On Monday the S&P 500 was up 0.6% and Toronto was up 0.95%. So it was another good day to be an investor holding a diversified portfolio.

AutoCanada was strong with a 5.0% gain.

This morning we had two banks reporting earnings. Bank of Nova Scotia and Bank of Montreal both increased their allowances for expected loan losses. But Bank of Nova Scotia’s share price is up moderately on the news and Bank of Montreal is down only very slightly.

The yield on the government of Canada five year bond has dipped to just below 4.0%.

These are signs that the economy is weakening. If we are near the end of the interest rate increases then bonds and preferred shares should begin to show some capital gains. We may have now seen the peak of GIC rates. In any case locking in some portion of a portfolio at higher interest rates is prudent although the future is never certain.

Stocks are off to a strong start this morning.

I added  quite a few more preferred shares to the list on the Subscriber Home Page. I included all those that were mentioned in my preferred share article.

When it comes to the rate reset preferred shares, my top picks at the moment would be those that have very recently reset to pay higher dividends for the next five years. In particular I like Emera’s EMA.PR.H that is paying a dividend that amounts to 8.1% of the current price and which dividend will remain in place for the next five years. The first payment at the higher reset dividend will be paid in November.

I also like some of the rate reset preferred shares that are set to reset within the next year or so (the sooner the better).  If interest rates remain about where they are now,  the reset dividends will reset to quite attractive levels.

I also like the perpetual preferred shares that are paying about 6.85%. For example Canadian Utilities CU.PR.E. If interest rates decline somewhat these shares are likely to offer a capital gain. But they also seem attractive to simply hold long term for the dividend.

See the full list on the Home Page. Since the future is always uncertain, It makes sense to diversify preferred share holdings.

On Friday, the S&P 500 was up 0.7% and Toronto was up 0.3%.

The FED chair Jerome Powell reiterated that the FED is committed to getting inflation back to 2%. The implication appeared to be that a another interest rate increase or two might be coming and certainly there should be no expectation of a rate decrease until and unless inflation is below 2%. This probably means that some sort of recession is coming.

The shortest term interest rates remain high and may go a bit higher. The direction of longer term interest rates is much tougher to predict. Possibly they have peaked. The inverted yield curve suggests an expectation that short-term interest rates will decline although that could easily be 18 months or more ion the future.

Having a balanced approach to equities, fixed income and short-term cash investments remains prudent. Being overly certain of where things are headed is not a great idea. 

Toll Brothers is updated and rated (lower) Buy at $75.49. Given a period of sharply lower contracts to build homes in the last half of fiscal 2022 and first half of fiscal 2023, I had expected it to be reporting earnings declines over the past two quarters. Instead earnings have soared. And now contracted home sales are very strong. But the period of lower contracts is still expected to result in lower earnings in upcoming quarters. So overall this is a tough call. It is a very well managed company but has a very cyclic history. It’s probably wise to hold any current position but be a bit cautious about buying. I’d be more  interested in adding to it if the price dips below $70.

Markets are somewhat weaker this morning and interest rates on the bond market have moves a little higher.

Recently I had mentioned an Emera rate reset preferred share (EMA.PR.H) which has very recently reset and will pay $1.581 annually starting with its next dividend on November 15. It has recently been falling in price probably partly related to the higher 5 year government of Canada bond yield and perhaps partly related to company-specific concerns.  The  credit rating is PFD-3H which is lower than the credit rating on the big Canadian bank preferred shares and lower than some other utilities.  This morning it is at $19.76. There are never any guarantees but this looks attractive to me at forward yield of 8.0%. It has declined since my first purchases but I picked up some this morning at $19.80.

I notice that Yahoo Finance and TD Direct both show the dividend and yield at the old lower rate based on the August 15 dividend which is the last one at the older dividend level.

These preferred shares trade at low volumes and can be volatile partly for that reason.

On Thursday, the S&P 500 was down 1.35% and Toronto was down 0.5%.

The great majority of stocks that I follow were down modestly on the day.

Royal Bank was up 2.0% after reporting earnings.

lululemon was down 4.6% and will releaser earnings apparently next week. Possibly this was a leak of poor results?

On Wednesday markets were strong as the S&P 500 rose 1.1% and Toronto rose 1.0%.

Shopify was up 5.0%. 

Toll Brothers was up 3.9% due to its strong earnings release.

AutoCanada was down 4.8%.

Interest rates in the bond markets took  a little dive today. This goes to show that things can change quickly.

Tomorrow, we start to get earnings reports from Canada’s big banks. There will be a focus on credit loss provisions. To date it seems that he big banks have no said much about the risks of mortgage renewals at higher rates. Perhaps they will now start to mention this risk.

Aecon group is updated and rated only a Weak Sell / Hold at $10.93. Aecon is a huge construction company and has been a disappointing investment since I first started looking at it over 4 years ago.

They had apparently under-bid on several very large projects which they later starting calling “legacy” projects in an apparent attempt to shirk responsibility for their poor performance. I find their disclosure to be lacking. They also focus heavily on EBITDA as opposed to net earnings which is disappointing.

It’s been an educational experience for me to see the low profits in such a complex and high-risk business.

I have a small position in this company and perhaps I should throw in the towel. But management is forecasting much better results ahead and so I will retain my position. One reason I wanted to update this company is that I am preparing a letter to a Board member to express some concerns.

On Tuesday, the S&P 500 was down 0.3% and Toronto was down 0.5%.

There were no unusual moves in the stocks I keep an eye on.

Interest rates in the bond markets continued to move higher today.

After the close Toll Brothers released what appears to be blow-out results for its latest quarter.  However, the stock appears to be little changed in after hours trading.  Despite strong home sales, the market is likely concerned about the higher interest rates. My inclination at this time is to add to my position. 

On Monday, the S&P 500 was up 0.7% . The gains came in the afternoon, as this market trended lower in the first few hours of trading. Toronto was down 0.2%. 

The government of Canada 5 year bond yield rose to 4.195%. This higher rate probably explained why a Royal Bank perpetual preferred share RY.PR.N was down 3.7% today. Yesterday it was yielding 5.7$ and today it is at 5.9%. Despite its high quality and despite that fact that interest rates are expected to decline within a year or two it seems that 5.7% was not attractive in the face of interest rates continuing to creep up.

On Friday, the S&P 500 and Toronto were each about unchanged. And there were no individual gainers or losers of any particular note among the stocks I keep a close eye on.

The Government of Canada 5 year bond is at 4.13%. The higher that rate goes the harder it is for stocks and bonds and preferred shares to go up. 

At the moment, markets appear set to open little changed on Monday morning.

I’m behind on updates but will definitely be working on updates starting tomorrow.

Markets were down modestly on Thursday with the S&P 500 down 0.8% and Toronto down 0.4%.

Shopify was down 3.8%.

Toll Brothers was down 4.6% as higher interest rates are a definite headwind for new home sales. Meanwhile though they have been announcing new communities open for sale.

Enbridge is yielding about 7.5% and is likely to be a good investment at its current price.

On Wednesday the S&P 500 was down 0.8% while Toronto was unchanged.

On the bond markets, interest rates continue to edge higher. The 5 year government of Canada bond yield is at 4.18%. The notion of “higher for longer” is settling in.

For years we wondered at the sheer stupidity of investing in something like a ten year bond at 1%. There were capital gains to be made on government bonds as interest rates fell and bond prices on existing higher interest rate bonds went above their $100 par value. But all those bonds will ultimately mature at $100.

With equity markets having soared in the first half of this year it seems clear that the second half will not be so rosy. But given the difficulty of such predictions the prudent course is likely to stay the course with a balanced and diversified approach. Those just started investing will benefit if stock prices decline and those with large portfolios will receive dividends and interest in any case. It’s not investors that probably have much to fear, it’s those with large mortgages and debts that have more to worry about.

Markets were noticeably negative on Tuesday with the S&P 500 down 1.0% and Toronto down 2.0%. That’s no surprise given various signs of a softening economy. This morning Target is warning of lower profits.

Most stocks were down 1 to 2.5%.

Toll Brothers was up 0.9% probably boosted by the fact that Berkshire Hathaway has initiated stakes in several home builders.

AutoCanada was up 1.4% to $26.04. That’s good on a day when the markets were quite negative. This stock has had a big recovery since it hit lows under $16 in May. That low came after two years of big declines from a high over over $50 two summers ago. I’m confident that it is well managed but higher interest rates are a headwind.

The 5 year government of Canada bond is at 5.13% this morning.

The ten year U.S. Treasury bond closed yesterday at 4.2%. The market is apparently not expecting interest rates to reverse anytime soon.

“Occidental Petroleum Corp. agreed to buy Canadian startup Carbon Engineering Ltd. for US$1.1 billion as the fossil-fuel producer works to expand its position as a leader in removing carbon dioxide from the atmosphere.” That is interesting news. If it becomes feasible and economic to remove carbon from the air then Net-zero can be achieved for any industry by removing as much carbon as is emitted. But my expectation is that many environmentalists will not settle for NET zero. They are so against the oil and gas industry that they will still start to push for ZERO as opposed to NET zero as soon as net-zero looks feasible.

Canadian inflation for July was about as expected. Higher month over month but the downward trend is intact.

An interesting tidbit was that “Electricity prices rose significantly in Alberta, increasing by 127.8% in July on a year-over-year basis.”  Most people and businesses have locked in lower costs through contracts but this is a huge increase in the market rate and is sure to set off some howls. There is lots of interesting figures in this report.

Stats Canada reported manufacturing data for June and there were a lot of declines. This is further evidence that the economy is slowing down. But oil which was one of the categories in June likely rebounded sharply in July and August. 

I was looking at the preferred share price changes since my article last month on that topic. Not a lot of price movement. One that caught my eye is a rate reset from Emera. EMA.PR.H It has just reset to pay $1.5810 for the next five years starting with the next dividend paid November 15. I bought shares this morning. I paid the offer price of $21.04 for a yield of 7.5%. That seems to me to be quite attractive especially in taxable accounts. I notice the last trade as I write this was at $21.20. I also notice that Yahoo Finance is still showing the old yield based on the previous $1.225 annual dividend.

Markets are weak this morning. The 5 year Canada bond is at 4.1%. Increases could benefit any rate reset shares that are resetting in the next year and especially any that are set to reset in the next few months. But higher rates are negative for the perpetual shares. But if rates do decline after a year or so the perpetual preferred shares should rebound.

On Monday, the S&P 500 was up 0.6% while Toronto was down 0.6%.

The Q2 earnings season is basically over now which could lead to quieter markets.

The bond market does not seem to be signaling that interest rates will decline anytime soon. The 5 year government of Canada bond is at 4.11% as it apparently rose in over night trading.

The Bank of Canada has rather quietly reduced its balance sheet by 200 billion dollars. This was likely due to short-term government bonds maturing as opposed to the Bank selling bonds into the market. I find it strange that the financial community seems to have nothing to say about this.

Canada’s M2 money supply is decreasing and this seems to be little talked about. Inflation was blamed on excess money supply growth and so presumably the money supply decrease will play a role in reducing inflation.

Yesterday I saw a recommendations for a money market fund (Excahnge Traded Fund with symbol CSAV that pays 5.14% and the sponsor CI Global Asset Management claimed it would continue to pay this level as long as the Bank of Canada interest rate remains at it its current level. But TD Direct / TD Waterhouse does not allow this fund to be purchased online (or possibly at all). I understand some of the big bank brokers have blocked these funds and others have not.

CI also offers a convertible bond ETF that trades as CXF on Toronto. It has an attractive yield to maturity of 5.7%. But be aware that there will likely be some defaults in this space as it is often weaker companies that use convertible debt. And with interest rates having risen so much, some of those companies will be in trouble. 

In a few hours the July inflation number for Canada will be released. The year over year figure should be tame but the month over month figure could rise due to gasoline prices.

Friday’s action saw the S&P 500 down 0.1% and Toronto up 0.3%.

Canadian Tire was down another 5.5% adding to similar losses on Thursday. The market is worried after Canadian Tire reported lower discretionary sales. This could certainly continue. I’d be interesting in accumulating shares in Canadian Tire at this price and lower. But I suspect there is no hurry.

Melcor Developments was up 3.1% after its earnings report. Basically almost no one follows this company and it trades very thinly. I think management is doing more of the right things now but interest rates are a big headwind to selling new building lots. The Calgary market is relatively stronger and the company is well positioned in that market. It will be interesting to see if the Melcor REIT can sell its Saskatchewan properties for about book value or more as it looks to raise cash.  Oil prices are stronger in Alberta and immigration is strong. This will hopefully support new home building.

The 5 year government of Canada bond yield is back above 4.0%. Any decrease in interest rates is certainly not imminent at all.

On Thursday, the S&P 500 was about unchanged while Toronto was up 0.3%.

Canadian Tire was down 4.5% after the weak results I mentioned yesterday. Possibly a sign of lower consumer spending ahead.

AutoCanada was up an impressive 16.6% after its god earnings report. The car dealer industry faces higher interest rates and the fact that a portion of consumers are financially stressed. But the industry seems more disciplined with lower inventory and this is a well-managed company.

Linamar was down 3.1% despite its good results. The market is worried where things are headed.

Melcor Developments reported earnings that were better than might have been expected. They sold some home building lots in the U>S at a 49% gross margin. That’s getting toward the acceptable range. They also has a few asset sales and as I recently commented they have more assets up for sale as well as share buy backs. They recognise they have too much equity tied up. Gros margin on lots sold in Canada was 46% a big improvement from their recent inadequate 40% level. I have been on their case telling them that 40% is simply fundamentally too low. They also have two new communities coming on stream in Calgary where the housing market has heated up somewhat. High interest rates certainly remain a headwind but their results have improved.

U.S. inflation came in tame for July and this could give hope that the interest rate increases will soon cease.

On Wednesday, the S&P 500 was down 0.7% while Toronto was up 0.3%.

A number of companies had strong earnings reports yesterday. Linamar was down 3.3% yesterday but then after the close reported very strong results. 

Grocer/ Pharmacy Metro reported very strong results yesterday morning but rose only 1.2% on the day as it faces a large strike at its Toronto stores.

Stantec reported strong results after the close yesterday.

This morning Canadian Tire has reported somewhat weaker results. They indicate consumers are cutting back on discretionary items. They did not highlight any issue with higher credit losses. Apparently not many people are falling behind on credit card payments. (But I think that continues to be a risk given inflation and vastly higher mortgage costs for a significant chunk of people). Canadian Tire did withdraw their financial aspiration guidance which could send the stock lower. But overall it remains a very well run company and a “keeper” for the long term.

AutoCanada was also out with earnings this morning. The results look reasonably good but not gangbuster by any means. They are dealing with higher floorplan (Vehicle inventory) financing by reducing the number of vehicles on the lots. This may in part explain the general trend of a lack of vehicles at many dealerships (not just AutoCanada) and most dealers will want to hold fewer vehicles unless the manufacturers give incentives such as lower floorplan financing. AutoCanada reduced used inventory by 33%.

With that, we shall see how the day’s trading goes.

On Tuesday, the S&P 500 fell 0.4% and Toronto fell 0.15%.

AutoCanada was up 4.0% and will release earnings tomorrow (Thursday) morning. As a well-managed company I am hoping for good profit news. But their debt and interest costs may be an issue and a definite headwind. They did sale and lease backs on many assets (dealership buildings) and so that reduced their debt and the lease costs are likely mostly locked in for several years. Their general debt does not appear to be excessive but floor plan debt that finances the vehicles is high by nature and is variable interest rate by nature.

Yesterday I saw headlines about Moody’s credit rating agency downgrading 10 small to mid-sized banks. This morning that news was hard to find so not apparently not considered a big concern. But this could be the tip of the iceberg.  Sorely there is a good number of companies really hurting from the massive interest rate increases. And yes the rate increases are massive even if 7% mortgage rates do not seem high to boomers.  Titanic never saw the iceberg coming and despite its reputation as a Seer and Soothsayer, in my experience the market has been very late to see many icebergs – even in clear weather. I’m not saying an iceberg is looming. But if the next one got kicked off by credit downgrades followed by a credit contraction (banks more reluctant to lend), I would certainly not be surprised.

Meanwhile the yield on the 5 year government of Canada bond has settled back to 3.87% and was briefly 3.80% yesterday. In a credit contraction corporate bond yields could rise while government bond yields could decline in the usual “flight to quality”.

As always diversification including an allocation to cash is prudent. I have been mentioning that with cash now paying attractive yields it is far easier to justify holding cash than has been the case in recent years. I have always said that having some cash is a good idea. ONLY cash (and cash equivalents) are guaranteed not to decline (in nominal dollar terms) no matter what. And cash provides dry powder to pick up bargains when things occasionally get ugly.

On Monday, the S&P 500 was up 0.9% while Toronto was closed for the civic holiday. (And people wonder why productivity is lower in Canada – for one thing we get more holidays.)

Berkshire Hathaway was up 3.6% to a new all-time high. Never dismiss the abilities of Warren Buffett even at age 92. So far, his mind remains very sharp. 

I see where SNC-Lavalin expects to be Cash-flow positive in the last half of this year. It’s pretty pathetic when that is something to brag about. 

Melcor Developments has done two block share repurchases in the past month. The total was about a half million shares. This is quite significant given they have about 32 million shares outstanding. It also suggests tthat managment is quite confident in their cash and debt position. They report earnings on Thursday after the close. I’m not expecting anything great given that home starts are weak with higher interest rates. But they did close on the sale of some lots in the U.S. This has been a long-suffering investment but hopefully some recovery ahead. Unfortunately they are stuck in a fundamentally low return business it seems and are now harvesting land to get cash out of the business.

The Melcor REIT is not buying back any units becasue that subsidiary is strapped for cash. 

I look forward to Canadian Tire’s Q2 earnings on Thursday morning. It will be interesting to see if their credit card delinquencies will be on the rise. I would not be surprised if they are. They continue to benefit from population growth but the concern is that people may have started to cut back on spending due to higher interest rates and inflation biting into discretionary spending. Gotta eat and pay the mortgage before they buy a new fire table for the deck.

Never a dull moment but overall investing continues to deliver gains over time.

Friday saw the S&P 500 down 0.5% and Toronto up 0.6%

Amazon was up 8.3%. Wow!

AutoCanada was down 4.9%. But they don’t release Q2 earnings until Thursday so I’m not sure this is anything more than sort of random noise.

Apple was down 4.8%. Investing in individual stocks is never for the faint of heart. 

Intact Financial was up 3.8%.

With Telus announcing a staff reduction of 6000 and with the latest jos report showing a small loss in employment, there are signs that the economy is starting to cool.

On Thursday the S&P 500 was down 0.25% and Toronto was down 0.5%.

Shopify was down 5.4%. It released earnings earlier this week. There is probably little reason to expect this stock to rise in the short term. I feel comfortable with my decision to reduce my holdings which was about two months ago as I recal. But I also like continuing to hold some for the long term.

Fortis Inc. was down 4.1%. It released Q2 earnings earlier this week showing modest growth. It’s logical that Fortis is worth somewhat less simply due to higher interest rates. It remains a great lower risk holding for the long term.

Intact Financial released earnings this morning which on a headline basis were far lower than last year but that was due to unusual gains last year. Fundamentally the operating results were somewhat weaker this year due to storm damage claims. I have not looked at this company in any detail in recent years.

West Texas Intermediate oil WTI is at $82 U.S. dollars. Three cheers for Alberta and a chorus of boos from the rest of the country. 

The 5 year Canada bond is at 4.1% as interest rates stay high. Great news for all those boomers with money invested in GICs and terrible news for young people with mortgages.

On Wednesday the S&P 500 was down 1.4% and Toronto was down 1.5%.

This was blamed mostly on the fact that the credit rating agency Fitch has downgraded the U.S. from triple A (AAA) to double A plus (AA+). This pushed the yield on U.S. treasuries only moderately higher.

Warren Buffett has said he is not worried about it although the concerns of Fitch are valid he said.

The great majority of the stocks I follow were lower on Wednesday.

Shopify was down about 7% and AutoCanada was down 5.9%.

I notice that TFI International was actually up 0.15% on this day when most of the market was down. TFI is a powerhouse due to superior management. Yahoo Finance shows the forward P/E at 19 which is probably not excessive at all given its history.

This morning I see a certain rate reset preferred share has reset to a higher dividend. Enbridge announced that ENB.PR.H has reset to pay 6.112% on the $25 par value. This is based on the recent 3.992% 5 year Canada bond yield plus its rather low rese spread of 2.12%. The shares closed yesterday at $17.70 so the going forward uield is 8.63%. That’s higher than most of the high quality rate reset yields becasue Enbridge has a somewhat lower credit rating and is generally somewhat out of favor at this time. Their unsecured debt is rated Triple B plus (BBB+) The pref shares are rated PF-d 3(H) or Triple B minus (BBB-) by Fitch. BBB- is considered to be the lowest end of investment grade.

Overall, this looks like a good investment to me. But it could turn out badly is the company-specific situation at Enbridge worsens or if interest rates and inflation go higher instead of lower. Although in the case of higher interest rates and inflation it will eventually reset again so that provides some protection.

We never know the future and that’s why diversification is prudent. No one should go hog wild on preferred shares but they certainly can have a place in many portfolios at this time. And I like the idea of haveing some rate reet shares and some perpetuals. 

If you look at the recent history of ENB.PR.H , now at $17.70 it was about $15.70 in mid-May and about $16.70 at the end of June. This move higher and this higher reset is exactly what I have been talking about with rate reset shares this past couple of months or so.

Lower markets on Wednesday may also have been related to news about another indictment for former President Trump. NEVER a dull moment it seems.

Tuesday saw the S&P 500 down 0.3% and Toronto down 0.45%.

I was surprised that TFI International was up 3.1% after announcing lower year-over-year earnings that reportedly were below analyst expectations. Really? Maybe earnings were expected to be below expectations? (Oxymoron alert). Apparently the shares rose because TFI said it will benefit by picking up customers from bankrupt competitor Yellow (which I have never heard of). TFI has also negotiated a 5 year labour deal with many of its truckers and with modest wage increases. TFI is also putting in place systems to monitor profit by terminal in the U.S. They already do that in Canada. Basically more examples of the strong management at TFI. Seeing the surprise gain yesterday and not knowing the reason I sold 50 of my modest 200 share holding. I’m not at all sure that was wise. After I update this company I may be wanting to buy back in if the price happens to drop.

Earnings reports are coming in hot and heavy. Starbucks, RIOCAN and Fortis among others out this morning

I likely won’t have much if anything in the way of company updates for the next 2 to 3 weeks due to travel. Then I should have a lots of updates in late August and through September.

Overall, I am certainly surprised at the strength of the S&P 500 this year. I keep expecting more things to “break” with the massive interest rate increases, the rent inflation and other inflation. How can lower and lower middle income people keep making those credit card payments? Who will crumble as their mortgage payments soar? Which companies will struggle due to high interest? Time will tell. I will be paying more attention than usual to the debt levels when I analyse companies. The schedule of debt maturities becomes important also.

Cameco was out with earnings that focused on growth but reported a net earnings loss of $3 million. Despite its momentum and the fact that uranium and nuclear is back in favor, this company remains risky. 

On Monday, the S&P 500 was up 0.15% and Toronto was up 0.5%.

Cameco was up 3.2% as the U.S. brought on line its first new nuclear reactor in about seven years. This is a tough business but I have mentioned a few times that it may be time for uranium and nuclear to shine once again.

AutoCanada was up 5.1% and will announce earnings on August 10.  Due to a shortage of cars, a modest rental car in Halifax is apparently about $350 per day as the walk-in rate. (We booked ahead). That suggests to me that auto dealers can command high margins on whatever cars they can get their hands on. AutoCanada will have no qualms about charging whatever they can get. But hopefully will not get too greedy.

The car rental market on the other hand is greedy and therefore unintentionally basically begging people to start renting out private cars such as through Turo. We rented that way in Maui. Worked great. Turo is already active in Halifax and presumably most of Canada. The law of unintended consequences will be doing its work. When maximising profit turns into gouging, karma has a way of biting back.

TFI International reported lower earnings that were below analyst expectations. This is a fantastic company but the stock price may have got someone “out over its skis”. If it declines much I would be interested to buy. Selling this company has always worked out badly.

Couche-Tard reported Monday morning that  it will buy back 10 million shares in a block trade from an institution that owned over 50 million shares. They will buy at a 3% discount which was $64.69. On that news the shares closed about unchanged at $66.76. The market recognises that a block trade of that size does not necessarily sell at the market price when it it is the seller and not the buyer who was motivated to make the trade. Retail investors have an advantage over institutions in this regard in that we can sell without affecting the market price or having to sell below market.

Oil – West Texas Intermediate -WTI has risen to $81 U.S. dollars. This is bad news for inflation but vry good news for Alberta.

Andrew Peller announced that it has final approval for a major redevelopment of a very valuable parcel of land in Port Moody B.C. My understanding is that the company took years (perhaps many years) to get the residential / commercial proposal approved. They are now apparently just  starting to look for redevelopment partners. I would have though such partners would have been lined up a long time ago. I wonder if the initial partners have bailed. They may have missed the boat here due to regulatory delays. The share price did not bother to react to the news which came out Monday morning. Drat, it seems that laggard companies find a way to lag. 

Markets were higher on Friday with the S&P 500 up 1.0% and Toronto up 0.7%.

Meta was up another 4.4%. And Amazon was up 3.1%.

Shopify was up 3.2%.

After the close the Melcor REIT released Q2 earnings which were not great but not too bad. Expenses are rising faster than rent. The payout ratio remained. Net operating income was up 4% which is certainly better than a decline. Their retention of existing customers as leases expire has been very strong at 92% in the first 6 months of 2023. Occupancy is stable at about 87% and with commitments for future it is at 89%.

Adjusted Funds from operations were down 6% in the quarter which is definitely not good but was actually an improvement versus Q1. 

In order to raise cash they have listed for sale their 5 Saskatchewan properties. 

They secured one small new mortgage in the quarter at 4.62% for a five year term. That strikes me as a low rate considering that even residential mortgages are higher than that. But they said another mortgage was renewed at 6.97% so it’s rather confusing to know what their current cost of debt is. The higher one was probably on raw land since it is Joint Venture and the lower mortgage may have been secured by very secure tenant cash flows.

Overall their financial statements and commentary are always confusing. On my initial reading it looks like a relatively poor quarter but as they struggle with low occupancy and higher interest costs and the need to offer incentives to attract tenants. The low unit price already reflects a weak environment. I understand that management may even find it necessary to reduce the distribution but that may depend on whether or not they can sell the Saskatchewan properties.

Given the low unit price I am not thinking of selling and I believe the Alberta economy and population growth will lead to better results in future.

On Thursday the S&P 500 was down 0.6% and Toronto was down 0.9%.

Meta (Facebook) was up another 4.4%. The gains on this since last Fall when it was out of favor have been massive especially considering the size of the company. 

Most stocks on my list were down modestly.

Aecon Group was down 16% after reporting yet another poor quarter. They did report a profit but that was due to the sale of two parts of their business. But they reported another $80 million of losses on so-called “legacy” projects. My understanding was that they had said early this year that they had already booked all the expected future losses on those projects. Yet they now report more big losses. They appear to be very poorly managed. In addition they are in a tough industry.

Markets appear set to open modestly higher this morning.

Many Canadian companies will be reporting earnings in the next week or two. 

The yield on the government of Canada 5 year bond has increased to just above 4.0%. Apparently mortgage rates are set to increase again. Some companies and many individuals will be experiencing a lot of financial pain due to the higher interest rates. But I understand the FED no longer expects the U.S. economy to go into a recession. 

On Wednesday, the S&P 500 was about unchanged while Toronto was up just 0.05%.

TFI International was very strong with a 4.3% gain. That is strong especially considering CN rail just reported a 7% revenue decline in Q2. TFI has not yet reported. This is an extremely well managed company. It has done extremely well despite being in a competitive industry and despite labour shortages and volatile fuel prices. When I see the recent spike in TFI I am tempted to trim the position but historically that has been a mistake with this company.

AutoCanada was up 2.7%. Desrosiers has reported that June auto sales were quite strong. I’m optimistic about AutoCanada given the higher industry sales and given that this has been a very well managed business – under current management that is. My understanding is that due to lack of supply car dealers are easily getting full manufacturer suggested retail price, if not higher. AutoCanada has also been very successful in used vehicles.

The FED hiked interest rates once again yesterday. Their next meeting is September and its not clear if there will be another hike then or not.

Markets are set to open higher this morning apparently (once again) on optimism that the interest rate hikes have possibly peaked.

On Tuesday the S&P 500 was up 0.3% whil;e Toronto was down 0.15%

There are signs that the economy is slowing. 

CN just reported weak Q2 results with a 7% revenue decline. Intermodal (consumer goods) was one area that was down.

StatsCan reported early indications that both wholesale trade and manufacturing were down modestly in June.

These higher interest rates have to cool the economy at some point and it appears it is starting to do so.

The 5 year Canada bond which had dipped back to 3.75% is back up to 3.94% indicating that expectations that interest rates will decline are being pushed out further in time. When it comes to interest rates the expectation is basically “higher for longer”. Not much higher. The issue now may be more so the “longer” and how long that will be.

On  Monday, the S&P 500 was up 0.4% and Toronto was up 0.2%.

The S&P 500 has continued to go higher powered by about 7 dominant stocks. Toronto has also done well.

What we have not seen yet is any big impact from those consumers and businesses that are getting hit hard by the higher interest rates. I will be interested to see what Canadian Tire says about credit card delinquencies. 

This week we will have numerous Q2 earnings reports coming in.

Canadian Tire had an unusually weak Q1 for several reasons including a fire at a distribution center. Hopefully they will be back on track in Q2. In any case their shares look attractive in relation to earnings so I am definitely not thinking of selling.

Most of the preferred shares I follow were higher yesterday. I see one (RY.PR.S) that jumped 3.5% but that appeared to be just based on a few shares near the end of the trading day. These shares can show that type of volatility. Be cautious not to use market orders but instead use limit orders at a certain price and avoid buying just after something like a 3% jump as that might quickly reverse.

On Friday the S&P 500 was about unchanged while Toronto was up 0.5%.

American Express was down 3.9% and AutoCanada was down 3.0%.

Almost all the preferred shares I have been mentioning were up modestly. I have mixed feelings on that since lower prices make for a better buying opportunity for those interested in buying.

I thought maybe the 5 year Canada bond yield had declined and that was why the perpetuals were going up a bit. But, no that 5 year yield is at 3.85% and so it’s still close to its recent high around 4.0%.

I notice that TD Direct (TD Waterhouse) has raised the interest on its high interest account TDB8150 to 4.55% to reflect the lates Bank of Canada hike. I assume the other banks have made similar increases. It’s stunning to think that about two years ago they were paying as low as a token 0.05%.

Truly, I think the market is giving investors a golden opportunity to earn and lock in (with some investments not TDB8150 which floats) attractive yields on fixed income for the first time in a decade or more. 

At one time I might have turned up my nose at a 6% locked in yield. But I’m older now and after years of near-zero interest rates, 6% looks pretty good and 7% in something safe definitely looks good. As always diversification is called for. I don’t want to over-load on fixed income but I definitely want a material allocation to it.

On Thursday, the S&P 500 was down 0.7% and Toronto was down 0.3%

Toll Brothers was down 4.1% as apparently all the big U.S. home builders were down on Thursday.

Shopify was down 4.1%  and Amazon was also down.

Just another typical day in the markets.

The S&P 500 is predicted to open modestly higher this morning.

On Wednesday, the S&P 500 was up 0.2% and Toronto was up 0.4%.

TFI International was up another 4.0%.

Other than that, not too much excitement for the stocks I monitor.

There were some interesting Q2 earnings reports after the close today and that may be the driver of some moves tomorrow

Markets were strong on Tuesday with the S&P 500 and Toronto each up 0.7%

TFI International was up 5.9%. What a fantastic long term winning company. This latest gain was likely due to analysts upgrades although I see FedEx was also up 2.8% so maybe the whole sector was more loved today. What is nice too, is that it gapped up at the opening. The positive news must have come out while the market was closed. That’s the way it should be.

Cameco was up 4.0%. Nuclear power may be about to have its day in the sun again.

AutoCanada was up 4.1%

CMHC reported June housing starts. The headline was that Canada saw a huge increase. Looking at the details, that headline was quite misleading. The increase was versus May and month to month things can be volatile. The overall trend was relatively flat. For Canada single family starts were DOWN 28% versus June of last year and total starts were unchanged. The overall trend in recent months is about flat. It’s almost irresponsible that this comes out with a headline about a record increase.  

Because of my interest in Melcor Developments I always focus on the Alberta starts. These were dismal. In Alberta, single family home starts were down 26% versus June of 2022 and multi-family starts were down 36%. Calgary single family starts were only down 6% while Edmonton was down 34%. (And June 2022 was no banner month either.) The dismal housing starts in Alberta are despite the surge in immigration and the relatively affordable prices. High interest rates are clobbering the market. But rents are rising and so perhaps the starts in upcoming months will improve. 

On Monday the S&P 500 was up 0.4% while Toronto was down 0.2%

Constellation Software was up 2.0% after announcing a big acquisition. What a winning company it has been.

The Melcor REIT was up 6%. That’s on small volume so may not mean anything. But I now see that they announced Friday (presumably after the close) that the distribution for July would be (remain at) 4 cents. They are somewhat tight for cash due to higher interest rates and the ongoing vacancies in their office buildings. Unfortunately, this may signal that they plan to cut the distribution for August after they come out with results. I believe they normally declare the distribution three months at a time. The units have a big discount to book value but we could certainly see a price drop if they have to cut the distribution. 

I scraped up some cash and added to my perpetual preferred share position today. In one account I added some Great West Life. GWO. PR.Y yielding 6.8%. Then in another account I was tempted to buy more of the GWO but thought it better to diversify so I placed an order for some CU.PR.E yielding 6.7% but it has not gone through yet as it was late in the day and I bid less than the offer price.

Possibly I am over-doing it on these perpetuals. But they look attractive and safe to me. I have historically been light on fixed income and these higher interest rates (and specifically the higher yields) seem like a good opportunity to increase my fixed income allocation. I like the idea of a substantial amount of dividends flowing my way regularly.

On Friday, the S&P 500 and Toronto were each down 0.1%.

Stantec was up 2.7%. Dollarama, WSP Global and Metro Inc were all up just over 2%.

AutoCanada was down 4.1%.

Q2 earnings reports are starting to come in for U.S. companies and will likely include some surprises in both directions to give the market something to react to.

On Thursday the S&P 500 was up another 0.85% and Toronto was up 1.0%. Apparently, investors are in an optimistic mood.

Shopify was up an impressive 6.1%.

Update  dated July 16: I had made a comment here July 13 about one of the perpetual prefs being down 8% from my recent article price. Actually I had entered an incorrect price and then in my comment I also got he symbol wrong so the comment got too garbled to fix and I have deleted it. I would virtually never delete a comment but this one just got too garbled to fix. I remain attracted to perpetual preferred shares. Since my article the seven listed are down an average of 1%. The range is minus 4% to plus 2%. 

Markets were strong on Wednesday after U.S. core inflation came in a little lower than expected fueling hopes that the end is in sight for the increases in interest rates. 

In response, the yield on the U.S. 10 year treasury declined modestly from 3.99% yesterday to 3.86% today.

In Canada the five-year government of Canada bond yield held steady at about 3.85% even as the Bank of Canada raised its rate 25 basis points to 5.0%.

The big Canadian banks raised their Prime rates to 7.2%. I continue to think that is going to cause major pain to certain borrowers and it’s hard to say what the fall-out will be.

It’s great for savers such as retirees with investments. The rate on money market funds such as TDB8150 is likely to now increase from 4.3% to about 4.55%. About two years ago it was 0.05%! One year GIC rates are easily found at 5.35% and may go a little higher. The five year GIC rates are at as high as 5.05% for the annual pay option. That rate may have reached its peak.

With inflation starting to come down and with expectations that interest rates will be lower in a year or two, I continue to think that grabbing some perpetual preferred shares yielding about 6.5% is not a bad idea especially for more conservative investors and perhaps for a portion of almost anyone’s portfolio. See my recent preferred share article.

Today, the S&P 500 was up 0.7% and Toronto was up an impressive 1.0%.

AutoCanada was up 6.6%.

Canadian Western Bank was up 3.9% as the Laurentian Bank potential sale pulled it up a bit.

Toll brothers was up 2.8%. West Fraser Timber was up 3.2%. Apparently the market thinks that U.S. home building can remain strong despite higher interest rates.

Linamar was up 2.9%.

All in all, the markets have done very well and do not seem to see much risk of a big recession in spite of the sharply higher interest rates. Perhaps “the market” should think about the fact that the reason interest rates would come down is because of a cooler economy. We probably can’t have both a strong economy and lower interest rates. Central Banks will keep interest rates high until the economy softens and brings inflation down. All of that is another reason I would not mind having a higher allocation to preferred shares. 

On Tuesday the S&P 500 was up 0.7% and Toronto was up 0.3%.

Aecon Group showed some life gaining 4.3%.

Visa was up 1% which is not much. But it’s now up 16% this year to date. I figured that would mark an all-time high but upon checking it was slightly higher two years ago. This stock is a keeper.

Oil has been gaining and West Texas Intermediate is at $75 which bodes reasonably well for Alberta. 

Tomorrow’s excitement for the Canadian market will be the latest Bank of Canada interest rate decision.

After the close today, Laurentian Bank more or less put itself up for sale. It trades at only about 53% of book value and will likely jump somewhat on this news.

If it is purchased, I think National Bank might be the most logical buyer. There is no way the big 5 banks should be allowed to grab it. I’d like to think that Canadian Western Bank could buy it but that would require CWB to issue shares at well below book value which would be unfortunate. Like CWB, Laurentian has a strong focus on commercial lending. But unlike CWB it also has a significant residential mortgage book. One possibility is that Laurentian will sell off pieces of itself. It has some equipment financing operations that would be of interest to CWB.

On Monday the S&P 500 was up 0.2% and Toronto was roughly unchanged.

Starbucks was up 3.2%.

Toll Brothers was up 2.7%.

This morning West Fraser Timber announced that it will sell its Hinton Alberta Pulp mill for just US $5 million. This mill had previously been permanently curtailed in April of 2022. Pulp mills are not exactly in favor with environmentalists and it’s a tough business. But the new owner has tentative plans to invest 400 million euros to expand the mill. Although West Fraser Timber will take a write-off of about $110 million the market was unfazed by the news as the shares rose 1.3% today. Running a pulp mill is not a core business for WFG and they have enough issues keeping environmentalists at bay in their core lumber and related business. 

On Friday, the S&P 500 was down 0.3% while Toronto was up 0.1%.

Next week’s excitement will be whether or not the Bank of Canada increases its interest rate by another 0.25%.

The market expects an increase and that in part is why the yield on a five year government of Canada bond poked its nose over the 4.0% level on Friday. It’s now at the highest level since late 2007 just prior to the financial crisis.  That yield was under 1% in 2016. And with the pandemic panic in 2020 it was at about 0.3% for about nine months. The increase in the past two years has been epic.

It seems clear that higher interest rates are driving a huge transfer of wealth from debtors to savers. And I suspect many corporate and personal debtors are going to end up bankrupt. But it does not appear the markets are concerned so far about the impacts of those bankruptcies.

At this time most investors should probably be tilting their portfolios more in the direction of safety especially if they have been over-exposed to riskier allocations. Even cash now pays you to own it so it seems logical to have a higher allocation to cash. And GICs and all forms of fixed income now pay you more to hold them and so it makes sense to have a reasonable allocation to fixed income.

The report on Ceapro Inc. is updated and rated Speculative Buy at $0.44. 

This company has been a disappointing investment to date. But it does have a strong balance sheet and is trading down very near its book value. It generates cash and profit from its “base business” even after expensing its research efforts. It claims to have a number of promising developmental areas that may be close to commercialization if it can do a licencing deal. It has other research efforts hat are longer term. So far none of these research efforts have panned out but there is definitely potential This is a Speculative penny stock and is suitable for only a smaller investment.

Thursday was a negative day for markets as the market (finally) starts to believe that at least one more (and quite likely two) interest rate hike will occur in the U.S. 

The S&P 500 was down 0.8% and Toronto was down 1.5%.

Most stocks wed down on the day. AutoCanada managed a 2.0% gain.

Costco reported same-store sales for June. I focus on the numbers adjusted for changes in gasoline prices. 

In the U.S. they were only up 2.0% which is low for Costco but not surprising after  all the huge gains since the time of the pandemic. Same -store sales growth in the U.S. has been quite weak for several months now. But the  market so far does not seem concerned and the stock barely budged in after-hours trading. If the weaker U.S. sales growth is due to volume being down it could be an indication of softer consumer spending. But it could also be due to lower inflation which would be good news for consumers. Costco does not break out its sales increases between volume and price changes.

In Canada, Costco’s same store sales growth in Canadian dollars was 6.5%. That could be both volume and inflation driven. And volume growth in Canada could be explained by the fact that the population here rose by over 1 million in the past year. I suspect that competition may be causing Costco in the U.S. to keep a lid on prices while in Canada competition is not as strong.

In my own investing I am interested in adding more in the area of preferred shares. 

For rate resets (see my recent preferred share article) I like EMA.PR.H. At $20.75 it yields 5.9%. But it is going to reset in mid August and if the 5 year Canada bond is at 3.75% (it’s currently 5.9% – correction 3.9% ) then the yield based on the new dividend would be 7.6%. With a reset date coming up in less than 6 weeks, there is not much risk that the 5 year Canada yield (which drives the reset level) will be much lower at that time.  And this one has a minimum dividend that would mean it won’t ever reset to a lower yield than the current 5.9% even if the 5 year Canada bond sinks very low once again in future.

Another possibility is to choose a perpetual. There I can get a yield of 6.5 to 6.7% which does not change with interest rates.

Another possibility is a floating rate perpetual. There is a rather complicated one BCE.PR.E that currently yields 9.6% at a price of $17.95. But this one floats monthly and so the dividend could definitely be noticeably lower over time. And oddly enough, its dividend will decrease if the price rises due to a complicated formula.

West Fraser Timber’s shares increased sharply in June. And that’s despite the fact that the company has now reported two quarters with bottom line losses due to lower lumber prices. U.S. home building has held up well and even increased and that is likely the reason for optimism. But lumber prices, despite an increase in June, remain well below the levels of a year ago. Therefore it seems certain that West Fraser will report lower year-over-year earnings in Q2 when it is reported. And the same is likely for Q3. At 0.9 times book value the company could be held as a long term investment. But looking at the short term and considering the difficulty of predicting commodity prices and considering the forecasts of recession, it seems reasonable to Sell these shares now at about U.S. $83 and Canadian $110 and take advantage of the recent gains. Our report is updated and rated Sell.

On Wednesday, markets were down modestly as the S&P 500 was down 0.2% and Toronto was down 0.5% despite higher oil prices.

My next update will be for West Fraser Timber. Its stock has been surprisingly strong despite lower lumber prices. It’s a very hard company to predict. Subject to finalizing my analysis I suspect I will rate it a Sell.

On Tuesday, the Toronto stock exchange rose 0.25%.

See the update for Boston Pizza just below. I bought a few shares today.

Between the higher yields available today and the fact that I have moved more into these type of investments I am finding that my level of dividend (and to a small extent, interest) income is becoming quite significant. However. However, market value fluctuations over a month or a year tend to often dwarf income levels. Therefore we have to be able to stomach market value fluctuations.

Our report on the Boston Pizza Royalties Income Trust units is updated and rated Buy at $16.63. The Coles Notes version is that you get a 7.7% cash yield and that is yield is likely (but not guaranteed) to increase over the years. The biggest risk is if more BPs become unprofitable and close. Overall, this could have a place in portfolios along with other higher yielding investments. 

On Monday the S&P 500 was up a scant 0.1% while Toronto was closed in lieu of Canada Day.

Tesla was in the news with a 6.9% gain after announcing strong Q2 sales volumes.

Tomorrow, Toronto will be on its own with the U.S. markets closed.

Earlier today I emailed out the latest edition of our free newsletter. If you did not receive you could try checking your junk folder and if still not found, click the link above to our free newsletter and add your email address to the list.

You also see past editions of the free newsletter here.

On Friday, the S&P 500 and Toronto were each up a stout 1.2%.

Apple was up another 2.3% and poked its nose above the $3 trillion dollar market value level. It’s hard to have a feel for numbers that big. But I read today that this makes Apple about as valuable as the entirety of all the companies in the Toronto Stock Exchange industry. That is rather mind boggling.

Over the weekend it was announces that Tesla’s deliveries in Q2 were at a record and beat expectations. I think we reached the tipping point for electric vehicles at least a year ago. They are taking over the market rapidly. 

I’ve owned a model Y since last May. Probably 98% of my charging is at home so the lack of chargers is not an issue most weeks and months. We have done just two road trips and with a little planning it was no problem to get charged. When I use a Tesla Supercharger I simply pull in and plug in. Tesla recognizes my car and charges my credit card automatically. Our Hotel in Canmore had three free chargers in the parkade. A Tesla is roughly equal parts mechanical, electrical and software. And it is the software that is the value-add.

Canadian markets will be closed tomorrow, Monday in lieu of July 1 and the US. markets will be closed on Tuesday for their holiday.

On Wednesday, the S&P 500 was about unchanged while Toronto was up 0.4%.

Couche-Tard was up 4.0% after releasing earnings. This company has a fantastic winning track record. With the government suddenly wanting more grocery store competition (after having approved all the grocery mergers for decades that led to a situation of not enough competition) that might be an areas for Couche-Tard to get into. They already tried to buy a large grocer in France (Carefor) but that got blocked by the French government.

I met today with the CEO and CFO of Melcor. While they were friendly enough and while the CFO said they do want to do some return on capital calculations that I suggested (when they find time), in general they seem complacent and say they are doing a good job and already know what to do. They blame low profits on market conditions. Sadly, it was not an encouraging meeting. They are not used to any shareholder asking questions. They have virtually no analyst coverage so they don’t get questions that way. 

Markets were positive on Tuesday as the S&P 500 gained 1.15% and Toronto gained 0.7%.

TFI International was up almost 8% but I did not see any news to explain that. (But TFI is a perennial winner so its not a shock).

Toll Brothers was up another 3.8% and continues to surprise me given it will almost certainly be reporting lower earnings due to lower contracted home sales in the last year. But perhaps the focus is rightly on current contracted home sales even though those do not show up in revenue until completed some 9 to 12 months later. Toll is very well managed. It has always been a tough one to predict.

The Canadian headline year-over-year inflation was out and has declined to 3.4%. But it’s not clear that inflation has been beaten back yet. The month-over-month number was 0.4% which could be said to represent 4.8% annualized although trying to annualize a one month figure may not mean much. But if so, then the idea of grabbing some strong yields now on GICs and preferred shares continues to look good. If the bank rate peaks at 5.0% but is back to 3.0% in two years then the yields available today, some of which can be locked in, are going to look attractive in retrospect at that time. 

I bought a small amount of the Fortis perpetual preferred share today. I also somewhat reluctantly sold some (not all) Toll Brothers in an account where I need to have some cash. It was at a gain of 103% in that account so that felt good.

On Monday, the S&P 500 was down 0.45% while Toronto was strong with a 0.9% gain.

For some months now, I have mentioned that our higher interest rates are a “massive game changer”. For example, see my newsletter of February 25. 

Lately I have been talking about and recommending rate reset preferred shares.

Another timely choice is perpetual preferred shares. These were not what we wanted when they paid say 4.5% and could be expected to fall in price as interest rates rose. But now that they have fallen for that reason their yields look more tempting at over 6%.

For a very long time it has been difficult to get much yield on safe fixed income. Many investors turned to dividend stocks and away from bonds and preferred shares. And that worked well. But now it’s probably a good idea to pivot and invest in some safer fixed income including GICs, some bonds and preferred shares and also high interest savings vehicles. 

I’ve just added three perpetual preferred shares to our list on the Subscriber Home page. These are three that I happened to have bought small amounts of at their IPOS. They are down in price and I had not been paying much attention to them. But now they do look attractive.

No one should go “all-in” on these or any other type of investment. But they can certainly earn a place in most portfolios.

These are not as safe as annuities. I don’t know how much a (say) 65 year old could yield on a lifetime annuity. (Annuity prices to my knowledge are not transparent and you have to probably talk to an annuity salesperson to get a price). And in any case an annuity yield is NOT in any way the same as the yield from bonds or preferred shares. An annuity yield includes a substantial slice of giving you back your own money over time and it goes to zero on death. They tend to be safer but they are not likely a better return.

On Friday the S&P 500 and Toronto were each down 0.8%. In part, this is as markets continue to adjust to the idea that interest rates will be “higher for longer”.

Starbucks was down 2.5%. Linamar was down 2.6%.

Lately I have mentioned that it may be timely to buy rate reset preferred shares. I like many of those for both the yield and the capital gain potential. But for long term income they run the risk of a lower dividend if and when interest rates eventually go down and if they reset at a time of low interest rates.

It may also be very timely to look at perpetual preferred shares. These pay a fixed dividend that does not change. As interest rates have risen these have come down in price and so their yields are up. 

One that I own is issued by Intact Financial Corporation,  IFC.PR.E paying 5.2% on its $25 issue price. Now, because of higher interest rates, it trades at $20.28 to yield 6.38%. This and other high-quality perpetuals are worth considering. If you are looking for secure income where the dividend will not decrease, this may suit your needs.

Thursday saw the S&P 500 up 0.4% while Toronto was down 0.6%.

Canadian Western Bank was down 2.5%. One thing in favour of CWB is that it does not have any of those variable rate residential mortgage loans. The bigger banks seem likely to incur some losses on those type of  mortgages.

AutoCanada was down 3.4%. Linamar was down 3.7%. 

I was looking today at the rate reset preferred share CWB.PR.D which is on our list. It was issued over four years ago in early 2019 at a time when these shares were very unpopular and the 5 year Canada bond yield was low. CWB had offer a dividend high of 6.0% to sell the shares at that time. That was a spread over the 5 year of 5.04%. That’s one of the highest rate reset spreads that I am aware of. After it was issued, the market for rate resets improved and the 5 year bond yield recovered from its lows and CWB.PR.D traded as high as $27.50 in mid-2021. In my several updates and comments about it, I did not like it much above $26 becasue I figured it would ultimately be redeemed at $25 on the reset date of April 30 2024. Even though the yield of 6% seemed quite attractive in 2021 I did not like the idea of the capital loss if redeemed and at that time it looked like CWB would redeem it due to its high spread (and therefore high dividend upon reset.).

But things have changed a lot. Now it trades at $23.78 for a yield of 6.3%. And now 6.3% is not as attractive as it was in 2021 since we can now get over 5% on a GIC. But in 10 months it is either going be redeemed at $25 (for a 5.1% capital gain) or it could reset to a very high dividend level given its high spread since it does not look like interest rates will move down much in the next ten months. Either way, this all seems attractive. If it is redeemed, we will collect just 3 more dividends for a yield of 4.7% plus the 5.1% capital gain, for a total return of 9.8% (on a holding of just over 10 months).  CWB likes having these shares as part of its capital structure, so it is possible that they will let the dividend reset significantly higher (assuming the 5 year bond yield is still above 3.0% in ten months), in which case the yield would be 8.5% of the current price or higher. 

I bought some today. In doing so I am trusting that CWB is not going to run into financial difficulties.

Markets were down on Wednesday as investors start to accept the reality that interest rates will be “higher for longer”. Remember “lower for longer”? That’s so yesterday.

The S&P 500 was down 0.5% and Toronto was down 0.2%.

There were no particularly notable moves in the stocks on out list.

Looking at some figures today, I see that the Government of Canada can still borrow 30 year money at 3.2%. It might be a good idea for them to do that. It was a travesty that most of the Canadian government borrowing during he pandemic was very short term when they could have locked ion 30 year money at ridiculously low rates. Such rates were under 1.0% for several months in 2020 and were under 1.5% for the entire year. 

Stocks were down on Tuesday ad the S&P 500 fell 0.5% and Toronto fell 0.9%.

With higher interest rates stocks market declines are to be expected. Markets may not fall but it seems more likely than not.

AutoCanada managed a 2.4% gain. And Toll Brothers continues to do well with a 2.5% gain today.

There seems to be more stories about businesses and people struggling with debt. I suspect there will be LOTS more stories. While the big banks seems cheap, I think their earnings will be hurt by bad loans so I am not bullish on the banks at this time. But that’s just based on an impression and not based on detailed analysis.

P.P.S I settled on a rating of Speculative Weak Buy / Hold. This has been a very poor (pour?) investment but perhaps it has no where to go but up from here. Management is confident. Then again, that’s one reason I usually don’t talk to managements – they always tend to be confident. 

A P.S. to this post below , I just spoke to John Peller and got some information that will change my rating to Speculative Buy / Hold. He views what I called a subsidy as just  return of a small portion of the excise tax that the industry pays. And he pointed out that the company expects to get a very large gain on a land-sale probably this year. The land is in Pt. Moody in an urban area apparently slated for a high-rise development. He also indicated that profits will be up double digits in each of the next two years. Now is probably not the time to give up on these shares. 

Andrew Peller is updated and rated Sell / Hold at $4.06

I wanted to update the company because I own a few shares. Luckily a small position for me. And because the company remains on our list and some subscribers may own it. I don’t think I ever rated it higher than (lower) Buy but at one time I thought it merited that luke-warm rating. Instead, it has cratered. 

It’s an interesting company in a relatively simple business and seemed like it was worth keeping tabs on.

But is has become a lesson in the types of companies to avoid. The Canadian wine industry faces such intense competition from imported wines that they need at least modest government subsidies. That’s not a recipe for attractive or even reasonable profits. It seems to be a hobby business.

At this point I am very reluctant to sell at such a low price and will hold onto my shares.  Management does project better times ahead but they seem to be pointing to two years from now!

On Monday, Toronto was down 0.2% while U.S. markets were closed for a holiday.

Interest rates continue to go up. The yield on the 5 year government of Canada bond hit a new 15 year high today at 3.78%. This rate bottomed out at around 0.30% and was at that level for most of 2020.  So we are up enormously from that level.

So how should this impact Rate Reset Preferred shares? Consider TD.PF.D that pays only 80 cents and won’t reset until 25 months from now. It trades at 18.36 to yield 4.36%. The fact that it is stuck at a low dividend for two years is a negative. But if the 5 year stays at 3.78% then, with its spread of 2.79% it would ultimately reset at 6.57% of $25 paying $1.6425 which is a juicy 8.95% of the current price. But if rates stay high then there will be many high rates available which TD.PF.D has to compete with. 

And consider CWB.PR.B which pays $1.0753 and trades at $16.95 to yield 6.3%. And it will reset in 10 months with a spread of 2.76%. If the 5 year is at 3.78% in 10 months that would be a dividend of $1.635 or 9.6% of the current price. With a relatively short time until it resets, it seems to me that each time rates go up, CWB.PR.B should go up. But the counter argument is that there will be lots of other high yielding things that CWB.PB.B has to compete with. And perhaps investors are thinking all the way to the next reset after that in 2029 when it might reset to a far lower dividend.

The original attraction of rate reset shares was that if rates rose , perpetual preferred would lose value, but these reset shares would tend to hold their value. So far, we are not very much seeing that.

Investors seem to be leery of rate reset shares due to their past price declines. A case of twice burned, three times shy. But if that fear is over-done then now may be a buying opportunity.

On Friday, the S&P 500 was down 0.4% and Toronto was down 0.3%.

Shopify (see update just below) was down 2.1%.

U.S. markets are closed tomorrow for the Juneteenth holiday.

Shopify is updated with the admittedly wishy-washy rating of Highly Speculative Hold at U.S. $65 and Canadian $85.

This is a great company and one that deserved a ton of admiration. The founder Toby Lutke has turned himself and early investors into multi-billionaires. And this company is almost certain to continue to grow.

But the stock has an extremely volatile history. And it trades at a very hefty 14 times revenue and 189 times analyst forward projected earnings. So a fantastic but very expensive company. So a tough call.

Not a stock you likely want to put in your Mother-in-law’s portfolio. 

But maybe not a bad idea to take a flyer and make a modest investment for those willing to take some risk and willing to invest more if the price declines materially.

I expect adjusted earnings to be positive in coming quarters while there were losses or low profits in the past four quarters. But the market already expects that. And we could be heading into a general market decline if the central banks succeed in triggering a recession.

I am holding it and a family member is holding it and we both have quite good gains on it and we have a meaningful although not huge amount of dollars invested..

My strong inclination now is to sell one third of those positions or maybe even half at this time.

On Thursday the S&P 500 was up an impressive 1.2% while Toronto was almost flat with just a 0.1% gain.

The only large gain for companies on list was AutoCanada up 3.2%. Yesterday Desrosiers reported that May auto sales were very weak but blamed it on a lack of supply. I would think that would be a recipe for high dealer profits. No need to discount when there is a shortage of inventory to sell. 

Not on our lists, I see Meta (Facebook) up  3.1% and FedEx up 2.95%.

I’m quite surprised at the gain in the S&P after the FED paused but apparently signaled two more rate hikes ahead and indicated rate s will not decline anytime soon at all (think two years). Nevertheless, long treasury yields came down slightly. 

It’s almost mind boggling to see the short-term treasuries from 1 month to 1 year paying 5.2% after being at virtually zero in 2021. One of the biggest beneficiaries of this is Berkshire which holds roughly $100 billion in those treasuries. It’s nice to pick up an extra $5 billion (pre-tax) in profits.

Berkshire Hathaway has been in the news as courts are blaming certain large forest fires on its PacifiCorp utility subsidiary. Estimates are that the awards could go into the billions. Buffett has talked before (in a difference context) about how courts are sometimes inclined to go after the deepest of pockets.  It will be interesting to see if the utility has insurance for this and if so if it is with Berkshire’s own insurance companies or not. I suspect they will not be insured with Berkshire companies. And I doubt that they have the level of insurance that would be needed to pay these awards. The billions awarded will be appealed  and this will drag on. If it ever comes down to it the award being so large that PacifiCorp was broke then Berkshire would likely go ahead and file bankruptcy on that company. They will not let one company take down too much of Berkshire. Berkshire at the corporate head office level  guarantees payment on most of its debt but does not guarantee the debt of its utilities – that lack of guarantee has been prominently indicated in the annual report for many years. So far the market is showing no concern about this in terms of Berkshire’s share price.

The market today was waiting nervously to see if the FED would pause or continue to raise rates with its noon announcement.

It ended up that they DID pause but also apparently signaled they expected two more increases by the end of this year.

The market took this mixed news well with the S&P 500 and Toronto each managing a 0.1% gains.

Shopify was up another 3.4%. That’s a 52 week high but it remains about half of it’s all-time high which came during the pandemic when it looked like the movement to online shopping was more permanent.

After the close, Andrew Peller reported another set of weak results. I’m sorry I ever looked at this company. The problem is that that are trying to compete against other areas of the world which simply have lower costs. Canada imports cheap wine from those places. In fact Andrew Peller’s biggest seller is made from imported bulk wine. They are competing with places with better growing seasons, possibly lower land costs and probably lower labour costs. Probably no need to heat their buildings in winter in some cases. And they claim that foreign governments subsidise wine growing while Canada does not. It all ends up being a recipe for poor results and I’m not sure there is any relief in sight but I will dig into their results. 

With the FED apparently suggesting two more rate increases by the end of this year I would not expect stocks to do well on that news. It seems to me to be a time to be defensive and make sure you have some fixed income and cash. 

On Tuesday, the S&P 500 was up another 0.7%. This was apparently because the latest U.S. inflation report out this morning came in slightly lower than forecast which gave hope that the FED will not raise interest rates with its announcement  tomorrow.

Toronto was up 0.35%.

AutoCanada was strong with a 4.2% increase. 

Most of the rate reset preferred shares edged up today. I have added an Intact Financial Corporation rate reset share to the list rated Strong Buy. IFC.PR.G It is just resetting at the end of this month to pay $1.503 annually for the next five years and at $21.49 it yields 7.0%. This can be bought for the yield. And it seems likely to offer some capital gains at least temporarily unless market interest rates continue to move up. It was at $21.00 when I first mentioned it on May 31, so it’s already up a little. If interest rates are lower next year than the 7% could be attractive and the price would rise.

I also mentioned TD.PF.K on May 26, when it was at $20.60. It has now jumped up to $22.23 so I am less interested in that one at this point.

Unfortunately my mainstays CWB.PR.B and ENB.PF.A have not risen much lately. They are somewhat lower credit quality but I think they are both good choices. And the Brookfield Office Property rate resets on our list are riskier and may continue to languish or decline. They are higher risk at this time.

Rate resets have had a poor history but I believe they are timely now. 

This stock is trading at just 30% of book value despite its apparently strong assets. It has been very disappointing since the Summer of 2014 when it plunged with oil prices and a softer Alberta economy.

This is a relatively small company and their headquarters are close to me and I have followed the company for over 20 years. For the past two years, I have been putting considerable pressure on the company to do better. That pressure includes complaining to the CEO and Board about the poor earnings performance and making suggestions for change. I talked to them at the annual meeting and then met with the finance VP. The CEO and CFO have indicated they want to meet with me again later this month.

Management also wants to do better and between that and probably spurred on by the pressure I think they are making some new efforts. For example last year they bought back 5% of their shares after many years of buying back extremely few shares. Just last week they renewed their buyback program and have already made a block purchase of 300,000 shares which is almost a full 1% of shares outstanding. Last year they also sold an office building in Kelowna and quite a few apartments that they owned in the U.S. and made quite good gains on those sales.

So the good news is they are doing share buy backs. And they will likely sell some lots in the U.S. and may have sold some this quarter. Lots in the U.S. sell in bulk rather than dribs and drabs and so any sale would be material to results. I think they are looking at selling at least some vacant land which would free up cash and would likely be sold at more than book value (hopefully substantially more). They are buying little or no new land and this makes more cash available for share buy backs and possible dividend increases.

But the bad news is that lot sales in Alberta may remain fairly low due to higher interest rates and despite population growth. This will depend how confident home builders are to take on more lots.

Higher interest rates are also likely to lead to market value reductions on the investment (commercial rental) buildings. Their office buildings will continue to struggle to attract tenants but their retail properties are strong. At last report the Investment property side was doing reasonably well and slowly improving. 

Overall, I see some reasons for optimism but the higher interest rates are a definite headwind. 

I am also trying to convince management that they need to do more to help the market understand the value of their assets and that they in fact really have a responsivity to do that and can’t just have the attitude that the share price is not their responsibility. I do agree with them that achieving higher earnings is the main priority.

Last year a number of you joined my disgruntled Melcor owners list and gave me your email addresses and your share holdings. I have 18 names on that list with a total of 171,300 shares. If anyone wants to join that list or confirm they are on it, let me know at shawn@investorsfriend.com

Monday’s action saw the S&P 500 up 0.9% and Toronto up 0.15%

Cameco was up 4.0% as nuclear and uranium are in revival mode. 

Shopify was up 6.2%. This will likely be the next company that I update.

I am doing some work on the rate reset preferred shares and continue to think they are timely. 

On Friday the S&P 500 was up 0.1% and Toronto was down 0.25%.

Shopify was the biggest gainer on my list with a 3.4% increase. There were no losers of any particular note.

The latest jobs (labour force) survey was out today and was fairly weak. It could be that the interest rate hikes are finally starting to have the desired affect of cooling the economy. Some workers are unfortunately going to be sacrificed for the goal of getting inflation under control.

Higher interest rates are a gravitational force on stock prices. Some strong companies will overcome that gravity through the buoyancy force of higher earnings. But in general it seems likely that stocks may be more likely to decline than rise.

Therefore it is important to have a balanced portfolio that includes dividend stocks as well as fixed income and cash. See my recent comments about rate reset preferred shares.

On Thursday, the S&P 500 was up 0.6% and Toronto was down 0.2%.

There were no particularly notable moves in the stocks I monitor.

Major banks have raised their Prime rates to 6.95%. Mortgage rates have increased again with the Bank of Canada rate hike.

Money market and high interest savings account interest should also be increasing. GIC rates should also be increasing.

GIC rates at TD Direct are as high as 5.12% for a 1 year term and as high as 4.71% for a five year term. If inflation and interest rates do come down next year then locking in today’s rates will have been a good thing for the fixed income portion of a portfolio particularly in in non-taxable accounts. Since no one knows the future it might be prudent to spread GIC money across different maturities.

In taxable accounts, interest income and REIT distributions are taxed heavily while capital gains and especially eligible dividends are much more favorably taxed. Many blue chip Canadian stocks have been great choices for eligible dividends.  Rate reset preferred shares have mostly been a frustrating source of such dividends as they too often declined in value. But I think the current interest rate environment is favorable to these. 

On May 31 I mentioned Intact Financial Corporation’s IFC.PR.G that has just reset to pay $1.503. That’s a yield of 7.06% at today’s close of $21.30.

I also mentioned (May 27) one that is considered safer from TD Bank I said  “TD.PF.K which will reset in September. It pays $1.1875 per year and last traded at $20.60 to yield 5.76%. But if the five year Canada is say 3.0% at the reset date then the dividend will rise to $1.3975 to yield 6.8% at the current price. It appears that this share is trading at least partly on the expected increased dividend as opposed to the lower existing dividend.” This one has now risen to $22.08. It seems increasingly likely that the 5 yar Canada bond yield could remain well above 3.0% as of September.

And on the list of stocks I have the tow Canadian Western ones and ENB.PF.A.

The point is that if higher interest rates pull down a low of other investment values, these rate reset preferred shares may be a good thing to have as part of a portfolio because they are paying higher yields (and provide eligible dividends) and in many cases now seem more likely to rise in value than to fall.

It seems to me that Canadian home prices will have to drop on average. Stocks prices may also decline. Higher interest rates are always a powerful gravitational force on the value of financial assets. Others factors can offset that especially temporarily. But in the end I believe the math of higher interest rates will not be denied its due.

It also seems to me that a lot of businesses and individuals must already be getting fairly crushed by these higher interest rates. But not much of any such carnage has hit the news yet. Many of these companies and individuals may be keeping their heads above water for now but in many cases that can’t last much longer.

On Wednesday the S&P 500 was down 0.4%. And Toronto took the news of the Bank of Canada increase in stride adn was also down just 0.4%.

Shopify was down 6.4% giving back a similar sized increase from yesterday whatever that was about.

The yield on the government of Canada five year bond is up to 3.76%. That’s the highest since the Summer of 2007 when the Financial Crisis was just getting rolling.  These higher interest rates are going to cause a LOT of pain for many people and businesses while many others will benefit by earning this higher interest. A better time to be a lender than a borrower.

Donald Trump has been informed that he likely to be charged in the classified documents case. Meanwhile he is still considered a front-runner for the Republican candidate for President. It’s a strange world. So far the market has not given a care about Trump’s troubles and hopefully that can remain the case. My thinking is that Trump’s best move would be to throw his support behind DeSantis in return for a promise of a pardon.

There was big news today that the Irving Oil Company may be looking to sell. It’s owned it seems entirely by Arthur Irving and probably his offspring. Arthur is about 90 and has given a lot to charity and may want to cash out to give a lot more to charity. Obviously he can’t take it with him. That is one of the saving graces of the fact that we have billionaires. They can’t possibly spend that king of money even together with their offspring and much of that wealth will come back to society in some form. Whether to charity or through taxes. Also having wealth is the ability to consume mega amounts. But billionaires typically just leave their wealth in businesses and they are not consuming mega amounts. For example it is completely wrong to say that Warren Buffett is either greedy or keeping consumption from others. He consumes the tiniest fraction of what he could. 

The Bank of Canada has raided its interest rate another 0.25% to 4.75%.

My fear is that this is going to be very harmful to a large group of individuals and corporations. Meanwhile the economy remains strong.

The very purpose of the rate increases is to cool the economy so we should not be surprised if it actually starts to work and does lead to lower corporate profits.

As always only time will tell where we go.

Meanwhile a good strategy is to have a balance of equities and safer investments and some cash or cash equivalents.

On Tuesday, the S&P 500 was up 0.2% and Toronto was up 0.6%.

Shopify was up 6.0%.

Toll Brothers was up 4.5%.

There was a report from Equifax today that households have fairly sharply increased their credit card debt in the past year and defaults are starting to rise. 

Stocks ended the day on Monday slightly lower with the S&P 500 down 0.2% and Toronto down 0.5%.

AutoCanada was up 3.3%

The Canadian market awaits the Bank of Canada rate decision on Wednesday morning. With the 5 year Canada Bond yield at 3.55% the betting is that the Bank might raise the rates 0.25%. My own bet and hope is that they leave it unchanged. 

ON Thursday, markets were higher with the S&P 500 up 1.0% and Toronto up 0.5%. Most stocks were higher on the day. Cameco was notable gaining about 8% as prospects for uranium use are improving.

As of this Friday morning at just after 11 am eastern time the S&P 500  and Toronto are each up 2.3%.

An important U.S. payroll survey out this morning showed strong job growth but slightly higher unemployment . This could be considered a mixed signal as far as FED tightening.

U.S. Treasury yield rose on the news suggesting an expectation of higher interest rates.

At the end of the day, the markets, like all of us, play a guessing game and can turn on each new piece of news.

Meanwhile lululemon is up 12% today after releasing a strong earnings report with strong sales in China.

Toll Brothers is up 3.3%. It’s a great company but I do worry that it is set to report lower earnings in the next few quarters based on lower contracts for new homes in the past year. Possibly the market will look past that if it is reporting strong gains in current contracts signed. I hedged my bets and  yesterday sold about 40% of my position in a non-taxable account but kept the shares I hold in a taxable account.

American express is up 3.4% this morning.

Overall, the mood of the market today is optimistic but that can always change with the next news item

Markets were weak on Wednesday apparently due to fears that the the US debt ceiling deal might not pass congress so easily.  The S&P 500 was down 0.6% and Toronto was down 0.85%.

Linamar was down 4.5%. 

Constellation software was up 3.5%.

The debt deal is scheduled for a vote this evening and if passed could provide a boost to the market tomorrow. (P.S. the bill did pass the house tonight – it should pass the Senate easily except apparently any one Senator can delay the vote).

Regarding rate reset preferred shares, one that is resetting based on today’s interest rates caught my eye.

The Intact Financial Corporation rate reset share that trades as IFC. PR.G will reset to pay 6..012% of the $25 par value for five years starting June 30. That’s $1.503 per year. It closed today after that news at $21.00 to yield 7.16% at the new dividend level. It was previously paying $1.224. 

The credit rating on these preferred shares is Pfd-2 which is higher than on the pref shares of Canadian Western Bank and Enbridge.

So, it seems that the going market required yield on high quality rate reset preferred shares is about 7.2%. This market required yield has risen along with all other interest rates in the market. These shares are tax advantaged. Taxable investors would be comparing this yield to that available on safe things like GICs. A more direct comparison would be to the yields available on high quality dividend shares such as the banks, Fortis Inc., Enbridge and Intact Financial itself.

If interest rates are lower in a year then I would expect these rate reset shares to increase somewhat in price. For example a 6.0% market required yield would put their price back to $25.  But then investors might be concerned that the price would not stay at $25 because if interest rates go lower than the next reset dividend level in five years would be lower.

Perhaps a better bet is Bank of Nova Scotia yielding 6.4% and where the dividend is almost certain to be higher in five years and which could easily give a bigger capital gain than these rate reset shares. Presumably the Bank of Nova Scotia share could be more volatile in the short term however.

On Tuesday, the S&P 500 was unchanged on the day while Toronto was down 1.1% as oil prices fell.

Canadian Western Bank was up 3.3% after an RBC analyst recommended the stock with a price target of $34. The report indicated that CWB is noticeably under-valued and I concur with that view. The fact that its loan loss provision at 12 basis points in the latest quarter got little or no attention as bank earnings were released last week. 

The Alberta election win by the United Conservative Party last night is also judged to be a positive for Alberta businesses.

 After the close, Linamar announced it will acquire “three EV battery encloser plants” for US $3275 million cash. This is good news for Linamar’s increasing push into the EV space. 

The yield on the 5 year government of Canada bond was down modestly to 3.54%. At that level the rate reset preferred shares that reset will see noticeable increases to their dividends which can support price increases Offsetting that the market required return on those and all other investments is higher which is a gravitational force on the prices of preferred shares and all investments. Overall, unless inflation remains quite stubbornly high I expect the market required return on these shares to  move lower and which should push the share prices higher unless the 5 year Canada bond yield plummets under 2.5% which I do not expect. In any case the existing yields on rate reset shares are attractive especially in taxable accounts and can be bought to hold for yield with any capital gain a bonus.

Stock movements next week could be more volatile if the Bank of Canada raises interest rates as some suggest it will or should. Wage settlements like the 24% raise over four years for the Wet Jet pilots are not good news for the Bank of Canada which is hoping the economy will cool.

In the U.S., the yield on Treasury Bonds declined moderately on news of the debt ceiling deal.

Elizabeth Holmes starts an 11 year jail sentence today. It’s often said that white-collar criminals get off easy. Not in this case in my view. More importantly for the world I hope the goal of doing every blood test in an automated fashion from a few drops of blood will in fact soon be a reality. That would be quite a game-changer for our health.

As of the close on Monday, with U.S. stock markets closed Toronto was up 0.2%.

When it comes to interest rates there was an interesting comment on BNN today. It was pointed out that as the debt ceiling approached the U.S. very significantly curtailed the issuance of new bonds. If so, that’s the first I have heard of it. Apparently they drew down cash at the New York Fed and now need to issue about a trillion dollars of debt just to replenish that cash and on top of that will resume regular bond issuance. At the same time, the FED is no longer buying bonds (which pushes interest rates down) but may also be selling some into the market. The thinking was that this will push interest rates up because of the extra supply of U.S. bonds. If so, that’s not good news for mortgage rates or for stock markets or bond valuations for that matter.

With the U.S. markets closed and with the news of the apparent resolution to the U.S. debt ceiling crisis, Toronto is relatively unchanged with a 0.2% gain.

The yield on the government of Canada 5 year bond has not reacted positively to the debt ceiling resolution and is at 3.62%. I think this bodes badly for mortgage rates but positively for the rate reset shares.

Canadian Western bank has recovered most of Friday’s loss and is up 5.2%.

I had an interesting trade experience as I bought some CWB.PR.B based on my updated comments about rate reset preferred shares yesterday. This is very thinly traded and the bid / ask showing on TD Direct was wide at $16.30 bid, $16.70 asked and the closing price yesterday was $16.70. If I wanted to be sure to get a fill I would have to offer $16.70. I was not confident of a fill at say $16.35 so I decided to bid for half the shares I wanted at $16.50. I then soon noticed the price down to $16.30. I went on the TMX Money site to see if maybe only a 100 shares or something had gone at $16.30. But apparently 1400 had traded at $16.30. Meanwhile my fill at $16.50 was not indicated on the TMX and so it appears that TD sold me my shares from their own inventory at $16.50. That’s not something that bothers me. They cat as market makers and can make a profit doing that.

A 40 cent bid/ask spread is pretty large since it represents about 2.5% and since that spread is higher than the quarterly dividend which is just under 27 cents. On such a thinly traded stock with a high bid/ask spread we have to be careful not to overpay.

Subsequently the bid was higher at $16.53 and so I bought the other half of what I wanted at $16.55. I might have done better to try a lower bid but then I would take the chance of not getting a fill.

The report on Starbucks is updated and rated Buy at $98.53. The company just reported a very strong quarter of earnings growth and the outlook is good but the stock at 31 times earnings is not cheap. Still, it is probably a good buy for long-term growth. 

One year ago on May 7, 2022 our report rated it a a Speculative Buy at $76.52. At that time the valuation was looking more attractive with a P/E of 23 but it was facing a weak outlook for earnings. In fact the next two quarters after that had an earnings per share decline of about 18%. After that it did dip very slightly in June to about $71 but essentially it rose steadily (despite the two quarters of earnings decline – which did have revenue growth) reaching about $115 in April. The current pullback may be a buying opportunity. 

I hold some and am looking to add to that especially if it dips even modestly.

There is a tentative agreement on the U.S. debt ceiling.  It comes at an interesting time given that U.S. equity markets will be closed tomorrow for their Memorial Day holiday while Toronto will be trading.

U.S. futures tonight suggest that the S&P will rise but only moderately on this news.

For those Canadians that take this as quite positive news it might be opportune to buy tomorrow.

I will be paying attention to Canadian government bond yields tomorrow to see how those react. I am not sure if the U.S. bond markets trade on holidays. 

The reports for the Canadian Western Bank rate reset share CWB.PR.D as well as for Enbridge’s ENB.PF.A are updated and rated (higher) Buy and  Strong Buy respectively. See the reports for more detail.

These two have attractive yields of 6.3% and 7.1% respectively. And not only that but they are set to reset to higher dividends in just 11 months and 18 months respectively.

The reset dividends depend entirely on the yield of the Canadian government five year bond at the time of the upcoming resets. That is unknow. The current yield on that bond is 3.6%. For most of the past year this yield has bounced between about 2.9% and 3.6%. Some forecasts call for interest rates to be lower in 2024 when these reset. So it might be prudent and conservative to predict a level around 2.5%. It’s hard to imagine it would be lower although of course that is possible.

As long as that yield at the time of reset is above 0.96% or 1.44% respectively the dividends on these two will increase on the reset date. However in the case of CWB.PR.D which last traded at $23.77 there is a possibility that these would be redeemed in 11 months at $25.  

Both of these appear to be attractive at the current yields and even more so when the almost certainly higher dividend at reset in 11 or 18 months is considered.

The above two rate reset shares are considered riskier and less credit worth than those issued by, for example, TD Bank.

You can buy TD.PF.J which last traded at $20.77 to yield 6.9% and it has only recently reset and will therefore pay a dividend that represents a 6.9% yield on the current price for about the next 4.75 years. That would seem to be attractive.

Or consider TD.PF.K which will reset in September. It pays $1.1875 per year and last traded at $20.60 to yield 5.76%. But if the five year Canada is say 3.0% at the reset date then the dividend will rise to $1.3975 to yield 6.8% at the current price. It appears that this share is trading at least partly on the expected increased dividend as opposed to the lower existing dividend.

Another way to invest in rate reset preferred shares is through a preferred share ETF. The dividend on those should be increasing as various rate reset shares reset to higher dividends.

CPD currently yields 6.0% and its dividend is likely to increase over the next year.

ZPR currently yields 6.3% and its dividend is also likely to increase soon.

Canadian preferred shares benefit from the dividend tax credit. The tax rate is therefore usually lower than the tax on wage and interest income. In the unique situation where a taxpayer gets most or all of their income from dividends the tax rate can be extremely low up to about $50,000 per year, depending on the province. for example in Alberta, the marginal tax rate on such eligible dividends is only 2.57% for taxable incomes up to $53,359 and then only 10.18% for taxable income from $53,359 to $106,717. The rates are even lower than that in Ontario! But a fly in the ointment is that the tax is based on a grossed up amount which effectively increases the tax rates and and in some cases can be detrimental when it causes a higher old age pension claw back or a reduction in other benefits such as the Canada child benefit. Still, in many or most cases these dividends are taxed at a lower rate than wage or interest income.

Of course rate reset preferred shares have mostly been a bad investment over the years. They have repeatedly broken investors hearts by falling in value. They fell when interest rates fell but then also often fell when interest rates rose. However when purchased at various low points they have rebounded to provide strong capital gains – but only if then sold at the higher prices. Looking at the current yields and prices and thinking about where the reset dividends are likely to be, it appears that rate reset preferred shares are likely set to provide capital gains in the year ahead. And if nothing else, they are providing high tax-efficient dividends.

The report on Linamar is updated and rated Buy at $63.90. Its valuation and its very recent strong earnings recovery would suggest a higher rating. But the market never tends to put a very high P/E or P/B multiple on it due to its cyclical nature. And with forecasts for recession, the market may continue to be cautious. But overall it is a strong company  that appears set to grow earnings and perhaps get back an ROE in the mod teems and you can buy it for 80% of book value. It’s likely to be a long-term winner.

On Wednesday markets continued to be negative due to concerns about the U.S. debt ceiling negotiations.

The S&P 500 was down 0.7% and Toronto was down 1.1%.

Toll Brothers managed a 2.1% gain after its strong earnings report.

In general, it seems that a lot of companies are trading at P/E multiples that are the lowest we have seen in years (outside of perhaps the COVID panic in the spring of 2020). Dividend yields are much higher in many cases. Staying the course with good companies will be rewarded. 

Markets declined on Tuesday due to fears that the U.S. debt ceiling would not be raised in time to avoid the Treasury running out of money.

Almost certainly the U.S. will find a way not to run out of money. But meanwhile the markets are rightly nervous. 

The S&P 500 ended the day down 1.1% and Toronto was down 1.0%.

Cameco was one of the few gainers and rose 5.1% on the day.

After the close, Toll Brothers released a strong earnings reports. And although their contracts for home sales are running significantly lower than last year, they are still contracting for a healthy amount of homes and the stock was up modestly in after-hours trading. Due to lower contracts over the past year or more, I expect reported earnings to show declines in upcoming quarters. But the stock is probably cheap enough to account for this.

On Monday the S&P 500 ended the day about unchanged while Toronto was closed for the Victoria Day holiday.

Shopify was up 3.1%

Toll Brothers was down 2.5%.

With the Canadian markets closed BNN was showing footage from J.P. Morgan’s investor day and in particular I saw CEO Jamie Dimon taking questions. He was very relaxed and very knowledgeable. Basically he was in teaching mode. This is the kind of long-time winning CEO that it makes sense to bet on. Buy some shares and ride his coat-tails.

An analysts made the assumption that J.P. Morgan would be increasing its operational efficiency and therefore profit margins. Analysts often like that idea. Jamie Dimon shot down that idea and said it can’t be done and should not be done. Their margins are already high he said and if they were higher that would just make them vulnerable to competition. I agree with that. For example, I pointed out years ago that Canadian Tire has high retail margins. While I like Canadian Tire I said that the high retail margins made them more vulnerable. In contrast I love Costco (as a business but the stock is never cheap). Costco has ultra-low margins (even including the annual fee as revenue) and yet makes a high ROE. That’s a great combination. It’s extremely hard for anyone to under-cut Costco. Costco could raise its prices at will. But they play the long game.

On Friday the S&P 500 was down 0.1% and Toronto was up 0.3%.

Constellation Software was up 3.2%.

This week the U.S. market’s attention will certainly be on the debt ceiling negotiations. That could certainly cause some volatility to say the least. But assuming it gets resolved then could then be a relief rally for stocks at that point. It seems to be a tough negotiation because both sides have to make concessions that will be unpopular with parts of their “base” in order to resolve this. Never a dull moment in the markets, it seems. 

Starting Wednesday, the Canadian banks report their latest quarterly earnings. Focus will be on the provision for credit losses. There will also be attention on the percentage of mortgages that have amortizations greater than 30 or 35 years or even negative amortizations. Bank analysts and the banks themselves provided very little commentary on this to date and seem not to think it is a big issue. On social media, people complain that the banks “extended amortizations”. In reality, as far as I can see, what happened was that variable rate mortgages with fixed payments had variable amortizations by nature and as rates rose the amortizations automatically lengthened. They are supposed to reset to under 25 years when the variable term expired and the mortgages must be renewed. So far, the banks seem confident that most mortgage holders will be able to handle the higher payments on reset. And they will be prepared to lengthen amortizations at the time of reset as needed and the government has directed them to do so in the latest budget.

In Canada the banks have not been caught with excessive fixed rate loans as deposit rates rose. Loan interest rates has reset quite quickly as interest rates rose. But what we have not yet seen (to any great extent) is the pain that this will be causing the borrowers who are paying far more in interest. Companies and individuals with too much debt compared to their incomes are going to be in big trouble.

Canadian Tire is updated and rated By at $169. It reported a very weak Q1 and its earnings have been weaker for the past year. But that came in comparison to an extremely strong year in 2021. The stock is cheap in relation to earnings at 10 times. But it may face several quarters of weak results due to higher interest rates and a generally tougher economy. On the other hand is is a very well managed company and is always focused on growing earnings. 

Ten years ago its adjusted earnings per share were $6.45. In the trailing four quarters this figure was $16.82 – despite a significant decline in the latest quarter. While 2023 could very well see a decease in earnings versus 2022, the long-term trend to growth remains intact.

On Thursday the S&P 500 was up 0.9% while Toronto was unchanged.

Toll Brothers was up 2.5%.

My next update will eb for Canadian Tire. They had quite a weak Q1 but they are a strong company and have a history of adjusting to changing conditions. Higher interest rates were part of the reason for the weaker results in Q1.

Markets rebounded on Wednesday with the S&P 500 up 1.2% – although Toronto was up only 0.3%.

AutoCanada was up 11%. That may have been due to some analyst upgrade. Or it may be related to Statistics Canada reporting this morning that vehicle sales were up sharply in March versus February. But that was likely already known since Desrosiers reports auto sales within a few days after the end of each month. AutoCanada had likely been beaten down too far. Anecdotally I am hearing that many vehicle models are in short supply. Dealers are taking orders rather just selling inventory on the lot. That should be a recipe for much higher markups which can offset the higher interest rates.

Linamar reported its annual meeting voting results today. I clicked on it expecting to see the usual 98 or 99% votes in favor and 1 to 2% withheld. But, surprise, they had four of their six directors get 25 to 37% withheld. Even CEO and founder’s daughter Linda Hazenfratz got 25% withheld. I suspect this is based on some institutional advice groups that think that what matters is having a larger board and having diversity and so-called independent directors. In reality “independent” directors are almost always extremely loyal to the chair and CEO and rarely ever actually act independently in any case. My perception is that Linamar is very well managed and so it’s crazy to be voting against the likes of Linda Hazenfratz – who owns  a massive 33% of the company. I like having a major owner is charge. And if you have ever heard her speak you will know she earned her position as CEO.

Stocks were mostly lower on Tuesday as the S&P 500 was down 0.6% and Toronto was down 1.45%.

Enbridge was down 3.8% apparently on fears that one of its major pipelines could be shut down by natives who are concerned about oil spills on their lands. 

Monday’s market saw the S&P 500 gain 0.3% and Toronto gain 0.6%.

Constellation Software was up 3.8%. I so regret the times I held shares in this company and sold for modest gains despite knowing that its management was absolutely the best. 

I  am now trying to concentrate on higher quality companies. Constellation is certainly a very high quality company. I am also thinking of Apple, Visa, Costco, Dollarama, TFI International, Couche-Tard and some others. Perennial winners.

I would like to get clear of my large Melcor position but it always seems under-valued making me very reluctant to sell. Today, I asked for a meeting with them to try to spur some action. I have some analysis to discuss with them. I have been “putting the wood to them” for about two years now and I will keep it up. 

On Friday the S&P 500 was down 0.2% while Toronto was essentially unchanged.

Aecon Group was up a modest 2.65% after announcing it has secured a billion dollars of new work at the Bruce nuclear generating station. I suspect that the market, like myself, is concerned that this company has a recent history of making little or no money on some of its major contracts.

Thursday’s action saw the S&P 500 down 0.2% and Toronto down 0.4%.

Canadian Tire was down 2.5% which was a modest drop given its weak Q1. It seems the market has confidemce that the rest of the year will look better than Q1.

Linamar was up 3.8%. Stantec was down 3.6%.

On Wednesday the S&P 500 was up 0.45% and Toronto was down 0.4%.

The Boston Pizza Royalties Income Fund was up 2.7% after releasing Q1 results. It yields 7.9% and appears set to continue to do well.

After the close, Melcor Developments reported Q1 results which were substantially lower than Q1 of the prior year. But occupancy in its rental investment properties continues to increase modestly and is not bad at 88%. Despite lower revenue it remained profitable. It continues to appear to be under-valued. But fundamentally it is a low return business. At the annual meeting they mentioned that they will have some U.S. lot sales to report in Q2. It’s been quite a disappointing company in recent years but does have potential due to its asset value – book value is $37 per share. I have been putting pressure on management to recognise that results are not good and try to spur action and I will continue to do that.

Statistics Canada reported March building permits. For Canada residential permits were down 18% but non-residential permits were up a very strong 35%. Ontario was very strong in non-residential. Alberta saw residential building permits down 8% but non-residential was up 18%. Hopefully as interest rates have stabilised and mortgage rates edge down, residential building will pick up as it is greatly needed.

U.S inflation came down to just under 5% and this likely allows the FED to stop increasing interest rates. But the Bank of England raised rates to 4.5% as inflation there is 10%.

Canadian Tire reported Q1 results with comparable Canadian Tire store sales down 4.8%. But Sport-chek and Mark’s same store sales were up 3.7% and 4.8%. Financial services (their credit card business ) was down modestly. Earnings were down very sharply. Although weaker results ere likely expected, the market will likely be disappointed by these results. But Canadian Tire fundamentally continues to be a company with a reasonably strong ROE and will likely continue to do well over time.

On Tuesday, the S&P 500 was down 0.5% while Toronto was unchanged.

Cameco was up 3.8%. Possibly this will be a good year for the nuclear fuel miner. 

AutoCanada was down 2.1% to $16.26. The company itself seems confident of growth but the market worries about weak auto sales and higher interest rates. An equity fund acquired about 250,000 shares in April at just over $20.00 doubling its position to 554,000 shares. There were no other insider trades this year other than that fund buying. Clearly, this fund has confidence – although they have not bought it appears since the Q1 results came out.

Aecon Group was up 3.2%. I am not convinced that they can generate adequate profits despite their revenue growth. I’m still not clear if they will book any material amount of gain on two recent sales of operating divisions (sold a highway construction business in Ontario and about half of their Bermuda Airport operation. Their Q1 report seemed to imply a minimal gain but when I inquire they point out the deals did not or will not close until Q2.

I’ve been giving more thought to the benefits of holding higher quality companies versus what appears to be lower quality but under-priced companies. In the end a high ROE will usually provide the better return even if it was expensive to buy. Ideally we would invest in very high quality companies that can be expected to continue to produce a high ROE but which are not prices to extremely high. A company earning over 20% ROE )and expected to continue to do so) and trading under a 20 P/E would appear to be very attractive.

The highest ROE companies on our list are (in no particular order): 

CN Rail, Couche-Tard, Costco, Dollarama (return on assets in this case), Visa Inc., Constellation Software, American Express and TFI International. These usually are expensive but sometimes appear relatively cheap such as TFI at this time. Couche-Tard is also not very expensive in terms of P/E but faces the uncertainty of the long-term impact of electric vehicles.

Another group of companies with somewhat lower but still very good ROEs are:

Stantec, Canadian Tire (and a P/E under 10), Royal Bank, Linamar, Starbucks, and Metro Inc.

TFI International is updated and rated Buy at $141.57. This has been a truly fantastic company over the years and has been extremely well managed. It is currently facing an industry downturn and the price has pulled back somewhat. This is likely an opportunity to buy but since the near-term outlook is weak it might be best to buy some now and then be prepared to add if the price declines.

On Monday the S&P 500 was about unchanged and Toronto was up 0.2%.

Shopify gained another 3.7%.

This week a number of Canadian companies on our list report Q1 earnings. This includeds Melcor Developments, Canadian Tire and Stantec.

U.S. stocks are set to open slightly down this morning.

Interest rates are a huge driver for both real estate and stocks. Government bond rates have been relatively stable recently. The Canadian 5 year government bond is at 3.1% and in the past two months has been relatively close to 3.0%  after declining from 3.6% when Silicon Valley Bank failed. This decline to 3% has been positive for stocks and residential real estate.

I notice you can get about 4.6% on a 1 year GIC and 4.3% on a 5 year. That’s worth considering for a portion of a portfolio especially for people looking for simplicity as well as safety. I’m thinking of a senior for example with a modest portfolio where safety of principal is paramount.

Just when markets seemed particularly gloomy they offered up a strong day on Friday as the S&P 500 rose 1.85% and Toronto rose 1.5%.

Shopify was up another 6.9%. Apple was up 4.7%., Visa was up 2.7%.  Starbucks was up 2.4%. American Express was up 2.8%. These are all high quality companies. Over time high quality companies seem to beat value companies. Under-valued companies can offer high returns but may require then getting out if and when the price recovers to a more fair value. High quality, high ROE companies are better suited to buy and hold for the very long term but they rarely trade at what looks like a bargain price.

Markets were down modestly on Thursday with the S&P 500 down 0.7% and Toronto down 0.6%.

Shopify surged up 23% after announcing it would sell its logistics operation and reduce staff. 

AutoCanada got pushed down 17% to $16.09 after releasing earnings. Part of the concern is likely the soaring cost of of its debt and in particular the “floor plan” debt that finances its vehicle inventory. This should not have been a surprise to analysts. The market is rightly skittish about companies with high debt as interest rates are sharply higher.

Perennial winner, Constellation software was down 3.7% and then announced it had suffered from a cyber attack on some of its systems and after announcing results from A subsidiary business that trades separately (Topicus).

The Melcor REIT is down under $5.00. To me that seems extremely cheap but of course I thought it was already very cheap at $6.00. When investors get nervous stock prices can be pushed lower than seems logical. This REIT, like most REITS does have substantial debt and so higher interest rates are an issue. But the Alberta economy remains strong and the Melcor management are experienced in managing through tough times. 

Markets can change direction quickly but it does seem that there are a lot of negative things weighing the market down now including certainly the bank failures in the US and the impacts of sharply higher interest rates.

Meanwhile markets are set to open somewhat higher this morning.

Wednesday was an eventful day in the markets.

The FED raised interest rates by another 0.25% to “approximately 5.1%”. It’s a target of 5 to 5.25%.

While this is not high by historic standards it is really an epic increase from the level of 0 to 0.25% that existed during the pandemic. The consequences of this are not yet known. Consider that home prices were driven way by ultra-low interest rates. Can home prices hold up in the face of far higher mortgage rates?

I’ve mentioned that in the case of RBC and Canadian Western Bank I have seen that their loans and other “interest earning assets” have already “re-priced” upwards substantially to  the new rates. These banks (and most banks) are collecting far higher rates on loans and paying far higher interest on deposits.

Some people such as some seniors and some people with multiple properties are now in a position to sell at high home prices that still pretty much reflect a world of low interest rates. And they can invest the proceeds in safe GICs suddenly paying say 5%. Great for them! Meanwhile young people pay 5 to 7% on the mortgage to support the savings of these sellers. And the mortgages of young people buying now are still massive.  I think young people should be up in arms about this. They get high how prices AND high interest rates. No previous generation has had that combination to the extent we see today.

These rate increases have already driven three fair sized U.S. banks into receivership. In good part these were poorly managed banks who bet that interest rates would not rise much. But the FED and FDIC is taking the wrong approach. They keep taking over banks and then having to sell them at a huge loss. This then spooks more deposit withdrawals at more small banks. It may have been far cheaper for the FDIC and government to declare that until further notice, ALL depositors at all banks would be fully insured. That would stop the bank runs. Some banks might still have struggled due to their locked in low loans but I think in most cases they would have limped along. The current approach is creating cascading bank failures. Apparently a fourth bank is teetering this evening. (PacWest).

There are other impacts from this huge increase in interest rates. Companies with too much debt will be struggling. Many consumers will be struggling too.

Apparently the FED will now likely pause. Picture going on on the battle field to see how the casualties look.

We have already seen that the transport company volumes are down. The cooling off of the economy, that the FED desires may very well be taking hold.

On Wednesday, the S&P 500 was down 0.7% and Toronto was down 0.3%.

Starbucks was down 9.2% after reporting earnings. And that’s after they claimed they had a great quarter. The market is skittish. Certainly a stock like Starbucks can decline more but in the long run it is a great company and probably a great long-term hold. I plan to update this company before the end of this month. I suspect it will look somewhat expensive.

After the close, Costco reported a lack-lustre same-store sales increase of 4.3% (adjusted for fuel price volatility and foreign excahnge impacts). This 4.3% may indicate a volume decrease given food inflation is higher than that. In Canada the same-store sales growth was stronger at 8.3% in Canadian dollars and adjusted for fuel price changes. In Canada, Costco has no other big warehouse store competitor. Surprisingly Costco shares were almost unchanged in after-hours trading. Costco had a long string of stellar growth starting prior to the pandemic and accelerating through the pandemic, so it’s not surprising to see it struggle to keep on growing same-store sales.

Also after the close, AutoCanada reported results. Most of the figures it appears were somewhat lower than Q1 last year but I think not too bad in the circumstances. We shall see how the market responds.

Markets were weak on Tuesday with the S&P 500 down 1.2% and Toronto down 1.0%.

Restaurant Brands International was strong with a 2.8% gain.

AutoCanada was notably weal with a 6.6% decline. They will report earnings tomorrow after the close of trading.

Today, after the close the Melcor REIT reported Q1 results. There were some good points and some negative points. Revenue was fairly stable. Occupancy was up slightly to 88.4%. Retention of expiring leases in the quarter was quite strong at 95.5% (but that may tend to be volatile as the amount expiring in any given quarter may be volatile. Cash flow was apparently down 35%. But Funds from Operation which is a better measure of performance was down 8% as expenses were up. Overall, the results were “okay” given the circumstances of the weak demand for office space. It appears that the distribution is secure at its current level. 

 Starbucks reported a strong Q1. 

Markets were little changed on Monday with the S&P 500 about unchanged and Toronto up 0.1%.

First Republic Bank which was somewhere around the 15th largest bank in the U.S. was seized by the Federal Deposit Insurance Corporation on the weekend and most or all of its assets and deposits sold to J.P. Morgan at a fire sale price and there will be no recovery for shareholders or even bond holders. This was no bailout. 

Penny Stock RIWI had previously announced it would miss a filing deadline for its annual results. In a somewhat cryptic fashion it appears to have just announced that it will cease trading at least until it gets the results filed. Quite possibly headed to zero unfortunately.

My next update will be for TFI International.

Last week I attended the annual meeting of Melcor Developments and made sure to meet with their executives. I continue to remind them that results are not good and I have been pushing them to do certain analysis which could provide useful insight. It’s been a long time waiting for better results. The Alberta oil economy is strong but higher interest rates are a headwind in terms of housing starts. still, I saw a headline today that Calgary home prices edged up to a record high so that’s positive. Melcor will report Q1 results on May 10. I don’t think we can expect anything too positive. They did reveal at the Annual meeting that they have closed on some U.S. lot sales (which will boost earnings) but it was not clear if that occurred by the end of Q1 or subsequent to March 31.

A lot of Canadian companies will be reporting Q1 results in the next week or two.

After that the banks report around the end of May and there will be a focus on loan losses, interest rate spreads and what is happening with all the variable rate mortgages. 

Most of you will have received emails from me this year as I sent out editions of the free newsletter.  If you did not receive that then add your email to the free newsletter list using this link or the link at the top of every page on this web site.  

Friday’s action saw the S&P 500 up 0.8% and Toronto up 0.6%.

TFI International bounced up 5.7% after its loss on Wednesday after it posted earnings. It seems it’s hard to keep a good company down.

As of Sunday afternoon, the Federal Deposit Insurance Corporation is apparently taking bids for First Republic Bank which it will apparently then seize. It likely does not have the ability to force a buyout of the bank’s shares at any price. The potential buyer in this emergency fire sale will want to pay little or nothing plus they may want various guarantees that they will not lose money on the deal. There is probably zero chance that First Republic shareholders will see a dime from this. That likely sends more shockwaves through for other smaller banks. Why keep your deposits in a small bank? And why own shares in any small bank now that there have been multiple runs on deposits. It would be far better for stability if First Republic could have been sold or partially sold as a going concern, even at a very low price.

I’m fairly confident that Canadian Western Bank does not face these sorts of risks. It has not locked in low interest rate loans to any great extent at all. And a lot of its deposits are locked in (GICs). But unfortunately some businesses might still be more hesitant to keep money in CWB. I hope that’s not the case but the more these U.S. bank failures are in the news, the more chance that Canadian depositors in small banks also get a bit nervous, as share holders as well.

This post repeats what I said in the free newsletter mailout that I  sent out on April 28. I am repeating it here because I need to be able to link to it. And I have one correction below.

Last edition [of the free newsletter] I explained how Silicon Valley Bank’s problem was that it had invested a massive 43% of its assets in mortgage securities at low interest rates averaging just 1.63% and with 95% of those securities locked in for more than 10 years. Given the short-term nature of its deposits this was an inexplicable and inexcusable mismatch between assets and liabilities. Bank management and bank regulators were clearly asleep.

Today I looked at the February annual report of First Republic Bank. A huge amount of their loans were interest-only residential mortgages (no payments on principal) and locked in for 15 years or more at an average interest rate of 2.9%. [Correction, after I wrote this I saw that their mortgage loan interest is locked in from one to ten years although the terms are 15 years and longer – so at least eventually those mortgages do reset to higher interest rates which is good for the bank – but they still have way too much locked in at low fixed rates for too long]  And this was funded mostly by no-interest checking accounts that were free to leave with no notice. Again this is a shocking duration mismatch between assets (loans) and  liabilities (deposits).  These loans were well secured by the value of the homes. But’ that’s of no help. The situation now is that with higher market interest rates those mortgages are worth far less than their stated values. And most of the no-interest deposits have fled and even if they stayed they would have now demanded to be paid the going interest rate.  As I write this on Friday April 28, it appears likely that First Republic is headed for receivership with a total loss to share owners. In receivership the Federal Deposit Insurance Corporation is likely to sell off those mortgage loans at a steep discount easily wiping out the bank’s equity.

First service just reported last week that its book value per share was $77. That now seems highly misleading given that they would have known that the market value of those loans was vastly lower than book value and that they were unlikely to be in a position to hold onto those loans with their deposits so badly depleted. Banks are always highly leveraged and so anything approaching even a 10% loss in value on assets (loans) is a total wipeout of share owner equity. This development signals that the financial statements of at least some U.S. banks cannot be trusted. Unless the deposit insurance limit is raised, why would any company keep more than $250,000 in a smaller bank? This is likely to lead to big changes in the regulation of U.S. banks and perhaps to the elimination of hundreds of smaller banks.

In my experience, the Canadian banks do not engage in the kind of asset / liability mismatch demonstrated here. It increasingly appears that the Canadian banks are indeed far better regulated than U.S. banks. Also far better managed than many U.S. banks. Some Canadian banks may indeed face problems with bad loans if a recession occurs and/or if Canadian home prices decline from their lofty levels, but I don’t think any of the publicly traded Canadian banks will will suffer from the kind of interest rate mismatch that has wrecked the two U.S. banks that I mention above.

Markets staged a strong rebound on Thursday with the S&P 500 up a hefty 2.0% and Toronto up 0.8%.

Almost all the stocks on our list gained on the day.

Wednesday was another negative day in the markets with the S&P 500 and Toronto both down 0.4%.

TFI International was down 11.3% to $139.20  after reporting its latest earnings. It has been a fantastic company for years but could not escape a general downtrend in trucking.

Markets were down noticeably on Tuesday with the S&P 500 down 1.6% and Toronto was down 1.15%.

The great majority of stocks were down on the day.

Markets were spooked partly by another regional bank First Republic looking like it could potentially be in even bigger trouble than thought. It’s management refused to answer questions from analysts yesterday after releasing earnings. That was probably a very dumb move.

CN Rail was down 4.0% despite reporting strong earnings. 

Aecon Group reported earnings after the close that did not look very good. They continue to blame a lot of their problems on four “legacy” contracts. Basically trying to distance themselves from their own past mistakes. They did recently contract to sell off two chucks of their business but the the press release failed to indicate what the gain on those sales will be. I find it bizarre that a company would sell off a division and or major asset and not immediately indicate the gain or loss. Unfortunately this appears to be a poorly managed business and also a tough and risky sector. Hopefully the analysts and the market will have a better opinion than I do.

TFI International reported lower earnings. But this is an exceptionally well managed company.

On Monday, the major stock market indexes were little changed with the S&P 500 up 0.1% and Toronto down 0.1%.

After the close CN Rail reported good earnings a good outlook for earnings despite expecting the economy to slow somewhat.

On Friday the S&P 500 was up 0.1% and Toronto was up 0.3%.

The great majority of the stocks that I keep a close eye on wee up on the day. This included the rate reset preferred shares.

I have updated my reference article that breaks out Canada’s GDP by segment and shows what Canada imports and exports as well as which countries are important trade partners.

Looking at GDP it turns out that “Real estate and rental and leasing” is the largest contributor to GDP. And this does not include the construction of real estate. For real estate it appears to be primarily the leasing of existing real estate as well as real estate brokerage. This category also includes the rental and leasing of equipment and vehicles. Manufacturing (which includes refineries) is the second largest category followed by “mining, quarrying and oil and gas extraction”. While many would (wrongly) argue that all government activities are non-productive, the reality is that various government-dominated sectors including healthcare and education as well as public administration are very important contributors to GDP.

Looking at exports and especially NET exports the contribution of energy – mostly crude oil – is enormous. Talk of replacing oil and gas in Canada’s economy anytime soon is fanciful at best. At least that’s what the figures I see appear to show.

And looking at Canada’s continued enormous dependence on the U.S. as a trade partner is somewhat frightening. 

On Thursday the S&P 500 was down 0.6% and Toronto was down 0.2%.

Stantec was up 2.1%. 

Costco was up 1.9% after announcing the 13% increase to its dividend. The dividend is definitely not what drives the value here but the increase is a sign of confidence. The (previous) dividend amounts to a payout ratio of about 27% of earnings.  The yield is under 1%. But that’s because Costco trades at about 10 times book value. 

American Express down just 1% after it came out with earnings. Analysts noted that it had increased its provision for bad debt on credit card receivables. But the company said that it is not seeing any big increase in actual credit losses and this is just a return to a more normal level of provisions for bad debt.  

We have just two penny stocks on our list, RIWI and Ceapro and I generally have kept away from penny stocks. (Actually RIWI was on the list for a few years but is not currently on the list.)  Unfortunately RIWI has been a very poor investment. And today it was down 32% after announcing it will miss the deadline to file its earnings and related material. They said this was related to complexities in accounting for an acquisition it make last Summer. Their CFO left (or was fired) a few months ago and they have a new CFO now in place. Hopefully this is truly just a case of accounting complexities and a former CFO who was in over their head or something. But obviously this is an ugly development.  I tend to see it as too late to sell. It seems my last update on RIWI was to call it a Weak Sell/ Hold in August 2021. I will take a look at it again when the financials are finally released.

Both the S&P 500 and the Toronto exchange closed about unchanged on Wednesday.

After the close, Costco increased its dividend by 13%. This is a better kind of inflation. Costco however is not much of a dividend stock as the yield remains under 1%. Costco is bought for capital gains which it has delivered for many years.

Many of the U.S. companies have already reported Q1 earnings. The Canadian company Q1 reports will start to come in next week.

CMHC today reported housing starts for March and they were down. The annualized trend was down to 241,000  versus 256,000 as of February. 

Single family homes in particular were down sharply in most places including Alberta. Hopefully this was an anomaly and it will pick up in the next report. 

Markets were not much changed on Tuesday with the S&P 500 up 0.1% and Toronto up 0.2%.

AutoCanada was up 2.0% after announcing an acquisition of a very large GM dealership in Windsor Ontario. They will use their line of credit to pay for it. My take on this is that it shows that the company is confident about cash flows. It’s a good sign. 

Toll Brothers was up 2.7%. U.S. home starts for March were reported and were down less than 1%. Commentary indicated that there are fewer existing homes for sale becasue owners are less willing to sell and upgrade when the would face higher interest rates on their next home. Sop they stay with their existing home typically at a lower interest rates. The commentary suggested that this is good news for new home builders since buyers are less able to find existing homes to buy.

About those higher interest rates:

Bank of America reported stronger earnings today. 

I’ve been watching the increase in interest income and interest expense of the banks and I find the numbers to be rather breath-taking.

Bank of America’s interest income was up $15.8 billion versus Q1 of 2022 or 121%. Some portion of that was likely paid by other banks. But most of it was likely paid by businesses and individuals. And it seems to me that that this is a MASSIVE increase in interest payments and I wonder how many businesses and individuals are simply not going to be able to continue to pay. What this also means is that Bank of America’s loans and other interest-earning assets have “re-priced” rapidly with the higher interest rates. Unlike (the dummies) at Silicon Valley bank this bank was not locked into low interest investments to any important extent. In the U.S. mortgages are mostly fixed for 30 years but banks sell those mortgages in securitizations partly because they don’t have 30 year deposits to match those loans. The dummies (and really I’m being kind with that word) at Silicon Valley Bank went out and BOUGHT low-rate 30 year securitized mortgages!

Meanwhile, Bank of America’s interest expense was up by $12.9 billion or 975% (not a typo)!!  Basically, a year ago Bank of America was paying almost nothing on deposits and now they are paying quite a lot. Some of this may have been paid to other banks. But a great deal was no-doubt paid to businesses and individuals. 

So I think we have some businesses and individuals suddenly collecting a lot of interest (albeit less than the rate of inflation) and another group of people and businesses suddenly paying a LOT of interest. And that group too faces inflation and I am NOT in the camp that believes that inflation makes it easier to pay off debt, not in the short term at least. Obviously there is some overlap where some are both paying more interest and receiving more interest but in general there must be a huge group that is finding these higher interest payments very difficult. And perhaps that will lead to to the next shoe to drop on the markets this year. 

Bank analysts and observers tend to focus on the NET interest income of banks. For bank of America as higher income is partly offset by much higher interest expense, the net interest income was “only” up $2.9 billion or 25%. That’s a big increase but I think the analysts seem to be missing the more massive increase in interest income and therefor interest being paid by businesses and individuals.

P.S. I just noticed the two Brookfield Office Property rate reset shares were down today. They look cheap but are in a troubled segment and it’s hard to say how this will turn out. More will be known when they release Q1 results around May 10 or so.

Stocks mostly moved somewhat higher on Monday as the S&P 500 and the Toronto stock excahnge were each up 0.3%.

Shopify was strong with a 4.8% gain.

Bank of America was up 2.9%.

Tomorrow, the March inflation number for Canada will be reported and it is expected to show that inflation is cooling.

Meanwhile the yield of the Canada 5 year bond is back up to 3.3% meaning it has retraced about half the decline that occurred last month with the panic over the U.S. bank failures. This likely means that mortgage rates will not be declining in the next month or so. Right now might be a good time to lock in a pre-approval for those looking to buy. 

Markets were mixed on Friday as the S&P 500 was down 0.1% while Toronto was up 0.1%.

Linamar was up 2.3%. 

The two Brookfield Office Properties rate reset preferred shares on our list were up modestly once again, but also once again on thin volume. 

There were some very interesting results from the large U.S. banks that have reported Q1 earnings. It appears that loan and other interest earning assets of these banks has repriced quite quickly to the new higher rates. Meanwhile it seems they have not had to move their deposit rates up as quickly.

I looked at Wells Fargo and found that its NET interest income (after deducting deposit interest) was up by a huge 45% year-over-year. I was interested to see what the increase in interest income (before deducting interest expense) was  but that has not yet been released. There are two implications that I see here 1. Borrowers are paying a LOT more interest and it’s unclear what problems that may lead to. 2. Wells Fargo’s earnings per share were up sharply. It seems to me that Wells Fargo is likely a very good investment at its current price. It’s trading at only 11% higher than book value and Yahoo Finance indicates that its forward P/E ratio is 8.3.

I also see that J.P. Morgan’s net interest income soared 49% and that its net interest margin increased from 1.67% to 2.63%. That is a stunningly large increase in the net interest margin. Overall J.P. Morgan is a lot more complicated than Wells Fargo and I am a lot more familiar with Wells Fargo. I was very tempted to buy some Wells Fargo hares on Friday but did not end up doing so.

With predictions of recession and loan losses, the U.S. banks could certainly face some problems in 2023. But overall, they look like good bets to me and I would go with Wells Fargo because of its simpler business model (not as much exposure to bond trading and capital markets).

Markets were solidly higher on Thursday with the S&P 500 up 1.3% and Toronto up 0.5%.

Amazon was up 4.7% but remains well below its 52 week high.

Apple was up 3.4%.

Visa was up 2.1%. 

BPO.PR.G was up 4.6% to $16.53. BPO.PR.A was up 2.5% to $12.16. I have not seen any direct news that explained either the recent sharp fall in these two or the recovery.  The trading volume today was extremely thin with just 3,080 of the dot G shares traded and so perhaps We should not read much into the gain today at all. We may not have anything further to go on until they release Q1 earnings in early May. It’s true that that office segment faces higher vacancies and higher debt costs. But it’s not clear that this would be serious enough to put the dividend payments on these preferred shares in doubt. Given the complexity of the issuing company and the difficulty of predicting its future cashflows it would not be prudent to really load up on these shares. But a small position in them as part of a diversified portfolio seems reasonable.

U.S. markets had been higher most of the day on Wednesday but ended the day moderately lower.

The S&P 500 was down 0.4%. But Toronto managed a 0.2% gain.

The Bank of Canada left interest rates unchanged. But in general, hopes that interest rates will soon start to go back down are fading. The 5 year Canada bond yield has been trending up somewhat after it had declined with the US bank run shock last month. Fixed term mortgage rates had declined somewhat in the past month. Further declines now seem less likely. 

One of the Brookfield rate reset shares that I have been mentioning (BPO.PR.G) was up 4.7% but the other one (BPO.PR.A) was down 1.0%. A mixed message there.

Warren Buffett along with his second in command (Greg Abel) were interviewed today while on a trip to Japan to meet with five large “trading houses” that Berkshire invested in in late August 2020. Warren was asked about bank failures. He said that there would be more but that depositors would almost certainly be fully protected. His main message was that it is not something to worry about but the headline on CNBC focused on his statement that there would be more bank failures. But there are always some small bank failures in the U.S. every year  so the focus should be on the fact that depositors have nothing to worry about.

I hesitate to say it but I thought that Buffett sounded just a bit less sharp than usual. Still VERY sharp, but maybe a little less so. Then again he was being interviewed in the dark probably after a long day of meetings and after a lot of travel and a huge time zone change. He is still sharp enough to mention that he is prepared to invest billions on extremely short notice when the opportunity arises.

The Toronto stock exchange index was up 0.7% on Tuesday as oil prices rose. The S&P 500 was  unchanged.

The two Brookfield Office Properties rate reset preferred shares on our list staged a modest partial recovery today with gains of 5.2 and 6.1%. 

AutoCanada was up 3.1%.

Toll Brothers was up 2.6%.

US inflation data for March will be released tomorrow morning and could be a driver of markets. In Canada the bank of Canada is expected to keep interest rates unchanged at its announcement tomorrow but it is releasing its latest economic outlook which provide some indication of whether we should expect interest rates to remain on pause.

On Monday the S&P 500 was up 0.1% and Toronto was up 0.4%.

The Boston Pizza Income Trust units were up 3.7%. It had announced a small increase to its distribution last week.

Perennial winner TFI International was up 2.9%.

The Brookfield Office Properties rate reset preferred shares were up modestly.

Excitement this week will include a Bank of Canada interest rate announcement (the expectation is for no change) on Wednesday as well as the Bank’s comments on the economy and its views on the expected outlook for interest rates.

A strong US jobs report released Friday has slightly increased expectations that the US FED will raise rates another 25 basis points in April. Bu that of course remains “data dependent”.

The report on Alimentation couch-Tard is updated and rated Buy at $67.95. 

Based on its past earnings and excellent management this company looks very attractive. It’s latest announced pending big acquisition in Europe will almost certainly boost its earnings.

But it has been benefiting from unusually high gasoline margins for the past three years. If those margins were to return to the historic levels then earnings would decline significantly. For whatever reason it appears that gasoline retailers have not been competing as aggressively in recent years. 

And longer term it could be quite vulnerable to the switch to electric vehicles. Suburban Commuters will charge their vehicles primarily (almost exclusively) at home. Highway “gas stations” could become even larger with many charging stations. But many suburban neighborhood gas stations will ultimately face closures. And without the gas pumps will people still visit the convenience stores? Many will for lottery tickets, tobacco and snacks. But overall the switch to electric vehicles has to be considered a headwind for Couch-Tard.

Higher interest rates are also a headwind but Couche-Tard appears to heave locked in much of its debt and so this does not appear to be a big concern.

Overall given its history and its pending large acquisition, Couche-Tard is a Buy but the longer term threat of the switch to EVs should be kept in mind.

On Thursday markets were quiet as we head into the Easter long weekend. 

The S&P 500 was up 0.4% and Toronto was up 0.2%.

Costco was down a modest 2.2%  to $486 after reporting weak same-store sales growth. Their same-store sales have grown fairly massively over the past three years and it was probably inevitable that growth would slow. The stocks always seems to be expensive. The forward price earnings ratios is  I own some and will nibble if it goes back down to about $451. It’s a long-term keeper for sure. 

WSP Global was up 2.1%.

The Brookfield Office Property rate reset preferred shares were up modestly today. They have likely fallen due to concerns about the credit strength of the issuer and a general negative tone adn outlook for office building properties. This negative sentiment could last quite a long time since office vacancy rates seem likely to remain high. And with higher interest rates and vacancies, there likely will be some office investment companies that really suffer. The next news around these will likely be when the publicly traded parent Brookfield Property Partners L.P. releases Q1 earnings in about one month. My expectation is that there will be no interruption to the dividends on these shares and that at some point the price will rise. I can’t guarantee that but it is my expectation. We may also get a change or update to the credit rating at any time and that would also affect the  share prices. Brookfield Property Partners is a large and complex entity. 

Markets were down moderately on Wednesday as the S&P 500 fell 0.25% and Toronto fell 0.6%.

Shopify was down 5.0%.

The two Brookfield Office Properties Rate Reset Preferred shares on our list got hammered again today.

BPO.PR.G was down 5.2% and BPO.PR.A was down 9.6%.

This would appear to be due to concerns about how credit worthy the issuer of these shares (Brookfield Office Properties)  is. There is a lot of negativity around the commercial office segment. Neither BPO nor its parent Brookfield Property partners LP has issued any news. And I have not seen anything regarding a change in their credit ratings although that is certainly something that could occur. DBRS last reported on the credit rating one year ago.

Is the market correct that these shares are at risk of not paying the distribution? That’s a possibility. My understanding of the Brookfield entities is that they are very reliant on the debt and credit markets. I very much doubt that they would allow these shares to go into any kind of default unless they had no other choice. It would presumably be quite a black mark.

These rate reset preferred shares are quite thinly traded. Thin trading can definitely make stocks more volatile.

I am not thinking of selling but I can can’t deny that the lower prices here are a red flag.

In other developments, Costco reported very modest same-store sales growth in March. They were up just 2.6%  versus March of 2022 (adjusted for gasoline price changes and currency changes) . In the U.S. the figure was just 0.9% while in Canada it was good at 7.4% (at constant currency and constant gasoline prices). Given inflation this would indicate that volume was down noticeably in the U.S. Costco has now reported several months of slim same-store sales growth. This comes after almost 3 years where sales growth was abnormally high  starting with the beginning of the pandemic. Costco shares price fell modestly in after-hours trading. 

Markets were generally down on Tuesday with the S&P 500 down 0.6% although Toronto was about unchanged.

The great majority of the stocks that I monitor were down.

The Brookfield Office Property rate reset preferred shares were down once again. Presumably that’s on credit concerns linked to weakness in the commercial office market.

Going the other way, Constellation Software was up 2.4%. 

Former President Trump was formally arrested and charged with felony crimes. It appears that protests against his arrest were not not that large. Hopefully protests will remain peaceful.

By next week the market should be turnings its attention to the Q1 earnings reports – unless something else distracts which is always possible.

The report on Royal Bank of Canada is updated and rated (higher) Buy at $130.08 or US $96.33.

The bottom line is that it looks attractively valued but banks are always highly leveraged and dependent on sophisticated risk management systems and models. The outlook appears good but there are headwinds in terms of possible higher loan losses and businesses and individuals struggle to pay higher interest rates and due to the projected mild recession.

It was surprising to see how quickly RBC’s loans and other assets have adjusted upwards to higher interest rates. Apparently they do not have that much in assets locked into low rate loans and investments (unlike Silicon Valley Bank) that had way too much locked in (invested) at low interest rates. RBC’s interest income rocketed up a shocking 162% year-over-year in the latest quarter. They collected $19.3 billion in interest versus $7.4 billion a year earlier.

It’s a bit scary to think about who was on the other end of that paying an extra $12 billion in interest. That’s $48 billion annualized just at this one bank! This would include governments, institutions, businesses and individuals. We have not seen reports yet of businesses going under due to higher interest rates but that seems a possibility.

It was less surprising to see that RBC’s interest expense on deposits and other funding has repriced to higher interest rates. They paid out $13.1 billion in interest versus $2.1 billion the prior year. Many individuals and institutions and businesses are benefiting from that but they are not usually or certainly always the same ones that are paying higher interest.

One group that is falling behind due to higher rates is residential mortgage payers. Many are on variable interest rates but with temporarily fixed payments. 26% of RBC’s Canadian mortgages now have amortizations over 35 years. A year ago there were none over 30 years. And these appear to be mostly uninsured mortgages. Strangely, this was not mentioned at all in the management discussion in Q1 it was just noted in a table without comment. And I searched through the the Q1 analyst call transcript and it appears there were no questions about this.

Interestingly, NONE, of RBC’s U.S. mortgages have amortizations over 30 years. This may be one time where the Canadian system is not in fact safer than the U.S. 

I bought a few shares of RBC today on the basis that it looks attractive although there are some risks here.

On Monday the S&P 50 was up 0.4% while Toronto, benefiting from the OPEC announced production cut, was up 0.9%.

The Energy ETF, XEG was up 5.3%.

AutoCanada was up 3.4%.

Almost forgot, Trump gets arrested tomorrow. Hopefully pretty much a non-event as far as the markets and New York are concerned.

Friday’s session saw the S&P 500 up a strong 1.4% and Toronto up 0.8%.

Almost all the stocks on my list were up.

But the market continued not to like the Brookfield Office Properties rate reset preferred shares.

Today, OPEC surprised the market with a promised production cut. This could be quite positive for oil-related stocks on Monday.

On Thursday, the S&P 500 was up 0.6% and Toronto was up 0.5%.

Constellation Software was up 2.4%.

After the close came the news that Donald Trump is being indicted and charged with some 30 financial fraud charges. I don’t know if the market will react to that.  Never a dull moment…

Markets were strong on Wednesday as the S&P 500 rose 1.4% and Toronto rose 0.9%.

lululemon was up 12.1% after releasing earnings and outlook. 

Shopify was up 5.1%.

The Brookfield Properties Ltd. rate reset preferred share that is on out list (BPO.PR.G) was down 2.8% and is down 16% this year to date. The yield is now 10%. Clearly, it is credit concerns that is pushing this down. In adding this share to the site I did not potential credit risks but at the same time I indicated that I did not think that default risk was much of a concern. Apparently the market disagrees. There has been speculation recently that commercial real estate will run into defaults and that office properties in particular are problematic. On top of that a Brookfield subsidiary recently defaulted on two large bonds on Las Angeles office buildings. The credit of this share is apparently guaranteed by Brookfield Property Partners L.P. The dividend is cumulative which is comforting. This is a complex situation. I don’t think Brookfield Property partners could default on this without essentially declaring the whole of Brookfield Property Partners L.P. to be insolvent. Looking at the annual report of Brookfield Property Partner’s L.P., it is a large and complex entity but it was profitable in 2022 and does not appear to be in financial danger. At the same time, this is a complex entity and it seems anything can happen. I will be holding my investment in this preferred share and a similar one BPO.PR.A . Given the risks that the market seems to be signaling, I am not about to add to my positions despite the attractive yields.

If interested, do a control-F in the 2022 comments where I did mention this preferred share a few times.

Overall, rate reset preferred shares have been a terrible investment especially when purchased anywhere near par. Only when purchased at big discounts have they been good investments it seems. 

P.S. A company like Brookfield often uses non-recourse debt. That Los Angeles  debt was secured by specific buildings and nothing more. Executing their legal right to default on the debt and negotiating with the debt holders as they are now doing is quite a different thing than potentially being unable to pay the dividends on these pref shares. In other words  the possibility of Brookfield not paying the dividend or going into receivership on this part of their empire probably remains very remote even though their portfolio of buildings is likely less profitable than previous.

On Tuesday markets ended “little changed” with the S&P 500 down 0.2% and Toronto up 0.2%.

There were no particularly notable moves in the individual stocks that I track.

But lululemon was up 12% in after-hours trading after releasing earnings.

Worries about banks continue to be a negative for the markets.

The Budget had little or nothing new for most investors.

Dividend income earned by banks will be taxed as regular income. Banks may well respond by not bothering to hold those dividend stocks.

Canadian Western Bank in its latest quarter had, just $132 million of non-government securities which may have been mainly preferred shares. These amount to far less than 1% of its assets, just 0.3%. This certainly does not appear to eb any big deal for Canadian Western Bank. It may be that this is more of an issue for life insurance companies than banks.

Markets rose modestly on Tuesday as the banking crisis seems to be getting better.

The S&P 500 was up 0.2% and Toronto was up 0.6%.

Tomorrow’s excitement in Canada will be the federal budget coming out after the market closes. 

The report on Melcor Developments is updated and rated (higher) Buy at $11.36.

Admittedly, this has been a poor investment since it peaked at over $26 back in 2014. It then fell as much lower oil prices caused a recession in Alberta and then after a long slide it really cratered with the pandemic. During that time the dividend was cut in several stages but the stock price finally staged a nice a nice recovery to over $18 in early 2022 as oil prices soared and the Alberta economy was very strong and  as the dividend was increased. But then it slipped back to the $10 to $12 range. 

Trading at just 31% of book value, I believe the company is clearly under-valued.

Fundamentally, Melcor appears to be a relatively low return business. Its investment property rental buildings including its REIT are fundamentally lower return but also lower risk investments. With an occupancy level of about 88% and which does include substantial older office buildings that portion of the company should justify a price to book value ratio closer to but probably not above 1.0.

The land development business appears to be problematic by tying up investment for far too many years. The gross margins on sale at about 39% do not appear to be high enough to generate an adequate ROE considering the years the investment was tied up before sale. And it may be that Melcor is sitting on way too much vacant land. It’s very hard to know what price to book value is reasonable here but 31% certainly seems WAY too low.

Melcor’s share price seems to suffer from the fact that no bank analysts follow the company. This may be because it is too thinly traded. It may also reflect the fact that there are essentially no other publicly traded land development companies  in Canada. And Melcor is a mix of a property developer and a REIT while the market prefers pure plays. Overall, there is an extreme lack of interest in this company. The fact that the Melton family owns over 50% of the shares also seems to preclude any takeover possibility,  despite the depressed share price.

In 2022 the ROE based on funds from operation remained far too low at 4.7%. But there are some very positive aspects to consider including:

• The dividend decrease that were made in 2016 – 2020 have been restored with 5 increases since 2021 and the yield is now 5.6%.
• 5% of the shares were repurchased in 2022 at low prices and this shows confidence.
• An office building Kelowna was recently sold for $19.5 million. This was $4.3 million higher than the book carrying value of the building even though buildings are carried at estimated modeled market value.
• In late 2022 they sold 117 residential units in Phoenix for $35 million. They had purchased these units around 2013 for $12 million. What was particularly surprising was that it appears that the this was a huge gain over the book value of these residential units even though they were theoretically already marked to market. A fair value gain of $23 was made on the sale and it appears that almost all of this was booked in 2022 indicating the residential units were significantly undervalued on the books. An additional $11 million in fair value gains was booked on other U.S. residential units that remain unsold.
• Here we have two major asset sales at well above carrying value and yet overall the shares trade at 31% of book value and counting debt plus equity the assets trade at 58% of book value.
• Melcor’s conservative approach to financing with limited use of short term debt is now paying off as much of the debt is locked in at lower than current market interest rates.
• In 2022. there was a substantial improvement in the occupancy level of the non-REIT investment properties. From 76% to 89% in Canada and from 75% to 83% in the US.
• The book value per share rose 11% in 2022. 
• Melcor will continue to operate conservatively but appears to be optimistic about 2023.

There are some headwinds for 2023 including higher interest rates which could limit housing starts. But the Alberta economy is strong and Melcor appears set for a better year in 2023 as they expect to sell their inventory of U.S. lots this year along with possibly additional land sales there.

On Friday, the S&P 500 was up 0.6% and Toronto was up 0.2%.

Aecon Group which had been strong lately was down 4.1%. It has had two recent major asset sales and it did not reveal the gain on either one. There will be clarification on this when it reports on April 25.

Fortis was up 3.0%.

The bank contagion worries are not over yet. Regulators and central banks continue to try to reassure markets. But depositors have a tendency to “run” at the any hint of trouble in a bank.

About Mortgage rates:

There has been speculation that fixed mortgage rates would come down given that the yield of the 5 year Canada bond is down to 2.8% from recent highs of 3.6% and has now been at or under 3% for almost two weeks.

But I see that 5 year GIC rates have not fallen much if any and are at 3.85% for the big banks.

If banks fund mortgages with GIC then for a slim 1.25% margin the 5 year mortgage rate would be 5.1%.

To the extent that banks can fund CMHC insured mortgages by securitising them through CMHC at an interest cost of not much more that the government yield of 2.8% then it seems possible that 5 year mortgages could be closer to 4.1%.

But I am not clear on the interest rate margins that the big banks get on 5 year CMHC insured mortgages. It’s a small margin because they can leverage it almost infinitely due to the government guarantee. Earnings say  1% interest margin on the banks’ own equity capital would be very slim but when you can earn a 1% margin on depositors money and when that category of government-guaranteed loan can be funded with almost entirely with deposit money, the ROE can work out to be quit high.  

 I am also not clear to what extent the big banks do securitise these mortgages as opposed to fund them with 5 year GIC deposits.

The bottom line for potential mortgage borrowers is that things are very much in flux at this time and it is especially important to shop around and to check with a mortgage broker. Mortgage renewals are an area where banks will likely not offer the best deal unless you threaten to shop around. And I (vaguely) understand that there may be barriers to shopping around in that a new stress test may be required if you switch lenders. If so, that’s highly unfair and makes you captive to the current lender. 

Apparently, nothing major happened in the financial markets today. And that’s a good thing.

The S&P 500 was up 0.3% and Toronto was down 0.4%.

The 5 year government of Canada bond yield is at 2.8%. Down substantially from 3.6 to 3.7% in early March.

Mortgage rates have come down to some extent. If you are looking at locking in a mortgage in the next week or so shop around really hard because many mortgage providers have not yet reflected the lower 5 year Canada yield.

You can apparently still get up to 4.7% on  1 year GIC and over 4% on a five year. Those rates may not last long if the five year Canada stays below 3%. Again, it’s pretty sweet that a retail investor gets a higher 5 year interest rate than an institutional investor. (Institutions are too big for GICs or they value they ability to sell the government bond early if needed.)

On Tuesday, markets rose for the second day in a row. The S&P 500 was up 1.3% and Toronto was up 0.7%.

There were some indications that the bank contagion may not get any worse.

Canadian inflation came out lower than expected at 5.2% year over year.

More importantly, this was the sixth month of quite tame inflation on a monthly over month basis. The total inflation in the past six months was apparently only 1.2% but the year-over-year numbers were high because of earlier inflation. This particular report is definitely one where people can cherry pick and conclude things are much better or are still terrible. Basically people believe what they want to believe, and see what they want to see, as always.

Obviously, even if we do get back to 2% year-over-year inflation, it will still be about 10% higher than two years ago if the first year was 8%. No one is expecting prices to return to the 2021 level.  The 2% inflation target would be on a go forward basis and would not erase the high inflation that already occurred.

Markets were up modestly on Monday as the S&P 500 was up 0.9% and Toronto was up 0.7%.

It’s not clear that the bank issues have been resolved yet and so markets are likely to continue to be volatile.

The report on WSP Global is updated and rated Weak Sell / Hold at $173. It’s a strong company and could continue to go up. But it seems expensive at 30 times trailing adjusted earnings.

Friday continued a pattern of one day up and next day down for the markets. Friday’s turn was down.

The S&P 500 was down 1.1% and Toronto was down 0.8%.

AutoCanada was down 3.9% to $18.69. There are certainly some headwinds as mentioned in my recent updated report for this company. These include higher interest rate which negatively affect the company as well as potential vehicle buyers. And a possible recession is another headwind. But current management who took over this company about 5 years ago have proven to be able to manage through very hard times (The 2020 panic caused by the pandemic) and have grown revenues and profitability considerably. They brought the company back from big losses caused by the prior incompetent management. National Bank recently reduced its target price to $27 but did question whether investors need to be exposed to a consumer discretionary business at this time. Overall, I’m surprised how far the stock has been pushed down. I bought a few more shares yesterday. Earnings are expected to be lower this year but the company appears to be under-valued. This has been a very volatile stock over the years and that could certainly continue to be the case.

With oil prices down I also bought a small amount of the energy exchange traded fund XEG. This is an inherently volatile investment as oil and natural gas prices fluctuate. 

Overall, there are lots of uncertainties in the market and with cash now paying about 4%, it is not a bad idea at all to maintain a material allocation to cash and near cash assets. It’s true that this 4% is lower than inflation but inflation affects every investment. 

Markets bounced higher on Thursday with the S&P 500 up 1.8% and Toronto up 0.8%.

After the close, Melcor Developments reported Q4 and 2022 earnings. Although lower than 2021 The earnings were likley better than expected (to the extent that anyone has any expectations for this thinly traded company).

A positive surprise was the sale of 117 residential units in the U.S. for $35 million. There was a very large gain over Melcor’s original purchase cost for these units. But some of that gain had already been reflected due to mark-to-market accounting for rental buildings. I’m not fully clear on it but it appears that much of the gain had  NOT previously been booked and so there was a large fair value gain in 2022. 

Melcor’s book value per share has risen to $37.71. Yet the shares are trading around $12.00. I will take  detailed look at this and plan to update the report on Melcor in the next few days.

The dividend was also increased from 15 cents per quarter to 16 cents. That’s a vote of confidence.

Stantec is updated and rated (lower) Buy at $79. It’s strong Q4 capped off a strong 2022. The company has been firing on all cylinders and expects continues growth in 2023 and beyond. The only concern is that at 25 times earnings it is not cheap. It’s been a huge long-term winner but of course has had its dips over the years.

On Wednesday the markets continued a yoyo reaction to the developing bank issues.

With Swiss bank Credit Suisse apparently in trouble, market reacted negatively.

The S&P 500 was down 0.7% and With lower oil prices. Toronto was down 1.7%.

Couche-Tard was down 3.2%. After hours it released earnings that were up only modestly. But that was partly because of unfavorable currency impacts as it reports in U.S. dollars. In Canadian dollars, the currency impact was mostly positive. It’s gasoline margins increased once again and are double the historical levels. I keep expecting those high margins to fall due to competition but so far they have not.

With the 5 year Canada bond yield down, rate reset preferred shares got hammered down. These things just never seem to catch a break. The banks seem to be no longer issuing these. The existing issues are mostly small and illiquid and don’t seem to attract institutional investor interest. When the 5 year bond yield goes down then the projected reset yield is lower which is negative. And the recent high short term interest available on GIC and even certain savings accounts provides stiff competition for the rate resets (although rate resets have the advantage of the dividend tax credit).

Aecon Group announced today that it has sold a 49.9% interest in its Bermuda Airport “Concession” for U.S $128.5 million or about $177 million Canadian. The company said this demonstrates the value of the Bermuda Airport Concession. It’s not clear from the press release whether there is a gain or loss on this sale. Looking at the asset value it would be a loss. But since there was substantial debt against this asset it appears it was a gain. I have written to the company for clarification.  To me it seems very poor practice indeed to not indicate the level of gain or loss in the press release.

P.S. I got a quick clarification and it seems there is a nice gain on this sale. They did not give the dollar amount but I calculate roughly $100 million dollars which if I am right is roughly $1.00 per share after income tax.

So a bit more bank contagion this morning. The thing with contagion of any kind is that it will always be initially denied. To do otherwise is akin to yelling fire inside a very crowded building – people could get trampled.

I don’t know if there is more bank contagion to come or not. Banks that have been very weak for years like Credit Suisse and perhaps some others in Europe could certainly go down.

The Canadian banks are safe by all accounts. But I have always said and observed that banks are highly leveraged by nature. That risk has always been there. What offsets it is very strong risk management practices and strong regulation designed to keep risks under control.

I’m tempted to add to some positions on this dip. But my cash position is modest and so is my fixed income position. Therefore I decided not to buy anything this morning. I’m also determined not to do ANY panic selling whatsoever.

Looking at interest raters. I see that the 5 year Bank of Canada bond yield is down 22 basis points to 2.81% this morning. That rate peaked at about 3.70% in early January. This decline is indicative of fear and suggests that interest rates will be lower in the next year or so.

Looking at GIC rates, TD does not appear to show any updated lower rates. I suspect the GIC rates for 2 years and longer will come down this week if the Canada 5 year bond yield stays below 5%. We should also see lower fixed mortgage rates. If buying a GIC or looking for a mortgage this week it’s probably appropriate to negotiate harder than usual. Maybe move fast on locking in a 5 year GIC (if that is attractive to you) and move a little slower on mortgage negotiations.

Markets are staging a nice recovery today with the S&P 500 up 1.9% and Toronto up 1.2%.

I have some thoughts on the banks:

The banks are paying 4.75% (RBC) to 4.92% (Canadian Western bank) on one year GICs.

Obviously they have to charge interest rates in the range of about 6.75% or higher to make a reasonable spread on those deposit costs.

Clearly some individuals and businesses are facing high borrowing costs. Unsecured personal lines of credit are at about 9.2%. Secured personal lines of credit are at about 7.2%.

Banks are getting squeezed int he short term becasue many loans do not reset higher as fast as deposit costs have reset. That will lower their income or the growth in income but is not a serious problem and is only short-term.

More seriously, I think it is inevitable that we will start hearing about more businesses and individuals who can’t meet these higher interest costs.

I would think anyone who can will be paying down lines of credit and other debt.

I suspect banks will see little or no loan growth in 2023. And, as loans are paid that also reduces deposits.

The banks also of course face higher credit risks (loan losses).

Overall, I would be cautious about bank earnings. On the other hand the Canadian banks tend to trade at low multiples of earnings and have high dividend yields. Therefore even with a tough year for earnings, the Canadian banks are unlikely to sink too much in price.

Markets on Monday survived the first day after the Silicon Valley Bank failure and the related Signature Bank failure. But there were some impacts.

The S&P 500 ended the day down 0.15% while Toronto with its heavier bank exposure was down 0.9%.

Canadian Western Bank was down 3.4% and Royal Bank was down 1.4%. 

American Express (which has significant banking operations) was down 4.9%.

AutoCanada continues to fall for some reason and was down 5.8%.

Fortis Inc. was up 2.7%.

Expectations for further Central Bank interest rate hikes melted away to a good degree and bond yields came down significantly.

There is now an expectation that Canadian fixed mortgage rates could drop starting tomorrow.

With prices down today I nibbled on Canadian Western Bank and AutoCanada. But I am being cautious and will deploy cash only quite slowly. Hopefully this bank contagion episode is over, bet we really can’t be sure.

It seems that the receiver is selling off the assets of Silicone Valley Bank on a total fire sale basis. Apparently bids for its assets were due at noon on Sunday. It seems to me that a more orderly and less panicked sale of assets could have resulted in far higher prices for those assets. I guess the problem for receivers if that in a liquidation if they go slow and get better prices the creditors and even possibly the equity owners win. But if they go slow and it turns out to be a mistake as prices drop then the receiver gets the blame. So it seems that their incentive is to do a fire sale.

No one said that investing was dull and this weekend certainly provided some excitement and stres for investors.

The Silicon Valley Bank depositors have been fully protected. That was what I expected since the main purpose of bank regulation is to protect depositors. Shareholders adn bond investors in the bank appear set to be wiped out. In large part that is because the receiver (The federal deposit insurance corporation) appears to be selling off assets at a fire sale price rather than holding those assets (which include government bonds) to collect full value at maturity. 

There has been some contagion to other small banks but the FED is attempting to reassure markets.

Depositors and shareholders in small banks may have a tendency to abandon ship even with the FED assurances.

It’s not surprising that there has been some fallout due to the massive interest rate movements.  Hopefully most of the losses are in the private shadow bank sector as opposed to publicly traded banks.

I believe Canadian Western Bank is very well managed and has not suffered any material losses due to the rise in interest rates. But they could still be vulnerable to some depositors seeking larger banks.  

The Melcor REIT report is updated and rated (lower) Buy at $5.60 and yielding 8.6%.

I use Adjusted Funds from Operation per unit as the adjusted earnings figure. This was down 14% in 2022 due to higher expenses. Utilities costs were up.  The REIT is responsible for those costs on vacant space and space used for its own needs. Professional fees were up due due to more buildings needing valuation experts and due to outside advice sought in regards to the maturity of a convertible debenture. They also increased the normalized expense for capital expenditures and for tenant incentives. And interest rates and expenses were up.

All of these same expenses were particularly high in Q4 leading to a large 23% decline in adjusted earnings but it looks like the run rate on expense increases was closer to the 14% as an unusual amount of the expenses were booked in Q4. Most of the expenses may have stabilized with more modest increases in 2023 but interest expenses will definitely continue to rise.

There is some good news. The occupancy has increased modestly due to the rent incentives. Rental revenue has remained stable – it’s not clear if there will be any material rental rate increases in 2023. They sold a building in Kelowna at a premium of 28% over its previously estimated market value. This appears to have been an isolated incident as they incurred modest market value losses of 2.4% on their remaining buildings. But it does show that there is still a market for investment property buildings and the “cap rates” have held up well in the face of interest rate hikes.

Despite higher costs the distribution appears to be safe with a relatively low payout ratio of 81% of adjusted earnings. 

Overall while the 8.6% yield is attractive, the higher interest rates are certainly a headwind and there is probably little reason to expect the unit price to increase anytime soon.

As a REIT the distribution is not eligible for the dividend tax credit and there are certain income tax complexities. Therefore these units are best held in non-taxable accounts.

On Friday the S&P 500 and the Toronto stock exchange were each down 1.5%.

Markets reacted negatively to the strong jobs report in the U.S because it adds fuel to predictions that the FED will raise interest rates even more than previously thought.

And markets and particularly bank stocks declined on news that the Silicon Valley Bank was effectively in receivership, taken over by the FED to be wound down. This was a private bank – not listed on the stock exchange. It suffered a run on deposits after it released some bad financial news. There is no indication that the problems at this bank have any relevance to any Canadian Bank.

Almost all the stocks I follow were down on Friday. American Express was noticeable with a 3.7% decline because of its banking operations. Dollarama was among the very few that bucked the trend as it managed a 0.2% gain.

In the U.S. the short term Treasury Bills yields (interest rates) declined very slightly on Friday. That may indicate something of a flight to quality. Longer term treasury bond yields declined noticeably. This could indicate predictions of lower interest rates ahead – in 2024 and beyond.

In Canada, a large volume of variable rate mortgage payers have seen or are about to see huge increases in their monthly payments. For CMHC insured mortgages (which is most of them) the banks With the approval of CMHC) are allowing the amortizations to be extended to 40 years to mitigate the payment increases. The change from 25 years to 40 years is going to going to help a lot actually. But there are still some big increases.

If the interest rate changes from 2% to 6% and the mortgage is extended to 40 years from 25, the payment goes up 29%. If the existing payment is $2000 then the new payment is $2580. If the amortization stayed at 25 years, the payment goes up 51%! Here’s a link to a mortgage calculator that goes to 40 years. 

A lot of people on variable rate mortgages are going to have to hope that they qualify for an extension to a 40 year term.

Even with the mitigation the banks are offering, I suspect these far higher interest rates are going to lead to defaults and that the fall-out has not yet even begun. I am not suggesting widespread disaster but surely there is going to be some noticeable impacts. 

People who suddenly find themselves paying 6% on a mortgage should look at any way possible to pay down the principle. That could mean using savings, selling surplus assets, cutting back on expenses, working overtime or getting a second job. People have to do what they have to do.

Markets were pretty much a sea of red on Thursday with the S&P 500 down 1.85% and Toronto down 1.3%.

Linamar got spanked down 13.7% after releasing earnings and a weak outlook.

Aecon Group (up 0.7%) and Constellation Software (up 1.1%) and Dollarama (up 0.6%) were about the only gainers on my list.

The market appears to have been worried about the February jobs report out tomorrow. A strong jobs report will signal higher interest rates adding to the already strong expectation for higher interest rates.

After the close, Toll Brothers announced a modest 5% dividend increase.

Yesterday American Express announced a 15% dividend increase.

The report on Canadian Western Bank is updated and rated Strong Buy at $25.65.

Its Q1 report appeared strong but was actually weak after adjusting for an unusual earnings boost caused by the recover of a prior bad debt. Earnings have suffered due to a lower net interest margin caused by deposit interest rate rising quickly with the Bank of Canada rate increases while loan interest rates do not move up as quickly. The valuation appears to be very attractive with a 5.0% yield and P/E ratio of 7.4 and a price to book value ratio of 0.74. Management forecasts a relatively modest earnings increase in 2023. They are optimistic that the ROE will increase to 12% by 2024. That ROE should easily support a higher share price. At the same time it is significantly lower than the ROE of the big banks. Overall, CWB is quite attractively valued but it may stay under-valued for some time. Ultimately the chance to buy a profitable bank at about 74% of book value is likely to pay off.

Wednesday’s action saw the S&P 500 up 0.1% and Toronto up 0.35%.

Constellation Software was up 3.2%. I’m not aware of any specific reason but it has just been such a well managed and highly profitable company since about forever!

AutoCanada was up 4.1% to about $22. I added a little to my position yesterday at $20.69. I was then reluctant to buy today at closer to $22. That’s called anchoring. I am mentally “anchoring” on yesterday’s price of under $21. It’s not a logical or smart way to think. Yesterday’s price is really irrelevant to my decision to buy or not today. But being human, I can’t help being reluctant to add another 100 shares today at $22 when I thought about adding that extra 100 yesterday below $21 and did not do it.  If I had been running with a very substantial cash position such as 20 or 30% I think I would have bought more AutoCanada yesterday. But my cash position remains fairly thin (about 9%) and I want to be disciplined. I’m trying to only buy after selling something. Yesterday I reluctantly sold half of my very small position in Restaurant Brands in order to buy the AutoCanada. AutoCanada is certainly not without risk but it seems to me that it could easily run back up to say $30 if it has some good quarters later this year. It’s well managed and ambitious and the company itself was buying back shares last Fall and Summer and $27 and $28.  

Markets crumbled somewhat on Tuesday ad the Fed chair signaled that the U.S. Fed funds rate would ultimately be going higher than previously thought.

The S&P 500 was down 1.5% and Toronto 1.2%.

Aecon was strong once again with a 4.4% gain. 

I have said before that the stock markets have been slow to accept just how high interest rate are going to go and how long they will stay there. With the U.S. Q4 earnings season over there may not be much reason to think that the S&P 500 will rise in the next few months. It’s more likely to be steady or to fall on bad news. But a lower inflation report or an improved situation in Ukraine could be catalysts for stronger markets. It’s seldom a good idea to get scared out of the market. But having a solid allocation to fixed income is also wise. And now that cash pays a decent return, fixed income should include an allocation to cash.

The next Bank of Canada interest rate decision comes out tomorrow morning. All indications are that they will pause. But they might signal that the next move is likely another hike.

The Canadian dollar is down to 72.7 U.S. cents. I have some U.S. cash and this may be an opportunity to bring some of it back to Canadian dollars. Each $1.00 U.S. is worth about $1.37 Canadian. 

The report on AutoCanada is updated and rated (higher) Buy at $20.62. Its profits were down in Q4 despite higher revenues. Margins on new and used vehicles had been unusually high during much of 2021 and 2022 due to shortages of vehicles. But that has now normalized. 

The share price has reacted very negatively to the lower profits in Q4 and is perhaps also reacting to fears that higher interest rates will severely impact sales of new and used vehicles. 

While profits certainly could be lower in 2023 it appears that the share price has more than priced in that bad news. 

While there are always risks the share price appears to be quite attractive.

This company has a history of very strong cash flows under the current management which took over in 2018. The company continues to project strong growth.

On Monday markets started out stronger but closed with the S&P 500 up 0.1% and Toronto down 0.3%.

Aecon Group was up another 2.9%. 

lululemon was down 3.9%

AutoCanada was down another 7.8%. Clearly, the market did not like its Q4 results. I am now reading its Q4 and and year-end results and it will be my next update. There are a lot of non-operating items that affect its profits each quarter. This makes it more difficult to interpret its earnings. So far, my impression is that the current price represents a buying opportunity but I have not yet really dug into the results. The f=ear may be more about high interest rates preventing people from purchasing vehicles.

Aecon Group is a huge construction / infrastructure company. They do enormous projects including the new Gordie Howe bridge (Windsor / Detroit), large LRT projects, pipeline construction and much more. 

Aecon’s profits have recently been abysmally low due to cost over-runs on four large projects. They now claim that the losses on those four projects are largely behind them and that they are no longer doing fixed price work on the largest projects. The claim that these big mistakes are behind them has to be greeted with a fair amount of scepticism. But it does appear that earnings are likely to be much better this year. 

I am rating Aecon a Weak Buy / Hold at $12.27 and will continue to hold my shares hoping for a an exit point later this year. Fundamentally this does not appear to be an attractive industry. It is too competitive. It’s a tough way to make money. And the company does not appear to be well managed. 

The recent problems loading this site are caused by the web site hosting company. Yesterday only the home page would load and it was giving an error code [CFN #0005] that I have never seen before. This morning the site is loading quickly and properly. I apologise for these problems. This site has always been hosted at the same place. which was telushosting but that service was sold to easyhosting a year or so ago. I am looking into changing to a better and faster hosting situation.

Meanwhile markets were up relatively sharply on Friday with the S&P 500 up 1.6% and Toronto up 1.2%.

Aecon Inc. added another 7.6% ion further reaction to its recent earnings gain. It’s reported profits are very low. But it actually does look like it MAY be putting certain problems behind it. I will have an update posted shortly.

AutoCanada was down 6.0%. I suspect its issues are more of an industry-wide problem as opposed to company-specific. Higher interest rates are a headwind for the industry both in terms of financing their huge inventories and in terms of affordability for customers.

Costco was down 2.1%. I did add modestly to my position at $471 sand I placed an order for a little more at $451. Although it has retreated from a peak of  $612 last Spring this stock remains expensive. It could certainly drop further as the market realises that its huge and consistent  same-store growth during the pandemic was not sustainable and now same-store growth is returning to more traditional ands sustainable levels such as 6%. But it remains an extremely high quality company and I plan to add to it if and as it declines. Otherwise if it does not decline, well that’s certainly okay.

On Thursday, the S&P 500 was up a healthy 0.8% and Toronto was up 0.4%

Canadian Western Bank was down 5.5% as I commented earlier today.

After the close, Costco reported earnings and same-store revenue growth was weaker than analysts hoped. Foer the quarter adjusted same-store sales growth was up 6.8%. But for February the adjusted same-store growth was 5.0%. That’s pretty decent growth. I don’t know why analysts would think they could keep posting growth towards 10%. They can only pump so much through each store when they are already very busy. I’ll consider nibbling on a bit more Cost if the price is down tomorrow.

Nordstrom announced it will close its Canadian stores. It’s only 7 Nordstrom and 6 Nordstrom rack stores so not really a big deal in the scheme of things. I just hope the parent company pays all creditors in full and all its obligations. They have filed for creditor protection which may indicate the parent intends to walk away from their Canadian child’s obligations. Target Canada stiffed a lot of Canadians which was unethical on the part of the parent. You absolutely know that when one of Warren Buffett’s subsidiaries winds down (as very occasionally happens) no one gets stiffed even if legally they could be.

Canadian Western Bank shares are down close to 5% after reporting Q1 fiscal 2023 earnings. Earnings were good but revenue was down. Credit losses were not a problem.

It’s no surprise that net interest revenue would be down. We all know we are getting paid a LOT more on certain deposits and GIC rates are way up. It takes longer for loan interest rates to adjust up.

On top of that I believe loan growth and deposit growth will definitely slow or even go negative at all the banks. Many people and businesses with lines of credit and other debt will be looking to paydown debt rather than borrow. And paying down debt reduces deposits also. (Borrowed money seldom leaves the banking system it just becomes the deposit of some other person or company).

ROE was good at 12% but nowhere close to what the big banks achieve. But then CWB trades under book value (which management should consider to be a fail).

I want to do a detailed update of both RBC and CWB before long. It is getting annoying how long CWB is taking to show improvements. I am starting to think a new CEO is needed. Listening to their Investor Day conference a few months ago, I think their CFO is exceptionally good. They do have a lot of good plans but my patience wears thin.

I noticed from TD Direct that they out with a Nova Scotia bond paying 4.05% and maturing in six years. I was thinking no thanks. But for those with a lot of cash and wanting fixed income and wanting to lock in a decent rate this might be okay. It sold out within two hours and so I guess a lot of investors liked it. If you are going to hold actual bonds (as opposed to a bond ETF) then buying at the offering would be the way to go as you pay no commission. I think you then have to be prepared to hold until maturity. While you can sell it early you will find that TD or your broker will grab quite a large commission via the bid / ask spread. This could also be used instead of a 5 year GIC. I thought the 5 year GIC rates were a bit higher but looking this morning on TD, they are pretty close to this 4.05% rate. P.S. I was forgetting, it’s the one year GICs that are higher – close to 5% then you are only sure of getting that rate for one year.

On Wednesday the S&P 500 was down 0.5% while Toronto was up 0.2%.

Aecon was up 8.4% after announcing better earnings and announcing it is selling a business in Ontario. I still think their profits are far too low but I need to go through the latest results.

After the close AutoCanada reported what look like weak results for Q4.

TD Waterhouse was out with a 5 year convertible debenture paying 7.0%. On its face that sounds pretty good but I don’t know anything about its financial strength.

RioCan is offering a bond paying 5.6% for 4.5 years. This one is almost certainly safe. This one did not show up in TD Waterhouse for whatever reason. TD probably did not join in this offering.

If I was sitting with a LOT of cash I might be interested but right now I don’t want to tie up cash. In buying these you have to be prepared to hold until maturity in my view. Not the best option if you might need the cash in say two years. But if you are looking to lock in a rate for about 5 years these are worth considering.

There has been a lot of corporate takeovers in the financial news the past couple of weeks or more. Clearly some big buyers are optimistic.

I had occasion to email a question to the Toll Brothers executive VP yesterday. He got back to me promptly this morning. Then I asked another question tonight and he responded at just about midnight in his time zone. Toll Brothers had always been extremely responsive when I have questions. It adds to my confidence that they are a very well managed company.

Markets drifted lower on Tuesday with the S&P 500 down 0.3% and Toronto down 0.2%.

Aecon Group (the big construction company) was down 2.6%. Then it reported better-tan-expected earnings after the close. This has been a disappointing business. They do great and impressive projects but their profit margins are generally way too low. They have lately been blaming their problems on four “legacy” contracts. Basically it means they made big mistakes in the bidding or execution of four large contracts and now they want us to forgive that I guess. It’s like they are trying to distance themselves from – themselves. It is possible that they will get a settlement from the Coastal Gas Pipeline where they are in a big dispute. I’ll know more when I go through the results in detail probably later this month. I have a small position and am just holding. My last rating was Weak Sell / Hold. I doubt I would raise it to more than Weak Buy / Hold once I go through the numbers and the report.

News today was that Canada’s GDP was flat in Q4 and particularly weak in December. It’s very possible that we are heading into the recession that the Bank of Canada and other central banks is actually trying to trigger in order to tame inflation. That’s bad news for earnings but it could be good news in terms of hopes that interest rates will decline within a year or less. Overall it seems like a good time to have a solid allocation to cash and fixed income. 

On Monday, the S&P 500 started off strong but ended the day up just 0.3% and Toronto was up a similar 0.2%.

There were no notable moves for any of the individual stocks on my watch list.

Warren Buffett’s latest annual letter came out on Saturday. https://www.berkshirehathaway.com/letters/2022ltr.pdf

His main lesson for investors was that it only takes a few very good stock picks in a lifetime if you can let those winners really run. I’ve been much more active on Facebook and Twitter lately (use the links at the top of every page on this site to follow InvestorsFriend on Facebook  and or Twitter) and coincidentally it was just a few days ago that I mentioned that the hardest part of buy and hold was often having the discipline to simply hold for a very long time.

Buffett also gave some figures about income taxes. He mentioned that the U.S. federal Treasury collected a total of $32.3 trillion dollars in 2021 sourced as follows: 48% from individual income taxes, 34.5% from social security and related receipts, 8.5% from corporate income taxes and the rest from a wide variety of lesser levies. He then explained that Berkshire’s contribution alone amounted to one tenth of one percent of the grand total. I found it interesting that he did not say anything about the corporate taxes being just 8.5%. But I suspect he may have just let that figure speak for itself to those readers whose eye it caught. To make his point that, if there were 1000 taxpayers as big as Berkshire, no other business or individual would have to pay a penny Buffett did not need to give that breakout showing the 8.5%. So I think he may have just slipped it in without saying anything and therefore getting into a controversial area. But I’m pretty sure he thinks that 8.5% is far too low. He tends to think corporate income taxes should be higher. This may even have been for Elizabeth Warren’s eyes. A bit of a hidden message in plain sight? 

Related to this Buffett also rather subtly noted that the 2021 U.S. deficit was $11.6 trillion. Then he said he had no opinion on the consequences of that that huge imbalance.  Yet he went on to say that huge and  entrenched fiscal deficits have consequences. Right after saying that he laid out the revenue source percentages that I mentioned above. Now if he wanted to subtly get readers thinking of about which of the sources could be higher to solve the deficit, it’s pretty obvious that you would have to conclude that the 8.5% corporate contribution looked a little skinny. 

Am I reading too much into this? Maybe. As far as I can tell no one in the media has picked up on that skinny 8.5% figure.

On the other hand Buffett said that anyone claiming that all share buy backs are harmful to shareholders or the country is an economic illiterate or basically a liar. That too may possibly have been directed at Elizabeth Warren.  If so, that message was certainly not subtle or hidden.

On Thursday, the S&P 500 ended the day up 0.5% while Toronto was about unchanged.

Stantec was up 9.3% after releasing Q4 earnings and a strong outlook for 2023. As a side point, it would be a great thing is Turkey started using reputable engineering companies for their buildings. It’s very sad to see that quite modern buildings fell becasue they were not properly designed and/or constructed.

WSP Global was up 2.9% probably pulled up by Stantec although WSP had already released earnings about two weeks ago.

Toll Brothers was up 2.5%,

I saw the alert today from TD Waterhouse about Lithium Royalty Corporation issuing shares. That’s not the sort of thing I normally buy and I would have no ability to analyse it. But it’s likely to be popular. And it could do very well if lithium prices rise. And as a Royalty unit it probably can’t go broke although the units could fall in price if the lithium market got saturated. I did not try to buy immediately and when I decided to throw in a few dollars as a speculation the issue had already closed.

Another issue a day or so ago was Morguard North American Residential REIT with a 6.0% convertible debenture.  It is still open. I have not analysed it in any way but I suspect it might be a decent investment. But you would have to be prepared to hold until maturity in 5 years and these units often trade below book value. The REIT is trading at $18.36 and the conversion price is $24.15 so there is perhaps not a lot of chance that the conversion option would happen. Overall there are probably better places to get 6%. Which is why these debentures did not sell out yet.

I was wondering today, how 5 year GIC rates compare to the 5 year Canada bond. I’m not interested in buying 5 year GICs but the rate on those forms a sort of competition for other fixed income investments.

Let’s see TD today is showing 4.0 to 4.3% for a 5 year GIC. That’s up to  0.76% higher than the yield on a 5 year government of Canada bond currently at 3.54%. So a couple things:

1: This certainly seems like a case where the little people get a better deal that big institutional investors. 

2: The ability to get 4.3% on a GIC has to be kept in mind when comparing it to something like a rate reset preferred share that pays about 6% but will fluctuate in value and reset to a different unknown interest rate. But if the rate reset preferred is in a taxable account then the dividend tax credit also has to be considered.

Markets down but only quite modestly today. The S&P 500 was down 0.2% and Toronto was down 0.3%. 

Toll Brothers was strong after its very strong reported earnings release and conference call with a 3.0% gain. And this was despite its contracted homes being down 50%. But they did say that activity had picked up noticeably in January and February.

This is a company that has fairly volatile earnings by nature. I’m understanding more and more that there is no way to predict its earnings in the medium term (the short term is actually predictable based on past contracts to build homes) I do know that it is very well managed and I trust it will do well over time. At the moment, the market seems to be willing to sort of look past the fact that its contracts to build new homes have fallen off a cliff for three quarters in a row. Meanwhile it has reported stellar earnings growth based on contracts signed an average 9 to 12 months before each quarter. It’s clear that its earnings are going to drop quite noticeably later in 2023. But it has great assets and great future and it trades at only a shade over book value. The bottom line is this is a really tough company to judge as to valuation. I updated the report earlier today. My best guess after looking at it is that the shares may slide lower at some points this year and may well end the year lower. It all depends now on whether contracts really ramp up this Spring from the weal levels of this past nine months. They won’t get as high as last Spring but they still may be high enough to support the share price. Over time I do think Toll Brothers will do well but it may be a rough ride. If you have a modest position I would hold. I had a very heavy position and I sold about a third. So I may still be over-exposed to it. 

Couche-Tard was also up 3.0%.

As to the overall markets, they may have about finished adjusting to higher interest rates for now. But there is still lots of other things to move the market such as earnings reports and the situation in Ukraine.  The best approach is to have a balance of equites fixed income and cash. The youngest investors can take the risk of going all equities but most investors should probably not take that risk.

Markets were quite weak on Tuesday as the S&P 500 fell 2.0% and Toronto fell 1.3%. For the reasons I explained earlier today – the market is taking notice of higher long-term interest rates.

Given this decline, almost everything on our list was down today.

Toll Brothers was down 2.5% (so not unusual given the whole market was down). But then Toll Brothers released earnings after the close and the stock rose 2.85% after-hours. (Hurray!)

Toll is destined to report strong earnings (I’m not sure it will be growth but at least solid earnings) for a couple more quarters as it delivers its backlog of houses that customers contracted for in the past year. But its contracts for this quarter were down 50% and had been down 60% in the two quarters before that. So at some point Toll is going report sharply lower year-over-year earnings. BUT with the stock so cheap, maybe that is already priced in. AND they once again expressed a lot of optimism. Overall, this one is likely to continue to be volatile and although it is cheap I don’t see much reason to expect it to gain much if any in the near term. There is a conference call tomorrow morning and that may push the stock in one direction or the other.

Note that the “February 18” comment just below this one was meant to be uploaded on Saturday and I found it in a browser tab today, waiting for me to press the “publish” button. that’s why it is out of date order.

The report for this Enbridge Rate Reset preferred share is updated and rated (higher) Buy at $16.56.

I know, I know, this one and almost all rate reset preferred shares have been heart breakers. They do pay their dividends as promised but many like this one have fallen in value and then after partially recovering has fallen again. Enbridge Inc. Rate Reset Preferred Shares ENB.PF.A

I’m not surprised that markets are down today (S&P 500 down 1.6% and Toronto 1.0%).

I believe I have mentioned that stocks markets have been slow to react the the very recent increases in longer term interest rates which has occurred becasue the FED is now expected to ultimately push rates higher than previous thought/hoped. During January, the U.S. ten year yield fell sharply from 4.14% down to 3.39% which pushed stocks higher. Now in February the ten yield yield has risen fairly sharply to 4.01%. So it’s no surprise that stocks are down and they may not have fully priced in these higher rates yet.

Today I had planned to add to my Enbridge rate reset preferred share position ENB.PF.A and to Visa Inc. But I did not like the idea of reducing my cash position which is still not that large. And I did not find anything to sell so I will do nothing today.

My fingers are crossed for the Toll Brothers earnings release after the close. It could certainly include a poor outlook. As posted here, I did reduce my Toll Brothers position recently to hedge my bets and raise cash.

Stocks edged lower on Friday on continued concerns about just how high interest rates will go as the FED and other central banks raise rates to cool the economy in order to fight inflation.

The S&P 500 was down 0.3% and Toronto was down 0.4%.

Toll Brothers was down 2.9%. It will report earnings after the market close on Tuesday. I expect strong reported earnings growth. But contracts for  homes may be down significantly – as they have been in the previous two quarters.  What may be most important could be their comments on home sales in February (after the end of the latest quarter) and what their expectations are for the Spring selling season.

Our report on Dollarama is updated and rated Weak Buy / Hold at $79.55. Dollarama has been a fantastic investment and is a fantastic business. At 31 times earnings it is not cheap. Still I was tempted to rate is a bit higher because of its track record. I hold a modest amount and I would like to buy more if the price dips. A reasonable strategy at this tome for those not holding it would be to take an initial small position and be prepared to add to it on dips.

On Thursday markets fell as stock markets started to get the message that the interest rate hikes may go somewhat higher than recently hoped. I mentioned yesterday that I expected markets to turn attention to that.

The S&P 500 was down 1.4% and Toronto was down 0.55%.

Shopify got hammered down 15.5% after indicating a weaker outlook. It’s a very volatile stock.

Canadian Tire was strong with a 5.0% gain after announcing a strong Q4.

My next update will likely be for Dollarama. 

It’s RRSP season until March 1.

RRSP’s sometimes get a lot of bad press. But they are still a great choice in some cases and Spousal RRSPs can be a fantastic choice in some cases. 

But back to the bad press…

Those now withdrawing RRSP funds in retirement face heavy marginal tax rates and some of them lament that they would have been better off in a taxable account where only growth (interest, dividends and realised capital gains) is taxed – and much of that is taxed  at lower rates – but actual withdrawals are not taxed.

But these complainers tend to forget a number of things including: 1. They generally got a big tax refund upon contributing to the RRSP. Each $1000 contributed may have cost a net $650 after the tax refund in which case you can argue that 35% of “your” RRSP was funded by the tax refund. 2. In a taxable account there would have been annual tax to pay all those years. 3. Without the incentive of that tax refund an awful lot of people would never have saved much for retirement at all. The end result is that most people with large RRSP withdrawal tax bills would simply never have had anywhere near as much saved without the RRSP. And in any case, this is the “deal” we all sort of signed up for when we made RRSP contributions, so why complain now?

These days the TFSA is indeed a better choice in a lot of situations. But some lucky people can maximise the TFSA as well as contribute to an RRSP and that still makes sense if they are in a relatively high tax bracket.

For those (probably increasingly rare) cases of a single earner couple, the spousal RRSP can be a fantastic way to go and is really something of a gift. A high income earner can get a large tax deduction and if the spouse has very little other income in retirement they may be able to withdraw those RRSP funds (which will have grown tax-free) at a very low tax rate. If the high income spouse gets a 35% tax refund and the low / zero income spouse later withdraws at a very low tax rate, the end result is actually a negative tax rate!

In the archived newsletters I have written about RRSPs in the past and compared them to TFSAs. Do a search for “RRSP” or TFSA in the newsletter list here if interested.

Newsletter List

Stocks managed a small gain on Wednesday with the S&P 500 up 0.3% and Toronto was up 0.1%.

Shopify was notable with a 6.9% gain. But it then came out with earnings after the close disclosing a large loss but with revenues up 27%. The stock was down about 10% in U.S. after-hours trading. But the after-hours trading on news tends to be quite trigger happy and sometimes a different picture emerges over night once analysts have had a bit more time to digest the news.

Long-term interest rates have climbed noticeably in the past few weeks. So far the stock markets have pretty much ignored that. But now that the U.S. Q4 earnings season is over the market may turn its attention more to this headwind of higher long-term interest rates. At this time, I’m more inclined to increase my cash position as opposed to my equity position.  The difficulty is always in deciding what stocks I might like to sell down. Doing nothing for another day or week is always a default option.

After the close RioCan announced good Q4 results and announced a 6% distribution increase. As I mentioned in my update of December 17, I was expecting a distribution increase. Therefore RioCan may not move on this good news since it was probably about as expected.

CMHC reported January home start data today. Alberta managed to have only a 2% decline in detached single family home starts compared to January a year ago while all the other big provinces had large declines. Ontario and B.C. both had big gains in multi-family starts.

Markets were a bit confused as to how to react to the U.S. inflation report that came out this morning.

At the end of the day the report was not too different than expected and markets ended the day virtually unchanged.

Toll Brothers was featured on BNN this morning. The Analyst views it as a buy based on its Backlog. It is destined to have a profitable 2023 based on that backlog.  But the earnings will be lower than 2022 and contracted home sales could be way lower. So despite the stock being very cheap in relation to earnings and trading not much over book value and being well managed, I decided to sell some of my shares in Toll Brothers to hedge my bets and raise cash. Basically, I am very uncertain how the market is going to react to its earnings report next week. I still like the company long term.

After the close West Fraser Timber reported a loss in Q4. I’ve been surprised how well that stock price has held up in the face of lower timber prices and a reduced level of new home construction.  The weak Q4 is not likely a surprise to the market but we shall see how the stock reacts tomorrow to this news. 

On Monday stock markets were strong. The S&P 500 was up 1.4% and Toronto was up 0.4%. It was another good day to be an owner of stocks.

I sold some Toll Brothers today.  As mentioned yesterday, its earnings are basically certain to be lower in 2023. But then its P/E is so low that it may still look pretty cheap even with lower earnings. So it’s hard to say if the stock will head down or not. The outlook for 2023 will be more clear when it reports its latest earnings next week. Meanwhile I hedged my bets buy selling some Toll Brothers to raise cash but am also keeping for now more than half of my shares in the company. 

The markets are now eagerly awaiting the release of January U.S. inflation numbers tomorrow morning. Analysts will be trying to guess if the FED will need to go higher than currently anticipated with interest rates or no. It could be a volatile day. (Never a dull moment.)

Toll Brothers is updated and rated Weak Sell / Hold at $58.47.

This is a very tough company to rate at the moment. Trailing earnings are at record levels with a 21% ROE and the the stock is trading at just 1.1 times book value and 5.8 times trailing earnings. And this is a very well managed company with a strong balance sheet. BUT the recent earnings were based on contracts to build and sell homes from an average of 9 to 12 months prior to each earnings release. In the two most recent quarters reported, the contracts to sell homes were down a huge 60%. Next Wednesday (February 22) it will report its latest earnings. The earnings may continue to be good but the contracted home sales could be very weak indeed. And earnings are definitely going to fall in 2023 due to lower contracted home sales in recent quarters.

Despite the fact that it is well know that home sales have been weak in November and December (with some improvement after that) the stock is up 18% in 2023 to date. Although the market knows that home sales were weak it’s not entirely clear if that bad news is already priced into the stock.

In my own case I am heavily exposed to this company and I will likely sell about half my shares tomorrow. I think it remains a good company for the long term and it is not expensive. But there is certainly a risk that the share price could fall when it reports earnings next week. I also want to increase my cash position and that is another reason for me to sell down my position in this company. 

On Friday, the S&P 500 was up 0.2% and Toronto was up 0.1%.

Fortis Inc. was up 3.3% after reporting year-end earnings.

AutoCanada was down 5.1% giving back some of its recent gains. This may have been linked to a weak report from Magna.

On Thursday, the S&P 500 was down 0.9% and Toronto was down 0.4%.

Earlier hopes that the end of the hikes in U.S. interest rates was very near have begun to fade. Long-term interest rates have edged up after having declined in recent months.

Cameco was up 4.6% after posting Q4 results and after announcing it has a deal to supply uranium to Ukraine nuclear plants.

With short term interest rates up so much in the past year it’s now definitely worth it to put cash in your brokerage account into a daily high-interest account if your broker offers one. For TD I use TDB8150 now paying 4.05%. And on U.S. dollars TDB8152 is paying 4.15%. See near the bottom of the Subscriber Home page for a list of symbols for other big bank brokers and a  few smaller brokers. With TD, money that I have in these accounts is available instantly for buying stocks or whatever. I just have to place an order to sell the high-interest rate investment right after I place a stock buy order. And I understand that there is no penalty even if the money is only in these accounts for a day or so. I never bothered with TDB 8150 when the rate got down close to zero. But it’s worthwhile at this point. With TD you buy TDB8150 under the mutual fund category even though it is in fact a bank account.

Until recently TD Waterhouse was even offering high interest accounts from competitor banks. But last March a new rule came in that prevents the brokers from collecting the small trailer fees on these accounts so the competitor versions are no longer offered. I’m surprised that the bank brokers offer such a relatively high interest rate on these products. 

Markets declined on Wednesday with the S&P 500 down 1.1% and Toronto down 0.2%.

Toll Brothers was down 2.6%.

Toll brothers will be my next update. The company remains optimistic about the future although fully recognising the current slower market. They have  a strong balance sheet and can easily weather a down period. They appear to be a very ell managed company. But it is a cyclic industry. 

Markets were initially lower on Tuesday but ended the day higher on talk that inflation might be heading down.

The S&P 500 was up 1.3% and Toronto was up 0.5%.

TFI International was up 6.8% after releasing Q4 earnings. 

After the close, West Fraser Timber announced curtailments at a B.C. lumber mill. The stock has done well and it may be because the various competitors are sort of sharing the curtailments around instead of over-producing and driving prices down.

Markets declined modestly on Monday as long-term interest yields were on the rise. 

The S&P 500 and Toronto were each down 0.6%. 

Most stocks were down on the day.

But what a start it has been to this new year. After losing ground in 2022 our Buy and higher rated stocks have completely recovered that ground. The six picks currently rated in the Strong Buy range were up an average of 19% as of Friday. In all cases the gains are recoveries from declines in 2022 or earlier and they are not back to record highs. 

After the close, TFI International reported what they describe as strong Q4 results. This has been such a fantastically well managed company. About 20 years ago I came up with the politically incorrect observation that “winners win and losers lose”. TFI has been very much a case in point. My biggest investment mistakes have involved selling winners (as in companies that I knew were great) too early. I also made the mistake of hanging onto (and adding to) some under-performers that looked cheap. But I think the bigger mistakes involved selling great companies when they looked too expensive.

The report on Visa Inc. is updated and rated (lower) Buy at $230. This is a fantastic company and despite the high P/E ratio of 29 it may still be a good investment at this price. I’m holding a reasonable allocation to VISA and have no plans to sell. I’d like to add to my position if it happened to fall back to about $200. But that’s unlikely to happen unless there is a general market pull-back such as due to a recession or fears that the FED is going to push interest rates up more than expected. (Two more hikes of 0.25% are now the consensus expectation). 

On Friday, the S&P 500 was down 1.0% because the huge January job gains at 517,000 net new jobs stoked fears that the end of the interest rate hikes is no so nigh after all.

Toronto managed a gain of 0.1%.

Starbucks was down 4.4% as its China sales were weak. 

American Express was up another 3.3%.

I did trim my AutoCanada position today. I had added to it at $22 and $24 in recent months so I am just selling some shares and still have a good exposure to the company. 

Selling in a (potentially still) rising market tends to look like a mistake and it may be. But in my case it seems prudent to raise some cash both for portfolio stability and to possibly purchase other names.

On Thursday, the S&P 500 was up 1.5% while Toronto was about unchanged.

Meta (Facebook)rocketed up 23% after its earnings announcement and outlook. 

I rarely comment on companies I have not recently analysed but I did mention on January 11 Meta (Facebook) and also Amazon as probably not a bad idea.

FedEx has another strong day rising 6.1%. AutoCanada was up 8.3% to $30.25. It bottomed under $21 on November 9th. I updated it on December 21 rated Strong Buy at $22.22.

Shopify was up 6.9%.

Given the recent gains and given that my equity exposure is very high (and my cash position is quite low) I’m looking for some positions to trim. So I trimmed a little off my Toll Brothers position and sold a very small portion of my Canadian Tire shares. I ay trim a little from my AutoCanada position tomorrow.

The Toronto stock index was down 0.1% on Wednesday.

But the U.S. market rose after the FED raised interest rates by 0.25% (not as high as some feared)m and apparently indicted that the end of the rate hikes was possibly in sight but that two more increases would be needed.

That really does not sound as good as the market may have hoped but nevertheless the FED comments were taken positively.

Canadian Tire was strong with a 3.65% gain today. 

FedEx was up 4.3%.

TFI International was up 3.6% to a new record high. 

Linamar was up 5.7%

Overall, investors are in a very positive frame of mind.

After the close Meta (Facebook) reported better than expected earnings and rose 20%!! in after hours trading.

Tuesday was a strong day in the markets. The S&P 500 was up 1.5% and Toronto was up 0.95%.

AutoCanada was notable with a 7.5% gain today.

FedEx and toll Brothers were each up 5.3%.

Overall, the gains is January were very strong with the S&P 500 up 6.2%, Toronto up 7.1% and VBAL up 4.8%.

On Monday, the S&P 500 was down 1.3% and Toronto was down 0.7%.

It seems that most “tech” stocks were down. Shopify was down 5.2%.

Cameco was up 1.2% and has been strong lately for reasons that I am not familiar with. (Probably higher uranium prices.)

Lot’s of Q4 earnings coming in now to move the market in one direction or the other.

On Friday, the S&P 500 was up 0.25% and Toronto was up 0.1%.

American Express ended the day up 10.5% after predicting better growth in 2023.

VISA was up 3.0%. I was reading the first part of their annual report today. This is an extremely powerful company that is very likely to keep on being a good investment.

Shopify was up another 3.5%.

It’s been an extremely strong start to the year. Let’s hope it continues.

The report on Enbridge is updated and rated Buy at $54.53. 

I spent a lot of time reading its annual report. It has an almost dizzying list of oil and gas pipelines and some windmill assts. This a massive company. It does not appear to have made many mis-steps over the years. It’s a high quality company that will add stability tom most portfolios. Buy it and collect the dividend and keep for the long term. 

Thursday’s session saw the S&P 500 up another 1.1% and Toronto up 0.5%.

West Fraser Timber for whatever reason was up 8.0%. It may be that the various timber companies have sort of shared the plant shutdowns around (quietly and without officially colluding) as opposed to doing ruinous battle with price cuts.

Aecon was up 4.9%.

With market up so strongly this month and again today, my thoughts turn to trimming some positions to build cash and to ultimately move more money into more predictable stocks. We’ve seen a number of strong rallies since the early Summer of last year only to be followed by noticeable dips. Being over exposed to equities can be uncomfortable and cause regret over not trimming.

But I always find it hard to sell shares in companies that I like. When I have added to positions on dips it makes sense to maybe sell some of the recent lower priced purchases when they rally. TD Direct does not make that so easy becasue under activity it only shows less than 60 days of activity. I’d prefer it to show far more than that so I can see what I paid say 6 months ago. Of course it is possible to look that up on TD Direct under trade confirmations but it’s cumbersome.

If I had some funds in the likes of VEQT or VGRO it would be easier to trim since there is always less emotional and analytical attachment to an index than to an individual company.

Ideally, I would commit to 30 or 40% fixed income / cash and not get over exposed to equities. But then I see something I want to buy…

Today, I found nothing I was willing to part with so will keep with my very high equity exposure for now.

First, a comment about spam and dangerous emails.

I think we are all aware that the spammer are getting more sophisticated.

If you ever see an email purportedly from investorsfriend with an attachment or a PDF it is almost certainly fake. If in doubt delete and email me at shawn@investorsfriend.com to ask if I sent anything. My emails to subscribers including my automated emails usually have links but basically never attachments. 

I think most of us have learned to spot the scam emails. Always be careful. Sometimes what can work is to hover over a link and you can often see it is not from who they claim. 

Meanwhile on Wednesday markets ended the day little changed with the S&P 500 essentially unchanged and Toronto down just 0.15%.

Shopify was up a hefty 11%. This stock / company has not been for the faint of heart.

The Bank of Canada has paused its interest rate hikes at 4.5%.

The five year Canada bond yield is at 2.9%. That’s down from a peak around 3.9% three months ago. It seems to me that various investments yielding 5% or more are attractive. The Enbridge rate reset share on our list (now at $16.30) gets no respect or love and yet will yield 6.3% through the end of 2024 and then most likely reset to a higher dividend. In fact the dividend will increase on December 31, 2024 unless the 5 year Canada bond goes back below 1.44%. That’s possible but basically no one is predicting such a thing. 

The Bank of Canada raised its interest rate this morning by 0.25% to 4.5% and apparently signaled that it’s likely done raising rates. Directionally, that is good news for stock prices and longer term rates are coming down in reaction to the news.

But U.S. news drives the market and stocks are down modestly today apparently based on MicroSoft’s “dismal outlook”.  

CN rail is down 4.5%. Possibly an opportunity to nibble. CN may fall temporarily but its a good long-term bet.

Markets were Quiet on Tuesday with the S&P 500 up 0.1% and Toronto essentially unchanged.

We are now in the thick of Q4 earnings reports for U.S. companies and a few early-bird Canadian companies have also reported.

After the close CN Rail reported a strong Q4 report and raised its dividend 8%. How grand it is to be in a duopoly business. But they did “warn” that 2023 earnings may only go up very modestly due to the expected recession. The stock fell 2.85% in U.S. After-hours trading.

Monday, was another strong day in the markets with the S&P 500 up 1.2% and Toronto up 0.6%.

Shopify was up an impressive 8.9%.

Costco was up 2.6% which is a reasonably big move for that company.

Canadian Western Bank was up 1.9%.

It’s nice to enjoy the ride up.

Friday was a strong day in the markets  with the S&P 500 up a hefty 1.9% and Toronto up 0.8%. Shopify was up 5.6%.

Visa Inc. was up 1.8% to $224.31. It’s up 8% since January 1 and about 12% since I updated it as a Buy on December 22 at $201. That the likes of VISA inc. is doing well should not surprise anyone. The lesson I keep learning is that the strongest and consistently high ROE companies almost always do well long term. It’s often better to pay a high P/E multiple for the best companies as opposed to getting a low ROE company at a seeming bargain price. 

Thursday’s action saw the S&P 500 down 0.8% but Toronto was down only 0.2%.

lululemon was down 3.2%.

No surprise that markets are having a couple of down days. But look at long-term interest rates, they are still falling. (Good news for my VBAL idea by the way) The 5 year Canada bond yield is down to 2.84%. It peaked at about 3.9% three months ago. This is a big drop. similarly, the ten year U.S. treasury yield is down to 3.39%. It started January at 3.79% and had peaked a few months ago at 4.2%.

If the Fed is indeed going top keep raising rates much more and if inflation is going to be stubborn, this bond market has not gotten that memo.

Overall, while short term market movements are always unpredictable I don’t see any reason to worry about a few down days. But those over exposed to stocks can certainly consider trimming some positions. Always nice to have some cash in the investment account and for the first time in a long time we can actually get a decent yield on short term cash investments.

P.S. looking for news about the U.S. debt ceiling crisis tonight, I don’t see any news really. As far as I can see the financial markets are yawning about it so far. But maybe tomorrow the market will wake up and take notice. 

Note that you can also follow InvestorsFriend Inc. on Facebook (see link at the top of every page here). I’m more active on the InvestorsFriend Facebook page lately. Just go there and hit follow if you don’t already follow it.

Markets are down modestly this morning. CNBC attributes this to “fears the Fed will over-tighten”. That makes sense since most of the gains this month were on hopes the Fed soon would be done. If those hopes fade then markets tend to go down.

There are always other news items to drive markets and right now that includes the Q4 earnings which are rolling in and which tend to include company outlooks as well.

I’ve been light on cash in my accounts and started thinking, what can I lighten up on given the recent gains? So I sold some CWB yesterday that I had picked up at lower prices a couple months ago. I still have lots of Canadian Western Bank (I prefer to spell out company names as a reminder that they are companies and not just trading symbols – I only use the symbols when they are hopefully really obvious like RBC and maybe CWB). I often add (perhaps excessively) to positions when they get cheaper and cheaper and so it makes sense to trim those positions when prices recover. This is in an RRSP account where  thee is no concern about triggering income tax on a capital gain.

It seems I neglected to make my usual comment yesterday. Well, The S&P 500 was pretty flat yesterday and Toronto was down modestly.

But today, Wednesday the markets had a down day after being up almost everyday in January. The S&P 500 was down 1.6% but Toronto was down only 0.4%.

I don’t see any particularly big moves worthy to comment about.

Apparently today’s losses were blamed on profit taking and a weak retail sales report. I assume there is also worries about the debt ceiling that needs to pass Congress.

U.S. markets were closed on Monday for the martin Luther King Jr. holiday. Toronto was up just 0.15% on the day.

Apparently, the next thing to worry about is the U.S. debt ceiling crisis. They go down to the wire with this thing every few years and once in a while fail to increase the ceiling until after they have to sort of shut down government and send most federal employees home. It’s quite possible  a shutdown will happen on Friday this week. But the market has seen this game of crying wolf a few too many times and may not get too panicked about it. It’s all just a negotiation tactic and will get resolved soon enough I think.

See also my update on Couche Tard and my comment on VBAL just below.

I’ve been mentioning VBAL as a Buy including in the newsletter dated December 5. I therefore put it in the table of stocks as a Buy. It’s a good default position to provide diversification. It got hammered last year because it includes an allocation to longer term fixed income which got hammered as interest rates rose. That particular problem is probably largely behind it now so it’s set to do much better in 2023 (unless stocks really tank in which case it may still end up doing okay in comparison to a  lot of other stuff).

The report on Couche-Tard is updated and rated Buy at $63.36. What an incredible company this has been for decades! I weep about the times I sold it at a good profit only to miss out on larger gains. Such is life. More and more I am learning that the best companies should never be sold unless the valuation looks extreme. I’ve always liked this company although I occasionally thought it was too expensive. At this point Couche-Tard does face some risks certainly in terms of the Electric Vehicles. People will charge those mostly at home and many neighbourhood gas stations will have to close by at least 2035 and possibly earlier. But Couche-Tard also has its convenience stores which did amazingly well even when people largely stopped driving during the pandemic. Beer, lottery tickets and smokes probably saved the day. Management of this company has always been very ambitious and very competent. So they will likely find a way to continue to thrive. 

Markets edged up again on Friday. The S&P 500 was up 0.4% and Toronto was up 0.7%.

Shopify was up 6.1%.

Next week the market starts to turn its attention to the first of the Q4 2022 earnings releases including the big banks. Some such as J.P. Morgan have already reported earnings.

When you read a bank or any S&P 500 company annual financial report it is massive. It always impresses me how they get those reports out in some cases in two or three weeks. 

Markets pushed a little higher once again today with the S&P 500 up 0.3% and Toronto up 0.9%.

The optimism may continue until and unless there is a sign that inflation is not being slayed and / or that the Fed will continue to raise interest rates higher / longer than hoped. 

No particularly noteworthy stock movements today for the stocks I follow. But a lot of names sort of grinding higher in this new year. 

Aside from stock picks, I continue to like VBAL or VGRO as sort of default investments that should do well this year. And in any case they are prudent choices. VBAL suffered last year from the sharp increase in interest rates as well as the lower stock markets. This year interest rates (longer-term rates specifically) are extremely unlikely to move up as sharply as they did last year as they started this year at a higher level.  In fact longer term rates have been falling steadily since the January 1. It’s very early going but in January VBAL is benefiting from higher stock prices, lower long term rates (causing capital gains on longer bonds) and the fact that short term money now earns at least something. Of course inflation remains a problem, but inflation is there whether VBAL goes up or not.

Wednesday was another positive day in the markets apparently based on hopes for or signs of (modestly) lower inflation. 

This positivity could increase or reverse course tomorrow as the U.S. December inflation report is due out tomorrow. (Let’s all cross our fingers?)

Wednesday, the S&P 500 was up 1.3% and Toronto was up 0.6%.

Toll Brothers was up 2.9% and has been holding up rather well in the face of declining home sales.

Amazon was up 5.8%. I have not analysed it recently but just based on it being such a powerhouse and based on its recent declines I would suspect that buying some shares would not be a bad move. The same may apply to Meta (Facebook) but it’s probably more speculative.

Rate reset preferred shares were mostly up another modest amount. The 5 year Canada bond yield has been falling the last few weeks. That means that the rate resets (which can be up to five years in the future) could be projected to reset to somewhat lower levels than might have been expected a few weeks ago. But, the lower 5 year bond rate means that the existing and yields (generally high) become more attractive. 

My next update will likely be for Alimentation Couche-Tard. I am interested to look at its gasoline margins which have been higher than normal for some time (will they go back down to normal?)  I also want to look at its debt structure since it historically used a lot of short term debt – but it has paid down a lot of debt. It’s very tough to guess what impact the switch to electric vehicles will have on their gas stations. I “see” a lot of neighbourhood gas stations ultimately closing (Commuter EVs charge at home) but the big highway stops will be busier than ever. But Couche-Tard makes a lot of money on convenience stores and the 2020 pandemic showed that people kept going to those stores and spending apace even when they were not stopping for fuel nearly as often. And Couche-Tard is extremely well managed and so it certainly cannot be counted out.

Markets crawled a little higher on Tuesday with the S&P 500 up 0.7% and Toronto up 0.2%.

lululemon recovered somewhat with a 3.2% gain.

After the close West Fraser Timber announced it would curtail a lumber mill int he U.S. Probably will be a very tough year for lumber produces. But so far they all seem to be sort of sharing the curtailments instead of over-producing which drives down prices.