2014

Element Financial is updated and rated Highly Speculative Weak Buy at $14.14. This company may do very well. Management is expanding it very aggressively. I spent a full say looking at its reports. I just could not get comfortable with what I feel is its aggressive view of how to calculate adjusted earnings and with its high executive compensation. It compensates executives very highly, mostly with stock options but also with millions in cash incentive pay. It then proceeds to add back the stock-related compensation as if it were not a real expense. I totally disagree with that view. In a recent acquisition it paid out $24 million in contingent compensation ($14 million in cash) and then added all that back because it was not an ongoing expense. I have some sympathy for that view but then again if they do repeated acquisitions this expense will occur again. With their method this expense is totally ignored forever. They even add back all income taxes on the basis that they will not pay cash taxes for the next 20 years. That does not give me comfort that the earnings are “real” and basically is simply distasteful to us. Finally, the provision for bad debt looked low to me. I could have rated this a By, albeit a highly speculative one, but overall I am more comfortable calling it a highly speculative weak Buy. Perhaps I am just jealous of the high salaries of management but I just don’t feel comfortable with this investment. (I edited this paragraph on Jan 1 with very minor edits, I generally never change any posts after they are written except I occasionally fix obvious typos, if changes are at all substantive I will make a note of that or add it as a P.S. to identify it was written after the original post)

On Tuesday the S&P 500 was down 0.5% and Toronto was down 0.2%.

I will have a few more updates before the start of trading for the new year.

Bombardier Inc. is updated and rated Speculative Buy at CAN $4.11. It reports in U.S. dollars and does most of its business in U.S. dollars. Our report is therefore in U.S. dollars. The emphasis here is on the word “speculative”. The company has a LOT of negative aspects. But it is likely moving into a period of improved profitability. It is a low margin business but the upside of that is that a given increase in revenues can lead to a large increase in profits. For investors willing to take a risk this could be a good speculative choice. I will consider increasing my position.

The Bombardier perpetual preferred shares report is updated and rated Speculative Buy. at $21.84 These yield 7.2% because Bombardier is a weak company. There is some risk here. And the possible upside is certainly not as good as on the common shares. I hold shares. I am attracted to the 7.2% yield despite the risk. We first added to this site on June 17, 2010 at $21.75. So, overall it has delivered the 7.2% yield since then but has had no capital gain. In the that period of time the shares were mostly above $22 and got as high as $25 but were recently as low as $21 and so there can be volatility.

On Monday, the S&P 500 was up 0.1% and Toronto was up 0.4% despite another decline in the price of oil.

Most of the stocks on my list were up. Liquors Stores N.A. was up 3.3% to $15.46. Maybe some of their stores are doing well. But in my area they have too many stores and the industry has FAR too many stores. One of their small competitors, Solo Liquor is trouncing them in my area. Then there is Super Store Liquor Stores and Costco to compete against. As far as I can see the earnings don’t justify the price. They recently issued stock. I suppose that keeps the dividend safe for a while. But unless earnings increase I don’t see how the dividend can be maintained longer term. And perhaps the earnings will increase but I am just not seeing any sign of it.

Melcor was down 1.9% to $19.51. This is a thinly traded stock which has very little analyst coverage. The market has pushed it down due to lower oil prices. It could certainly fall further and its earnings could certainly be hit hard by low oil prices. But it seem to me that there is a margin of safety here in its assets. Very few profitable companies trade at less than book value. But Melcor’s stock trades at 75% of book value. And that book value consists mostly of raw land, developed land and commercial rental buildings. Those seem like solid assets. Of course land values could plummet if there is a very deep recession in Alberta. And the value of commercial rental buildings would also decline. But it seems to me that it would take a deep and relatively permanent recession in Alberta to justify Melcor trading at 75% of book value. I feel good about holding Melcor but only time will tell how the economy in Alberta unfolds.

Alimentation Couche-Tard is updated and rated Sell at $47.50. I feel I am going out on a limb by rating this great company “Sell” but it just seems too expensive at this time. We had rated it only a (lower) Buy at the start of this year and it is now up 78%. We first added it to this site on March 31, 2005 rated (lower) Strong Buy at a split-adjusted $5.80. Since then it is up 719%. Over the years we mostly had it rated in the Buy range and sometimes the Strong Buy range and never in the Sell range. I did (sadly) sell my own shares in April 2012 when it “popped” on the announcement it would acquire Statoil Retail. I have always been impressed with management and the growth. Those who own it could consider selling or reducing their position.

FirstService is updated and rated Weak Buy / Hold at $US. 49.95 or CAN $58.49. Due to both its cyclical nature and to a number of accounting complexities it has a been a difficult company to value or predict. I have always thought that it was well managed. It may be worth investing in based on its management. It will also benefit if the U.S. economy continues to improve. It’s unfortunate that I cannot be more definitive in rating this and other companies as either a buy or a sell. But in theory the stock market is supposed to do a good job in valuing companies and when it does most companies should be rated Hold. It is only a minority of companies that tend to look like clear Buys or clear sells at any given time. Canadian investors face currency risk in investing in FirstService. This is the case even when it is bought on Toronto. Currency risk is linked to where the earnings come from, not from where a stock trades. For this company, the price on Toronto will fall if the Canadian dollar rises, all else equal.

Fedex is updated and rated Weak Buy / Hold. This company has been difficult to rate over the years due to its profits being quite volatile with the state of the economy in recent years.

eBay is updated and rated Weak Buy / Hold at $57.01. This is a difficult company to rate for several reasons. First, it is to be broken up into two companies in 2015. More importantly it is subject to the risk that larger financial players like VISA or the banks will eventually dominate the online payments business or at least push the margins in that business down. Its marketplaces (eBay and classified ads) may be subject to less competition than the PayPal business. Given its current market position I would consider buying it as a speculative pick except for the fact that I just don’t trust and respect its management due to their insistence on adding back stock options as if they were not a real expense and also due to the very large compensation and due to a recent flip-flop on the issue of breaking up the company.

On the short trading day of Wednesday the 24th the Canadian and U.S. markets were about flat overall.

Melcor was up 4.0% but as always it can jump around more than other stocks due to its thin trading.

The thinly traded Canadian Tire voting shares (CTC) lurched up 10% to a new high of $260. This makes no sense to me and I don’t see the basis for it. The non-voting shares (CTC.a) are at $122.

Yesterday I sold about 25% of my Wells Fargo shares at about $55.60. After the sale it will still represent close to 15% of my equity investments. I had basically been letting this ride despite having a very large position in it. I also added to the position at lower prices in October. Considering that I also have a large position in Bank of America and a very large exposure to Toll Brothers, I have overall a very large exposure to the U.S. economy and the rebound in its housing market. That is probably a good bet but it certainly seems prudent, given my exposure, to trim this somewhat at this time.

I don’t believe that Toronto is open for trading on the 26th but I believe the U.S. markets will be open.

On Tuesday the S&P 500 and The DOW again hit record highs.

The S&P 500 was up 0.2% and Toronto was up 1.1%

Most of the stocks I monitor were up. Canadian Western Bank was up 3.3%. Melcor was down 2.2% which I would attribute more to randomness and the thin trading than anything.

I am pondering if I should trim my Wells Fargo position tomorrow. It makes up a rotund 19% of my equities. I have not taken profits in Wells Fargo in quite some time. Selling it would be an opportunity have at least a modest cash position. The news from the American economy has been quite strong and so maybe I should hang on. But prudence would suggest that I trim the position. I am leaning towards trimming.

On Monday, the Dow and the S&P 500 hit record highs….

The S&P 500 was up 0.4% while Toronto was down 0.3%.

Melcor was up 3.2% at $19.56…

I note the very (very) thinly traded Canadian Tire voting shares have dropped from recent highs of $257 to $202,. The non-voting shares are at $123. (The voting shares should probably be about the same.) I said the voting shares were an accident waiting to happen. Maybe they will go back up but I see no reason for it. It seems to me highly unlikely that 1) Canadian Tire voting shares are about to be sold by the founding Billes family and that 2) in any case the voting shares even then would be worth more than the non-voting shares even if that unlikely scenario came to pass. The voting shares seem to have defied gravity for several years now. I doubt that that can continue indefinitely.

Costco is updated and rated Weak Buy / Hold at $141.77. Based on the P/E at 29.5 we could have rated it a Weak Sell. But one has to respect the fact that it is the one of the very lowest cost and most efficient retailers in the world. It will continue to grow. And it could increase profits at will by raising prices or using more debt. But it is very unlikely to raise its markups and there is no sign that it will leverage up or do things like sell off its real estate. We first added it to this site in 2008 rated (lower) Buy at $72.55. Most of the time since then we have had it rated Weak Buy or even Weak Sell. The earnings and the share price multiple have both done better than we would have expected.

The weaker Canadian dollar will hurt it somewhat next quarter. But the price might not fall because it will likely still do very well in the U.S. In the perhaps unlikely event that it fell to $125 or especially $115 I would then consider buying it. It’s a powerful company due to its low costs and so even though the P/E is high, the P/E could stay that way. I certainly would not expect the P/E to rise.

On Friday, the S&P 500 was up 0.5% and Toronto was up 0.8%. The oil sands ETF, CLO was a notable gainer, up 5.0%.

American Express is updated and rated Buy at $92.90. We first added American Express to the site last February 8 rated Buy at $87. We also indicated that a reasonable strategy might be to take a quarter or half position and look to add on dips. That is what I ended up doing. Since February the price has varies from about $84 to $96, with a recent dip to about $80 with the stock market weakness that bottomed in mid October. Overall there has not been that much of an opportunity to buy on dips. I would continue to want to hold a modest position and look to buy more on any sharp dips. Canadian investors have benefited from the slide int eh Canadian dollar. But I don’t attribute that to American Express. That gain is associated with the decision to be invested in U.S. stocks in general and is not associated with the particular stock chosen.

On Thursday, the S&P 500 was up 2.4% and Toronto was up 0.9%.

Almost all the stocks on our list were up.

As always I don’t spend much time trying to predict where the market is headed. Basically no one can because it is subject to many random events. Instead I focus on trying to react to existing stock prices by trying to find and buy some companies that appear to be under-valued and to sell out of (or reduce) positions that I hold that become apparently over-valued. This is an exercise that at least has a chance of success. Trying to predict random events does not seem worthwhile. Some people may have success predicting how long certain trends will last once set in motion. I don’t think very many have success at that. trends may also end for random unpredictable reasons.

Investors should decide if they think of stocks as ownership of small pieces of real businesses or as mere squiggles on a screen. Most apparently are in the second camp.

Wednesday was a strong day in the markets and today, Thursday is strong as well.

Canadian Western Bank and Melcor have risen somewhat.

Couche-Tard (note, our analysis is out of date due to the large price increase) is up 7.6% after announcing a large acquisition. There has just been no stopping this company. I have long said it is one of the best managed companies in Canada. In July I thought it was a reasonable but not a screaming buy at $29.26. Now it is $45.78. I sold my shares a few years ago after gaining a bout 100% and thereby missed out on much larger gains. The value was helped by the lower Canadian dollar as most of its revenues comes from outside of Canada.

When it comes to world markets I wondering what the fallout will be from the Russian situation. Also, I wonder who has lost money on oil futures. When there are massive changes in currency values and commodities there are huge traders and possibly investment banks somewhere that are on the wrong end of those bets. And their losses can cause ripple effects on financial institutions. So far I have no seen any news or concern about this.

On Tuesday the price of oil did not drop – which was news. The S&P 500 fell 0.9% while Toronto rose 1.1%.

The oils sands ETF, trading under the symbol CLO rose 4.5%. A number of stocks on our list rose but none by exciting amounts especially given the recent declines. Although CN rail was up 2.7%.

Oil was trading again this evening and appeared to be giving back Tuesday’s increase.

On Monday the S&P 500 fell 0.6% and Toronto fell 0.2%

Melcor was down another 2.2% to $17.80, Canadian Western Bank was down 1.8% to $29.41.

A few stocks on our list rose – Couche-Tard up 4.1%, and Element Financial up 2.7%.

My long-time and large investment in Melcor certainly has taken a pounding down recently. And I bought more as it fell. Canadian Western Bank also went down a lot and I bought too early on the way down. I also bought a small amount of Stantec after it fell — and then it fell some more.

These three Edmonton-headquartered companies have fallen due to the lower oil prices. I did not anticipate that oil would fall like that. I have never attempted to predict oil prices and have generally not invested in energy stocks over the years. I did have some exposure to CLO the oils sands ETF for the last two years or so – and managed to add to that position on the way down.

Even with oil down I have been surprised at how far Melcor and Canadian Western Bank have fallen in response. It’s my assessment that Melcor is trading well below its intrinsic value and the same is true to a lesser extent of Canadian Western Bank and Stantec. It is true that if oil prices stay very low then a reasonable assessment of the intrinsic value of these companies will fall. But at this time I would judge these stocks to be under-valued.

If the Alberta economy is larger in several years then it is now then it seems highly likely that these stocks will be significantly higher in several years.

In regards to the reasons for the low price of oil I can’t pretend to have any special knowledge. But here are my thoughts.

I would say that the notion that the Saudi’s are letting oil drop simply to protect market share seems a bit absurd. To use some made up but illustrative numbers: Can it really be true that they would rather have say 30% of a $50 billion market ($15 billion for them) than say 28% of a $100 billion market ($28 billion for them)? These are made-up numbers but that would seem to be the illustrative result if they push oil prices down by 50%. It seems to me that having a market share for a finite resource like oil is a bit different than having and maintaining a market share for something like Coke. It would seem logical that a country would want to maximize its short- and long-term benefit from a finite resource. Driving the price lower would be a strange way to do that. Decreasing production at times of low oil prices would seem more logical.

One explanation for low oil prices that I have heard centers around the Saudi’s desire to economically hurt some of their enemies. That makes more sense to me.

Another explanation is that they are trying to drive shale oil out of the market. That seems unlikely to me since even if current shale producers are bankrupted the resource would still be in the ground and would be bought up on the cheap out of bankruptcy auctions and so would likely then be able to produce at lower oil prices due to the low cost of acquiring the resource.

We are also told that demand for oil is dropping. Yet the graphs I see show it increasing. Perhaps they mean increasing at a a slower rate.

We also hear that oil supply outstrips demand. What does that mean? Do they mean potential supply? I thought Economics 101 teaches that supply must equal demand and that the price adjusts to make that happen. I believe I was taught that every barrel of oil (or anything else) that is supplied (sold) must also be demanded (bought). Perhaps they mean some oil is bought for storage, but that is still demand. Or perhaps we are into some new math of economics?

Or perhaps 90% of what we hear on business television is again the need for talking heads to fill air time whether they know what they are talking about or not.

But I am not suggesting that I know where oil prices are headed. In the short term that would seem to be anyone’s guess. In the longer term I would guess higher but it’s an uneducated guess on my part since I don’t pretend to know the economics of the business. My uneducated guess would be that oil demand will keep growing to some extent with the world economy. And I would be surprised if that demand can be met at lower prices but again I have never followed the economics of the business.

It will be interesting to see if Warren Buffett comes in with an oil investment sometime during the period of low oil prices. I certainly would not be surprised by that. However, upon checking a site called www.warrenbuffett.com I see that Buffett is busy attending football games at the moment. The man gets around. I marvel at how he manages his time so well. It helps to have private jets at his disposal. Still…

Toll Brothers is updated and rated Buy at $31.56. This stock was added to the site in mid 2011, rated Speculative Buy at $21.03 at a time when it was suffering heavy losses. I added it to the site as a way to benefit from the expected recovery in U.S. home building and home prices. After that the stock briefly got as low as about $14 and has been as high as $39 and has spent the past two and a half years mostly in the $30 to $37 range. It’s earnings recovered steadily from negative levels and were recently at an “acceptable” level with a P/E of about 17 depending on how one adjusts for unusual items. This company is unusual in that it operates with a predictable lag of perhaps 15 months from signing a sale to delivering the house and booking the revenue and profit. While earnings continues to increase rapidly in 2014 its contracted sales in terms of number of units were flat with 2013 although up 7% in dollars. however signed contracts were up 10% in units and 16% in dollars in its latest quarter. It now seems likely that its earnings growth will be quite modest in 2015. But if signed contracts exhibit strong growth then the share price could increase on that basis. Now that its earnings have returned to a reasonable level and given the price to book value ratio does not seem excessive at 1.52, this company now seems like an attractive investment. It has potential for significant growth if U.S. new home construction levels return to historic levels and if the economy there continues to recover. Canadian investors face the risk that the Canadian dollar could rise against the U.S. currency.

On Friday, the S&P 500 fell 1.6% and Toronto fell 1.3%. Almost all of the stocks on our list were down as well.

On Thursday, the S&P 500 was up 0.4% and Toronto was also up 0.4%.

Most of the stocks on my list were up somewhat.

A notable decliner was Melcor, down 7.0% to $18.35. This is a thinly traded stock and can be volatile partly for that reason. But apparently the market is afraid that oil prices are going to stay low and that Melcor’s sales of new home building lots are going to decline substantially and/ or that the prices it obtains for lots is going to decline materially. I notice the Melcor REIT units have not declined much in price and were up slightly today. This would seem to suggest that the market has not (at least not yet) pushed down the value of commercial investment properties. 45% of Melcor’s assets are investment properties of which its ownership in its REIT is part. If the investment properties have not declined much in value with the oil price decline then it would appear that the market believes that Melcor’s land inventory has declined in value quite significantly. And perhaps it has or will if indeed oil prices remain low and if that in turn causes a serious decline in housing starts and lot prices.

I continue to view Melcor as a good investment especially for the long term. I am already heavily exposed to it but may add to my position.

A director at Melcor bought 1000 shares a few days ago at just under $20.

Similarly an executive at Canadian Western Bank bought 2000 shares in the past few days at about $31.50.

Perhaps we will see more insider buying which would be a positive signal.

On Wednesday, the S&P 500 fell 1.6% and Toronto fell 2.4%.

Almost all of the stocks on my list were down.

The biggest decline was for Toll Brothers, down 7.9%.

Toll Brothers released earnings this morning. Earnings were up 25% compared to the same quarter last year. The company’s earnings and sales have risen rapidly since the low point in 2011. It appears that 2015 will see modest growth but the company was quite optimistic about 2016 and beyond.

This recent market decline marks the third time this year that markets have pulled back noticeably. On the past two occasions our stocks picks recovered on average. Markets are always unpredictable in the short term. In the long term they do continue to rise. The average large corporation is not going to stop making money or to stop growing its earnings.

On Tuesday, the S&P 500 ended the day about flat while Toronto gained 0.4%.

Canadian Western Bank fell another 1.5% and I added to my position in it. Most of the stocks I track were up somewhat today.

As I drove to work this morning I heard on the business news that “oil is plunging”. That sounded depressing. But, actually, they meant it plunged the day before. It was actually up for the day at the very time they were spreading that false news. In my mind it is almost never correct to say a stock or commodity IS rising or IS falling. That would appear to suggest that someone knows the direction something will head next, rather than the reality that they simply know the direction something headed in the past. And if they really do know where things are headed they ought perhaps to be buying or selling based on their apparent knowledge of the future. I mean every “trend” turns around at some point. How do people who say something IS rising or IS falling know that it did not turn around just as they made their claim? Are these the same sort of people who say things like “my gut tells me XXX will go down another YY%”? Or I “see” it headed down another ZZ%. Do people really listen to the advise of people’s guts or what they “see” (apparently in the stars). Oh well, there are 24 hours times multiple business news T.V. channels and other business news media outlets and they have to fill all that air time with something. And people do listen to this stuff, they will even constantly ask where do you “see” ZZZ heading? I say good luck with that approach to investing. And luck will be needed, I suspect.

On Monday, the S&P 500 fell 0.7% and Toronto was down 2.3%.

Once again lower oil prices were causing investors to bid down the price of many stocks.

Many reports will say that investors “pulled money out of stocks”. It’s true that some investors did so, but they could only do so by having other investors buy their shares. As a population, investors are powerless to pull money out of the market. The overall TSX market had a lower value today than it did on Friday. The difference in wealth was not “pulled out”. Instead, it evaporated into thin air. That’s how markets work.

The value of the overall stock market index should, in theory, reflect the present value of the future cash flows from the market index from now to eternity discounted at an appropriate interest rate. As forecasts of the growth of earnings and of interest rates change then the valuation of the market changes. These changes tend to be fairly radical at times in both directions. On some days the average investor makes money, on other days the average investor loses money. Those gains and losses basically come from thin air (or at least not from other investors) reflecting future expectations. In this aspect of the market winning days outnumber losing days because over time the present value of the future earnings from the overall stock market index (of corporate Canada or of corporate America as Buffett likes to say) is constantly (but irregularly) growing as the economy expands over the years. This is a positive sum game, the average investor wins over the years. Layered on top of that, everyday some individual investors profit at the expense of other individual investors as they trade stocks with each other. That part of the market is a zero sum game.

Notable decliners today among the stocks I follow included: Canadian Western Bank down 2.8%, Stantec down 3.0%, Couche-Tard down 3.1% and Constellation Software down 3.9%.

Under the category of “Life is Just Not Fair”, we can perhaps file the fact that Berkshire Hathaway was up 0.8% today and has been setting new all-time highs quite regularly including today. And I read today that the recent huge gains in Berkshire has pushed Warren Buffett past Carlos Slim Helu into second place on the list of the world’s richest people. Number one on the list is Buffett’s very close friend, Bill Gates.

Perhaps we can take some comfort at this time from the fact that Buffett never let oil prices or macro economics interfere with his investment decisions. He simply bought the best companies he could find that were likely to earn the highest profits per dollar that he invested. He then benefited as those companies grew through investment of retained earnings. Or, if they paid a high dividend he took that money and repeated the process. He selected only companies that he felt were simple to understand — those where he could predict with confidence that earnings would grow relatively rapidly. And he focused on their earnings, not their share prices. The ideal scenario would be a share price drop even as earnings grew so that he buy more shares (of a fundamentally more valuable company) at a lower price. He never relied on the ability to sell the shares at a profit. He bought companies that he expected would ultimately be good investments if held forever and never sold. But he also did occasionally sell shares when the price seemed over-valued or he had better used for the the money. When he bought outright control of an entire company for Berkshire, it was always “for keeps”, never to be sold. As he would say, the returns made in this fashion have been “satisfactory”.

Shares of most profitable companies, and most certainly the broad market indexes, tend to move upwards over time. But not in straight lines. A volatile market presents opportunities for those still in the investment phase of their lives to buy more shares at opportune prices. Unfortunately, once one is in the phase of life where savings are being drawn down it is difficult to see an upside to market declines. Only if dividends are larger than the annual withdrawals or if there was a substantial allocation to cash or to assets that have not fallen in price is there much opportunity to take advantage of lower prices.

It is interesting that it is always AFTER the market falls 10% or whatever that everyone seems to get fearful. It might have been more logical to have been more fearful when the Canadian market was higher. Similarly with oil. At $64 people seem fearful of further drops but at prices over $100 they were not so fearful of a decline. I certainly can’t predict short-term oil price movements. It’s probably safe to say that oil will be over $100 again. Whether that will be in one year or five years or more I don’t know. Does anyone?

Canadian Western Bank is updated and now rated (lower) Strong Buy. Its share price has recently fallen from the $40 to $42 range of this past Summer. Nothing it its achieved earnings explains the decline. Rather, the decline is based on fears of a slow down in Western Canada (and possibly a spike in loan losses) due to lower oil prices. The company itself is projecting somewhat lower earnings growth of 5 to 8% in 2015. Obviously a slow down could a occur. Nevertheless on the numbers and on its past record of growth this stock looks relatively compelling at this price. But those who buy should, as always, be prepared to withstand a decline if that should occur.

Stantec is updated and rated Buy at $31.15 (It had a recent two for one stock split). At the start of this year we had rated it Weak Buy at $32.93 (split-adjusted). Since then its trailing earnings have increased 7.1% or 9.5% annualized and its book value per share has increased 12.1% or 16.1% annualized. On the basis of trailing earnings Stantec is a better value now than it was at the start of 2014. There are fears that its outlook for growth is lower no due to lower oil prices. However this may be offset by growth in the U.S. and by the lower Canadian dollar. About 40% of its revenues are from the U.S. I had sold my the last of my shares in Stantec in late 2013 at about $34.50 (split-adjusted) after making a very strong gain. Now I have started to buy back in. I don’t consider it be a strong Buy (which would be a more compelling Buy) but I do consider it to be a Buy and expect that it will be a good long-term investment. The short-term is always unpredictable.

I have updated the composition of my own portfolio. For this update I included an explanation of why I like to track the P/E ratio and earnings of my overall portfolio. I had started doing that years ago based on some advice I read from Warren Buffett. Later I could not find where he had said that. Recently I was re-reading his old annual letters and came across the advice in his 1991 letter.

My own portfolio gain for 2014 is still good at 10.2% despite the recent declines in Melcor which is my largest position.

On Friday the S&P 500 gained 0.2% and Toronto was about flat.

Most of our stocks rose but Canadian Western Bank fell another 2.2%. I think that is a buying opportunity. However, I have always said that banks can be risky. They operate with extreme financial leverage. At the same time a well managed bank is an earnings generating machine most of the time. In the past when Canadian Western was hammered down to low prices on fears of loan losses, those losses did not appear and the stock recovered. At this time the fears may involve both lower growth (which is certainly quite possible, even probable) and higher loan losses (which is possible but perhaps not probable to any great degree). Time will tell.

Thursday was a nasty day in the Canadian markets with Toronto down 1.9% while the S&P 500 was down 0.1%

Our Alberta stock picks were hard hit with Melcor down 6.2%, Stantec down 2.1% and Canadian Western bank down 4.6%.

I was surprised to see Canadian Western Bank down 4.6% to $33.15 after announcing record earnings of 72 cents per share and a 5% increase to the dividend after having already increased the dividend about 6% since this time last year. If it were to make 72 cents per share for four quarters that would be $2.88 per share or a P/E of 11.5. It’s actual trailing earnings are $2.70 or $2.76 adjusted for a few items and so the actual trailing P/E ratio is about 12.1. That’s an earnings yield of over 8%. That seems attractive with interest rates at record lows.

Obviously there is a lot of fear in the markets and people are bidding down the price of stocks linked to the Alberta economy due to low oil prices. Will the the down draft continue? I can’t predict that. What I can do is observe that these three stocks alls seem to be trading at attractive prices. Alberta may well have a slow down. But I don’t think it will be permanent. It simply seems to me that on the face of it these three should all be good long term investments.

I added to my Canadian Western Bank position today. It’s always been my strategy to add to positions at lower prices unless something has happened to change the long-term positive outlook for the companies.

I may have to suffer more short term pain before seeing the long-term gains. Time will tell.

Melcor is trading at 76% of book value. And the assets that you can buy for 76 cents of the equity value on the balance sheet consist almost entirely of land, investment properties and accounts receivable. If a huge company came into Alberta and wanted to replicate these assets it seems certain that they would have to pay more than book value for the land while the investment properties and the accounts receivable should be obtainable at book value. Then there would be administrative costs to set up the business. So, it seems attractive to me to be able to buy the equity ownership in these assets for 76 cents on that dollar. In my experience it is rare for profitable companies to trade down near, let alone under, book value. The market however appears to fear that the profits are about to plunge with lower oil prices. That is always possible. It’s my belief that equity investing involves accepting a certain amount of risk and volatility.

Wednesday was a better day for the Canadian stock market with Toronto up 0.9%. Meanwhile, the S&P 500 was up 0.4%.

Canadian winners today included Canadian Western Bank up 2.0%, Stantec up 1.9%, and FirstService up 3.6%.

After the close of trading Canadian Western Bank released its Q4 earnings and reported another record quarter. Here are some value ratios calculated based on its trailing earnings as at Q3 (When I enter the Q4 numbers the value ratios will improve slightly). It’s trading at 1.85 times book value. It’s ROE is 14.2%. It retains 68% of its earnings and pays out 32% as a dividend. The dividends yield is modest at 2.3%. But if you have an earnings engine that that is making 14% on equity it’s questionable if it should pay out any dividend at all. If you had a bank account paying double digit returns would you withdraw any money?

One can always come with scenarios of doom. What if the Alberta economy tanks due to low oil prices? What if the bank suffers huge loan losses. Well anything is possible but the question is, is this company more likely to suffer that problem or more likely to keep growing its earnings? I have been tracking it for just over 15 years. During that time its stock price is up 604% or a compounded average of 13.6% per year. It’s had its downs as well as its ups in those 15 years. I certainly like its chances for being a good investment over the next ten years. As far as the next 10 days or ten months that is harder to predict. But I am happy to climb aboard and see what happens.

Tuesday was yet another interesting day in the markets.

The S&P 500 was up 0.6% whole Toronto was about flat.

Most of the stocks on our list were up. But three Edmonton-headquartered companies that I like were down. Melcor was down another 2.8% to $20.77, Stantec was down 3.0% to $31.11 ($62.22 adjusting for its recent split) and Canadian Western Bank was down 1.8% to $34.08. I have been following two these for over 15 years and the third for 12 years. All three have seen big price drops on more than one occasion over that period. And all three have done very well over that period. I consider all three to be very well managed companies. I suspect all three will be excellent long-term investments. In the short term they could certainly continue to go down, as can any stock.

Today I bought back into Stantec which I had sold last year at about $69 (about $35 adjusting for the split). I also added to my Canadian Western Bank position. It’s entirely possible that my buying on this dip has been too aggressive and too early. Only time will tell.

Berkshire Hathaway’s A shares closed today at an even $225,000. It is almost beyond comprehension that these are the same shares that were trading at about the $14 to $18 range when Buffett took control of the company in 1965. In late February Buffett’s annual letter will tally up the results of his first 50 years of running Berkshire. Other stocks have rocketed thousands of percent in a short time. But I am not sure if any others can claim a gain of over one million percent in the last 50 years or less. If there was another, it was likely a penny stock. A one cent stock going to $100 (adjusting for splits) would be a one million percent increase, so maybe it has happened.

Monday was another ugly day for the Canadian stock market. Toronto was down 0.8% and the S&P 500 was down 0.7%.

The last I had looked the Canadian dollar was up about three quarters of a cent which reduces the value of American stocks when measured in Canadian dollars.

Notable losers included CN rail down 5.1% (apparently on fears there will be less crude oil being transported). Stantec was down 3.4%. Both of these stocks trade actively in the U.S. as well as Canada. My unscientific observation is that U.S. markets are often a lot faster to push a stock down on bad news. It may be that a higher percentage of market participants in the U.S. are trading on pure momentum and when they see a dip they push prices down fast as many people head for the exits and the only way to find buyers is at lower prices. The fact that these two trade in the U.S. may be part of the reason for such a rapid drop.

I considered buying some Stantec today but I don’t have much cash left in my accounts. Stantec’s earnings come from all over Canada and the U.S. and I don’t think are all that tightly linked to the Canadian energy “patch” or to energy in general.

I may sell more of my rate reset preferred shares to raise some cash. But I hate to sell unless I can get somewhat more than I paid.

Meanwhile seeing a new offering for a 4.5% five year rate reset preferred share from Husky (I got the notice from TD Direct) I put in for 500 shares of that. That was before I noticed Stantec was down.

Another decliner was Canadian Western Bank down 3.9%. I added to my position today. I believe it is due to report earnings in the next week or two.

Liquor Stores N.A. has announced that it is selling 3.4 million shares at a gross price of $14.65. (and presumably somewhat less than that net of fees_. The process will be used “initially top repay outstanding indebtedness under its credit facility, thereby freeing up borrowing capacity that may be redrawn and applied, as required, to fund, among other things, working capital, acquisitions, construction and/or renovations of new or existing stores and information system upgrades.”

The current share count is 23 million, so this is a hefty 15% increase in the share count.

This is a high dividend entity. It is constantly paying out cash and now it is selling shares to raise cash. I struggle with how that makes sense mathematically.

I realize that REITs do this and I hope to do some analysis to understand why it makes sense for REITs.

If a REIT or a Liquor Store chain is paying a dividend from the profit or at least cash flows on existing buildings and stores and then uses newly raised cash to build new buildings or new stores, maybe that makes sense (Although I am not really convinced of that).

But in the case of Liquor Stores N.A. it has been paying our more than it earns lately. As a consequence , its debt has increased. On the face of it, it appears to have been borrowing to maintain the dividend. It has done some investing in stores, but lately not more than its depreciation expense.

I do think it is a good thing for the company to sell shares. The sale will strengthen the balance sheet and I think they are getting a good price for the shares. If the company is getting a good deal selling the shares at $14.65 (less costs) are the share buyers getting a good deal?

Maybe this will all work out and Liquor Stores N.A. will resume its former growth. But I am just not convinced.

Canadian National Railway Company (CNR or CN or CNI) is updated and rated Weak Buy / Hold at CAN $81.23 and U.S. $71.05. I have now been “tracking” CN for 15 years. Its share price is up a staggering 905% in that time or 17% per year on average. I have not tracked its ROE all the way back but in the last five years the ROE has been above 20%. That explains much of the earnings and share price growth. I have long described CN as having to some extent monopolistic characteristics. The stock is up 34% this year to date . That’s a HUGE gain for such a large company. Part of the recent gain is explained by the lower Canadian dollar because its U.S. earnings are worth more as the Canadian dollar sinks. It has also see huge growth in hauling crude oil in the past few years and it had a bumper crop of grain to haul in 2014. I like it very much as a company. But as a stock it seems somewhat expensive and I am not a buyer at this price.

Regarding Liquor Stores N.A. I lost money on that company and, more importantly, some others no doubt invested based on our analysis (albeit at their own risk) and lost money. We have it rated as a Sell at $13.31 and it is currently at $14.85. So, I may be somewhat biased against it. (We all have our biases whether we admit it or not). In any case I was in one of their stores yesterday. (I have to admit they have convenient locations, which is the reason I was there for a small purchase). In other news I spoke to someone recently who had worked at one of their large new Wine and Beyond stores. This person told me that sales were slow in November and that some staff shifts had been cut back. I imagine all liquor stores will do pretty well in December. But the problem in Alberta is there seems to FAR to many stores.

Friday was an ugly day in the market for those with exposure to oil and gas stocks or anything related to it.

The S&P 500 was down 0.5% and Toronto was down 1.2%.

Lower oil prices hit the Toronto market hard. I have always been clear that I have no ability to predict oil prices. It seems there are some people who, also having no such ability, nevertheless thought and claimed that they had that ability. Jeff Rubin threw away a very lucrative career as chief economist at CIBC World Markets in order to be free to go forth and warn the world that oils was going to get WAY more expensive. On a quick Google search I find the following: “In April 2008, Jeff Rubin, chief economist at CIBC World Markets, predicted a barrel of oil would cost $225 by 2012. With oil at $118, it was a controversial call.” In 2009 he quit his big job in order to publish his book predicting “peak oil”.

Well at least Jeff had the courage of his predictions. He was wrong but honorable. With the current lower oil prices I am sure we will hear from many who will claim to have predicted it. Many will also jump on the band wagon and predict prices to go lower.

Again, I can’t predict oil prices. I have often mentioned in the posts below that lower oil prices were a risk to the Alberta economy. I did not predict it but I noted the risk.

My approach to investment over the years has not been to avoid risk. It has been more an approach of accepting risk. In particular I accept short term risk when I think the long term outlook for a company is solid.

While my own account saw losses in the last two days, I am still ahead by 11.9% this year which is not a bad result.

Back to Friday’s stock movements…

Melcor was down 6.5% to $21.51. With the lower price I (perhaps in an act of stubbornness) added modestly to my position at $22.10. And I placed an order to buy a bit more at $21.10. Our latest update on the stock indicated that it looked very good based on its numbers but specifically mentioned the risks associated with oil prices and the Alberta economy. I am comfortable holding it, but it is not without risk. Other notable declines, in stocks on our list, were CN rail down 4.4% and Stantec down 1.8%.

U.S. stocks fared better. Walmart was up 3.0% to $87.54

Costco continued its winning ways, up 1.7% to $142.12.

The drop in the Canadian dollar on Friday also pushed up the value of American stocks when measured in Canadian dollars.

On Thursday, the American stocks exchanges were closed. But Toronto was open and fell 0.8%.

I got clobbered on my oils sands ETF CLO which was down 8.7% to $10.59. This ETF reached a high of $16.00 in late Spring / early summer this year. That’s a decline of 34%. With this decline I added a little to my position at $10.73.

Obviously the decline in oil prices is a worry for the Alberta economy.

Canadian Western Bank fell 4.1% to $35.95. I had an order in to add to my position in this bank if it fell to $35.75. As a few days ago that looked unlikely. But it did touch $35.75 today. My order was for 500 shares and I got 100. Canadian Western Bank has a very strong history and I like it at this price. It’s share price could certainly drop if oil stays low and its earnings could too. But longer term on the balance of probabilities this will turn out to be a good investment.

Canadian Tire had a strong day, rising 1.8% despite the weak market.

My guess is that tomorrow will see some bounce back in oil prices.

The Canadian dollar fell today which does push up the Canadian dollar value of any U.S. stocks that we own.

Given this display in Canada, it will be nice to see the U.S. markets open tomorrow even if for just a half day.

On Wednesday, the S&P 500 was up 0.3% and Toronto was down 0.2%.

Liquor Stores N.A. was up 1.6% to $14.91. Looking at the earnings and looking at the low level of business at their stores in my area and looking at the extreme level of competition in Alberta I would use the price rise to sell this. I sold at lower prices…

I notice Agrium was down 1.8% to $109.20. I sold last week at $116.69, so with one week down and infinity to go, my sell looks like a good move so far.

Today, Manulife was out with an IPO of 5 year rate reset preferred shares. With a yield of 3.8% I did not buy any. Some of the rate reset shares that I bought earlier this year had yields as high as 4.5% and seemed like safe companies. My threshold is 4%. At 4% or more I don’t mind grabbing some of these as an alternative to cash. But given some risk that they could trade under the issue price I am not going to bother buying any under 4.0%.

The one investment that has been a noticeable negative for my portfolio in the last several months is my investment in the oil sands ETF, that trades under the symbol CLO. This ETF is not on my list above but has long been on my list of Canadian Exchange Traded Funds.

In 25 years of investing I have rarely owned any energy or mining stocks or any other commodity stocks. And that was working well. I bought this one for perhaps a silly reason, to get “exposure” to this sector. This spring I was sitting on about a 30% gain and considered selling but I kept it. Now I am sitting on a 5% loss. I certainly had no ability to predict short-term oil prices. At this point there seems to be a lot of pessimism around oil prices. At this point I will likely keep this and will even add to it if it goes down much more. At some point oil prices will likely rise again but I have no idea when. Also perhaps this one will rise if Keystone pipeline is approved in January. I am not in a big hurry to buy more commodity companies.

Canadian Tire is updated and rated (lower) Buy at $125.50. The stock is up 26% this year to date. We had rated Buy at $99.49. Normally it might be expected to rate a weak buy / hold after a 26% gain in 11 months. But the earnings per share have risen about 14% since the Q3 2013 numbers that we used to arrive at the Buy rating for the start of this year. Based on earnings it is roughly 10% more expensive per dollar of earnings than it was year ago.

A bit if history…

I have mixed feelings about Canadian Tire’s performance. I still own 700 shares and so I benefit from the rise. But in the late Summer of 2011 I owned 3736 shares and the price was $57 (and my price paid was likely below that). It was my largest position. Back then the stock was selling down close to book value and seemed like an obvious bargain. We had it rated Strong Buy at $52.40 in an update of August 27, 2011. I mentioned it to a number of people back then even outside of this web site and the general reaction was quite skeptical.

Somewhat regrettably I started selling too soon as the stock rose in price. It had been over 20% of my portfolio which by conventional wisdom was WAY too high. Perhaps I should have ignored such conventional wisdom and let it run up to 30% of my portfolio. In any case I made good money on this investment despite taking some potential gains off the table too early. Also, I did buy some back on dips after selling and then sold those again later but that helped my return versus simply selling.

At its current price it could keep rising. But it could also easily slip back 10% or more on an earnings stumble. Such a slip would likely be a buying opportunity.

I notice the Canadian Tire voting shares CTC are now trading at $255 over 100% higher than the non-voting shares CTC.a The voting shares are extremely thinly trades (635 shares today). I have been skeptical about the huge premium on the voting shares for a long time. And so far I have been wrong. But I firmly believe that these voting shares are an accident waiting to happen. Over 90% of the voting shares are held by the founding Billes family (Matha Billes 41%, her son 20%), the dealers association and the employees profit sharing plan. In this situation the ability to cast a vote seems pointless as the controlling owners can always win every vote. Possibly someone is trying to get a hold of several percent to try and get a Board seat. Back in the 80’s there was a big take-over battle for Canadian Tire and someone tried to buy control by offering a high price for only the voting shares. The courts ruled against it and there is now a stipulation that if someone buys a majority of the voting shares then all shares become voting. It does not look like anyone could gain control without all shares becoming voting. In theory one might gain effective control by buying only Martha Billes 41% but it is highly likely that such a move would face challenges. And, if someone wanted to Buy Martha’s shares, why would they fool around buying a few percentage on the market at a huge premium?

I conclude that the $255 voting shares are an accident waiting to happen. Someday, someway they will end up worth no more than the non-voting shares. That is my long-term prediction.

On Tuesday the S&P 500 was down 0.1% and Toronto was up 0.4%.

Couche-Tard was up 4.0% on another good earnings release.

On Monday the S&P 500 was up 0.3% while Toronto was down 0.6%.

Toll Brothers was up 0.8% which put it just above $35. In October it had gotten down under $30 and I reported adding to my position under $30. Stantec was down 2.1% at $34.00 (it recently split 2 for 1). I am tempted to buy back into this company at this price.

As another year draws to a close our performance figures for 2014 look good. Our two Strong Buys from the start of the year are up 19% (Wells Fargo) and 18% (Melcor). The average for all the 15 stocks rated in the Buy or Strong Buy ranges is a gain of 10.9% which matches the rise in the TSX. My own total portfolio is up 14.1% despite having a healthy allocation to cash most of the year. Regarding my two RRSP accounts the gain there was 13.4%. If I calculate this year’s RRSP gain as a percentage of the total money that ever went into these two RRSPs the gain on that basis is 107%.

Friday was a strong day in the markets with the S&P 500 up 0.5% and Toronto up 0.2%

I mentioned that I had placed an order to sell any of my pref. shares if they happen to rise to about $26.00. They only pay 4 to 4.5% per year and $26 is 4% higher than the $25 I paid for these and I figured I might as well grab the 4% if they go to $26. Also it was a way to “play” market volatility.

For Brookfield Asset Management series F preferred share I set the sell price at $26.10 and it sold on Friday. I had bought these at the IPO at $25.00 as noted under May 27 below. I have received one dividend on September 11 of 36.06 cents per share. (I believe the first dividend was for a bit more than three months). So in total I had a return of $1.4606 per share or 5.84% in about six months. So, that is a good return. Some would calculate this as 11.68% annualized but I don’t really think that is a useful way to look at it. In the other half of the year that money might be in cash earning nothing or in stocks earning or losing who knows what. So I just look at it as a 5.84% return. But yes it is nice to do that in six months on a low risk investment. Maybe I would have been better off to hold the shares but that depends what I do with the funds received.

I posted a new article with some very basic math on how to value cash flows from things like safe bonds and safe preferred shares where the cash flows to be received are known with close to 100% certainty.

I plan to write another article extending this valuation to stocks where the cash flows are always uncertain (but sometimes can be conservatively estimated).

On Thursday, the S&P 500 rose 0.2% and Toronto rose 0.6%

Couche-Tard was down 3.8%. I did not see any news top explain why.

On Wednesday the S&P 500 was down 0.2% and Toronto was about flat.

Bombardier was up 2.0%. The company always seems to have its struggles. I’d certainly like to see it it do well. It seems to have great products but is in a very competitive industry.

Walmart was up 1.4% to an all time high. It’s still a powerful competitor in the market place. A lot of people sort of wrote it off as an investment in the last decade but it has quietly increased it earnings and gone about its business.

I see a report today that grocer Metro has seen sales benefit due to a rise in meat prices. Actually I don’t think a business benefits when its sales rise simply because of inflation. Same store volume sold matters more than same store sales dollars. If , for example, prices fell 5% and a grocer’s sales fell only 3% I would call that a great quarter because volume had increased 2%. Analyst focus too much on same store dollar growth. If they had the figures they would likely focus on same-store volume growth. But such figures are typically not available. In a world of 3% inflation a grocer needs 3% same store dollar sales growth just to stand still. If inflation were 0% and same-store dollar volume great 2% that would be a strong result, and far superior to 3% growth in a 3% inflation world.

On Tuesday the S&P 500 closed up 0.5% for yet another record high. Toronto was up 0.6%.

The biggest gainer for the stocks on my list as Agrium which closed up 2.6% at $115.60. This morning it was as high as $117.56 or up 4.3%. At my recent update of this stock I was relatively luke warm on it. So, this morning seeing a 4% jump and not immediately seeing the reason for it I decided to just sell my relatively modest position. I sold at $116.69. It seems that the reason for the gain today was that another company had had to shut down a potash mine and this would push up the price of potash. I had bought the shares at the end of June for just under $100. So, I was up about 17% and just decided to take my gain and move this money into cash. Perhaps I should have held to see what happens with the activist investor. I considered selling just half but it was a relatively small position so I just cleared it out.

My thinking is also that I don’t mind having some cash in the account just in case we get a pull back related to the economy or “geo-politics’ / world terrorism.

On Monday, the S&P 500 was up 0.1% and Toronto was up 0.3%.

Canadian Tire was up 1.7% to $127.137and set another high. It’s up 28% this year. And that’s on top of a 43% gain in 2012. It started 2013 at $69.38. I have not yet updated for its excellent Q3 results. Given the strong Q3 the stock is probably still not very expensive. Still, I took most of my money off the table on this one. I still hold some in a taxable account. In tax free accounts where there is more freedom to trade without capital gains taxes I would be inclined to reduce my position at this price (But keep in mind I have not updated my analysis for the Q3 earnings – nevertheless, that is how I feel at the moment).

Liquor Stores N.A. was up 2.9% today. Having lost faith in management of that company, if I had not already sold I would be using this current increase as an opportunity to reduce or eliminate this position.

I mentioned activist investors yesterday. Sometimes they certainly push share prices up. But when I look at the most successful and fastest growing (in terms of share price) companies that I have followed for may years none of them benefited from an activist shareholder. They all have had the same CEO for many years or else promoted CEOs from within. This includes Stantec, Canadian Tire, Melcor, Canadian Western Bank and Alimentation Couche-Tard. I believe that would also include all the big Canadian banks and Wells Fargo and. of course, Berkshire Hathaway. It seems to me that activist shareholders are a big benefit only where current management is relatively incompetent.

What about some companies that took in CEOs from outside? Nortel was one, Blackberry is another. Air Canada under Robert Milton was one. I always take it as a bad sign when a company feels that it must go outside for a CEO.

As you may have seen in my email of yesterday if you are on the list for my free newsletter, I am currently working on a series of articles that shows with actual data that people who invested annually in U.S. stocks (the S&P 500 index) over a 30 year period have ALWAYS ended up at least preserving their spending power after inflation and, on average, have more than tripled their spending power, after inflation. And keep in mind that when money is saved regularly for 30 years, the average length of investment is only 15 years. The results from investing in the S&P 500 index only get better when longer time periods are examined. These results are not restricted to the S&P 500 index, but that is the index for which I have all required the data.

Here is a link to the first article in this new series.

http://www.investorsfriend.com/Saving%20versus%20Investing.htm

On Friday the S&P 500 was flat while Toronto was up 0.4%.

Alimentation Couche-Tard was up another 1.6% and is up a stunning 52% this year. Subject to further updates we would judge it too expensive at this point. (I personally sold this one WAY too early). This company flies somewhat under the radar but is truly an amazing Canadian success story. Element Financial was up 3.1%. It has been relatively volatile. Liquor Stores N.A. managed a 2.9% gain on Friday after releasing earnings that did not look impressive to me.

Agrium is updated a rated Speculative Buy at $113.19 or U.S. $100.28. It’s a strong company with excellent past growth. It is also cyclical. At this time earnings have been declining and I do not find its valuation to be compelling. It might be worth holding as a speculative pick. The recent share price increase due to an activist investor getting involved is s=not something that enters my analysis. Maybe that investor will encourage actions that “release” value. But to me, activist investors are only a benefit where a company was poorly managed and where a change of management can be brought about which appears to have been the case at, for example, CP Rail. I did not own CP rail and I can not think of a single case where one of my investments benefited from an activist investor in all the years I have been investing.

Agrium is a complex company. It’s relatively new to our list and I can’t say that I have really internalized a lot about its operations to the point where I have much of an understanding of its economics and outlook. In addition its product prices are very cyclic and so are some its major input costs including natural gas. I cannot claim any particular insight into its future earnings. I do think it is an interesting company and one that I will enjoy learning more about. Looking simply at the numbers right now it is neither very expensive nor very cheap. Given the recent share price rise which was simply associated with activist interest I personally am perhaps more inclined to reduce my position and take my modest profit than I am to add to my position. The path of least resistance for me is to just continue hold my modest position.

My plan for the rest of this year (six weeks) is to try to get all the stocks updated for Q3 earnings releases or any other earnings releases out by year end. Every year I try to start to the new year off with everything updated relatively close to to the end of the year. At that time I also tend to delete any companies that are both well out of date and which I don’t update due to lack of time or interest in them. This year there may not be any deletions or at most about two. After that early in the new year I would hope to find time to add a few new and perhaps interesting stocks to the list.

On Thursday, the S&P 500 was about unchanged while Toronto fell 0.5% on lower oil prices.

After the close Melcor announced that it would sell $138 million worth of its rental buildings to its 47% owned REIT. It appears that $45 million will be paid through issuance of REIT units to Melcor which will increase its ownership of the REIT to 56%. Fundamentally not a whole lot is happening here since property already carried at market value is being sold to an entity which Melcor owns about half of for market value. If the market views this as favorable to the REIT and its growth then the REIT units might rise which would in turn pull the Melcor shares up. If nothing else this news may bring Melcor to the attention of investors which should be positive for its price.

Berkshire Hathaway announced this morning a small to medium acquisition. It will buy the Duracell battery brand from Proctor and Gamble for $3 billion. It’s an odd deal in that Berkshire will pay for it by trading essentially all of the shares it owns in Proctor and Gamble. To make things even out Proctor and Gamble has to throw in $1.7 billion in cash. This is really not a large acquisition for Berkshire which has $517 billion in assets.

Buffett / Berkshire has held P&G shares for many years. The shares were acquired when P&G bought Gillette which Berkshire had previously owned for quite a few years. In recent times P&G had come in for some criticism and as I recall Buffett had been mildly critical. Buffett was sitting on HUGE capital gains on these P&G shares and would have faced hundreds of millions in income tax if he simply sold the shares. So this acquisition allows him to trade the P&G shares for Duracell and likely will not generate any capital gains taxes.

I had been surprised over the years to hear that Duracell was a money loser or at least not a big profit maker. When you look at the price of batteries and consider manufacturing efficiencies, I would have though they would be a high profit item. Also Duracell is a strong brand name. To me, this looks like a good fit. Buffett gets yet another brand name business. And he will set it up so that he president of it or top manager will have big incentives to minimize the capital invested and maximize profits. Berkshire will make sure that Duracell has all the money it needs to invest appropriately and to advertise. Any excess cash flow will go straight to Buffett to invest elsewhere. Duracell will be relieved of certain head-office related costs and will likely have a reduced burden of reporting. Buffett will want all the details on weekly sales but they won’t likely have to spend time preparing budgets and strategic plans or Board presentations for Buffett since he is not a big believer in such things.

For Proctor and Gamble this is basically a massive stock buyback funded partly with cash and partly with its Duracell unit.

Berkshire (B) shares are up 23% this year to $146. Buffett has crushed the likes of Doug Kass who was stupid enough to short Berkshire shares in the Spring of 2013 at prices from about $90 to $110 who and even got invited to speak his silly views at the 2013 annual meeting. It would be one thing to simply choose not to own Berkshire. That is perfectly valid. But to short the company was just stupid.

Liquor Stores N.A. released earnings after the close. While the same store sales growth was good at 3%, profits are down somewhat compared to last year. As noted previously, I basically gave up on this company. I used to think it could be a good growth and industry consolidation story with scale advantages but I basically lost faith in management.

Wednesday was a case of another day and another few dollars made. The S&P 500 was down 0.1% but Toronto was up 0.6%

Gainers included Canadian Tire up 1.7% to $126.00. Agrium. up 2.3%.

I noticed an offering today of Melcor REIT convertible debentures at 5.5%. I got an alert email from TD Waterhouse. It looked somewhat tempting. One of the problems with new issues is there is usually zero time for analysis by the time the alert comes out. There may have been a preliminary prospectus filed earlier but few investors would be aware of it. If I am not mistaken, the institutional investors do get time for analysis. This takes place in a “road show” process that follows strange archaic rules. I believe it is an instutionalized form of legal selective disclosure. Whatever, there are alwys parts of the market that are unfair to retail investors. On the other hand there are PLENTY of opportunities for retail investors. Institutional investors are usually somewhat forced to go along with the crowd where as retail investors are free to be contrarian whenever they wish. Ultimately, one does not beat the market (the crowd) by following the crowd.

This particular convertible debenture sold out quickly. All else equal a convertible option on a REIT may not be as attractive as a convertible option on a more normal corporation. REITs dividends all their earnings and so can have a hard time growing the unit price. Perhaps Melcor will grow but it does not have the advantage of retained earnings to add to the growth in price per unit.

With the lack of time for any analysis and with the fact that I am already hugely exposed to Melcor I decided not to grab any of this convertible debt.

While many of us had today off the American and the Canadian stock markets were both open.

As happens every day “the market” or at least the consensus opinion of the marginal sellers and the marginal buyers of each stock changed the view of the value of most every stock. Some up, some down, a few basically unchanged. This happens everyday and, except for as few as four times a year, usually has nothing to do with any real specific news about the companies involved. Sometimes it has to do with general changes in the economy such as interest rates or jobs reports. Most of the time (probably at least 90% of the time) these day to day price changes are basically meaningless noise. When the moves are larger or accumulate up to larger moves over a period of time we can perhaps use the price change to advantage in buying and selling — assuming we have some idea if the stock is now over-priced or under-priced.

Despite the fact that the movements are usually noise, we do tend to pay attention.

In the longer run there is a method to this noisy madness and stocks tend to rise or fall for important fundamental reasons over the long term.

And sometimes what looks like daily noise can in fact be linked to important fundamental reasons. Sometimes the reasons are fairly widely known (but I may not be aware of them) other times the reasons could be relatively unknown such as leaked information.

In today’s noise:

The S&P 500 rose 0.1% and Toronto rose 0.3%

Toll Brothers was up 2.3% (In fairness there is some signal on this one as this movement is still related to its improved sales figures released Monday morning).

Melcor fell 1.8%. I certainly consider that to be noise because the stock is thinly traded and therefore subject to downside volatility simply because an extra trader or two decides to sell on a given day. Similarly its price can rise a few percentage points just because a few extra people decide they want to buy on a given day.

I notice the debentures of Liquor Stores N.A. were up 1.4% to $104.98. These pay 5.85% on a $100 and mature in about three and a half years. So roughly this looks like about a yield to maturity of about 4.15% considering that the current yield is 5.57% and from that I would deduct about 1.42% per year to reflect it maturing at $100. (The math is not exact here but should be close). The debentures also are convertible into common shares at $24.90. At the moment the common shares trade at $13.70 and the company has been struggling. So I can’t see much if any value on that conversion option.

For a yield of around 4% and reasonable stability of price or expected redemption I would look to some of the rate reset pref shares I have mentioned.

Overall I would ascribe the little rise in this debenture to its low trading liquidity and what I might call “silly buyer syndrome”. Note that I did rate these a (lower) Buy in August 2013 at $104. But at that time the common was at $15.90 and seemed more likely the conversion option could pay off. The trade up to to $104.98 today looks like noise to me.

On Monday the S&P 500 rose 0.3% and Toronto rose 0.1%

The Canadian dollar fell which raises your wealth if you own U.S. assets and measure your wealth in Canadian dollars. But it lowers your wealth if you have Canadian assets and measure in U.S. dollars. If you are Canadian and own Canadian assets that are unaffected by currency (houses would be one) then the currency change really has no impact. Most people would measure their wealth in the currency in which they live. If you think you might spend 25% of your wealth in the U.S. then a logical approach might be to have 25% of your investments in the U.S. and then ignore currency movements. That is measure two pots of wealth, a Canadian pot and a U.S. pot and ignore currency changes.

However, some Canadian companies are affected by changes in the dollar. In general those that have costs in Canadian dollars and sales in U.S. dollars (exporters) benefit from a lower Canadian dollar. Those who face costs in U.S. dollars and sell in Canadian dollars (many retailers) are hurt by a lower Canadian dollar. Hedging can offset this for a while but it can only be a temporary solution. (Virtually no company does or even can hedge out more than a couple years.)

Toll Brothers was up 2.3% today after an early release of its latest quarterly sales figures.

As of today, 2014 has been a bumpy but rewarding year.

Melcor is updated and rated (lower) Strong Buy at $23.89. Its just released Q3 earnings report was very strong. There was however a modest market value decline on some of its rental buildings and this could be a sign of more to come. Based on achieved earnings and the fact that it is selling at about 92% of book value per share this is clearly a Strong Buy on that basis. However it is a cyclical company and so that certainly adds risk in the shorter to mid term. If Alberta’s economy declines materially such as due to lower oil prices then the share price would likely decline. A sharp rise in interest rates would likely have the same effect. Longer term It is very likely to be a good investment barring any large and permanent decline in the Alberta economy. Overall based o the achieved earnings and the price in relation to earnings and book value, I feel quite comfortable owning this stock. But like most stocks it is not without risk.

Berkshire Hathaway is updated and rated (lower) Buy at $143.61. Berkshire has always been difficult to analyze because its results are a bit volatile by nature due to the impact of catastrophes on insurance results. Also its earnings have been under-stated because when it owns say 9% of Wells Fargo it only gets to report the dividends as earnings and not its full 9% share of earnings. These missing earnings turn up in gains on the Wells Fargo shares but those do not flow into earnings. For this update I have introduced a new view of adjusted earnings for Berkshire based on the assumption that its adjusted earnings are 10% of book value per share since it has increased its book value per share by a (lumpy) average of 10.7% per year in the last ten years (and the last five years was over 14%). On this basis its intrinsic value appears to be in the range of $129 to $169.

On Friday the S&P 500 was about flat, while Toronto rose 0.9%.

In Thursdays market the S&P 500 rose 0.4% and Toronto rose 0.1%.

Melcor rose 3.0% to $23.90. Volume at 21,500 shares was a little higher than normal. It’s a somewhat thinly traded stock. The value traded today was about $514,000. And lots of days it might trade only $100,000 worth. By way of comparison, Royal Bank traded about $144 million worth today and Stantec traded about $9 million worth. Melcor is thinly traded but it’s not incredibly thin. It has enough trading volume to suit the needs of most retail investors. One simply has to be a bit more cautious in buying and selling to not simply put in a market order as the price can move even on a few hundred shares bought or sold. It’s best to put in an order at a specific price (a limit order).

About the only time I worry about really thinly traded stocks is that I would not put an extremely thinly traded stock on my list because in that case a few buys from my subscribers could push the price up. I never ever engage in trying to push stock prices up. I try to predict which stocks will rise (on the basis of fundamentals). I would never engage in promoting a stock in the hopes of causing it to rise. I consider that to be unethical even if the stock truly should rise. It’s definitely unethical if a stock is not worth much and someone tries to push the price up just so that they can sell at a profit. Always be cautious is someone is promoting a very tiny company or a very thinly traded stock. Those are prime candidates for “pump and dump” schemes.

I was a bit surprised when Royal Bank rated Melcor a Buy this Spring. With their many thousands of brokerage customers I would have thought Melcor would be too thinly traded for them to rate it.

On Wednesday stocks rose. In part, this was due to the republican gains in the U.S. elections.

The S&P 500 was up 0.6% and Toronto was up 1.1%.

Some notable gainers included:

VISA Inc. up 2.7% at $250. This is a company that touched under $200 less than three weeks ago on October 15. A 12.5% gain in three weeks would not be out of the ordinary for a small company. But this is a HUGE company. The market cap is $157 billion. On October 15 the market cap was about $126 billion, or $31 billion less than today. It’s interesting to ask where did this extra $31 billion which we might say is “invested in Visa” and “invested in the market” come from? The answer is from thin air. The extra $31 billion is a result of investors simply deciding to bid up the price of the shares. In theory this is because investors have decided that the risk-adjusted or present value of all the probable future earnings of VISA is now about $157 billion, $31 billion more than the perception of the of the value as of October 15. It’s not likely that both of these perceived valued were “correct”.

The financial press likes to describe a price rise as money flowing into a stock. As popular as that description is, it is in fact totally wrong. It is certainly not the case that anything close to $31 billion “flowed into” VISA stock in these three weeks. In fact basically not a cent flowed into or out of VISA. It did not pay a dividend though it may have gone ex-dividend which should have decreased its price by 40 cents, which is immaterial. And a small amount of options may have been exercised but that would be immaterial and also would have added to the share count and should have decreased the share price if anything. And there may have been some share buy backs which would be money flowing OUT of VISA as opposed to in. What happened was investors traded shares of VISA among themselves and bid up the price by $50 and so bid up the market cap by $31 billion but those trades were between investors and did not involve any cash flowing to or from VISA. I am not sure of the total dollar volume traded but it basically has no relation to the $31 billion in any case. (VISA can trade $500 million a day and the stock can go up or down, there is no relation here).

I had rated VISA as only a (lower) Buy on October 12 at $212. It certainly looks expensive now. I had the trailing P/E at 25 at $212, so now it would seem to be about 29, which is high. But the recent share price illustrates that it is hard to keep a good (largely unregulated and near) monopoly down. It seems I recently sold too early at $241 and so I may be a bit biased for that reasons, but I would not buy it now and since I sold at $141 it can assumed that I would certainly be a seller at $250. I would not however short the stock which is a FAR different game. Also the I note that the P/E based on analyst projected 2016 earnings is 20 which is high but not outrageously high. On that basis holding could still be a reasonable strategy. If I held it I would want to be in a position to add to the position if it fell back to $220 or $210 or so.

Okay, other gainers:

Canadian Western Bank up 2.4%, Canadian Tire up 2.2%, The oil sands ETF CLO on Toronto up 3.1% (This one appears on our list of Canadian Exchange traded Funds and is in my own portfolio though not on the list above.)

As far as decliners, Constellation Software was down 3.5% but this is after recent sharp rises.

Melcor was out with strong earnings after the close. This stock looks like excellent value, But there is the risk of a decline in the Alberta economy with lower oil prices. The company has not seen any slowdown and continues to say it is cautiously optimistic. This is my biggest holding which is a risk, but overall I feel very good about owning it. I await to see if there is any price reaction tomorrow.

I remember times when the markets seemed boring for weeks and months at a time. But it seems like its been years since that was the case.

Today the S&P 500 fell 0.3% and Toronto fell 1.0% as oil fell about 3% to just over U.S. $77.

I got fairly clobbered with Melcor down 4.7% to $23.15. A 4.7% decline hurts when its your largest position. On the other hand today’s loss comes at a time when my portfolio had in recent days regained and surpassed its previous high for the year. So, perhaps it just my turn. Since I have a highly concentrated portfolio and one with significant exposure to Alberta and oil, a certain amount of volatility is not surprising.

Canadian Western Bank was down 3.8% today to $36.24 and I grabbed some more of that. Also grabbed some more of the oil sand ETF CLO on Toronto which was down 4.3%. That may seem a strange and dangerous strategy given I already had heavy exposure to oil. But it fits in with my usual modus operandi of buying low or at least lower.

I am confident (but can’t guarantee) that Canadian Western Bank will be going higher in the long term.

As for oil, I really have no ability to forecast that but am just buying the oil sands ETF at this lower price.

As always. some stocks rose today. Costco was up 1.7% to another record high.

Sometimes buying on dips can turn into short term pain for (hopefully) eventual long term gain. That is a risk I am taking.

Couche-Tard was up 1.7%, possibly helped by the small cuts to merchant fees that were announced by Visa and MasterCard. Regarding those fee cuts I have not seen any information on how the cost is shared between VISA Inc. and MasterCard versus the banks.

Agrium rose 1.2% on earnings that were lower but that beat expectations. I will plan to update Agrium within a few days.

I mentioned the other day that tend to sell those rate reset preferred shares that I bought on IPOs this year when they hit $26. I had thought one of them was over $26 but I had the wrong symbol. I have now placed orders to sell any of these that hit $26. This is in RRSP and RESP accounts where I don’t have to worry about tax consequences.

On Monday the S&P 500 was about unchanged while Toronto fell 0.5%.

Oil fell 2 or 3% to close under U.S. $80. This pushed the Canadian dollar down so that it worth only 88.1 U.S. cents.

I should probably start to get a bit concerned about the price of oil because I am indirectly but perhaps heavily exposed to oil through Melcor and Canadian Western Bank. (P.S. forgot to mention my oil sands ETF symbol CLO on Toronto) However, I am not inclined to reduce that exposure.

With the Canadian dollar at about 88 U.S. cents I have placed an order to move some cash from A U.S. money market account to a Canadian money market account. In part this is due to the favorable exchange rate but its also because in that account I had a fair amount of U.S. cash and little Canadian cash so this will balance that out.

Dolllarama is updated and rated (lower) Buy at $99.02. As I mentioned back on September 27, 2013, this is one of the best managed companies that I know of. They are shockingly profitable. Unfortunately the shares have always traded at a high multiple so it it never looks like a bargain. Certainly, I would like it better at say $85. If I were to buy this, I would buy what amounts to a quarter to half position and hope that the price fell to allow me to buy more at a lower price. Alternatively, rather than buy at $99, I could place an order at say $90 and see if it dips. But its not that likely to dip unless the whole market dips.

In the last 18 months or so Dollarama has been buying back shares quite aggressively. Some people consider that to boost earnings per share by mere financial engineering. In this case while it adds to earnings per share growth the underlying growth was already very strong. This is a growing company but it still has excess profits that it can use to buy back shares. Also it increased its use of debt. But I see nothing wrong with that as long as the debt level is still relatively modest which I consider it to be.

On Friday, the S&P 500 was up 1.2% and Toronto was up 1.1%.

That was driven by renewed quantitative easing in Japan. I can’t pretend to very much understand quantitative easing and the ultra low interest rates that result. Low interest rates make the returns on stocks look attractive in comparison to bonds.

This rapid recovery from the recent market decline has been a pleasant surprise. The U.S. market has fully recovered. My own portfolio has fully recovered and is back to a 14% return for the year. I certainly can’t pretend to accurately predict where the market will head next. On the last dip I reacted by buying. At this time I will look to see what I might sell.

I notice at least one of my rate reset pref shares went above $26 on Friday. The Brookfield A pref. My habit with these rate rest prefs has been to sell when they hit $26 so I will look to do so tomorrow. My reason to sell at $26 is that it is 4% higher than $25 and these things only pay about 4% per year and I expect they will eventually go back to $25.

Constellation Software rose 4.8% on its earnings release. Melcor was up 3.2% but I consider that to be basically “noise” as it is so thinly traded. Agrium was up another 2.0%.

Visa was up another 2.0% or $4.78 to $241.73. It had only been about three weeks since I bought it on October 9 and I was up about 15%. So I decided to sell it Friday at about $241. I had last rated it (lower) Buy at $212 on October 4 and so it seemed to make sense to sell at $241. Selling may well have been a mistake given the monopolistic characteristics. I’ll consider buying it back on a dip to say $220 or lower.

Well, I had to laugh when I checked the markets today and saw Visa up about 10%. Not sure I would want to buy at the new price but its certainly a nice jump in the last couple of weeks. I had noted that I bought some Visa on October 9. As a company it is “monopolicious”, though not at any price and again it does face technology and regulation risks.

This sharp rise in Visa contributed to the S&P 500 rising 0.6%. Toronto fell 0.5%.

Last week I circulated the latest edition of our free newsletter in which I mentioned that it was not surprising that Visa had done well (I did not predict this latest “pop”). Most of you likely received a link to that free newsletter in an email last Thursday evening. If you are not on the list for the free newsletter you can join the list by clicking the link here and entering your email address.

If you are already on the list the system will indicate that.

Most of our Stock picks were up today.

Constellation Software announced earnings that were 44% higher in Q3. I had rated it only a (lower) Buy because I would be reluctant to assume and pay in advance for growth anything close to this 44% level. So I assume a more normal level of growth in my analysis. Possibly I should be upping my earnings growth assumptions for really strong companies like this. There is a tendency to assume a regression to the mean which can tend to under value the best companies. Ideally I would find companies that would be good value even at modest growth rates and then if they happen to grow extremely fast that just becomes a thick layer of icing on the cake.

I notice Barrick Gold was in the news today regarding another 20-year low in their share price. I have mentioned the company before. In my opinion (and I admit I don’t know the full story) and on the face of things it has been an abysmal destroyer of shareholder money. I am not talking about a decline in market price. I am talking about a decline in book value where a dollar is raised from shareholders by selling shares and ultimately turned into less than a dollar over a long period of year. Peter Munk is often lauded as a business leader and yet I understand he has been losing money for shareholders for about 50 years. See Clairtone, Nova Scotia which went broke in 1967. Apparently though destroying other peoples wealth has paid handsomely.

Not only has money been lost in Barrick but it apparently (and again I don’t have al the facts) on the face of it, the company has more or less poured equipment and manpower and all manner of valuable and useful materials down a hole much of it apparently never to emerge. The Gold extracted quite simply has been worth less than what was poured down the hole.

Economies (and people) benefit when manpower and materials and knowledge are combined in such a way that the output is more valuable than the inputs.

Barrick’s apparent destruction of real and tangible goods and labour is reflected in its loss of money. I have not done a thorough analysis but I believe the figures indicate that the sum total of its reported earnings since its inception are a negative number.

On Wednesday the FED, as expected, confirmed it would end its bond buying program. There was no indication of imminent interest rate increases.

The market fell only modestly. The S&P 500 was down 0.1% but Toronto was down 0.7%.

Visa was down 1.0% but then announced earnings after the close and was up 4.2% in after hours trading. As I have said before its got monopoly characteristics. Despite the risk of regulations of its fees it is never much of a surprise when it earns more money.

Tuesday was a strong day in the markets, with the S&P 500 up 1.2% and Toronto up 1.1%

Almost all of the stocks on our list were up. FirstService however was a notable decliner, down 6.9% after releasing earnings before the start of today’s trading. It’s still up 25% in 2014.

Melcor was down 2.7% to $23.70. I would chalk that up to the volatility of a thinly traded stock. Perhaps it is a delayed reaction to the dimmer outlook for oil prices released by A Goldman Sacks analyst yesterday.

Tomorrow, Wednesday should prove to be an interesting day in the market as the FED will apparently have some statement about the outlook for interest rates and is expected to wrap up its QE3 bond buying program.

On Monday the S&P 500 fell 0.23% and Toronto fell 0.5%.

Constellation Software rose 1.9% to close just over $300. Agrium rose an additional 2.1% for the same reason noted on Friday. While energy stocks were down, most of the stocks on our list were up modestly on Monday. Many Canadian companies will report Q2 earnings in the next two weeks.

Bank of America is updated and rated Speculative (higher) Buy at $16.72. This bank is difficult to analyze because it earnings have been affected by numerous litigation settlements related to the financial crisis and other unusual items. It’s balance sheet is strong enough that even if the economy int he U.S. continues to languish this bank will almost certainly survive. It’s very likely to be a good investment in the long term. It is expected to report good earnings going forward. The analyst earnings projection combined with the P/E increasing to 14 would push its price up by 25% by the end of 2015. I consider Wells Fargo to be a significantly better bank but Bank of America probably has the higher short-term potential to rise.

On Friday, the S&P 500 was up 0.7% and Toronto was up 0.4%

Agrium was up 7.5% on news that an activist investor now owned a stake around 6%. I am not sure that this is a good reason for the stock to go up. But the market seems to believe that the activist will generate some change that will drive the earnings up or otherwise add value to the shares.

FirstService was up 4.4% although it will not release earnings until next week.

Anatomy of a Winning Stock

Canadian Tire reached a new high today and closed over $125.

Three years ago in the Fall of 2011 Canadian Tire was trading around $56 to $65. It was under $60 from mid-July through tot the end of October 2011. So the stock is up over 100% from the prevailing price three years ago.

So what explains that?

We can divide the gain into two components:

1. Gains in its earnings per share and resulting gains in its book value per share.

2. Gains in its multiple as in the P/E ratio and Price to book ratio which in turn reflect many things including the outlook for earnings.

Canadian Tire’s earnings per share since the Fall of 2011 are up 42%. And the book value per share is up 28%. So, 42% of the rise in the stock can be accounted for by the rise in achieved earnings.

If we are conservative and use $62.50 for the share price in the Fall of then the P/E ratio was an attractive 12.4 times earnings (and at $56 it was only 11.1). Today the P/E ratio is 17.4 times.

So the P/E ratio is up by 40% or more (depending on which price we use from 2011)

If we compound a 42% increase in earnings and a 40% increase in the P/E ratio we get an increase of 1.42 times 1.40 = 1.99 or not coincidently an increase of about 100%.

So… Canadian Tire has risen 100% from about $62.50 in the fall of 2011 to $125 today. This is explained about equally by the increase in its achieved trailing earnings and an increase in the P/E ratio.

In the Fall of 2011 Canadian Tire looked like an obvious bargain and we said so at the time and I made it over 20% of my own portfolio. The stock was basically pricing in a lot fear including what Target would do to it and pessimism about the economy and markets in general.

Today, Canadian Tire is not a screaming bargain but at 17.4 times earnings and just under 2 times book value it is also not all that expensive. We last rated it only a (lower) Buy at $115.51. Possibly I have been too conservative with this company as it has continued to do very well. But at some point P/E ratios can also come down.

A small drop in earnings combined with a small drop in the P/E ratio can pull any stock down say 20% quite quickly. I have tried to be conservative and assumed that the P/E ratio for Canadian Tire will be in the range of 14 after my assumed five year holding period. Perhaps I should assume more like 16. I also assumed a conservative earnings growth rate of no more than 7.5% per year. By using higher growth rates and a higher P/E ratio it is possible to push the apparent value of a stock to just about any number desired within reason. I try to be conservative without being too conservative (in which case everything looks too expensive).

The ideal scenario is when we find stocks of high quality companies that appear to be obvious bargains even assuming quite low earnings growth and assuming a conservatively low P/E ratio. In 2009 and in 2011 we had a number of stocks like that. Today we don’t have anything quite that attractive on the list.

Melcor is perhaps our best obvious bargain though it can be quite cyclical. Basically to the extent some of our picks look like bargains (our banking picks come to mind) they also come with risk. Then again the market and even Canadian Tire was perceived as quite risky in 2011 which was why the bargains existed.

On Thursday, the S&P 500 was up 1.2% and Toronto was also up 1.2%

The strength of the recovery, particularly in U.S. stocks, seems surprising. It illustrates how hard it is to guess the direction of the market in the short term. I basically avoid trying to do so.

Like almost everyone, I can’t help but pay attention to short term gains and losses but it is the long term that really matters. The short term is best used to react by taking advantage of (hopefully temporary) lower prices of quality companies when the occur rather than trying to predict them.

Notable gainers today included Melcor up 2.9% to $24.10, Couche-Tard up 2.4% to $36.70.

I did add to my position in CLO the oil sands ETF at the opening price of $12.10 this morning. I had entered my order the night before with a price just above the close yesterday knowing I would pay $12.10 or less but that I would not get any if it opened above $12.10 and stayed there. It closed up 2.7% at $12.29.

Canadian Tire was up 1.0% to $124.15. It’s a strong company but I would likely take some profit if I still held it. In fact I already sold all I had in tax deferred or tax free accounts (sold too early it seems) but have held onto the shares I hold in a corporate taxable account as I prefer not to pay the capital gains tax and also not to create a transaction that I have to report for taxes.

Wells Fargo and Bank of America may be benefiting from a jump in mortgage refinancing in response to lower rates. Strangely in the U.S. most mortgages can be refinanced if rates drop and it does not hurt the banks. I believe the interest rate hit to the bank may be paid by Fannie / Freddie or they have sold the mortgages so that the hit is taken by investors in mortgage backed securities. In any case the banks do earn a fee for the refinancing and benefit that way. However, in the long run lower interest do hurt bank earnings. But then again the p?E ratios rise with lower rates. The end result is that I am comfortable buying or holding these banks.

Terrible news from Ottawa today. It was impressive the way the Seargeant at arms apparently shot and killed the terrorist. No surprise really that these ISIS-linked attacked have reached Canada. But Canada will not be cowed by this. Security will be tightened but business will continue. It’s basically our responsibility not to let these events stand in the way of normal day to day life in Canada.

Today the S&P 500 was down 0.7% and Toronto was down 1.6%.

Canadian Tire had a strong day even in the face of this day rising 1.8% to almost $123.

CLO the oils sands ETF was down 3.67% today. I can’t even pretend to know where oil prices are headed. But I do know oil is down noticable from recent levels. I will add to my CLO position tomorrow if it stays around $12.

This ETF is on our list of Canadian ETFs

Wells Fargo is updated and rated Buy at $50.45. Possibly it should be rated higher than that but I will be a bit conservative due to its leveraged nature as a Bank and due to the still slow U.S. economic recovery.

Tuesday was a strong day in the markets with the S&P 500 up 2.0% and Toronto up 1.5%.

For the S&P 500, the recent market “correction” has been recovered back to a good degree.

Notable gainers included Constellation Software up 4.6%. Couche-Tard up 3.8%. Visa and Wells Fargo and Fedex all up 2.6%.

Canadian National Railway was out with earnings up 21% and with revenues up 16% and car loads up 11%. This is another sign that the economy in North America is growing.

On Monday the S&P was up 0.9% and Toronto was up 0.8%. The S&P rose despite IBM reporting a big loss.

I read the Wells Fargo Q3 report (from last week) and this bank is still growing strongly in almost all of its business lines. Its net interest margin however is continuing to decline as older higher interest rate loans roll over to new lower interest rates loan. Overall it looks like a good long term investment.

Toll Brothers was up 1.3% today to $31.64. It appears that its recent trip down to under $30 was a good buying opportunity. I think it is a good investment that has the potential to be be over $40 or higher in the next year. That is not to say it can’t decline. It would if the U.S. housing recovery stalls.

Melcor was about flat today. I continue to think it will be a good investment. It’s trading around book value. There is lots of upside potential and it I think would take quite a sharp decline in the Alberta economy to cause this to be a poor investment for a holding period of at least several years. In other words it seems to me that there is some margin of safety here on a balance sheet basis.

Costco was up 3.0%. I have been waiting for a bigger dip before I would buy but the experience seems to be that this stock has not offered big dips. It’s a case where it might be worth paying a high multiple on earnings due to the high quality of the company.

On Friday the S&P 500 was up 1.3% and Toronto was up 1.2%.

As of Sunday night the Dow futures were up 84 points. It’s anyone’s guess whether the market remains volatile. But in the end owning high quality companies tends to work out unless one really over-pays for them.

On Thursday, the markets again had people guessing where they will head next. Markets opened down quite noticeably but in the end the S&P 500 was about unchanged and Toronto was up 1.3%.

Some of the earnings reports coming out were strong and that helped markets.

I had thought about entering bids on several stocks that I like say 5% below current prices. That might be a good way to buy on the steep dips that have been occurring. For those committed to buying on dips a strategy like that can make sense. But it’s not a strategy that everyone would like because it can you man you buy at 5% down on a day when the stock ends down 10% or more.

It probably did not escape anyone’s notice that markets got hammered down on Wednesday. Even after a partial recovery from steeper declines, the S&P 500 was down 0.8% and Toronto was down 1.2%

Bank of America reported approximate break-even results after another huge settlement charge related to the financial crisis. Other than that charge the results looked pretty good. This bank is trading at about 80% of book value and 120% of tangible book value. A more normal price to tangible book might be towards 200%.

I grabbed a few more share of this as Well as Wells Fargo today.

Canadian Western Bank fell 3.5% to $36.46. No doubt there are concerns that the lower oil price could cause bad debt. But overall this price may represent a good opportunity to initiate a position in this banks with its long history of growth.

Boston Pizza at $19.71 yields 6.2% which seems attractive even though I would expect very modest growth if any due to the nature of this entity.

My strategy be to continue to buy selected stocks on dips.

It remains to be seen whether markets continue to decline or of instead earnings reports or other economic news causes the market to rise.

Wells Fargo is out with Q3 earnings this morning. Earnings per share growth was only 3% but overall the report seemed strong. Deposit growth was very strong and loan growth was good. The shares were down 1.5% adding to recent declines. I grabbed a few more shares this morning.

On Tuesday the S&P 500 was up 0.2%, while Toronto, playing catch-up (or catch-down) for yesterday’s holiday was down 1.3%.

Wells Fargo ended the day down 2.7% at $48.83. I was surprised they got their earnings out so fast. Seems to be a competition among big companies to see how fast they can report. I find it impressive that a detailed quarterly report can be put together and approved for issuance that fast. I am pretty sure that a lot of people worked late and weekends to get that done. Wells Fargo is now trading at a P/E of 13.0. Now one might argue that the profit has been boosted by low loan losses but even so I don’t think the P/E would be above 14 even adjusting for that although I am not sure. And one could argue that earnings will decline for various reasons. that is always a risk. But this bank has been growing for years and even if earnings do decline (which I have no reason to suspect they will) it would likely recover. The price to book ratio is 1.6 which does not seem excessive. The price to tangible book (after deducting goodwill ) is 1.92 which is not particularly attractive but is also not that high for a best in class bank and one which is earning an ROE of about 13% in a world where 10-years government bonds earn 2.2%. The dividend yield is 2.9%. All in all, Wells Fargo certainly looks attractive to me although there is certainly no guarantee that the price won’t continue to fall.

Toll Brothers rose 2.8% after yesterdays fall of 4.1%.

Stantec was down 1.4% to $67.12 and is worth considering. It’s been a tremendous growth company over the years.

As my own portfolio breakdown indicates, I have a position in the Claymore Oils sands ETF, CLO. I had just let that ride for a long time. Back in June when I updated the list of Canadian ETFs I called that one unattractive and yet I held on to it. The thought of selling it had crossed my mind but I just let it ride. At this point I’d be more interested in buying than selling.

If oil stays down in the low eighties or lower then presumably it will affect the Alberta economy at some point. On the other hand it would likely be good for the much of the North American economy.

I don’t have any particular insight into this market correction. Attempting to guess the market direction has never been part of my strategy at all. I react to where the market is and where stock prices are and try to buy low and then hold or sell high.

Corrections always loom large when we are experiencing them but most turn out to minor in hindsight. But obviously some do extend quite deeply.

I’ve generally ridden through corrections. I try to keep some cash on hand to take advantage of bargains and that has worked for me.

On Monday the S&P 500 fell 1.7%. Toronto was closed.

It seems that the declines will test the resolve of those of us who invest based on fundamental analysis. Stocks can always get cheaper and for that reason it is probably best to nibble at positions rather than buying too aggressively.

Our Toll Brothers was pounded down 4.1% to $29.18. I added a bit more to my position. American express was down 2.6% to $82.78.

Constellation Software is updated and rate (lower) Buy at $280.50. It’s been a fantastic growth story and will likely continue to grow rapidly. It’s management appears to be excellent and are extremity candid. The difficulty is that the stock is already pricing in a lot of growth. I would consider taking a small position or hope for a pull-back to perhaps $250 before starting to nibble. Those holding it probably should continue to do so.

It recently had a rights offering whereby shareholders received rights to buy a long-term but floating rate bond that initially pays 7.4% and then resets to 6.5% plus or minus inflation. It takes just over 21 rights to purchase just $100 in bond face value and shareholders only received 1 right per share. The rights trade at trade around 54 cents per share and have to be exercised by November Next March bond holders will have the option of giving the company five years notice that they want to redeem or turn in their bonds for face value. This five year notice seems a bit bizarre. I understand the bonds will trade on the TSX – which is surprising for bonds. I wonder what happens if you give notice in March to redeem in five years but meanwhile you forget about that and sell them. For those holding a few hundred rights I don’t see the point of exercising them it is probably just as well to sell them. The company also has the right to provide notice that it will redeem the bonds at face value but only upon five years notice! The whole matter of this bond and the associated rights seems very complicated and I really am not sure what to make of it. Very strange.

On Friday, Stocks also got cheaper. The S&P 500 was down 1.2% and Toronto was down 1.6%.

For the year to date Toronto remains up 4.4% and the S&P remains up 3.1% while the DOW is down 0.2%.

Our two Strong Buys from January 1, 2014 remain up 12% (wells Fargo) and 13% (Melcor). Our 15 stocks that were rated Buy or higher are up an average of 5.0% each. My own portfolio with a heavy weighting in Melcor, Wells Fargo and a few others remains up 7.3%.

Markets and the gains on this site are down from what they were earlier this year. But it is never realistic to expect to invest in stocks without periodic declines. The recent declines are relatively modest. I don’t think it is possible to predict the direction of markets in the short term. Owning shares in profitable and growing companies has always worked out well in the longer term. Shorter term volatility is basically the price we pay to enjoy the longer term gains.

An order I had in to add modestly to my large Melcor position if it hit $23.10 was filled as Melcor closed at $22.71. Melcor is now trading at 95% of its book value. It’s assets are strong. 47% of its assets are investment buildings that are rented out. These are marked to market which means they are fully valued in the book value. 39% of its assets consist of its land inventory. This is reflected at cost (including costs to develop the land and capitalized interest) and is almost certainly worth more than book value. The remaining assets are mostly receivables and cash and would be worth book value. Melcor is also trading at 10.5 times trailing earnings (with the earnings adjusted down to remove gains related to marking buildings to market). But its earnings are cyclic.

In this case the chance to buy assets and this business below book value seems quite attractive. If you were to start your own such business today, you would have to pay market value for the assets which would be somewhat more than Melcor’s book value. And it seems unlikely that you could be as profitable as Melcor given their years of experience and their scale.

The main risk with Melcor is that due to lower oil prices or for other reasons sales of new building lots in Alberta could slow substantially and/or the prices could drop. I don’t have access to market data but I am not aware of any such slowdown. The company will no-doubt provide an update int his regard when it releases its Q3 earnings in about one month from now. Melcor has weathered such slowdowns int eh past but they do tend to send the share price down when they occur.

There are always risks, but I view the chance to buy this business at slightly below book value to be quite attractive.

The stock is thinly traded which makes it more volatile and which also can allow the share price to deviate further from its intrinsic value than is the case for most companies.

On Friday I also bought a small amount more of Canadian Western Bank and Toll Brothers to take advantage of the lower prices.

By my calculations, Toll Brothers trailing adjusted P/E ratio is 20.3. Still not cheap but much lower than it has been in some years. I expect it to report increased earnings int he next two quarters based on houses it has already sold and is int eh process of building. Warren Buffett said last week that the housing market recovery has not been as fast as he expected. He expected to to continue to recover. He stated that that with Americans able to lock in 30 year mortgages at very low rates (and to refinance if rates get lower) it was a no brainer for people to buy houses. (I believe he is taking into account that houses in the U.S. are reasonably priced and he referred to new families starting out). His comments add to my comfort in holding and buying Toll Brothers.

Canadian Western Bank is not cheap but tends to grow earnings fairly steadily over the years and the recent price drop provides an opportunity to accumulate some shares for those interested.

For fixed income, I like Boston Pizza. It would decline if long-term interest rates rise substantially but at the moment that does not appear to be imminent.

On Thursday … stocks got cheaper.

The S&P 500 was down 2.1% and Toronto was down 1.4%.

One of the few gainers was Canadian Tire up an impressive 3.1% as its new or incoming CEO predicted profit growth an at investor day conference. Those holding a a large position in it may wish to reduce their holdings or even sell entirely.

This stock is up over 100% in three years since the Summer and Fall of 2011. Back then it got ridiculously cheap on worries that Target coming to Canada would give it a pounding. Turned out, not so much.

With stocks down today I figured I should do a little buying. I added to my small position in Canadian Western Bank and opened a new position in Visa.

I can’t predict where the markets will head in the short-term. I do know that most (but not all) of the time it turns out to be a mistake to sell heavily into a decline because it is the rare investor who ever managed to get back in before the market has already recovered most or all of the lost ground.

We are just entering into the third quarter earnings season. Those reports could determine where the market heads next.

On Wednesday the markets were down for a time but then ended very strong to the upside as the FED signaled that an interest rate hike was not likely imminent.

The S&P 500 was up 1.7% and Toronto was up 0.6%.

Fedex was up 2.7%. Costco reported strong earnings and was up 2.8%.

Liquor Stores N.A. managed to be down 2.4%. I wonder if someone could buy it out and take it private? Perhaps the money going to dividends now could go to paying debt in a leveraged buyout. But the problem is it has not been earning its dividend and needs some kind of major surgery to get back to profitability. I have lost faith in current management. Maybe they will prove me wrong.

Perhaps yesterday and this morning I should have been nibbling on some stocks but I have wanted to be cautious about spending my “dry powder”.

On Tuesday, the S&P 500 fell 1.5% and Toronto was down 1.1%.

Most of the stocks I monitor were down. A notable gainer was Canadian Tire up 1.0% to a hew high of $117.37. That is impressive on a down day. I did not see any special reason for that. They were doing some marketing but I am not sure why the stock went up. Actually almost all daily moves in stock prices are pretty much random. Companies only tend to release real news about four to 10 times in a year and yet stock prices gyrate daily. Usually there is really no particular reason.

I have never claimed any ability to predict where markets are headed especially in the short term. I did observe a few weeks ago that the S&P 500 looked some 16% over valued. But that was not a prediction it would fall in the short term and in fact it had looked somewhat over-valued on that analysis since February of 2013. I did not get out of the market in early 2013 and that was a good thing because the markets are up a LOT since then.

In any case I do not find myself disturbed by this decline. It’s always nice when the market is up but declines offer opportunities as well. I will be looking to add to some positions but I don’t want to get into a rush.

This morning, before the open I got an alert from TD about a Brookfield Office Properties rate reset preferred at 4.75%. and I grabbed some basically sight unseen because with these offering I have no time for analysis. I have never analyzed any Brookfield company but I do recognize them as smart successful companies over the years.

Coincidently Brookfield properties fund bought a casino today for some 5% of what it cost to build it two years ago. Without any analysis that sounds like a sweet deal. I have not analyzed it but am tempted to just buy some Brookfield Properties partnership. But I will likely try to analyze it first.

Another comment on Share Buy Backs

It is often said that companies are inflating their share prices with share buybacks. There is some truth to it. But buying back shares does not automatically raise the share price. If a company is profitable and is sitting on cash earning nothing then yes a share buy back will increase earnings per share. But it also means the company has less cash, and that means it may be less able to fund growth. Its book value per share almost always declines (since the shares usually trade above book value). Sure the buying in itself may support the share price momentarily in the market but that effect evaporates quickly and the shares will stay high based on earnings and growth prospects (or may fall). The shares could fall in price if the market realizes that growth will be slower with less cash to fund it.

It seems true that the market often pushes share prices up on news of buy backs. Sometimes that is quite irrational but it can work for a while. Longer term the share price is determined by earnings and growth prospects not by expectations of buy backs.

Buying back shares makes perfect sense when the shares are trading below a fair value and when the company has no better use for its cash. A one time buyback could lead to a misleading earnings per share growth that can not be counted on in future. But if a company buys back 2% of its shares every year and that adds say 2% to earnings per share in the process and it can keep doing that, funding the buybacks from earnings then to my mind that 2% earnings growth is perfectly good growth and can be projected into the future.

Companies are free to buy back their shares and recent commentary about it is mostly just noise. Non share owners who want to tell companies what they should do with their cash. The noise makers should worry about their own cash.

If a company really wants to increase its share price over the years it should retain all earnings (pay no dividends and do no buybacks) then it can invest all the earnings for growth and if it has good growth opportunities including acquisitions, then its share price will rise. Stantec was an example until it more recently brought in a small dividend. Berkshire is a classic example. In both of these cases the growth was highly logical and not done to pump up the share price per se, though it did do that.

Walmart is updated and rated (lower) Buy at $77.32 (That was Friday’s close it closed today at about the same price $77.35). It’s not an exciting investment and it is not very likely to deliver double digit returns over the next five to ten years. But it is likely relatively safe. A reasonable strategy might be to buy on dips.

We first added it to this site on April 20, 2006 rated Buy at $46.70. Since then it is up 65% (excluding dividends) which is a decent but not spectacular return.

It is currently in a period of flat earnings due to currency impacts and weak to moderately declining same store sales. If it can resume growth the share price would likely rise somewhat. If the share price were to decline to about $70 I might buy.

Even if we conclude Walmart is likely to be a decent investment I might still not Buy. There may simply be better opportunities.

On Monday the S&P 500 fell 0.2% and Toronto fell 0.3%

This evening the Canadian dollar is at 89.44 U.S. cents. A lower Canadian dollar means U.S. stocks gain when valued in Canadian dollars. However American investors holding Canadian stocks see a decline. Whether a stock is “Canadian” or America in this context is NOT determined by the exchange it trades on. It is determined by where it earns most of its money. A lower Canadian dollar is generally considered good for the Canadian economy. It will harm retailers such as Canadian Tire as their costs s of good sold will rise.

Recently I have judged the America market to be somewhat over valued. That is definitely NOT the same as predicting it will decline. I will follow Buffett’s view on that and admit that I cannot predict the direction of markets especially in the short term. Nevertheless I can react to the a higher market by being cautious in buying and by perhaps cutting back some positions.

However, another consideration is that an expensive market does not means that every stock in the market is expensive. If I like what I hold I can potentially even add to those particular positions even while suspecting that the overall market is somewhat high.

The Canadian “market” is harder to judge in part because it is too concentrated in a few sectors. And also because I have had difficulty getting reliable earnings figures for the Toronto index.

On Friday the S&P 500 gained 1.2% while Toronto was up 0.2%. Almost all of the stocks on my list were up.

Wal-Mart will be updated shortly and most likely rated (lower) Buy. Not an exciting investment but probably a fairly safe one.

Walmart has bought back 25% of its shares over the past years and at relatively attractive prices. We like that.

Walmart has continued to grow despite share buy backs and dividends paid and without taking on excessive debt. It can do this because it has been a highly profitable and cash generating entity.

Speaking of share buy-backs…

One of the strange but well accepted fictions is that share buybacks return money to share holders just like dividends do. It may well be the same thing from the companies perspective but it is definitely not the same from the perspective of share owners.

Share buy backs return money only to departing share owners. If the share price was where it should be the continuing owners own a larger share of a company with a bit less money than it had before the buy back. It’s a wash from the perspective of continuing shareholders unless the shares were bought back at a good price. Often that is the case. Sometimes it is not.

To illustrate:

Imagine if 5 people owned 20% each of a local Boston Pizza Restaurant owned through a corporation. One wants to sell out and the ownership corporation has the money to buy back the shares of the departing owner. It’s clear to see that the remaining four now own 25% each of a restaurant that no longer has the money that was just paid to the departing owner. Money has been returned to the departing owner and not to the four continuing owners. In contrast a dividend returns money to all owners. If the restaurant continues to do well the four remaining owners may well benefit by their increased ownership. But that is not a given. And the restaurant may need to borrow money now that its cash has been depleted by the buy-back. It is not necessarily the case that the earnings per share of the four remaining owners will increase. However that is likely the case if the cash used to buy back the shares of the departee had been sitting earning little return. But the point is that a corporation buying back shares certainly does not return money to the non-selling share holders by buying back shares. For whatever reason the fiction that this is the case seems widespread.

Theorists may point out that the share buy back is exactly like a dividend if all owners sell back the exact same proportion of shares. But no one would suggest that this ever happens in reality. Also the tax consequences would differ.

Visa Inc. is updated and rated (lower) Buy at $212. It was last updated on December 29, 2013 and rated Weak Buy / Hold at $220. It traded above $220 for the first tree months of 2014 and then dipped very briefly under $200 in April and has since been around the $215 level plus or minus about $5. It looks moderately more attractive today than at the start of the year because the price is down slightly and the earnings have increased.

We first added it to this site on April 15, 2009 (just after the bottom of the market at a time when fear still reigned supreme), we rated it Buy at $58 at that time. We rated it a Strong Buy in May 2011 at $79 and it is up 167% since then. It dropped off at our list at the end of 2012 but we added it bank to the list March 28 2012 rated Buy at $119 in November 2012 we updated and rated it Buy at $147 on August 4, 2014 we rated it Weak Buy at $184.

Visa is a great company with some monopoly characteristics. It does have risks due to regulation and future competition and it is not a cheap stock. Therefore I am not in a big hurry to invest but would consider a small position with a hope to buy on dips.

On Thursday markets were at one point down more noticeably but ended the day with the S&P 500 unchanged and Toronto down 0.3%.

Agrium was down 2.5% on a warning of lower profits. That does not seem too surprising given that profits had declined in earlier quarters. What is more important is the outlook for the next few years and beyond. I did not see any comments about that. I would want to see the Q3 results and more detail on the outlook before buying or selling.

I expect to update a couple of the reports within the next few days

On Wednesday the S&P 500 was down 1.3% and Toronto was down 1.0%. But the S&P is still up 7.3% year to date and Toronto is up 10.3% year to date, so really there is not much to complain about.

Melcor managed a 1.2% gain today although on very little volume. Constellation Software was up 1.1%. My strategy when the market is falling has always been to sort of nibble and add to positions but to do so patiently and slowly. I believe the only order I have in is to buy a bit more Melcor at $23.10. It touched that price a few days ago but my order was not filled as there must have been orders ahead of me at the same price.

I noticed TD Waterhouse has had a couple of new issues of 5 year rate reset shares 3.9% National Bank and 4.5% Brookfield Asset Management. The market apparently has a big appetite for these. If you are interested in getting these when issued you have to register for new issue alerts with your broker and then pounce on them. I bought some earlier this year figuring they were relatively low risk and at least beat holding cash.

Warren Buffett traces his starting point with Berkshire Hathaway back to 50 years ago today. He took over control of the company 50 years ago next May 10. But he counts the year ended September 30, 1966 as his first year for his performance history in running the company. Possibly he was already having an influence on the company somewhat before the May 10, 1965 coup d’etat when he ousted the long-time CEO. At the end of February Buffett will release his annual letter and will review the results of his first 50 years on the job. He has asked his partner Charlie Munger to write about why did their methods work and will Berkshire continue to work in the future. That letter will be absolute must reading.

On Tuesday the S&P 500 was down 0.3% and Toronto was down 0.1%.

The Canadian dollar is worth 89.15 U.S. cents in the U.S. It remains, as always, worth precisely $1.00 in Canada. A lower dollar benefits Canadian exporters and makes imported things more expensive. It makes travel to the U.S. more expensive. It also hurts the Canadian NHL hockey teams who generally pay salaries in U.S. dollars but collect most of their revenue in Canadian dollars. (So sad for them) For investors if you have U.S. investments that you will eventually spend in the U.S. the exchange rate change is of no real meaning. But it does increase the value of those investments as measured in Canadian dollars.

eBay rose 7.5% today after announcing they will split off PayPal into a separate company. They were under pressure to do so but had resisted the idea. There were some good synergies between the two and it probably is a dumb idea to break it up but activist investors are only interested in short-term gains.

Today marks the end of Q3 and within a week or or so the Q3 earnings reports will start to come in although most will arrive in three to five weeks.

Melcor declined 2.6%. As a thinly traded stock it can be volatile. There may be some fear that the Alberta economy will soften. But overall Melcor appears to offer good value. Melcor will likely report good Q3 numbers. Toll Brothers declined 1.5% and I took the opportunity to add to my position.

On Monday the S&P 500 ended the day down 0.25% and Toronto was down 0.3%.

I added a new short article about Buffett just to document the total return achieved since he took over Berkshire in 1965.

Most subscribers will be aware that this web site is something I work at on a part-time or side-business basis. Starting around next May I expect to devote closer to full time hours to this site and to my investment work in general.

Stantec is updated and rated (lower) Buy at $72.20. It is clearly a great company. But it is not an obvious bargain. Still it will likely turn out to be a good long term investment. I would consider it particularly on pull-backs.

My personal portfolio composition is updated. My own portfolio is highly concentrated and not diversified. Somewhat offsetting this is the fact that I have a 23% allocation to cash.

Our Buys and Strong Buys have averaged a gain of 5.9% this year to date. The two stocks that were in the Strong Buy range at the start of the year have averaged a gain of 16.8% each. My own portfolio has a return of up 9.6% (including dividends)

On Friday markets partially recovered from Thursday’s decline with the S&P 500 and Toronto each up 0.9%

A down day on Thursday as the S&P 500 fell 1.6% and Toronto fell 1.5%.

It’s anyone’s guess where the market will head next. My tactic has always been to react to overall market moves rather than predict them. I have an order in to get a bit more Melcor if it hits $23.10. Also I may add to my small Canadian Western Bank position.

If you find a pull-back of the size we have had recently to be particularly disturbing then perhaps you should not be invested in stocks at all. I believe Buffett used to say that if you would be very troubled by a 40% decline, perhaps you should not be in stocks. That seems a bit extreme. I think almost all of us would be VERY troubled by a 40% decline. I guess what really matters is what your reaction would be. If you would sell your stocks if they took a sudden 40% swoon and would not be prepared to wait it out then likely you should not be in stocks. If you would be disturbed but would nevertheless hang in there and also not be afraid to put in new money then you are probably okay to be in stocks. If you have a large amount invested and truly would not be upset at a 40% loss then I am not sure I believe you. Anyhow the 40% was just something Buffett used to say probably to scare weak knee’d (is that a word?) investors away from investing with him. I am certainly not predicting a 40% decline.

Wednesday was a good day for U.S. stocks with the S&P up 0.8%. But Toronto was basically flat.

Toll Brothers did not participate in the rise and instead fell 0.4% even as a report came out that new home sales (deliveries) in August were well above forecast. The problem is that orders for new homes have been weaker. Also KB homes reported what was apparently poor earnings today. We will see in the next few months how the orders for new homes go. In any case I expect Toll Brothers to have another two or three quarters of earnings growth due to orders already in the pipeline. I would think that would push the P/E down to attractive levels but I can’t be sure. Also a lower P/E will still not be considered attractive if the outlook turns to earnings declines.

Costco was up 1.7% today. And Walmart rose 2.0%. Possibly this was due to an announcement that it was getting deeper into banking by offering chequing accounts. Stantec was up 5.0% on news of a fair-sized acquisition in Quebec.

Melcor drifted a bit lower today.

Tuesday saw the S&P 500 down 0.6% while Toronto was flat.

Most stocks fell today. Among the rare winners were Couche-Tard, up 3.3% and Agrium up 2.7% on news that some other fertilizer company was being taken over.

Canadian Western Bank is down to $39.55 and is worth considering.

On Monday, the S&P 500 fell 0.8% and Toronto was down 0.9%.

Stocks on our list that declined included Stantec and Canadian Tire each down 1.9%. Toll Brothers down 3.1% and Liquor Stores N.A. down 3.4%. Toll Brothers shorter term stock price will depend on the U.S. housing market. Given the decline I added a small amount to my Toll Brothers position today.

Stocks on our list that rose today included Couche-Tard up 3.0% and Melcor up 1.8%.

I have updated my article on the valuation of the S&P 500. The index does appear to be over-valued using conservative (but not pessimistic) assumptions. That is not a prediction of an imminent decline but it does offer reason to be cautious.

On Friday, the S&P 500 was flat but at one point during the day set another record high at 2019. Toronto fell 1.3%.

Wells Fargo hit a new high of $53.80 and closed at $53.36. My figures show that the P/E is 14.2, the price to book value is 1.8, the dividend yield is 2.6% and the ROE is 12.9%. While there are always risks in investing, the overall picture here is “what’s not to like?”.

Canadian Tire has been hitting new highs, I calculate its stats as P/E 16.3, price to book value 1.8, yield 1.7% and ROE 11.4%. Those stats are not as good looking as Wells Fargo but a P/E of 16.3 is still below that of the average stock.

Melcors earnings are volatile due to both its cyclic nature and accounting rules that mark it portfolio of rental properties to market as if they were investments in stocks. In that case I focus on the attractive price to book value of 1.0. I also consider that while Melcor’s reported earnings are volatile they have never been negative on an annual basis in the past ten years.

Overall, I am feeling quite good about how the markets and the economy has been doing. Things can change but at the moment I like how things have unfolded this year.

Thursday was a strong day in the U.S. markets with the S&P 500 up 0.5%. Toronto however was up less than 0.1%.

Gainers of particular interest included Bank of America up 1.6% and Berkshire Hathaway up 1.2% and Wells Fargo up 1.4%.

Liquor Stores N.A. was up 6.4% to $14. There has been no news from the company that would explain the recent strong recovery in this stock. Possible some analyst are recommending it. It’s also possible that some good news is pending such as maybe selling some of its British Columbia licenses to large grocery stores. Or maybe it will announce an acquisition (But where would it get the money?). Or maybe a buyout is in the wind? Without confirmation (or even any indication) of positive news I am skeptical that the rise will last. As reported previously I have rather soured on the company and no longer own it. It has lately been earning far less than it pays out as a dividend and seems to indicate that earnings will remain low until 2016. In my area it has way too many stores and they are not busy at all and strong competitors are taking market share. Maybe they are doing well in other areas and especially with their newer big box stores. I was recently in Vancouver and happened to walk past its Kitsilano wine store which was very nice and was busy. Overall, if I owned it I would likely reduce my position given the recent price rise.

I had entered an order a couple of weeks ago to sell my Berkshire shares if they got as high as $141. Partly just to grab profits and partly because there could be a perception of a conflict of interest for me due an acquisition that is pending by one of its subsidiaries that affects a company that I am involved in another aspect of my life. Every time I have ever sold some Berkshire shares it has later felt like a mistake (partly because one never quite remembers or tracks where the money from the sale gets reinvested). Anyhow at this time I don’t own any Berkshire shares.

Berkshire Hathaway closed at a record high of $141.28 for the B shares and a staggering $212,075 for the A shares. Earlier this year there was much ado when Buffett noted that in the six years ended December 31, 2013 Berkshire’s book value had not kept pace with the S&P 500. Buffett measures progress by book value not share price. A number of analysts jumped on this and talked about Berkshire under-performing. A look at the chart will dispel that nonsense.

https://ca.finance.yahoo.com/echarts?s=BRK-A#symbol=BRK-A;range=5y

An analyst named Doug Bass was famously short Berkshire and was silly enough to go to Berkshire’s annual meeting in Spring 2013 and debate the matter with Buffett. If Bass is still short the stock he has gotten absolutely clobbered.

On Wednesday the S&P 500 rose 0.1% and Toronto fell 0.3%. U.S. markets were slightly buoyed be the FED statement which was basically a stay-the-course statement.

Housing stocks were buoyed by news that homebuilder sentiment was up and by a strong earnings report from one of the builders. Toll Brothers gained 1.9%. Fedex was up 3.3% on a strong earnings report. It is often thought of as some kind of indicator of business growth in the economy so this is a positive sign for markets.

Canadian Tire hit a new high today.

An interesting news item indicates that Costco will no longer take America Express in Canada. I don’t know if this is particularly bad news for AMEX since Costco had probably negotiated quite a skinny fee. It may indicate retailers starting to push back against the credit card companies. Also of interest Costco has an outsized presence in Canada with 88 stores versus 468 in the U.S. Based on 10% of the population you would expect Canada to have more like 47 stores in Canada. Costco likes Canada perhaps due to our demographics and income distribution and also perhaps because there are few close competitors to Cost in Canada.

Markets rose on Tuesday after reports indicated that the U.S. inflation rate remains subdued which was interpreted as meaning that the FED will not be in a hurry to raise interest rates.

The S&P 500 rose 0.75% and Toronto rose 0.2%.

Canadian Tire had a strong day rising 1.5% to almost $116.

Melcor fell 1.9% to $23.19. This thinly traded stock has been relatively volatile since May. It first rose above $23 around May 1 and then rose to a peak of $27.60 but has now fallen back to the $23 level. Apparently part of the reason it was rising this Spring and earlier Summer was a strong recommendation by RBC capital. That at least temporarily boosted demand for the stock. While probably 99% of investors worry about market demand for a stock. That is not my concern or certainly not my main concern. As long as the company continues to do well the stock price will eventually follow suit. I have always said that every stock and every company has its risks. This is particularly true if you define risk as the chance of a stock price decline even if temporary. I would be more concerned about the risk to Melcor’s earnings. And its earnings would decline if the Alberta economy and the demand for new homes in Alberta slows down. Even in that case the earnings would, if history is any guide, eventually recover. And at this time I am not aware of any slow-down in the Alberta new house market. The bottom line is that Melcor appears to offer good to excellent value. I have an order in to add still a bit more to my position if it drops to $23.10.

Melcor’s stock price has about doubled from the $11 range at the start of 2010. Therefore you might think the stock is not the bargain now that it was then. But the book value has more than doubled from about $10 at the start of 2010 to over $23 at this time. Some of the increased book value is due to new mark to market valuation accounting for its rental buildings. But most of the increase is simply due to retained earnings. The stock may actually be more of a bargain at this time compared to early 2010 based on trailing valuations. But of course we now know its earnings grew a LOT since the start of 2010 and we don’t know for sure what the earnings will do in the next five years. I strongly suspect the earnings will rise although they will have their ups and downs as well.

I was just noticing that Canadian National Railways is up 10 fold since I first started following it 15 years. Over the years it often looked expensive but I consistently recognized it as an excellent company and noted that it appears to have certain monopoly characteristics. In my January 2003 article called “Do as the Rich Do” I mentioned that rich people were buying the likes of CN while most investors were chasing various penny stocks. It’s almost painful to mention that Bill Gates became its largest shareholder I believer over 15 years ago and has therefore made at least 10 times his money on the millions he invested back then. And I believe he has added tot he position over the years.

Monday was not a particularly exciting day in the market, at least not for the stocks I follow.

The S&P 500 was down 0.1% and Toronto was down 0.3%.

On Friday the S&P 500 was down 0.6% while Toronto was about unchanged.

Toll Brothers was down 1.8% to $33.07. Melcor was down 1.1% to $23.74. That drops the price to book value to 1.0. It is a cyclic company that would suffer if there happens to be a slowdown in housing construction in Alberta and the western provinces. And the book value has been pushed up somewhat by its rental buildings that are marked to market under IFRS accounting. Nevertheless, I find the chance to buy this company with a long history of growth at book value to be attractive.

As of Sunday evening, markets were set to open lower on Monday. While rising markets are always more enjoyable, declining markets offer opportunities as well.

Canadian Tire is updated and rated (lower) Buy at $115.51. We rated this company a Buy at the start of this year at $99.49 and it is up 16% this year. At the start of 2013 we had rated it (lower) strong Buy at $69.38 and it rose 43%. At the start of 2012 we had it rated (higher) Buy at $65.90 and it rose 5%. Back on August 11, 2011 we updated it as a Strong Buy at $52.40 with a price to book value of 1.04 and a P/E of 10.5. Soon after that it became my largest position. Since then it has more than doubled. In April 2013 it represented 22% of my equities. I sold gradually on the way up but it was still recently 6.4% of my portfolio and 8.0% of my equities.

But that is history. At this time it is still a great company but it appears to be about fully valued. On Friday I noticed it hitting $116 and I sold 30% of my position. These were shares that I had bought at $101.50 in late June after I had earlier sold most of my shares at around $110.

I may be tempted to buy back these recently sold shares if it happens to fall back to even $112. In any case it now represents about 6% of my equities and that is held in a taxable account and I will likely hang onto to that for the long term.

I don’t see any reason that Canadian Tire will not continue to do well in terms of earnings. It is also selling off 20% of its credit card operation to Scotia Bank and that could also provide another boost to the share price although that is, in theory, already priced in.

Obviously, the shares could also decline with the general market if the economy softens. Overall it remains a reasonable investment but is certainly not at the bargain basement price it was in August of 2011.

On Thursday, the S&P 500 was down 0.1% while Toronto was up 0.4%

Bank of America rose again today, up 1.3% to $16.57.

The Canadian dollar was down close to a cent and that pushes up the value of American stocks when valued in Canadian dollars. For the most part, it’s probably not worth worrying about what the dollar does. It’s very hard to predict. A while back I toyed with hedging against a rise in the Canadian dollar which would reverse my gains from holding U.S. stocks. I bought an ETF called FXC to do that. As mentioned previously I have sold out of that. Since I will someday need U.S. dolalrs in retirement. I rally don’t need to hedge the currency risk anyhow. It’s only because my portfolio is reported in Candain dolalrs taht there is an apparent risk there. The reality is that my future need to spend U.S. dollars provides a natural hedge agaisnt the currency change.

Speaking of currency, I am not at all in favor of currency trading which is a zero sum leveraged game. Many times I have been approached to place links on this site to forex trading sites. I would never do that. The whole notion of forex trading is at odds with the mind set that as investors we should seek to make money by owning profitable companies. Many people think that stock market investing is all about making money from other investors. They think that stock investing is a zero sum game. They are wrong. In stock investing we should think mostly about making money from the customers of the businesses we own (as the company provides valuable goods and services) and not so much about making money from other investors (though we are OK we doing some of that as well).

An old article of mine explains this in more detail.

On Wednesday, the S&P 500 rose 0.4% and Toronto fell 0.4%.

As long-time subscribers know, my approach when the prices of stocks that I own and like fall is usually to add to positions.

Most investors would not do that. And a major reason for that is that most investors find themselves judging a company by its stock price. Consider that almost all investors look at price charts but are not able to look at charts of earnings per share. Even more shocking is the fact that investment television shows tens to show you a chart of what the price did today. They often don’t even look at the say the last year. They are focused on today. The reality is that the price movements in a given day are almost always effectively random noise as opposed to any kind of signal.

If you own a stock but are not very familiar with how the company makes money, with its long term outlook and with its competitive advantages, then when the price falls your natural reaction is to be very concerned. In this situation most investors figure that “the market” knows that bad news is coming and so they are inclined to sell.

I find that by developing a strong (but certainly never perfect) knowledge of a select group of companies I can be in a position to be much more sanguine about price declines. If it still looks to me like the outlook is good then I would tend to buy on dips. Sometimes that can turn out wrong but most of the time it has worked out well.

On Tuesday, the S&P 500 fell 0.7% while Toronto rose 0.2%.

I picked up some more Melcor shares based on an order I had placed at $24.10. There was a report today that the pace of Canadian home building was down slightly but that the pace in Alberta was higher. Barring a slow-down in Alberta, Melcor is likely to continue report good results.

Stocks fell on Monday with the S&P 500 down 0.3% and Toronto down 0.4%.

Bank of America was up 2.1%. It should rise in price as it finally puts the the problems of the financial crisis and the resulting litigation behind it (or at least mostly behind it).

I added a modest position in Canadian Western Bank today.

Melcor continues to slip and was down 1.4% today to $24.20.

Canadian Western Bank is updated and rated Buy at $40.54. This has been a very well managed bank and been an excellent investment over the years. I made the mistake of selling my shares last August (as detailed at that time) due to concerns about their losses caused by the floods in Alberta last year (They have a property insurance division). It turned out the losses were minimal. I compounded that mistake by not buying the shares back at a slightly higher price after it became apparent the losses were minimal. The shares rose a lot in the last part of 2013 which made it even harder to consider buying back into it. Psychologically, it is always hard to buy back into a stock at a higher price. However, I am now ready to do so and I plan to buy some shares.

On Friday the S&P 500 rose 0.5% to another record closing high while Toronto was essentially flat.

Canadian Tire rose 1.0% to $113.95 which is at or close to a record high at it has risen 14.5% this year.

Costco was up 1.5% to a record $127.01 and is up 6.7% this year.

Melcor was down 1.1% to $24.55. It’s still up 22.4% this year but after reaching highs over $27 after RBC has put a target of $35 on it, it now seems to suffer from some lack of interest. Ultimately the share price will be be determined by its earnings performance.

Toll Brothers is updated and is rated Buy at $33.78. It’s P/E is still high at about 23 and the ROE is too low at 7.9%. But it is set to continue to increase earnings strongly in the next six to nine months. However with new contracts to sell houses having declined slightly, its earnings may flatten after that. The company believes that the housing recovery continues although it is bumpy. Toll Brothers is a luxury home builder with an average selling price just over $700,000. More recently it has gotten into building expensive condos in New York and other cities. A joint venture in New York is selling condos that in recent quarters averaged $3 to $5 million per unit.

On Thursday stocks were mostly down slightly with the S&P 500 down 0.15% and Toronto down 0.5%.

Costco was up 3.1%to $125 on a strong earnings report (and very strong same-store sales in August). It’s another example of a strong and very well managed company that always seems to look expensive but manages to maintain its high P/E ratio. Couche-Tard was up another 3.5%.

Toll Brothers was down 0.7%. I have ran some numbers and I calculate its P/E at 22.5 times adjusted earnings and 20.4 times GAAP earnings. That does not seem excessive given that its adjusted earnings growth has been over 100% in each of the last four quarters. Clearly its earnings growth will slow or flatten now. And the next quarter it faces a high comparable in the prior year. Analysts are worried about a slow-down in signed contracts in the latest quarter months versus the prior year. Sales and earnings lag signed contracts and so this is a worry. Definitely there are some signs weakness in some of its geographic areas. But it has also expanded its geography in the west. Management points to the fact that its business tends to be lumpy and argues that the slow recovery in housing continues. I would continue to judge this to be a good long-term investment.

On Wednesday the S&P 500 was down less than 0.1% and Toronto was up 0.25%

Toll Brothers was down 4.7% to $33.95 after it reported earnings this morning. This was a case where a year over year earnings increase of 110% and revenue increase of 53% was just not enough. The concern is that the sales were a little weaker than its pervious quarter although much better than the year ago quarter. Management appears to believe that the housing recover continues but is “bumpy”. They believe that the pace of new building should be 50% higher to reflect population growth.

Basically this is a bet that the housing recovery will continue in the U.S. In the past the stock has been pricing in a continued rapid increase in earnings. In the past year the stock price has bounced around but is relatively unchanged from October 2013. Meanwhile the earnings are up strongly and so the P/E ratio has started to look more reasonable although it is still somewhere around 24.

I continue to think it will be a good long-term investment and added to my position today at $34.10.

Liquor Stores N.A. was up another 4.4% today.

Couche-Tard was up 6.7% after reporting another strong quarter. It’s a case of a very strong and superbly managed company that has usually looked expensive but that has continued to out perform.

On Tuesday, the S&P 500 and Toronto both ended the day down very slightly less than 0.1%.

FirstService was up 3.8% to $62.00. I had apparently under-rated it at my last look at it in May. I have long said that I really like the management. It has been a tough company to analyze due to being cyclical and basically my analysis does not seem to work well for this company.

An order I had placed previously to add modestly to my Melcor position was filled today at $25.10. Perhaps I am being reckless adding to my large position but I think the company offers good value. I then placed another order to add a bit more at $24.10 if it goes that low. As a thinly traded stock it can be volatile for that reason alone.

Toll Brothers will report earnings tomorrow Wednesday before the market opens. The expectations are high and the stock will react to the actual results versus the expectations as well as to the outlook.

Liquor Stores N.A. is updated and rated Sell at $13.37. I mentioned in recent posts that I had pretty much given up on this entity and had sold my shares. With a strong gain in the price in the past two weeks (which gains did not seem based on any news from the company as the shares did not gain in the first day after the earnings release) it seems opportune to sell these shares. It seems to me that the company is weak and it is going to take some kind of restructuring for earnings to recover to acceptable levels. The company seems to indicate that the dividend will not be cut but the financials would seem to suggest it should be.

With Warren Buffett’s $3 billion preferred share investment in the Tim Hortons deal in the news, it is interesting to look at his similar $8 billion investment in 9% preferred shares of Heinz with the same partner called 3G.

Berkshire’s Q2 report indicated that it made the expected $360 million in the first half of 2014 on these shares. But that it lost $20 million on its half of the common shares of Heinz. In other words 3G (which only owns common shares) made a loss of $20 billion on Heinz in the first half of 2014 while Berkshire made $340 million even after deducting its share of the losses. This seems a bit hilarious and is par for the course for Buffett who certainly knows how to make a profitable deal.

In the case of Tim Hortons, Berkshire is not involved in the common shares and is very much a passive investor simply collecting the 9% on $3 billion. Berkshire has approximately $55 billion in cash (out of total assets of $504 billion) and this$3 billion at 9% is a nice alternative to cash that earns next to nothing. This investment is really not much of an endorsement of Tim Hortons or Burger King since Berkshire is not investing in the common shares. It simply gets its 9% on $3 billion.

On Thursday the S&P 500 was down 0.2% and Toronto was down 0.3%.

Melcor was down 3.4% to $25.11. But most of the decline was based on one small trade at the end of the day.

On Wednesday the S&P 500 was flat and and Toronto was down 0.1%.

Stantec was up 1.4%. Melcor was down 1.25% to $25.98 as the interest that had been generated this Summer by the RBC analysis that it was really worth more like $35 has waned. I will buy a little more if it dips to $25.10 as I havce an order in at that level.

Also on the theme of real estate I am looking forward to see Toll Brothers results on September 3. I expect them to be good but really an expectation for continued earnings growth is already reflected in the stock price. So they might need to be better than just good to move the stock price. What they have to say about the outlook may be more important than the quarterly earnings.

On Tuesday the S&P 500 rose 0.1% to finish at an even 2000. Toronto also rose 0.1%.

Liquor Stores N.A. rose 5.9%. I did not see any news to justify the recent gain. Presumably some investors have taken a sudden interest.

Tim Hortons rose 8.1% after it was announced that the Burger King deal would be mostly hash and was worth about $84 per share with $65 of that in cash and the rest in shares of the new combined company. Burger King fell 4.3%. Whiel the rise in Tim Hortons is understandable, the big gain in Burger King (yesterday) is more of a puzzle. Burger King is apparently paying 30 times earnings for Tim Hortons. That would certainly not appear to be a bargain.

They are going to have to leverage the heck out of it and also squeeze costs out like crazy.

Buffett is apparently just collecting 9% on his $3 billion investment. Good for him.

I did sell 150 B shares of Berkshire that I bought about 3 weeks ago. I got a very quick 9% gain. I still own 400 shares in another account. I may sell those because a tiny conflict of interest may arise due to one of Berkshire’s pending acquisitions.

There is in fact mostly cash involved with the Tim Hortons deal, so it appears selling yesterday would have been pre mature. Still there is a long ways to go before this deal closes. As I speculated in my first post yesterday, Buffett is involved. This deal was apparently leaked badly. That is both unfair and illegal. Anyhow good times for Tim Hortons shareholders. I owned it and rated it a Buy here a few years back but got out too soon. I would sell today.

There was interesting news yesterday about a proposed Tim Hortons / Burger King merger.

This is far from done and may never happen. It may not be a good deal for Tim Hortons shareholders who will apparently trade a majority stake in Tim Hortons (a wonderful business that has long been number one in its market by a mile) for a minority stake in a rather tired third place burger chain. For Burger King it is apparently driven by Canada’s lower corporate income tax rate (about 25% versus 35% in the U.S.). There was no indication that Tim Hortons share holders would receive cash. If cash were involved then I would wonder if 3G’s friend Mr. Buffett would get involved. Burger King is controlled by 3G, Buffett’s partner in the Heinze deal.

Monday provided an interesting start to the week. The proposed Burger King / Tim Hortons merger is big news taht send both companies stocks up about 20%.

In other trading, the S&P 500 rose 0.5% to 1998. It also briefly rose above 2000 which excited some people since it such a nice big fat round number being reached for the first time. Toronto rose 0.4%. Liquor Stores N.A. was up 3.6%. Good for the stock, but as I mentioned recently I have pretty much given up on this company. Melcor was down 0.6% on low volume and seems not to be generating much interest at least at recent prices.

Getting back to the Tim Hortons story, I am not a fan of this. Why should Tim Hortons share owners collectively want to trade say 55% of Tim Hortons for 45% of Burger King? We are told that the Burger King share holders will have majority control so Tim’s is getting less than 50%, perhaps closer to 40%. The deal was announced because news of the merger discussions had leaked (which speaks to poor management of the process). There may never be even a proposed deal here and after that actual approval would be a long ways off. Most likely the Tim Hortons CEO has been all over this deal. It’s possible the Tim Hortons Board of directors did not even know about it. This might be a case where the Board should vote against it. It’s one thing to allow a CEO to run the company. It’s another thing to allow the CEO to effectively sell more than half of the power house that is Tim Hortons in return for part ownership of the large but third place burger operation.

And if I was a Tim Hortons corporate employee or a franchise owner I would certain not be excited by this. 3G, the controlling owner and manager of Burger King, has a reputation for ruthless cost cutting.

I see no reason for both (or either) company’s shares to rise about 20% given a complete lack of detail and even a lack of a signed deal. If I owned Tim Hortons shares I would sell at least half and perhaps all. And particularly if I owned them in a non-taxable account.

On Thursday, Bank of America was up 4.1% as it reached a huge settlement of fines and penalties associated with mortgages from the financial crisis era. I had noted previously that it appears that Bank of America is about finished with these past troubles. I expect it to be a good investment.

August has been strong for most of our stock picks and the market. The market “correction” of July seems to have been short lived for the major indexes. My own portfolio has recovered losses from July and moved on to new highs.

Having made a 9% gain on some Berkshire shares that I purchased three weeks ago today, I am tempted to sell for the short-term gain. In the past every time I have sold Berkshire it seems to look like a mistake a year later.

Overall I don’t plan a lot of buying or selling. Continuing to ride along with the stocks I own has worked out quite well.

I own some FXC on New York that is a hedge against a rising Canadian dollar. I find it more of a distraction than anything and may sell that.

FedEx is updated and rated Weak Buy at $149.47. It is an interesting company. It’s profit margin is surprisingly low but may mean there is an opportunity for improvement. It could be more aggressive in the use of debt to boost profits. It is projecting a 30% profit increase in the next year but that appears to be already reflected in the share price.

Markets were relatively flat on Friday.

Markets were positive in Wednesday as the S&P 500 rose 0.2% and Toronto rose 0.5%. CN Rail was up 1.6%. Liquor Stores N.A. rose 2.2%

Melcor was down slightly but still remains close to its recent highs and is up about 30% this year.

Tuesday was another good day for our stock picks. The S&P 500 was up 0.5% and Toronto was up 0.9%.

We had Toll Brothers up 2.2% on news of higher housing starts in the U.S. Liquor Stores N.A. was up 2.2% though that is one I gave up on. FirstService was up 3.2%. Canadian Tire hit a new high today.

On Monday, the markets got off to a strong start for the week. The S&P 500 was up 0.8% and Toronto was up 0.2%. Toll Brothers was up 1.7%, Visa was up 2.0%. All in all it was a good day for our stock picks.

On Friday, the S&P 500 was about unchanged and Toronto was up 0.1%

I am working now on an update for Fedex. It’s a great company but is probably not much of a bargain. But I have not crunched the numbers yet.

Owning equities is always risky or at least exposes us to volatility. But the only way to benefit from the good days (and years) is to be in the market. That comes at the cost of losses on the bad days. But over time the good days (and years) have historically more than made up for the bad days (and years).

It’s up to each of us to determine how much volatility we can accept emotionally and can afford financially. It’s never a good idea to invest the money you really need for groceries or the rent. Most of us can afford financially to take some risks. And most of us can either emotionally handle losing days (and years) or we can learn to handle it emotionally through experience and and education. Then there is the old saying; If you can’t handle the heat, stay out of the kitchen.

eBay is updated and rated Weak Buy / Hold at $52.64. It’s a powerful and relatively fast growing and profitable company. The share price is not cheap at about 22 times earnings. Still, it may be a good investment. I am tempted to buy just a modest amount.

On Wednesday the markets were relatively flat.

The next update will be for eBay, it continues to show strong growth.

Much has been made of Stats Canada’s error in the July job numbers. I have never believed that things like jobs added or certainly the unemployment rate could be measured very accurately in the first place. Analysts may have been wrong to assume such numbers were ultra accurate and not susceptible to errors. As far as the numbers having an impact on the stock market, I don’t think that is Stats Canada’s worry. They produce the numbers. They have no responsibility for how how others use the numbers. Of course they have to be as accurate as they can. But to assume there would never be errors was unrealistic.

The very thinly traded Canadian Tire voting shares have jumped to $194 versus about $110 for the non-voting shares. I have mentioned before that I see no rationale for the big premium on the voting shares. No one can take over the company by buying those shares as there is a provision that in a change of control all shares become voting. I think those buying the voting shares at such a big premium are at risk for a vary large decline. So far though the voting shares continue to rise and I have been wrong. However over an investment lifetime, acting rationally will tend to win in the end. I just don’t see a rationale to buying the voting shares. If there is effectively one buyer attempting to accumulate the A shares then perhaps they can keep rising. I just checked and the major holding of the A shares have not been buying with the exception that the Dealers association bought a small amount of shares (less than 4000 in small lots) in the last nine months with the last buy at the end of June at $146.

On Thursday, the S&P 500 rose 0.4% and Toronto rosé 0.2%.

Notable gainers included Berkshire up 1.7% and Toll Brothers up 2.1%.

Melcor was up 1.3% on decent volume.

Element Financial was up 4.2% and that was on top of a good gain yesterday as it released a good earnings report.

A number of news stores noted that Berkshire had reached $200,000 per share today. Only the American Press service noted that these were the same shares that Buffett began buying at $7.50 and that were at about $15 to $18 as he took over the company 49 years ago. Basically, I think the gain (over one million percent) is just incomprehensible to most people. It seems well beyond the realm of the possible even in 49 years.

Liquor Stores N.A. has released earnings this evening. Better than Q1 but nothing great. Earnings per share are at 14 cents and the dividend is 27 cents. They are expecting improvements in 2016. This company has been a disappointment. As noted earlier, I have sold most of my shares.

On Tuesday the S&P 500 fell 0.2% and Toronto rose 0.1%

Melcor fell 1.5% to $25.61 after being up slightly for much of the day. I am comfortable holding Melcor and I think it will be a good long term investment and that it will be worthwhile buying, particularly on dips.

I usually do not read any analyst reports on companies. But it is encouraging the RBC has reiterated its $35 target on Melcor. That report was updated yesterday and could cause some short-term interest in the stock. Until very recently no big bank was “covering” Melcor to my knowledge. The recent IPO of the Melcor REIT has no-doubt generated interest in Melcor from the banks. Perhaps they are hoping Melcor will issue common shares at some point. That could even take the form of the Melton family selling off some of its huge stake in the company although I am not aware of any plans for that. And the Melton family is already now collecting very substantial dividends and may have little reason to sell. The company itself has certainly not been a frequent issuer of shares by any means.

Berkshire Hathaway’s A shares almost touched $200,000 each today. Buffett’s birthday is August 30 and perhaps a birthday present will be a stock price hitting $200,000. Imagine, five A shares is a million dollars. Same five shares were worth about $75 dollars ($15 each) when Buffett took control 49 years ago. The B shares are about $133 each. Each A share can be converted to 1500 B shares.

On Monday the S&P 500 rose 0.3% and Toronto rose 0.4%.

Almost all of our stock picks were up.

I sold most of the rest of my Liquor Stores N.A. shares. I retail a small amount in a tax free savings account. It has been a disappointment. They will release earnings within a week. I am not at all confident that they will have a good report. Maybe they will. I went to pick up beer and wine of Friday and headed for Superstore. I could not get myself to shop much at Liquor Stores N.A. (Liquor Depot and Liquor Barn) and that was not a good sign.

They need to cut the dividend and the refusal to do so seems irrational. There are far too many stores in Alberta and at some point they may announce some closures.

Melcor is updated and rated Buy at $25.88.

On Friday, the S&P 500 rose 1.1% and Toronto rose 0.5%.

Toll Brothers was a notable gainer, up 2.7%.

On Thursday, Canadian Tire was up 2.6% as it released strong earnings. Melcor released earnings after the close that were relatively good. Melcor was set to open up slightly this morning. If RBC updates its report on Melcor that could generate some excitement. Otherwise it is a good company to continue to hang onto and to look to buy on dips.

On Wednesday. the S&P 500 and Toronto both closed at approximately the same level as the day before.

Bank of America received permission and raised its dividend from one cent per share to five cents. That is still almost nothing but it is a sign that the Bank’s health is much improved. The market reaction was quite muted because this was widely expected to happen. Meanwhile they are still dealing with payments and settlements related to the credit crisis. many of these payments are starting to look like corrupt shake-downs by the U.S. government and its agencies. It has already set aside or recognized liabilities for these settlements for the most part and so it may be that it is largely past the financial impact of settlements. I suspect it is a good investment but it is not without risk.

Agrium reported earnings. In a pattern that is not unusual the earnings were down versus last year but were still good news because they were higher than expected.

On Tuesday the S&P 500 fell 1.0% and Toronto fell 0.2%

Agrium was up 2.0% which was the highest of the stocks on our list.

This week I am looking forward to Melcor’s earnings release on Thursday (probably after the close)

On Monday, the Canadian markets were closed. New York was open and the S&P 500 rose 0.7%.

Berkshire Hathaway rose 3.1% due to its earnings release. It hit a new all-time high. The A shares traded as high as $195,000. 50 years of compounding growth within Berkshire under Buffett’s control and with all earnings reinvested (no dividend paid – save literally a single dime per A share paid in 1967) certainly adds up.

On Friday, the S&P 500 fell 0.3% and Toronto fell 0.8%. Constellation software was up 7.3%.

Berkshire Hathaway is updated and rated Buy at $125.83. On Friday I increased my position in Berkshire because the shares were down a bit and I figured the earnings release after the close on Friday would be good and it was.

On Thursday the S&P 500 was down 2.0% and Toronto was down 1.3%.

For those with an allocation in cash it now may be time to consider if one should begin buying on this dip. And if so how aggressively. Or should one wait for a larger dip. Logically, dips in the area of 2% to 5% are not much reason for buying. It might make sense to wait and see if more like a 10% dip or larger occurs at least in certain stocks. In my own case I often find myself nibbling on dips. Often I may do that too early when waiting for a bigger dip might have been better. But as long as I reserve some funds in case larger dips appear and/or I have new funds coming in, my strategy tends to do okay.

I noticed today that dividends were paid on Boston Pizza, and my Bombardier pref shares. Dividends can be used to buy shares at lower prices when markets decline.

On Wednesday, the S&P 500 was flat today while Toronto gained 0.5% and rose to a new all-time record.

Canadian Tire was up 1.5%, Canadian Western Bank was up 1.8%, FirstService was up 2.3%. Bank of America was up 1.6%.

I added to my Toll Brothers position today as it fell 1.1%. I entered an order to add to my Melcor position if it should fall as low as $24.15 in the next month.

Lots more earnings reports are coming… including Berkshire Hathaway on Friday – always ian interesting read.

The S&P 500 fell 0.5% apparently due to global tensions (particularly sanctions against Russia) while Toronto was about flat.

American Express reported (after regular hours) a 13% increase in earnings per share and rose slightly in after-hours trading.

FirstService Corporation reported earnings before the opening of trade and rose 5.2%.

I sold what amounted to 43% of my Liquor Stores N.A. shares today. Perhaps I should have sold it all.

On Monday, the S&P 500 and Toronto were relatively unchanged.

Liquor Stores N.A. was up 1.8% to $11.42. I probably should use the recent gains to reduce my position in this stock. I consider it speculative and my opinion of the company has deteriorated since I first looked at it. I don’t see a lot of reason to expect the Q2 report to be very good. And that could certainly push the stock price down. But perhaps they will make soothing comments about the future and the dividend that will help the stock price.

I have considered this to be a weak business but which did seem cheap. Perhaps I should have stuck with higher quality businesses.

On Friday, the S&P 500 fell 0.5% while Toronto rose 0.4%.

Melcor declined 1.9% to $25.14. It will report earnings on August 7. With this company I am certainly more inclined to buy on dips than to sell.

Canadian National Railway is updated and rated Weak Buy / Hold at $74.02. This company is exceptionally well managed. The stock is up over 800% since I first looked at it 1999. It has generally done better than expected over the years. Often I had rated it a Buy it did better than expected. The history here illustrates the fact that investors can do very well in buying and holding profitable companies. It is certainly a surprise that CN has gone up 800% in 15 years. But no one in 1999 would have doubted that it would continue to grow and be profitable.

At this time, CN looks expensive. It’s P/E is 22. It appears to be “pricing in” a continuation of very strong earnings per share growth. It would be tempting to justify paying this price. But it would not be prudent to forecast that the P/E will remain this high over the next five or ten years. Also it seems unlikely that it can grow profits are rates over 10% for the next decade.

It seems dangerous to bet against this company and I certainly would not short the stock. If I had a large position in it I would reduce that position (especially in non-taxable accounts). If I had a small position, I would probably just hold onto that.

I have not owned it for quite some years (unfortunately) and have no plans to buy.

On Thursday, the S&P 500 and Toronto were each about unchanged.

However Toll Brothers fell 4.1% as some other home builder companies reported heavy use of incentives to sell more houses. Also recent reports indicated some slowing in new home sales in the U.S. Toll Brothers will not report again for about a month. My inclination is to buy this on dips. It’s P/E is high which means it does need to continue to grow profits to justify its price. Based on analyst forecasts of earnings in 2015 it trades at 15 times those projected earnings.

Melcor fell 2.3% to $25.62. Again my inclination would be to buy on dips. The stock is up a lot lately and so it is going to need a good Q2 report (on August 7) to maintain and grow the price. If the earnings and outlook are strong then Royal Bank will likely update its recent Buy recommendation which could generate renewed interest. Aside from that short-term possibility it is a very well managed company which should be a good long term investment. It does however tend to be cyclic and would drop in price if new home building in Alberta slows significantly.

On Wednesday, the S&P 500 crawled a little closer to 2000, up 0.2% at 1987. That right around 200% higher than its March 6, 2009 low of 667.

Toronto was up 0.5% to a new record high.

Toll Brothers was up 1.4% today.

Bombardier announced layoffs and a reorganization.

On Tuesday, the S&P 500 rose 0.5% and set a within the trading day record. It’s very close to 2000. In theory there is absolutely nothing special about 2000. In practice a bunch of traders will take that as either a buy or a sell signal and generally get all excited about it.

Toronto rose 0.4%.

Winners today included Canadian National Railway, up 2.0%, and Element Financial up 3.3%.

Activist investor Bill Ackman pretty much appeared to lose his marbles today with a tearful three hour presentation suggesting that Herbalife was a pyramid scheme. Well apparently it is a pyramid selling scheme. But there is nothing necessarily wrong with that.

I am not sure what to think about short sellers who loudly spread the word that a stock is over-valued. In some way this is no different than owning a stock and then telling everyone what a bargain it is. No one seems to have a problem with that. Probably both should be okay as long as the view being spread is a legitimately held view. It is wrong and should be illegal to try to push a stock up or down based on no valid reason and done just for the purpose of manipulating a stock.

In my own case I have always wanted to predict which stocks will rise or fall through analysis. I never wanted to cause a stock to rise or fall by pushing the price around such as by convincing others to buy or sell. Even if doing so was based on reasons I thought were correct, the whole idea of doing that does not seem entirely ethical to me. It just smacks of pump and dump.

Anyhow Ackman apparently has a great track record with CP Rail and other investments. But he is looking like a crackpot over Herbalife. I know he is involved with Valient / Allergan and to me, that is a negative as far as Valient goes.

Ackman may be perfectly correct that Herbalife products are basically snake oil with no redeeming features. But the same may be true of half the crap we buy. I am not sure that should be the concern of a stock analyst. Ackman contends that Herbal life basically sells an awful lot of its product to its own recruits rather than to external customers. If so, that can’t go on for ever. To a greater or lesser degree the same probably applies to Amway and Mary Kay and Avon. If so, so what? Most recruits will never make much money in these type of multi-level (pyramid if you will) marketing “schemes”. But I know a couple people who have done very well at it. Most kids will never make money at hockey either. But that does not mean we crush the dream of every eight year old hockey player and his parents. 100% of the people who never try will never succeed. A 0.001% or whatever chance is still a lot bigger than a zero % chance.

I have no idea if Herbalife is a good investment. But I am not sure anyone should take Ackman’s biased word on the amtter.

On Monday, the S&P 500 was down 0.2% and Toronto was down 0.1%. So far, it seems that the market is only moderately concerned about recent world events.

I added modestly to my Bank of America position today. If the U.S. economy continues its slow improvement then Bank of America is likely to be a good investment at its present level.

There will be lots of Q2 earnings reports out in the next couple of weeks.

Bombardier perpetual preferred shares are updated and rated Buy for fixed income at $22.05. The dividend at just over 7% is attractive. But there are risks. The company is relatively weak financially. Perpetual shares will fall precipitously if long term interest rates rise a lot. The company has certain conversion options that are negative to investors. Still for those looking for income a modest position in these shares is worth considering. The next quarterly dividend is payable July 31 but I was unable to find the record date so I don’t know if anyone buying these early this week would get the next dividend or not. In any case, in theory the share price will drop after the ex-dividend date if it has not already passed.

Bank of America is updated and rated Speculative (higher) Buy at $15.49. I believe now may be a good time to buy these shares. Its reported earnings are predicted to rise sharply as it puts the settlements related to the mortgage issues of the financial crisis behind it. I will likely add to my position. Bank of America shares will likely do better than the average U.S. stock over the next year.

U.S. stocks are well suited to RRSP accounts because the normal 15% withholding taxes on dividends does not apply to RRSP accounts. Also, most retirees will spend some money in the U.S. and so having U.S. investments makes sense. Regarding taxable accounts, the 15% dividend withholding tax is not something that should stop investors from buying U.S. shares and especially shares of a low dividend company like this one. (For taxable high-dividend shares it does make sense to favor Canadian companies.)

Canadian Western Bank rate reset preferred shares are added to the list and rated buy for fixed income. The 4.3% yield is not exciting. But is seems a reasonable alternative to cash. I first mentioned these shares back on January 31 when I bought at the IPO at $25.00 (with no time for analysis). I mentioned on May 6 that I had sold these at $26.00. The next dividend record date is next week, Thursday July 24. If you buy on Monday (and possibly Tuesday) you will get a dividend on July 31. But, in theory, the price will then drop by the amount of the dividend.

I (very) rarely ever call and speak to company executives. I prefer the results to speak for themselves I prefer not to become friendly with management as that can make me less objective. Also executives will almost invariably paint a rosy picture.

Today, I did speak to the Liquor Stores N.A. CFO today by phone. I was concerned that emails to the company had not been answered. In fact, that was my mistake I had the wrong email address. (But I should have gotten bounce backs but did not) The CFO was quite upbeat about the future but did say it is going to take a while for recent and planned investments to show up in profits. He was also forthcoming about the challenges being faced from competitors. This company believes its expansion opportunity is in the U.S. I confirmed that the CEO does live in the U.S. which I find not at at all ideal. It may make sense longer term when they expand in the U.S.

I am not sure if their future is bright or not. I will likely hang onto my shares but am not planning to buy any more despite the lower price.

On Friday, the S&P 500 rose 1.0% and Toronto rose 0.4%.

Most of our stock picks rose as well.

Alimentation Couche-Tard is updated and rated (lower) Buy at $29.29. It’s a fantastic company. One of the very best managed large companies in Canada. Also one of Canada’s largest companies by revenue. But at 20 times trailing earnings, it is not cheap. I don’t own it, I sadly sold it a few years ago at only a 100% or so gain and let a potential 300% slip from my grasp. It could rise if it makes another very large acquisition at a good price.

On Thursday the S&P 500 was down 1.2% and Toronto was down 0.1%. This was apparently driven by the downed air plane.

Most of our stocks were down…

My strategy is to ignore events like this.

I am tempted to buy some more Bank of America shares.

On Wednesday, the S&P 500 rose 0.4% and Toronto was up 1.0%.

Toll Brothers was up 2.3% as new home builder sentiment improved.

Bank of America fell 2.0% as it released earnings that wer a mixture of good and bad items. Overall it appears that Bank of America continues to improve.

Melcor was down 1.1% to $26.68. However, the trading volume was good. This stock is up a lot and so set backs are to be expected. There is always the risk of a decline, but overall I expect this stock to continue to be a good investment. If I was not already so heavily invested in it I would throw in a stink bid at say $25 as one never knows…

On Tuesday, the S&P 500 fell 0.2% and Toronto fell 0.6%

In part, the Toronto market has fallen with lower oil prices as oil was down under $100. Thought it is just above $100 at the moment.

Liquor Stores N.A. fell a bit more. It announced after the close that it had (as usual) declared its next monthly dividend of 9 cents per share. Unfortunately, the payment of a dividend is no proof that the company is actually earning the dividend. It may or may not be sustainable.

On Monday, the S&P 500 rose 0.5% and Toronto rose 0.3%.

Liquor Stores N.A. was down 1.8%. Of my own investments this is the one I worry about. Historically they had done well. I had thought their size gave them advantages over smaller players. But they seem to be struggling. In my area a somewhat newer competitor “Solo liquor stores” is more popular and more aggressive on pricing. Plus Superstore and Walmart have opened more liquor stores. On top of that when I emailed the Liquor Stores CEO and CFO I was ignored, despite several follow ups. (As an update, I have now learned the emails were not received, I did not get a bounce back so assumed I had the correct email address but I did not, that was my mistake) It will be interesting to see how their Q2 report comes in but I am not overly confident.

This week there will be many more large U.S. companies reporting earnings and that may drive the market in one direction or the other depending if expectations are exceeded or not.

My personal portfolio composition is updated. With the rise in Melcor, I am certainly dangerously concentrated in that stock. I have an order in to begin trimming that if it hits $27.95. I expect it to release a good earnings report for Q2 and I suspect its outlook will continue to be good but one never knows for sure.

We certainly owe much of the strength in Melcor and in the market in general to low interest rates.

I no longer have any stocks rated in the Strong Buy category. That mostly reflects the fact that obvious bargains are simply less common at this time.

On Friday, the S&P 500 and Toronto were little changed, each up about 0.1%.

Wells Fargo is updated and rated Buy at $51.40. Due partly to its price rise (up 13% this year to date), I am no longer rating this a Strong Buy. It’s still considered a Buy and a good long-term investment.

I have followed this bank on the site since February of 2009 when it was very low due to the financial crisis. At that time it was looking cheap on a book value basis but also speculative given the financial crisis. It is up 372% since being added to this site as a highly speculative Buy at $10.91 on February 22, 2009. It then rose rapidly as the stock market recovered sharply in 2009. It is up 92% since being rated a Strong Buy on February 15, 2010 at $26.88. During 2010 and 2011 it was volatile, climbing to close to $35 each of those years before going back under $25. Since late 2011 it has doubled in a fairly steady climb although with some modest pull-backs along the way. Basically it has rewarded patience and fundamental investors. Its volatility has probably left those using stop loss orders wishing they had not.

At this time those who have big gains on it and especially where it may be too large a portion of an equity portfolio (which may mean over 5% or over 10% depending on risk tolerance) may wish to reduce their position. And particularly in non-taxable accounts where one does not have to worry about triggering a capital gain.

Wells Fargo represents about 13% of my portfolio and about 16% of my equities. (I have a high risk tolerance, risk capacity). Given that it is now rated Buy rather than Strong Buy it is probably prudent for me to reduce my position.

On Thursday, the S&P 500 was down 0.4% and Toronto was down 0.7%.

Melcor had a good day and was up 1.6% to a new multi-year high at $27.40. Back in 2007, this stock briefly was around $30. But back then it did not deserve to be that high. Today it probably does.

This morning the market had opened down due to (of all things) concern about the finances of a large Portuguese bank. Really. Now Buffett might ask, if you owned the finest and busiest large restaurant in your City, would you sell it on that news? And if not, is it rational to think about selling stocks on that news? I don’t think so. Thought I do like to keep an allocation to cash in case others sell for silly reasons and drive prices down.

On Wednesday, the S&P 500 and Toronto each rose 0.5%

Most of our stocks were up. The biggest gainer was Element Financial, up 3.5%.

I plan to dedicate time for updates the full week starting July 19. Until then I won’t likely have any updates (possibly something this weekend) but definitely a number of updates in the week starting July 19.

On Tuesday, the S&P 500 fell 0.7% and Toronto was down 0.2%.

Almost all of our stock picks were down.

However, Costco was up 1.0% and Walmart rose 0.8%. Costco always seems expensive but is a great company and I would like to buy it at some point.

On Monday the S&P 500 was down 0.4% and Toronto was down 0.3%.

Most of our stock picks were down. After so many positive days this tiny decline does not seem like anything to complain about.

The market’s direction this week will likely depend on the first few Q2 earnings releases coming in from the S&P 500 companies.

In the next day or so, Warren Buffett / Berkshire Hathaway will announce that Warren has made his annual charity donation. This is the ninth donation since his big charity plan was announced in 2006. The amount will be about $3 billion. Meanwhile his friend Carol Loomis has announced that she will retire as a regular columnist at Fortune magazine – this at age 85 and after 60 years on the job at Fortune. She is rich from her Berkshire stock and probably other investments. She clearly loved her work to have delayed retirement so long. And, in fact she will still do the odd article for Fortune, edit Buffett’s annual letter for free (as she has done for about 40 years) and sit on the Board of one of a Buffett family foundation. If everyone enjoyed working as much as Buffett and Carol Loomis do, more people would be happy.

On Friday, the U.S. markets were closed. Toronto rose 0.05%.

This week, the S&P 500 companies will start to report Q3 earnings, although most will report closer to the end of July. Canadian results will not start for about two weeks.

Hopefully, the results will allow markets to remain strong. However, there is always the chance that world events and interest rate increases or just the age of this bull market could spook markets.

On Thursday the S&P 500 as well as the DOW set new records before closing early for tomorrow’s holiday. Toronto was about flat.

The Canadian dollar has risen to about 94 cents U.S. from lows of 89 and 90 cents earlier this year. And back in January as it went under 90 cents most analyst seemed to be suggesting it would go quite a bit lower. They were wrong.

My strategy has been to try to buy more American dollars when the Canadian dollar is higher and convert some U.S. back to Canadian as the Canadian goes lower. But is never easy to know when to do this. It probably does not make sense to be buying and selling on a 1% move in the dollar, maybe on 3% to 5% in either direction makes more sense.

Back in January as the Canadian dollars went lower and as that increased the value (in Canadian dollars) of my American investments I hedged some of the currency buy using U.S. dollars to buy a Canadian dollar fund FXC on New York. I started hedging a bit too early. Most of this year that hedge was in a loss position as the Canadian dollar was lower than where is was when I purchased my FXC (average purchase price). Right now I am thinking of selling some FXC as it has risen. But I am tempted to wait and see if the Canadian dollar goes a bit higher before I do that.

Overall, most Canadian investors probably don’t need to bother with hedging U.S. dollars. Over a long period of years hedging might not make much difference. Also most Canadians will ultimately need U.S. dollars to spend so in that sense leaving U.S. dollars un-hedged is a natural hedge against your future shopping/ vacation/ retirement spending in the U.S.

Wednesday was a positive day on the markets as the S&P 500 was up 0.1% and Toronto was up 0.4%.

Melcor was unchanged at $26.50 but had 124,000 shares traded. This included a 100,000 share traded that was likely a “block trade” between two institutional investors. In the long run, what is important is how much Melcor earns and what its true value is (hopefully higher than $26.50). But in the short term increased buying interest can push the price up. So far, it seems that the buying interest is supporting the recently higher share price. Right now it seems that those who hold the stock want to keep it and can only be convinced to sell with this recently higher price.

On Monday, the TSX was up 0.3%. The S&P 500 was flat.

On Tuesday, the Toronto market was closed and the S& P gained 0.7% and made a new record closing high.

Melcor was up 0.6% to $26.50 on Monday. It had just over 30,000 shares traded which is high for this company. Apparently there is more interest in this company than usual.

Constellation Software rose 5.6% on Monday.

The first half of the year is over and its been a good first half for investors.

On Friday the S&P 500 rose 0.2%and Toronto rose 0.4%. Most stocks on our list were up including Constellation Software, up 3.2%.

Agrium is added to the list above as a new stock pick rated Speculative Buy at CAN $98.05 and U.S. $91.89. I call it speculative because its earnings are cyclical as it products and major inputs are commodities and the earnings were recently declining. But it will likely continue to be a good investment in the long run. I find it interesting learn about the agricultural economy by studying this company. I plan to buy shares. I will not make a large investment because I want to see how its earnings progress in the next few quarters. It is expected that its earnings will decline in Q2 compared to last year and that could possibly lead to a share price decline when it reports those earnings although in theory that is already factored into the price.

On Thursday, the S&P 500 was down 0.1% while Toronto was up 0.4%.

Melcor was down 2.6% to $26.22 on good volume (by the standards of this thinly traded stock).

I finally entered an order tonight to sell about 10% of my Melcor shares if they should hit $27.95. This is my biggest position by far and so I think it makes sense to start to trim at some point.

News of Sobeys closing some stores is not much of a surprise given amount of new grocery stores that have been built in Canada in the past decade or so. Where I live in St. Albert, Alberta, I believe the were three or four grocery stores 20 years ago. Now the population is up by a third or maybe 50% but the number of grocery stores has about tripled. Possibly this is a negative sign for certain REITs but it may be more of an isolated incident. Certainly things do not appear to have slowed down in Alberta.

On Wednesday, the S&P 500 was up 0.5% and Toronto was up 0.1%.

It was a strong day for Melcor, which rose 2.0% to $26.93 on higher-than-normal volume. Melcor announced today that it would redeem some convertible bonds that it has outstanding which are now well into the money. The bonds convert at $18.51. I am not sure if this had anything to do with the price rise today. In fact I would have though it might have a small negative effect.

It’s interesting that the bond holders have until August 7 to convert at $18.51. IF they fail to instruct their broker to take the conversion at $18.51, then the bonds automatically covert on August 8th at 95% of the average trading price in the previous 20 trading days. Based on today’s price the forced conversion might be at about $25.60. In that case investors would be FAR better off to take the conversion at $18.51. I find it disappointing that Melcor has issued a press release that technically gives the facts but omits the simple observation that if the 20 day average price is higher than $19.48 (which seems all but certain) then the convertible bond holders are better off converting at $18.51 rather than taking he default conversion. Every company seems to do this sort of thing. That is, they issue a press release that meets the legal requirements but omit plain language and common sense advice. And they probably could make the default option the $18.51 but they do not appear to be doing that.

Basically the result is that if you get a “corporate action” notice about things like this you as an investor have to take the time to understand the best option.

In the case of Melcor however, the convertible bonds do not appear to trade and were issued on a private placement basis. So, perhaps everyone that owns them would be sophisticated and would know they should convert at $18.51. Perhaps the press release was not directed at the bond holders but was more so to let the public shareholders know about this. If that is the case and the private holders of the convertible bond were notified to convert then perhaps my concern about the press release wording is misplaced.

On Tuesday, the S&P 500 was down 0.6% and Toronto was down 1.0%.

However, some of our stocks did well, Canadian Western bank up 1.5%, Toll Brothers up 1.2%.

I neglected to mention that on Friday my order to buy back some of the Canadian Tire shares that I had sold at close to $110 was filled at $101.50.

On Monday, the S&P 500 and Toronto were both about flat.

There was nothing too exciting happening with our Stock Picks today.

Currently I am reading a book that traces the history of commerce back about 5000 years. According to this book trading and commerce is basically the fountain of wealth. Many or most rich people throughout history were merchants and traders. I think this is in agreement with Adam Smith in the Wealth of Nations. It is the the related combination of the division of labor and trading along with the necessary banking and enforcement of debts and contracts that is the source of wealth.

We sometimes think of retailers as mere middle men. Yet some of the richest people in the world built their fortunes in retail. The Walton family is FAR richer than Bill Gates or Carlos Slim or Warren Buffett if you combine the family. And all their wealth came form the often maligned Walmart stores.

Most of us will never start our own businesses to get rich that way. But the next best thing may be to buy shares and ride the coat tails of successful businesses. Most investors seem to focus on trying to guess which stock is going to rise or fall. But in the long run it may be best to try to figure which businesses will thrive in the long run and buy their shares (if the price if not outrageous). If the company grows its earnings per share at a high rate the stock price will tend to follow along eventually.

On Friday, the S&P 500 rose 0.2% and Toronto was about flat.

Wells Fargo rose 1.7%. Wells Fargo has been a great investment. It was first added to this site very near the bottom of the stock market in February 2009. It was rated highly speculative Buy at $10.91. Since then it is up 385%. It was first rated a Strong Buy on this site on February 15, 2010 at $26.88. Since then it is up 97%. It has also been relatively volatile and offered plenty of opportunities to buy in the 20’s in 2010 and through to the end of 2011. It is by some measures the largest bank in the U.S. Sometimes even very large companies can provide excellent returns.

I am working on the analysis of Agrium but did not finish it yet. It is currently in a period of lower earnings due to lower prices for its commodity products. It has an excellent history of profitability. I believe my analysis may settle on a (lower) Buy rating. I like the company and may buy a modest position and then see what happens after it reports Q2 results. Q2 is by far its most important quarter. It is expecting profits per share to be about 15 to 20% lower than last year. Therefore it seems unlikely that the price would rise much in the near term. It’s financial disclosure is extremely detailed and it appears to have a strong focus on return on equity which I really like. It is however subject to wide swings in the prices of its products and some of its raw materials. Therefore it will never be an easy company to predict.

On Thursday the S&P 500 rose 0.1% and Toronto was about unchanged.

Constellation Software was up 2.5% and Element Financial was up 3.4%

Melcor was down 0.9% and its volume was closer to its old normal. Almost everyone owning this has made exvellent gains recently and many may be predisposed to sell especially if they see the price rise seems to be over or headed the other way. But fundamentally it is likely still good value and so could easily go higher (perhaps after a bit of a breather now) as lomg as the Alberta economy stays strong.

I plan to add Agrium to the site by Sunday.

On Wednesday the S&P 500 was up 0.8% and Toronto was up 0.3%. Both gains wee after statements from the FED about interest rates rising relatively modestly were taken as positive.

Melcor edged up another 1.4%. Obviously it can’t rise everyday and at some point the impact of the recent RBC report is fully reflected in the price. I am thinking of trimming my large position modestly, perhaps at just under $28 if it should get that high. Obviously the stock could fall based on world, Canada, oil-patch or company-specific news. I think it remains good value but certainly recognize that stocks don’t go up in straight lines and sometimes bad things happen to good stocks.

Fedex rose 6.2% after posting strong earnings and an upbeat outlook. As of my last look at it, I thought it was too expensive. But sometimes it’s hard to keep a good company down.

On Tuesday, the S&P 500 was up 0.2% and Toronto was up 0.1%

Those who don’t own it may tire of hearing about Melcor but it managed another 1.2 % today. Volume was 25,000 shares. At that level it would trade 6.25 million shares a year. It has 33 million shares. But over half are with the founding family and lots more are probably held by those who will never trade. So 25,000 shares per day may be at the high end of the trading we will ever expect to see here. (So, again it’s surprising that RBC would mention it to their vast client base.) In theory trading adds nothing to the true value of a company, especially one that is not looking to sell additional shares. In practice it often adds to the share price. A decent volume of trading can facilitate making a quick capital gain and then selling. And it facilitates selling out at any time. Most retail investors do not need to see a lot of volume since we tend to have 1000 shares or (much) less very often. But for those who get into owning say $50 or $100k or more in any one company a lack of trading liquidity can be a concern.

With a company like this, a good strategy might be to have a core or minimum holding intended to hold indefinitely. On top of that when it is cheap one could own another layer with the intention to sell if it no longer looks cheap. Or a layer of stock that is used to buy low and sell high and perhaps repeat that if the stock is volatile. I have tried to do that with stocks like Wells Fargo, Toll Brothers, Canadian Tire and some other over the years. Sometimes it has worked out. I have not however had firm rules so it has been ad-hoc.

Wells Fargo also did well today, up 1.2%. Bank of America was up 2.0%. I read mixed mixed messages about the U.S. economy and about home building. In general, I believe a slow recovery continues and that the big banks and Toll Brothers will do okay.

On Monday the S&P 500 was up 0.1% and Toronto was up 0.3%

Melcor rose 4.0% on the continued effect (or affect?) of the RBC report on Friday. But really the volume, although a good bit higher than normal, is still quite low and for that reason the stock price could be volatile. But overall, I agree with RBC that the company is worth more than it is trading at and I am inclined to enjoy the gains and not sell any at this time. Perhaps I am being rather greedy in doing that (since I have such a high exposure to it) but that is my thinking at this time.

On Friday, the S&P 500 rose 0.3% and Toronto rose 0.6%.

Similarly, most of our stock picks were up.

There was an interesting development for Melcor on Friday. RBC Capital markets has initiated overage with a rating of outperform and a $35.00 price target.

I am surprised they would “cover” it given the very low trading volume. Their report alone could certainly push the price up.

I have occasionally been concerned that even my own recommendations could push up a stock price. If a stock were under-valued and any analyst said so and the stock rose as a result, there is technically nothing wrong with that. It’s fair game if the stock was truly under-valued. But the worry would be that if an analyst pushes a stock price up, then who would be there to buy when that analyst and his “followers” wanted to sell? Out of caution I never want to push a stock price up. I want to identify under-valued stocks and then ride them up. The seedy side of pushing up stock prices would be “pump and dump” where an analyst purposely pushes a stock price up and then sells ahead of his followers. That of course is highly unethical. About 10 years ago I briefly removed Melcor from this site when its price kept rising and I was afraid I was causing that. (It turned out it was a Calgary brokerage company that had recommended the stock).

So I am surprised that RBC is covering this thinly traded stock. I suspect it will push the price up. I am perfectly happy with that.

The stock initially rose about a $1.00 on Friday but closed up 44 cents. Volume was several times higher than normal but still quite low. Near the end of the day the graph shows a lot of very small trades. I am not sure what to make of that.

Part of the reason for RBC covering the stock may be that Melcor now has someone dedicated to investor relations. Also the company has grown and it makes sense that eventually the bigger brokers would take notice.

In looking into this I also found the following comment about the RBC report:

“A number of other analysts have also recently weighed in on MRD. Analysts at Laurentian raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th. They now have a “buy” rating on the stock. Analysts at LB Securities raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th.” (I think that would be just one analyst but the quote implies more than one)

This probably explains much of the recent surge in Melcor’s price. The Laurentian coverage does not seem to have had any great impact on volume however. A worry with Melcor is that if someone were to rush to sell 10,000 shares or more they could push the price down.

I would buy Melcor at this price if I did not already have such a large position in it. My thought has been to not even trim this position unless it gets closer to $30, although prudence would suggest I should be thinking about trimming now.

I will be interested to see how the price reacts this week to the RBC report.

Overall I am happy with my large investment (as a percentage of my portfolio) in Melcor and look forward to (probable) gains ahead. If it happened to fall back to the $21 range I suspect I would buy more despite already owning what most would advise is too high a position in one company.

Today I am reading the annual report for Agrium. I really like what I see. It’s also trading at a reasonable P/E. I plan to add it to the list above when my analysis is complete and I suspect it will be rated Buy or higher.

P.S.

On Friday there was news about a very large acquisition by a Canadian gaming company.

“Amaya Gaming Group (TSX:AYA.TO – News) announced a jackpot of a deal Friday as the Montreal-based company said it will pay US$4.9 billion in cash to buy the world’s largest online poker company, operator of popular brands PokerStars and Full Tilt Poker.”

.. So a $4.9 billion acquisition. Looking up Amaya Gaming I see that it last reported assets of $519 million and equity of $238 million. I saw some information about how this would be financed including issuing shares through a subscription receipts method at a price of $20, some 42% above the previous days closing price. Most of the purchase price would be raised by issuing $2.9 billion in debt and $1.0 billion in convertible preferred shares at $24 per share in a private placement.

It all seems very strange indeed to me. It appears that the the new pref share holders will eventually own about 30% of the company if the conversion is exercised. (It would make more sense to me if they ended up with over 50% in which case this would be a sort of reverse takeover deal.)

It simply baffles me how the market could so quickly decide that this is a good deal and that Amaya’s shares are now worth some 42% more than they were the previous day. Usually acquisitions are viewed with skepticism.

The reason that the stock price ahs risen close to $20 appears to be that:

Amaya has entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. (“Canaccord Genuity”), Cormark Securities Inc. (“Cormark”) and Desjardins Capital Markets (“Desjardins”) (collectively, the “Lead Underwriters”), and Clarus Securities pursuant to which the Lead Underwriters and Clarus Securities have agreed to purchase from treasury, on a bought-deal private placement basis, 25 million subscription receipts of the Corporation (the “Subscription Receipts”) at a price of C$20 per Subscription Receipt (the “Subscription Price”), for aggregate gross proceeds to Amaya of C$500 million.

I remain quite baffled and skeptical of this deal.

On Thursday, the S&P 500 fell 0.7% and Toronto rose 0.1%.

Fedex fell 2.5%, possibly because oil prices rose.

I am pretty much holding tight, not buying and not selling though I do have an order in for some Canadian Tire at $101.50 and it got down to $101.84 today.

On Wednesday the S&P 500 was down 0.4% and Toronto was down 0.1%.

Alimentation Couche-Tard was up 2.8%. Canadian Tire was down 1.6% to $103.55. I still own some in a taxable account but had sold most of what I owned (all in registered accounts) at close to $110 (before that I sold most on the way up over the past couple of years). I have an order in to buy some back if it hits $101.50 which it could well do.

Berkshire Hathaway is now number 4 on the Fortune 500 which is ranked by revenue. It’s number 2 in terms of book value of equity. It’s number 5 in terms of market value. It has 302,000 employees in total but only 25 at head office. What Buffett has accomplished starting with a $20 million dollar textile company in 1965 is truly staggering.

On Tuesday, the S&P 500 was about unchanged and Toronto was up 0.2%

There were no particularly notable moves in our stock picks.

I am cognizant that there have been few updates lately or new companies added to the list. I plan to work to change that.

Monday was a positive day in the markets as the S&P 500 rose 0.1% and Toronto rose 0.2%

My own portfolio took a hit due to Melcor being down 2.3%. But that is not something that bothers me given the recent gains in that company. I suspect it will be higher before long and and am highly confident that it will be higher in the long run.

On Friday the S&P 500 rose 0.5% and Toronto rose 0.3%

Canadian Western Bank was up 3.1% and American Express was up 2.3%

Last week I purchased data from the TMX group (data that used to be free) so that I could check the P//E ratios and yields of the Toronto Stock index and its various segments. The TMX data provides a P/E ratio based on the published earnings numbers without adjustment. In general the P/E ratios were unattractively high. Using this data I updated two reference articles:

1. The valuation of the TSX

and

2. A list of Canadian Exchange Traded Funds with the P/E ratio, yield and price to book ratio.

In addition to the TMX “raw” P/E ratios I also show the P/E as seen by ishares which are adjusted P/E ratios but which may be more relevant.

Due to the introduction of IFRS accounting in Canada, the reported earnings are often relatively meaningless. That’s mostly because IFRS apparently makes no distinction between a one-time gain or loss and earnings from operations.

These articles were included in the latest edition of the free newsletter which has been emailed out today.

On Thursday, the S&P 500 rose 0.6% and Toronto was about unchanged.

I did not note any dramatic moves in our stock picks.

The European central bank will charge banks 0.1% to keep money on deposit at the central back. I don’t pretend to have a great understanding of this but the idea is that the banks should lend out the money instead of keeping it at the central bank. But banks would rather pay the 0.1% than lend to bad credits. Also Amanda Lang pointed out today that most of the countries in Europe can now borrow at better rates than the U.S. That seems strange. It could be because the banks in Europe are buying up the government bonds of all the European countries rather than keeping money at the central bank or lending it out. This pushes down interest rates. Bank regulators always seem to encourage banks to hold government debt as they consider it risk free. The central bank in Europe is also buying up government bonds (and this “support” is why they are considered relatively risk free). Hopefully all of this will lead to a continued and further recovery of the economy in Europe. Stronger companies in Europe are certainly benefiting as they can borrow at ultra low rates.

Possibly, it would be a good idea to invest in some European ETFs. Some are listed in our Global ETF article. The ETF that trades as IEV on New York offers broad exposure to Europe. I don’t have a buy /s sell recommendation. I don’t think it would be a bad idea to purchase some for diversification. I don’t own any.

Toll Brothers is updated and rated Buy at $36.01. As the report indicates its earnings are still too low but they are recovering very rapidly. This still seems to be a reasonable play on the long-term recovery of the U.S. housing market. I first added Toll Brothers to this site on June 5, 2011 as Speculative Buy at $21.03. It subsequently soon went under $15 but then rose rapidly to the $35 range where it has been with some fluctuations for the past two years rising as high as $40. It’s been a good investment and has been a good one to play the game of selling on rallies and buying dips. I plan to add to my position.

On Wednesday, the S&P 500 was up 0/2% and Toronto was up 0.4%.

I added to my Toll Brothers position today based on the update posted earlier today.

The reference article on the valuation of the Toronto stock index is updated. I had to purchase the P/E data from the Toronto Stock Exchange (it used to be posted free). On A GAAP basis the P/E of the Toronto index is apparently 38. However iShares puts the figure at 17.6. Reality may be somewhere in between. I am worried that iShares is too aggressive in assuming that all negative earnings can be set to zero. Nevertheless I used the iShares figure.

I will also shortly update my list of Canadian exchange traded funds and their P/E ratios.

On Tuesday, the S&P 500 was about unchanged and Toronto was up 0.4%

There as a new issue of “split shares” stocks and debt today form a company called. NewGrowth Corp. That’s interesting, a company with a name that contains absolutely no clue about what line of business it is in. From the name all we know is that it is new and intends to grow. While overall the market may not be over-valued, the existence of this company seems a little scary. I realize that one could read its prospectus to find out what it does or in tends to do. The reality is that few investors read the prospectus and in many cases there is literally no time to to do so as the issues often fill and close out very quickly. In this case, and I think it is not surprising, the issue ahs not yet sold out.

Apparently this entity already trades and appears to be a closed end ETF. It was apparently created by Scotia Bank to invest in banks and utility companies. It splits out the income from dividends versus capital gains.

I have never bothered to look into the mechanics of any of these “split” corporations. To me, they just add in a lot of complexity and some fees. If I want dividend shares I will buy dividends shares. If I want capital gains I can buy directly shares in companies that I expect to grow. Bank shares typically offer both and I don’t see any value in separating them. Most advisors suggest having some of each in any portfolio so why separate them? I doubt that these split entities add any value to the market. And I doubt that very many investors would understand much about how these entities work.

I suppose I might consider it if the closed end fund were trading at a large discount to the underlying shares.

There might be the odd situation where someone with no other income wants a portfolio with 100% dividend income because there is very little tax in that situation. But that is a rather rare situation, I suspect. It could perhaps be arranged for a non-working spouse but seems to be an aggressive form of tax planning and revenue Canada might want a very clean paper trail on where the funds came from that are generation say $60k in dividends, in a taxable account, for someone who is not working or drawing a pension. While such cases might exist, it does not apply to me and I have no interest in this at this time. Even if I was especially hungry for dividend income I don’t think I would look to the complexity of split shares. They are derivatives. Nothing inherently wrong with that but it definitely adds complexity.

Overall I just don’t see it as useful to spend any time looking at this or any other “split share” entity.

And it is just very hard to take seriously an entity called NewGrowth Corp.

On Monday , the S&P 500 was up 0.2% and Toronto was up 0.1%

FirstService was up 3.1% on news of an acquisition it is making.

Element Financial was down 2.6% on news it is making a large acquisition. It also has a new issue out for subscription receipts at $12.75 (existing shareholders can buy more shares at $12.75). A convertible debenture at 5.125% and a five year rate reset preferred share at 6.4%. As this company makes acquisitions and issues shares and debt its balance sheet changes rapidly. I think it has to be considered speculative. I am not particularly inclined to invest in it at this time.

Melcor was up 1.6% to $25.40. I think we should not get too excited about the recent increase in Melcor. It’s been on low volumes and it would only take a few sellers of 20,000 shares or whatever to push the price down. So I am enjoying the ride and have not sold any but would certainly not be surprised if it fell back.

On Friday, the S&P 500 rose 0.2% and Toronto rose 0.1%

Melcor closed up 0.6% at $25.00 and is up 25% this year.

The next update will be for Toll Bothers. My preliminary analysis indicates it will be rated Buy at its recent price of $36.22. As its earnings grow it is looking less speculative. I am considering adding to my position.

On Thursday the S&P 500 was up 0.5% and Toronto was down 0.2%.

None of our stocks moved much. Today may have been my chance to buy back some Canadian Tire as it hit a low of $102.26 before ending the day up 0.7% at $103.97. I have now placed an order to buy some at $101.50 it it happens to fall that low in the next month.

Also I placed an order by some more Boston Pizza at $20.18

TD sent me notice of about four more stock offering today.

The five year rate reset pref shares that I mentioned yesterday fell a bit more today. Yesterday they fell despite the fact that the five -year government bond yield fell. I think they may be falling due to so many new issues coming out. But given that so many investors look for dividends these are probably good value at this time. Having sold some near $26 I am inclined to buy back in if they go back to $25 or so.

This morning it is Bank of Montreal out with an offering of five year rate reset non-cumulative preferred shares at 3.9%. It is probably a decent alternative to cash but you have to be willing to hold for five years. You could sell any time but it would drop somewhat below $25 if interest rates rise but likely (no guarantee) return close to $25 in any case when the rate resets in five years. I have never analyzed Bank of Montreal but perceive it to be a strong bank. I am not recommending or rating these shares as I have not analyzed them but they are probably a reasonable investment as part of a portfolio. For myself I had bought a few issued previously from other banks and companies at over 4% or so I decided not to buy any that are under 4% so I will not buy this one. It will likely sell out in a few hours or less. I have to wonder at what point the market gets saturated with these.

On Wednesday the S&P 500 was down 0.1% and Toronto was down 0.3%.

Toll Brothers rose 2.1% after releasing strong second quarter earnings.

Onex (which we had rated only a Speculative Weak Buy at $62.00 rose 4.3% to $67.70 after releasing earnings.

It will likely take a another day or so for the market to digest the earnings reports of both of these companies. I will plan to update these reports soon.

Canadian Tire was down 1.8% at $103.23. I plan to enter an order to buy back some of the shares I sold.

In terms of preferred shares the three five year rate reset preferred shares that I had bought earlier this year (and then sold out of two of them) all fell in price today. These were Canadian Western Bank CWB.PR.B, National Bank NA.PR.S 4.1% series 30 and Enbridge ENB.PF.A 4.4% series 9. (I also have the very similar ENB.PF.C series 11)

The Enbridge Pref. ENB.PR.A fell to $24.97. I already own this one having paid $25.00 for it. So this seems attractive given that interest rates are now lower than when it sold at $25.00. 4.4% is not a great yield but may be a reasonable substitute if one is holding excess cash. In buying these I would not do it unless prepare to hold for five years if necessary. (I don’t want to buy and then sell at a loss, so if they fell I would likely then want to hold until maturity and hope to get $25 when the rate resets.

TD Waterhouse continues to fairly bombard me with emails about various new issues. The pace of new issues seems to be some multiples of what it was for most of the past year or two. Investors should be a bit cautious to be buying shares at a time when so many companies seem eager to sell shares. Most of these new issues I ignore but these rate reset preferred shares seemed relatively safe. The yields are not great at all but I consider them to be relatively safe.

On Tuesday the S&P 500 rose 0.6% to a new closing record high. Toronto fell 0.4%.

American Express rose 2.9% to $91.39. Constellation Software rose 3.1%. and Bank of America rose 3.4%.

Wells Fargo continues to rise and was up 0.8% to $50.55.

This morning I got an alert from TD Direct (my discount Broker) that Brookfield Asset Management was issuing five year rate reset cumulative preferred shares at 4.5%. This compares to a non-cumulative issue a few days ago from Royal bank at 3.9%. I have done well with the 5 year rate rest preferred shares that I bought earlier this year, most of which I later sold for small but quick gains. So it was an easy decision to grab some of this issue. It’s more or less a substitute for holding a higher than normal cash position although I have to be prepared to hold it for up to five years.

These shares are not without risk as they could certainly trade under $25 if interest rates rise. But as long as Brookfield Asset Management remains financially strong I suspect they would ultimately return back close to $25 in five years even if they did fall in price. This is because if rates are higher in five years the yield will reset to reflect that. In the meantime I may well get a chance to sell them off at something like $26 if they prove popular in the market and if interest rates stay low

On Monday the U.S. markets were closed for the Memorial Day holiday. Toronto rose marginally (0.05%).

FirstService is updated but remains rated Weak Sell / Hold at U.S. $48.77 or Canadian $52.91.

In many ways I like the company and its management. But it has a number of accounting complexities. Also even on an adjusted earnings basis the trailing P/E of 25 is not attractive. It could be bought as a speculative pick due to its long-term growth history.

On Friday the S&P 500 rose 0.4% to close above 1900 for the first time. Toronto was about flat.

Toll Brothers was up 1.6% to $35.50 and will release earnings this week.

Canadian tire was down 2.0% to $103.44. This decline was likely in reaction to other retailers reporting difficulties. I had sold most of my shares (all in registered accounts and kept those that were in a taxable account). I may start to buy back a few shares if especially in the price keeps dropping.

Melcor closed at $24.25 but as usual the volume is thin. At some point I will likely begin to reduce my large position in this stock especially if the price keeps rising.

On Thursday the S&P 500 rose 0.2% and Toronto rose 0.4%.

Toll Brothers rose 2.0%. It will release its Q2 earnings next week.

I am considering adding to my Wells Fargo position and Boston Pizza. But I may wait and see what else turns up.

On Wednesday the S&P 500 rose 0.8% and Toronto rose 0.9%.

Element Financial rose 5.3% on some news it would make an acquisition.

Crombie REIT was raising money today by selling additional shares. It’s rather baffling to me why the market rewards the charade action of paying a large dividend only to take that money back in through share sales. Ultimately long-term gains come from earnings and cash flows, not this sort of financial engineering. It is true that the dividends are paid to existing share owners and the money is raised back from new owners but still I think owners would ultimately be better off if some earnings were simply retained for growth. Consider if if a huge investor initially owned 10% of a REIT after some years his ownership falls due to the share issuances. Or if he wants to stay at 10% he has to buy more shares (in effect give back the dividend), so what good did the dividends do in that case? In fact the dividends would trigger taxes in a taxable account whereas retaining the earnings should lead to an unrealized taxable gain and no tax. I believe REITS have benefited greatly from ever declining interest rates. At some point that will end and REITs will not look so good.

On Tuesday, the S&P 500 fell 0.7% and Toronto fell 0.8%

Most of our stock picks were down although none were down sharply other than Element Financial which was down 2.8%. Liquor Stores N. A. was up 4.8%. It seems someone must think the decline was over-done. I was just checking if perhaps insiders had bought any shares on this recent decline. Nothing has occurred or at least nothing has been reported yet.

TD Direct (Waterhouse) sent me notice of three more stock offerings today. A possible interpretation is that companies are scrambling to raise money while stock prices remain high.

It was interesting to hear today that the Target Canada CEO has been fired and replaced by a Target corporation marketing veteran. It is clear that Target made mistakes. It is not as clear who made the mistakes. I feel some sympathy for the fired CEO (though I imagine if I saw his severance package I might not shed any tears for him.). He had a very tough job. For whatever reason Target gutted many or most of the old Zellers locations and even expanded some. So this guy has basically been managing a HUGE construction project, or really close to a 100 construction projects. He had to continue doing that even as stores opened. He no-doubt has a construction executive but still it would not have been easy to manage the merchandising and store openings at the same time as maybe 50 construction projects were going on. Overall I believe Target paid way too much to Zellers and cam at Canada too big t and too fast. Now, we will see if the U.S. marketing executive will be able to straighten things out in Canada.

On Monday, the Canadian stock market was closed but U.S. markets were trading. The S&P 500 rose 0.4%. Our U.S. stocks picks were mostly up slightly.

AT&T is buying Direct TV for $48.5 billion. I have no idea if that is a good idea for AT&T or not but it goes to show that buying and selling companies remains popular.

The composition of my own portfolio has been updated. I am running an extremely concentrated portfolio. Not everyone has the risk capacity or the risk tolerance to do that.

Melcor is updated and rated (higher) Buy at $23.52. I decided to update this again because it was one of two Strong Buys on the site and because the price had risen. It’s up 17% in 2014. I was also interested to update it because it is my largest holding. It’s thinly traded and therefore we should be cautious in placing buy orders (enter an order to buy or sell at a fixed price, not at the market price) and we should be cautious in interpreting its daily price movements. It still looks like a good investment. However, it is cyclical and certainly not without risk especially in the short term.

Liquor Stores N.A. is updated and rated Speculative (lower) Buy at $10.21. This company has been a disappointment. It was first added to this site two years ago on April 10, 2012 at $17.01.It subsequently went over $20. But then it started reporting various bits of bad news and has fairly plummeted in the last year. (There is some offset in that it has paid out about $2.16 in dividends since April of 2012) It seems I took too much faith in its prior success. I thought it had advantages as the largest liquor store owner in Alberta. It’s sales per share have not been the problem. But earnings have evaporated for various reasons. And lately the sales per store have declined modestly. I am reluctant to give up on it at this point. But Q2 is not likely to be a strong quarter given the weather and given increases to their cost structure, although they did mention on the conference call that the trends in Q2 were good. Management seems optimistic of improvements starting later this year but does not appear to forecast a return to the former profit levels until 2016. The dividend is too high and it seems likely it will be cut. I am holding onto my shares but I will not likely add to my position despite the lower price. I calculate that in buying these shares we are paying about $1.6 million per store fully stocked (inventory is $0.4 million per store net of accounts payable) and that is considering that we notionally paid off the debt. The stores are in rented premises.

On Friday the S&P 500 was up 0.4% and Toronto was down 0.5%. There were no particularly noteworthy moves in the prices of our stock picks.

On Thursday, the S&P 500 was down 0.9% and Toronto was down 0.6%.

Most of our stock picks were down. Walmart was down 2.4%. Bombardier was down 7.4% after Air Canada announced it would not be replacing certain jets which “the market” was thinking it would replace with Bombardier’s new C-Series jet.

Most painfully for me, Liquor Stores N.A. was down 7.4% as the market continues to react to its Q1 earnings. If this does not turn around and continues to be a loser it will be something of an unforced error on my part. I had expressed concerns about management and noted the declining earnings but I still added to my position after concluding that the stock was cheap. Buffett has always said to restrict investments to the best companies and I failed to follow that advice in this case. I plan to update the analysis within a few days. I suspect the weather is not doing the company any favors in Q2 either. We are halfway through Q2 and today felt like Fall in Edmonton.

TD Waterhouse seems to be almost bombarding me with stock issues lately. A couple more today. In contrast, early this year it seems there were more like a couple per month. Smart companies issue shares when the share prices are over-valued and certainly not when the shares are under-valued (unless they HAVE to). So, this is a red flag of caution for me.

The TD site shows two REITs offering shares this week. Now I would ask what should we call an entity that pays out a high dividend but then turns around and sells shares to bring in new money? It seems the market values a company higher if it pays out a dollar and then brings that dollar back through share sales than it does a company that merely keeps the dollar in the first place. Both would look the same in substance and so my fear is that some of these REITs are practicing financial engineering designed to raise the share price. Now that may be fine in the short term. But in the long term value is created by earnings not from paying a dividend and then grabbing the money back.

On the Enbridge preferred shares that I attempted to buy at the IPO on Monday morning I got allocated only half of what I put in for. This could be because my order was delayed when their system was not working when I first tried to buy. (I placed my order an hour later by phone).

All of this share offering actively also seems to indicate that investors are eager to buy now that markets have risen so much. This is typical, investors sense less risk when share prices are higher and they perceive great risk when share prices have fallen a lot. Just the opposite of reality.

On Wednesday, the S&P 500 was down 0.5% and Toronto was about unchanged.

Liquor Stores N.A. was down 2.7% to $11.16, Toll Brothers was down 1.5% to $34.35, Canadian Tire was down 1.3% to $107.94. Meanwhile Element Financial was up 5.2% to $14.00.

Boston Pizza Royalties Income Fund released earnings this morning and same restaurant sales were down slightly. That can probably be fairly attributed to weather. And I suspect Q2 is also affected by the late Spring. I have not updated the analysis but I still look favorably on this company. I may add to my position, especially on a dip.

On Tuesday the S&P 500 was about unchanged and Toronto was up 0.2%.

The S&P 500 briefly went above 1900 for the first time.

The only particularly noticeable move for our stock picks was Liquor Stores N.A. which was down 3.5% to $11.47. This company released “earnings” actually a loss in Q1. Perhaps I never should have looked at this company. It retails the same products that its hundreds of competitors do. I had thought there was value in its scale and ability to buy up smaller competitors. But right now it’s not clear that this is the case. And it increasingly appears that management is not strong.

I would not be at all surprised if they cut the dividend which is too high. On a positive note they were able to increase their borrowing limit this quarter. I don’t particularly want to see more debt but it is encouraging that the lenders allowed it.

TD Waterhouse seems to be coming put with a lot of IPOs and secondary stock options. It may be that companies are eager to issue shares at the higher prices. This could be a signal that we should be more cautious.

Element Financial came out after the close today with what appear to be good earnings and strong growth.

As expected, the Enbridge pref shares did fall today as they went ex-dividend. They closed at $25.10 versus $25.35 yesterday. However it would have been easy to miss the decline. Yahoo shoes the shares down only 1 cent because they adjusted yesterday’s close for the dividend of 24 cents. It seems one has to be careful in looking at past prices because sometimes they are adjusted.

Enbridge just announced (I saw it on TD Direct Investing) a new issue of 4.4% five year rate reset preferred shares. I tried to grab some as they may be more attractive than the preferred I sold last week. The TD site was broken and I was unable to buy.

On Monday, the S&P 500 rose 1.0% and Toronto rose 0.8%.

Notable gainers included Toll Brothers up 2.0%, Bank of America up 2.2%.

The Enbridge preferred shares that I hold were down 1.2% to $25.35. This would appear to be because Enbridge issued new shares that seem to be about identical priced at $25.00. The existing shares, I believe, pay a dividend to owners of record as of this Thursday, May 15. I believe that means that they trade ex-dividend tomorrow so we may see them pretty close to $25.00 The existing pref never got all that high, it peaked at $25.74 which would have included perhaps 18 cents for the pending dividend. Perhaps the new issue of Enbridge pref which opened (and then closed) today was no great bargain at $25.00. But it was somewhat better than the existing at a recent $25.6 or so (notwithstanding that the $25.60 included a pending first partial period dividend of around 18 cents. I don’t pretend to know the precise relative risks of these shares versus the Canadian Western Bank that paid a similar amount and that I just sold at $26. But I consider the risks to be roughly quite similar and quite low and am happy to buy these Enbridge at $25 with proceeds of selling the Canadian Western Pref at $26.

I did end up buying some of these new Enbridge shares today at $25.00 via the IPO.

Canadian Tire bounced around a bit today from $108.14 to $111.34. I decided to sell what I had inside of tax free accounts and got about $110.00. The Canadian Tire that I hold in a taxable account I have not and may not sell. In the taxable account, which is a corporate account I am up 67% on the Canadian Tire shares. I am not sure what tax rate applies, probably at least 15% and so it may not be wise to sell those unless I thought the price was going to drop at least 10%. That is certainly very possible. But I am not predicting that and I still rate these shares a (lower) Buy and so overall it likely makes no sense to sell these in my taxable account. I am really not sure it made sense to sell int eh non-taxable account either. Every time I have sold Canadian Tire in the past 18 months or more the stock has ended up going higher. In some cases the decision to Sell something will seem clear cut. In this case it was not a clear cut decision.

Melcor Developments released earnings after the close on Friday. Earnings were down but that does not mean much because Melcor’s earnings tend to be relatively lumpy. They did increase the dividend. It’s my biggest position and I am relatively confident that it offers good value for the long term. I wills see if the market reacts to the news and will plan to update this company within the next week.

Canadian Tire is updated and rated (lower) Buy at $111.29. Our last rating before this was Buy at $99.85, and before that it was (higher) Buy at $83.78 and it was (lower) Strong Buy at $68.65 back on February 24, 2013. On August 11, 2011 we had called it a Strong Buy at $52.11.

A year ago and certainly three years ago we would not have guessed it could go this high. In some measure the strong price rise is due to strong earnings – especially at its Sports Stores. Certainly in 2011 it was artificially low due to unfounded fears about the impact of Target. It was trading right down around its book value and at under 11 times earnings although it was well known that it had real estate that was worth far more than book value. The fizzling of the Target threat is part of the reason for the strong gains.

A good portion of the gains comes from financial engineering designed to make visible the value of the real estate and the credit card portfolio. By forming a REIT but retaining 83% of the REIT people can see the market value of that real estate. Similarly we found out on Friday that the finance division was worth about $2.5 billion as Scotia Bank is buying 20% for $$500 million.

Many analysts will do a sum-of-the-parts analysis and may conclude it is still under-valued. I focus on earnings. I don’t do any sum-of-the-parts-analysis at all. It only really applies to entities which have subsidiaries that also trade (like Canadian Tire) but is fairly rare and I simply don’t do that analysis.

At a current 16 times earnings its not expensive but it is certainly not the bargain it once was. Anyone with big gains on this would likely be prudent to reduce the holding. Say you put 5% of your portfolio into this in 2011 and it is now 8% of the portfolio. Prudence might suggest bring it back to 5%.

It’s still a great company and make do well but I don’t think we can possibly expect the leaps in price we have seen in the past 18 months or so. And it could always stumble from here. If I had a small position I would hold and look to add on dips.

One ironic thing is that surfacing the value in the REIT came at he cost of some earnings now flowing to the minority owners of the REIT who now own 17%. Canadian Tire got cash for that 17% but may not be earnings much on that cash. Similarly Scotia will now get 20% of the earnings on Finance and Canadian Tire may earn little on the $500 million received for that. For these reasons earnings growth may be hard to come by in 2014 and for example earnings per share were down slightly in Q1 2014.

I still have a fairly large position and may sell the part that is in non-taxable accounts.

On Friday the S&P 500 was up 0.1% and Toronto was down 0.1%.

Canadian Tire was up 3.3% as the analysts apparently liked the news better after having more time to analyze it.

On Friday my National Bank 4.1% preferred shares that I purchased at the IPO in early February for $25.00 were sold at $25.95. I will also receive a dividend of 27.24 cents per share which will be paid on Monday. So my return was $1.22 or 4.9% in just over three months. The yield on these is now down slightly to 3.95% which is perhaps not bad and beats cash. But as with the Canadian Western preferred shares that I mentioned a few days ago, I am happy to grab the 4.9% in such a short period of time and move on. If I saw these shares retreat to $25 I would quite possibly buy them again.

To the extent I decide I want more exposure to preferred shares perhaps I should buy instead more of the Bombardier preferred shares which yield about 7.0% — although those are perpetual shares and therefore come with a great deal of risk if interest rates were to rise significantly. Or for yield, I might look to buying more of the Boston Pizza. It’s basically a perpetual as well but its distributions should rise slowly over time offsetting some of the risk there. There is always Liquor Stores N.A. but I feel I have enough exposure to that and it is far different than any of the preferred shares.

There is relatively big news at Canadian Tire this morning about partnering with Scotia Bank and a higher dividend and share buy backs. Offsetting this is a lower earnings per share. As of now shares are set to open at $109.50. I would not tend to buy or sell at that price but rather wait and see how the price settles out today and probably tomorrow as the news is digested.

On Thursday the S&P 500 was down 0.1% and Toronto was down 0.8%.

Nothing on our list was down more than about 1%. However the oils sands ETF that I have in my own portfolio and which is on our list of Canadian ETFs was down 3.5%. That ETF has been up nicely this year but took a bit of a dive today. I have not looked into the reason. I suppose it may have been the sad news of a worker being killed by a bear at Suncor. But then Suncor was only down 2.2% so that does not really explain it.

Meanwhile Costco was up 2.5% and was the only notable gainer on our list.

Canadian Tire ended the day down 0.2%. Basically it seems that while the Scotia Bank deal is positive it was already anticipated and “priced-in”. I plan to update the Canadian Tire report in the next few days. I suspect that that the big move up in this stock is likely about done with. It should continue to do well long-term but it has about finished with the financial engineering moves that have boosted its price about 100% in under three years. Presumably the analysts will have further digested the news after close today and we could see some additional price reaction to this news before it settles out.

Stocks were up on Wednesday as the S&P 500 rose 0.6% and Toronto rose 0.3%.

The biggest gainers on our list were Fedex and Berkshire each up 2.2% and American Express up 2.1%.

Melcor should be out with earnings in the next few days.

On Tuesday, the S&P 500 was down 0.9% and Toronto was down 0.6%. That hardly seems noteworthy given all the recent gains.

Constellation Software was down 3.8%. Toll Brothers was down 2.6%.

Recently I mentioned that I had placed orders to sell some preferred shares at about $26. These were shares I recently bought at their IPOs at $25.

My Canadian Western Bank pref. shares sold today at $26.00. They were not in the list above but I had mentioned them when I bought them and several times since. I only held these for 3 months (plus 1 week). I just collected a 1.0% dividend on April 30 and now I have sold at a 4% gain. So that’s 5% in 3 months. I could think of that as 20% annualized although I am not sure that is really a useful way to think of it because it’s not something I can repeat again in the next three months. They were to pay 4.4% annually, so I am happy to grab 5% in 3 months and move on. They still actually yield 4.2% which is not bad and so maybe I should have held. Time will tell if selling was a good move.

Most things in the market are hard to predict. So it’s fun when a prediction comes true. I said from the outset that the amount that Target was paying to come into Canada seemed very high. I said it would be a high cost operation. $1.8 billion to merely take over the leases on the Zellers stores! (which in my experience were in many cases located in tired old malls). I checked at the time with at least one real estate expert and they had no concerns about it. More like no clue. The smart play was selling off leases like Hudsons Bay / Zellers did and like Sears did. And it was smart to sell off real estate into REITs as Melcor and Canadian Tire (although only about 10%) and others did.

Now there is chatter that Target should pull out of Canada. I very much doubt that would happen, they have already spent the money now. The one-time charge to close up now would be several billion, I suspect. At this point I am fairly sure they will stick things out.

On Monday the S&P 500 was up 0.2% and Toronto was down 0.5%

Melcor was up 3.4% to $24.05. But we REALLY need to remember that this is VERY thinly traded. Just a few people keen to buy or sell can really push the price around. I believe they will issue earnings shortly, possibly at the end of this week. And they will likely announce the dividend as well. Last year there was a special dividend but that is less likely this year.

Melcor is my largest position and for that reason I could start to trim my position anytime. But if don’t particularly want to do that and may just let things ride and see what happens with the Q1 report.

The latest version of our free newsletter was sent out yesterday. You should have received it but note that it is a separate email mailing list.

On Friday the S&P 500 fell 0.1% while Toronto rose 0.7%.

Notable gainers included Constellation Software up 3.6%, Element Financial up 4.3% and Toll Brothers up 2.0%

After the close on Thursday it was announced that a unit of Berkshire Hathaway was buying AltaLink and electricity transmission company in Alberta from SNC Lavalin. SNC’s stock jumped 5.1% on the news.

It now appears that SNC was a buying opportunity at prices in the $35 to $40 range back in 2012 when major problems with bribery were identified at the company. Back on June 20, 2012 I commented on SNC and said that I would stay away from it. It seemed to me that the corruption was probably well entrenched in the company. Subsequent to that I was not very impressed how it was handling the issue. It seemed to blame it on a few bad apples as opposed to doing a major house cleaning. But perhaps in fact the problem has been well taken care of. Buying a wounded company after its price falls can be a good strategy. The difficulty is to determine how the serious the wounds are. In the case of SNC it was well known that it had two valuable assets in AltaLink and in its 407 Toll road that it could sell. I have not looked at SNC and so I really have no idea if it is still a good investment at this point.

Thursday was another decent day for our Stocks. The S&P 500 was flat and Toronto was up 0.1%.

Melcor was up 1.5% to $23.25 (on thin volume). Canadian Tire was up 1.3% to a new high at $109.02.

Constellation software was up 4.6% after posting another strong quarter of earnings.

Wednesday was another positive day in the markets with the S&P 500 up 0.3% and Toronto up 0.5% and with the DOW closing at a new record high.

Bombardier was up 5.5% to $4.41. Stantec was up 2.5%, Couche-Tard was up 2.3%. eBay was down 5.5%.

Melcor was up 0.5% on (as usual) very thin volume and at $22.90 is at a 52 week high.

The Wells Fargo Preferred shares rose 1% to $22.63 and I have now sold out of that position.

These perpetual shares pay $1.28125 per year to yield 5.66%. That is perhaps not a bad yield at all but I had bought these shares at $19.90 just a few months ago and so I am basically taking my quick profit and moving along.

The price movements in these preferred shares can be divided into two causes. 1. They tend to move up and down as the yield on long term government bonds move. Most of the reason that they got down under $20 was because the long-term U.S. bond yield had risen. 2. Additional price moves occur (or cause depending how you look at it) when the spread or the yield difference between these shares and the long term treasury yield changes. The other part of the reason for the sub-$20 price was a wider spread at that time. Just in the last two weeks these shares were as low at $21.70 (yielding 5.90%). The rise to $22.63 came despite the long-term treasury bond yield being essentially unchanged at about 3.50%. Therefore this recent price rise occurred as the spread over the Treasury bond declined from about 2.40% to about 2.16%. Wells Fargo has been a strong company all along and so it’s not clear why the spread should change that much. (There is also some impact as it gets closer to and then farther from its dividend date each quarter.)

The bottom line on these shares is that they rose a bit over 4% lately for no reason that I know of and I had a profit in them already and I don’t much like perpetual preferred shares in any case (due tot he interest rate risk) and so based on some orders that I had placed I have sold out of these shares. With the spread now at 2.16%, it (the spread) may not get much lower and any further price increase here would likely come from long term interest rates falling, and most forecasts suggest the opposite is more likely.

Tuesday was a strong day in the markets with the S&P 500 up 0.5% and Toronto up 0.4%.

Looking at my favorite stocks, returns seemed to be bustin’ out all over.

Melcor was up 1.2%. (It’s thinly traded and so it’s gains must be taken with a grain of salt but at least the still tiny volume was a bit more than it is most days). Wells Fargo was up 1.1%. The oil sands ETF, CLO which we don’t have a rating on but which has been in my own portfolio for about a year (as disclosed on this site) was up 1.9%. FirstService was up 2.8%.

Bank of America, as I had expected, recovered some ground today and was up 1.9%.

My Wells Fargo preferred share was up 0.9% today to $22.40 and also rose yesterday and as a result my order to reduce that position at $22.25 was filled. I believe this is the first time in a while that it has been this high (The less than fabulous Yahoo Finance only shows me five days on the stock for some reason). I have entered an order to trim some more at $22.50. The yield on these is perhaps still quite good at 5.7% and maybe I should keep them but I don’t really like perpetual shares in an environment where interest rates could rise.

Yesterday the Canadian government apparently sold $1.5 billion of 50 years bonds at just a hair under 3.0%. I fail to see the logic in that for pension plans, life insurance or anyone else. Years ago Buffett wrote about people buying non-taxable bonds int eh 1940’s at around 1% which he said was clearly an abominable return. I think 3% is quite abominable too especially where the investor is taxable. It’s a P/E ratio of 33 if you want to look at it that way. And while the E, the earnings will be paid in cash (unlike the case for most of the earnings of stocks), it will also (unlike the earnings of most stocks) not grow at all over the 50 years. Well, to each his own.

On Monday, the S&P 500 bounced around considerably but when the bell rang it was up 0.3% and Toronto finished about unchanged.

Bank of America was down 6.3% to $14.95 after it had to admit to an embarrassing calculation error involving submissions it made to the FED when it applied to raise its dividend and buy back shares. Now those two things are on hold. There is speculation that the dividends hike will go ahead but perhaps not the stock buy-back.

I suppose this illustrates what I have said (see April 18 for example) that this Bank is not as well managed as Wells Fargo and is not as much on top of its game. But in its defense this was an arcane calculation that involved reversing some strange mark to market rules that apply for GAAP purposes to debt it owes but do not apply for FED purposes. The fact that the calculation lowered its ratio of investor capital by 20 basis points also points out the fact that those calculations are NEVER all that certain. Equity capital is Assets minus liabilities . And when you start marking some assets to market and some not (as banks must) and marking to market some liabilities and some not (as banks must) and when you start risk adjusting the assets (as banks must do for some purposes), it is an awful lot of arcane calculations and assumptions in the end and yet it gets presented as a calculation to two decimal places. In substance it’s not really a figure that is known to such accuracy in the first place.

In any case although highly embarrassing, this does not appear to change the Bank’s earnings power at all. And as far as being disappointed by the lack of share buy backs, I don’t really share that disappointment. The market is not disappointed because the buy backs are necessarily a good investment in substance. The market only cares that the buy backs would drive the share price up at least in the short term. If people really think the shares are such a bargain that the bank should buy them back then certainly they can buy themselves at 6.3% less than yesterday.

I added to my position in this stock today though I was a bit hasty and only got a 4% discount to yesterday’s price.

I suspect, but certainly can’t guarantee that cooler heads will prevail tomorrow and Bank of America will likely start to recover form this little dip quite quickly. I can’t predict which way it will head but to me it looked like good value at this price although I do continue to regard it as somewhat speculative.

I mentioned on April 21 that I would sell some pref shares that I had bought this year at $25 if the price should hit $26. I mentioned Canadian Western Bank and National Bank rate reset shares. There was also Enbridge 5 year pref. shares.

I am not sure why I did not choose $25.95 instead because sometimes I figure that is a way to sort of be ahead of all the orders at the even price. National Bank got to $25.95 today which I am not sure is justified. I entered an order to sell eh Enbridge as well at $25.95. The thing is I never expected these to trade more than a few cents above $25 and if I can grab $26 or so I am happy to do so and will have made a good annualized return and can look for somewhere else for a safe alternative to cash as I felt these shares were. If these were in a taxable account I would not do this since selling for a 4% capital gain would not be worth the bother and the tax.

Regarding National bank at $25.95, that seems a bit high. The initial yield was 4.1% at $25, so now the yield would be 3.95% and I believe I would still collect a small dividend since the ex-dividend date was April 9. The yield on 5-year government bonds is not down and appears to be up about 10 basis points since these were issued and so the decline in yield here is just due to market popularity it would seem. I would have liked to have soldl at $25.95 today because it may not get to the $26.00 sell price that I has entered.