Genworth MI Canada update

I am generally skeptical of stocks when they do parabolic-type increases that we have seen over the past two weeks of trading, but the obvious conclusion is that somebody presumably wanted to get their hands on some shares of Genworth MI Canada (TSX: MIC) quickly.

My theory is that whoever decided to do the “dump the shares slowly starting April until they’re gone” sale was gone after the couple high volume days in late July and then it was off to the races once that supply dump was concluded. This is one of those rare moments where I have some technical analysis insight (but alas it is still backward-looking).

What I find rather funny is that I (hopefully) timed the bottom relatively well (my average price is around $18/share) but I still feel quite bad that my entry wasn’t perfect. That is the emotional feel. The cold, hard rational world of mathematics, however, says that it is impossible to pick that exact bottom – you will not be that person picking up shares at $16.72 unless if you are very lucky and getting 100% of what you wanted in your portfolio at that bottom price.

With any luck the stock will get around to book value, which is around $26.30/share when you strip out intangibles. It won’t be a straight line otherwise I will start to really get worried. The dream scenario is if they’ve found somebody to buy out the subsidiary business of Genworth (NYSE: GNW). Heaven forbid if they fetch a premium to book value.

I will warn readers that now that I have a tendency of picking tops and bottoms when writing about upward and downward price spikes, respectively!

Raising cheap debt capital

Cenovus Energy (TSX: CVE) raised $1.25 billion in debt financing today. Here were the relevant terms:

TRANCHE 1
AMT $500 MLN    COUPON 3 PCT       MATURITY     8/15/2022
TYPE NTS        ISS PRICE 99.129   FIRST PAY    2/15/2013
MOODY'S Baa2    YIELD 3.102 PCT    SETTLEMENT   8/17/2012   
S&P BBB-PLUS    SPREAD 137.5 BPS   PAY FREQ    SEMI-ANNUAL
FITCH N/A       MORE THAN TREAS    MAKE-WHOLE CALL 20 BPS
    
TRANCHE 2
AMT $750 MLN    COUPON 4.45 PCT    MATURITY     9/15/2042
TYPE NTS        ISS PRICE 99.782   FIRST PAY    3/15/2013
MOODY'S Baa2    YIELD 4.463 PCT    SETTLEMENT   8/17/2012   
S&P BBB-PLUS    SPREAD 165 BPS     PAY FREQ    SEMI-ANNUAL
FITCH N/A       MORE THAN TREAS    MAKE-WHOLE CALL 25 BPS

So they can raise 10-year money at 3.1% and 30-year money at 4.46%. After taxes (assume 26%) this is about 2.3% and 3.3%, respectively. At these rates, I’d be raising as much 30-year capital as I can and figure out what to do with it later – there has to be a way to deploy it at a better pre-tax return rate of 4.46%.

Long term bond yields – creeping up

The following is a chart of the US Government 10-year and 30-year bond yield to maturity:

Up about 0.3% from their yield lows, which is fairly significant. Now the $64,000 question is: Is this just a short squeeze, or do yields shoot higher from present?

Ex-dividend price reaction

When stocks open trading ex-dividend, all things being equal, they should trade at the previous closing price minus the dividend. This can vary slightly depending on what happens in the market overnight, but without any relevant news the price should follow that formula.

Genworth MI Canada went ex-dividend today, which was a 29 cent dividend, but their opening price did not even make a blip to reflect this dividend.

Yahoo sometimes adjusts the charts to reflect dividends (especially large special dividends), and sometimes it does not. It always pays to find out whether huge price drops are caused by special dividends or distributions, or whether it was purely market action. For instance, EnCana’s chart at the end of 2009 is still unadjusted by the Cenovus distribution. In MIC’s instance they did not update the chart so what you are seeing is the unadjusted trading action.

I wonder if there are any studies done on future performance of equities compared to how they trade after they go ex-div. Intuitively I would guess there is no correlation whatsoever, but you always hear of amateurish websites that talk about “dividend capture” strategies where you’d buy stocks the day before they go ex-dividend and sell it the day after to “capture the dividend”. What they frequently forget is that the market marks down the stock appropriately (not to mention liquidity), but at least at this one time, the market seemed to forget about the dividend.