Uber files preliminary papers for IPO: report

SAN FRANCISCO — Ride-hailing giant Uber has filed confidential preliminary paperwork for selling stock to the public.

That’s according to a report late Friday in the Wall Street Journal.

Citing people familiar with the matter whom it did not identify, the Journal says San Francisco-based Uber Technologies Inc. filed the paperwork earlier this week. That would indicate it could go public within the first three months of next year.

Uber did not immediately respond to an email requesting comment on the Journal report.

The filing would come on the heels of a similar move by Uber’s smaller rival Lyft. The two initial public offerings could raise billions for the two companies to fuel their expansions, while giving investors their first chance to buy stakes in the ride-hailing phenomenon.

David Rosenberg: Bank of Canada makes 90-degree turn with its latest economic statement

The hawkish tone in the Bank of Canada’s October statement swung to a much more dovish assessment on Wednesday as the bank held rates at 1.75 per cent, as was widely expected. If there is good news, it is that the BoC retains its prerogative to be flexible. The message is crystal clear: Rate hikes are off the table for now. 

The changes to the statement were substantial.

Six weeks ago: “The global outlook remains solid.”

Currently: “The global economic expansion is moderating.”

The fact that the Bank put this in the very first sentence is telling: “…signs are emerging that trade conflicts are weighing more heavily on global demand.”

Energy was absent in the communiqué of six weeks ago, but featured prominently on Wednesday as a pronounced economic headwind. The bank also acknowledged that there “is less momentum going into the fourth quarter.” This certainly is a different shade from the more ebullient macro view espoused in late October. 

Six weeks ago, the bank had upwardly revised its projections for business investment and expressed disappointment that “business investment fell in the third quarter,” boiling it down to “heightened trade uncertainty during the summer.” My sense is that the uncertainty has not subsided at all and too much emphasis is being placed on the USMCA, which still may not get through the legislative process south of the border.

The bank still retains a fairly optimistic macro assessment on the housing market, even as it has pared back its bullishness at the margin, saying that “household credit and regional housing markets appear to be stabilizing.”

Try telling that to the Vancouver housing market where sales have collapsed more than 40 per cent over the past year to 10-year lows. And the latest data show that the 12-month trend in household credit has softened to 3.5 per cent, which is the slowest pace seen since the economy was emerging from the deep recession of the early 1980s.

The next two comments are really key.

First, the bank no longer believes the economy is necessarily operating at full capacity.

It says that all of its core inflation measures “are tracking two per cent” and added that this is “consistent with an economy that is operating close to its capacity.” This is a big shift from October, when the BoC came right out and said that the “economy is operating at capacity.” The gap between “close to” and “at” is a mile long.

Second, and this was brand-spanking new: “Downward revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth.” The bank didn’t specify what the “recent macroeconomic developments” were, but something tells me it is the notable deceleration across virtually every wage measure.

So the economy is still operating with a gap, it is not at full employment, core inflation is at target, and the economy is set to slow in the fourth quarter with limited visibility thereafter. Not exactly a backdrop favourable for higher interest rates over the near- or intermediate-term.

The bank also carefully chose its words with respect to future tightening. Last time, it said the “policy interest rate will need to rise to a neutral stance” and this time it took a page out of U.S. Federal Reserve Chairman Jerome Powell’s playbook and said that the “policy interest rate will need to rise into a neutral range.”

Most market participants see neutral as the three-per-cent mid-point of the Bank’s own estimated 2.5 to 3.5 per cent range. The new wording sends the message that perhaps neutral is as low as 2.5 per cent.

In October, the bank said that when determining the pace of interest rate hikes, the Governing Council would continue to take into account how the economy is adjusting, given the elevated level of household debt.

In December: “The appropriate pace of rate increases will depend on a number of factors,” and the caveats are numerous. “These include the effect of higher interest rates on consumption and housing, and global trade policy developments. The persistence of the oil price shock, the evolution of business investment, and the bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy.”

The reality is that it will take quarters, not just months, to make a full assessment of how this laundry list is going to play out.

One cannot call the December statement a mea culpa or a 180-degree turn, but central bankers tend to move incrementally. But it is an attempt to walk back the rate-hike expectations planted six weeks ago — it is a 90-degree turn, for now.

The tightening bias is still there, but watered down, and it wouldn’t surprise me one iota that by the next meeting, the bank will complete a 180-degree turn and officially switch to neutral (especially if the Fed does something similar on Dec. 19).

Even if the economy does better than I expect, the latest revelation that the output gap is not closed after all, and that GDP revisions have uncovered some previously hidden slack, then time is on the bank’s side — and that goes for the hawks on the Council as well.

It is little wonder then that the Canadian dollar lost a half-cent following the release of the press statement, the two-year GoC yield melted by six basis points and the OIS market took the odds of a Jan. 9 rate hike down to nearly 40 per cent from 55 per cent.

In other words, there is more room for the Bank of Canada to be removed from the picture, with the two jobs reports between now and then likely to tip the balance. My bet is that the bank is done, period.

David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave.

Sears’ hedge fund war: Awaiting Eddie Lampert’s next weird move

Edward Lampert isn’t done with Sears yet. Neither are Sears’s enemies on Wall Street.

Six weeks after the storied department store chain filed for bankruptcy, Lampert is maneouvring to salvage what he can from the worst investment of his life.

Having presided over Sears’s collapse, the hedge-fund titan is now preparing a takeover bid for the chain with another private investment firm, Cyrus Capital Partners, people with knowledge of the matter told Bloomberg News this week.

They’re having to maneouvre around other prominent hedge funds that bet against them — as well as a long list of lenders who’d rather shut down the retailer and get whatever money they can now.

The machinations have sent the 125-year-old Sears tumbling down a financial rabbit hole and into a Wall Street Wonderland where, to the uninitiated, up might seem like down.

Swaponomics

Key to the story are credit-default swaps and other arcane investments that hedge funds can wield in ways that might appear to defy common sense or, according to some investors involved, even border on manipulation. For many of the players in this drama, whether Sears survives as a going business is beside the point.

The retailer “is just burning money,” said Aldon Taylor, the chief executive officer of Deep Roots Capital, which isn’t an investor. “It’s a joke.”

The potential takeover bid is the latest twist in Lampert’s decade-long attempt to engineer profits out of Sears Holdings Corp. Behind him now is Cyrus’s Stephen C. Freidheim, who has made his own play for Sears with a series of complex — and sometimes controversial — investments.

Cyrus became deeply entwined in Sears’s fate in the months leading up to the company’s collapse. It amassed positions in its stock and bonds. And it lent money to the retailer alongside affiliates of Lampert’s hedge fund, ESL Investments Ltd.

Then Cyrus doubled down — some would say even tripled down — with a massive credit-default swaps trade that effectively insured other investors against a potential Sears default.

That’s when things began to get weird.

At one point, for instance, rival CDS factions battled over an unlikely prize: obscure Sears notes that are virtually worthless on their own. But those notes, it turns out, could hold the key to the insurance-like wagers in the CDS market. So Cyrus ended up paying US$82.5 million to Sears to keep the debt from falling into the hands of funds on the other side of its trade.

Then, this week, Cyrus unexpectedly showed up in court with an offer to lend US$350 million to the bankrupt retailer at terms that undercut a previously announced loan. The deal was hastily cut in the hallway of the bankruptcy court. Once again, the move could strengthen Cyrus’s hand when it comes to Sears’s investments, including its CDS bets.

The CDS tail, in other words, keeps wagging the Sears dog.

Representatives for Sears, ESL and Cyrus declined to comment for this story, which has been pieced together from interviews with market participants and other people with knowledge of the behind-the-scenes dealings. Representatives for key rivals on the Sears trade, including Omega Advisors, Och-Ziff Capital Management and Brigade Capital Management, also declined to comment.

Sears Holdings Corp. CEO Eddie Lampert

Hard Sell

For most of the investing world, Sears has been a hard sell. The retailer, along with its Kmart chain, has bled more than US$11 billion since 2012.

That would have been the end of it for many other companies. But Lampert, who served as Sears CEO, its largest shareholder and ultimately its biggest creditor, engineered spinoffs and asset sales to keep the chain going. By the time Sears filed for Chapter 11, Lampert and his ESL held more than US$2.6 billion of loans to entities within the retailer’s sprawling capital structure.

Enter Cyrus. Its bet isn’t so much a wager on Sears’s survival as it is a bet that it can recoup a lot more money on the company’s assets than the rest of the market expects.

Swaps Goldmine

Other hedge funds have taken the opposite view. Seeing bankruptcy and default as all but certain, they were paying almost 50 per cent premiums — US$5 million for every US$10 million insured, in upfront cash — for Sears CDS.

To Cyrus, it became a potential goldmine. The swaps are linked to a unit of Sears that, in the wake of Lampert’s financial maneouvring, has little remaining debt itself. Which means that when buyers of the swaps came to collect on their insurance, sellers of the swaps, like Cyrus, could dodge a big payout because there wouldn’t be enough bonds outstanding to cover all the trades. Cyrus would, in turn, pocket the juicy premiums.

Around the time of Sears’s Oct. 15 bankruptcy filing, there were more than US$400 million of swaps wagers linked to less than $300 million of the Sears unit’s unsecured bonds.

To boot, rumours swirled that Cyrus was snapping up whatever of the Sears entity’s bonds were left. And Lampert at one point proposed a complicated refinancing, which drove speculation that he would take out the remaining debt. The market chatter caused prices on the swaps to nosedive, which would have caused Cyrus’s profits on the trade to swell.

That’s where the obscure Sears notes came into play. Hedge funds including Omega, Och-Ziff and Brigade, which had bet against Sears by buying CDS protection, sought to acquire the debt from Sears this month in order to boost their payout from the swaps, people familiar with the matter said.

Ultimately, after about a week of legal wrangling — and accusations from both sides that the process was being manipulated — Cyrus outbid them. The deal handed Sears US$82.5 million of cash just as the crucial holiday shopping season was getting underway. As part of the sale to Cyrus, Sears agreed not to auction any more of the notes that are so crucial to the CDS trades, people with knowledge of the matter said.

Then, this week, Cyrus representatives turned up in the federal bankruptcy court in White Plains, N.Y., and made Sears another offer it couldn’t refuse. Cyrus agreed to shave 1.5 percentage points off the 11.5 per cent that another lender, Great American Capital, was charging Sears for financing.

Blindsided

The president of Great American Capital, John Ahn, was blindsided. He said Cyrus was offering terms that weren’t attractive for an ordinary lender. But then he acknowledged that the hedge fund has many fingers in the Sears pie.

“Cyrus is invested in a lot of different pieces of Sears’s capital structure in a big way, so it’s unclear what their overall motivations are,” Ahn said.

Outside of the Wall Street rabbit hole, many retail experts doubt that Sears can survive.

Consider that holiday staple, the poinsettia. While Sears is selling them for US$6.99, competitors like Home Depot and Aldi have priced the plants at US$0.99, according to Burt Flickinger, managing director of Strategic Resource Group, a retail-advisory firm.

That’s just one example of how Sears merchandise is overpriced — which, in turn, explains why sales keep falling, he said.

“There’s no way to stop the bleeding and bring the proverbial patient back to life,” said Flickinger. “Sears has already gotten a death sentence.”

— with assistance from Claire Boston

Why Canada’s wealth management sector is ripe for disruption

Last week I participated as a panellist at an AIMA Canada Investor Forum titled “Investing in an Age of Disruption.” Being a direct industry participant and co-founder of an investment firm, the topic is one that I believe deserves a lot of attention, especially from Canadian investors.

While Canada has had its share of financial innovation, the oligopolistic structure of the industry has in the past inhibited that innovation from disrupting the status quo in a positive manner. It has failed to do so because 90 per cent of Canadian investors choose to have their wealth managed by the Big Five banks, as compared to American investors who prefer to deal with independent Registered Investment Advisors (RIAs), with only 35 per cent dealing with the five biggest U.S. banks.

A great example of this is the exchange traded fund (ETF) market which has exploded in popularity globally. Many may not realize that the world’s first ETF — Toronto 35 Index Participation units (TIPs) — was created by the Toronto Stock Exchange in March 1990.

Now consider the following: Bank of Montreal, which was the first major Canadian bank to launch an ETF business, did not do so until 2009, 19 years after TIPs. BMO was followed by RBC Global Asset Management in 2011, while TD Asset Management re-entered in 2016 following a brief stint in 2001.  The Bank of Nova Scotia, CIBC and National Bank have only just this year launched their own ETFs.

The banks historically have had a golden goose — in the form of high-fee in-house mutual funds — which was protected by their impressive control over what their clients could see and invest in. As a result, the banks were strongly disincentivized from introducing lower fee and easily tradable ETFs, until Canadian investors demanded access. The situation is not unlike how our telecommunication and wireless carries had locked their phones with high-cost, three- and five-year cellular plans until consumers finally started pushing back.

Meanwhile, ETFs have disrupted Canada’s largest independent investment managers, who have experienced massive margin compression on higher compliance costs and much lower fees. The banks, being more protected via their control over Canada’s distribution channels, ironically are now using the disruption in the industry to increase their market share by consolidating the independents.

We have seen this phenomenon accelerate with TD’s acquisition of Greystone Managed Investments and BNS’s acquisition of Jarislowsky Fraser, and MD Financial Management. More recently, Calgary-based Mawer announced that it has hired Scotiabank to explore options, including a sale.

Now all of these firms are essentially investment product manufacturers so it makes a lot of sense for the banks to consolidate them into their Borg-like, “you will be assimilated” structures. However, we are keeping a very close eye on whether this distribution system will be disrupted itself, with Canadian investors finally giving the independent RIA model — which has been successful south of the border — a try.

Frankly, the problem is that Canadians currently do not have a lot of alternatives with a plethora of smaller independents all competing against each other for that 10 per cent slice of the market, with many still focusing on the old model of creating investment products and “tapping” into the bank-owned “distribution” system.

In our opinion, there is a great first-mover advantage to be had for an independent player willing to scale up by consolidating these independents and focus on the direct-to-client relationship model. We know of one U.S. consolidator quite active in the Canadian market and some larger innovative independents trying to get more market share, but we have yet to see a real tide of change — at least not yet anyway.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

Cineplex shares plunge 20% on third-quarter earnings miss despite higher revenues

TORONTO — Hit films helped deliver box office and concession stand gains for Cineplex Inc., but that wasn’t enough to keep the entertainment giant from missing expectations as lower profits caused the company’s shares to fall by nearly 20 per cent.

The Toronto-based movie theatre operator said Wednesday that it earned $10.2 million, or 16 cents per diluted share, for the company’s third quarter, a 40.7 per cent drop from $17.2 million or 27 cents per diluted share the year before.

Revenue for the period ended Sept. 30 increased 4.4 per cent to $386.7 million, up from $370.4 million.

The company was expected to earn 30 cents per share on $400.2 million in revenues, according to analysts polled by Thomson Reuters Eikon.

Cineplex shares lost nearly 20 per cent at $28.92 in afternoon trading on the Toronto Stock Exchange after hitting a low of $28.54.

President and chief executive officer Ellis Jacob attributed the decreased profits to lower advertising revenue and some screens that were out of commission.

However, he said he considered the quarter’s performance “an anomaly.”

“It was a tough quarter,” he said, referencing the advertising dollars the company attracted. “The large contracts in some of the automotive areas … pushed out or reduced, and then we also had the change in the (Ontario) government and there has been less spending in comparison to the prior year.”

Cineplex’s earnings were also hampered by higher share-based compensation and $1 million in restructuring costs.

Jacob stressed that Cineplex is not expecting to see in the fourth quarter — typically Cineplex’s best quarter — the decline it saw in the third quarter.

“This is not a business where the floor is falling out from under it,” he said on a call with analysts.

Later, in an interview with The Canadian Press, he added, “we would like to be up, but this quarter has been such a big mess that it’s drawn a lot of attention, but we think the fourth quarter will be back to normal.”

Concession revenue per patron rose to $6.25, up from $6.01 in the same quarter last year and box office revenue per patron was $10.07, an increase from $9.81 a year ago.

Theatre attendance was up 2.6 per cent to 17.2 million, compared with 16.8 million. That increase was attributed to moviegoers flocking to see Mission: Impossible Fallout, Ant Man and the Wasp, Jurassic World: Fallen Kingdom, Crazy Rich Asians and Hotel Transylvania 3: Summer Vacation, Jacob said.

“When we started 2018, everybody was nervous about the box office, but some of these movies have come out and delivered and the audiences want to see it on the big screen in a social environment,” he said. “I think that is going to continue into 2019.”

He said he was feeling “encouraged” by the 2019 film slate because it includes much-anticipated films Mary Poppins Returns, Star Wars: Episode IX, Jumanji 3 and Transformers spin-off Bumblebee.

Jacob said he still considers the movie business to be “strong,” especially when content is good and a social experience can be delivered for the price of a film ticket.

“It is a very small price to pay,” he said. “It costs you more to park your car than to go to a movie.”

Drew McReynolds of RBC Capital Markets said the quarter was dragged down primarily due to Cineplex Cinema Media, a high-margin business whose revenues decreased by 26 per cent to $20.3 million from the prior year.

Manulife reinsuring business, hiking dividend, buying back shares

Manulife Financial Corp. says it is reinsuring some of its businesses and boosting the company’s quarterly dividend by 14 per cent.

The insurance firm says it has entered into agreements with counterparties to reinsure substantially all of its legacy U.S. individual and group pay-out annuities businesses, and mortality and lapse risk on a portion of its legacy Canadian universal life policies. These transactions are expected to release over $1 billion of capital over the next year.

The dividend payout — which is coming a quarter earlier than in recent years — will increase by three cents per share to 25 cents, payable as of Dec. 19 to shareholders of record at the close of business on Nov. 30.

The Toronto-based company also says it has received TSX approval to repurchase up to 40 million of its common shares or about two per cent of the nearly two million shares outstanding.

The announcements were made ahead of Manulife’s release of third-quarter results after markets close next Wednesday.

Manulife’s shares have fallen about 25 per cent from their 52-week high.

The company, which operates mainly as John Hancock in the U.S. and Manulife elsewhere, had more than $1.1 trillion in assets under management and administrations.

No UK interest rate rise but plenty of no-deal Brexit warnings

The Bank of England warning aims to focus MPs’ minds on getting a Brexit deal done. Project Fear Mk II might just work

Picture the scene. The UK economy is in turmoil after the government fails to reach a Brexit deal with the EU. Amid fears of a looming recession, the Bank of England turns the screw by raising interest rates.

Unlikely? Not according to Threadneedle Street, which has warned there is no guarantee that it would respond to the shock of a no-deal Brexit by reducing borrowing costs, which is what it did in the aftermath of the referendum in 2016.

Lenders have already bumped up the cost of fixed rate mortgages ahead of the Bank of England’s decision to raise base rate from 0.25% to 0.5%, and mortgage borrowers on tracker and variable rates will see their monthly payments become more expensive in the coming days. ​

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Investment veterans play the long game with launch of new private equity fund Peloton

Two veterans of the Ontario Teachers’ Pension Plan, Steve Faraone and Mike Murray, are teaming up with Stephen Smith, co-founder of Canada’s largest non-bank commercial and residential mortgage originator, to launch a $400 million to $600 million private equity fund.

Smith — who co-founded First National Financial Corp. in 1988 and is also the largest shareholder in Equitable Bank — will be chairman of the new fund, Peloton, to which he has made an “anchor” commitment of $150 million.

Through Peloton Capital Management, managing partners Faraone and Murray plan to target investments in the mid-market with a longer-term holding strategy than traditional private equity funds, and a focus on investments in the financial services, health care and consumer markets.

Smith will be on the investment committee of the new buyout fund, which has also attracted interest from four of Canada’s largest banks. Bank of Montreal and Toronto-Dominion Bank are “committed to be foundational investors alongside me,” Smith said in an interview with the Financial Post. Canadian Imperial Bank of Commerce and Royal Bank of Canada also intend to make commitments to the fund.

Peloton has also signed on Jim Leech, former head of the Ontario Teachers’ Pension Plan, as chair of an advisory board to the fund.

“Our vision is to establish Peloton as a leading Canadian private equity firm,” said Smith, who recently extended his reach in financial services through an agreement with U.S. investment firm Centerbridge Partners LP to purchase Walmart Canada Bank, the retailer’s domestic banking arm.

“I’ve worked closely with Steve and Mike for almost a decade and am confident in their investment abilities and the potential for generating long-term, sustainable returns,” Smith said.

The trio got to know each other shortly after the 2008 financial crisis, when Teachers’ teamed up with Smith to buy AIG’s Canadian mortgage insurance business. Now known as Canada Guaranty Mortgage Insurance Co., it is a private sector competitor to the Canada Mortgage and Housing Corporation (CMHC).

Faraone and Murray, who are both in their mid-40s, worked for more than a decade in Teachers’ private capital group, where they played key roles in the development of the pension fund’s direct private equity program. They were also members of the investment committee before leaving Teachers in June of this year.

“We had a very, I would say, successful and happy career there … but I think we were both at the stage of life where we felt like taking a risk and being more entrepreneurial,” Faraone told the Financial Post. “We thought the timing was right to do that.”

The managing partners said Peloton will seek control stakes in companies, with holdings of at least 30 per cent, while offering funding stability over a longer time horizon than most private equity funds — up to 12 years. This is a differentiator they hope will be appealing to established middle-market players with earnings (before interest, taxes, depreciation and amortization) in a range of $10 million to $40 million, including those with entrepreneurial founders.

“We believe there is a need in the North American PE middle-market for a long-term, sector-focused alternative,” said Murray. “While the fundraising market is competitive and there is a lot of capital chasing deals, the opportunity is significant … with our unique approach.”

The target investment size will be between $25 million and $75 million, and, as with the well-worn Teachers’ model, the partners say they are open to teaming up with other large investors to secure buyouts. The fund is named for a cycling term that refers to how racers gain efficiency by peddling together in tight groups, Smith said, noting that he, Faraone and Murray are all cyclists.

With Smith’s financial commitment to Peloton in place, Faraone and Murray are already starting to evaluate possible transactions for the buyout fund. They plan to build on the anchor funding commitments with a formal fundraising push launching at the beginning of January, with a target of $300 million by the end of the first quarter. They anticipate the fund will close by the end of 2019 with up to $600 million.