Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, highlights the week’s top financial stories and explains what they mean for Canadian investors.
Retail struggles continue
The latest quarterly reports released ahead of the holiday shopping season show a familiar paradox: many large retailers posted strong sales but also struggled with unusually large inventories. Lululemon Athletica (LLL/TSX) issued an updated earnings forecast on Monday that underscores ongoing retail pressure. (All figures below are in U.S. dollars.)
The athleisure leader said holiday sales were bolstered in part by deep discounts, and it now expects margins to compress as the quarter progresses while inventories are worked down. The stock dropped more than 9% after the update, a sharp reaction considering the company narrowed its fourth-quarter earnings guidance only slightly—from $4.20–$4.30 to $4.22–$4.27 per share—and nudged net revenue guidance from $2.61 billion to $2.66 billion. In today’s market, investors appear quick to punish any sign that margins may be under pressure.
At the opposite extreme, Bed Bath & Beyond (BBBY/NASDAQ) reported steep losses and a perilously low cash balance, renewing bankruptcy concerns. The company lost $393 million in the quarter and reported roughly $153.3 million in cash on hand. Despite that weak fundamental picture, a speculative surge propelled the stock dramatically higher over a few trading days. The frenzy pushed share prices up hundreds of percent in a very short span and produced enormous intraday trading volumes relative to the company’s market capitalization.
This kind of meme-stock volatility underscores a dangerous disconnect between short-term speculation and underlying business health. Short sellers and long-term investors can be whipsawed by sudden rallies that are driven more by momentum and social-media attention than by fundamentals. Many retail investors who chase these moves risk significant losses when the euphoria fades.
In utilities, Algonquin Power & Utilities Corp. (AQN/TSX) surprised investors with a 40% dividend reduction, sending the stock lower. The dividend had surged to a yield near 10% as the stock weakened in late 2022; after the cut, the yield sits closer to 6%. Algonquin also trades on the NYSE (AQN).
I’ll provide deeper coverage of earnings from major Canadian and U.S. financial companies in next week’s edition.
Why Canadian and American homeowners feel interest rates differently
Beata Caranci, chief economist at TD Bank Group, highlighted important contrasts between Canadian and U.S. household debt that will shape how each country reacts to interest-rate changes. Canadians enter 2023 with higher overall debt levels than Americans, and that difference is expected to grow.
Mortgage debt is the primary driver. Canadian borrowers are more heavily leveraged and tend to favor five-year mortgage terms, while roughly 90% of U.S. homebuyers carry 30-year fixed-rate mortgages. That structural difference means Canadian households face more frequent rate resets and greater sensitivity to short-term rate moves.
The practical implication: if your mortgage rate is fixed for the full amortization period, you’re less exposed to rate volatility. If your mortgage matures or you carry a variable-rate mortgage within the next 24 months, you’re likely watching for how higher borrowing costs will change monthly payments. Caranci also noted that the share of mortgage credit on variable-rate terms has risen from about 25% in 2018 to roughly 34% more recently, increasing vulnerability among Canadian borrowers.
Because Canadian households overall carry more debt, Bank of Canada rate decisions may have a larger immediate impact on spending and inflation here than in the U.S. If Canadian consumer spending proves especially rate-sensitive, that could help lower inflation sooner and create public pressure against further hikes—or even for earlier rate cuts—relative to the U.S. bond market and policymakers’ path.
On a personal note, I wrote previously about why owning a home in Canada wasn’t my choice at a time when many were buying. Given current rate volatility, some recent buyers may be re-evaluating the trade-offs between homeownership and the flexibility of renting.
Canada continues to miss out on oil profits and tax revenue
Although Canadian energy companies experienced a strong 2022 overall, Canadian crude still sells at a significant discount to U.S. benchmark grades. Rory Johnston of Commodity Context documented a widening gap between West Texas Intermediate (WTI) and Western Canadian Select (WCS) during the latter half of last year.
The widening discount matters for two main reasons: it reduces profits available for shareholders, and it lowers taxable revenues the government can collect. While pipeline capacity constraints have historically driven much of the differential, recent analysis points to rising refining costs for WCS relative to WTI as a growing factor. If refining bottlenecks ease and infrastructure such as the Trans Mountain expansion increases takeaway capacity, producers and governments could both see improved receipts when market conditions allow.
Putting politics and the climate debate aside, Canadians have a financial stake in capturing as much value as possible from the country’s energy resources—both as shareholders and as taxpayers.
Wealthier buyers remain resilient
While many Canadians and Americans feel price pressures on rent, groceries and travel, luxury spending has shown remarkable resilience. Rolls-Royce reported record vehicle sales and a rising average selling price, signaling that very high-net-worth consumers are less affected by inflation and higher interest rates. As the company’s CEO noted, demand has not softened and pre-orders remain robust.
The broader point: economic challenges are not felt uniformly. Luxury markets can expand even as mainstream consumers tighten their budgets.
We’ll see early hard economic indicators for 2023 at the end of this week—most notably the U.S. consumer price index (CPI) and quarterly results from major U.S. financial firms. Those reports will help clarify the path ahead for inflation, interest rates and markets. I’ll share further analysis next week on what these signals mean for Canadian investors.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances at MillionDollarJourney.com and through the Canadian Financial Summit.