Who is clapping for Canada's central bank planned economy?

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July 20, 2015 - If there was any doubt that the current government in Ottawa has thrown in the philosophical towel on free market oriented economics, it was removed last week when its central bank governor cut rates back down to great financial crisis levels. The lack of a crisis did not deter the central bank from pushing overnight rates into emergency status, a situation last seen during 2009 when the global economy was on the brink in wake of the Lehman bankruptcy.

On Wednesday, central bank governor Stephen Poloz even had to admit that the rate cut could negatively impact financial stability "vulnerabilities." This rolling of the dice has brought out the critics, which now even include some Bay Street money-bank economists. On Friday's edition of BNN's The Close, Bank of Nova Scotia's Derek Holt, Vice President of Scotia Economics, eloquently summed up the dangers of the rate cut. In the interview, he also shattered the Stephen Poloz claim that strong core inflation is due to "transitory factors." The interview can be seen here: http://bit.ly/1fVB4X9.

In our view, Canada has entered into a full blown era of centrally planned economics led by the Bank of Canada Governor, supported by the Finance Minister. At this point, from an investing perspective all we can do is try to identify the industries that Mr. Poloz has decided to favour. For that, we look to see which insiders are clapping their hands the loudest in the current policy environment.

Applaud if you like seeing your global purchasing power fall

 

Making the most noise last week were insiders in both the Industrials and Consumer Non-Cyclical sectors. Although we already have the Industrials at an undervalued reading, the case for the group has become even stronger over the past week based on insider signals. Our 30-day indicator jumped above the 400% mark at which point there are four stocks with key insider buying for every one with selling. The central bank appears to be engineering a nice profits boom in certain exchange-rate sensitive companies. Indeed, many insiders in the group seem to view the falling loonie as the gift that keeps on giving (though we doubt it will result in the jump in manufacturing jobs and investment that Stephen Poloz and Joe Oliver are trying to engineer, see today's Morning INK report on Firan Technology Group). 

Our 30-day Consumer Non-Cyclicals Indicator soared even higher last week, hitting 600% at one point. We are a bit surprised at the positive response given that so many companies in this group such as Metro (INK Edge outlook: mostly sunny; MRU) rely on imports. However, as Steve DiGregorio, portfolio manager at Stanton Asset Management, pointed out on BNN Friday, it may well be that this group believes they will be able pass along food inflation to the consumer: http://bit.ly/1TKyG3Q. If he is right, times will really get interesting for the Bank of Canada as the dampening impact on CPI of last year's crude oil plunge starts to disappear later this year.

S&P/TSX Capped Consumer Staples Index

S&P TSX Capped Consumer Staples Index

Higher inflation will be bad news for consumers, but might be good news for some retailers.

 

Insiders in the Financials also remain upbeat on the back of the rate cut. Interestingly, bond yields did not establish new lows last week in Canada. Unfortunately for the central bank governor and finance minister, they will not ultimately be able to control long-term rates if US bond yields begin to rally. Canadian bonds have to compete for foreign capital, so a move up in American rates will drag up Canadian rates. Such an environment could favour insurance companies and asset gatherers compared to the major banks which will have to contend with the cross winds of an over-levered consumer even as lending margins improve on the back of a steeper yield curve.

Offering a more subdued response to the events of last week were insiders in the Energy sector. While they continue to signal that the group is undervalued, they are being much more cautious in their buying during the current pullback in oil and gas stocks than they were in early winter. The muted response of insiders may be partly explained by trading blackout restrictions. Alternatively, insiders might be content to wait to see how oil markets settle out given the risk of more Iranian crude hitting the market next year on the back of the 6-nation nuclear deal struck in Vienna.

At the broad market level, insiders continue to offer a bullish take on Canadian equities. Indeed, over the past week, both the S&P/TSX Composite and INK Canadian Insider (CIN) Index rose 1.6%. Within the INK CIN Index, four of the top five performing stocks since the May semi-annual rebalancing rose significantly last week: Alimentation Couche-Tard (ATD.B +10%), Exco Technologies (XTC +8.1%), Magellan Aerospace (MAL +6.7%), and Air Boss of America (BOS +6.1%). It is no coincidence that all four serve or have significant operations in the US market. Of the top five performers, only Uni-Select (UNS -0.5%) lagged last week, a company which is now squarely focused on serving the Canadian auto-parts market as a distributor.

 

An earlier version of this post appeared before the market open on INKResearch.com.

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