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Bring on the taper

Also: Alaris Royalty finally invests in a loser, but CEO Steve King thinks there are plenty of winners still ahead

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Dec 18, 2013

by Max Fawcett

In a somewhat surprising decision, the U.S. Federal Reserve announced today that it has decided to begin the tapering of its $85-billion monthly bond-buying program. Many market observers expected outgoing Fed chair Ben Bernanke to punt that decision to his replacement, Janet Yellen, but apparently he decided to relieve her of that obligation. And so far, anyways, the markets seem to like it – U.S. equities spiked up after news of the taper hit the street.

How come? As always, when it comes to the Fed, it’s all in the details. Yes, there was a reduction in its bond buying program, but it was about as small a reduction as possible – just $10 billion a month. More importantly, in announcing the decision, Bernanke stressed that the Fed would not be bound by its 6.5 per cent unemployment rate target when it came to increasing the federal funds rate. According to Paul Ashworth, an economist with Capital Economics who was quoted in David Berman’s Globe and Mail story on the decision, “The median FOMC forecast suggests the fed funds rate will end 2016 at only 1.75 per cent. That perhaps helps to explain why, so far at least, bond and equity markets appear to be taking the tapering announcement in stride.”

There’s more optimism to be found over at Barron’s, which featured an unabashedly bullish cover on its 2014 year in preview issue. Of the 10 strategists that the magazine tapped for forecasts, the mean target for the S&P 500 at the end of next year came in at 1977 – well above where it’s trading now. The biggest bull of all was JP Morgan’s Tom Lee, who thinks the index will race all the way to 2,075 in 12 months’ time, a 20 per cent return from where it’s at today.

And closer to home, Alaris Royalty’s Steve King was on BNN to discuss the fact that his company, after an unbroken streak of investing in winners, finally had a loser on its ledger. Sears Home Services (NYSE:SHS) went into receivership, and as one of its larger shareholders Alaris took a hit on the market today. Still, King thinks the sell-off is overdone, and says it won’t change his company’s plans going forward. “SHS is only three per cent of our revenue. We hold back a significant amount of our free cash flow to pay our dividend and this takes our payout ratio from 76 per cent to 78.5 per cent, so certainly not material to us, and it won’t change our business plan going forward.”

In fact, he said, that 78.5 per cent figure (which assumes it will get nothing out of its SHS holdings, which is unlikely) is still below its target of 80 per cent. “We’ve got lots of room there,” he said. “Going forward, it all depends on new deals. We have a very active pipeline of partners that we’re talking to – mostly U.S. companies – for the first quarter.” The company, which deployed $175 million of capital in 2013 after investing just under $100 million in 2012, sees plenty of opportunities ahead. “We see that growth continuing,” King said.


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