August 14, 2019

On Wednesday, the S&P 500 was down 2.9% and Toronto was down 1.9%.

Market sentiment seems to be on a hair trigger with stocks rising or falling materially each day depending if news developments are considered bad or good.

The fact is that being invested in equities is never for the faint of heart.

Some of the more notable decliners include: FedEx – down 3.4%, Wells Fargo (no longer on our list) – down 4.3%, Bank of America (also no longer on our list) – down 4.7%, Amazon -down 3.4%, Visa and Amex both down 2.9%, Costco -down 2.9%

When markets decline it is never clear if it is a buying opportunity or if it is just the beginning of a larger drop. If I were “sitting on” a lot of cash I would be tempted to add to positions. But I would also try to remember that there should be no hurry to deploy cash.

Rate reset preferred shares were pounded down again. I look at the Enbridge ENB.PF.A. It’s down to $14.37. It will reset on December 1 and at the current 5 year Canada bond rate of 1.19%, the dividend would drop from $1.10 to 96 cents. That’s a yield of 6.7% at the current price. Assuming the Canada bond yield remains 1.19% on December 1, 2019 then over the next 5 years the Canada bond would pay out $11.90 per year per $1000 invested or a total of $59.50 over five years. But then it would mature at the $1000 face value. ENB.PF.A barring insolvency of Enbridge would pay out $67 per year per $1000 invested at $14.37 for a total of $335 over the five years. But what would ENB.PF.A be trading at in five years? It seems to me that if the Canada bond yield were still very low then ENB.PF.A should be trading higher since its dividend of say 96 cents per year would be attractive. And if rates rise then the reset yield on ENB.PF.A would rise. And ENB.PF.A would have to fall by about 27% at the end of five years before it would under perform a 1.19% Canada bond.

The market repeatedly teaches that there are no guarantees on the value of rate reset shares. But If I had cash and was looking for yield I would consider a including a number of rate reset shares.

CWB.PR.D trading at $25.40 has four and a half years to go paying $1.50 per year or 5.9% and then will reset at a hefty 4.04% above the five year Canada bond or it may be called in at $25 at that time. Either way, that seems attractive. Buying ENB.PF.A today involves the risk of where the Canada bond yield will be on December 1. And with negative rates in the news it certainly could be lower than the current 1.19%.

Overall, a small group of rate reset preferred shares could be selected that would yield over 6% and with the reset dates somewhat spread out over time. In our world of extremely low interest rates, 6% is becoming very attractive.

With prices down today, I bought a very small amount of lululemon. I don’t rate it a buy and will wait for a lower price before adding to this small position. I bought it partly because my family shops there.

The latest rail car loading reports out today, are similar to last week. Canada still running slightly above 2018 levels. The U.S. running above 2016 levels but noticeably below 2018 and even below 2017.

The CEO of Melcor Developments, Darin Rayburn bought 1000 shares today at $12.31. It’s a small purchase but it is with his own money and I would consider it to be a small positive signal. Note too, that lower interest rates tend to push up the market value of commercial rental buildings. The impact on the value of Melcor’s lands should also be positive with lower interest rates but those values are affected by many other factors including the state of the economy and the growth of the communities where it owns land.