Looking at resilient market
It’s a line derived from years of experience, but the market is very resilient. consider the changes introduced in this year’s federal budget affecting so-called character conversion transactions, a feature that made the products tax efficient for the holders. Ottawa’s plan was to prevent taxpayers (owning mutual funds or structured products) from converting fully taxable ordinary income to capital gains by purchasing or selling capital properties under a derivative forward agreement.
The response was fast: Many existing issuers announced changes, while some issues that were being marketed were pulled.
but the market for so-called structured products didn’t disappear. After a short period, products without such a feature were marketed. Manulife was first with its first deal: based on floating rate senior loans it raised $283-million. Since then others have followed and at least five deals are now being marketed. Most of the issues will be invested in debt securities.
“While there was uncertainty initially, funds [without a forward] appear not to have missed a beat,” noted one market participant. “but overall it hasn’t been a stellar year because of weaknesses in precious metals, resources and uncertainty around rates.” Putting losses into perspective.
Given that the S&P/TSX composite index closed at a lower level this week than last week, the average passive investor suffered losses — albeit small. Maybe perspective is required.
Ike batista, at one stage the world’s eighth-richest person and the richest brazilian, has lost a reported uS $34.5billion over the past year. This week BusinessWeek published a major piece on batista’s rise to riches that was based on large bets on natural resources, particularly oil — and his decline. OGX, one of the key companies within his conglomerate was also in the news: It defaulted on uS$1-billion of bonds after missing an interest payment. The predictions of what lies ahead aren’t positive.
ron Wayne, one of the three cofounders of Apple, probably holds the record for the largest opportunity loss. Wayne, who along with Steve Jobs and Steve Wozniak founded Apple computer in April 1976, sold his 10% stake back to the others 12 days later for uS$800. (Apple was incorporated in January 1977.)
Had Wayne kept his 10% stake and had he invested along the way to maintain his equity stake, he would be worth uS$44-million today.
Why did he sell? In 2012 he wrote that while he had “every belief [it] would be successful but I didn’t know when, what I’d have to give up or sacrifice to get there, or how long it would take to achieve that success.” Floating-rate debt
This past week, two reITs issued floating-rate unsecured debt, the first in that sector to do so. dundee reIT raised $125-million of three- and a one-year debt while H&r reIT added $235-million of two-year debt.
In both cases the issuer will use the proceeds to pay down secured debt, a move that gives it flexibility and fewer encumbered assets. Also, the rates being paid were at or below the rates paid on secured debt. (The two reITs are continuing a trend: A few days before these two deals the TMX Group raised $350-million of three-year floating rate debt.) For issuers, it represents an alternative source of funds. Floating-rate debt is popular with investors because it lets them participate in any increase in short-term rates.
This week, bill Gross, manager of the PIMcO Total return Fund, wrote that, “The u.S. (and global economy) may have to get used to financially repressive — and therefore low policy rates — for decades to come.”