Second quarter of 2010 ends with a flurry

The second quarter of 2010 ended today. I noticed there was a lot of trading going on, especially in less-than-liquid issues that tended to trade down. I am guessing there were some liquidations that were part of some window dressing and/or automatic buying/selling for indexing purposes.

In terms of the broader markets, the S&P 500 was down 12.2% for the quarter. The TSX composite was down 6.2%. Spot oil was down 10.0%.

Perhaps the most important broad market financial measure was the 10-year US treasury bond, down from 3.85% at the beginning of the quarter to 2.95% – the market has made a significant deflationary bet over the past three months. The Canadian 10-year bond was down from 3.56% to 3.09% (June 29th data). This decrease in long term interest rates has very interesting implications – banks are parking cash in bonds rather than lending it out.

Shanghai Stock Market vs. S&P 500

The relatively large drop in today’s trading was attributed to a decrease in the reported consumer confidence (which is irrelevant) and China reporting lowered economic growth.

If you look at the Shanghai Index, you can see share prices are already ratcheted down since roughly in April. This also corresponds to the S&P 500:

I don’t have any strong opinions on the broad markets – I find the S&P 500 to be a fairly good screening tool, whereby I would not consider investing in an S&P 500 equity component unless if something really significant was going on that I thought the market had an incorrect take on. The last example I can think of was Philip Morris during the middle of the tobacco lawsuit settlements. Too much money is linked to the S&P 500 index so the equity is likely to be over-inflated. Not only that, but closet index funds do enough research on all of the components to make the markets relatively efficient, so it is generally worth spending your time on smaller and less liquid issues.

If growth in China, however, is slowing then you are going to see ripple effects in the marketplace.

CRA Prescribed rates for Q3-2010

Thanks to the comments from Jeff Usher, it appears my initial thoughts about the CRA prescribed rates were incorrect. I consider myself well-researched in these matters, but once in awhile, things slip and this was one of them. Thank you Jeff.

The CRA, on June 28, 2010, published the third quarter prescribed rates.

Apparently the reason for the delay is that Bill C-9 implemented a reduced rate of accrued interest for corporate overpayment of tax. Corporations were using the CRA as a savings account, where they were getting higher rates of interest than the banks. In the previous quarter, this amount was 3%, but going forward it will be 1%.

Canada Pension Plan not happy with Magna

Magna International is a dual-class stock that retained control of the corporation in the Stronach family.

The Canada Pension Plan is unhappy that the corporation recently agreed to a deal with the Stronach trust to convert their class of voting stock into regular common stock, at a very high premium – $300 million in cash, plus 9 million class A shares. At today’s prices for class A shares, this works out to approximately $920 million in exchange for the voting rights of the company.

Suffice to say, shareholders are not too happy about the matters, including the Canada Pension Plan.

However, this should be a huge lesson to those that invest in majority-controlled companies – your interests have to line up with the interests of the majority holder in order for you to make any headway on your investment. In the case of Magna, its majority holder (Stronach) clearly wants as much cash and liquidity out of the corporation as possible – and the common shareholders, including those invested in the Canada Pension Plan, will be paying the price.

What is interesting, however, is that the deal was structured in a politically astute manner – common shares went up after the announcement since Magna was already trading at a discount due to the adverse interests of the majority holder. It is the company, however, that will be paying the price to buy out the Stronach voting stake.

If you have shares in companies that are majority controlled, pay careful attention to these agency issues.

Summer Markets

Readers here might have noticed a lull in posting over the past week – it’s because I’ve been on a break and will continue to be so until mid-July.

A good deal of people on Wall Street take some part of the summer off – especially the month of August. Trading, as a result, becomes dominated by computer trading and volatility is typically higher due to decreased market volumes.

This last quarter has been quite dull on the trading front, but as the markets continue to dive, I am watching for opportunities.