June 29, 2017

Thursday saw the S&P 500 and Toronto both down 0.9%.

U.S. banks went the other way with Wells Fargo up 2.7% and Bank of America up 1.7%.

Alimentation Couche-Tard was down 2.5% to $62.75. It is a stock that I would be tempted to add to at this price. It will release its Q4 fiscal 2017 results probably around July 11 judging by last year’s release. Most of the time they report earnings gains. But what is important is how the earnings compare to expectations.

Rate reset preferred shares should have been on the rise today with the higher government of Canada five year bond yield. But they were likely held back by the weak day in the markets. The five year yield is up to 1.35%. Paltry but the highest in over two years and up 0.064 percentage points today.

Home Capital got their approval for the Buffett investment today from the TSX and Berkshire now owns 20% of the company. Berkshire spent  CAN $153,225,739 to acquire 16,044,580 common shares. Those seem like odd numbers. But this is classic Buffett. He worked it out (probably personally and possibly in his head) to own an even 20.0% of the shares after his purchase. In many ways I think this whole investment was just a fun little project for Buffett. Normally, $153 million is far too small for him. But he was asked by a friend to get involved and he may have wanted to demonstrate his skills at bargain hunting. Some will complain about his discount deal at $9.55. But he made the deal when the shares were around $11. (Ad they may have been more like $7 when he was first approached)  He likely would have been prepared to close the deal or certainly announce it immediately but Home Capital took a week or more to agree to it and announce it as they had to seek a fairness opinion. Anyone complaining about Buffett buying at $9.55 was free to buy the days the shares were down under $7. The fact is that when Buffett bought for $9.55 the company got a LOT more than just $9.55. They got that cheaper line of credit and more importantly they got a TON of market confidence.

Home Capital also just announced a sale of $252 million of mortgages at 99% of face value. This company is completely out of danger now. It’s GICs are as safe as they ever were and they carry the highest rates around. Anyone wanting GICs and having convenient access to these should grab them. Anything up to the $100k CDIC limit is 100% safe. Going above that also seems quite safe though it might be wise not to put too of a portfolio with one company. I do expect however that they will report a big loss in this Q2 due all the unusual expenses, the biggest of which was a $200 million upfront payment on the $2 billion line of credit that they got from Ontario Hospital Pension plan. That line of credit has now been paid off and the Pension Plan has (I believe) pocketed $200 million. Recall many were aghast at the risk the pension plan took.

In my opinion, the whole episode was completely bungled by the former Board of directors and by the Ontario Securities Commission. The run on the bank should that was precipitated by the OSC was needless damage. They charged in to punish management for some very poor disclosure and their cure was far worse than the initial disease. There should have been a way to announce the punishment (which for the company was mild) much faster or immediately, before the run on the bank.

Meanwhile, Friday’s excitement will include a GDP report before the market opens and then an outlook update from the Bank of Canada. Analysts will be trying to predict if the Bank of Canada will raise interest rates on July 12.