Market Insights: 'Buybacks Bonanza' & Dr. Copper
Milestone Wealth Management Ltd. - May 14, 2021
Macroeconomic and Market Developments: Equity markets in North America were lower this week. In Canada, the S&P/TSX Composite was down 0.24%. In the US, the Dow Jones Industrials Average declined 1.13% and the S&P 500 Index fell 1.37%. The Canadian
Macroeconomic and Market Developments:
- Equity markets in North America were lower this week. In Canada, the S&P/TSX Composite was down 0.24%. In the US, the Dow Jones Industrials Average declined 1.13% and the S&P 500 Index fell 1.37%.
- The Canadian dollar was slightly higher this week, closing at 82.58 cents compared with 82.40 cents last Friday.
- Oil prices were higher this week, with US West Texas crude oil finishing at US$65.35 vs US$64.75 last Friday and the Western Canadian Select price at ~$52.60 vs ~$50.60 last week.
- Gold prices were also slightly higher this week, closing at ~US$1,843 compared with ~US$1,833 last Friday.
- Last weekend, the Colonial Pipeline fell victim to a cybersecurity attack on Friday that involved ransomware, forcing it to temporarily shut down all pipeline operations. Colonial transports nearly half of the East Coast’s fuel supply through a system that spans over 5,500 miles between Texas and New Jersey. The pipeline transports gasoline, diesel, home heating oil and jet fuel.
- Suncor Energy (SU) and ATCO (ACO.X) announced that they are collaborating on early-stage design and engineering for a potential clean hydrogen project near Fort Saskatchewan, Alberta that would help reduce the province's carbon dioxide emissions. The companies say the project would produce more than 300,000 tonnes per year of hydrogen. They expected 85 per cent of the gas would be used to supply existing energy demand including in refining processes and cogeneration of steam and electricity at the Suncor Edmonton Refinery, reducing refinery emissions.
- US inflation in April accelerated at its fastest pace in more than 12 years. The CPI (Consumer Price Index) rose 4.2% from a year earlier vs a Dow Jones survey that had expected a 3.6% increase. Excluding volatile food and energy prices, the core CPI increased 3.0% from the same period in 2020 vs estimates of 2.3%. In addition, the US Producer Price Index (PPI) rose 0.6% in April, well above the consensus-expected 0.3%. Producer prices are up 6.2% versus a year ago. Food prices rose 2.1% in April, while energy prices declined 2.4%. Producer prices excluding food and energy increased 0.7% in April and are up 4.1% in the past year.
- The takeover battle for Kansas City Southern (KSU) seems to have concluded. A revised proposal from Canadian National Railway (CNR) that KSU’s board determined to be superior to the CP Rail bid; under the terms of CN's revised proposal, each share of KCS common stock would be exchanged for $200 in cash and 1.129 shares of CN common stock.
- For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER
- In addition, First Trust has created a COVID Recovery Tracker. Click here: RECOVERY TRACKER
Charts of the Week:
This week we wanted to share something that has received very little press. Companies are preparing to launch a record wave of share buybacks as executives get comfortable with spending excess cash following a blockbuster earnings season and greater clarity on the trajectory of the world economy. US companies announced $484bn in share buybacks in the first four months of this year, the highest such total in at least two decades, according to Goldman Sachs. In what its analysts dubbed a “buyback bonanza”, Goldman projected share repurchases by US companies would increase 35 per cent this year from 2020. As the chart illustrates, the announced buyback authorizations this year through April would be a record.
Source: Goldman Sachs Global Investment Research, Canaccord Genuity
Let’s move on to an earnings season update. We are now in mid-May and thus most companies (~90%) have reported their Q1 earnings. As the following chart depicts, the year-over-year growth from Q1 2020 has shown a massive rebound over 45%; this was somewhat expected given the nature of last February/March period when COVID hit hard. However, the surprising rate and magnitude really left analyst’s consensus estimates “in the dust”.
Source: Connected Wealth, Bloomberg
Lastly, we wanted to highlight that copper prices have been surging. We have written about this commodity in the past, as it has been known as “Dr. Copper”. The reason why it makes headlines is because it is viewed by economists and investment strategists as a good gauge of worldwide economic activity, thanks to its numerous and ubiquitous applications in wide ranging industries like electrical goods, technology, car-making or in the building trade. There are some that consider copper as primarily apart of the ‘old world’ energy economy and that its importance as a global economic activity indicator is not as worthy. However, it is our view that copper will also play a crucial role in the new green one too. Cables made of copper are still the most cost-effective way of transmitting energy wind and solar sources and is key material in a vast number of electrical applications like charging stations and the electrical cars that use them. In other words, as Goldman Sachs analysts put it, there is “no decarbonization without copper” which they call the “new oil”. Of note, an electric vehicle contains as much as 180 pounds of the red metal, four times the amount found in an internal-combustion-engine vehicle. In addition, onshore wind turbines use roughly four times more copper than power plants fired by fossil fuels per megawatt of electricity.
On Tuesday, the price of copper closed at a price of US$4.78/pound, the highest price in history, eclipsing the US$4.58 price achieved in February 2011. That $4.89 price is 36% higher than the end of last year, and an incredible increase of 143% from the March 2020 low. According to a report by Goldman commodity analyst Nicholas Snowdon, “supplies, already tight as the global economy recovers, could be further strained by a predicted fivefold rise in green energy demand in the current decade, leading to significant shortages, starting in the mid-2020s”. Going forward, he sees copper hitting $6.80 by 2025, while Bank of America commodity strategist Michael Widmer thinks the price could hit $6 this year.
Source: Macrotrends LLC
Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, Connected Wealth, Bloomberg Goldman Sachs, Barron’s, Macrotrends LLC