Friday, November 30, 2018

The Powell or Trump Put?

Fred Imbert of CNBC reports, Dow ends volatile November with more than 150-point rally on hopes of a US-China trade deal at G-20:
Stocks rose on Friday after a Chinese official reportedly said the U.S. and China are finding common ground on trade ahead of a key meeting between President Donald Trump and Chinese President Xi Jinping.

The Dow Jones Industrial Average rose 200 points while the S&P 500 and Nasdaq Composite gained 0.8 percent and 0.7 percent, respectively.

Reuters reported that a Chinese official said "consensus is steadily increasing" in U.S.-China trade talks. The official added, according to the report, that differences between the two countries remained. The report sent stocks to their highs of the day, erasing earlier losses.

Jeff Powell, managing partner at Polaris Greystone Financial Group, said investors are taking a "wait-and-see approach" ahead of the meeting. "I don't think people are expecting too much of a change, but if we can get some sign of progress, that will help."

Trump and Xi are scheduled to have dinner on Saturday and are expected to discuss trade issues between the two countries. Investors are eagerly looking ahead to the dinner, hoping the two leaders can quell trade-induced volatility in the global economy and corporate earnings.

U.S. Trade Representative Robert Lighthizer said Friday he expected the meeting to be a "success," raising hope that a trade truce between the world's largest economies could be struck.

Caterpillar and Boeing rose 4.4 percent and 0.8 percent, respectively. These stocks are considered bellwethers for global trade because of their high exposure to foreign markets.

However, China hawk Peter Navarro, Trump's trade advisor, will attend the dinner between the two. Navarro is seen as a contentious figure in terms of Washington's trade relations with Beijing due to his aggressive stance on the world's second-largest economy. He clashed with White House economic advisor Larry Kudlow earlier this month after saying any deal with China would be "on President Donald J. Trump's terms, not Wall Street's terms."

Friday also marked the last trading day of November. Barring a major sell-off, two of the major indexes are on pace to post solid gains for the month. The Dow is up 0.9 percent in November, while the S&P 500 has risen 1 percent.

Heading into December, however, stocks could be in for more volatility, said Bruce Bittles, chief investment strategist at Baird.

"We do not have evidence that a meaningful cyclical low is in place, and the character of any rally attempts that do emerge will be watch closely," Bittles said in a note. He added, however, stocks have historically done well in December.

"December has a well-known history as being a strong month of the year for stocks," Bittles said. "In fact, it is the strongest month of the year for U.S. stocks on an absolute basis. Stocks have rallied over the course of the month about three quarters of the time."

The Dow is also on pace to register its biggest one-week gain since late 2016, while the S&P 500 is on track to post its largest weekly rise since February.

Shares of World Wrestling Entertainment traded 6.7 percent higher after J.P. Morgan Chase upgraded them to overweight from netural, noting the company's valuation is attractive compared to industry peers.
After the worst October since 2008, stocks rebounded in November but not enough to make up for the losses in the previous month.

As I stated last week, it might not be bear market time for the overall market but the FAANG stocks got clobbered in October and remain weak.

While all eyes are on the G20 meeting and Trump and Xi's dinner, the big news this week was the Fed Chairman Jerome Powell saying on Wednesday that the central bank's benchmark interest rate is "just below" neutral.

That unleashed a massive rally on Wall Street on Wednesday, but after reading his prepared remarks, I think a lot of people are getting way too excited about the so-called "Powell put".

On Thursday, the Fed paved the way for a fourth rate hike in December but sent a clear signal that it would be flexible on plans to raise rates in 2019:
Minutes of the US central bank's November 7-8 meeting showed "almost all participants" agreed that another rate hike would likely be necessary "fairly soon."

But Fed officials also raised the prospect they could slow plans to raise rates next year, and discussed how to signal to investors that they would stay flexible "in responding to changing economic circumstances."

Thursday's minutes reinforce a message sent by Federal Reserve Chairman Jerome Powell as yet another signal the Fed may pause rate hikes next year. His speech to the Economic Club of New York sent markets soaring more than 600 points on Wednesday.
In other words, the Fed realizes the cumulative effects of their soon to be nine rate hikes are starting to hit financial markets and the US housing market and don't want to commit to three more rate hikes next year.

The problem is the damage is already done, and if you ask me, the US economy is already slowing considerably and will continue slowing next year (start taking your profits from USD long positions in Q1 of next year)

About the only Fed official who's making any sense these days is Minneapolis Fed President Neel Kashkari who appeared on CNBC earlier today stating rates should not go up when job creation is strong and inflation is tame:
Minneapolis Federal Reserve President Neel Kashkari told CNBC on Friday that central bankers should not be raising rates while job creation continues to be strong and inflation remains tame.

"For the three years since I've been at the Fed, we have been surprised by the labor market. We keep thinking we're at maximum employment. And then wage growth is tepid. And the headline unemployment rate drops further. Inflation has been well under control," he said. "If the U.S. economy is creating 200,000 a jobs a month, month-after-month, we're not at maximum employment."

With neither pillar of the Fed's dual mandate from Congress — to promote maximum employment and keep inflation from getting too high — throwing off warnings signs, the Fed should pause on rate increases at this point, Kashkari said. He added that hiking too forcefully before necessary could risk causing a recession in the U.S. economy. He believes rates are "close to neutral."

Furthering his case for holding rates steady, Kashkari said "there's still slack" in the labor market. Unless wages really go up or inflation spikes, a wait-and-see posture at the Fed makes sense, he suggested.

Kashkari is not a voting member on the central bank's policymaking committee this year or next year. But as a voter in 2017, he was against all three rate hikes last year, saying at the time there was no need to move because inflation wasn't a problem.

Over the long term, he thinks the economy won't grow much more than 2 percent. While that's been seen as a base case for some time, he said Friday that 2 percent growth at the near zero percent rates of the past is far more difficult to maintain with rates so much higher nowadays.

Kashkari appeared on "Squawk Box" as debate raged in the investment community on whether Fed Chairman Jerome Powell's speech this week really departed materially from the comments he made last month that led to widespread concern about the path higher next year for interest rates and an October market rout.

In Wednesday's address to the Economic Club of New York, Powell said rates are "just below" neutral, which appeared to be a sharp turn from his Oct. 3 remarks that rates were long way from neutral, a level neither stimulative nor restrictive to the economy.

The stock market ripped higher Wednesday on the thought that Powell softened his stance and thus signaled that the Fed may not be as aggressive as feared on rates. Stocks pulled back slightly Thursday. While U.S. stock futures were lower Friday, on the last day of the month, the market stands a chance at holding on to the small gains made in volatile trading in November.

Despite the initial optimism in the market, some prominent Wall Street economists said they did not see a major difference in what Powell said this week compared to last month.

The central bank has already increased rates three times this year, with one more expected in December. The target range for the central bank's benchmark federal funds rate, which banks charge each other for overnight lending, stands at 2 percent to 2.25 percent. After its most recent hike, in September, the Fed projected three rate increases for next year.

In recent months, Powell has been under constant pressure from President Donald Trump to halt rate hikes. Trump told The Washington Post Tuesday that he blames Fed policies for the stock market declines and General Motors' plan to cut production at several U.S. plants.

Kashkari on CNBC Friday defended the Fed's independence.

"Inflation expectations are so anchored because of the political independence of the Fed, because the Fed has done a good job over the last 20 or 30 years. That to me is something that is enabling this economy to continue strengthen, enabling the job market to continue to strengthen without inflation taking off. And so, let's let it continue."

Kashkari, who unsuccessfully ran as a Republican for governor of California in 2014, served as the administrator of TARP, the Troubled Asset Relief Program, at the Treasury Department during the financial crisis. After leaving Washington, he joined Pimco as a managing director and head of global equities. Before his time at Treasury, he was a vice president at Goldman Sachs.
A friend of mine who trades currencies sent me something this morning after I sent him this article:
Here is some food for thought... US funds rate is at 2.25% core inflation is 1.8% so real rate is 0.45% hardly tight monetary conditions. The problem is consumers can't borrow at 2.25% ... the prime rate is 5.25% so the banks charge a 3% spread for their best customers... avg credit card rate in the US is 17.14%... avg rate on 1 year US CD's by the banks is 2.5% and 30yr fixed mortgage rate is 4.90% vs 3.30 for the 30 year bond.

So, essentially US banks take a huge spread on short term loans which is very greedy and this is what the problem is. That is what Trump should be complaining about.

In Canada, the Bank of Canada rate is at 1.75% and the prime rate is 3.95%. During the decade of the 1990s the spread between the two averaged 1%, during the 2000s it averaged 1.5% and now its north of 2% sneaky creeping up and nobody says anything. On top of that they always increasing service fees.

So, the takeaway is that central banks can do what they want but domestic banks move in unison and try to continuously widen their spread to the detriment of the consumer and economy.

The correct scenario is poor credit should not have access to cheap money, good credit should get better rates and savers should get paid more for their money. Banks need to narrow their lending spreads.

Another problem is greedy corporate management that uses the company cash reserves to buy back stock (which benefits them) and raises their own compensation at a multiple of the inflation rate but refuses to raise the avg employee salary. We all have heard how the avg CEO salary as a multiple of the avg employee at their company. In 1950s the avg CEO made 20x what the avg worker made. In May of this year it hit 361x.. Hey, if you started the company took all the risk, built it up, God bless you, make as much as you want...but if you didn't then its a different story.
He's absolutely right, banks are collecting huge spread and compensation is out of whack but I'm sure some academics at Harvard or Yale's business school will defend the current bloated compensation structure at corporate America so their very wealthy alumni can keep donating to their large endowment funds.

The system is rigged folks, it's been rigged forever to favor the affluent class. Even financial markets are rigged with some participants getting information seconds ahead of others which is all they need to have an "edge" and make a killing in markets.

Anyway, don't get me started on that tangent, it will devolve and get ugly very quickly.

What I find interesting is even though banks rallied on Friday (with exception of Goldman Sachs),  financial shares (XLF) remain weak (click on image):

Now, given my macro view that the US economy is slowing and will follow the rest of the world lower next year in a synchronized global slowdown, I remain bearish on cyclical shares like energy (XLE), financials (XLF) and industrials (XLI).

But markets swing so violently that it's hard staying bearish on some sectors (like energy) and even in financials, there are opportunities like shares of Goldman Sachs (GS) which have been clobbered following the 1 MBD scandal (click on image):

Had lunch with two friends of mine today and one said "I think Goldman is going under." I replied: "No chance. Zero, zilch. This feels a lot like JP Morgan's London Whale scandal and I ended up buying those shares at $35 and sold them at $70."

In fact, on StockTwits today, I recommended buying out-of-the-money calls on Goldman's shares at these levels and hedging that with some puts (2 to 1 call/put ratio).

I realize that chart is bearish and signals more downside ahead, but either Goldman leads the rest of the banks or something is way off and the premium other banks are receiving here is ridiculous.

What about Malaysia? What about it? Goldman will pay a fine and move on. Trump will call the Malaysian Prime Minister and tell him: "That's it. Lay off Goldman."

People have this irrational hatred toward Goldman. They need to relax, it's a great bank with a boat load of smart people printing money. I'm sure their traders are thriving in these volatile markets.

Anyway, back to the G20 and the Trump - Xi dinner. I'd be surprised if there is a major positive announcement, however, Trump has shown his cards, he tracks the stock market very closely.

If Powell is now on the fence, it's up to Trump to do something on trade to ease fears in the stock market. He might say there will be no new tariffs on China as the US continues to negotiate trade with that country and that might be enough to lift Chinese and US shares higher.

Interestingly, on Friday, I noticed iShares China Large Cap ETF (FXI) and the Kraneshares China Internet ETF (KWEB) were both up big on expectations some good news will come out of the G20.

Both these ETFs have bounced but remain very weak (click on images):

If you believe China is turning the corner, you should be loading up on these ETFs, especially KWEB. I remain skeptical as China just reported its weakest factory growth in over two years on eve of US trade talks, but I remain open-minded and I'm tracking these ETFs very closely.

Below, Lori Calvasina, RBC Capital Markets head of US Equity Strategy, and Bruce Bittles, Baird chief investment strategist, discuss markets ahead of the G-20 summit in Buenos Aires.

Second, Neel Kashkari, Minneapolis Fed President, joins 'Squawk Box' to discuss the state of the labor market, neutral rates and the chance of a recession.

Third, Gluskin Sheff’s David Rosenberg believes a liquidity squeeze could hit stocks hard next year, stating people are ignoring the 'elephant in the room'. Very interesting comments, listen carefully to Rosie's comments.

Lastly, investors are piling into boring defensive stocks like P&G (PG) as 2018 comes to an end. While the rest of the market struggles to get back up to record highs, consumer staples stocks like Church & Dwight and Hormel have quietly rallied to new highs. Mark Newton of Newton Advisors and Erin Gibbs of S&P Global Market Intelligence discuss whether their rally can continue.

Hope you enjoyed this market comment, please remember to kindly donate to this blog on the right-hand side, under my picture using the PayPal options. I thank all of you who support my efforts.

Thursday, November 29, 2018

Caisse to Co-Invest in Colombia's Infrastructure?

The Caisse de dépôt et placement du Québec put out a press release, Creation of a private capital fund led by FDN and including all Colombian pension funds to co-invest in infrastructure with CDPQ:
An infrastructure co-investment platform was officially launched with the President of the Republic of Colombia, Iván Duque, the President and CEO of Caisse de dépôt et placement du Québec (CDPQ), Michael Sabia, and FDN President Clemente del Valle, as well as the presidents of all Colombian pension fund administrators in attendance.

The FDN and Colombian pension fund administrators (AFPs) have created a new private capital fund of USD 490 million. This fund will co-invest with CDPQ through a platform whose objective is to make capital investments in infrastructure projects and companies for a total amount of up to USD 1 billion. CDPQ will contribute up to USD 510 million. The minimum size of each investment will be USD 50 million, split between the fund and CDPQ.

"We are very pleased to invest in Colombia with the private capital fund created by the FDN and pension fund administrators. This partnership combines our partners' market knowledge with our expertise in infrastructure. We believe that together, we can find the best investment opportunities in a variety of sectors, generate returns for our respective pensioners and at the same time contribute to economic growth in Colombia", stated Michael Sabia, President and CEO, CDPQ.

Following significant efforts to raise infrastructure debt financing, the FDN also identified a need for equity investments. This is how it came to spearhead the creation of the private capital fund, the co-investment platform and the partnership with CDPQ, a long-term strategic partner with a vast experience in infrastructure investment in various countries. Through these three initiatives, the FDN will be able to mobilize up to 10 times the invested resources.

"With this private fund, capital will be invested in infrastructure, with the support of all Colombian pension fund administrators, who will be able to make long-term equity investments in projects and companies, hand-in-hand with a professional, highly reputable investor and global leader in infrastructure investment, CDPQ. This is a leap for the country in the field of infrastructure financing", said FDN President Clemente del Valle.

The investment processes of the private investment capital fund will be conducted by the administrator, INFRAESTRUCTURA ASSET MANAGEMENT COLOMBIA SAS, a wholly-owned FDN subsidiary.

Investors in the private capital fund will include the FDN, with up to 20% of the total, and the remaining 80% will come from Colfondos, Old Mutual, Porvenir and Protección.

About the FDN

The Financiera de Desarrollo Nacional (national development finance agency – FDN) is a specialized, technical and independent private entity charged with mobilizing the players and resources necessary to successfully develop the country's infrastructure. Its specialization and knowledge of infrastructure and financing enable it to design solutions with sophisticated and innovative schemes and mechanisms aimed at adequately managing risks, and identifying and attracting other sources to participate in financing schemes. Through its objective of overcoming financing barriers and providing solutions, the FDN promotes efficient financing structures with the aim of obtaining competitive sources of long-term financing and mitigating the risks of refinancing.

The arrival of the IFC, Sumitomo Mitsui Banking Corporation and CAF Development Bank of Latin America as FDN shareholders bolstered the entity's independence by bringing international best practices and solid corporate governance. These investors also reinforced the FDN's technical capability by promoting financing of the country's infrastructure projects and strengthened its financial muscle by mobilizing all of the stakeholders needed to fulfill this mandate.

About CDPQ

Caisse de dépôt et placement du Québec (“CDPQ”) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2018, it held CAD308.3 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
This is a big deal for all parties involved. The Caisse gets  a great partner in FDN and in return FDN gets an experienced partner in the Caisse, an organization which is arguably one of the best infrastructure investors in the world and doing things no other pension is doing in the asset class, like the greenfield REM project.

Co-investing alongside the Caisse will allow both entities to develop Colombia's infrastructure without paying huge fees to outside funds. FDN has the expertise to find the projects it wants to invest in and the Caisse is a great partner with a lot of experience in this area.

Colombia's economy is set to grow 2.6 percent this year, the central bank chief said on Thursday, a slight decrease from previous bank predictions of 2.7 percent. A friend of mine visited the country last year and was extremely impressed.

Earlier this month, the Caisse announced a deal with Brookfield Business Partners to acquire Power Solutions business from Johnson Controls:
Brookfield Business Partners L.P. (NYSE:BBU) (TSX:BBU.UN) ("Brookfield Business Partners") together with institutional partners (collectively, “Brookfield”) and Caisse de dépôt et placement du Québec (“CDPQ”), today announced that they have reached an agreement whereby Brookfield and CDPQ will acquire 100% of Johnson Controls’ Power Solutions business (“the Business”) for approximately US$13.2 billion.

“We are excited to grow our business with the acquisition of Power Solutions, a global market leader which generates consistent cash flows and profitability,” said Cyrus Madon, CEO, Brookfield Business Partners. “We look forward to partnering with the management team to continue growing this world-class business and build on its track record of innovation.”

“We are very pleased to partner with Brookfield, that shares our vision of value creation through long-term commitment,” commented Stéphane Etroy, Executive Vice-President and Head of Private Equity at CDPQ. “This transaction enables us to acquire not only the world leader in automotive batteries, but also a model in terms of environmental and health & safety measures, that runs one of the most efficient industrial recycling systems globally.”

Business Overview

The Business produces batteries for global automakers and aftermarket distributors and retailers for use in nearly all types of vehicles, including hybrid and electrical models.


Market Leading Business with Strong Competitive Position. The Business is the market leader in automotive batteries, with significant global reach and market share in both original equipment manufacturers and aftermarket channels. It is well positioned to benefit from growth in demand for advanced batteries in all vehicle powertrains including electric vehicles.

Durable Business with Stable Cash Flows. The Business generates stable cash flows driven by non-cyclical aftermarket sales which comprise approximately 75% of its profit. Its position as a low-cost producer in its core markets has enabled consistent growth through business cycles.

Long-Standing Relationships with Diverse Customer Base. The Business holds long-term relationships with top-tier original equipment manufacturers and auto retailers globally, which are served by its more than 15,000 employees in 150+ countries.

Reputation for Safety, Product Quality, and Performance. Through its 100+ year history, the Business has earned a reputation for strong environmental health and safety standards, including a differentiated closed loop recycling program, and best-in-class product quality and distribution, supporting improved performance and reliability for its customers.


The transaction will be funded with approximately US$3 billion of equity and approximately US$10.2 billion of long-term debt financing.

Brookfield Business Partners expects to fund approximately 30% of the equity on closing from existing liquidity. CDPQ will commit to fund approximately 30% of the equity on closing, and the balance will be funded by other institutional partners. Prior to or following closing, a portion of Brookfield Business Partners' commitment may be syndicated to other institutional investors.


Financing will be led by a syndicate of banks including Barclays, Credit Suisse, JPMorgan Chase, BofA Merrill Lynch, BMO Capital Markets, CIBC Capital Markets, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, RBC Capital Markets, The Bank of Nova Scotia and TD Securities, who are each (other than Barclays) also acting as financial advisors to Brookfield.

Davis Polk & Wardwell LLP is acting as lead deal counsel to Brookfield. In addition, Baker McKenzie is providing non-US legal advice, Cahill Gordon & Reindel LLP is providing compliance advice and Weil, Gotshal & Manges LLP is providing consortium advice to Brookfield. Kirkland & Ellis is acting as legal counsel to CDPQ.

Transaction Process

Closing of the transaction remains subject to customary closing conditions including regulatory approvals. Closing is expected to occur by June 30, 2019.

About Brookfield Business Partners

Brookfield Business Partners is a business services and industrials company focused on owning and operating high-quality businesses that benefit from barriers to entry and/or low production costs. Brookfield Business Partners is listed on the New York and Toronto stock exchanges. Important information may be disseminated exclusively via the website; investors should consult the site to access this information.

Brookfield Business Partners is the flagship listed business services and industrials company of Brookfield Asset Management Inc. (NYSE: BAM)(TSX: BAM.A)(EURONEXT: BAMA), a leading global alternative asset manager with more than US$300 billion of assets under management.

About Caisse de dépôt et placement du Québec

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2018, it held CA$308.3 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
Earlier today, I was looking at 5-year chart of Brookfield Asset Management (BAM) with Fred Lecoq and we noted it's doing great (click on chart):

Fred told me he met Bruce Flatt, Brookfield's CEO and billionaire toll collector of the 21st century and he's a "very sharp guy."

I'm sure he is and the other thing Brookfield does is invest in infrastructure all over the world including Latin America. Don't be surprised if it partners up with the Caisse and FDN on some deals (for those of you who don't know, Brookfield is the best infrastructure investor in the world).

What else? The Caisse just announced that it is taking an equity interest totalling $200 million in Plusgrade, a leading provider of revenue solutions to the global travel industry. The transaction values Plusgrade at over CA$600 million:
With this backing, the company will continue to execute its expansion plan, which includes penetrating new international markets and expanding its suite of products. Since its founding in Montréal in 2009, Plusgrade has become one of the fastest growing technology companies, and was ranked in Deloitte’s Canadian Technology Fast 50 list in 2016 and 2017. Recently, it also received the Deloitte Technology Fast 50 Leadership award, which recognizes the innovation and leadership of companies at the forefront of the Canadian technology sector.

Led by a solid management team, Plusgrade is rapidly expanding its team across its Montréal headquarters and its New York and Singapore offices.

Over 70 travel companies worldwide, including Air Canada, Lufthansa and Singapore Airlines, trust Plusgrade to deliver key revenue streams via software solutions for optimizing their seat inventory. Its signature product provides travellers with an opportunity to bid on upgrades to a superior class of service.

“Plusgrade has a unique and innovative business model that is revolutionizing practices in its industry. Meeting an airline industry need, their products have been quickly marketed around the world in the last few years,” stated Mathieu Gauvin, Senior Vice-President, Québec, at la Caisse. “This investment is aligned with our strategy of supporting the growth of Québec companies that prioritize innovation to drive their international development.”

In the context of this transaction, la Caisse acquired a portion of the shares held by TA Associates, a leading global growth private equity firm that will continue to be a major shareholder, alongside the management team and other investors.

"We are very excited to welcome la Caisse as our new institutional investment partner as we accelerate our growth into new markets and verticals," said Ken Harris, Founder and CEO, Plusgrade. "The confidence that la Caisse and TA Associates have shown in Plusgrade is a testament to the value that our talented team is delivering across our global footprint of travel suppliers. We look forward to la Caisse joining our Board and providing valuable guidance as we pursue our strategic growth initiatives."

Morgan Stanley Canada Limited served as financial advisor and Davies Ward Phillips & Vineberg LLP served as legal counsel to Plusgrade. Osler, Hoskin & Harcourt LLP served as legal counsel to la Caisse.


Plusgrade is an award-winning technology company at the forefront of ancillary revenue and merchandising in the global travel industry. As the market-leading provider in its category of upsell solutions, Plusgrade is generating billions of dollars of new revenue opportunity and powering leading travel suppliers in more than 50 countries. Plusgrade is headquartered in Montréal with offices in New York and Singapore. For more information, please visit
If you want to know why Montreal's economy is thriving, look no further than to innovative tech companies like Plusgrade.

Unlike other large Canadian pensions, the Caisse has a dual mandate to maximize returns and invest in Quebec's economy.

That leaves me with a final thought. Michel Girard of Le Journal de Montréal, the same journalist who criticized Quebec's government for "wasting $4 billion on the Caisse's train," is back at it today with a new article, Sommes-nous les dindons de la farce? ("Are we the turkeys of the farce?").

In it, he criticizes the Caisse, l’Agence métropolitaine de transport (AMT) and VIA Rail for not doing enough to support the local economy by ordering their trains from Bombardier, a local company.

It never occurred to this guy that maybe the problem is Bombardier isn't competitive enough and wasn't able to compete to win those mandates which went through a rigorous tender process.

On one hand he talks about wasting taxpayers' money and on the other he wants the Caisse and other agencies to just order from Bombardier no matter the cost.

Well, I have news for Michel Girard, the people working at the Caisse, AMT and VIA Rail aren't turkeys who will just hand over money to Bombardier without a tender process.

I note the Caisse and and the Fédération professionnelle des journalistes du Québec (FPJQ) just announced the creation of the Fonds CDPQ pour la relève journalistique, an initiative that will provide ten young journalists or students each year with a $10,000 bursary enabling them to take a paid three to four month internship with a Québec media outlet.

Maybe they can teach these aspiring journalists the value of good old-fashion investigative journalism which isn't blatantly biased or full of disinformation (Trump is right about "Fake News" but it's fake and pathetic on all sides).

Lastly, I note Michael Sabia is at the G20 conference where he stated: "We should be investing in infrastructure that contributes to a lower-carbon economy. Too many investors still see climate change as a constraint. It’s not – it’s an opportunity. It’s time to turn the telescope around and think differently."

He must have attended OPTrust's climate change symposium last week.

Below, Caisse de Depot et Placement du Quebec Chief Executive Officer Michael Sabia discusses the importance of continuing multilateral negotiations ahead of the Group of 20 summit in Buenos Aires. He speaks with Bloomberg's Erik Schatzker on "Bloomberg Markets: The Close."

And the Venezuelan exodus is already having a deep impact on Colombia's economy. The arrival of more than a million new people is putting short-term pressure on the economy but it could also be a long-term boon for the nation, according to a new report. See the details here.

Wednesday, November 28, 2018

Busy November at PSP Investments?

It's been a busy month at PSP Investments so I decided to do a recap. At the beginning of the month, Benefits Canada reported, AIMCo, BCI, PSP close agreement to affiliate timber investments:
The Alberta Investment Management Corp., the British Columbia Investment Management Corp. and the Public Sector Investment Board have closed a previously announced plan to conglomerate their long-term timber investments.

Originally announced in August 2018, the agreement affiliates timber investments TimberWest Forest Corp. and Island Timberlands Ltd. Partnership. Moving forward, the two organizations will continue as standalone companies, but share facilities and corporate services.

The benefits for the move include improved logistics through the use of shared roads, sort yards and infrastructure, enhanced forest health through coordinated stewardship and integrated best practice approaches to managing the watershed, ecosystem and species at risk, according to a press release.

TimberWest was first acquired by BCI and PSP in 2011, while AIMCo and BCI have been limited partners in Island Timberlands since 2005.
Also, at the beginning of the month, SWFI reported that PSP plans to open a Hong Kong office for 2019, following the path of its peers such as CPPIB and Ontario Teachers' Pension Plan. According to the release, PSP plans to "increase its exposure to Asian assets by hiring more managers and identifying potential co-investments."

PSP also sold off a major Paris office building at the beginning of the month:
The Public Sector Pension Investment Board, alongside global real estate developer Tishman Speyer Properties, is selling Parisian office building Tour Pacific to Société Générale Insurance Group.

After taking on the 53,000 square metre office building in 2013, the two investors renovated and refurbished it, adding 30 tenants. The building features a office spaces, a conference centre, fitness space and lounge. The amount of the transaction was not disclosed.

“Tour Pacific is an exemplary case of PSP’s ability to align itself with best-in-class partners to execute on tactical value creation strategies in core global markets,” said Stéphane Jalbert, managing director of real estate for Europe and Asia Pacific at the PSP. “Tour Pacific was modernized through a comprehensive refurbishment to meet the demands and expectations of today’s tenants, while taking advantage of the unique building design and vibrant La Défense submarket.”

Philippe Joland, senior managing director and president of Tishman Speyer France, noted the company’s goal was to create an appealing office building with new services and amenities, as well as a great work environment. “We also believe that managing the asset directly creates additional value through the development of a unique relationship with the tenants,” he said. “Tour Pacific has become a long-term, high-quality asset with a core profile as evidenced by the sale to Société Générale Insurance.”
More recently, VCCircle reported, PSP, Ferrovial vie for GVK Airport stake:
Canadian pension fund PSP Investments and Spanish infrastructure company Ferrovial are vying to pick up a 49% stake in GVK Airport Holdings Pvt. Ltd, a wholly owned unit of GVK Power and Infrastructure Ltd, a media report said.

The Times of India reported, citing people aware of the development, that GVK will use the funds from the stake sale to invest in the Navi Mumbai airport and pare debt.

GVK Airport holds 50.5% of Mumbai International Airport Ltd (MIAL), which is developing the Navi Mumbai airport. The other shareholders in the Mumbai airport operator are South Africa’s Bidvest Group (13.5%), Airports Company South Africa (10%) and Airports Authority of India (26%).

Citigroup is advising GVK on the stake sale, according to the report. GVK Airport Holdings has a debt of over Rs 8,000 crore, it added.

Last week, GVK Power had received its shareholders’ approval to raise up to Rs 8,000 crore through various options.

Ferrovial operates four airports in the United Kingdom, at Heathrow, Glasgow, Aberdeen and Southampton, according to its website.
Airport Technology also reports, PSP and Ferrovial emerge as final applicants for stake in GVK Airport:
Spanish airport operator Ferrovial and Canada-based Public Sector Pension Investment Board (PSP Investments) have emerged as two final candidates seeking to acquire a majority stake in India’s GVK Airport Holdings.

GVK owns and operates the country’s second busiest Mumbai International Airport. It will also manage the proposed Navi Mumbai International Airport.

The development comes after GVK Power & Infrastructure sought shareholder approval to sell more than 50% stake in its wholly owned subsidiary GVK Airport in a bid to raise up to Rs80bn ($1.13bn), reported

Proceeds will be used to pay debt and develop the Navi Mumbai airport. Citigroup is advising GVK over the transaction.

One source told the publication that the share sale to one of the bidders would be limited to 49%. Additionally, GVK Airport may launch an IPO by next year that will help promoters reduce their stake below 50%.

PSP and Ferrovial have emerged as the final bidders for the deal, which also saw participation from infrastructure investor in Australia AMP Capital, Abu Dhabi Investment Authority and Malaysia Airports, among others.

PSP Investments controls Germany-based airport operator AviAlliance, which owns stakes in Hamburg, Düsseldorf, Athens and Budapest airports.

Ferrovial operates Heathrow, Glasgow, Aberdeen and Southampton airports in the UK.

GVK Airport holds a 50.5% share in Mumbai International Airport, which has won the rights to develop the Rs150bn ($2.12bn) Navi Mumbai airport project through a step-down subsidiary.
India is a hot emerging market for Canada's large pensions and there are different ways to invest through public and private markets. This is an infrastructure deal which is a great long-term play in India.

In another recent infrastructure deal, Kirk Falconer of PE Hub Network reports PSP Investments buys 49 pct stake in Stillwater Wind Facility:
Pattern Energy Group Inc (TSX, Nasdaq: PEGI) has acquired a 35 megawatt owned interest in the Stillwater Wind Facility from Pattern Development.

Pattern Energy acquired 51 percent of the class B interests in the Montana wind power facility for about US$23 million.

Canada’s Public Sector Pension Investment Board (PSP Investments), which agreed last year to co-invest US$500 million in projects acquired by Pattern Energy, took 49 percent of the class B interests in Stillwater.

The facility commenced commercial operations in October.

Pattern Energy Group LP, Pattern Energy’s main shareholder, is backed by U.S. private equity firm Riverstone Holdings.
As you can see, it's been a very busy month at PSP Investments and even though they don't have press releases on all these deals, there's a lot of activity involving the pension fund lately.

I also invite you to scroll through PSP's Twitter account here to keep informed of investments and other corporate activities.

Below, NMIA is one of the world’s largest ”Greenfield” international airports, currently proposed for development, offering world-class facilities for passengers, cargo, aircrafts and airlines.The proposed second airport for MMR is located at Navi Mumbai for several reasons. Prominent among them is the fact that Navi Mumbai is expected to cater to the future growth in population, business and commercial activities of MMR.The availability of excellent physical and social infrastructure coupled with an environment-friendly site makes the Navi Mumbai Airport project both technically feasible and financially viable.The Airport master plan will be developed in modules, operated and managed to internationally recognized standards.

NMIA will support the rapidly growing air travel needs of Mumbai Metropolitan Region. It is expected to absorb annually 10 million passengers in its first operational year 2017, 25 million by 2020 followed by 45 million passengers in 2025 and ultimately 60 million by 2030.

Like I said, this is a great long-term investment for PSP and its members.

Tuesday, November 27, 2018

Ontario Teachers' Tracking Fleet Complete?

Business Wire News reports, Fleet Complete Announces New Investment Partnership with Ontario Teachers':
Fleet Complete®, one of the fastest growing tech companies in the connected vehicle space, today announced that it has entered into a new investment partnership with Ontario Teachers’ Pension Plan (Ontario Teachers’).

Ontario Teachers’, Canada’s largest single-profession pension plan, is acquiring equity from existing investors, including funds managed by Madison Dearborn Partners (MDP), a leading private equity firm based in Chicago. Ontario Teachers’ will work in joint partnership with Fleet Complete’s management team and MDP to continue executing against the company’s strategic plan.

“I am thrilled to partner with Ontario Teachers’ and it’s a bonus that we both share Toronto as our respective headquarters,” said Tony Lourakis, founder and CEO of Fleet Complete. “Ontario Teachers’ provides Fleet Complete with access to significant long-term capital. This, coupled with our ongoing partnership with MDP, will enable us to continue our fast growth and focus on being the world’s leading provider of mission-critical connected technologies for fleets, assets and mobile workforce-based businesses.

Established in the technology industry for twenty years, Fleet Complete has one of the leading and most comprehensive connected vehicle platforms globally, helping small to medium-sized businesses and large enterprises improve their daily operations. Serving 500,000 subscribers around the world, Fleet Complete harnesses state-of-the-art technology and partnerships with leading global OEMs to provide some of the most innovative solutions for clients.

Ontario Teachers’ Private Capital group has a long history of investing in the technology sector, as well as a track record of working with leading management teams to execute on their growth ambitions.

“We are excited to partner with Tony and Fleet Complete’s management team, along with MDP, to help build on this great Canadian success story,” said Jane Rowe, Senior Managing Director, Private Capital, at Ontario Teachers’. “Fleet Complete has a proven track record of robust growth, underpinned by its successful global expansion strategy and product innovation. We look forward to working closely with Fleet Complete’s senior leadership team and MDP in a partnership that we believe will help further accelerate Fleet Complete’s global growth ambitions.”

“Fleet Complete has experienced significant growth over the last several years, through expanding the business globally and providing exceptional product suites and technology solutions to its growing customer base,” said Doug Grissom, a Managing Director at MDP and head of the firm’s Business and Government Software and Services team. “Tony and his management team have done tremendous work and, together with Ontario Teachers’ and the Fleet Complete team, we look forward to continuing Fleet Complete’s strong momentum.”

Financial terms of the transaction were not disclosed.

Lazard and Barclays acted as financial advisors to Fleet Complete. Kirkland & Ellis LLP and Dentons Canada LLP served as legal counsel to Fleet Complete and MDP. Torys LLP served as legal counsel to Ontario Teachers’.

About Fleet Complete

Fleet Complete® is a leading global provider of connected vehicle technology, delivering mission-critical fleet, asset and mobile workforce management solutions. The company is servicing 500,000 subscribers and over 30,000 businesses in Canada, the U.S., Mexico, Australia, the Netherlands, Belgium, Luxemburg, Austria, Germany, Denmark, Sweden, Finland, Norway, Estonia, Latvia and Lithuania. It maintains key distribution partnerships with AT&T in the U.S., TELUS in Canada, Telstra in Australia, and Deutsche Telekom (T-Mobile) in multiple European countries. Many of the world’s largest vehicle manufacturers and tier-one suppliers, such as General Motors, Mitsubishi and Phillips Industries leverage Fleet Complete’s connected vehicle platform, CONNVEX, to bring commercial-grade telematics solutions to their customers. It remains one of the fastest-growing companies globally, having won numerous awards for innovation and growth. For more information, please visit

About Ontario Teachers’

The Ontario Teachers’ Pension Plan (Ontario Teachers’) is Canada’s largest single-profession pension plan, with $193.9 billion in net assets at June 30, 2018. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an average annualized rate of return of 9.9% since the plan’s founding in 1990. Ontario Teachers’ is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario’s 323,000 active and retired teachers. For more information, visit and follow us on Twitter @OtppInfo.

About Madison Dearborn Partners

Madison Dearborn Partners, LLC (MDP), based in Chicago, is a leading private equity investment firm in the United States. Since MDP’s formation in 1992, the firm has raised seven funds with aggregate capital of approximately $23 billion and has completed over 140 investments. MDP is currently investing out of its most recent fund, $4.4 billion MDCP Fund VII, in businesses across a broad spectrum of industries, including businesses and government software and services; financial and transaction services; basic industries; health care; and telecom, media and technology services. For more information, please visit
Transport Topics also reports, Telematics Firm Fleet Complete Gets Investment From Ontario Teachers’ Pension Plan:
Fleet Complete, a Toronto-based provider of vehicle telematics and driver management software with operations in North America, Europe and Australia, has received an investment from Ontario Teachers’ Pension Plan.

Ontario Teachers’ will acquire an unspecified amount of equity in the company from Madison Dearborn Partners and other investors, according to a statement released Nov. 26. Madison Dearborn Partners, a Chicago-based investment firm that has owned a stake in Fleet Complete since 2014, will continue as a smaller stockholder in the company.

“Ontario Teachers’ provides Fleet Complete with access to significant long-term capital,” said Tony Lourakis, founder and CEO of Fleet Complete. “This, coupled with our ongoing partnership with MDP, will enable us to continue our fast growth and focus on being the world’s leading provider of mission-critical connected technologies for fleets, assets and mobile workforce-based businesses.”

Lourakis and Andrew Merisanu launched a company that would later become Fleet Complete in 1998 to provide a software platform for couriers. The business expanded to Australia in 2003 and more recently in Europe with the acquisitions of ITmobile in 2016 and Ecofleet this January.

Merisanu has since left the company to become senior director of development at RBC Ventures. He also serves as chief technology officer for MoveSnap, a startup that helps individuals with tasks associated with moving.

In 2017, Fleet Complete purchased BigRoad, a Canadian provider of electronic logging devices and regulatory compliance services.

The company also struck deals with General Motors Co. and Toyota to incorporate its telematics systems in commercial vehicles.

Fleet Complete maintains distribution partnerships for its products and services with AT&T in the United States, Telus in Canada, T-Mobile in Europe and Telstra in Australia.

Jane Rowe, senior managing director of private capital at Ontario Teachers’, said the Fleet Complete investment is part of an effort to help management achieve its growth objectives.

“Fleet Complete has a proven track record of robust growth, underpinned by its successful global expansion strategy and product innovation,” Rowe stated. “We look forward to working closely with Fleet Complete’s senior leadership team and MDP in a partnership that we believe will help further accelerate Fleet Complete’s global growth ambitions.”

Ontario Teachers’ manages C$193.9 billion in net assets on behalf of 323,000 active and retired teachers in the province of Ontario and has invested in more than 500 companies since launching a private capital investment fund in 1991.

Among the holdings in the Ontario Teachers’ investment portfolio are SeaCube Container Leasing, Global Container Terminals and PODS Enterprises.

Earlier this year, Ontario Teachers’ participated in the recapitalization of GFL Environmental Inc., a Toronto-based waste management firm. In October, GFL Environmental announced plans to merge with Waste Industries in Raleigh, N.C., in a deal valued at C$3.65 billion. When completed, the combined enterprise will be the largest privately owned environmental services company in North America with 98 collection operations, 59 transfer stations, 29 material recovery facilities, 10 organics facilities and 47 landfills.
And Benefits Canada reports, Ontario Teachers’ takes stake in vehicle GPS tracking firm:
The Ontario Teachers’ Pension Plan is entering into a partnership with Fleet Complete, a Toronto-based software company in the vehicle space.

The company provides GPS tracking solutions for enterprises using multiple vehicles for shipping, delivery and transportation in order to optimize efficiency. The Ontario Teachers’ is purchasing private equity in the company from current shareholder Madison Dearborn Partners.

“Fleet Complete has a proven track record of robust growth, underpinned by its successful global expansion strategy and product innovation,” said Jane Rowe, senior managing director for private capital at the Ontario Teachers’, in a press release. “We look forward to working closely with Fleet Complete’s senior leadership team and MDP in a partnership that we believe will help further accelerate Fleet Complete’s global growth ambitions.”

The investment fits into the Ontario Teachers’ private capital arm’s significant history of investing in the technology sector, noted the release.

“Ontario Teachers’ provides Fleet Complete with access to significant long-term capital,” said Tony Lourakis, founder and chief executive officer of Fleet Complete. “This, coupled with our ongoing partnership with MDP, will enable us to continue our fast growth and focus on being the world’s leading provider of mission-critical connected technologies for fleets, assets and mobile workforce-based businesses.”
This is a very interesting direct deal in the technology/ transportation space. I'm pretty sure the way it happened is Ontario Teachers' invested in a fund from Madison Dearborn Partners and at the end of the life of that fund, they bid on this company which they grew to know well and really like.

The terms of the deal weren't disclosed but it's a minority stake in one of the fastest growing tech companies in the connected vehicle space.

Looking at an older (2014) MDP press release provides us with more information and background:
Fleet Complete is a leading provider of fleet, asset and mobile workforce management solutions and offers its software as a service to approximately 5,000 customers globally.

  • MDP identified the fleet management industry as an attractive area for investment several years prior to the Fleet Complete investment, and evaluated a number of opportunities in the sector.
  • MDP was introduced to the company after it received an inbound offer from a strategic buyer. The company’s founder and CEO was not interested in exiting the business, and as the controlling shareholder, was looking to find a partner to help him grow the business
  • Based on MDP’s relationship with the founder, and previous experience investing in both the software and wireless industries, the CEO chose MDP as his new partner

Value Creation:
  • Assembled a strong, independent Board of Directors composed of technology executives and industry experts
  • Expanded international carrier partnerships with AT&T, T-Mobile and Telstra
  • Completed four acquisitions during MDP’s ownership: Fieldworker (employee-tracking software), ITmobile (European telematics company), Securatrak (Australian telematics company) and BigRoad (North American Hours of Service company)
  • Meaningfully increased revenue in the first two years of ownership and diversified the business away from dependence on one geography and channel partner
  • Invested in technology and capabilities ahead of legislative mandate to have Hours of Service technology compliance installed in 4 million vehicles by 2018
That's why Fleet Complete chose MDP as a partner and that's why OTPP invests in MDP's funds.

There's not much more to share on this deal.This looks like a great company to own over the long run and I'm not just saying that because Tony Lourakis is Greek Canadian and made Greek America's Forty Under 40 list back in 2014:

Good for him and good on Ontario Teachers' for making a long-term commitment to this global technology company.

Below, Guy Broderick, Driver Training Supervisor at APPS Transport Recruiting, discusses how important Fleet Complete has been for them to track their trucks and to service their customers. And Lino Cardoso, CEO of Yummy Catering, talks about how Fleet Complete assists them in their operations.

Lastly, Tony Lourakis, founder and CEO of Fleet Complete, talks about the scalable solutions of his company's applications and services. Smart guy, listen to his message as he explains their value proposition, how they're customer focused and operate across many industries.

Monday, November 26, 2018

OPTrust's Climate Change Symposium?

Yaelle Gang of the Canadian Investment Review reports, Translating climate risk into the language of investors:
A few decades ago, people were concerned about the depleting ozone layer. Then, in the late 1980s, the Montreal Protocol was ratified to phase out ozone depleting substances.

Fast forward to today.

The ozone hole is shrinking and is expected to completely close by 2060.

“That says to me that if you get policy makers, if you get business leaders and scientists together you can come to solutions to these kinds of problems,” said James Davis, chief investment officer at OPTrust.

Speaking at OPTrust’s climate change symposium on Nov. 20, 2018, Davis said that an investor’s role is to manage risk.

“We can get a handle on the risk of a recession, stock market volatility, even the systemic risk of a financial crisis that we experienced in 2008, but climate change risk is even tougher,” he said. “We know it’s real, we know it’s slow moving. Its impact is not expected to be felt for many years.”

Because for many investors, the typical investment horizon is within one to three years, investors may think climate change isn’t in their time frame, Davis said. But, with the spread of severe weather like the recent forest fires and floods, the impact is here now.

“We know, as investors in assets, that if there’s uncertainty and rising risk that eventually is going to get reflected in asset prices,” Davis said. “The market is a very effective discount mechanism.”

Despite this risk being real, Davis said that it is not being talked about more because responsible investing, or ESG professionals, are not speaking in the same language as investment professionals.

He highlights that OPTrust has a responsible investment committee with representation from every asset class. He said that when he first joined the committee the discussions were focused on compliance. “The conversations weren’t making this risk feel real,” he said. “The problem was there was no measure of the impact of climate change-related risks that an investor could relate to.”

“If we’re going to manage this risk we need to find a way to measure it,” he continued. So, OPTrust conducted a series of education sessions at the committee to better understand the economic and financial impacts of climate change on their portfolio and assets and engaged with partners. On example is that a partner presented them with a model to figure out a way to better measure climate related risks on earnings, which was focused on public markets.

“This was a wow moment,” said Davis because it allowed them to match climate change to an investor’s decision-making framework.

“The reality is that climate change has the potential to impact our ability to pay pensions,” said Davis.

He said plans need to price climate change risk into their investment decision process better than they currently do.

“Good thing is we are investors and we’re used to pricing risk. This is what we do all day long and, the fact is, if we can do this better than our competitors we might even have an edge.”

Davis said that they are still early in their journey and although there are climate risks there are also opportunities. “Risk and opportunity are often two sides of the same coin.”
Benefits Canada also reports, Could climate change turn Canada’s Arctic into an emerging market?:
As climate change restructures the Canadian Arctic year by year, institutional investors should be paying attention to this all but undeveloped economy, according to one expert.

“For those that live there, the dominant narrative is about how climate change is remaking the Arctic from a frozen periphery to an area of immense geographic and economic significance,” said Jessica Shadian, president of Arctic360, during OPTrust’s climate change symposium in Toronto on Tuesday.

Currently, Canada’s northern territories suffer from a major lack of modern infrastructure, impacting virtually every aspect of life, including access to fresh food, clean water, reliable transportation and the internet, she said. However, the area is rich in natural resources, such as minerals, fish and fossil fuels. But the lack of infrastructure makes it difficult for local communities to harness these resources to bolster economic development, said Shadian. As the area’s weather gradually changes, current challenges are exacerbated but new opportunities are beginning to emerge.

During her presentation, Shadian pointed out the potential for investment in the area, noting many other countries have paid much more attention to their Arctic regions. “Canada lags behind many of its Arctic neighbours,” she said. “Over the past 10 years, Norway has turned its attention north by expanding its Arctic fisheries and offshore gas production.”

Iceland and Greenland both make rigorous use of the Arctic region with an eye towards responsible energy practices, and 20 per cent of Russia’s gross domestic product comes from economic activities in its Arctic, added Shadian.

Even China, which has no physical exposure to the Arctic, is realizing the potential of the changing realities in the region, particularly in the case of shipping, she said, noting Canada’s Northwest Passage is already experiencing increased shipping traffic and China is eyeing the potential trade route keenly, hoping to make it a more widely used path.

Ports are another area where local communities see a direct benefit, due to better access to virtually all goods, said Shadian.

As well, beginning to address the crippling lack of infrastructure in Canada’s north could be a tangible option for institutional investors that are concerned with the issue of economic reconciliation with Indigenous peoples, she said. The federal government should correct its mistake of failing to demonstrate the region’s potential to investors, she added.

“Most of Canada’s banks and pension funds have not been provided an opportunity to see the north as an emerging economy, with a strategic value, a human value placed there, and thus cannot see it as a region worthy of consideration let alone investment,” said Shadian.
Last week, OPTrust organized a climate change symposium in Toronto. The full agenda is available here and the speakers are to be found here.

I did not attend this symposium but did get to speak with OPTrust's CEO Hugh O'Reilly on Friday and we went over the main points.

I should also point out Trina Hiscock of TRIA Consulting did a great job covering highlights of the symposium on her Twitter account here and posted some podcasts. I embedded some of her tweets below and thank her for her great coverage.

Hugh told me the main objective of the symposium was to bring climate scientists and big investors together, a first in Canada.

He said the climate scientists presented balanced but "sobering" views on climate change and emphasized the need to address it.

Another objective was to broaden the political discussion and hear opposing and entrenched views from all sides. As Hugh told me: "Move away from downtown Toronto and listen to views from rural areas."

There were plenty of interesting panelists. Dr. Charles Donovan spoke of the need to better measure the risk of climate change and the business case for adaptation to climate change. For example, he discussed how in some areas, "flood-proofing" your basement will be the norm.

Hugh said there was an interesting panel with Christy Clark, Dwain Lingenfelter and Joe Oliver in a discussion on the Complexity of Climate Politics moderated by Tim Shortill.

Ema Howard Boyd talked about regulations stating: "We have to bring together environmental regulations with financial regulations."

And about Millenials and their perspective on climate change:

There were also excellent presentations on how to better measure climate change from ClimateAI and Ortec Finance and a panel on Good, Better, Best: Assessing the Investment Risk which looked at how some of the world’s leading organizations are thinking about climate risk in their business.

James Davis, OPTrust's CIO said: “We look at companies in Canada and abroad for a variety of risks. This analysis adds value to our partnerships. It’s not just based on sector – you need to dig down, doing a bottom-up assessment. “

Ashby Monk of Stanford University spoke of the need for institutional investors and other large organizations to do more to address climate change:

This sentiment was echoed by Tim Hannah, Chair of OPTrust's board and Hugh O'Reilly:

What else? Hugh told me Roger Urwin, the "godfather of governance," also talked eloquently about governance and climate change.

The key thing Hugh emphasized was climate change has risks for institutional portfolios, risks that need to be assessed and measured properly but it also brings opportunities as the "adaptation economy" becomes a reality.

He said institutional investors are taking small steps which will give rise to larger steps to address climate change.

He ended by telling me that when he started working at OPTrust, he wasn't a "climate warrior" but is now convinced addressing climate change risks and opportunities are part of being a good fiduciary, noting something someone told him: "what good is a pension if the world is unlivable by the time the next generation needs to collect it."

Lastly, Hugh is working on another symposium with another interesting topic but I'm not at liberty to discuss it and he told me Felipe Calderón, the former president of Mexico, gave an excellent keynote speech.

Actually, the entire symposium was interesting which is why I invite you to scroll through Trina Hiscock's Twitter feed here. I thank Hugh and Trina for sharing so much with me and everyone else on this symposium.

Below, Dr Charles Donovan introduces the new Centre for Climate Change, Finance & Investment at Imperial College Business School.

Friday, November 23, 2018

Bear Market or Miller Time?

Fred Imbert of CNBC reports, Dow falls more than 150 points, posts worst Thanksgiving week decline since 2011:
Stocks fell on Friday as some of the most popular technology shares were under pressure once again, while a steep drop in oil prices also weighed on equities.

The Dow Jones Industrial Average dropped 178.74 points to 24,285.95 while the S&P 500 pulled back 0.65 percent to 2,632.56. The Nasdaq Composite dipped 0.5 percent to close at 6,938.98. The Dow and S&P 500 posted their worst Black Friday performance since 2010. The Nasdaq had its worst Black Friday since 2011.

For the week, the major indexes all dropped more than 3 percent. They also had their biggest loss for a Thanksgiving week since 2011.

"I don't think the bull run is over but I think we're close to the end of the cycle," said Mark Esposito, CEO of Esposito Securities. "It feels a bit unsafe." Esposito cited slowing earnings growth, higher market volatility and slowing economic growth as signs the currency cycle may be ending.

Facebook, Amazon, Apple, Netflix and Google-parent Alphabet all fell on Friday. These stocks, which make up the popular "FAANG" trade, all fell at least 5.7 percent through Wednesday's close.

Apple, which has fallen more than 25 percent since hitting an all-time high earlier this year, dropped 2.5 percent after The Wall Street Journal reported the company plans to cut prices for the iPhone XR in Japan because it's not selling well.

Friday's session ended early after the Thanksgiving holiday on Thursday, when U.S. markets were closed.

Stocks were also under pressure on Friday as crude oil prices plunged. West Texas Intermediate futures fell more than 6 percent to $51.03 per barrel, reaching their lowest level of the year.

"Tech stocks are under pressure once again but more troubling is that oil prices are collapsing," said Peter Cardillo, chief market economist at Spartan Capital Securities. "Lower oil prices are not a good sight for the economy."

"OPEC has indicated they're going to cut [production], but that's not helping. That's a bad sign," said Cardillo.

The drop sent the Energy Select Sector SPDR Fund (XLE) — which tracks the S&P 500 energy sector — down more than 3.1 percent. Shares of Concho Resources, EOG Resources and Devon Energy were among the biggest decliners in the XLE.

Crude's decline comes at a time when U.S.-China trade tensions have raised concern of a possible economic slowdown. The two countries have imposed tariffs on billions of dollars worth of each other's goods as the Trump administration takes on a protectionist stance on trade.

U.S. and Chinese leaders are expected to meet at a G-20 meeting in Argentina at the end of the month, though few economists expect the scheduled talks to resolve the trade dispute.

"A lot of the moves have to do with tariffs and moves by the Fed," said Greg Powell, CEO of Fi-Plan Partners. "Depending on what happens in those talks, that could change the whole dynamic in the market from a sentiment standpoint."

China stocks fell on Friday in anticipation of the U.S.-China trade talks. The Shanghai Composite dropped 2.5 percent while the Shenzhen A Share index pulled back 3.7 percent.

Retailers bucked the negative trend, as the SPDR S&P Retail exchange-traded fund (XRT) rose 0.3 percent on Black Friday, one of the busiest shopping days of the year. Shares of Lands' End and Etsy rose 5 percent and 2.8 percent, respectively, while L Brands gained 2 percent. Overstock, which is also in the XRT, surged more than 23 percent after its CEO said the company would sell its retail business to focus on crypto.
So what to make of the slide in tech stocks and stocks in general? Berkeley Lovelace Jr. of CNBC reports, Goldman Sachs: The stock market plunge does not indicate a recession on the horizon:
The U.S. economy will not head into a recession in the next two years despite fears in the market that one may be on the horizon, Goldman Sachs' Peter Oppenheimer told CNBC on Wednesday.

Oppenheimer, chief global equity strategist at Goldman, expects the U.S. economy to grow but at a much slower pace of 1.6 percent by 2020.

Equity markets are selling off for several reasons, he said, citing global trade worries, fears of weak profit growth in the next few years and rising interest rates.

"The reality of a slowdown in profit growth and in activity, economically, has really been at the heart of this sell-off," Oppenheimer said in an interview on CNBC's "Worldwide Exchange."

U.S. stocks rose Wednesday. With Tuesday's losses, the Dow and S&P 500 were lower for the year, and the S&P 500 joined the Nasdaq in correction territory.

Oppenheimer said he expects support for equity markets, arguing that stock returns compared to economic growth expectations suggest there may have already been an overshoot on the downside in the market.

"We're still in an upward trend," Oppenheimer said. "The overall growth rates are going to slow, and we should expect a relatively low return in global equity markets next year but still positive."
While Mr. Oppenheimer remains upbeat on the US economy and stocks, his colleague at Goldman, David Kostin, is a lot more cautious. John Mellow of CNBC reports, Goldman Sachs on 2019: Raise cash, get defensive and look out below if more tariffs happen:
Goldman Sachs is not feeling very bullish about stocks in 2019, according to its official outlook report to clients out this week.

Here are some of the investment bank's predictions for next year:
  • The S&P 500 will rise just 5 percent to 3,000 by year-end 2019 (after closing 2018 at 2,850).
  • Households, mutual funds and pension funds should raise cash: "Cash will represent a competitive asset class to stocks for the first time in many years."
  • Investors should buy defensive sectors and stocks to ride out a tough year where fears of a recession increase. Goldman raised utilities sector to "overweight" in the report.
  • Base forecast: Stocks return 7 percent, T-bills return 3 percent and Treasurys return 1 percent in 2019.
  • But the market could be in for big trouble from tariffs: "If the full 25 percent tariffs are levied on all imports from China the earnings impact could be significant, potentially eliminating any profit growth next year," the report said.
Goldman generally believes the bull market will continue in 2019, but it could get choppier as the year continues and investors begin to worry about a recession in 2020. The bank puts a 30 percent probability on a market "downside scenario" where fears of a recession and tariffs drive the market earnings valuation to contract and the S&P 500 to end the year down at 2,500. (It gives a 50 percent probability to its S&P 500 3,000 base case and just a 20 percent probability for the 3,400 upside case.)

"For equity investors, risk is high and the margin of safety is low because stock valuations are elevated compared with history," chief equity strategist David Kostin and team wrote in a note to clients Monday. "We forecast the S&P 500 index will generate a modest single-digit absolute return in 2019. Perhaps more important, the prospective risk-adjusted return to equities will be less than one-half the long-term average and cash will represent a competitive asset class to stocks for the first time in many years."

The bank's economic team said Sunday that economic growth will slow to a crawl in the second half of next year.

The S&P 500 closed Monday at 2,690.73, little changed for 2018 and down 8.5 percent from its record reached earlier in the year. The market slid again Tuesday as investors continued to dump their technology stock winners. An earnings miss from retailer Target also added to the negative sentiment.

Too much in stock market

Most investors (households, mutual funds, pension funds and foreign entities) are too overweight stocks and need to raise cash, Goldman said.

"These entities have equity allocations ranking in the 89th percentile vs. the past 30 years," the report said. "At the same time, these investors have cash allocations at the very bottom of their historical allocations, often ranking below the 1st percentile."

Buy utilities

Goldman still likes technology stocks despite the rout that started in October. The bank also likes communication services, saying both sectors have high profit margins that could be sustainable in a tougher economic environment.

But Goldman is especially bullish utilities, raising the sector to overweight.

The bank likes the sector's "track record of notable outperformance during decelerating GDP growth environments and a low historical beta to S&P 500."

Quality stocks

Goldman also advised clients to buy stocks with stable businesses and recurring revenue. Members of the firm's "high quality" stock basket include Dollar Tree (DLTR), PepsiCo (PEP) and BlackRock (BLK).
Mr. Kostin is kind of late, I've been telling my readers to get defensive and stay defensive since July, recommending stable sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and of course, hedging your equity risk with US long bonds (TLT).

As far as Goldman's "quality stock" recommendations, looking at the 5-year weekly charts, I like the breakout in Pepsico, Dollar Tree looks like it's bottoming and might bounce back and BlackRock which got whacked the most is basically a bet on the stock market (click on images):

Not surprisingly, the focus is on the FAANG stocks as they haven't been doing well and are in a bear market (click on image, h/t Visual Capitalist):

Last week, I discussed shares of Apple (AAPL) when I went over top funds' Q3 activity and said even though I prefer this company over Facebook, its share price needs to hold its 50-week moving average or else it's headed lower. And the 50-week didn't hold (click on image):

Will Apple shares continue to head lower and make a new 52-week low (its 50-week low is $150)?

I doubt it but who really knows? Selloffs tend to be self-fulfilling and stock prices swing and overshoot on the upside and downside so there is a big risk that Apple's share price heads lower before recovering and there are a lot of factors at play here.

There is a general malaise about tech shares (XLK) which have been pummeled and are at risk of sliding lower here if they don't hold these levels (click on image):

More importantly, credit spreads blew up this week, sending high yield bond prices (HYG) lower and they too are at a critical level (click on image):

By the looks of it, the bear market has arrived, but not everyone is convinced. Martin Roberge of Cannacord Genuity sent me his weekly market wrap-up earlier, Bear Market in Time?, and shared these insights:
This week’s pullback in stocks has brought indexes to their October lows which is where the battle between bulls and bears begins. Since October lows, however, one could argue that bears have the upper hand given this week’s blow out in credit spreads, the rout in oil prices and the breakdown in FAANGs. Bulls may argue, however, that the ongoing tightening in financial conditions and weak global economic data are bringing the Fed closer to a pause after a December hike. Also, bond yields have stabilized and the bearish narrative is well discounted into stocks. Should none of these two outcomes materialize, investors could face a bear market…in time, something that we explain below. Otherwise, in Canada, the government is following the US experiment by providing fiscal reflation ($17 billion) despite good economic conditions and tight labour markets. The fall economic statement reinforces the case for the Bank of Canada to pursue gradual rate hikes. In fact, the BoC could outpace the Fed in 2019 and this could go a long way in re-rating the CDN$. By ricochet, this could end the lengthy bear market in the S&P/TSX relative to world equities.

Our focus this week is on the US Conference Board leading economic indicator (LEI). To the extent that the longevity of the equity bull market is correlated with odds of a US recession, this week’s advance in the LEI is positive. As our Chart of the Week shows, the ratio of the leading-to-coincident indicator (L/C) keeps accelerating, moving away from its 5-yma which historically represents the boom-bust line. Since 1960, when the L/C ratio broke below the 5-year average, a recession set in 13 months after the downward cross on average. This means that even if one were to expect the L/C ratio to rollover next year, a recession would not arrive before 2020. With odds of an economic soft-landing in 2019 much higher than 50%, we believe equity market corrections are unlikely to morph into a bear market in PRICE. However, the draining of liquidity by world central banks and a 2000-01 style decline in growth stocks is likely to cap the upside in broad equity indices. The net result takes the form of a bear market in TIME, which is a prolonged trading range (click on image).

Now, I like Martin, think he's a very smart guy who produces great research but it's worth noting the LEI is reported with a lag and stocks and credit spreads are components of it, so I wouldn't read too much into this chart even if it looks clear there's no recession next year.

The problem is everyone is expecting a recession in 2020 or beyond, not before, and markets have a tendency to surprise us on the downside.

Moreover, once a bear market develops, it could get really nasty, really fast, which is why some investors will tell you, raise cash, don't give up on US long bonds (TLT) and even hold gold as a hedge.

Earlier this week, was talking to my trading buddy Fred Lecoq who likes gold miners (GDX) here and think there may be more upside (click on image):

I think it's a bit early but I did note Ray Dalio's faith in gold is unshaken despite the selloff this year, CPPIB took a major position in gold miners in Q3 and Vital Proulx's Hexavest increased its gold miners and junior gold miners in Q3 (see top positions here).

Fred told me Hexavest has been under-performing this year and I said: "yes, they're bearish on these markets so that doesn't surprise me but when things turn south, I expect them to outperform their peers" (Vital Proulx is an excellent portfolio manager with a lot of experience).

Let me leave you with some more thoughts. The Macro Tourist blog posted a great comment this week, The Fed Finally Blinks, which showed a chart you need to bear in mind (click on image):

It’s a great table for it shows that both bonds and stocks around the world have suffered this year with almost no financial asset class posting positive returns. Brazilian and American stocks, along with Chinese 10-year bonds, were the only ones that could muster a return with a plus at the front. And even those returns were anemic.

Will the Fed raise in December and take a long pause? I hope so or else CNBC's Jim Cramer might have a meltdown on air again.

But on a serious note, what if the Fed doesn't blink and continues to indicate it will tighten at least three times next year, if not more? Then risk assets are in big trouble, especially if the yield curve inverts which it will if the Fed overshoots.

I don't think it's bear time yet but be careful here, if something breaks, risk assets will go into free fall and that's when you'll remember the wise words of John Maynard Keynes: "Markets can stay irrational longer than you can stay solvent."

Capiche? Hope you enjoyed this market comment and all my comments. Please kindly remember to support this blog with a donation or subscription using PayPal on the right-hand side, under my picture. I thank everyone who shows their financial support and welcome new supporters.

Below, Goldman Sachs chief global equities strategist Peter Oppenheimer says a big reason why the equity markets have sold off is because of an expectation of an economic slowdown and slowdown in profit growth.

Also, CNBC's Wilfred Frost and Dom Chu report on the state of the market before the closing bell on Black Friday.

Lastly, economic consultant Gary Shilling breaks down the biggest risks to the US economy, including contagion from emerging markets debt, the Federal Reserve raising rates and potential shocks that could cause stocks to sink. Listen to Shilling, he's often right on his big calls.