November 14, 2012 Comments

Another down day on the markets. Dow down 1.5%, Toronto down 1.7%.

Well, the fact is that all the days of our investing lives cannot be happy days (nor all the weeks, all the weeks, all the months or all the years).

Notable losers included Bank of America down 3.6%, Toll Brothers down 3.5%, Fedex down 3.3%.

And Canadian Tire was down another 0.8%.

I don’t think it is possible to predict what the market will do next. The whole fiscal cliff issue may certainly be a negative factor until it gets resolved around the end of the year. And beyond that the feared recession in 2013 is certainly a possibility. Things should be relatively quiet on the earnings front until late January. Various positive or negative news can come in at any time from economic reports (jobs, housing consumer sentiment, retails sales, producer price index and other).

What has worked for me over the years has been 1. A bias to remaining mostly invested in equities. 2. Investing in the higher rated stocks from our analysis here, and 3. leaning a bit against the market, taking a bit of money out of the market as it rises and buying gradually as it falls. That has worked over time but admittedly is scary during the dips.

I bought a modest amount of RIM today.

I am inclined to buy more shares in most of what I own.

To that end I have placed some bids modestly below today’s closing price for Berkshire Hathaway, Toll Brothers, Wells Fargo and Canadian Tire.

The majority of my cash has been in U.S. dollars, simply because it was mostly U.S. stocks that I sold this Fall. I moved a bit of that back to Canadian just now to provide funds to buy Canadian stocks. Also with the Canadian dollar below the U.S. the exchange rate is better than it has been. If the Cnadian dollar goes several cents lower I move a bit more cash out of the U.S. dollars.

I notice on the TD Waterhouse new issues page, Hudson’s Bay is still open for buying. I believe this means that the banks are having a hard time flogging this. If it was a bought deal then the banks are stuck with it. If it was not a bought deal then the offer could even be pulled. I suspect it won’t be pulled at this point.

I notice too, three mortgage investment corporation offerings are still open. I believe those are all relatively small. And apparently not meeting with much appetite from investors.

A Tale of Two Lenders…

There is a very interesting contrast between a mortgage investment corporation and a mortgage bank. The mortgage investment corporation takes in equity and lends it out with little or no leverage at 8% or more. The investors may treat their investment as more of a fixed income investment since it funds loans and pays a high yield. The mortgage investment corporation is largely lending out its own money (the equity it raises). It does not have access to deposits from customers that it can lend out. In order to make 10% return on equity the mortgage investment corporation would have to lend at an interest rate probably above 10% since it typically has modest or no leverage. It therefore is going to be targeting commercial borrowers who are will pay that kind of interest rate. The loans may be far riskier than the residential type mortgages targeted by a mortgage bank but then the Mortgage Investment Corporation does not face much risk from its own leverage (its own debt).

The mortgage bank is typically HIGHLY leveraged. It may have 90 cents of customer deposits and other liabilities for each 10 cents of equity. It is largely or almost completely loaning out other people’s money. It can turn take in deposits at 1%, lend at 3%, for a spread of 2% and use 1% of that spread to cover costs and be left with a 1% net profit on the loan and still make 10% on equity due to the leverage. It’s really a totally different operation than the Mortgage Investment Corporation. The Mortgage bank has to target very safe loans like government insured residential mortgages. With it’s high leverage it has to take on low-risk loans.

It’s a Tale of two lenders and they really are quite different. Both can be good or bad investments.

Leave a Reply

Your email address will not be published. Required fields are marked *