...take a break

I'm Going To Try REALLY Hard Today...

...to ignore the markets. At least for the first couple of hours. It looks like it is going to be a really wild ride when the markets open. The Asian markets took a beating today and that sell-off is getting ready to make its way over the Atlantic.

Are we going to see new lows today? Maybe.

Does a sell-off like this right now make sense? I have no idea.

Why would the markets sell off like this now? We've been making some pretty good progress in setting up a little bit of a base over the last couple of weeks. Some Asian companies (Toyota, Samsung and Sony) apparently made some worrying comments about their outlook. Egads, you mean we may actually be facing some slower economic activity in the coming quarters? Well, nothing to do but sell!

I want to ignore the markets at least for this morning because I think that the markets this morning are like a 2 year old throwing a tantrum. I could very easily be wrong and the moves that the market makes today are justified but I have a feeling that for the gutsy this morning could be a good buying opportunity. Time will tell but while we wait we are in for a wild rile.

Those with a weak stomach may want to look away for a little while. I'm going to be trying to do just that.
category: Finance posted on Friday October 24, 2008 at 09:08:52 by: 0xCC

The Banks Are Back In Line

The Bank of Canada surprised everyone a little bit on Tuesday by only cutting the overnight target rate by 25 basis points (0.25%) and the Canadian banks took their time announcing cuts to their prime rates but by 6:00pm all the banks had announced cuts to their prime rate. The interesting thing about those announcements is that some banks (TD for example) actually cut their prime rate by more than the 25 basis points that the Bank of Canada cut the overnight target rate. This was because they didn't match the 50 basis point cut that the Bank of Canada had made in the previous week. Suddenly, after the CMHC announced it was going to buy up to $25 billion worth of insured mortgages TD claims that its cost of capital had gone down and that they are now able to offer customers the lower interest rate. In other words the other banks weren't willing to stay at the 4.35% prime rate and had moved to 4.25%. When the Bank of Canada announced the 25 basis point rate cut this week all the other banks lowered their prime rate to 4% so TD really didn't have too much choice so they also lowered their prime rate to 4%.

Now that prime is at 4% this raises some interesting circumstances. Looking at the big 5 banks right now they all have dividend yields north of 4%. So it is possible to get a secured line of credit with an interest rate of 4% (that is variable so it can change at any time) and take cash out of that to invest in a bank or two or three. The interest you pay on the line of credit is tax deductible and the dividends generated by the banks would more than pay for the interest plus dividends generate a dividend tax credit so the taxes generated by the dividends are less than the tax deduction generated by the interest paid on the line of credit.

Of course this is leveraged investing and there are a lot of things that could go wrong. If interest rates go up (which they will eventually) a whole chain reaction of events will make things very sticky. As interest rates go up the variable interest rate on the line of credit will also go up so suddenly the dividends won't cover the interest payments anymore. The next thing that will happen is the stock price of the banks will probably also go down because the market will demand a higher yield from the stocks (yield = dividend paid/stock price so if the dividend paid stays constant the only way to increase the yield is to decrease the stock price). So the end result is that not only are the dividends not covering the interest payments anymore but the market value of the stocks wouldn't cover the cash originally borrowed from the line of credit. I think it is very likely that in the next 2-3 years we are going to be in a situation where inflation starts to creep up and as soon as the central banks are comfortable with the state of the economy they are going to start cranking up the interest rates to get inflation back under control. So in the end this could end up being a very, very dangerous strategy. However, I do believe that if the leveraging aspect is taken out of the equation (i.e. if some one has some cash available to invest) this could be a very good time to be buying stocks in a couple Canadian banks (and I would stay away from the ones that have a yield higher than 5.5% right now because if you look at how far they are from their lows you have an idea of how far they could fall again).

We haven't seen the prime rate this low for a few years and I think the lowest I remember ever seeing it in the last decade is 3.75% which we just might see before the spring. Interesting times we are in...
category: Finance posted on Thursday October 23, 2008 at 10:48:34 by: 0xCC

More Interest Rate Shinanigins

Well, the interest rate shinanigins continued late last week. After a coordinated move around the world by central banks to cut interest rates by 0.5% in the middle of the week the Canadian banks decided to only pass a 0.25% cut along to consumers. Late last week the Canadian Federal government announced that they would be injecting $25 billion into the mortgage market by agreeing to buy mortgages through the Canada Housing and Mortgage Corporation (CMHC).

On the heels of the announcement of that plan the interest rate battle began. TD Canada Trust was the first bank to announce it would lower its prime rate 0.15% to 4.35% CIBC followed shortly after also announcing a 0.15% cut to 4.35%. Scotiabank was the first bank to announce that it would lower its prime rate a full 0.25% to 4.25% effectively giving Canadians the full 0.5% cut the Bank of Canada announced earlier in the week. Soon after the Bank of Montreal and Royal Bank followed suit. So now we have two of the big five banks with prime rates at 4.35% and three banks with 4.25% prime rates. I'm not sure how long this difference can last but it will be interesting to watch what happens over the next couple of weeks.

The next interest rate announcement from the Bank of Canada is in a week on October 21. Was that 0.5% cut all they planned on doing or will they cut a little bit more? If they don't cut next week will they announce a cut at the net planned interest rate announcement in December? It will be interesting to watch what happens and how the banks respond.

Finally, don't forget to vote today! You have until at least 7:00pm to do it. If you live in the Pacific time zone, polls close at 7:00, in the Mountain time zone they close at 7:30, Central time zone polls close at 8:30, Eastern time zone polls close at 9:30 and in Newfoundland/Atlantic time zones the polls close at 8:30 (all closing times are local times).
category: Finance posted on Tuesday October 14, 2008 at 15:52:20 by: 0xCC

Interest Rate Shinanigins

Well it seems like some fallout from the US credit crisis has finally spilled over the border for Canadian borrowers (of course for investors it spilled over a long time ago). On Monday TD announced that home equity lines of credit and variable rate mortgages would increase from prime to prime +1%. I am a TD Canada Trust customer and I have a home equity line of credit with them. When I read that press release I was concerned that the rate on our home equity line of credit would jump from the 4.75% prime rate to 5.75% so I checked our account on-line. The interest rate was still set at 4.75%. Interesting.

Yesterday in a coordinated effort with central banks around the world the Bank of Canada lowered overnight rates in a coordinated effort with central banks around the world by 50 basis points or 0.5%. Usually this results in a lowering of the prime rate by the big 5 Canadian banks of the same amount. In the last 8-12 months or so the big banks have been reluctant to pass on the rate reduction to consumers through the lowering of their prime rate. In fact, during the last Bank of Canada rate reduction there seemed to be a little bit of a game of chicken going on where the banks waited until the end of the day to announce interest rate reductions after the Bank of Canada changed their target overnight rate the the regular time of 9:00 am.

So the banks also seemed reluctant yesterday to lower their interest rates. The interest rate announcement came fairly early in the morning (I can't remember the exact time but I am pretty sure it was before 9:00 am) and the first bank to announce a reduction in their prime rate was TD but it didn't make the announcement until around 1:00 pm and it only reduced the prime rate by 0.25%, not the full 0.5% the Bank of Canada reduced their target rate by. When I look at my home equity line of credit interest rate today it is still set at 4.75% but if you add together all of these changes to the prime rate and variable interest rate policy it should be at 4.75% + 1% - 0.25% = 5.5%. Interesting.

What is the Bank of Canada target rate anyway? Well, according to the Bank of Canada, it is the middle of a range that the bank wants to see the average of the rates for overnight lending between banks to happen at. So what motivation do the banks have to lend to each other at the target rate? Well, the Bank of Canada sets up a range that is 0.5% wide with the target rate in the middle of the range. The Bank of Canada will lend money to banks at the top end of the range (or the target rate + 0.25%) and it will pay interest on deposits at the bottom end of the range (or target rate - 0.25%). So if a bank wants to try to charge or pay an interest rate outside of the range the other banks can just go to the Bank of Canada to get a better interest rate. There is no motivation for a bank to try to charge outside the target range, they won't be able to get anyone else to accept those rates.
category: Finance posted on Thursday October 09, 2008 at 11:27:03 by: 0xCC

Royal Bank Reports

Royal Bank reported earnings today. While their income increase wasn't as strong as TD's it was still a very nice 19% higher than the year ago quarter. It seems as though all of their divisions reported strong results. However, these results probably don't reflect any impact (if there is any) of the recent credit crunch.

Of course, once again there was one particular aspect of the Royal Bank's earnings release that caught my eye. They increased their dividend. They actually increased their dividend more on a percentage basis than TD did yesterday. The dividend is going from 46 cents to 50 cents, an increase of 8.69% (even though the press release says it is 9%). Just like TD this is the second dividend increase for Royal Bank in the last year. If you had held Royal Bank stock one year ago (or more precisely if you were a shareholder of record on October 26, 2006) you would have been paid a dividend of 40 cents on November 24, 2006. Now in 2007 if you are a shareholder of record on October 25 you will receive a dividend of 50 cents on November 23 (RBC makes this really easy to figure out by providing this table on their website). That is a 25% increase in one year. That most definitely beats inflation and also soundly beats the increase in salary in my day job over the last year.

Royal Bank is the single largest holding in our portfolio. Before making any investment decisions you should do your own homework and consult with your financial adviser to make sure the choices you make are appropriate for your unique situation.
category: Finance posted on Friday August 24, 2007 at 17:45:00 by: 0xCC

TD Reports

Despite all the theatrics in the market over the last few weeks companies are still trudging along and they still report their earnings. TD Bank reported their earnings today. The headlines look pretty good, income increased just over 38% over the year ago quarter and above analyst's expectations ($1.51 or $1.60 per share depending on what you want to exclude from their earnings vs. expectations of $1.36 and a year ago income of $1.21, according to Reuters).

Of course, the thing that really caught my attention is the fact that they raised their dividend. The dividend went from 53 cents to 57 cents, a 7.54% increase. The last time they increased their dividend was only two quarters ago when it increased from 48 cents to 53 cents or 10.41%. So if you had held this stock at the beginning of September in 2006 you would have been given a dividend of 48 cents on October 31, 2006. Now a year later if you are a shareholder of record on October 3, 2007 then on October 31, 2007 you will get a dividend of 57 cents. The increase in dividends over the last year (and if I were to go back one more quarter this number would be even more impressive because the dividend was 44 cents in July 2006) has been 9 cents or 18.75%. I think this is not quite in line with the average dividend increase (which I suspect is closer to 10% yearly) but it does show how being a dividend oriented investor that looks for companies that not only pay dividends but have a strong history of raising their dividends can really pay off in the long term.

We own TD bank (as of April of this year) in our portfolio. Before making any investment decisions you should do your own homework and consult with your financial adviser to make sure the choices you make are appropriate for your unique situation.
category: Finance posted on Thursday August 23, 2007 at 18:00:00 by: 0xCC

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