September 30, 2015

S&P 500 up 1.9% and Toronto up 2.1%…

Notable gainers included Valiant up 12.3% (in a partial rebound from recent large losses). Dollarama, up 2.3%, Liquor Stores N.A. up 3.6%. Couche-Tard up 2.2%, AutoCanada up 4.0%.

I had noticed today that Canadians Western Bank’s rate reset preferred share was down as low as $16.45. At that price it would yield almost 6.7%. And it can’t reset to a new and possibly lower distribution until April 2019. I put in an order at $16.60 but did not get a fill. About six months ago it was trading at near $25 and yielding 4.4%. At that time the government of Canada 5 year yield was 0.86%.

Today that government of Canada 5 year yield is 25 basis points lower at 0.51%. But that does little to explain the 230 basis point increase in the market yield. (Correction, today’s yield is only about 5 basis points lower so the increase in the yield on CWB pref shares is not explained by any material change in what it might reset to)

The higher yield would appear to be based on a general distain for rate reset shares and an increased fear that the 5 year Canada yield could stay low for a very long time and this the reset distribution on these shares could be lower than the current distribution. It is also likely based on fears that Canadian Western Bank could run into financial difficulty due to loan losses linked to the low oil prices. However, I note that according to the CWB web site the credit rating on these preferred shares is the same as I saw in March when the yield was so much lower.

Every so often the market offers what later can be recognised were clearly bargain prices. For example in early March of 2009 at the bottom of the financial crisis and around August 2011 in the debt ceiling “crisis”. It remains to be seen if the rate reset preferred share prices of September 2015 will later be recognized as being clear bargains. I suspect they will…time will tell.