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Making sense of the markets this week: December 4, 2022


This week, Cut the Crap Investing founder, Dale Roberts, shares financial headlines and offers context for Canadian investors.

What a week—the wrap 

It’s rate-hike hiatus déjà-vu all over again. In a replay from my column last week, the U.S. Federal Reserve Chairperson Jerome Powell reinforced expectations. On Wednesday, Powell said: 

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

What happened next? The markets cheered! They do like certainty. 

The NASDAQ Composite closed up +4.4%, the S&P 500 finished at +3.1%, and the Dow rose +2.2%. 

Bonds also delivered some modest gains as yields declined. Canadian stocks (XIC/TSX) were up modestly on the day at +0.80%. 

Canadian GDP growth more than expected

The Canadian economy grew more than expected in the third quarter, although the weakening housing investment and consumer spending suggests that higher interest rates are beginning to bite. Gross domestic product (GDP) increased 2.9% on an annualized basis from July to September, Statistics Canada reported Tuesday. 

Much of the growth came from higher energy and agriculture exports. 

A strong economy might not be what the Bank of Canada (BoC) wants to see as they attempt to cool economic growth and inflation. The economy and Canadian consumers have been very resilient. That suggests that rates may need to go higher—and stay higher well into 2023 and perhaps beyond. 

And employment is holding up better than central bankers would like, on both sides of the border. Good news can be bad news in the fight against inflation. 

The Bank of Canada loses money for the first time

In the third quarter of this year, the BoC lost money for the first time ever. In fact, it racked up $522 million in losses. The BoC is a victim of its own rate hiking scenario. CTV News reported

“‘Revenue from interest on its assets did not keep pace with interest charges on deposits at the bank, which have grown amid rapidly rising interest rates.

The Bank of Canada’s aggressive interest rate hikes this year have raised the cost of interest charges it pays on settlement balances deposited in the accounts of big banks.’”

With rates set to increase even more over the next few months, we might expect the losses to continue and even accelerate. 

What is “funny” is that Bank of Canada Governor Tiff Macklin called the loss “largely an accounting issue.” 

When you or I lose money, it’s called losing money. 🙂 

Canadian banks report earnings 

Canadian investors love their bank stocks. This week, all of the big six banks in Canada reported earnings. And the investors watched with elevated enthusiasm. 

The banks benefited from a rising rate environment, as net interest income increased. The spread between the rate banks borrow at and the rate they lend at increased favourably and helped their bottom line. They faced pressure in wealth management and capital markets due to decreased investment returns and trading activity. Amid recession and real estate risks in Canada, the banks increased their provisions for loan losses. 

Think of that as their “rainy day fund.” It eats into profits, and rain is in the forecast. 

If you’re looking for a recession, you won’t find it in the banks’ earnings reports. It was a solid quarter with slower growth being the headline takeaway. All of the banks, save for one, increased dividends. 

We’ll keep an eye on the recession risks and watch for ongoing stress in residential real estate. We will likely see one or two more rate increases over the next few months. 

I hold TD Bank (TD/TSX), Royal Bank of Canada (RY/TSX) and Scotiabank (BNS/TSX) in the Canadian Wide Moat 7 Portfolio

The following summaries are courtesy of Dan Kent of stocktrades.ca. (All numbers are in Canadian dollars.)

Scotiabank

To kick the earnings season off, the Bank of Nova Scotia reported earnings per share of $2.06 and revenue of $7.987 billion. This topped earnings expectations for the bank by $0.06, and revenue came in just a few million shy of expectations. 

When we look at the year-over-year basis, the bank posted relatively flat revenue growth, mid-single digit earnings growth, and return on equity increased by 10 basis points. 

What is interesting about Bank of Nova Scotia’s earnings report, is there was no raise to the dividend, despite every other bank doing so.

Royal Bank

Royal Bank (RY/TSX) topped estimates on all fronts, with revenue of $12.57 billion coming in $220 million higher than expectations, and earnings of $2.78 per share being $0.10 ahead of estimates. 

On a YOY basis, the company posted a small 1.4% dip in revenue and earnings were down 2% when compared to 2021. Canada’s largest bank made a small 3% increase to the dividend.

Also of note, RBC is set to buy HSBC’s Canadian assets. RBC also introduced a DRIP (Dividend Reinvestment Plan) that gives investors the opportunity to automatically reinvest their dividends at a 2% discount to the price of the shares.

TD

The best quarter of the year arguably goes to TD Bank (TD/TSX), which posted strong top and bottom line beats. Earnings of $2.18 per share topped expectations of $2.05, and revenue of $12.247 billion topped estimates just shy of a billion dollars. The company also posted exceptional YOY growth, considering the circumstances, with earnings increasing by 5.6% and revenue increasing by 8.1%. It also bumped dividends by 8%.

CIBC 

CIBC (CM/TSX) posted a weaker quarter than previously, with revenue coming inline with estimates but earnings per share of $1.39 missed estimates of $1.72 by a wide margin. On a YOY basis the company reported a 6% increase in overall revenue and a 17% dip in earnings per share. The company chipped in with a small, 2.4% raise to the dividend.

BMO

The Bank of Montreal (BMO/TSX) reported revenue of $10.57 billion, which came in well above expectations. And earnings per share of $3.04 fell just $0.03 shy. Year over year, the company reported a 2.1% increase in earnings and a 24.3% bump in revenue. Much like the other banks (BNS aside) it raised the dividend by 3%. 

National Bank

National Bank (NA/TSX) missed on both top- and bottom-line estimates in the third quarter. Earnings of $2.08 per share came in below the expected $2.24, and revenue of $2.429B missed by around $50 million. On the YOY, it posted strong high single-digit growth in both revenue and earnings. The company bumped the dividend by 5% in the quarter.

Overall reports for Canadian banks

It was a strong quarter overall from Canada’s banks, and slower growth was to be expected.

In terms of provisions for credit losses, here are the quarter over quarter increases for each bank: 

  • BMO: 84%
  • CIBC: 79%
  • TD: 75.7%
  • RY: 12%
  • BNS: 28.3%

The dividend increase scoresheet:

  • BNS: 0%
  • RY: 3% 
  • TD: 8%
  • BMO: 3%
  • CIBC: 2.4%
  • NA: 5%

Please note that RBC, BMO, CIBC and National Bank are typically on biannual dividend increase plans. So, you might double the above raises to get to the annual rate of dividend increase. 

China’s zero policy for COVID-19 fails on every count 

The COVID-19 headlines are still dominant in China. Lockdowns have suppressed economic output and have rattled markets at times. China faces ineffective domestic vaccines and a failed “Zero COVID” policy. The rest of the world has largely moved on thanks to a combination of vaccine uptake and natural infections. 

The current measures are seen as irrational by some, as citizens are watching a maskless World Cup. Chinese citizens have had enough and—at great risk—have taken to the streets in protest. Its economy slowed due to their policies, and many workers are now finding it difficult to make a living amid severe restrictions and lockdowns. 

Apple has most of its iPhone production in China. The leading smartphone maker estimates that they will be short nearly 6 million iPhones for 2023. 

Sensing that it may have lost control of the situation, China may pull back on the restrictions. The decision along with the political and economic significance will be felt around the globe. 

This is a story to watch in the coming weeks. 

Walmart is a Black Friday winner 

Holiday shopping in the U.S. has been robust, and Walmart (WMT/NYSE) was declared a Black Friday winner

This is one of my favourite defensive stocks. Walmart is touted to be a recession-resistant company. In troubling times, consumers of all stripes seek out lower prices. 

Other favourite defensive stocks I hold include: CVS Health (CVS/NYSE), Pepsi (PEP/NYSE) and Colgate-Palmolive (CL/NYSE). Those U.S. stocks can team up with Canadian telcos, pipelines, grocers and utilities to create a formidable defensive line. 

As I’ve written many times in this column, consumer staples, healthcare and utilities tend to hold up much better during periods of economic weakness. That has played out to script in 2022. Defensive stocks are doing their thing, but energy leads the way despite oil trading remaining around the same level it was in early 2022. 

And of course, I have long beat the drum of oil and gas stocks. On my blog I recently updated the ridiculous dividend growth of our energy holdings. 

Did Apple just hang up on Twitter?

Last week, I touched on the Twitter troubles for Elon Musk. The unraveling of Twitter is just jaw-dropping. This week, Musk picked more fights and most notably with Apple, the most valuable company on the planet! 

Musk says that Apple has removed all of its advertising from Twitter. And now they may remove Twitter from the App Store. There are rumours that Google may do the same on their Google Play distribution service. 

Given that, Musk threatens to create a Tesla smartphone. It’s a soap opera starring some of the biggest players in tech. 

And now the European Union is piping up. The 27 nations may pull the plug on Twitter. CTV reported:

“A top European Union official warned Elon Musk on Wednesday that Twitter needs to beef up measures to protect users from hate speech, misinformation and other harmful content to avoid violating new rules that threaten tech giants with big fines or even a ban in the 27-nation bloc.”

Tesla caught in the crossfire 

As a former advertising and brand guy (I was an advertising writer and creative director), I suggest that Musk is damaging his brand. And we see the bad aura hanging over Tesla, with many consumers now saying they would never buy a Tesla. I observed the same sentiment from posters on social media. 

I wonder what he’s going to tweet next week? 

Dale Roberts is a proponent of low-fee investing, and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every day. 

The post Making sense of the markets this week: December 4, 2022 appeared first on MoneySense.





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