April 28, 2014 Comments

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.