Markets were strong on Monday with the S&P 500 up 1.1% and Toronto up 0.8%.
lululemon jumped 10.3% on news that it will become part of the S&P 500. This means that numerous funds that track the S&P 500 will HAVE to buy shares and this pushes up demand for the stock. I’d rather a stock go up because of higher earnings but going up for reasons of higher investor demand is okay too.
After the close, the Melcor REIT announced that its monthly distribution will remain unchanged at 4.0 cents per unit for the next distribution. I understand they are tight for cash and a distribution cut is a possibility. But my understanding is that they will be reluctant to do that. Given the strong Alberta economy I suspect that the distribution will not be reduced. We’ll know more when they release earnings on November 2. They are also trying to sell their Saskatchewan properties to raise cash. If they can do that then there should certainly be no distribution cut. But such a sale might have to be done at a loss. But then again with the units trading at such a low price (well below book value) a sale of assets below book value may not be a big deal. A sale of those assets at book value, if that were to occur, would be a very positive development. Also Melcor will likely focus on the gain versus original cost rather than the IFRS book value. There would likely be a gain on that basis. A sale would also require a buyer interested in what are apparently older strip mall type properties. Higher interest rates make it more difficult and more expensive for a buyer to finance a purchase. Worse case, the Melcor REIT can retain these for business as usual.
Canada will report September inflation figures tomorrow. The results will have an impact on whether or not to expect another interest rate increase.
It was interesting to see today that U.S. drug store chain Rite Aid will file for creditor protection. in Canada drug store chains seem to be highly profitable. There is more competition in the U.S. but it should still be a profitable business. I looked back and as of early 2019, Rite Aid had just replaced nearly its entire Board (not a great sign) and warned in its disclosure that it had a lot of debt and the debt was at variable rates. Overall, I am not sure why the chain failed but I would chalk it up to poor management.
I see that its shares absolutely spiked around 1998 and then crashed hard. It turns out that spike and crash were caused by fraudulent accounting which got discovered. But that was a long time ago and it seems that management must have made grave mistakes in more recent years. No doubt this will make a great Business Case for Harvard and other business schools to dig into. Meanwhile share owners have suffered big losses.