July 12, 2017

On Wednesday, the S&P 500 was up 0.7% while Toronto was about flat.

Alimentation Couche-Tard was up 3.7% to $62.40 after releasing earnings prior to the open.

As expected, the Bank of Canada increased its key interest rate by 0.25 percentage points.

“The bank’s target for the overnight rate — at which major financial institutions make one-day loans to each other — moved up by one-quarter of a percentage point from 0.50 per cent.” (to 0.75%)

It interesting that a central bank can set a rate at which banks lend to each other. I am not familiar with all the levers they have to encourage banks to lend to each other at their target rate but they do in fact have the tools to get the big banks to cooperate.

Rate reset preferred shares (especially those trading under their $25 issue price) edged up as the higher Bank of Canada rate (and more specifically a higher yield on the government of Canada five year bond) leads to a higher coupon at the next reset date for these shares.

Perpetual preferred shares should act like very long term bonds and decline with higher interest rates.

Boston Pizza Royalties is an unusual security that in some ways is similar to a perpetual preferred share. BUT, unlike perpetual preferred shares, its distributions tend to increase over time.  It would decline in value if long-term rates were expected to soar. But as long as rates are expected to rise only modestly it could certainly continue to hold its value and perhaps even rise. I hold it for yield not for gains at this time. It would also decline if same store sales decline such as in a recession. It’s distributions of about 6.0% may be relatively succulent but they do not represent a (risk) free lunch.

The Canadian dollar rose about three quarters of a U.S. cent in currency trading. My approach to the exchange rate has not been to try to predict movements. Instead I have basically committed a certain amount of my portfolio to the U.S. dollar side of my accounts and I (very occasionally) tweak that by moving some money back to the Canadian side when the Canadian dollar sinks  and do the opposite as it increases. At the moment I feel no great urge to start moving Canadian dollars to the U.S side. It there is such a thing as predictable momentum in the exchange rate (which is doubtful) then my approach may lead to short term regret as it will seem I should have waited longer to make each move but likely works out well longer term. This is similar to how buying good companies on dips can lead to short term regret as the dip deepens but usually works out well with an eventual rebound.

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