January 26, 2015 Comments

On Monday, the markets started off the week with the S&P 500 rising 0.3%
and Toronto up 0.1%.

Canadian Western Bank was down 2.5%. This could be due to continued fears of weakness in the western-Canada economies due to low oil prices. It could also reflect continuing decline in “spreads” that banks are earnings as interest rates fall. The reason spreads decline is that banks have a lot of deposits that they pay no interest on. As interest rates decline the profit banks make on lending out zero-cost deposits declines.

Melcor was also down 1.7% to $16.50. Again, this is likely related to fears about the western economy.

Some people might think I should know rather than merely suspect the reasons for stocks moving up or down. But the reality is that the market price reflects the individual buy and sell decisions of many investors. It’s impossible to know what each was thinking and basically the market is never under any obligation to explain itself at any time. On bigger moves the reasons can be fairly obvious. Smaller price moves are often nothing more than random noise.

Royal bank was out with a five year rate re-set preferred share yielding 3.6%. It seems we have to continuously get used to lower yields and interest rates. But I decided a while back that 4.0% would be my absolute floor on these shares. I will not buy at yields under that.

Some of the rate reset preferred shares that I mentioned earlier this year were yielding over 4% at their $25.00 issue price. This included Brookfield Asset Management at 4.5% series F, now trading at $25.80. I had mentioned the series 9 and series 11 Enbridge five-year rate rest shares that initially yielded 4.4%. I would have expected these to trade at $26.00 or more given the decline in interest rates since they were issued. But Enbridge Inc. did a reorganization that weakened its credit worthiness and these are trading at just under $24. There was also a Brookfield Office pref that I mentioned that initially yielded 4.75% and current trades at $25.40. Overall, I would have expected higher prices here as interest rates fell.

Royal bank is considered to be more credit worthy than the others I mentioned here witch would explain its lower yield.

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