Author: Consultant

Nat-Gas Prices Plunge On Increased Supply And Slack Demand

Nov Nymex natural gas (NGX22) on Friday closed down by -0.399 (-7.45%).

Nov nat-gas Friday sank to a 7-month nearest-futures low and closed sharply lower.  An easing of U.S. nat-gas supply concerns is weighing on prices as U.S. nat-gas stockpiles have been accumulating at a faster-than-expected pace in recent weeks, aided by mild weather that has curbed heating demand.  Forecaster Maxar Technologies said the U.S. weather forecast has shifted to higher U.S. temperatures, eroding the outlook for heating demand.  Maxar expects the Eastern half of the U.S. to see above-normal temperatures at least through Nov 4.  

Lower-48 state total gas production on Friday was 99.3 bcf, up +5% y/y.  BNEF data showed lower-48 state U.S. nat-gas production on Oct 3 climbed to a record high of 103.6 bcf.  Lower-48 state total gas demand Friday was 68.3 bcf/day, up +5.6% y/y.  LNG net flow to U.S. LNG export terminals Friday was 11.5 bcf/day, up +2.5% w/w.

A decline in U.S. electricity output is bearish for nat-gas demand from utility providers.  The Edison Electric Institute reported Wednesday that total U.S. electricity output in the week ended Oct 15 fell -3.8% y/y to 70,244 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Oct 8 rose +2.0% y/y to 4,113,318 GWh.

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months.  Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia and reduced supplies to Germany for not acceding to its demand for gas payments in Russian rubles.

In an underlying bullish factor, last month’s sabotage of the Nord Stream 1 undersea nat-gas pipeline and the massive leak under the Baltic Sea means there will be no near-term chance that Russia might reopen the pipeline to begin delivering gas to Europe again.  Prior to the explosions, Russia’s state-owned gas company Gazprom had cut off the delivery of gas through that pipeline to Europe under the pretext of technical issues.

Nat-gas prices have seen downward pressure from the prolonged outage at the Freeport LNG export terminal, which curbed U.S nat-gas exports and put upward pressure on domestic supplies.   The Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on Jun 8 knocked it offline.  The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower 48 U.S. states.  The Freeport terminal said Aug 23 that it won’t reopen until early to mid-November, later than a previous announcement of a restart in October.

Thursday’s weekly EIA report was bearish for nat-gas prices as it showed U.S. nat gas inventories rose +111 bcf to 3,3421 bcf in the week ended Oct 14, above expectations of a +106 bcf increase and well above the 5-year average of +73 bcf.  However, inventories remain tight and are down -3.4% y/y and -5.2% below their 5-year seasonal average.

Baker Hughes reported Friday that the number of active U.S. nat-gas drilling rigs in the week ended Oct 21 was unchanged at 157 rigs, falling back slightly from a 3-year high of 166 rigs the week ended Sep 9.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).

U.S. consumer is soldiering on despite soaring inflation and recession risk, credit card giants say

U.S. consumers have demonstrated a willingness to continue to pay higher prices in the face of a sluggish economy that could be tipped into a recession, according to credit card giants American Express and Bank of America.

American Express on Friday reported stronger-than-expected third-quarter earnings and revenue, while raising its full-year forecast. The company said overall customer spending jumped 21% year over year, driven by growth in goods and services as well as travel and entertainment.

The demand for travel is particularly resilient as Americans make up for postponed trips due to the pandemic. Consumers are also splashing out on food and entertainment after pandemic lockdowns eased.

American Express said its travel and entertainment segment saw spending climb 57% from a year ago with volumes in its international markets surpassing pre-pandemic levels for the first time in the third quarter.

“Card member spending remained at near-record levels in the quarter,” American Express CEO Stephen Squeri said Friday on an earnings call. “We expected the recovery in travel spending to be a tailwind for us, but the strength of the rebound has exceeded our expectations throughout the year.”

Bank of America isn’t experiencing any slower growth in spending either despite inflation having reached historic highs. CEO Brian Moynihan said earlier this week that the bank’s customers continue to spend freely, using their credit cards and other payment methods for 10% more transaction volume in September and the first half of October than a year earlier.

“Analysts might wonder whether the talk of inflation, recession and other factors could [result] in a slower spending growth,” Moynihan said Monday during a conference call. “We just don’t see [that] here at Bank of America.”

Recent economic data, though, have shown signs of stagnation in consumer spending. Retail and food services sales were little changed for September after rising 0.4% in August, according to the advance estimate from the Commerce Department.

Consumers might have started to grow guarded about splurging as prices moved sharply higher and the Federal Reserve raised interest rates to slow the economy.

— CNBC’s Hugh Son and Jeff Cox contributed reporting.

Oil steadies as rate hike talk offsets Chinese demand hopes

Oil steadied on Friday as investors weighed the impact of sharp interest rate rises on energy consumption, offsetting hopes of higher Chinese demand and output cuts by OPEC and its allies.

To fight inflation, the U.S. Federal Reserve is trying to slow the economy and will keep raising its short-term rate target, Federal Reserve Bank of Philadelphia President Patrick Harker said on Thursday.

Brent crude was down 2 cents at $92.36 a barrel by 1218 GMT. U.S. West Texas Intermediate crude was up by 35 cents, or 0.4 per cent, to $84.86.

“With several key Fed members taking turns at the hawk’s pulpit this week arguing for even higher interest rates, it blunted optimism from China’s reduced quarantine hopes,” Stephen Innes, managing director at SPI Asset Management, said in a note.

“Everyone is pining for a China-reopening-driven commodity boost, but we are not there yet.”

Brent, which came close to its all-time high of $147 a barrel in March, is on track for a weekly gain of almost 1 per cent, while U.S. crude was set to fall less than 1 per cent. Both benchmarks dropped in the previous week.

Oil gained a lift on Thursday after Bloomberg News reported that Beijing was considering cutting the quarantine period for visitors to seven days from 10 days. There has been no official confirmation from Beijing.

“The knee-jerk price action provided a useful glimpse of what to expect once more punitive restrictions are lifted,” said Stephen Brennock of oil broker PVM, of the market’s rally after the report.

China, the world’s largest crude importer, has stuck to strict COVID-19 curbs this year, weighing heavily on business and economic activity and lowering demand for fuel.

Oil gained support from a looming European Union ban on Russian oil, as well as the output cut agreed earlier this month by the Organization of the Petroleum Exporting Countries and allies including Russia, known as OPEC+.

Canadian retail sales up 0.7% to $61.8-billion in August; estimate suggests drop in September

Statistics Canada says retail sales rose 0.7 per cent to $61.8-billion in August.

However, the agency says its preliminary estimate for September suggests retail sales fell 0.5 per cent for that month, though it cautioned the figure would be revised.

Retail sales in August rose in six of the 11 subsectors.

Sales at food and beverage stores gained 2.4 per cent for the month, while sporting goods, hobby, book and music stores added 5.0 per cent. Sales at motor vehicle and parts dealers rose 0.6 per cent.

Core retail sales – which exclude gasoline stations and motor vehicle and parts dealers – increased 0.9 per cent.

In volume terms, Statistics Canada says retail sales gained 1.1 per cent in August.

OCT 21 – Before The Bell

Equities

Wall Street futures were down early Friday but key indexes still looked set for weekly gains with corporate earnings and rate concerns high on the agenda. Major European markets were lower with continued political uncertainty in the U.K. in the spotlight. TSX futures were also underwater.

In the early premarket period, futures tied to the Dow, S&P 500 and Nasdaq were all in the red after two straight sessions of losses. However, all three were up roughly 2 per cent on the week thanks to solid gains on Monday and Tuesday. The S&P/TSX Composite Index ended Thusday’s session down 0.51 per cent, reversing gains seen early in the day.

“Once again, few market participants want to hold risk into a weekend with U.S. Treasury 10-year through 4.25 per cent for the first time since 2008,” Stephen Innes, managing partner with SPI Asset Management, said.

“U.S. equities are tormented into the weekend by Federal Reserve officials reigniting fears of stricter monetary tightening and the possibility of a worldwide recession.”

He noted Philadelphia Fed chief Patrick Harker said Thursday that the central bank would likely raise rates to “well above” 4 per cent this year and hold them at restrictive levels, renewing worries about the broader impact of higher borrowing costs.

In this country, investors will get August retail sales figures ahead of the start of trading.

“Our economists don’t expect August retail sales to deviate significantly from Statscan’s preliminary estimate of a 0.4-per-cent month-over-month increase,” Elsa Lignos, global head of FX strategy, said.

“Actual sales volume was likely stronger than that, given offsets from lower prices at gas stations during the month. Sales in September however are expected to flatten out a bit more, according to data from RBC’s own debit and credit spending tracker.”

On the earnings front, Canadian markets will get results from Corus Entertainment. On Wall Street, Verizon is among the big companies reporting.

Overseas, the pan-European STOXX 600 was down 1.52 per cent. Britain’s FTSE 100 fell 0.78 per cent in morning trading as markets now await the outcome of a leadership contest after Prime Minister Liz Truss announced her resignation on Thursday.

Germany’s DAX fell 1.6 per cent. France’s CAC 40 was off 1.7 per cent.

In Asia, Japan’s Nikkei closed down 0.43 per cent. Hong Kong’s Hang Seng lost 0.42 per cent.

Commodities

Crude prices were lower as continued concerns about high interest rates and the potential for a global recession offset optimism over reports of easing COVID-19 restrictions in China.

The day range on Brent was US$91 to US$93.06 in the early premarket period. The range on West Texas Intermediate was US$83.15 to US$85.19. Both benchmarks were on track for weekly declines heading into Friday’s session.

“It has been a noisy headline week in the oil patch, but price action has been relatively contained,” SPI Asset Management’s Stephen Innes said in a note.

“There is a feeling of not wanting to fight the Fed until November across many assets, keeping risk-taking grounded.”

Markets drew some support this week from a report that China could soon ease the quarantine period for incoming visitors, easing some concerns over the government’s zero-COVID policy. The reports have not been confirmed by China.

In other commodities, gold prices were lower and looked set for a second consecutive weekly loss.

Spot gold shed 0.4 per cent to US$1,620.79 per ounce by early Friday morning. Gold prices have fallen 1.3 per cent this week.

U.S. gold futures fell 0.7 per cent to US$1,624.60

Currencies

The Canadian dollar was down amid weaker crude prices and negative risk sentiment while its U.S. counterpart edged higher against global currencies and bond yields hit a new 14-year high.

The day range on the loonie was 72.30 US cents to 72.67 US cents in the predawn period.

Investors get August retail sales figures today but markets are now focused on next week’s Bank of Canada rate decision with economists now expecting either a half or three quarter point rate increase.

On world markets, the U.S. dollar index, which tracks the greenback against six major counterparts, advanced 0.2 per cent to 113.130 while the yield on the U.S. 10-year note pushed to a a more than 14-year top of 4.272 per cent by early Friday, according to figures from Reuters.

Britain’s pound fell 0.8 per cent to a weekly low of US$1.11535 as Britain’s ruling Conservative party scrambles to replace Prime Minister Liz Truss.

The euro, meanwhile, fell 0.2 per cent to US$0.97705, after hitting an overnight high of US$0.98455, Reuters reported.

CRA delays cause tax battle to continue for more than 20 years

Last week, I shared examples of how the culture at the Canada Revenue Agency has gone wrong. I referred to an investment that has left the investors – over 2,300 of them – fighting the CRA for more than 20 years. Some investors have passed away during this time, leaving their surviving spouses – widows in many cases – to deal with the CRA in their twilight years. Others have literally grown old waiting for a resolution, which they thought was at hand several years ago.

I’m talking about the Sentinel Hill film investment, which raised funds to promote film production in Canada. At the time, promoting film production was a key policy objective for the government. Investors expected good after-tax returns, provided in part by tax savings from deductible business losses that were to be available to investors. Ken Gordon, one of the four principals of Sentinel Hill Ventures Corp. (SHVC), the architect of the Sentinel Hill investment, obtained advance tax rulings from the Canada Revenue Agency for film investments offered in both the years 2000 (known as SH2000) and 2001 (SH2001).

As an aside, an advance tax ruling (ATR) is a written ruling from the CRA that requires the taxpayer to provide extensive details of a strategy that the taxpayer is contemplating, in order to gain the CRA’s written confirmation of the tax consequences of the strategy prior to implementation.

Mr. Gordon and SHVC wanted to assure investors in SH2000 that the tax implications would be as expected. And so, he requested, and the CRA did issue, an ATR on Feb. 21, 2000. The ATR suggested the tax benefits would be available to investors assuming certain conditions were met. Despite those conditions being met, CRA challenged the amounts claimed by investors.

“Some of the threats and allegations made by CRA were egregious,” Mr. Gordon said. “Only the threat of an appearance in court caused the CRA to discuss a settlement – which was reached in 2004,″ he continued. After three years of fighting, investors did receive 91 per cent of the amounts claimed and that were supported by the ATR issued by the CRA. “At that point, we just wanted the battle over with, so we agreed to settle on 91 per cent of the tax benefits we expected, even though we should have received 100 per cent,” Mr. Gordon said.

In the meantime, before the battle over SH2000 began, a second ATR was issued, and more funds were raised for film productions through the 2001 Sentinel Hill film investment (SH2001). The 2001 deal was structured in an identical manner to SH2000, so investors expected that the tax implications would be the same as SH2000 based on the ATRs that had been issued.

Mr. Gordon and SHVC did not want to continue promoting the SH2001 film investment if CRA had concerns about it. “We met with the audit division of CRA on two occasions and had other discussions with the CRA Rulings department in 2001. We met on Sept. 11, 2001 – that’s right, the 9/11 date many of us remember for the terrorist attacks – and CRA said that they had no concerns about SH2001 as it was structured. It turns out that this was false, but the CRA did not communicate any concerns to us.”

Over the next three years, there was silence from the CRA. It should be noted that, after three years following the date on a Notice of Assessment, an individual’s tax return generally becomes statute-barred, which means the CRA can’t typically reassess a person beyond that date (unless there’s been misrepresentation or gross negligence). On the eve of the three-year anniversary for many of the SH2001 investors, in March, 2005, the CRA issued Notices of Determination to the SH2001 partnership (but not to individual investors) essentially denying 40 per cent of the amounts claimed three years earlier.

SHVC, on behalf of the SH2001 partnership, filed Notices of Objection in June, 2005, objecting to the CRA’s position and to protect the interests of the 2,300 investors, but the CRA failed to appoint an appeals officer to review the objections. “We waited four years for CRA to assign an appeals officer, but they never did. There was silence. So, in July, 2009, we filed a Notice of Appeal that would allow our case to be heard at the Tax Court of Canada,” Mr. Gordon said.

When a taxpayer files a Notice of Appeal, the CRA is forced to deal with the matter more quickly because, otherwise, the department will have to prepare for an appearance in court. So, after filing the Notice of Appeal, SH2001 and its investors finally had CRA’s ear.

But the story isn’t over. There is much to be learned from this story, both about tax planning and, importantly, about the culture at the CRA. I’ll finish the story next time.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.

European markets lower as UK political chaos continues (Oct 21)

European markets were lower on Friday as political chaos in the U.K. continues following the resignation of Prime Minister Liz Truss. A leadership contest will now take place over the next week.

Meanwhile, EU leaders are still debating how to tackle the bloc’s energy crisis as they meet in Brussels, after Germany gave the green light for discussions around a price cap.

EUROPEAN MARKETS

TICKER	COMPANY	PRICE	CHANGE	%CHANGE
.FTSE	FTSE 100	6883.52	-60.39	-0.87
.GDAXI	DAX	12565.37	-202.04	-1.58
.FCHI	CAC 40 Index	5976.01	-110.89	-1.82
.FTMIB	FTSE MIB	21365.26	-336.24	-1.55
.IBEX	IBEX 35 Idx	7480.5	-163.9	-2.14

The Stoxx 600 is 1.5% down mid-morning, while all sectors and major bourses are in the negative. Retail leads losses, down 4%, followed by construction at 2.4% and household goods at 2.2%.

U.S. stock futures are down after a tumultuous day on Wall Street, with bond yields rising and a slew of wide-ranging corporate earnings. Futures for the Nasdaq 100, Dow Jones Industrial Average and S&P all slipped.

https://www.cnbc.com/2022/10/21/european-markets-expected-to-open-lower-as-uk-political-chaos-continues.html

Japanese yen hits 150 against the U.S. dollar; Asia-Pacific markets lower (Oct 20)

Shares in the Asia-Pacific traded lower on Thursday as economic fears weigh.

The Japanese yen weakened past 150 per U.S. dollar late in Asia’s afternoon, a 32-year low against the greenback. It last traded at 149.85 per dollar.

The Hang Seng index in Hong Kong pared some of its earlier losses and traded 1.33% lower in the final hour of trade after dipping 3%, hitting its lowest level since May 2009. The Hang Seng Tech index was 2.08% lower.

The offshore yuan strengthened after Bloomberg reported that officials are debating reducing Covid quarantines to 7 days from 10 days, and was last at 7.2527 per dollar. The currency earlier touched a record low against the U.S. dollar overnight at 7.2786.

In mainland China, the Shanghai Composite closed 0.31% lower at 3,035.05 after struggling for direction, while the Shenzhen Component shed 0.561% to 10,965.33.

TICKER	COMPANY	NAME	PRICE	CHANGE	%CHANGE
.N225	Nikkei 225 Index	*NIKKEI	26890.58	-116.38	-0.43
.HSI	Hang Seng Index	*HSI	16211.12	-69.1	-0.42
.AXJO	S&P/ASX 200	*ASX 200	6676.8	-53.9	-0.8
.SSEC	Shanghai	*SHANGHAI	3038.93	3.88	0.13
.KS11	KOSPI Index	*KOSPI	2213.12	-4.97	-0.22
.FTFCNBCA	CNBC 100 ASIA IDX	*CNBC 100	6729.52	-80.78	-1.19

In Japan, the Nikkei 225 lost 0.92% to 27,006.96 and the Topix shed 0.51% to 1,895.41. The S&P/ASX 200 in Australia declined 1.02% to 6,730.70.

South Korea’s Kospi dipped 0.86% to 2,218.09 and the Kosdaq was 1.47% lower at 680.44. The MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.87%.

U.S. stocks fell as Treasury yields climbed on Wednesday stateside, and the benchmark 10-year yield touched 4.174% on Thursday in Asia, the highest level since July 23, 2008.

The Nasdaq Composite shed 0.85% to close at 10,680.51, while the S&P 500 declined 0.67% to 3,695.16. The Dow Jones Industrial Average lost 99.99 points, or 0.33%, to finish the day at 30,423.81.

UK Prime Minister Liz Truss resigns after less than 2 months in office

Prime Minister Liz Truss resigned Thursday after less than two months in office amid pressure following a reversal of economic policies that led to economic instability.

Truss made the announcement a day after she defiantly declared that she is “a fighter and not a quitter.” Ultimately, however, she said that circumstances have changed.

“Given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party,” Truss said. I have therefore spoken to His

Majesty the King to notify him that I am resigning as leader of the Conservative Party.”

https://www.foxnews.com/world/uk-prime-minister-liz-truss-resigns-less-than-2-months-office