Bank of Montreal is cutting brokers in dribs and drabs

“BMO has done a mini Scotia,” came the message from the other end of the phone.

“What do you mean,” came the reply from this end.

This week the bank marched out of its offices a number of brokers/investment advisers it determined either weren’t generating enough revenue overall, or not generating the right kind of revenue, or not growing their books of business fast enough.

It’s understood this week’s departures continue a recent trend that has left about 30 brokers needing to update their business cards. Like this week’s involuntary departures, the brokers have been leaving in dribs and drabs over the past days. BMO didn’t respond to a request for comment.

It’s understood that $600,000 in annual commissions was about the low water mark the brokers were required to achieve in order to keep their jobs. The other criterion about who stayed and who didn’t was the mix of business that the broker brought in: to the extent that it was fee-based and incorporated a range of services including tax and estate planning, the brokers tended to get looked after — but there was less pity for those whose business was more transactions-oriented and not that broad in scope. One source said “brokers whose business was not growing or not strategically aligned,” were affected.

Banks like fee-based operations that offer multiple services — because it is easier to predict revenue and profitability.

“The brokers were marched into an office in the morning and were told, ‘You’re gone here’s your letter,’” said one source familiar with the events.

And to add a little spice to the day’s proceedings, the clients of the investment advisers found out they had a new person looking after them.

“The IAs who were let go, discovered when they called some of their clients, the clients told them they had a new broker,” noted another source.

In this model, the employer — in this case the bank — and not the employee is deemed to “own” the client. Most firms operate with such a model but at Raymond James, the broker owns the client-relationship. Indeed such a relationship is written into the employment contract.

The brokers were marched into an office in the morning and were told, ‘You’re gone here’s your letter’

Accordingly if the broker leaves then the firm will facilitate that move — rather than convince the client to stay at the firm. “It’s a matter of respect,” said Peter Kahnert, the firm’s senior vice-president of marketing and communications. “We create an environment where the advisers choose to stay because it is theirs and their clients’ best interests. We don’t push proprietary products onto them.”

Earlier this year, Scotiabank started the process of reducing head count by culling about seven per cent of advisers and their assistants — about 70 people in all. Those changes came as something of a surprise not only to the individuals affected but also to the rest of the Street. But the changes are in line with the bank’s determination to employ fewer advisers with larger books of business: it’s easier and also more profitable.

The changes are part of another trend in retail money management: low-cost robo advisers have arrived and are offering clients mathematically derived solutions. And they are attracting assets, which in normal circumstances would have ended up with the brokers. Add in the continued growth and diversity of exchange-traded funds, a new grid — meaning the commission-split between the broker and the firm — and the retail brokerage world is evolving in many different ways.

Financial Post

bcritchley@nationalpost.com

CPP changes are ‘significant’ for most Canadians’ retirement incomes: economist

OTTAWA — In the past, the recurring theme at annual gatherings of Canadian finance ministers has been one of high-balling the expectations for pension reform and then low-balling the results, which usually didn’t amount to much anyway.

The issue now appears to finally be in play, with all but two provinces — Quebec and Manitoba — signing up for an enhanced Canada Pension Plan and Ontario agreeing to scrap its long-standing initiative to go it alone.

After years of coaxing by the federal government, the holdout provinces are now shifting towards Ottawa’s way of thinking, with movement coming the other way as well — especially from Ontario, which had been pushing for enhancements to CPP even as the province planned to launch its own retirement scheme, the Ontario Retirement Pension Plan.

“I really think it was Ontario’s push for the ORPP that probably moved the federal government to do something sooner rather than later,” said CIBC economist Royce Mendes, following the agreement by most provinces late Monday in Vancouver.

Ontario Finance Minister, Charles Sousa, “did say some of these plans were in the works before the meeting. So it didn’t all of a sudden come together at this meeting,” Mendes said.

“It had been in the works for a little bit longer than that,” he added. “It was surprising, though. I’ll say that.”

Ontario Premier Kathleen Wynne confirmed Tuesday that her government would scrap plans for its own pension scheme.

The agreement between Finance Minister Bill Morneau and his provincial counterparts will gradually expand CPP benefits between 2019 and 2023. During that time, Canadians who earn $55,000 or more annually will gradually increase their monthly CPP contributions, from an additional $7 per month in 2019 up to an additional $34 per month in 2023.

The Finance department has not released details about how CPP benefits will be increased during that time. However, Canadians who had constant annual income of around $50,000 will receive a pension benefit of about $16,000 each year under the final CPP expansion — up from $12,000 currently.

“After many years of discussions and a raft of proposals, it appears that the first major change to the structure of Canada Pension Plan since its establishment in 1965 is now upon us,” said Brian DePratto at TD Economics, who noted that many details of the planned changes have not yet been made public.

Even so, DePratto said the proposal represents a “significant, guaranteed enhancement to most Canadians’ retirement incomes.”  

“A number of studies have identified a savings gap among middle-income Canadians, which these changes should help reduce. However, the increase in contribution rates will impact Canadians across the income spectrum,” he said.

“For those earning below the income cap, increased contribution rates will result in higher deductions — and lower take-home pay.”

Conservative finance critic Lisa Raitt also warned Tuesday that higher contribution rates “will have a devastating effect on hard-working middle-class families.”

“As a result of this decision, we know that many Canadian families will pay thousands more in taxes every year,” said Raitt said in a statement. “Despite Canadians’ concerns, the Liberal government is refusing to confirm exactly how much his CPP tax-hike will cost the middle-class.”

Financial Post

gisfeld@nationalpost.com

Twitter.com/gisfeld

New landmark rules in U.S. means more drones for hire on the way

The Obama administration is opening U.S. skies to more commercial drones with long-awaited regulations that the government hopes will spawn new businesses inspecting bridges, monitoring crops and taking aerial photography.

In the most comprehensive set of rules yet for the burgeoning unmanned aircraft industry, the U.S. Federal Aviation Administration on Tuesday went far beyond its original restrictive proposal issued last year. Drone operators will be able to petition the agency to fly beyond the horizon, at night and over people if they can show such flights are safe.

“We are in the early days of an aviation revolution that will change the way we do business, keep people safe, and gather information about our world,” President Barack Obama said in an interview with Bloomberg News. “This is just a first step, but this is the kind of innovative thinking that helps make change work for us — not only to grow the economy, but to improve the lives of the American people.”

Low flights

The rules could be a boost for drone manufacturers such as SZ DJI Technology Co. of China, the world’s largest. U.S. companies that have been working with the FAA on expanding drone operations, such as PrecisionHawk in Raleigh, North Carolina, and AirMap Inc. of Santa Monica, California, also stand to benefit.

The new regulations, which will become effective two months from publication in the Federal Register, took years to craft and are seen as a critical step toward realizing the potential of drones to perform such tasks as monitoring crops, inspecting power lines and pipelines as well as assisting government agencies in disasters.

The basic rules permit only low-level flights that remain within sight of an operator or nearby assistant and don’t go over people. Drone operators-for-hire will have to pass a written test and be vetted by the Transportation Security Administration — but no longer need to be airplane pilots as current law requires. Drones under the regulation must weight less than 55 pounds (25 kilograms) and keep speeds below 100 miles (161 kilometres) per hour.

Allowing a device to be within eyesight of an assistant — a change from the proposed rules industry advocates won in the final version — means an operator can guide a drone by its video signal.

Drone package deliveries by companies such as Amazon.com Inc. and Alphabet Inc.’s Google Project Wing aren’t allowed under the regulations until the FAA writes separate rules governing their use. Similarly, the limitations in the regulations won’t initially permit longer flights for agricultural flyovers, pipeline and utility inspections and news media photography over crowds.

However, the agency heeded industry comments to its earlier proposal and added flexibility so that many such activities would be permitted under a waiver program, FAA Administrator Michael Huerta said in a telephone briefing.

“Our focus is to make this as streamlined as possible,” Huerta said. The agency will open an online portal through which applicants can learn how to file for waivers, he said.

Solving the more complex problems inherent in drone deliveries — which envision autonomous vehicles buzzing over highly populated areas — is a “very active research program,” Huerta said. He declined to set a timetable on when such flights would be permitted.

While the rules don’t apply directly to hobbyists, who don’t need a license to fly if they’ve registered their drones with the FAA, it lays out the government’s authority to enforce aviation regulations on all unmanned aircraft.

Symbolic victory

Drone-advocacy groups called the regulations a symbolic victory that paves the way for those future uses. The Association for Unmanned Vehicle Systems International trade group forecasts drones will produce US$82 billion in economic value and create more than 100,000 new jobs in the first 10 years after widespread flights are approved.

“This is a watershed moment in how advanced technology can improve lives,” Brendan Schulman, drone maker DJI’s vice president of policy and legal affairs, said in an e-mailed statement. “After years of work, DJI and other advocates for reasonable regulation are pleased that the FAA now has a basic set of rules for integrating commercial drone operations into the national airspace.”

The FAA’s decision to drop a requirement for a pilot’s license “is a significant win” for the industry that opens it to many more operators,” Diana Cooper, PrecisionHawk’s senior director of policy, said in a web posting.

“I regard it as a significant milestone,” said AUVSI President Brian Wynne, who had been pushing FAA to issue the regulations for years. “We’ll accelerate the process of understanding what the risks are that will allow us to move on to more complex operations.”

For some companies, the rules didn’t move fast enough. “We still have a long way to go, specifically when it comes to long- distance, or beyond visual line-of-sight, drones,” Tero Heinonen, chief executive officer of Sharper Shape Ltd., a Finnish-based company that has begun power-line inspections in Europe, said in a statement. The company expects to apply to the FAA for a waiver within months, Heinonen said.

This is a watershed moment in how advanced technology can improve lives

Ahead of EU

The release of the rules puts the U.S. ahead of Europe in setting standards for the drone industry. The European Union has yet to adopt comprehensive rules for civilian drones, according to the European Aviation Safety Agency website. Individual nations have imposed restrictions, but they differ across borders. EASA is trying to develop rules by 2017.

The FAA has already convened groups to study how to eventually allow such flights without waivers. Test programs are examining how to: approve long-range drone flights in which an operator steers with video images; make unmanned craft safe to fly over people; and expand agricultural uses.

The Obama administration also announced new federal initiatives with NASA, the FAA and other government agencies to study how to broaden drone uses for tasks such as disaster response and environmental monitoring. NASA is already developing an air-traffic control system for low-altitude drones.

Privacy concerns

Privacy concerns will be addressed by a new government campaign to educate operators and businesses. The National Telecommunications and Information Administration last month issued non-binding privacy policy suggestions. Commercial drone operators will be tested on privacy issues as part of their license, according to the Obama administration.

The FAA has permitted commercial drone operations — those conducted for hire, as opposed to recreational flights by hobbyists who don’t need a license — since September 2014 under a case-by-case exemption process ordered by Congress. Drone operators under this program had to have a traditional pilot’s license. As of June 2, the agency had granted 6,004 such permits to fly drones commercially.

The new regulation allows a far easier approval process and is expected to swell the ranks of commercial operators. The agency is dropping the requirement for a pilots’ license, relying instead on a simpler knowledge test. FAA-approved drone operators will have more leeway to fly different drone models and multiple missions.

‘Major step’

The regulations also will promote safety at a time when hundreds of thousands of hobbyists are flying with limited FAA oversight, Wynne said. There were more than 1,200 reports of drone safety incidents last year, including flying too close to airliners, according to FAA.

The new rules codify what until now have been set out as FAA policy statements and interpretations. All drones are aircraft and subject to FAA enforcement actions if operators are reckless or fly in prohibited zones, according to the agency.

“We need an attitude of professionalism where people are working to improve the safety record all the time,” Wynne said. People who obtain FAA drone-pilot certificates will now have an economic incentive to help police the system, he said.

Operators will be restricted to flying below 400 feet, more than five miles from an airport without obtaining FAA permission and must keep the device within sight — limiting flights to roughly a quarter mile.

Bloomberg News

Hot summer temperatures could lead to natural gas price appreciation

CALGARY — An uptick in natural gas prices caught some commodities analysts by surprise this week, as higher temperatures and more demand for gas fuel bullish calls for the commodity.

“We have been positively surprised by the relative strength of (Alberta) prices in the past week to 10 days,” FirstEnergy Capital Corp. vice-president, institutional research Martin King said in a Tuesday note, after AECO natural gas prices climbed above $2 per thousand cubic feet.

AECO prices haven’t risen above $2 since the first quarter, largely as a result of a warm winter in North America, leading to less demand for natural gas to heat homes.

However, King pointed out that hot summer temperatures are leading more consumers to switch on air conditioning units, at the same time as utilities are burning more gas and less coal for electricity.

“Sustained price strength will be a function of continued hot weather, Alberta demand and how quickly Alberta gas storage begins to reach physical (storage) capacity limits,” he said.

Though AECO prices climbed above $2 per mcf, Western Canada-sourced gas still faces a steep discount relative natural gas in many U.S. markets.

NYMEX gas prices, for example, climbed two cents Tuesday to close at US$2.76 per mcf.

The discount, however, is leading to additional volumes of relatively cheaper Canadian gas exports to U.S. markets. King said the pricing dynamics “can be seen in the latest net export data where Canadian gas flows to the U.S. have hit their highest level for this time of year in six years.”

At the same time as Canadian gas prices have been rising, hot temperatures in the U.S. have led to a rise in gas prices south of the border.

Raymond James analyst Jeremy McCrea said in a recent note that “gas demand continues to track above historic norms while gas supply continues to roll over.”

Utilities across North America are burning more gas for electricity as coal-fired power plants have been or are being retired. At the same time, hot temperatures in important U.S. markets has led to increased use of air conditioners, necessitating more power.

“With coal retirements (and a few nuke retirements) far more prevalent this year than at any point in the past, the generation stack has had little choice but to turn to increasing amounts of gas-fired generation, both efficient and inefficient units, to meet the power loads,” King said in a note.

Financial Post

gmorgan@nationalpost.com

Twitter.com/geoffreymorgan

Canadian Pacific Railway cuts revenue forecast 12% on deep drop in freight volumes

The dramatic decline in freight volumes is taking its toll on Canadian Pacific Railway Ltd., which took the unusual step Tuesday of warning that its second-quarter results will come in significantly below expectations.

CP’s volumes, measured in revenue ton miles, are down 12 per cent so far this quarter amid broad-based industry weakness, according to RBC Capital Markets.

The railway said it was dealt a particularly heavy blow by lower-than-expected volumes of bulk commodities such as grain and potash, as well as the wildfires in northern Alberta and a strengthening loonie.

As a result, CP now expects second-quarter revenue to decline 12 per cent from a year ago, adjusted earnings per share to fall to $2 and operating ratio to come in at 62 per cent. Analysts had expected revenue to fall about six per cent and earnings per share to come in at $2.45. The operating ratio — a key measure of efficiency, in which a lower number is better — would be 1.1 percentage points higher than a year ago.

CP’s shares fell as much as 4.2 per cent in early trading before closing at $159.30, down 2.3 per cent. The company will release its final second-quarter results on July 20.

Despite the unforeseen weakness in the second quarter, the railway said the impacts are “transitory” and it is still capable of achieving its forecast of double-digit growth in full-year earnings per share.

“CP will continue to focus on controlling costs in a difficult environment,” CEO Hunter Harrison said in a statement. “While we acknowledge the environment remains challenging, additional cost reduction opportunities and the potential for stronger volumes in the back half of the year still lead us to believe that achieving double-digit EPS growth in 2016 is a possibility.”

CP is not alone: All the North American railways have been battered by weak freight volumes, with commodities like coal and metals leading the way. The only commodity that saw volumes rise in the month of May was forest products, according to National Bank analyst Cameron Doerksen.

The decline in commodity volumes was not unexpected given the weak pricing environment, but more concerning is the recent decline in intermodal traffic, which tends to be more reflective of consumer demand.

“Through much of 2014 and 2015 one persistent area of strength for the Canadian rails was intermodal,” Doerksen wrote in a note to clients. “However, in recent months intermodal carloads have turned negative, which is cause for concern given intermodal is often viewed as an indicator of the broader economy.”

He added that automotive — another historic point of strength for the Canadian rails — may have peaked. On the bright side, the Canadian grain crop looks strong, which could boost volumes once it’s harvested later this year.

Doerksen lowered his price target for CP to $194 from $199 and reduced his target for Canadian National Railway Co. to $78 from $80.

The weak earnings outlook was “not totally unexpected” given management’s cautious comments during recent presentations and a 14 per cent drop in the stock since first-quarter results were released, said Benoit Poirier, who follows the railways for Desjardins Capital Markets.

“However, we expect the Street to remain skeptical about CP’s ability to achieve its 2016 guidance in light of the lack of visibility on a volume recovery in (the second half of the year),” Poirier wrote in an analysis.

He added that he does not expect a similar warning from CN, as it already lowered its 2016 guidance last quarter and its second-quarter volumes have largely been in line with expectations.

Both CP and CN have said they expect the second quarter to be the most difficult of the year.

Fed chair Janet Yellen warns that U.S. economy faces ‘considerable uncertainty’

WASHINGTON — The Federal Reserve’s ability to raise interest rates this year may hinge on a rebound in hiring that would convince policymakers the U.S. economy isn’t faltering, Fed Chair Janet Yellen told lawmakers on Tuesday.

In testimony before Congress that expressed general optimism about the economy and played down the risk of a recession, Yellen nevertheless said the Fed will be cautious about interest rate increases until it is clear the job market is holding up.

Immediate risks, like the potential fallout from Britain’s June 23 vote on whether to leave the European Union, could darken the U.S. economic outlook, she told the Senate Banking Committee, as could a downturn in productivity growth that may prove a permanent drag on the economy.

“Without a doubt, in the last several months a number of different metrics suggest … a loss of momentum in terms of the pace of improvement,” Yellen said. “We believe that will turn around, we expect it to turn around, but we are taking a cautious approach and watching very carefully to make sure that that expectation is borne out before we proceed to raise interest rates further.”

Her comments suggest the U.S. central bank is unlikely to raise rates at its next policy meeting in late July, since it will only have one additional monthly employment report in hand by that time.

They also demonstrate how a new sense of uncertainty has taken root as Fed policymakers come to grips with a broadening realization that the economy’s potential appears to be weaker than previously thought.

In a generally civil 2-1/2-hour hearing, Yellen was questioned less about those long-run economic issues and more about the immediate economic and political concerns of panel members: why agricultural prices were so low, why there were so many white men in charge of the Fed’s regional reserve banks, and why there was so much income inequality.

Asked about presumptive Republican presidential nominee Donald Trump’s suggestion the United States could lower its national debt by buying back securities at a discount, Yellen said any move that smacks of a default for a security generally viewed by the world as risk-free would have “severe” consequences.

Her comments largely tracked the Fed’s policy statement last week and the press conference that followed.

“It’s a rehash. The underlying message is a continuation of the trend that the Fed is moving toward a more cautious stance to support this economic expansion with the fragility of the economic backdrop,” said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.
U.S. Treasury yields had risen to session highs by the end of Yellen’s testimony, while stocks on Wall Street were trading higher. U.S. rates futures implied traders saw a 12 percent chance of the Fed raising rates in July, little changed from Monday. The dollar was stronger against a basket of currencies.

BREXIT RISKS

There was more explicit attention during Yellen’s testimony to the possible implications of the “Brexit” vote, which she said could have “significant repercussions.”

Asked if Britain’s departure from the EU could trigger a recession in the United States, Yellen said: “I don’t think that is the most likely case, but we just don’t really know what will happen and we will have to watch very carefully.”

Although the outcome of the British referendum will be known this week, the jobs issue may take longer to sort out.

Fed officials have said they expected U.S. job growth to slow from the average 200,000 per month typically seen during the post-financial crisis recovery. But the drop to an average of 80,000 in April and May was particularly sharp and put the economy below the level of job creation the Fed considers necessary to accommodate new labor force entrants.

In her testimony, Yellen called the slowdown likely a “transitory” phenomenon.

But concerns the hiring slowdown may be longer-lasting, coupled with a lowered sense of U.S. economic potential, mean the Fed’s benchmark overnight interest rate is likely to remain low “for some time” Yellen said.

Current Fed policymakers’ projections foresee two rate increases this year and three each in 2017 and 2018, a slower pace from what was forecast in March.

Yellen will appear before a House committee on Wednesday to complete her semi-annual testimony before Congress.

© Thomson Reuters 2016

Mary Ellen Harte: Climate Change This Week: Requiem for a Reef, Developing Divestment, and More!

Today, the Earth got a little hotter, and a little more crowded.

Saving BUB – beautiful unusual biodiversity, as illustrated in this small asian …

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Suncor Energy Inc targets acquisitions in North Sea, Eastern Canada: sources

TORONTO/CALGARY — Suncor Energy Inc plans to make acquisitions in the North Sea and Eastern Canada to bolster its offshore upstream oil business as assets become available due to the slump in global oil prices, three sources familiar with the process said.

The size of deals could range from several hundred million dollars to a few billion dollars, the sources said, adding that Canada’s biggest energy producer does plan a single transformational acquisition.

With a market capitalization of about $55 billion, the company is likely to use its equity as currency for deals, as it did with its $3.31 billion acquisition of Canadian Oil Sands earlier this year, one of the sources said.

Suncor is also looking at downstream targets such as refineries in the United States, said the sources, who did not want to be identified as the matter is private.

Oil sands producers have been struggling with tumbling global crude oil prices, which have slid to their lowest levels since 2003 over worries of a global supply glut.

The shift in mergers and acquisitions strategy would, if successful, expand Calgary, Alberta-based Suncor’s reach further beyond the oil sands region, which makes up the majority of its business.

The company reassessed its growth strategy after a massive Alberta wildfire in May that closed much of the Canadian oil sands, the sources said.

While remaining active in the region, it is expected to aggressively pursue deals in the North Sea and Eastern Canada, where it could acquire licenses, the sources said. Rivals Husky Energy, Statoil ASA and Shell Canada already own major Eastern Canadian assets.

Suncor declined to comment.

The company’s recent acquisitions during the oil price downturn have been focused on oil sands. In addition to the Canadian Oil Sands move, it agreed to pay about $937 million to buy an additional 5 per cent of its Syncrude oil sands joint venture from Murphy Oil Corp.

Suncor has described the oil sands as its “bread and butter.” In the first quarter, oil sands production, including its share of Syncrude, made up about 80 per cent of its output of 691,000 barrels of oil equivalent per day.

Earlier this month, Suncor said it would raise $2.5 billion in a share sale to help fund, among other things, its larger Syncrude stake and for “opportunistic growth transactions.”

The company had $3.1 billion in cash and $6.8 billion in lines of credit, according to an April investor presentation.

However, executives have told Suncor employees the Alberta wildfire would cost it nearly $1 billion.

At the height of the fires, more than 500,000 barrels per day of Suncor oil sands production, including its Syncrude share, was shut in.

North Sea for sale

Stung by the oil price crash, Royal Dutch Shell, BP , France’s Total and others have put dozens of assets up for sale in the North Sea, which has been on the wane since the late 1990s.

With many companies keen to sell assets in the region, Suncor could find compelling deals, the sources said, adding it could buy in both the U.K. North Sea and Norwegian North Sea.

Suncor currently owns 30 percent of the high-producing Buzzard field in the North Sea, and holds 17 licenses in its Norwegian portfolio.

Its desire to become a more integrated player is behind the interest in U.S. refineries, the sources said.

Suncor bid on Total’s stake in its Port Arthur, Texas, refinery, but the parties did not reach a deal, sources told Reuters last week.

Shell Canada’s Corunna refinery, located close to Sarnia, Ontario, may also fit with Suncor’s plans, one of the sources said.

Shell and Statoil did not respond to requests for comment. Husky declined comment.

Global oil majors Chevron Corp and Shell are also putting small refineries on the block.

Chevron has said it is soliciting interest in its Burnaby, British Columbia, refinery and gasoline stations. Meanwhile, Shell is looking for buyers for its Martinez, California, refinery, Reuters reported last week.

© Thomson Reuters 2016