December 14, 2015

Monday was another non-boring day in the markets.

The S&P 500 was up 0.5% while Toronto was down 0.78%

Oil is at $36.26. The Canadian dollar is worth just under 73 U.S. cents.

Natural Gas is at a low last seen in 2002 at U.S. $1.89 in New York

Notable decliners today included:

Melcor, down 3.7% to close at $12.98. As usual, this was on a small volume, just shares.

AutoCanada was down 5.7% to $20.66. A Statistics Canada report released today shows that new motor vehicle sales across Canada increased by 4.6% from the prior year in October. But they declined 15.7% in Alberta where AutoCanda has about 43% of its dealerships. Perhaps November and December will be far worse these sales figures would not seem to justify the huge slide in the share price here.

The preferred shares on our list were mostly down including the RioCan rate reset preferred share down 5.7% to $17.31. This particular share will reset in less than four months on March 31, 2016. It the Bank of Canada five-year rate stays around 0.75% then this share will rest to pay (0.75 plus 2.62 or 3.37% on a $25 face value yield about 4.9% at its current price.

Normally, in a world of 0.7% five-year bond rates a 4.9% rate reset yield might seem attractive. But last week Royal Bank sold a rate reset pref yielding 5.5% and which will reset at the five year plus 453 basis points. That would seem superior to the RioCan share although the bank preferred share I believe is subject to being converted into common shares of the bank in certain dire circumstances.

For whatever reasons it appears that buyers of rate reset preferred shares have gone from accepting yields around 4% and less on new issues about a year ago to now requiring 5.5% even from a very strong issuer. In part this is due to a fear that the Bank of Canada five-year yield will remain low and that the reset yields will be low even five years from now.

I added to my positions in Melcor, the Canadian Western Bank preferred share and Boston Pizza today. It’s always been my practice to try to add to positions of companies that I consider to be under-valued as they become cheaper. At the moment there seems to be more opportunity to do that than I would like. Time will tell if buying at these prices will turn out to have been wise.

Perhaps a FED move on Wednesday will put a different sentiment into the markets.



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