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Category: Newsletters

Published: 06 July 2010

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June 2010

Economic prospects for Canada H2

We could see Canada's hot economic rebound cool off a bit as Canada's best-of-the-G7 performance slows a bit in H2 (second half of 2010).

Canada's hot currency has not been as hot recently as declining commodity prices (oil, metals, etc) declined and worries about Greek sovereign debt made investors flee once again to the U.S. dollar. Our dollar which was at par just a month or so ago, swooned to almost $0.92[1] U.S. before recovering slightly.

Given Canada's low unemployment rate, healthy housing market, relatively low government and corporate debt, most market pundits are calling for the Canadian dollar to reach par once again by the end of the year.

Interest rates for Canada

Canadian banks appeared to have jumped the gun and raised interest rates despite the Bank of Canada's commitment to leave rates at record lows until the end of June 2010.

However a cheaper dollar and higher Canadian inflation may have prompted the Bank of Canada to raise rates by a quarter point on June 1st rather than wait for late June or July. We should not however make the assumption that the Bank of Canada will continuously raise interest rates as both Europe and the U.S. economies are much weaker than ours. This may mean that outside of our country, interest rates may remain at low levels.

Although higher interest rates in Canada are welcomed by savers it is not so good news for borrowers as lending rates (mortgages, loans, lines of credit) will become more expensive.

Sell in May and go away

This trite old saying actually came true this year as May was not a good month for many stock markets. The U.S market dropped just over 8% in May but the drop from the April peak was 12%. This is the first time we have had a significant correction since the low of March 9th 2009.

"Once bitten, twice shy" is another saying but some investors appear to be still nervous as the economy recovers from last year's recession. There always seems to be new news to worry about. Currently, North Korea is rattling the sabers once again, Israel Middle-east geopolitical concerns are flaring up and there are ongoing concerns about European sovereign debt.

Still, corporate profits are out performing expectations and an increasing number of analysts have "upped" their earnings forecasts. Is this correction a buying opportunity or the start of another corrective phase?

A few newsletters back I recommended that investors, that are drawing income from their investments, should keep 1 to 2 years worth of withdrawals in liquid investments outside of stock market related investments. That advice still stands. Please contact me about this especially if you are a retiree drawing an income from mutual funds.

Redefining risk

The emerging markets like Indonesia, South Korea, Vietnam, India, etc were once considered risky investments because they were thought of as underdeveloped third world countries. Not being exposed to the subprime crisis and having low debt levels have made emerging markets one of the better performing investments over the past year or so.

Investors in mainstream international funds though have made very little money in the past 10 years as a zooming Canadian dollar and other factors took away much of the gain. Some market pundits are now saying that diversification does not work and that all foreign investments should be repatriated back to Canada.

I do not agree with this extreme point of view. Canada is still primarily a commodity based economy and its markets will go wherever the price of commodities goes. If commodities suddenly go out of favour, our currency and stock markets may follow as well.

My recommendation is to keep those international investments and keep our portfolios diversified.

[1] Source: MSN MoneyCentral - the CDN$ reached $0.92 on May 25, 2010

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Category: Newsletters

Published: 05 May 2010

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Canada’s great recession wasn’t that bad after all: Stats Can
Source: Canadian Press – Julian Beltrame April 15 2010

A year or so ago, most reports described Canada’s recession as the biggest financial collapse since the Great Depression of the 1930’s, However recent economic numbers may prove that the statement is not completely accurate – perhaps not even accurate at all.

According to the Canadian Press article:” Canada did suffer through a technical recession -- a 3.3% drop in gross domestic product over three quarters between the fall of 2008 and the summer of 2009. But that was shorter and milder than the six-quarter slump of 1981-82 in which GDP fell 4.9% or the four-quarter 1991-92 downturn.”

[Ed. note: a quarter is 3 months; the recession lasted 9 months]

“Although the report [Statscan] does not touch the subject, Canada appears to be bouncing back stronger than any country in the G7 -- which includes the U.S., the U.K., France, Germany, Italy and Japan.”

Although the recession was very real for the 400,000 Canadians who lost their jobs, the article explains the reasons why the Great Recession should be more accurately described as the Great Escape.

The reasons given for Canada's superior performance included: past fiscal surpluses, low corporate and government debt and generally, sounder financial conditions.

GIC rates online 24/7

GIC rates are now available (daily) on our new web site, www.belmontvillagefinancial.com.

Here is a bit of background: Belmont Village Financial Group is one of the very early pioneers of the Canadian GIC deposit industry with roots going back to the late 1970's. In fact, one of the early founders laid claim that the Canadian GIC deposit industry was actually invented here in Kitchener, Ontario.

Our goal is simple and straightforward. Find the best GIC rates for our clients and do so without charging any fees or commissions.
We can place GICs with TD-Canada Trust, Scotiabank, Bank of Montreal and dozens of other banks,trust companies and credit unions. Your money is placed directly with these financial institutions and your GICs are safe and secure. All banks and trust companies that we deal with are members of the Canadian Deposit Insurance Corporation (CDIC) - an agency of the federal government that insures eligible deposits up to $100,000. Please visit the CDIC web site at www.cdic.ca for more details.

Although many other full service brokers claim they also offer GICs, in reality they do little business in this area. GICs are a low margin investment product and stock brokers generally prefer to sell stocks rather than GICs.

Belmont Village Financial is one of the largest if not the largest GIC broker in the Kitchener, Waterloo, Cambridge and surrounding area.

Please visit www.belmontvillagefinancial.com in order to see the best daily rates. Please call me or email me for a quote at glenns@belmontvillagefinancial.com

The Search for Yield – Part II

In last month’s newsletter we asked the question “Is there anything else that can potentially pay a bit more income to me without incurring a huge amount of risk?”

I had suggested using a Canadian mortgage fund like the TD Mortgage Fund or the National Bank Mortgage Fund in order to get a better rate than a daily interest account or short term GIC. To get a potentially higher interest rate the Powershares 1-5 Laddered Corporate Bond Index Fund could be used as an alternative to GICs. An appropriate target for this fund is to outperform a 5 year term deposit. A mutual fund containing foreign government bonds and corporate bonds such as the Manulife Strategic Income Fund also has the possibility of earning higher rates of return.
 
There is another investment that can give you the possibility of earning a higher interest rate. It is not a mutual fund, it is a GIC.  It is the National Bank Canadian Advantage 8 Plus GIC. This investment is a CDIC insured GIC that has a variable interest rate. The National Bank Canadian Advantage 8 Plus GIC interest rate is based on the performance of 20 Canadian stocks.
The overall rate of return consists of two parts:

1. You will receive 1% annual interest paid annually (no matter what the stocks do)
2. The second part depends on the performance of the basket of stocks. This is the variable portion of your return. The maximum possible return from the variable portion is 40%.

Worst case scenario: If calamity hits and the stocks drop in value (no matter how low – even zero!) you still get paid 1% per year for each of the next 5 years.

Basically, the stocks would have to increase in price by more than 5%, five years from now to increase the overall rate of return over and above the minimum 1% per year. That is why this particular GIC is called a variable rate GIC. The interest rate you receive is variable depending on how well (or not well) the stocks do. The bank gives you a head start by assigning 8 of the 20 stocks as having performed the maximum 40% on Day 1!

Best case scenario: This means that only the remaining stocks (12 of the 20) have to go up in value of 40% or more five years from now. If this scenario happens, you will have already pocketed the 1% a year and you will receive an additional 40% at maturity.

Please refer to the product brochure for the specific examples of how this might work.

Bottom line – depending on how well the stocks perform, you will receive somewhere between 1%  and about 7.5% per year return. The GIC is guaranteed by the National Bank of Canada and backed further by the Canadian Deposit Insurance Corporation (CDIC).

How to lie with statistics

The above title was the title of a book that was suggested reading in a Quantitative Economics course I took many decades ago. It’s all in how the numbers are presented.

The 10 year performance numbers for many stock market indexes (gleefully reported by the media) is not very good according to the press.

However, before we pass immediate judgment on this number we should recall our history, lest we are doomed to repeat it. Just to clarify - the press is 100% correct. They are not in any way misreporting the truth. They just are not telling the entire story.

If you are measuring from a high point 10 years ago and comparing them to an index at current levels, your theoretical rate of return may not appear to be very good at all. In the past 10 years a lot has happened. There was the famous “tech wreck” early in the decade and how can we forget …”9/11”, the Iraq war, the U.S financial crisis, sub-prime, etc. During that time the stock market went up a lot and down a lot. Lately it has gone up a lot.

Hopefully, you hadn’t invested your life savings all at once into a stock market index or ETF 10 years ago. Thankfully, very few investors would ever consider doing this.  In reality, most investors invest money as they earn it and would have been taking advantage of the lower stock market prices earlier in the decade. A practical example that comes immediately to mind would be contributing to your RRSP every year or having a systematic investment plan in a regular investment account.

Also, if we wait a year or two from now the 10 year returns will likely be measured from the low point – not the high point, so the very bad numbers may suddenly become very good numbers. Certainly, a topic for another future news story.

Therefore, the moral of the story is – be wary of how certain “stats” are presented to you in the popular press.

 ¹ For comparison purposes, the current interest rate is 2.1% for a 5 year conventional GIC at Canada’s five largest   chartered banks (Scotiabank, CIBC, TD-Canada Trust, Royal Bank, Bank of Montreal on May 3, 2010).

Whither the Canadian Dollar and interest rates?

dictionary: “whith-er”:  to what place? where?

According to a National Bank Economics & Strategy conference call recap of April 21, 2010, the bank believes the Canadian dollar which is at par with the U.S. is “priced for perfection” and that the Canadian Dollar may go up at most, a couple more cents. The “priced for perfection” assumes that the Bank of Canada may increase interest rates a staggering 200 basis points over the next year.

In a recent meeting with a TD bank V.P. their view is decidedly more modest. They are calling for a 0.25% to 0.50% rate hike this year (2010) and a further 0.25% to 0.50% in 2011.

I do not necessarily agree or disagree with the National Bank’s or TD’s projection for interest rates or currency as I firmly believe that we cannot know the unknowable and if economists have a flaw, it is their propensity to offer an opinion when asked for one.

[ed. note: as a graduate of the “dismal science” and having worked on an academic paper studying stagflation many years ago and briefly, tried to make a living at it, I can delight in skewering my former colleagues. My view is that economists are best suited at modeling past economic data rather than creating economic models based on future economic data.]

Have a great spring!

Regards….Glenn Szlagowski, Financial Adviser

PS. On a sad note, after three years as my sales assistant, Kim Carter has left our firm. We wish her well.

---

Services and products may be provided by an Assante Advisor or through affiliated or non-affiliated third parties.  An investment in the Canadian Advantage 8 Plus GIC is not suitable for all investors and even if suitable, investors should consider what part of the product should serve in an overall investment plan. The information Statement includes a summary of various suitability considerations and guidelines. You are encouraged to read the Information Statement carefully

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Category: Newsletters

Published: 23 March 2010

Hits: 4650

What we did for Bob – part II

 In part I we recall that Bob and his wife, Jennifer have recently retired.  They are both the same age - 62 and were surprised to learn that one of them could likely live to the age of 92. They would now have to plan for a 30 year retirement.

We illustrated the difference between fixed income investments like bonds and dividend paying stocks showing that bonds represent fixed income and dividend paying stocks represent rising income:

Rising income: real good

Fixed income: not so good

Why would one be better than the other? The answer is: “loss of purchasing power.”

And how do we counteract the loss of purchasing power? Many dividend paying stocks have a history of increasing their dividends but bonds pay a fixed unchanging income. Slowly but surely, inflation will exact a toll. Barely noticeable at first, Bob’s and Jennifer’s income could be cut by more than half¹

The general idea is that rising income will compensate for the ravages of inflation and the loss of purchasing power.

In reviewing the formal process of doing a financial snapshot along with income and expense projections throughout retirement, it turned out that for Bob and Jennifer, a mix of guaranteed GIC investments along with dividend producing investments was the most appropriate recommendation for their situation.

Survey says

No comment required (see survey results below) but I was surprised at the numbers. I do not agree that the media had intensive coverage of the turnaround. My view was that the media covered the decline intensively but somehow the recovery did not garner the same headlines.

A majority of the over 1,000 adult Canadians who participated in the Angus Reid survey² commissioned by Franklin Templeton early this year indicated they were unaware of the recent rally in the markets.

While the Canadian equity market posted a return of over 30% in 2009, 86% of Canadians had no idea the turnaround had taken place. In fact, despite intensive media coverage of the market turnaround, 74% thought the S&P/TSX Composite Index was flat, down or didn’t know. Only 14% knew the Index had posted a return greater than 20%.

One year after - analysis of the financial crisis of 2008/2009

When many investors rushed to one side of the boat to exit stocks in late 2008 threatening to swamp all, these same investors soon ran to the other side of the boat seeking the perceived safety of the bond market.

A word of caution here.  Bonds – specifically bond prices, do not like increases (especially large increases) in interest rates. In other words, bond prices and investments that invest in bonds could go down in value. Be very wary of bonds in a rapidly rising interest rate environment.

By late 2009, many investors had realized they may have made a mistake by exiting the stock market earlier in the year. The best strategy during last year’s financial crisis was to do precisely nothing as the stock markets made a wonderful recovery all on their own.

Doing nothing by staying invested was the hardest thing to do at the time, but it was the right thing to do.

I am hopeful that other advisers at competing firms gave the same advice - as difficult as it was at the time. Switching investments or making radical adjustments to investment portfolios at market bottoms in the midst of a panic rarely enhances returns. As a matter of fact it quite likely hurt client returns dramatically.

The worst of the crisis was actually quite short-lived - starting around mid-September 2008 and ending March 9, 2009. Scarcely six months.

Incidentally, the one or two experts who correctly predicted the U.S financial collapse in the fall of 2008, failed to predict the huge recovery rally that started on March 9, 2009.

[Editor’s note: I have included a link here to see what the markets have actually done over the last year or so. It is a U.S. stock market index (The Americans have got us beat for market data). It is a very nicely drawn chart and is updated daily. Note that this U.S broad market index was up over 70% by mid-March of this year.]

New web site

Coming soon – www.belmontvillagefinancial.com

Unlike most other Financial Advisers, I also have a dual role as a GIC Deposit Broker.

As a deposit broker, I scour some 40 different banks, trust companies and credit unions looking for the best interest rates that are available on any given day. It is truly amazing to see the difference in interest rates between the many banks and trust companies. For instance, for a short term GIC of one year, the difference is almost 4 times more interest!

When www.belmontvillagefinancial.com goes live, you will be able to access our top GIC rates that we offer.  Please call me for a quote if you have an investment maturing soon at your bank or credit union.

The search for yield

If the average investor is still reluctant to dip a toe back into the stock market, what other investments are there to look at?

GICs are safe and secure but your bank is likely paying only about 0.4% for a one year locked-in term to just over 2% for a five year term. Not much growth or income there.

I get asked the following question often: “Is there anything else that can potentially pay a bit more income to me without incurring a huge amount of risk?”

Yes there is and I have come up with a few recommendations.

Daily interest accounts and money market funds pay very little interest – rates are approaching zero in some cases. The bank is taking in money in the form of savings and chequing accounts and lending it to someone else in the form of a mortgage. The banks profit by doing this – we don’t.

We can turn the tables around a bit by investing in these same bank mortgages. These pools of mortgages pay higher interest rates. These investments aren’t terribly exciting (we like unexciting) and most have some sort of government backing if they are Canadian residential mortgages. They are suitable for risk adverse investors. These types of investments will pay quite a bit more than the best daily interest accounts. The investments are liquid and can be withdrawn at any time.

I like the TD Mortgage fund and the National Bank Mortgage fund.

To earn a bit more interest than investing in mortgages, we will have to go to the bond market. My cautions on the bond market refer to long term bonds – especially longer term government bonds. There is however, investments that specialize in short term corporate bonds specifically high quality corporate bonds – no junk bonds here.

The one I like in this asset class would be the Powershares 1-5 Laddered Corporate Bond Index Fund which could be used as an alternative to GICs. An appropriate target for this fund is to outperform a 5 year term deposit.

To get potentially an even higher yield we do have to go to the stock market to get enhanced returns. Not just any old stock market investment though – we want dividend income investments.

An example of an investment that could be suitable for the aforementioned Bob and Jennifer is the Stone & Co. Dividend Growth Class Fund which contains dividend paying stocks  and unlike the mortgage and bond funds mentioned previously, you do have to accept the normal 20% - 30% price fluctuations or more for this type of investment. In return, the fund has the potential to generate a stream of rising dividend income that Bob and Jennifer require over the years.

The fund, which is run by Martin Anstee, was recently profiled in a March 6^th article in the Globe and Mail; "We choose stocks that not only pay dividends, but increase dividends over time," said the manager at Stone Asset Management Ltd.

If you have an interest in dividend producing investments, please give me a call.

¹    inflation of 3% i.e. in 30 years, $2.42 is equivalent to $1.00 today.

²   January 4 and 5, 2010, Angus Reid Public Opinion survey of 1,019 adult Canadians.

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Category: Newsletters

Published: 11 December 2009

Hits: 3482

December 2009

Year in review 

The year 2009 started on a hopeful note as the markets made some encouraging gains around the Christmas holidays in 2008. The steep declines due to the sub-prime crisis in the U.S. and collapse of very large American financial institutions created a worldwide panic as investors fled to cash starting about mid-September 2008.

In 2009, U.S. and Canadian markets resumed their steep decline in January and by early March, markets in Canada had declined by a further 15% and the U.S. was down by 25%.

Some economic forecasters were even talking about another deep Depression or at the very least, a prolonged period of economic contraction.

Just as the consensus believed that it would be years until the markets would ever recover, the stock markets made a remarkable recovery starting on March 9, 2009. As of early December 2009, global markets were up by 50% to 65% and Canadian and U.S stock markets are up 50% to 60% from their March 9^th low.

Road to recovery 

It appears that the worst is behind us. Statscan has reported very slight, but positive economic growth in Canada. This signals the official end of the Canadian recession. The U.S recession likely ended sometime this past summer – perhaps July or August. 

Despite the recovery in domestic and global markets, there remain some challenges.

Unemployment usually continues to rise even as the recovery takes hold. Unemployment therefore, is a lagging indicator rather than a leading indicator. We can expect unfortunately, that unemployment may get a bit worse before it gets better.

Our most important trading partner, the U.S., has some lingering problems.  Their decimated housing market is slowing the recovery, unemployment is very high, excess manufacturing capacity remains a problem and lastly, very high debt levels caused by U.S. government bail-outs and stimulus packages are a concern.

The U.S may have to take a page from Canada’s own history book when we had to address our extreme debt levels in the 1990’s.

Our painful cure was higher taxes, lower government spending and a lower Canadian dollar. Perhaps our southern neighbour is contemplating the same.

 A case for optimism

On the positive side, the U.S. is addressing these challenges and a recovering economy will likely right itself. A cheaper U.S. dollar will make American products competitive and give them a tremendous trade advantage. Shuttered factories will reopen and people will be re-hired. Unemployment rates will start to drop.

In Canada, the economic picture is considerably rosier. Our housing market is very strong at the moment (unlike the U.S), unemployment is lower and rising commodity prices are giving our economy a boost. Our banks are reporting healthy profits.

In Europe, the EU(European Union)is starting to withdraw their monetary stimulus program which is a very encouraging sign.

Far East and emerging economies have fared much better than North America and Europe and these economies are growing by leaps and bounds despite America’s problems. A lower American dollar will benefit these economies.

Despite the recovery in world markets, the general sentiment and confidence level of many investors remains quite negative. As a result, a majority of investors have preferred to watch on the sidelines and even large rates of returns have not prompted investors to fully participate in the equity markets. This is starting to change.

Canadians have hoarded record amounts of cash and due to historically low interest rates – most of it is earning almost nothing. Will Canadians keep that money in cash for another year? I do not believe so. They will be looking for investment alternatives. Please see me for what these alternatives are and if they are suitable based on your circumstances.

 Portfolio reviews

Although I tend to spend a great deal of time studying the macro-economic picture, the most important work I do focuses on the client’s portfolio.

Throughout the year, all of my clients have received an invitation to do a complete and thorough portfolio analysis. If you have somehow been missed – or have not been able to respond, please call us immediately.

For retired clients and those who are withdrawing from their investment accounts on a regular basis to supplement their income, I am recommending that we move a portion of your equity holdings to a money market fund, Canadian mortgage fund or perhaps, a short-term Canadian bond fund. You may consider moving enough money to sufficiently fund your withdrawals for the next year or two. As everyone’s circumstances are different, please see me about this.

For investors that are in their accumulation phase, do not ignore equity mutual funds especially the international mutual funds. I see good value there.

In summary, we are more than just cautiously optimistic about the markets and the economy.

We have learned, especially in this most challenging year in decades, that discipline, diversification and patience most of all, have rewarded the long-term investor.

Best wishes for a joyful holiday season – I look forward to talking to you in the New Year.