February 13, 2017

North American markets on Monday added to the record highs of Friday.

The S&P 500 was up 0.5% for a total gain of 3.9% in the first six weeks of this year. Toronto was up 0.2% for a total gain of 3.1% in those same six weeks.

These are enjoyable gains. The fact that I am 20% or so in cash has been a drag on my own gains. But I don’t particularly regret that. It was a prudent approach. Markets can’t continue to rise at these rates and at some point this year having a reasonable cash position is likely to lead to opportunities.

Melcor was up 2.5% to $15.28. Those few people who bought under $12.50 in November have had a good gain. But we still have a LONG way to go before this stock rises to a reasonable level. Its main business of selling home building lots is hugely cyclical and it seems that “the market” tends to under-value it in the down years. The market overvalued it back in 2007.

I did, as planned, grab a small position in Ceapro today. I may add to that after the Q4 results come out. I would not be surprised at all if the earnings per share are down in Q4 due to a higher share count and the costs of its new building (the building is leased but there was very substantial spending on equipment and leasehold improvements). These costs will be hitting the income statement starting only in Q4. This building will also be a drag on earnings in 2017 but possibly the revenues from added production will more than offset that by the end of 2017. The stock could also jump around depending on news about the success or failure of their anticipated newer products in the pipeline.

I have a very large exposure to Boston Pizza and have had an order in for quite some time to reduce the position moderately if it hits $23.50. We got to $23.48 today.

I have my cash mostly just in cash in my TD Direct accounts. This provides maximum flexibility to redeploy and also avoids any risk of loss. I probably should put much of that into TDB8150 which pays 0.75% and can be accessed at any time. (See the subscriber home page for a list of similar accounts at other discount brokers.) Another option is some kind of fixed income investment but most of those subject me to some risk of loss if I need the cash quickly and I would also need to wait three business days to get the cash to buy stocks with. Taking a quick look at what is on offer under Fixed Income at TD Direct and focusing on a 1 year period, I don’t see anything remotely interesting. Most of the 1 year corporate bonds have an “ask yield” that is lower than 1%, and it seems you have to go out more than two years AND accept a riskier company to get close to 2%. I’d far rather take the 0.75% and maintain the flexibility to access the funds at any time. There are some online bank accounts that pay more like 1.5% but that is usually a temporary rate. And they can’t be accessed from registered accounts at TD and, for any non-registered accounts, I am not interested in the hassle of opening another account. I like having everything in one place at TD.

A few years ago I tried using rate reset preferred shares paying (then) about 4% to get a higher yield. For the first year of so doing that it worked out nicely and in some cases shares bought at $25 could be sold at $26. But when interest rates in Canada declined further in early 2015 the rate reset preferred shares fell in many cases at least 20% and in some cases 30% or more below their $25 issue prices. So that did not work out very well and the lesson was learned that ONLY cash and bank accounts and (maybe) certain other high quality investments with less than a year to maturity should be considered to be cash equivalents. A saving grace was the opportunity to grab some more rate reset preferred shares at 30 to 40% discounts as those have since given good gains. (The Canadian Western Bank preferred B shares were available at around $16 this time last year and have recovered above $20).



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