October 25, 2018

Thursday saw a partial rebound from Wednesday’s market declines.

The S&P 500 was up 1.9% but Toronto was up only 0.1%.

Amazon surged 7.1% but then was down 5.3% to $1687 in after-hours trading after it released Q3 earnings. If I had some U.S. cash I would be tempted to grab just a small amount of Amazon at prices under $1700.

Toll Brothers recovered 5.0% to $30.38.

Linamar recovered 5.15% to $54.50.

Visa was up 4.7% after its profit surged (again).

I notice that a CWB insider bought 475 shares yesterday. This makes three insiders that have purchased in October. Normally insiders of CWB are rarely purchasing, so I think they view the stock as under-valued.

After the close, Constellation Software released Q3 earnings showing a another quarter of strong growth – but that was likely as expected.

Royal Bank was out with a new rate reset preferred share paying 4.8% and resetting to the Bank of Canada plus 2.38% in five years. However, back on September 6, Bank of Montreal had done an issue at 4.85%, a spread of 2.69% over the government of Canada five year bond. Here the Royal Bank spread is lower at about 2.40. So, the Royal Bank issue looks less attractive to me especially given yesterday’s increase in the Bank of Canada interest rate. But nevertheless it sold out fairly quickly even as Royal bank increased its size from $300 million to $350 million.

Some, but not all, outstanding rate reset preferred shares will reset above 5.0% if the government of Canada five year bond stays at 2.40% or goes higher. Some rate reset preferred were issued at spreads of closer to only 2% above the Canada five year. Many investors may welcome the opportunity to get close to 5% or even higher on a preferred share that has a very high credit rating.

The existing rate resets have generally not been rising with the recent higher interest rates. But a perpetual preferred would fall. So these resets are pretty much doing their job simply by not declining. The problem is that some of them were issued at very thin spreads over the five year Canada and those one’s may never return to $25. They could do so if the market spread over the five year declines. And perhaps the RBC issue today indicates that is starting to happen. We might see the market yield on the highest quality rate reset shares (The Banks) top out around 5% even if rates rise another 50 basis points. That would mean tighter spreads to the five year Canada and would be very good news to any older rate reset preferred shares (that are trading materially below $25) that are of high quality and have a higher spread. Older rate reset shares that are already at $25 might not benefit since the issuer can redeem them at $25 if their spreads are above market.


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