Introduction
The economy is never steady and it never follows a predetermined course. There are various factors that influence the functioning of an economy and thereby force it to experience period of boom or recession. The various securities that are traded in these markets, whether government or private, also get influenced by these factors and experience fluctuations in their stock prices, in the case of shares, and in their yield, in the case of government bonds and securities. In most cases, it is easy to analyze and understand the cause behind the trend that emerge when one studies minutely the ups and downs in the stock price of a security.
Following these lines, in this report, an attempt to study the trends of three stocks has been made and to analyze the factors that influence the prices of these stocks. The stocks under observation are:
- Canadian National Railway (CNR)
- Ballard Power Systems Inc (BLD)
- MEG Energy Corporation (MEG)
In addition to these stocks of public companies, it would also be necessary to make a study of government bonds to understand how they influenced by market trends and in return what their contribution is. The government bonds under observation are:
- Government of Canada Bond, with maturity period of 10 years
- Government of Canada Bond, with maturity period of 5 years
- Government of Canada Treasury Bill, with maturity period of 90 days
In this report, apart from studying the trends for a period of 60 days of the securities mentioned above, an attempt would be made to understand the causes behind fluctuations in the market, the relationship between the securities in different markets and how economic principles govern the market trends. The data for the purpose of analysis and comparison has been collected from online newspapers and websites that offer historical data about stock prices of companies and government securities yield. Also company websites, where required, have been consulted to study financial reports and understand trends in cash flow for the desired period of 60 days.
It can be said the stock price of a company is the direct reflection of investor confidence and how strong a presence the company has in the market. Investor confidence is one of the main factors that influence the market price of a stock. If investors lose confidence, they would start selling their stocks which would cause the price to crash. The fear factor, as this behavior of the investors is often called, has been the reason behind the fall of stocks of many companies.
Another factor that often helps form an image about the company and its operations is its ability to earn and payout dividends. Companies that register huge profits and payout a substantial amount of dividends to its investors are always considered as safe investments. Investors and analysts predict the future of a company on the basis of this financial data that a company discloses. In this manner, companies build these market capitalizations. Based on these two information investors in the market demand a particular stock or decide that they want to sell their stock. This is where the concept of demand and supply of stocks comes into play, which is the actual determinant of the price of a stock. These economic concepts can be further validated by making a study of the trend of stock prices of company and analyzing the reason behind the changes.
Canadian National Railways
The Canadian National Railways have been one of the most profitable stocks listed on the TSX since 1999. It has one of the largest rail networks in the country and its operations reach up to the American provinces. It has a strong operating strategy that focuses on cost, asset utilization, service and people. The company has a strong financial base, has diversified its interests to minimize risk and has ensured free flow of cash through its operations and investments. The company has recently seen some fluctuations in its stock price as can be seen by the following chart:
As can be seen clearly from the trend chart, overall the stock price has seen a substantial increase. Over a span a 60 days, it opened at close a $100 and closed at approximately $108. Although in between there were periods when the stock price consistently fell and closed at around $98, following the declaration and payout of dividends and also securing major tenders and contracts from business and other companies, the investors regained their confidence in its operations. The company’s initiatives to control costs have also added to an increase in its profits which have again made it a popular investment option amongst investors. Currently, it is registering the highest margin of profit of approximately 26%. It has recently also bagged not just short term contracts, but also long term freight contracts which have given it an independence to adjust its rates as per economic conditions.
Ballard Power Systems Inc
Ballard Power Systems has made some of the most significant contributions in the area of clean fuel and energy. It engages in the development and the commercialization of proton exchange membrane fuel cells worldwide. Over the last couple of months, Ballard has registered a bullish trend in its stock prices. Investors are of the opinion that this is a good time to invest in Ballard stocks. The trend chart of the company’s stock prices for the last 60 days stands as follows:
As can be seen from the trend registered by the company, the stock prices were initially high and opened at approximately $2 at the beginning of August. However, this was followed by a spate of decline and close to the end of the August Ballard stocks registered the lowest point in the last 60 days when they closed at less than $1.50. This was then followed by an increase in stock rates which continued up to $1.80 and was again followed by a fall in stock rates when prices closed at $1.60.
The investor confidence has been shaky in the company, which is reflected in the fluctuations of the price. However, the announcement of a possible contract which will be a huge boost to the revenue of the company did show that the company is worth the investment. Also as the company has entered into agreements with other countries like China for licenses to operate and function in their region, the market is hopeful that by building cross border ties, the company will be able to further expand its operations. The rise in stock prices also coincides with the company being awarded funding for its clean technology initiatives from the U.S. FTA Funding. This indicates that the market closely monitors the functioning of the company. Receiving investment from governments and other sources is also helpful in creating a demand for the shares of a company.
If one analyzes the period of August for Ballard closely, it can be seen that some of the fluctuations in the stock price of the company coincide with major announcements that the company made. For example, the peak in the stock price during the middle of the month when the price closed at approximately $1.80 can be seen as a result of the event when the company announced new innovative fuel cell that cost less. Since this is seen to be a profitable product, investors saw potential in the company and invested their money.
MEG Energy Corp
MEG, like Ballard, is one of the biggest players in the energy industry in Canada. Its main operations are related to development and production of in situ oil sands. At present the major scope of its operations is dedicated towards developing oil recovery projects. These projects use steam assisted gravity drainage extraction methods. The company has registered a consistent increase in its stock price over the last 60 days. Except for a few days when the price dipped by a fraction, the stock price has increased from $11, the price at which it opened in August to $14.50 at the close of September.
The main rise occurred during the start of September. The performance of the stocks of MEG during August was very volatile where the share price fell by almost $1.50. The increase registered in September can be seen as a result of the announcement that MEG was offering Unsecured Notes to raise $750 million. The news was take very positively by the market and eventually MEG increase the notes offering from $750 million to $800 million. The dip in share price can be seen as a result of the loss that the company incurred on forex charge.
Bond Market
In the case of yields registered by government securities, although these are risk free bonds and treasury bills, they also have a market value since by nature they are marketable. This means that before maturity, a buyer of such bonds can sell them in the market to another buyer at the prevailing market rate.
If one considers the over 10 year maturity period Government of Canada bonds then over the last 60 days the market prices of the bonds has been very volatile. After a steady increase in yield which lasted for much of the first quarter and the beginning of the second quarter, the bonds have registered a sharp decline in yield in the months of August and September. The Government of Canada Bonds with maturity between 5 and 10 years, also registered a similar trend during the period of 60 days. After an initial increase in yield rates, the market value of the bonds fell by the beginning September. It rose and peaked at 2.50 but by the close of the month it again dropped to 2.25. For Government of Canada Treasury Bills which is issued for a period of 3 months, the trend chart for the last 60 days reveals that the yield on these bills has fallen by a significant amount in the month of August and the same trend has continued to September. The yield on the treasury bills closed at 0.98 at the close of the second quarter, where it has opened at 1.02.
Foreign Currency Market
The Euro and Canadian Dollar have almost been maintaining the same exchange rate for the last 60 days with minute changes. If one observes closely then they would see that there was a significant increase during mid-August when the Euro got stronger, but that was shortly followed by a dip when the Dollar got stronger. However, since September the exchange rate has steadily been going in the favor of the Euro.
The financial market, comprised of the stocks, bonds and foreign currencies, is greatly influenced by the money supply in the economy and the interest rates that are prevalent at a given point of time. During times when the investors expect the economy to be strong and stable would be when maximum risk is possible and this normally results in an increase in the performance of the stock market. When the interest rates on bonds goes up, the expectation of higher returns from new bonds increases and consequently the value or yield of older bonds decreases.
References:
Chande, Nikil, Jean-Phillippe Dion, Darcey McVanel, and Joshua Silve, The Canadian Approach to Central Clearing for Over-The-Counter Derivatives, Financial System Review, the Bank of Canada, December 2012, p. 43.
23 McVanel, Darcey, and Joey Murray, The Bank of Canada’s Approach to Adopting the Principles for Financial Market Infrastructures, Financial System Review, the Bank of Canada, December 2012, p. 51.
Kiff, John, Canadian Residential Mortgage Markets: Boring But Effective?, IMF Working Paper WP/09/130, International Monetary Fund, June 2009, p. 12.
Macklem, Tiff, Information and Analysis for Monetary Policy: Coming to a Decision, Bank of Canada Review, Summer 2002, p. 12.
Applebaum, Binyamin, By Switching their Charters, Banks Skirt Supervision, The Washington Post, January 22, 2009, p. A1.
