Monthly Archives: June 2009

Odette Morin

Careful Stepping on the green shoots!  They may be stronger than you think

After worrying for months that confidence would never return, we now are concerned that we are dealing with an overabundance. For the last few weeks, experts and authorities have been doing their best to dampen optimism, and step on a few of the celebrated “green shoots” that have dominated the discussion on Wall Street since March.  There was Mark Carney, governor of the Bank of Canada, last week warning that this recovery is still weak and fragile and the World Bank announced yesterday a weaker economic forecast predicting the economy will shrink by 2.9% this year, compared to its original 1.7%.  This news sent the TSX 453 points lower into the biggest day drop since December 2008.

Before last week, for us in the investment community, none of the scepticism mattered much as long as momentum remained in our favour. Consumer confidence is up.  Stocks have rallied for four months. Long-term bond prices have begun to fall. Commodity prices have substantially recovered . And all of this happened despite the fact that economic activity is still weak.

Rising confidence is essential for the economy to recover, however, too much optimism too soon may be the biggest threat to a sustainable rebound. That is largely what worries the authorities.  The higher the market climbs, the more extended stock valuations become and the more difficult it gets for central banks to hold down interest rates.  A few days of drops like we have seen in the past few days and there goes the investor confidence again.  Stepping too hard on the green shoots however, can also backfire and kill what was coming to life.  That is what infuriates me the most because not all news is bad.  Quite the contrary.

The story is different here in Canada.  The Wall Street Journal suggested last week that Americans should think about investing in Canadian assets to take advantage of the recent interim weakness in the Loonie, as Canada’s economic outlook hinges on China and emerging markets’ demand for oil and commodities. The WSJ reported last week that while the loonie might bounce around in the next few weeks, the expected long-term trend is for Canadian vigour.

Benjamin Tal, economist at CIBC World Markets, likens Canada’s exposure to the U.S.’s woes as like a second-hand smoker. Bad but not a direct hit.  China is scooping up oil and metals that Canada produces, China is taking a bigger role in Canada’s fortunes.

Though emerging markets remain far below the lofty highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe.  As a result, India, China, Brazil and other emerging markets’ rally have been much stronger than the US and Europe.

“There was a stampede for the exits in the fourth quarter,” said Gonzalo S. Pangaro, portfolio manager of the T.Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.”

It is not just China that is generating optimism. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil.

The fact of the matter we are no longer totally dependent on the US for growth.  In fact, Emerging Markets will play a big part in this recovery and future growth.

For the time being, by no means, is this recession over but please, let the green shoots live.

Odette Morin

Positioning for the real threat: inflation

Last week we were worried about rampant inflation with too much government stimulus and this week we are worried that a correction may be underway as a result of not enough government stimulus; this after several weeks of amazing gains.  One thing is for sure, no matter what happens, we are going to be worried about something. 

The recession is far from over.  We are going to get more bad news which will continue to send jitters to the markets around the world.  If any correction is underway, it is normal after such a sharp and fast run up.  If you remember, no one anticipated the markets to start turning around before fall 2009 or even 2010.  This was a very fast run up after the deepest drop in a decade.  I think it is likely that we will see a very volatile summer and some drops before the recovery continues.  The markets never go up in a straight line , but again no one knows for sure.  Thus the importance to remain calm and focused.  Warren Buffet says that the number one reason for his investing success is his emotional stability.

In any event, the biggest threat, the one we must plan for, is inflation.  That is much more of a threat than a few more months of volatility.

As the governments around the world, especially the US, continue to pump money into the economy, some inflation is inevitable. Most economists don’t expect inflation to arrive anytime soon. But nobody really knows when it will appear or how bad its effects will be. In the meantime, we are suggesting that investors make sure that their portfolios are well positioned to w eather the impact of inflation to come.

We don’t see inflation as a problem this year and even perhaps for 2010, and some deflation is more probable in the short term. But inflation is a factor that we need to plan on. That doesn’t mean making radical changes to your investment portfolio. It means incorporating some classic inflation hedges—like commodities, real estate and making sure your fixed-income investments have relatively short maturities.

We recommend shorter-term fixed-income investments, because bonds with long maturities are most affected by rising interest rates.  Bonds can be a disaster in inflationary times.  People think that bonds are safe and can’t suffer a loss. This is wrong.  When interest rates rise, bond market value drops.  The longer the bond term, the bigger the drop. It can be quite shocking to see your “safe” investment drop in value.

It is also time to add commodities to your portfolio.  Commodity investments tend to perform well when there’s inflation because rising prices usually mean a stronger economy. That leads to increasing demand for raw materials to meet rising production and consumer needs. Don’t be tempted to make individual bets on oil or gold. Instead, buy a diversified basket of commodities.

We suggest 5 to 10 percent of a portfolio in commodities. Given commodities’ volatility, investors need to rebalance their portfolio periodically to make sure their position doesn’t balloon.

Real estate can also be a good way to hedge against inflation. Real estate investment trusts, which invest and own commercial and residential properties, are an easy and liquid way to gain access. Not surprisingly, REITs, which are required to distribute most of their income (generally from rent rolls) to shareholders, have been battered in the downturn. But they have shown signs of hitting bottom, and might be a good time to start building a position.

If you did not see us recently for a review, you will be receiving a portfolio review in the mail.  We want to ensure that your portfolio is well positioned for the recovery and inflation down the road.

Terry Broaders

Interest Rates to Hold at Current Levels Until mid-2010

Interest Rates to Hold at Current Levels Until mid-2010 – Governor of the Bank of Canada Mark Carney says the central bank is committed to maintaining current interest rates through the first half of 2010, although he noted the challenge of resolving global imbalances stands in the way of convincing economic recovery. Speaking to the International Economic Forum of the Americas Conference in Montreal on Thursday, Carney discussed the recovery and rebuilding of the global economy. He noted that, “It appears likely that the global economy is entering a period of lower potential growth.”It will take time to work off past excesses and to rebuild globalization, he said. Moreover, the composition of global growth will also shift, as the bank expects the U.S. recovery to be relatively mild, and emerging markets to play a bigger role. “The greater proportion of emerging-market growth in the overall growth of the global economy should create new opportunities, particularly by supporting commodity prices,” he said.He also stressed that policymakers must continue to try and restore market confidence, although that too remains a work in progress. “With U.S. banks now raising significant capital to cushion their losses, the negative feedback loop between the financial and real economies has been slowed, though not yet reversed,” he said. “More capital will be required globally; the toxic assets in core banks still need to be addressed; and a host of vital financial markets, such as private-label securitization, must be relaunched. As a result, stabilization of the global financial system remains a precondition for a sustainable recovery, both globally and in Canada.”

Odette Morin

Our email issues have been resolved.

If you have sent us an email in the past couple of weeks and did not get a reply, it is because we did not get your email.  Our tech people have fixed the issues of spam filtering and the problem is now fixed.  Please call us at 604.878.0702 if this happens again or use the following email address as a temporary alternative.  email hidden; JavaScript is required

Thanks and sorry for the inconvenience. 

Odette Morin

New proposed CPP changes

On May 25, 2009 Finance Canada announced some proposed changes to how Canada Pension Plan will work. The goal is to to keep older workers in the workforce longer—to lessen the future labour shortage when the baby boomers retire.

In brief, the changes are proposed to take effect over a period of time from 2011 to 2016, so will affect anyone planning to retire after 2010.

a) early retirement (before age 65) will result in a reduction in CPP benefits by 7.2% per year, which is up from the traditional 6%. This means that if you begin to take your pension at age 60, your payments will be cut by 36%, not 30%.

b) on the flip side of this, late retirement (after age 65 but before age 71), CPP benefits will be increased, not by 7.2% but by 8.4%, which is up from the traditional 6%. this means that if you wait until age 70 to take your CPP, the benefit payments will be 42% higher, compared to the 30% higher today.

c) if you want to begin to collect CPP while you are still working. then instead of having to stay out of work for 2 months like you do now, you can begin to collect CPP at age 60 even if you continue to work – AND after age 65 if you are collecting CPP but want to continue to work, the proposal is that you can contribute to CPP again through your work in order to increase your benefits.

d) the calculation for CPP will change as well – currently the lowest 7 years of earnings is deleted from the calculation – under the proposals, the lowest 8 years will be omitted so that the benefits are not weighed down by low earning years.

These changes do not affect the Quebec Pension Plan and only proposed at this time.  We will keep you updated on the status of this proposal.

Odette Morin

Predictable & Consistent Investment Income

Where can you find consistent & predictable income from your investments

Constructing an income producing portfolio for retirement income is not an easy task when interest rates are so low.  The old way of structuring your portfolio was to ladder GICs and bonds.  With rates ranging from 1% to 3%, these don’t even meet inflation.  Where should you turn?

If you have a very large portfolio and your income need is modest you can easily find investment funds nowadays which will yield about 5% to 6% , paid as a regular cash distribution.  This income comes from High Yield income funds made of a mix of corporate bonds, government bonds, equities yielding high dividends and income trusts.  Among the best funds in that category out there are the Dynamic Strategic Yield and Signature High Income.  Several balanced funds do the same but may not yield as much or pay a regular distribution. The prospectus states that the distribution is fixed but not guaranteed of course. You can get these funds in class F as well which charge lower fees for accounts of $500,000 or more.

Depending on your income need, you may not need to set up a systematic withdrawal plan from these funds if the yield is sufficient. 

If these apply to your needs, we will be sure to let you know at our next periodic meeting if you don’t have them in your portfolio already.