January 7, 2016

Thursday was another negative day for stocks with the S&P 500 down 2.4% and Toronto down 2.2%.

Walmart remained one of the few stocks on the rise and was up 2.3% to $65.03.

Melcor was up 4.7% to $13.99 but that was based on just 200 shares trading higher at the end of the day. The stock was at about $13 for most of the day. (I get this detail from Yahoo Finance).

Canadian Western Bank was down 1.3% to $21.95. It is now trading at book value. An insider who had grabbed some CWB preferred shares this week also bought 500 common shares today at $21.96. At most companies, insiders rarely buy shares partly because they already often receive much of their compensation in the form of stock options. Insider buying can be a very good sign especially when it appears to be in response to a price drop as opposed to being scheduled buying unrelated to the share price.

Boston Pizza was down 3.2% to $17.07. Boston Pizza resumed its share buy-back program on Tuesday and bought back shares each of the past three days.

Among the other stocks posting notable loses today were Toll Brothers, down 5.5% (I added to my position today). Constellation Software down 5.9%, and FedEx down 4.4%.

Investors now are starting to fear a bigger market decline. One thing I  am keeping an eye on is corporate borrowing rates. If corporate lending were to dry up or get too expensive then it could cause bad debts which would tend to lead to even more tightening of lending in a cycle that can get quite ugly. So far, corporate lending rates appear not to be rising with the exception of yields on junk bonds which is lending to very weak companies.

Government bond yields in Canada and the U.S. have been falling this week presumably in a “flight to quality”.

U.S. job numbers for December come out on Friday morning and if the number is better than expected that could spur a rebound in the markets. In addition, as I write this at just before 10 pm eastern time, stock futures are higher because the Chinese stock market is up about 2%.

Regarding China, I saw discussion today about how money is “flowing out” of the Chinese stock market. I disagree with that popular perception. In fact, the only way one investor can get money out of a stock market by selling shares is for another investor to buy those shares which results in no net flow of money. It’s popular to imagine that money “flows out” when stock markets fall. In fact the value of the stock market simply evaporates when markets fall. And wealth is created when stock markets rise. The value of stocks is, in theory, based on the present value of future estimated cash flows of the companies in the market. When forecasted cans flow rise or the “discount rate” falls stock markets rise creating wealth without any money flowing in. And the opposite is true as well. It is true that some investors will have sold Chinese stocks and be looking to move the money out of China but this is offset by the investors that bought those stocks.

 

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