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Pension Pulse

Insightful information on pension funds and financial markets.

Updated: 2018-01-20T08:11:48.152-05:00


Why the 2018 Consensus is Wrong?


Earier this week, Chen Zhao, chief global strategist at Alpine Macro, hosted a webcast to discuss their 2018 Macro Outlook and investment strategy, Coming Boom and Policy Clashes: Why the 2018 Consensus is likely Wrong. The key questions that were addressed were the following:Is the recent spurt of strong growth around the world a late cycle phenomena or mid-cycle expansion? How long will the “sweet spot” last in the eurozone? Why has U.S. wage growth been so tepid against the booming job market and low unemployment? Is inflation in the U.S. economy a serious threat to the equity bull market? With global equities in a melt-up, what is the sensible investment strategy?What to do with emerging markets, international stocks, value and small cap equities? How high will the 10-year Treasury yield go? Is the recent rally in commodities a real breakout that will lead to a new bull market or a fake-out that will end in new lows?Please note that a replay of this webcast is available to qualified investment professionals. For the access code, you can send an email to with your contact details including name, firm, phone number and country.Before I begin, let me thank Chen for providing me his slides and notes for this webcast. I was hoping they would post it on YouTube so I can embed it here but I think it's best you contact them here, get a trial access to their research and watch a replay of the webcast (it was short, concise and thought-provoking).For those of you who don't know, Alpine Macro was formed by three industry veterans, Tony Boeckh who led BCA Research from 1968 to 2001 (see company's history here), Chen Zhao who worked many years at BCA as a Managing Editor of the Emerging Markets and Global Investment Strategist publications before going to work at Brandywine Global and David Abramson who was the Managing Editor of BCA's F/X and commodities publications. You can read more about them here.Collectively, Tony, Chen and David have many years of experience and they have seen it all, so I would definitely subscribe to their market research because as you'll see, it's not based on consensus. They have their own views on markets which you may or may not agree with but I guarantee it will make you think hard about where we're headed.You'll recall I alluded to Alpine Macro's 2018 outlook in my comment after Christmas looking at whether it's time for the Santa rally:It's particularly hard trading when markets enter a melt-up phase, where everything explodes up, and this in spite of the Fed raising rates.In my experience, this is when the biggest gains are made. This is why I've been trading stocks over the last month like crazy, because I knew as long as that tax bill wasn't signed, markets will keep going higher in anticipation of  the new tax plan.Now that we got this tax bill out of the way, it will be interesting to see if markets keep forging ahead despite the Fed rate hikes.Personally, I'd love to see a healthy pullback on the S&P 500 (SPY) right back to its 50-week moving everage before it takes off again. It doesn't mean it's going to happen, especially in these markets where traders chase momentum.But these markets aren't just about momentum and chasing trends. Some argue the fundamentals warrant more upside in stocks.In fact, Chen Zhao, Chief Strategist at Alpine Macro, sent me this in an email Friday morning:Alpine Macro’s 2018 Outlook, titled “Unanticipated Boom and Coming Clashes”, is currently being completed and will be released on January 5th . The report’s release will be followed by a live Webcast where I will answer your questions. Here is a preview of the report:Entering 2018, the investment community has comfortably converged to the view that economic growth in the U.S. will be around 2.5%, growth in the Eurozone will decelerate to about 2% and China’s economic growth will soften to 6.3%, ergo the consensus calls for a replay of 2017 in 2018. As for markets, most investors are cautious on stocks, bearish on bonds and uncertain about comm[...]

Canada's Hyper-Leveraged Economy?


Natalie Wong of Bloomberg reports, Canada’s Debt Binge Has Macquarie Sounding Alarm on Rate Hikes:The unprecedented rise in consumer debt means the Bank of Canada’s rate-hiking cycle is already the most severe in 20 years and further increases will have far graver consequences than conventional analysis shows, Macquarie Capital Markets Canada Ltd. said.Assuming just one further rate rise, the impact would be 65 percent to 80 percent as severe as the 1987 to 1990 cycle, according to Macquarie, which took into account five-year bond yields, household debt and home buying. Canada’s housing market slumped in the early 1990s after that rate-hike cycle and a recession.“The Canadian economy has experienced an unprecedented period of hyper-leveraging,” analysts including David Doyle wrote in the note released Thursday. According to Macquarie, this is underlined by the fact that:About 30 percent of nominal GDP growth has come from residential investment and auto sales over the past three years. This is about 50 percent greater than what has been experienced in similar prior periods.The wealth effect from rising home prices has driven nearly 40 percent of nominal growth in gross domestic product over the past three years, about two to four times the amount experienced previously when the BoC was hiking rates.Even as this has occurred, fixed business investment and exports have struggled, limiting the ability for a virtuous domestic growth cycle to unfold. This again is in sharp contrast to similar periods in the past when these were accelerating.New mortgage stress-test rules will also have a larger impact than estimated, Macquarie said. The new rules in isolation are expected to reduce buyers’ maximum purchasing power by as much as 17 percent. That jumps to about 23 percent after incorporating the rise in mortgage rates since mid-2017, according to the note.Governor Stephen Poloz has indicated high household debt could make the slowing impact of rate hikes harsher, and that the impact of 2017’s increases will not be fully clear for 18 months, Doyle said.“When taken together, these observations mean the Bank of Canada is proceeding with hikes despite uncertainty surrounding the severity of tightening performed so far,” Macquarie writes. “This elevates the risk of policy error.”Macquarie expects only one more rate hike in either April or July.On Wednesday, the Bank of Canada increased its target for the overnight rate by 25 basis points (0.25%) to 1 1/4 per cent. The Bank issued this press release (added emphasis is mine):The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report (MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, a[...]

A December Surprise?


IPE reports, Lendlease and CPPIB team up to invest £1.5bn in UK BTR sector:Lendlease and Canada Pension Plan Investment Board (CPPIB) have partnered to invest an initial £1.5bn (€1.7bn) in the UK build-to-rent (BTR) sector.The partnership will begin with an investment of £450m in the next phase of new homes at Lendlease’s £2.3bn Elephant Park development in Elephant & Castle, London.CPPIB will invest around £350m for 80% stake and Lendlease will invest the balance.This partnership is in addition to the £800m that Lendlease has already committed to housing and infrastructure in the development and will accelerate the delivery of private rental and affordable homes.Construction has already commenced, and the first homes in this phase are expected to be completed in 2020.Following this initial investment, the partnership will also pursue opportunities within Lendlease’s wider residential urban regeneration activities in London and across the UK under a 50:50 joint venture. It aims to help address the UK’s housing shortage, over time, providing thousands of homes in London and across the UK via the development, and long-term ownership, of BTR product.Lendlease will develop, construct and manage the BTR homes on behalf of the partnership.Dan Labbad, the CEO of Lendlease’s international operations, said: “In recent decades, structural shifts in the housing market have meant that demand has outstripped supply in the private rented sector, leading to a shortfall of homes in London and across the UK.“Today’s announcement is a logical next step for us as a business and delivers on our strategy to grow our urban regeneration pipeline and accelerate the delivery of much-needed homes, by working with institutional capital partners to launch this new asset class for Lendlease’s investment platform.”Andrea Orlandi, the managing director and head of real estate investments Europe at CPPIB, said: “This investment is a great opportunity for CPPIB to further diversify our European real estate portfolio, while at the same time addressing a need in the UK.“Through this partnership, we are able to access a sector we believe is poised for long-term growth, and we are pleased to be able to do so with Lendlease, one of our existing top global partners.”CPPIB is already a long-term global partner of Lendlease.You can read CPPIB's press release on this deal here. Lendlease has a good description of Elephant Park on its website:Lendlease is working in partnership with Southwark Council to deliver a GBP£2 billion regeneration programme on 28 acres of land in the centre of Elephant & Castle. Situated in London's Zone 1, our vision is to create Central London's new green heart.Inspired by the strength of its past, we will re-establish Elephant & Castle as the most exciting new neighbourhood in London not only through what we're building, but also how we're doing it. Our approach to urban regeneration in Elephant & Castle is already setting new standards in sustainability, that will not only will make the Elephant a great place to live, but will play a vital role in tackling issues such as air pollution and carbon emissions, creating a positive impact beyond just the Elephant.The regeneration comprises three sites:Elephant Park Masterplan Almost 2,500 new homes on the site of the former Heygate Estate. Received outline planning permission in 2013 and will be completed in phases between now and 2025. The first two phases South Gardens and West Grove are in construction. 25% affordable housing.Trafalgar Place 235 new homes, including 25% affordable housing and a local café. Completed May 2015.One The Elephant 284 homes in a 37 storey tower and four storey pavilion building, adjacent to the councils new Leisure Centre. Completes June 2016.Lendlease views the Elephant & Castle regeneration as a unique opportunity to work with a local authority to create positive change. We will harness the scale of the project to tackle head-on some of the most chal[...]

Workers and Retirees Over Bondholders?


The National Union of Public and General Employees (NUPGE), one of Canada's largest labour organizations with over 370,000 members, put out a press release recently, NDP private member's bill shows pension plans can be protected:“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence.”— Larry Brown, NUPGE PresidentOttawa (27 Nov. 2017) — A private member's bill, Bill C-384, introduced by Scott Duvall, NDP MP for Hamilton Mountain, shows that it is possible to protect pensions when companies enter bankruptcy proceedings.In the last few years there has been a growing trend where workers and pensioners are seeing significant cuts to their pension plans after the companies they worked for went bankrupt. Sears Canada is just the most recent example. US Steel, Nortel, and Can-west are the better known of the other companies where pensions were cut after the companies went bankrupt.There are 2 reasons pensions are being cut when companies enter bankruptcy proceedings. When pension plans are under-funded, companies find it easy to delay making the payments necessary to ensure they are fully funded. Then, when companies enter bankruptcy proceedings, workers and pensioners are at the back of the line when the company is wound up or restructured.“Current pension rules make it far too easy for companies to put off dealing with pension plan deficits. Then if the company enters bankruptcy proceedings it is retirees who pay the price,” said Larry Brown, President of the National Union of Public and General Employees (NUPGE).Bill C-384 would put workers and retirees firstBill C-384 would amend the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) so that a company going through bankruptcy proceedings would have to make sure its pension plan was fully funded before other creditors could be paid. The bill would also prevent companies going through BIA or CCAA proceedings from cancelling benefits for workers or retirees.Sears Canada liquidation an example of why Bill C-384 neededPeople who worked at Sears Canada could see their pensions cut by 20 per cent because the pension plan was not fully funded when the company entered bankruptcy proceedings. Extended health and dental benefits were cancelled. People who have worked at Sears for decades are being laid off without getting the severance pay they are owed.But while low- and middle-income pensioners will see their pensions cut, pensions they worked decades to earn, some select executives and senior managers are getting $6.2 million in retention bonuses. Existing bankruptcy laws protect retention bonus payments to executives, even though the company is being liquidated.Excessive payments to shareholders in the years leading up to bankruptcy proceedings are also not a problem under current legislation. At the same time that the workers’ pension plan slid into deficit, Sears Canada spent $1.4 billion on payments to shareholders.“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence. That’s why NUPGE is joining with other unions to support Bill C-384,” said Larry Brown, NUPGE President.Before I get to Bill C-384, let's have a look at what prompted this proposed bill. In September, the Canadian Press reported, Sears case shows the risk of defined benefit pensions for employees:Sue Earl, a 38-y[...]