Making sense of the markets this week: November 20, 2022

Inflation glass remains half full—and 6.9% more expensive

While many economists predicted a rise in the overall inflation rate, Statistics Canada revealed on Wednesday that consumer prices were going up at the exact same pace as they were last month. So, things might not be getting worse—but they’re not exactly getting any better. 

With more than half of the subcategories that the consumer price index (CPI) tracks up over 5% on a year-over-year basis, many experts remain worried about widespread inflationary pressures.

Overall, the market seemed to take the news in stride, as the Canadian stock market’s TSX 60 index was essentially flat last Wednesday. Relative to the big gains we saw upon last week’s American inflation data, it appears that Canada remains in a holding pattern. Betting markets now believe the chances of a 0.25% interest rate increase, versus 0.50%, next month are essentially a coin flip.

Teachers get fleeced by fraudulent crypto genius

Another week, another crypto asset goes broke and essentially steals billions from its customers.   

*Yawn* 

I don’t understand why crypto-related fraud is in the news anymore. It happens so often, I have to assume that it is in fact the rule and not an exception. Who would’ve guessed that a tax haven-based business built on exchanging imaginary assets could go from $32 billion to bankrupt within a few days? 

For those not glued to crypto message boards, the TLDR, long-and-short of this latest crypto meltdown is that “crypto genius” and founder of multiple crypto-based companies, Sam Bankman-Fried, was found to be running a fraudulent business called FTX. 

Basically, one of Bankman-Fried’s competitors pointed out that the cryptocurrency exchange platform was probably going to collapse. And that started a “bank run,” where FTX’s customers tried to withdraw their assets. Of course, their assets were nowhere to be found, because Bankman-Fried “borrowed” them to place risky bets on other insanely priced crypto assets.

Remember when cryptocurrency was supposed to be a stable inflation hedge? Remember when it was supposed to do away with all the systemic problems caused by the “bad” guys in the banking industry?  

This ridiculous circular logic is meant to backstop the narrative of crypto. My problem with it is that it’s now hurting people who didn’t even know they were exposed. 

For example, the Ontario Teachers’ Pension Plan (OTPP) is going to lose $95 million on its investment in FTX. Why in the world was a teachers’ pension fund invested in this sort of risky platform based out of the notoriously unregulated Bahamas?! This is a borderline criminal lack of due diligence on the part of whomever is handling the fund.

When confronted with this incredible lack of oversight, the OTPP pointed out that the $95-million loss only represented 0.05% of the plan’s assets. 

It’s time the folks behind the OTPP volunteer for a few substitute teaching days in order to understand how hard teachers had to work for that $95 million. Or perhaps they could use some professional development time to reflect on their fiduciary responsibilities. Maybe then they wouldn’t be so quick to liken $95 million-worth of teachers’ labour and contributions to “chump change.” If we put the average teacher’s annual salary at $90,000 per year, that means the OTPP just evaporated over 200,000 days (or 578 years) of teaching time. 

My father-in-law’s pension is funded by OTPP. My wife and I have hundreds of thousands of our future dollars at stake in our Manitoban equivalent of the OTPP. So, yeah, this is personal. 

That said, when you look at the fees of our major pension plans (including the Canada Pension Plan), you’d expect that the incredibly expensive “expertise” to involve not blindly throwing your money into shadowy private companies based in tax havens!

At this point, I think we should be looking seriously at drastically cutting back on the speculative investments made by pension plans (as well as the number of highly priced people making those investments) and going with a low-fee, indexed approach.

As you might guess, I don’t find the FTX story to be all that surprising. It’s the logical result of what happens when a speculation frenzy meets cheap leverage. And, then the couple get married in an unregulated market with no way to verify if anything said is true. A love story as old as the markets themselves.

Honestly, I find the only newsworthy parts of this story to be the fact that bitcoin’s value is only down 15% on the month. You’d think that when all aspects of the underlying infrastructure of this asset have been proven fraudulent and susceptible to theft it would shake the faithful a little bit. 

Apparently not.  

Are the lights still on at Algonquin Power?

Canadian utilities are supposed to be the determined tortoises of the investing race. Slow and steady—always winning in the end.

Someone forgot to tell Algonquin Power & Utilities Corp. (AQN/TSX) about how this consistency thing was supposed to work. 

Last Friday, the company announced earnings that came in below expectations at CAD$0.11 adjusted earnings per share. What happened next was a panic-driven run on share prices:

To sum up the Algonquin earnings call:

• Adjusted earnings per share were down 27% year over year,
• Revenue was up 26% year over year,
• No change to its dividend—which increased by 6% earlier in 2022.
• The company revised 2022 guidance from $0.72 to $0.77 earnings per share, to $0.66 to $0.69,
• “Asset recycling” meant that equity in some of its green energy projects was going to be sold as previously planned,
• Every 1% interest rate rise (or “100 basis points” in investing parlance) was going to cost Algonquin about $16 million per year in increased interest payments,
• And it was moving ahead with its acquisition of Kentucky Power at a lower price than previously negotiated.

Investors listened to this and promptly decided they should get rid of the company at almost any cost. Shares fell 19% on Friday. Then, after having a weekend to think about it, even more shareholders decided to sell. And by market close on Tuesday, the stock was down more than 32%.

This has me scratching my head. Sure, objectively, Algonquin released some bad news, and it came clean about how rising interest rates are going to sting its bottom line. The company is not worth as much today as it was a week ago.

That said, a 32% sell off?! And, for a company that has the bulk of its revenues guaranteed by regulated government utility contracts?

Critics of Algonquin point to the fact that interest rates will continue to bite, and if the new acquisition doesn’t go as well as planned, a dividend cut or share dilution might be the harsh reality.

However, several company insiders, including its CEO, purchased over a hundred thousand shares of the company this week. And many dividend-conscious investors are looking at the current 9.6%-dividend yield and might be thinking, “even if this dividend gets cut in half, I’m still looking at 4.8%… what are we missing here?”

While it might be a while before Algonquin gets back to the $20-per-share level it recently enjoyed, I have to say that this looks to me like a classic case of panic spiralling and leveraged investing. 

There is nothing in Algonquin’s earnings report suggesting it is worth a third less than it was a week ago. The company has 70% to 80% of its debt in long-term fixed rate agreements, and regulators will allow them to raise its revenues to some degree going forward (whether that fully matches inflation or not is tough to say). 

Its dividend looks reasonably secure from an adjusted funds from operations (AFFO) dividend payout ratio perspective (what most utility companies use as their preferred dividend security metric). 

Even if Algonquin has to pause dividend increases or cut its dividend for a year, the underlying investment philosophy of buying shares in a company that delivers water, natural gas and electricity to folks—with a side dish of renewable energy assets—still looks like a solid long-term option to me.

For context, fellow Canadian utility company Fortis (FTS/TSX) reported adjusted earnings per share of CAD$0.54 this quarter, beating analyst forecasts. And it is up about 2% over the last month. Canadian Utilities (CU/TSX) posted adjusted earnings of CAD$0.45 this quarter, and is essentially flat over the last month. We’ve also written about Canadian utility stocks over on MillionDollarJourney.com.

Retail giant places a target on shareholders’ backs

As retailers get ready for their big push for the holiday season, this week saw a mixed bag of results. Overall, Walmart continued to prove why it’s best-in-class for years now, while Home Depot and Lowe’s also showed solid inflation resilience. Target on the other hand, needs to rapidly re-evaluate its cost control measures if it wants to arrest the bleeding of their bottom line. (All numbers below are in U.S currency).

Target (TGT/NYSE): Earnings per share of $1.54 (versus $2.13 predicted) and revenues of $26.52 billion (versus $26.38 billion predicted).

Walmart (WMT/NYSE): Earnings per share of $1.50 (versus $1.32 predicted) and revenues of $152.81 billion (versus $147.75 billion predicted).

Home Depot (HD/NYSE): Earnings per share of $4.24 (versus $4.12 predicted) and revenues of $38.87 billion (versus $37.96 billion predicted).

Lowe’s (LOW/NYSE): Earnings per share of $3.27 (versus $3.10 predicted) and revenues of $23.48 billion (versus $23.13 billion predicted).

Algonquin looking at Bitcoin’s crash last week

With Dale Roberts stepping in while I head off to explore Africa for a few weeks, I had to keep our “Making sense of the markets” meme going as I hand him the baton.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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