A hawkish Fed and on-hold BoC has pushed 2-year Canada-US spreads to their tightest levels since 2019. That has put downward pressure on the Canadian dollar which is closing in on October’s lows relative to the US dollar (around 72 cents). Back then, there was speculation—fueled in part by comments from Governing Council—that the BoC might have to continue with aggressive rate hikes to keep up with the Fed and support the currency. But the market was ultimately disappointed when the BoC downshifted to a 50 bp hike in October. As was the case last year, we don’t think the currency’s recent weakness will have a significant impact on monetary policy. The Canadian dollar is down by 7% year-over-year against the greenback but only 3% lower against the currencies of Canada’s other key trading partners. In the BoC’s March policy statement, it put the focus on a strong US dollar rather than a weak Canadian dollar. It also pointed to tightening financial conditions, and in our view the recent increase in Canadian bond yields offsets any stimulative impact from a weaker currency. From an inflation perspective, a 5% year-over-year decline in the trade-weighted Canadian dollar will add to import costs but puts only modest upward pressure on broader consumer prices. RBC Economics sees USD/CAD at $1.36 (73.5) in Q1, $1.37 (72.99) in Q2, $1.38 (72.46) in Q3 and ending the year at $1.39 (71.94).
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Couche-Tard (ATD-T) ATD announced the proposed acquisition of ~2,200 retail sites in Germany, Netherlands and Belgium from TotalEnergies for EUR $3.1 billion or 8x EBITDA. Management also expects to realize EUR$120 million in synergies within the first three years after the acquisition is closed. ATD also reported that adjusted EPS increased by 5.8% to US$0.74 vs consensus of US$0.77 due to negative fx impact. ATD has extensive experience in successfully acquiring c-store networks from integrated oil companies, and subsequently creating compelling value for investors. In our view, this transaction has all the hallmarks of an ATD deal: strategically compelling, geographically complementary, attractive valuation to deliver financially accretive transaction for shareholders. Owned in Core Portfolio.
(-) US Financials The last few days have seen some positive news for banks, with funding lifelines provided to First Republic Bank (FRC) and Credit Suisse, but there is still concern over the fragility of the industry. Deposits from 11 banks have gone into FRC, demonstrating the strong position of the industry overall. However, it seems that money market funds are receiving the majority of the flows that left troubled banks. Uncertainty surrounds what the Fed will do regarding inflation and a vulnerable market, but we expect increased capital and liquidity requirements for all banks, which will be manageable but hurt EPS. In the medium term, larger banks may benefit from less pressure on deposit betas, although the desire to hold onto deposits may temper this. On valuations, bank stocks look attractive with money centres and regionals trading well below long term averages. But there is still uncertainty about the regulatory fallout as increased regulation and liquidity requirements are likely for the industry, and banks are tapping the Fed Discount Window up to a record level. The RBC analyst remains cautious about the potential for a recession. We believe the large banks, JPM and BAC, can be owned at these levels given their stable deposit base and sound balance sheets, and discounted valuations.
(~) Bank of America (BAC-US) is said to have received more than $15B in new deposits in recent days following the collapse of three regional banks. Confidence in smaller lenders has taken a hit following the collapse of Silicon Valley Bank (SIVB), Signature Bank (SBNY) and Silvergate (SI). The large inflow was spurred by customers likely shifting to bigger banks deemed to big to fail. Owned in US Portfolio.
(+) Canadian Pacific (CP-T) The Surface Transportation Board (STB) announced its approval of Canadian Pacific Railway’s acquisition of Kansas City Southern on Wednesday. The decision noted that while both operators are Class I railroads, they are far smaller than peers like Union Pacific, CSX Corp, Canadian National Railway, and Norfolk Southern. Even after the merger, the new Canadian Pacific Kansas City railroad will remain the smallest Class I railroad. “The Board expects that this new single-line service will foster the growth of rail traffic, shifting approximately 64,000 truckloads annually from North America’s roads to rail, and will support investment in infrastructure, service quality, and safety,” the decision explained, outlining the benefits. “The transaction is also expected to drive employment growth across the CPKC system, adding over 800 new union-represented operating positions in the United States.” The merger is also expected to open up passenger routes for Amtrak as it creates the first railroad providing single-line service spanning Canada, the United States, and Mexico. Amtrak was noted as an endorser of the merger. Owned in Core Portfolio.
(+) Enovix (ENVX-US) develops and produces silicon-anode lithium-ion batteries and is seeing considerable insider buying. Two recent insider buys, a new facility in Malaysia, and the appointment of new leadership positions all point to the company’s scaling up. This week, Enovix’s president and CEO, Raj Talluri bought $65,000 worth of shares. That purchase is on top of T.J. (Thurman) Rodgers’ nearly $1.2 million worth of purchases in ENVX stock in the past week. Rodgers is the chairman of the board of directors at Enovix. Last week, the company announced its plan to build its first high-volume manufacturing facility, located in Malaysia. Owned in Opportunity Portfolio.
(+) Occidental Petroleum (OXY-US) The oil stock rose late in the week, outperforming the S&P 500 energy sector after Warren Buffett’s Berkshire Hathaway snapped up 7.9 million shares of the company. The average price for the purchases from Monday through Wednesday was $59.17, totaling $466.7 million. Berkshire now owns 23.1% of Occidental. Owned in Opportunity Portfolio.
(-) RBC U.S. Banks Yield Index ETF (RUBY-T) This passive ETF tracks the performance and index of 21 of the largest dividend paying U.S. bank stocks, as measured by market cap, weighted based on their indicated annual dividend yields. The top seven yielding stocks receive 50% weight (7.14% each), next seven yielding stocks receive 33.33% weight (4.76% each) and the bottom seven yielding stocks receive 16.67% (2.38% each). The portfolio is then reconstituted quarterly to include 21 largest banks, weighted based on their indicated annual dividend yields. Currently, the top holdings are Citizens Financial Group 7.24%,, Ally Financial 7.20%, Huntington Bancshares 7.11%, Us Bancorp 7.08%, Truist Financial 6.47%, Keycorp 6.09%, Comerica 6.08%, JP Morgan Chase 6.08%, Northern Trust 5.79% and Wells Fargo 5.5%. The ETF is down over 20% in the past week and a half. I will not be selling the ETF and will be holding tight. Units yield 3.53%. It is a 4.19% weighting in the Core Portfolio.
(+) NuScale Power Corporation (SMR-US) the industry-leading provider of proprietary and innovative advanced small modular reactor nuclear technology, announced results this week. Revenue $3.4M, +127% vs year-ago $1.5M. They experienced higher cash usage in 2023 than previously anticipated, with contributing factors including: below anticipated FY23 U.S. Department of Energy (DOE) cost share appropriations that the company is seeking to recoup in FY24, the delay of customer progress payments while maintaining delivery schedule, and an increase in R&D expense driven by inflation and added work scope to mitigate risk and ensure delivery execution. For 2023, this equates to an anticipated negative operating cash flow range of $102M to $142M. Owned in Opportunity Portfolio.
Weekend Reading
The Risks of Investing in Bonds Many market observers seem to lack an understanding of the effect of rising interest rates on fixed maturity securities. RATIONAL WALK
Bank stresses bubble to the surface Interest rates have soared and there can be unintended pressure on the financial system, especially when the monetary tightening is as substantial as that of the past year, and when interest rates were unusually low for an extended period of time beforehand. RBC GAM
The good news This past week, investors finally got one of their most important arrows back in the quiver. Bonds are working again. Treasurys are risk-off. This is critical. JOSH BROWN
