February 17, 2016

Wednesday was another interesting day in the markets.

The S&P 500 was up 1.6% and Toronto was up 2.5%. Oil was up sharply and now sits at $31.45.

Some notable gainers on our list included:

Bombardier was up 21% and the Bombardier pref. shares were up 12%. This remains a highly risky company that is technically broke in the sense that liabilities far exceed assets. But, as they like to point out, they still have some cash and some “room” on the their credit card (err credit lines). I plan to update the Bombardier report before long, after the market has a bit more time to digest the latest news.

Element Financial was up 9.1% on further reaction to its plan to split into two companies.

Canadian Western Bank was up 3.6% in reaction to higher oil and the general strong day on the TSX as well as its announcement that it will brand its wealth management operations as CWB Wealth Management.

Currency Exchange using the Norbert Gambit

The following is my story of using Norbert’s Gambit today to change currency, for those interested.

I mentioned I would buy additional Bank of America nd Toll Brothers if I has U.S. cash. With Toll Brothers down about 2.5% this morning I decided to move some Canadian cash back to the U.S. side. And I decided to use the “Norbert Gambit” whereby one buys a stock that trades in both U.S and Canadian dollars. In this case I would buy in Canadian currency and then get the stock “journaled” over to an American dollar account and sell it there for U.S. dollars. There is a Trust unit called DLR that is U.S dollars that trades on Toronto in Canadian dollars as DLR and also trades on Toronto in U.S. dollars as DLR.u

This method of converting money is a bit complicated. It has a cost but is not as expensive as a straight transfer at least not at the rates TD Direct charges (which is about 1.5%, or 150 basis points).

I bought 1800 units of DLR which is U.S. dollars trading on Toronto in Canadian dollars and paid $13.66 per unit for a total $24,588. I paid the standard $9.99 commission to do that online.

Next I called TD and was given two choices:

1. They could “journal” my 1800 units of DLR to the American dollar side of this same investment account. They would do this at no charge. Then after 3 days I could sell that as DLR.u and get the American dollars. , or

2. They would do the journal entry (at no charge) and also enter the sale order now and charge me a special rate of $9.99 (The regular charge due it being a phone order and based on the amount is $107). I would have access to the U.S. cash after three days. I asked what the advantage of this was since I still had to wait three days and it was that I could fix the exchange rate rather than risking how it would change in three days.

I chose option number 2. The agent then sold the 1800 DLR.u in the American side of my account at a price of $9.95. for a total $17910.00, or $17900.01 after the $9.99 commission.

All told, I had converted $24,588 Canadian into $17,900 U.S. so my total exchange rate with commissions was $1.3736. I am not sure what the wholesale exchange rate was at the time but it may have been around 1.37 in which case my cost was 0.36% or 36 basis points. The cost of the Norbert Gambit depends on the buy/sell spread on the stock used, in my case the DLR as well as the Commissions paid. The buy/sell spread is probably often $0.01 or 1 cent per unit of DLR. Since DLR is around $13.66 Canadian that is roughly 7 basis points on DLR and 10 basis points on the 9.95 DLR.u for a total of 17 basis points (or maybe it is 7 each time for a total of 14 basis points in terms of the Canadian dollar) . My $24 or so in Commissions on the $24588 adds another 10 basis points for a total of about 27 basis points. There could be also an additional cost or benefit if the currency was moving even in the few minutes it took to do all this. Given the need to wait three days, the potential for a large commission (my commission was supposed to be $107 but they did it for $9.99 at the discretion of the representative) and the unknown buy/sell spread it is not an ideal solution but it worked out cheaper than paying the standard exchange fee.

I then decided just to try and see if the system would allow me to use the U.S. money today rather than waiting three days. In fact it did allow me to do so. I don’t know why given that the TD representative was quite clear I would have to wait three days.

If the Norbert’s Gambit did indeed come at the cost of waiting three days then it could prove more costly than paying the 150 basis points since the stock I wanted to buy in the U.S. could easily rise more than 150 basis points in that time.

I then added to my position in Toll Brothers.

It’s my view that TD (and the other online brokers) should offer a much lower currency transfer rate for online transfers. Most of the big banks are charging about 150 basis points simply because once our money is in their brokerage account (especially in the case of RRSP money) we are captive customers. Investors should complain loudly until they stop scooping this fat fee. Using Norbert’s Gambit helps but is confusing and inconvenient.