Not Stressful Enough?

Broadly speaking, it was a positive week for North American markets with Toronto’s main index up about 1.2 per cent, while the Dow Jones industrial average closed the week about four points off the level it was at when the year started.

The S&P TSX closed higher Friday as investors were “reassured” by European regulators that only a small number of banks in the region would struggle if the economy weakened. The tests were designed to predict whether banks could survive a downturn in the economy and showed just seven of 91 European banks tested would fail. The European Union said the results should put to rest questions about the health of the continent’s financial sector.

To that, the market responded with questions as to whether the tests were really “stressful” enough. The answer is likely not, but the results are broadly encouraging. Again however, they were largely priced into market expectations.

Earlier in the week, and as expected, the Bank of Canada raised interest rates by 25 basis points to 0.75 per cent. Perhaps more interesting than the hike was the cautious stance the bank adopted in regards to the Canadian economy going forward. Slower than expected economic growth in the U.S. is set to hamper Canadian exports, meaning the Bank of Canada’s interest rate is unlikely to rise beyond 1 per cent by the end of the year.

Looking ahead to next week, we await a pair of financial results and conference calls from two long-term favourites from our Canadian Small-Cap Universe (www.keystocks.com).

First off, on Wednesday, The Cash Store Financial Services Inc. (CSF:TSX) will hold its management conference call and webcast with shareholders, analysts, and institutional investors to discuss its fourth quarter results for the three and twelve months ended June 30th, 2010. The year-end results will be released after market close on Wednesday, July 27th, 2010.

Secondly, on Thursday, Bridgewater Systems (BWC:TSX) will host a conference call to discuss its fiscal 2010 second quarter financial results. Second quarter results will also be released on Thursday.

Looniversity - Insider Trading

In the markets, there are two types of insider trading: legal and illegal. Because it’s no fun hearing about what you can do, let’s talk about what you can’t. Essentially, this is the buying or selling of a security by insiders who possess material and nonpublic information about the security. The act puts insiders in breach of a fiduciary duty or other relationship of trust and confidence.

A common misconception is that only directors and upper management can be convicted of insider trading. However, anybody who has material and nonpublic information can commit insider trading. This means that almost everybody can be considered an insider, including brokers, family, friends, employees, and yes, even you.

Having said this, there is an important thing to distinguish here, insiders don’t always have their hands tied. In fact, insiders can and do buy and sell stock in their own companies all the time, but they are restricted as to when they can execute their buy and sell orders.

In terms of legal trading, the OSC considers insiders to be company directors, officials, or any individual with a ten per cent or more stake in the company. Canadian company insider trading statistics can be found on the web at www.stockwatch.com (subscription), while U.S. company data is available for free on Yahoo! Finance.

Put it to Us?

Q. What is a “dividend yield” on a stock?

- B. Mann; Calgary, Alberta

A. A dividend is a payment many companies make to shareholders out of their excess earnings. It’s usually expressed as a per-share amount. When you compare companies’ dividends however, you talk about the “dividend yield,” or simply the “yield.” That’s the dividend amount divided by the stock price. It tells you what percentage of your purchase price the company will return to you in dividends. Example: If a stock pays an annual dividend of $2 and is trading at $50 a share, it would have a yield of 4 per cent.

Not all stocks pay dividends, nor should they. If a company is growing quickly and can best benefit shareholders by reinvesting its earnings in the business, that’s what it should do. Microsoft doesn’t pay a dividend, but the company’s shareholders aren’t complaining. A stock with no dividend or yield isn’t necessarily a loser.

Disclaimer | ©2010 KeyStone Financial Publishing Corp.