October 4, 2016

On Tuesday, the S&P 500 was down 0.5% and Toronto was down 1.1%.

Some stocks declined in reaction to the measures announced yesterday to cool the housing market.

Canadian Western Bank was down 4.1% which may have been related to its Optimum Mortgage division which includes an “Alt-A” mortgage business which targets mortgages that are less than traditional prime. This business targets self-employed people and others who do not meet traditional guidelines. Personal mortgages represent 16% of Canadian Western’s loans and about half of those are from the Optimum Mortgage division. Overall, while Canadian Western Bank will likely see a decline in this business due to the new rules it does not look like a serious threat to the bank.

Melcor Developments was down 5.4% to $12.85 which may have been related to fears of lower home building with the impact magnified by its thin trading liquidity. I had placed an order to add to my position at $13.10 and that order was filled today. This demonstrates that I do have the courage of my convictions.

Regarding the mortgage stress test whereby borrowers have to qualify at the Bank of Canada’s reported measure of the posted five year conventional (20% or more down) mortgage rate, currently 4.64%: I looked today and found no one except one person commenting on a blog, that questioned (as I have) where this 4.64% comes from and why the banks could not manipulate that rate lower by simply using posted rates that are closer to the rates that they actually offer. The 4.64% appears nonsensical in the face of advertised rates closer to 2.5%. It remains to be seen whether the new measures will lead to lower home prices. They could and there is some risk that this would lead to a recession in Canada.