Sears Canada's majority owner to dramatically cut its holdings

Your top financial and economic news for Oct. 2


Top of the Morning

Scott Gilmore of Maclean’s urges Canadian policy-makers to work toward tripling the nation’s population by the end of the 21st century:

Now at 34 million people, we would only need an annual growth rate of 1.3 per cent to reach that target. Assuming our fertility rates remain low, this means an additional 186,000 migrants annually, bringing our total immigration numbers to 444,000 per year…

More immigrants mean more minds, more hands and more tax dollars. There is a misconception that new arrivals are a net drain on our economy. In fact, they are more entrepreneurial and work longer hours than average Canadians. The added muscle would make us smarter, stronger and louder…

Bigger tax rolls mean more money for the large-scale infrastructure investments that we currently cannot afford: Arctic harbours, high-speed rail and clean energy. It would also mean more money and more bodies for a larger military. We would no longer need to rely on lonely snowmobiles to protect our northern sovereignty. Our trade weight would increase, too. We would maintain our position as the United States’ most important trading partner.

On the Homefront

An unwelcome milestone for the TSX. After closing above 15,600 on Sept. 3, Canada’s benchmark index then proceeded to fall in 14 of the next 20 sessions for a cumulative decline of more than five per cent after Wednesday’s losses. That’s the first five per cent decline of 2014. While materials and energy stocks have come under particular pressure during this period, financials has also performed terribly since the sell-off in the United States began about two weeks ago. TSX 60 futures are moving lower ahead of the open.


Oil continues to weaken. The near contract for WTI crude oil futures is trading below $90 per barrel and has dipped to a level not seen in 17 months. This commodity has entered a bear market, falling 20 per cent from this year’s peak.


The loonie is rallying despite the drop-off in oil, rising to about 0.898 against the greenback this morning.


The yield on the five-year Government of Canada bond has ticked up to 1.575 per cent.


Sears to dramatically reduce its stake in Canadian subsidiary. Reuters reports that Sears Holdings will sell 40 million shares of Sears Canada (SCC), which are valued at about $380 million. This rights offering will see the American retailer’s stake in this Canadian division shrink from 51 to about 12 per cent, with shares of Sears Canada being offered to the parent company’s shareholders at a modest discount to Wednesday’s closing price. Edward Lampert, billionaire owner of Sears Holdings, has often used his Canadian subsidiary as a piggy bank, raising money for the parent company through asset sales. He will increase his personal holdings of Sears Canada, which currently sits at about 27 per cent, as a result of this sale. Sears Canada has posted uninspiring results over the past few years, with same-store sales in free-fall. Recently, rumours surfaced that the long-struggling Canadian retailer was considering filing for bankruptcy.


Big bank not allowed to spin off U.S. prop trading business. In light of some audio recordings that were recently publicized, it may make some people happy to know that regulators do indeed say “no” to banks. The Wall Street Journal reports that the Federal Reserve and Securities and Exchange Commission rejected the Royal Bank of Canada’s (RY) plan to make its U.S. trading division into a hedge fund in which it would invest up to $1 billion. The Volcker Rule, part of the Dodd-Frank legislation designed to improve the resiliency of the financial system, limits the ownership stake that banks can take in hedge and private-equity funds. Bloomberg observes that propriety trading isn’t too important to RBC, as this division makes up just 1.5 per cent of its total revenue. “We are actively working to restructure our proprietary trading business to comply with the Volcker Rule ahead of the July 2015 deadline,” RBC spokesperson Kevin Foster told Bloomberg.


Fertilizer company to take a hit. Agrium (AGU) began to tumble in the after-hours session on Wednesday after announcing that earnings from continuing operations in the third quarter are expected to be between $0.45-0.55, well below the consensus estimate. This looks to be a company-specific story, but we’ll see if weakness bleeds into other stocks in the space, namely, Potash Corp. (POT).


Canadian asset manager to turn around Atlantic City casino. On Wednesday, Brookfield Asset Managment (BAM.A) announced that it had won the bankruptcy auction for the Revel casino with a bid of US$110 million. The Globe and Mail’s Boyd Erman described the company’s blueprint for gaming resorts as: “Find struggling casino, acquire for a song, fix up and make profitable,” noting that Brookfield has executed this formula at the Atlantis casino in the Bahamas.

Daily Dispatches

Don’t expect the European Central Bank to announce more aggressive monetary accommodation today, says IG market strategist Stan Shamu. “While the ECB is unlikely to announce further stimulus, it’ll be interesting to hear what they’ve got to say — particularly about the low uptake in the recent TLTRO allotment,” he writes. “The general consensus is that the uptake will pick up in December, but there would be unanswered questions should this not come to fruition.” Meanwhile, Marc Chandler makes the case that if Draghi & Co. decided to start buying government debt, this wouldn’t be a panacea for Europe, as eight members of the eurozone already have negative two-year yields. “There are non-political and non-legalistic reasons to be suspicious of a sovereign-based QE,” he writes. “Of the ECB’s challenges, high sovereign bond yields are not among them.” The latest decision is out at 7:45 a.m. (EDT), with a press conference beginning 45 minutes later.


A pair of second-tier U.S. data points are due out before September’s non-farm payroll report grabs headlines on Friday, as last week’s initial jobless claims and factory orders for August are slated to be published this morning.