October 27, 2021

Wednesday was a rare down day for stocks. (That’s not to say that down days will always be rare but they have been rare for the past 18 months.) The S&P 500 was down 0.5% and Toronto was down a full 1.0%.

This was an eventful day in the Canadian markets. The Bank of Canada indicated that it will begin raising interest rates as soon as next Aril (only about six months away). More shockingly, the bank said it will immediately stop its Quantitative Easing program of buying $3 billion in government bonds each week. And the bank said it expects higher inflation until mid 2022. Basically all roads now seem to lead to higher interest rates.

All else equal, higher interest rates are a negative for stocks. They tend to push down P/E ratios. Investors demand higher yields which leads to lower prices on stocks (and similarly on existing bonds). I am wondering now if I should have been more aggressive in raising cash lately. 

This development caused the Canadian dollar to rise somewhat to 80.8 U.S. cents. 

Canadian stocks did not really show that much reaction. They were mostly down but mostly only in the range of 1.0% or so.

VISA Inc. was down a hefty 6.9% on a disappointing earnings report. I think VISA will remain a good long term bet and I will update my analysis before too long.

Rate reset preferred shares should do well as rates rise. In particular those that are trading well below the issue price of $25 could rise. I am not a fan of any that are already at say $26 becasue the issuers have rights to buy them back on the 5 tear reset dates at $25. The Enbridge rate rest on out list at $21 might continue to do well. It only edged up 0.7% today. Some of you may have bought rate resets when the were far lower over the past few years. For a very long time rate resets were frustrating money losers. But not lately.

I recently talked about and bought a perpetual preferred share that pays 4.5%. This was a Great West Life preferred share with symbol GWO.PR.Y. In theory this will fall in price if interest rates increase. But today it was actually up marginally to $24.80 Just yesterday I had added to my position in at $24.60 (I managed to get at the low price of the day yesterday – that saved me only $30 on 300 shares but still it was nice to get the lowest price. I had entered an order to buy at $24.60 when it was trading at $24.75 and happened to get a fill.

I am continuing my analysis of BHP the giant miner. It will always be an unpredictable company due to commodity price movements. But I like it at the current price. I bought some today in the U.S. “side” of an RRSP account. For tax reasons I don’t like it in taxable accounts and I’d rather not buy in a Canadian dollar account since that involves currency transfer fees (It’s not the wholesale exchange rate that is a concern at all but rather the extra 2% or more the broker tacks on  and that applies to dividend receipts as well).

West Fraser Timber reported Q3 earnings after the close. Profits looked good but far lower than the blow-out profits of Q2. I won’t speculate which way the stock will move tomorrow. 

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