Monthly Archives: September 2010

Odette Financial Brief – September 30, 2010

Tuning in the good news Today, many Canadians are pessimistic about global economies. These feelings may be driven by headlines about slow economic growth, depressed housing prices, high unemployment and deficit problems in the U.S. and Europe.

This pessimism is amplified by the intense media coverage given to voices of gloom such as economic commentators Nouriel Roubini and David Rosenberg. As a result, it’s easy to miss some of the good news beyond the headlines.

On September 13, 2010, at the Montana Economic Summit, Warren Buffett, GE’s Jeff Immelt and Microsoft’s Steve Ballmer all expressed very positive views about what’s happening at their companies. Given the attendees and their comments, the most striking thing about this conference was the lack of media coverage. I suspect media are so pessimistic that they tune out good news.

Anthony, Terry and I attended a number of conferences recently. Here are a few comments we collected for you from those who manage your money. I have added a few comments from the Montana conference as well.

From the Montana Summit

“I’m a huge bull on this country … we won’t have a double dip recession. I see our businesses coming back almost across the board”
—Warren Buffet, Bershire Hathaway

“We will see new technologies that move beyond the Internet to tie together computers, phones, televisions and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive.” “Business at GE is improving. Signs across the world show growth improving as evidenced by a rise in GE’s orders.” “GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.”
— Jeff Immelt, GE

Comments from Eric Bushell, CI Funds portfolio manager

Macro Economic overview

There will be a major public sector adjustment mostly in the US and in Europe following the bailouts. With government having recently added having added anywhere from 10% to 30% to their debt-to-GDP ratios. There will be belt tightening measures for the next couple of years.

The fiscal & public sector drag will cause low growth and low inflation.

This is a global issue not just a Greek issue.

In Europe

  • Jean-Claude Trichet of the European Central Bank (ECB) is doing a very good job at fixing both the banking system and the public sector. The 750 Billion Stability fund has not been drawn upon yet and has received a AAA rating. It will help stabilize the bond market, provide liquidity, and bring calm. The bail out comes with term and conditions attached for the countries who will need them.
  • Mr. Trichet also coordinated stress tests for European banks, and chaired the Basel Capital Committee that set out new capital regulations for banks. This will help both private banks and public banks compete on level ground. There will be lots of mergers happening to strengthen the balance sheet.

In the USA

  • The US will not face a Japan style liquidity trap and deflation. In Japan, it took 15 years to fix their banking system. It is a country with no developed debt market. The US has the most developed debt market in the world. Also, Japan took 5 five years to get real interest rates to go negative, while U.S. interest rates were reduced to record-lows shortly after the financial crisis started.
  • Ben Bernanke, Chairman of the U.S. Federal Reserve learned in his studies that to get out of such crisis, you need to overdo the stimulus. The debate is, are we in a liquidity trap? We are not currently. It is too early to judge. Let’s be patient. Banks have repaired their capital.
  • We have seen the lows of bond yields and inflation will remain low in the short-term but will go up in the mid-term. Long-term inflation is expected to be around 2%, so yields of 2% on 10-year bonds don’t even compensate for inflation expectations.
  • Expect to see a lot of buy-backs, mergers and growth from low debt, high cash flow companies. There are a lot out there currently. This will be good news for equity performance.
  • The recovery is underway, private sector jobs will go up but the public sector jobs will go down for a while due to cuts to pay the bail out and infrastructure investments made.

In Asia

  • China is on a course of continued growth. The consumer spending story will soon take over the export story. Consumer goods companies with dealings in China will benefit strongly. We are in the very early phase of a very strong growth for China.
  • China has consistently been a force of stability. They put the brakes on their own economy earlier this year by tightening bank lending and by taking measures to cool their housing market. They also bought European government debt when no one else wanted to buy it in the spring and summer.

In Canada

  • Several Canadian balanced funds are overweight in high quality large cap equities and underweight in bonds, with some cash for opportunities.
  • Now that the Basel rules are clear on what the capital (reserve) ratios are, the Office of the Superintendent of Financial Institutions (OSFI) has lifted the restriction on dividend increases, buyback or M&A activity for Canadian banks. Analysts are predicting a dividend increase from the big banks in the near future.
  • With a strong Canadian dollar and a slowing economy, Canadian interest rates will stay lower for longer. This will help reduce stress on household finances. However, the HST in BC and Ontario, along with other factors may soften those housing markets.

My notes from Dynamic Conference

  • Dr. Martin Murenberg — Chief Economist Dundee Wealth: No double dip in sight, the policy makers won’t allow it. The US dollar will remain weak. The current recovery will be slow at first, recovery pauses are normal but the Bull Market is a long-term trend.
  • Rohit Segal — Canadian Banks are in a “sweet spot”. They yield more and are cheaper than fixed income instruments – The big story is the BRIC countries who will drive global growth.
  • Oscar Belaiche — We protect capital and invest for income. Income investing is like the dairy farmer who owns a milk cow that will produce milk for many years to come. He’s unlikely to be very concerned with what the price of beef is doing since he’s in the business of producing milk. We see ourselves as the milk man. We want good and steady yields from our investment without worrying about the current price of the underlying asset.

It’s not realistic to suggest there won’t be challenges ahead, both for global economies and for stock markets. I believe today’s pessimism is overdone and remain positive on the long-term outlook for the global economy.

It is crucial that your portfolio is rebalanced and optimized periodically, at least each year. Take the time to book an appointment or return the portfolio adjustment forms we send you periodically.

It has been a very difficult year for investment returns. We are committed to making sure that you participate in the recovery. Thank you for your confidence!

Odette & the YOU FIRST Team

Anthony Sabti

Tax Treatment of Dividends

Morningstar article: How dividends can stretch your after-tax dollars

This is an informative article by Morningstar on the beneficial tax treatments of dividend income.  The dividend tax credit will be decreasing slightly over the next couple years. 

The actual rate at which dividend income is taxed changes by province and income level.  It’s interesting to note that BC residents in the 50k and 75k taxable income range pay the least tax on dividend income.  Alberta residents with 100k and 200k taxable income get the best rate. 

Anthony Sabti

Corporate Class Funds for Tax-Sensitive Investors

Have you ever scanned through a mutual fund list and seen the same fund offered as both “ABC Canadian Equity Fund” and “ABC Canadian Equity Fund Corporate Class”?  These two funds have the same holdings, but the corporate class version is structured to be more “tax-efficient”. 

Why the need for tax-efficiency?

Unlike RRSP accounts, investors with open (or non-registered) accounts may have to pay taxes in two instances.  First, they have to pay taxes on the annual distribution of the fund, which can come in the form of interest, dividends, or capital gains.  Second, when part or all of the units of a fund are sold, they face taxes if those units have increased in value.  Corporate class funds can help defer or reduce the tax impact of both these situations. 

Because of this, corporate class funds can be of great benefit for various types of investors such as retirees, income seekers, and investors who frequently switch in and out of funds. 

How are corporate class funds designed to be more tax-efficient?

Common mutual funds are structured as “trusts” and sold in units.  With corporate class funds, the mutual fund company establishes a corporation with different share classes, each representing one mutual fund.  For example, Class A shares would represent “ABC Canadian Equity Fund” and Class B shares would represent “ABC Global Fund”.  The main tax advantage of the capital class share structure is that switching from one fund (share class) to another does not trigger any capital gains, even if the fund has appreciated in value.  As long as you switch within the same mutual fund corporation you avoid having to pay taxes. 

Furthermore, certain mutual fund companies also take measures to reduce the impact of annual taxable distributions.  Different forms of distributions are taxed at different rates, with capital gains and dividends being preferable to interest income.  Most corporate class funds will issue distributions only as capital gains or dividends. 

Odette Morin
Odette Morin

What is a Depression Anyway?

The comments below come courtesy of Dave Rosenberg, Chief Economist and Strategist obtained from

“A depression is a very long recession. Like the one that lasted from Q4 1929 to Q1 1933 that contained no fewer than six positive GDP quarters and even a 50% rally in the equity market in 1930!

“You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending. Or when home sales go down to record lows despite record-low mortgage rates.

“The economy is in a depression when the banks are sitting on $1.3 trillion of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.

“They usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories.

“When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession.

“Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away.

“More fundamentally, in a recession, the economy is revived by government stimulus. In a depression, the economy is sustained by government stimulus. There is a very big difference between these two states.”

Indeed food for thought!

Odette Morin