June 13, 2017

On Tuesday, the S&P 500 was up 0.4% to another record high while Toronto was about unchanged.

(Apologies as yesterday’s post here did not get uploaded.)

Toll Brothers was up 1.5% to $38.57 and is up 24% this year.

Rate reset preferred shares have done well in the past two days as the yield on the 5 year Canada bond has jumped from about 0.96% to 1.15% in just two days. That is still an incredibly low interest rate but it is a big move in two days. When it comes to the long-predicted rise in interest rates there have been many false starts. But now the FED has increased rates 3 times in 18 months and Wednesday is expected to be the fourth time.

The FED’s interest rate announcement and and any comments if makes are likely to be the big focus for markets on Wednesday.

Home Capital is not on our list but is of interest partly because troubles at Home Capital caused Canadian Western Bank’s shares to fall due to (probably over blown) fears that some of the same issues would surface in a small segment of CWB’s business.

Home Capital’s shares have been rising on rumors that it will attract a large new investor to add to equity and will get new management. Today Home Capital’s shares fell 7%. The difficulty is that Home Capital’s brand name may be virtually beyond repair. It’s quite possible that Home Capital is worth at least its share price even if it simply winds down operations, collecting the existing mortgages as they come due. But as a going concern or brand name any added value beyond the liquidation value seems questionable.

GIC investors and mortgage applicants have basically no loyalty. Tonight Home Capital provided its latest daily summary of deposits and liquidity. Total deposits were down about $42 million. Yet the company indicates that its liquidity was UP $60 million. No explanation is provided in these daily updates. Presumably the increase in liquidity (despite lower deposits) means that mortgages are getting paid off or paid down and so the company is basically in wind down mode on its mortgages. It appears that few new mortgages are being funded or at least that repayments far exceed new mortgages. If Home Capital cannot attract deposits or mortgage customers, what is the value of the brand?

Possibly an announcement of a major equity injection at Home Capital would restore trust and customers. But at what price would a large investor be willing to buy shares? That price might be below the current share price.