Canadian Banks Now Paying 10% For Capital

Bank of Montreal announced through one of their wholly owned subsidiaries, BMO Capital Trust II, that  they will be raising $450 million of capital at a rate of 10.22%. 

For all intensive purposes, this is 10 year money. While the bank can extend the maturity date, it will be somewhat onerous to do so as they should be able to raise new capital at better rates than those indicated if the maturity is extended.

While BMO is the first to offer rates of 10%+, others will follow suit as secondary issues dropped on the day as sellers sold off positions to grab the higher rate on this issue.

With rates like these available on investment grade securities, investors would be hard pressed to place funds into equities right now.

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How to Profit if the Bond Bubble Bursts

With 90 day US Treasury Bills providing negative rates and 30 year rates hovering close to 3%, we have to wonder how much lower rates can go.

I thought that rates couldn’t go below zero but you realize that if you live long enough, you may just see everything as was witnessed with shorter term rates doing just that.

Long-term rates may go lower but one would have to think that with all of the economic stimulus provided, inflation will resurface sometime down the road and interest rates will have to go up in order to combat higher prices.

Another indicator that we may be nearing the end of this bond rally is that positive sentiment towards bonds is close to an all time high as 89% of all portfolio managers are bullish in this area.

Fixed Income Investing 101 will teach us that as interest rates rise, prices come down. If you believe rates will start to climb, here is how you can profit. The most sensitive price movements will be in longer term bonds such as the 30 year treasury bond. Aside from selling your position in these securities, one can profit by buying  an exchange traded fund on The TSX that goes up in value as the price of the 30 year treasuries drop.

Horizon Beta Pro has launched a 30 year Treasury Bear ETF that trades under the symbol “HTD”. The ETF will give you 2 times the daily movement up or down of the 30 year treasury bond allowing you to profit significantly from an upward revision in interest rates.

Please note that holding this ETF over a longer period of time will show discrepancies in the 2 times return expectation and will come in closer to 1.7 times due to a variety of factors that I dont want to explain in this post.

What are your thoughts on this idea and where do you think interest rates will head in a years time? Your thoughts and comments are greatly appreciated.

Gold Spot Price Higher Than Futures Prices For First Time Ever

For the first time ever yesterday. the spot price of gold traded higher than the futures price where investors or speculators accept the delivery of gold at a pre-determined later date at a pre-determined price.

Typically, the futures price equals the spot price plus the return you would receive if you took your funds and invested in a risk-free asset such as a Treasury Bill.

Most of the business media focused on this and indicated that investors were demanding ownership in physical gold rather than an exchange traded fund or some other derivative due to the uncertainty in todays economy.

This may be true to some extent. However, as Dennis Gartman reported in his daily report, the return on Treasury Bills are negligible. A 90 day treasury-bill is currently yielding in the vicinity of 1/100th of a percent so the spot price and futures price should be almost identical all things being equal.

Only time will tell if this situation will change going forward. What are your thoughts regarding gold investing? Will investors demand to have actual gold in their posession or will they be satisfied owning a derivative that participates in any upside in golds price? Your comments are greatly appreciated.

Canadian Markets Set to Underperform on Political Uncertainty

December 2nd was an interesting trading day as markets around the world rebounded from one of the worst trading session on record. Markets around the world except for Canada. Our markets dropped along with our dollar.

Any economic stimulus package that the three party coalition may put forward could be completely offset by foreigners dumping Canadian securities as corporations find it difficult to raise money in public markets as institutional investors leave our market for greener pastures.

This angle has not been put forward by the media as Harper and Dion’s outrage during question period is more exciting to watch then discussing the ramifications of an unstable government.

What are your thoughts on this political uncertainty? Your comments are greatly appreciated.

Ted Rogers….A Visionary That Can’t Be Replaced

The passing of Ted Rogers, founder of Rogers Communications, is a blow not only to the corporation but to Canada as he was a corporate icon that cannot be replicated.

He took on immeasurable risk to build a media giant that would surpass BCE and Telus. He did a great job buying media properties or building them from scratch and then buying content like the Toronto Blue Jays to increase the profitabilty of his organization.

His model was very similar to that created by Ted Turner, the founder of CNN and TBS as well as the owner of the Atlanta Braves. I look at Mr. Rogers in the same light as Steven Jobs from Apple or Bill Gates from Microsoft. There are very few entrepreneurs that have made suck an impact. He will be missed by many.

Your thoughts and comments are greatly appreciated