1.5% (abysmal) and reach to 2.8% in 2014. Statistics Canada will be releasing its first quarter reading on the economy on Friday June 1st and while analysts foresee a 2% annualized growth rate, the Bank predicts it will only reach 1.5%.
The Canadian dollar (CAD) rose on the news especially on the “appropriate period of time” portion of Carney’s announcement because it may indicate that the Bank might be willing to supply additional stimulus spending if the economy requires a boost. Carney was surprised that the economy had grown faster than expected and policy makers believe that there is still considerable room for the economy to grow. Additionally, it seems that Canadian’s debt burdens are shrinking as household credit posted its slowest annual growth in over 15 years in April. A shrinking/stabilizing debt burden will help reduce the risks of foreclosures and bankruptcies and will allow consumers to spend again to help propel the economy2.
As Mark Carney’s tenure as the governor of the Bank of Canada wraps up and he turns his eyes across the pond to England, I think his time will be looked at positively. Despite the fact that the majority of his policy decisions were to stand pat and that he was lucky that Canadian banks were forced to be more conservative than their counterparts across the world, many would give Carney’s performance two thumbs up. Overall, he guided the economy and while growth was quite strong over the last few years, his replacement Stephen Poloz will have the unenviable task of getting the Canadian economy back on track after several quarters of mediocre growth.
Here’s a recap of what happened on the TSX, Focus 5 stocks, several commodities and ETF’s. As usual, any questions or comments can be directed to joelchandran@train2invest.com.
Much has been written about the potential “fiscal cliff” faced by the US (click here to read article), but it seems that US equities are currently driving off an earnings cliff (click here to view video). As of last Friday, only 42% of the 98 companies in the S&P 500 who have already reported their earnings, reported sales figures that beat the market estimate. If this continues, this will be one of the weakest quarters for sales growth since the depths of the great recession in late 2008/early 2009. Over the past couple of years companies have been able to beat earnings estimates by cutting costs, but you can’t hide from sales declines forever. Europe in a near depression and a slowing China are starting to take its toll on corporate results.
Some of the companies that have reported disappointing results are some of the global economy’s bellweathers:IBM, DuPont, and 3M are just a few of the companies missing sales targest. DuPont also announced job cuts of 1,500, while Dow Chemical said it would cut 2,400 jobs (click here to read article). From the FT article:
US corporate earnings have so far been in line with forecasts that quarterly profits and revenues will fall for the first time since 2009.
Jack Ablin, chief investment officer at Harris Private Bank, said: “I give more weight to fundamentals than liquidity from the Fed.
The fact that we are seeing a 2 per cent drop in profits for the first time since 2009 . . . represents a directional change in the market.”
It is still early, but if this is a sign of things to come out of the US, then Mr. Ablin is probably right in that we are witnessing a major directional change in the makret. In Canada, the earnings season for the TSX 60 is just getting underway, with CN Rail announcing on Monday decent earnings (click here to read article) along with a cautious outlook for the rest of the year. Tomorrow we get a handfull of TSX 60 companies reporting their results. We are likely to see a number of Canadian companies across the commodity landscape report poor results. Keep a watchful eye on your companies.
