Category: Market Action

My attention was drawn to a piece by David Berman of the G&M, in which he touted the virtues of ZEB, BMO Equal Weight Banks Index ETF. I took issue with one rather careless line in the analysis, but was fascinated by one of the reader comments:

I own bank stocks and have done so for many years with great results.

But recently a friend introduced me to BK which is an ETF doing covered calls on the Canadian banks. Pays 15% annual dividends distributed monthly. Trying to figure out the downside on this.

Any opinions are appreciated.

My interest was piqued because I recently contributed to a FWF thread titled Covered Call ETF’s – Why? in which the pro-CC forces did battle with battalions of the anti-CC stripe. Also because, as we all know, BK is a SplitShare Corporation that, like most (all?) of the others, regularly touts its covered call programme:

. To generate additional returns above the dividend income earned on the portfolio, The Company engages in a selective covered call writing program.

So I responded:

BK is the Capital Units of a SplitShare Corporation and therefore has special risks all of its own. For starters, it’s leveraged. The capital units will stop paying dividends if the Whole Unit NAV falls below $15, which is another wrinkle often missed.

Hardly a thesis, but there’s enough there to tell the questioner where to begin asking questions about this wonderful investment that pays 15% annual dividends due in part to the magical powers of Covered Calls.

And that got me wondering: just what is the performance of BK/BK.PR.A Whole Units vs. ZEB?

There’s performance data, of a sort, in the 2024 BK Annual Report and the ZEB Web Page (where you can show Annualized Performance as of 2024-11-30 after a bit of fiddling).

So ZEB has done a little better over the ten year period than the BK Whole Units, but given the volatility of the relative returns as imperfectly reflected in these data, nothing to really write home about.

Now, zealots of the Covered Call faith will be quick to dismiss such heterodox notions and point out that the banks have been on fire for the past ten years. And the only coherent defence of their religion I have ever seen cheerfully admits that a covered call strategy will underperform in good times (because occasionally you have positions called away and replaced at higher prices; or you have to buy back your options before this happens, again at higher prices) but that this is compensated for by corresponding outperformance in bad times. This may not achieve much, net, over a cycle but it does reduce your volatility for those who care about such things. So we’ll wait for some banking bad times and see what happens.

That coherent defence of Covered Callism? It was some time ago I read it, but I think it was on the CBOE website. Those of you with a prediliction for archaelogical librarianism might wish to find it and post a link in the comments, because I got stuck!

I just hope that earnest inquirer in the Globe comments sees my response and does some checking, because there’s no way 15% is sustainable. As DBRS said in their most recent confirmation of BK.PR.A:

Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the Preferred Share distributions together with the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 9.3% per year over the next 5 years.

… and while it might be tempting to think there is a huge population of option buyers out there, eager to overpay for call options so they can underwrite excess performance for sleazy CC salesmen, I’m not convinced that call option buyers are that dumb.

See the sections Sequence of Returns Risk and The effect of Cash Income on Sequence of Returns in my discussion of SplitShare credit quality to learn more about cash grind.

Sorry this is so late!

PerpetualDiscounts now yield 5.62%, equivalent to 7.31% interest at the standard conversion factor of 1.3x. Long corporates yielded 4.92% on 2026-2-4. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 240bp from the 245bp reported January 28.

The Bank of Canada has introduced a new blog thingy, named Sparks at Bank:

Sparks at Bank is a new platform for sharing insights, research and analysis from staff at the Bank of Canada. It’s designed for people who think deeply about the economy and policy but who also appreciate clarity and brevity.
…
Here’s what to expect from the articles on Sparks at Bank:

• They’ll be relevant. You’ll read analyses about key economic issues affecting Canadians. You can count on each article to provide the Bank’s usual independent, evidence-based research and analysis.
• They’ll go beneath the surface. You’ll get a better understanding of the forces behind ongoing trends and recent developments.
• They’ll be easy to read. You’ll get clear writing that doesn’t sacrifice substance.

It’s also important that you know what articles on Sparks at Bank won’t be:

• They won’t be a statement about official Bank policies. You’ll be reading views that are solely those of the authors and produced independently from the Bank’s Governing Council. You’ll find official Bank views in the Monetary Policy Report, the Financial Stability Report and the many speeches members of Governing Council deliver throughout the year.
• They won’t be full research papers. You’ll be getting a snapshot of some recent work, and you can still find complete research papers on our website.

They are starting with three posts:

• What’s behind the slowdown in Toronto’s condo market
• Understanding the resurgence of food inflation in 2025
• Hedge funds and their trading strategies in the Government of Canada bond market

I think the home-page of the blog is LINK, but it’s not clear. The posts aren’t on the same directory stem, for one thing.

I’m pretty sure the name of the blog is a play on the nearby Sparks Street intersection with Bank Street:

West of Bank Street, outside of the mall itself, the street is overshadowed by the C.D. Howe Building, the home of Industry Canada to the south, and the headquarters of the Bank of Canada to the north.

There is an overnight treasury offering of LFE and LFE.PR.B:

Canadian Life Companies Split Corp. (“the Company”) is pleased to announce it will undertake an offering of Preferred Shares (TSX: LFE.PR.B) and Class A Shares (TSX: LFE) of the Company. The offering will be led by National Bank Financial Inc.

The sales period of this overnight offering will end at 8:30 a.m. EST on February 4, 2026. The offering is expected to close on or about February 11, 2026 and is subject to certain closing conditions including approval by the TSX.

The Preferred Shares will be offered at a price of $10.45 per Preferred Share and the Class A Shares will be offered at a price of $7.65 per Class A Share.

The closing price on the TSX of each of the Preferred Shares and Class A Shares on February 2, 2026 was $10.53 and $7.83, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $12.85 per share and the aggregate dividends declared on the Class A Shares have been $9.85 per share, for a combined total of $22.70 per unit. All distributions paid to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed portfolio primarily consisting of four publicly traded Canadian life insurance companies as follows: Great‐West Lifeco Inc., iA Financial Corporation Inc., Manulife Financial Corporation and Sun Life Financial Inc.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends at a rate equal to the greater of: 7.00% OR Prime Rate plus 2% (max of 9%) annually based on the $10.00 original issue price, and;
ii. on or about December 1, 2030 (subject to further 6 year extensions), to pay the holders of the Preferred Shares the original $10 issue price of those shares.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends as the directors of the Company may from time to time determine; and
ii. on or about December 1, 2030 (subject to further 6 year extensions), to pay the holders of Class A Shares such amounts as remain after paying the holders of the Preferred Shares the amounts owing to them.

The Fed kept the policy rate steady today:

Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Beth M. Hammack; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Anna Paulson. Voting against this action were Stephen I. Miran and Christopher J. Waller, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.

The two dissenters who proved their rugged independence, steely eyes flashing above their brown noses, have both been mentioned as being in the running for the chairmanship, once Trump gets a chance to make the appointment.

The eMail notification of the decision was swiftly followed by a note stating that the Statement on Longer-Run Goals and Monetary Policy Strategy has been reaffirmed:

Adopted effective January 24, 2012; as reaffirmed effective January 27, 2026

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. The Committee’s monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions. Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Monetary policy plays an important role in stabilizing the economy in response to these disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by its effective lower bound.

Durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans. The Committee views maximum employment as the highest level of employment that can be achieved on a sustained basis in a context of price stability. The maximum level of employment is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments.

Price stability is essential for a sound and stable economy and supports the well-being of all Americans. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates. The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The Committee is prepared to act forcefully to ensure that longer term inflation expectations remain well anchored.

Monetary policy actions tend to influence economic activity, employment, and prices with a lag. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.

The Committee’s employment and inflation objectives are generally complementary. However, if the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.

The Committee intends to review these principles and to make adjustments as appropriate at its annual organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its monetary policy strategy, tools, and communication practices.

The press release makes careful note of the fact that

The reaffirmed statement is identical to the version adopted in August 2025.

… which would be hilarious if the necessity of reaffirmation were not so clear.

The BoC also paused:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The outlook for the global and Canadian economies is little changed relative to the projection in the October Monetary Policy Report (MPR). However, the outlook is vulnerable to unpredictable US trade policies and geopolitical risks.

Economic growth in the United States continues to outpace expectations and is projected to remain solid, driven by AI-related investment and consumer spending. Tariffs are pushing up US inflation, although their effect is expected to fade gradually later this year. In the euro area, growth has been supported by activity in service sectors and will get additional support from fiscal policy. China’s GDP growth is expected to slow gradually, as weakening domestic demand offsets strength in exports. Overall, the Bank expects global growth to average about 3% over the projection horizon.

Global financial conditions have remained accommodative overall. Recent weakness in the US dollar has pushed the Canadian dollar above 72 cents, roughly where it had been since the October MPR. Oil prices have been fluctuating in response to geopolitical events and, going forward, are assumed to be slightly below the levels in the October report.

US trade restrictions and uncertainty continue to disrupt growth in Canada. After a strong third quarter, GDP growth in the fourth quarter likely stalled. Exports continue to be buffeted by US tariffs, while domestic demand appears to be picking up. Employment has risen in recent months. Still, the unemployment rate remains elevated at 6.8% and relatively few businesses say they plan to hire more workers.

Economic growth is projected to be modest in the near term as population growth slows and Canada adjusts to US protectionism. In the projection, consumer spending holds up and business investment strengthens gradually, with fiscal policy providing some support. The Bank projects growth of 1.1% in 2026 and 1.5% in 2027, broadly in line with the October projection. A key source of uncertainty is the upcoming review of the Canada-US-Mexico Agreement.

CPI inflation picked up in December to 2.4%, boosted by base-year effects linked to last winter’s GST/HST holiday. Excluding the effect of changes in taxes, inflation has been slowing since September. The Bank’s preferred measures of core inflation have eased from 3% in October to around 2½% in December. Inflation was 2.1% in 2025 and the Bank expects inflation to stay close to the 2% target over the projection period, with trade-related cost pressures offset by excess supply.

Monetary policy is focused on keeping inflation close to the 2% target while helping the economy through this period of structural adjustment. Governing Council judges the current policy rate remains appropriate, conditional on the economy evolving broadly in line with the outlook we published today. However, uncertainty is heightened and we are monitoring risks closely. If the outlook changes, we are prepared to respond. The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.

The BoC also released its Monetary Policy Report for January 2026, which included the following critical information:

The nominal neutral interest rate in Canada is assumed to be in the estimated
range of 2.25% to 3.25%.

So the neutral range hasn’t changed. Good. And there was a nice chart of inflation by sector:

PerpetualDiscounts now yield 5.68%, equivalent to 7.38% interest at the standard conversion factor of 1.3x. Long corporates yielded 4.92% on 2026-1-28. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 245bp from the 235bp reported January 21.