Month: November 2018

Well, investors, did you enjoy ‘Shocktober’? Yes, it was a brutal last month in the stock market, as investors fretted about mid-term elections, earnings and interest rates. For a while, it certainly looked like 2008 all over again, with tech stocks posting their worst month in nearly a decade. Pundits called for the “end of the bull” and of course all the doomsayers with wringing their hands with glee. We heard from many investors who were shifting to cash, “until the market settles down” or ”corrects dramatically.”

But, as usual, fear took over from reality. Even with some big corporate earnings misses, markets eventually calmed down. The main drivers of the stock market — interest rates and earnings — are still positive for the market. Takeovers continue and dividends keep increasing. While October certainly was no fun, for seasoned (i.e. old) investors like us it was just another month.

Here are five reasons why investors might not want to worry so much about events in October.

Market valuations are now very reasonable

According to FactSet, the forward 12-month price to earnings (P/E) ratio for the S&P 500 is now 15.6. This P/E ratio is below the five-year average (16.4) but above the 10-year average (14.5). With very strong economic conditions, good corporate earnings growth and lots of dividend increases and acquisitions, we would not view a 15 P/E as at all excessive. There has been lots of chatter about the ‘overvalued’ stock market, but it simply is just not the case. Put another way, just because a bull market has run a long time does not automatically mean it needs to stop.

Economic conditions are more than just ‘not bad’ — they are great

Unlike in 2008, we do not have a seize-up of credit markets. Employment is at a record. Commodity prices are not surging. Corporate earnings are solid. Things, simply put, are just not bad at all. Generally, the market reacts to the economy. The sharp sell-off in October simply made little sense if you look at economic strength, particularly in the U.S.

Investors were really not that scared

While we will never ignore market signals, we simply were not that worried in October because we were closely watching the VIX, or volatility index. It never breached 30. In 2008, it hit 80. Even in February — this year’s other “panic” — it hit 37. In 2011, it hit 48. Thus, in terms of real panic for investors, October really wasn’t even close to other panics, which of course, all proved to be opportune buying times (as panic usually is).

Money still came into the market

We like Vanguard ETFs, as the company has been a big driver of getting investors’ fees down. We like also to watch Vanguard’s fund flows, as it has a huge individual retail investor base. Once again (as it has for more than a decade) Vanguard reported net fund inflows in October. It is always hard to get a bear market rolling if money continues to pour into the market.

Buffett is still buying

Warren Buffett bought back close to US$1 billion in shares in his Berkshire Hathaway holding company in August, and the company finally made a dent in its giant cash hoard (still US$243 billion!). We haven’t seen his October buying numbers, but, as in 2008, when Mr. Buffett came in with US$5 billion to support Goldman Sachs while the financial world was imploding, he likes to buy when others are selling, and his timing is far more right than wrong. Investors could do worse than following his lead.

Even with October’s swoon, all U.S. indices are now up on the year, recovering nicely. Looks like it could be time for a Santa Claus rally.

Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors

Bite into a Honeycrisp apple and you understand why consumers are willing to pay so much for a piece of fruit: the crunch.

That’s no accident. In the pre-Honeycrisp era, apples had just two textures: “soft and mealy (that nobody liked), and then we had the good apples, the hard, crisp and dense,” said David Bedford, one of the original breeders of the Honeycrisp.

Unlike the vast majority of modern commercial produce, the Honeycrisp apple wasn’t bred to grow, store or ship well. It was bred for taste: crisp, with balanced sweetness and acidity. Though it succeeded beyond anyone’s wildest dreams, along the way it became a nightmare for some producers, forcing small Northeastern growers to compete with their massive, climatically advantaged counterparts on the West Coast.

The Honeycrisp wasn’t an immediate success. The original tree, known officially as MN1711, was discarded in 1977 over concerns about its winter hardiness. But Bedford, who joined the team in 1979, found four small clones that had miraculously escaped the garbage and decided to see if they’d yield fruit. “In 1983,” Bedford wrote in an email, “those small trees bore a few amazing fruit and the rest is history.”

The Honeycrisp variety is now so popular, consumers will spend three times the cost of other apples to experience it.

Production of Honeycrisps has doubled over the last four years, making it the fifth most-grown variety, according to Mark Seetin, director of regulatory and industry affairs at the U.S. Apple Association. But not everyone is a fan. Those who produce Honeycrisps often have the most cutting words for it.

“The first challenge is controlling its vigor,” said Brenda Briggs of Rice Fruit Co., which has been selling apples out of Adams County, Pennsylvania, for more than 100 years. Growers, she explains, have to train the trees so that their branches don’t get too tall too fast, with leaves that block the sunlight from the apples below.

The fruit is also vulnerable to bitter pit — small, sunken brown spots that sully an otherwise perfect orb. The flaw is a result of the trees’ inability to properly take up calcium from the soil. Growers are forced to spray their orchards with foliar calcium to boost their intake, but it’s not always enough.

Size can also be an issue. “The fruit tends to grow very big,” said Mark Nicholson of New York’s Red Jacket Orchards, whose business includes about 400 acres dedicated to apples. “That’s good, but at a certain point the consumer doesn’t want to buy an apple the size of a grapefruit.”

The thin skin that makes those first bites so juicy is also very delicate and easily sunburned. Birds love Honeycrisps more than other apples, forcing growers to buy and install netting to keep them away.

It requires growers to do a lot more work

Mark Nicholson of New York’s Red Jacket Orchards

Even if a producer manages to grow a decent crop of Honeycrisps, harvesting and storage come with additional hurdles. The variety is so delicate that the stems have to be clipped off so the apples don’t tear each other. And while other apples can go right from tree to cold storage, Honeycrisps must first spend 5-10 days being “tempered” at a mild temperature before they can be refrigerated.

“It requires growers to do a lot more work,” Nicholson said. In the end, only 55 per cent to 60 per cent of the fruit makes it to retail, Seetin said.

It also means that even though Honeycrisps cost more than double the price of Red and Golden Delicious apples — at a national average of US$2.19 a pound for the month of October — producers aren’t raking it in. “There’s a higher investment and production cost in places that are not Minnesota,” where the Honeycrisp was originally bred, said Karina Gallardo, an agricultural economist at Washington State University.

So why do farmers put up with the hassle? They simply don’t have a choice.

The demand for this one apple exceeds supply — it’s all consumers, and therefore supermarkets, want. So growers are planting with almost reckless abandon, pulling out old varieties, like the tired Red Delicious, and putting in Honeycrisp trees — even in places where they don’t grow well.

For the massive West Coast orchards, this isn’t much of a problem. But on the East Coast, which has smaller orchards and wet weather that makes organic growing impossible, the challenge is more acute. “There’s a lot of concentration of apple growing in the one place (Washington), and that makes it easier for those growers to supply big retailers,” said Susan Futrell, author of “Good Apples: Behind Every Bite” and director of marketing at Red Tomato, a Massachusetts-based nonprofit distributor for a network of over forty wholesale growers. “Decisions about what varieties to carry are getting made by fewer and fewer people and further away from where people are buying the apples.”

Even for such retailers as Whole Foods Market and FreshDirect, both of which have robust local programs, sourcing from the West Coast to sell in the East is inevitable if they want to carry the organic version of their most popular apple.

Meanwhile, everyone is nervously waiting for the day when the supply-demand equilibrium brings sticker prices down far enough that growing the Honeycrisp no longer makes economic sense.

But it’s not likely to happen soon, said Eric Rama, head of agricultural research at MetLife Inc. Even though production is increasing at a rapid pace, demand for premium apples isn’t waning. Retail prices, though slightly lower than last year’s, have stayed at appealing heights for farmers and probably won’t sink in the foreseeable future, he said.

Still, the industry is on the lookout for the next Honeycrisp. Something just as delicious, but less troublesome to cultivate.

Broetje Orchards in Prescott, Washington, is devoting 10 per cent of its 7,000 acres to the non-browning Opal, Paul Esvelt, the orchard’s post harvest manager, told Bloomberg at a New York City event to promote the fruit. That’s the same amount of space the grower sets aside for the Honeycrisp. Esvelt expects 3 per cent growth for the Opal next year, while Honeycrisp acreage will remain stagnant.

Washington State University plans to introduce the Cosmic Crisp as early as next year, said Gallardo. Tangy, sweet and — as the name implies — crispy, the apple could account for 5 per cent to 10 per cent of the state’s production.

Josh Morgenthau of Fishkill Farms in New York, meanwhile, would like to see more credit given to the Esopus Spitzenburg, a New York original known for its spicy profile and, some say, a particular favourite of Thomas Jefferson’s.

Despite the extra work, growers will keep planting, picking and selling the Honeycrisp, as long as the core economics makes sense.

“If they aren’t making money,” said Bedford, “I’d be the first to tell them to pull it out.”

Bloomberg.com

CALGARY – TransCanada Corp. said it remains committed to its long-delayed, often-challenged $10-billion Keystone XL pipeline Friday even after a U.S. federal judge blocked the project.

United States District Court Judge Brian Morris issued an injunction Thursday preventing either Calgary-based TransCanada or the U.S. federal government “from engaging in any activity in furtherance of the construction or operation” of the Keystone XL pipeline.

Morris’ ruling said the U.S. State Department’s analysis “fell short of a ‘hard look’” at potential spills, likely impact on Native American cultural resources, cumulative emissions from Keystone XL and other oilsands pipelines and how a change in oil prices would affect the viability of the pipeline.

Analysts say the decision could cause a delay of up to one year for Keystone XL, which was first proposed 10 years ago.

Former TransCanada executive Dennis McConaghy, who has written a book on the Keystone XL pipeline saga, said the Calgary-based pipeline giant had successfully re-contracted all the available space on the pipeline, which should sufficiently satisfy the court of the viability of the pipeline.

Noting that former U.S. president Barack Obama had appointed Morris to the court, McConaghy said opponents of the pipeline had “shopped (the case) as best they could to find a pliant federal court judge who had some nexus to the project.”

Obama rejected Keystone XL before leaving office.

McConaghy said that, most likely, “TransCanada has been working steadily through the night with the Trump administration to decide what they’re going to tactically do.”

U.S. President Donald Trump, who approved a revived Keystone XL through an executive order in 2017, blasted the decision Friday. “It was a political decision made by a judge. I think it’s a disgrace,” he told reporters at the White House.

TransCanada did not indicate how it would proceed on Friday but the ruling is a blow to the company’s plans to begin construction early next year. TransCanada had been staging pipes and clearing vegetation along the route in Canada and the U.S.

“We have received the judge’s ruling and continue to review it. We remain committed to building this important energy infrastructure project,” the company said in an emailed statement.

It was a political decision made by a judge. I think it’s a disgrace

U.S. President Donald Trump

Legal experts believe TransCanada has three avenues for the project. The State Department could try to address the deficiencies the judge indicated in the ruling, appeal the decision to a higher court, or Congress could try to pass a law enabling the project’s construction.

Each of those options have problems of their own, said Fred Jauss, a Washington, D.C.-based partner with Dorsey & Whitney LLP.

“The most likely outcome is they’ll take a two-track approach here and they will file an appeal up to the (San Francisco-based) Ninth Circuit, which has not been friendly ground for the Trump administration,” Jauss said. “Simultaneously, the State Department will start work on a revised environmental analysis.”

He said it could take several months before the State Department is able to issue a new environmental impact statement, putting a timeline for a decision “well into 2019.”

Alternatively, Republicans could try to pass a law through both houses of Congress to rubber stamp the project, but they’d need to do it before the House of Representatives switches to Democratic control in the New Year.

“They’ve only got just about two months to be able to get something through – that’s a very low probability, but it is a possibility,” Jauss said.

Trump could also either file an appeal or direct the State Department to conduct a new study, said Zachary Rogers, analyst at Wood Mackenzie.

“We see the potential delay of this project being between eight months and a year – and that could push the (in-service date for the) line back to the middle half of 2022,” Rogers said.

“This really underscored the painful year that Western Canadian producers are having and it’s really a function of the lack of infrastructure,” Rogers said of the ruling, which exacerbates Canada’s pipeline pinch that has led to record-setting US$50-per barrel discounts for Canadian crude.

The ruling in Montana against Keystone XL is “eerily similar” to the Federal Court of Appeals ruling against the Trans Mountain pipeline, according to Chris Bloomer, Canadian Energy Pipelines Association president and CEO.

“These things are turning on what seem to be pretty narrow issues and they’re pretty similar on both sides of the border. We characterize it as yet another wake up call as to how fragile and how vulnerable Canada is to not having infrastructure built to move its energy to market,” Bloomer said.

TransCanada would likely provide more information on how it will deal with Thursday’s court ruling at its investor day presentation next week, according to Chris Cox, analyst at Raymond James.

“An important dynamic here is whether the company remains committed to pursuing the project in light of ongoing regulatory delays, especially as we believe there is a strong desire to substantially complete the project before the next U.S. presidential election,” Cox said.

Tom Goldtooth, executive director of the Indigenous Environmental Network, which was one of the plaintiffs asking for the injunction, said his group felt vindicated by the ruling.

“Trump’s approval of this pipeline was illegal, violated environmental laws and was based upon fake facts.”

Canadian oil stocks traded lower on Friday following the decision and as oil prices entered bear market territory, with shares in the country’s five largest oil producers falling between one to three per cent, and TransCanada shares slipping 1.42 per cent to $51.46.

• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan

MONTREAL — The president of Air Transat is leaving the airline after five years at the helm.

Tour company Transat A.T. Inc. announced Friday that Jean-Francois Lemay will leave the subsidiary in a few months.

Lemay, who has been with the company for seven years, is leaving to “take on new challenges,” chief operating officer Annick Guerard says in a release.

A successor hasn’t been selected.

Lemay oversaw a series of changes, including reducing air costs, transforming the fleet and installing a new senior management team.

Montreal-based Air Transat flies to about 60 destinations in 26 countries.

Canada’s telecommunications regulator may slap more rules on large internet service providers in the face of a rising number of complaints about their services.

On Friday, the Canadian Radio-television and Telecommunications Commission launched a proceeding to establish a mandatory code of conduct for internet service providers in order to address problems of contract clarity, bill shock and barriers to switching service providers.

There are already codes for wireless and television services, introduced in 2013 and 2017, respectively. The wireless code, which effectively axed three-year contracts and capped much-loathed roaming and data overage fees, was costly for providers to implement.

With internet access increasingly critical to Canadians, it’s no shock the CRTC is moving toward a code. Yet the timing of a call surprised the industry.

The CRTC just wrapped up a government-mandated public inquiry into whether telecom providers use aggressive or misleading sales practices. At the October hearing, an internet code was discussed as a potential solution to some of the problems. Many internet-related complaints stemmed from the point of sale, where numerous customers reported a mismatch between what they thought they agreed to buy and the actual price or service they received.

Despite the overlap between the two files, the CRTC said the two proceedings are distinct. It called for public comments on whether an internet a code is needed, what should be in it and how it will be implemented, administered and enforced.

“While Internet services play an important role in the everyday lives of Canadians, the number of complaints has been trending up and we are of the view that a code for these services may be needed,” CRTC chairman Ian Scott said in a statement.

The Commission for Complaints for Telecom-Television Services (CCTS), the watchdog that consumers turn to as a last resort if they can’t resolve problems with their provider, reported a 38 per cent increase in complaints about internet services in its 2016-17 annual report.

The CRTC’s suggestions for the code included requiring door-to-door salespeople to clarify time-limited discounts, demanding service providers notify customers when they’ve used their monthly data allotment, and insisting upon trial periods of up to 30 days where a customer can cancel free of charge.

The code will not address prices, competition, wholesale issues, advertised broadband speeds, internet traffic management, privacy or content on the internet.

… the number of complaints has been trending up and we are of the view that a code for these services may be needed

CRTC chairman Ian Scott

The CRTC recommended the new rules only apply to incumbent cable and telephone providers such as Rogers Communications Inc., Shaw Communications Inc., Videotron Inc., Telus Corp, BCE Inc. and SaskTel. These players serve 87 per cent of the market. Smaller providers such as TekSavvy (there are 550 such resellers across Canada) would not be subject to the code.

Spokespeople from Rogers and Telus said they will actively participate in the consultation process.

“Our customer-first approach includes our commitment to being clear, simple and fair every time we connect with our customers, and our in-market residential plans are month-to-month with no early cancellation fee,” Rogers spokeswoman Sarah Schmidt said in an email.

Telus also touted its consumer-friendly ways.

“We’ve had the fewest complaints of any national carrier for the last six years,” spokeswoman Erin Dermer said in an email, adding that Telus has the highest customer loyalty rates.

Bell is still reviewing the notice, spokesman Marc Choma said.