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As 2011 winds down, we have seen something that has been quite rare of late. 2011 marks just the second time in the past 10 years that the S&P 500 (US markets) will have outperformed the TSX (Toronto markets) in Canadian dollars. We believe that this is a significant shift for Canadian investors. Quite frankly, after many poor years, the US market is today, simply better valued than Canada, and as a result, there represents greater opportunities to find ‘cheap’ companies in the United States. This doesn’t mean a wholesale shift in investments, but simply a meaningful return to the largest investment market in the world. Of key importance, this is not driven by any great belief in the American economy, but rather a focus on large, global companies that generate sizable revenues from Asia and emerging markets. We believe that many of these US based global companies have not seen appropriate valuations of late, in large part because of a negative view on the United States.
The next big theme is Europe. The only questions about Europe is “How bad will it be?”. The range of options go from a worst case scenario of significant bank failures and a freeze in global credit, to a best case scenario, with no bank failures but a period of recession and high unemployment and rising taxes. Neither sounds like much fun. While this will continue to put pressure on markets around the world, a ‘best case scenario’ will actually help North American markets in two ways. The first is that the market is pricing in very bad news from Europe, and only bad news is a positive. The second is that capital must flow somewhere. As money leaves Europe, some of it will support stock markets closer to home.
The other focus for 2012 is the search for income. In a world of GICs and government bonds paying 1% to 2%, the search for income, especially among retirees will only grow. 2012 looks like another year of very low interest rates. The good news is that dividend yields on stocks have improved over the past year as corporate earnings have been strong, and as some stock prices have declined. Corporate bonds and preferred shares continue to pay reasonable income in the 3% to 5% range for good quality companies. An added income opportunity that we will be using more in 2012, is covered call options. This strategy allows for added income that is treated as capital gains for tax purposes. In times of market volatility but low market growth, covered call options along with bond interest and dividends can provide for portfolio returns of 5%+ even when there is no growth in stock prices.
Overall, 2012 looks like a year that will start with continuing volatility and risk stemming from Europe, but we believe that it will also represent some exceptional entry points for great quality companies with growing dividends. These companies can form the foundation of portfolios for many years to come. We look forward to taking advantage of these entry points – in particular with Canadian bank stocks, US tech stocks and US health care stocks.
The global economy and stock market remains fragile. To make some sense of it all we have compiled comments and thoughts from some of the smartest economists, analysts and other so called experts.
All eyes seem to be on Europe right now as they struggle with seemingly insurmountable debt.
Appearing live on CNBC’s “Squawk Box” on Monday morning, Warren Buffett said he’s not sure Europe can or will do “whatever it takes” to resolve the debt crisis.
He said Europe isn’t “going away” and that the European economy will be stronger in a decade regardless, but he warned on CNBC that getting from here, in the midst of the crisis without resolve, to that point in 10 years may prove difficult.
Debt threatens to bankrupt several Southern European countries. Investors hoped a solution could be found, but when the stark reality sunk in that a quick deal was unlikely, stock markets plunged.
The many reasons for optimism or pessimism remain. Let’s consider both arguements:
Reasons to be (mildly) bullish
- Central banks will stimulate economies with printed money at the slightest hint of trouble, and this has the side-effect of increasing demand for assets such as shares
- Economists are already talking about a third round of quantitative easing to boost the market
- Europeans appear somewhat united in averting a full blown credit crisis
- Corporate earnings appear to be very solid across the board
- Shares look very cheap versus bonds
- Inflation is on the rise and a period of gentle price pressure can be good for equities
- The emerging market boom might continue, keeping the West out of recession
Here are a few specific investment guru comments.
Firstly, let’s consider some recent optimistic business outlooks from top company CEO’s:
Caterpillar just raised its dividend and reiterated its possitive guidance.
Cummins says that domestic demand is increasing for their trucks.
3M reiterated its bullish outlook and raised its growth targets.
Eaton CEO Sandy Cutler is optimistic and she is the one who predicted the slowdown in 2008 before the market crashed.
Honeywell says its business segments are going strong.
United Technologies – says it’s seeing no slowdown in business, if anything it’s accelerating.
A number of top investment pundits see reason to be upbeat….
Bill Miller of Legg Mason remains bullish. His outlook is that despite fears of another recession, Miller pointed out that the economy continues to expand. In addition, by and large companies are reporting good numbers and retail sales have been solid.
J. Kyle Bass, portfolio manager at Dallas-based Hayman Capital Management LP believes that the US housing market’s losses had largely been absorbed. “You can see that the pig has moved through the python in terms of U.S. housing losses,” he said.
Fifth wisest investor in the world according to a Bloomberg poll, Dr Marc Faber is bullish about the outlook for the US dollar because of current global liquidity tightening (although he believes global growth itself will stagnate).
Warren Buffett confirmed that his investment company Berkshire has been buying aggressively during the recent market turmoil. He said on Monday that his company has spent $10.7 billion to buy more than 5 percent of IBM’s stock this year, a surprising move by the billionaire investor who has long shied away from investing in high technology companies.
Twenty-one of 22 analysts surveyed by Bloomberg expect bullion to rise on the Comex in New York next week, the third consecutive increase and the highest proportion in data going back to April 2004.
Sandler O’Neill principal Jeffery Harte said the market has hit its low point and that means risk assets, including the banks he covers, will do well into early next year.
Bearish signs
- The good news is all factored into prices
- A fresh boom in China helped pull the world economy back from the brink. That economic charge may be slowing – the jury is out
- A recovery in house prices has ended. A second wave of falls, leading to more bad debts, could spark another waves of bank failures or another credit crunch
- Governments took on too much debt in the boom years, and bad debt from banks, and some could fail to meet repayments
- Spending cuts in the UK could hamper demand, particularly if it creates greater unemployment
- Deflation may take hold, leading to a falling spiral of consumer and asset prices, including shares.
Some guru’s remain cautious:
China Vice Premier Wong offered uncommon candour this weekend: “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” Wang was quoted by the official Xinhua news agency.
Dylan Grice and ultra bear Albert Edwards from SocGen suggested the US stock market was 50 per cent to 60 per cent overvalued.
Money Week’s Merryn Somerset Webb says shares are overpriced based on ‘the only reliable indicator of market performance’… ‘cyclically-adjusted price-to-earnings ratio’ (CAPE)
The highly regarded economist Robert Shiller, who came up with the concept of CAPE, estimated in September 2011 that the US market was 21 per cent too expensive, based on CAPE.
Our take:
At TriDelta we remain concerned at the crippling government debt and weak economic prospects due to slowing global growth, elevated unemployment, US housing market concerns (also Australian and European) and ageing populations that will hamper recovery.
This suggests that developed nations are likely to see wealth stagnate for a few years. Rates will likely remain low and assets such as property and shares will not generate the wealth we have come to expect in previous decades.
As such we have significantly reduced risk in our portfolios and remain focused on protecting clients capital by maintaining a prudent and conservative investment strategy.
Having said this, we believe there are certain sectors of the Global market that are getting very cheap by historical standards. Technology and Drug companies are now trading at historically low levels and paying solid dividends. This will be one of the areas that we initially focus on when putting some of that cash back to work.
It is important to remember that the market always works in cycles, and the best time to invest is when things look the worst. We think that there is worse to come, but that also means that we believe that the time to put cash to work is getting closer as well – especially where strong companies are available at 4%+ dividend yields.
Prepared by Anton Tucker – TriDelta Financial
Everyone knows that a book should not be judged by its cover. The same can be said for the unique segregated fund, an investment product that at first glance has some real flaws but when digging deeper, can prove very powerful.
This type of fund provides an opportunity for someone to invest in the stock market and if the market rises, they get the gains. If they want, they can lock in these gains. If the market falls, they keep their initial investment. If the market falls after they have locked in their gains, the investor gets to keep not only their initial investment but also the locked-in gains.
The key is using segregated funds in a way that is appropriate in the current market. Let’s start with what a segregated fund is.
According to some people, a segregated fund is just like a mutual fund but with higher fees. So far, it doesn’t sound too promising and in many cases it isn’t.
Segregated funds are like mutual funds, but they also have an insurance component that provides these added benefits:
• There is usually some form of 10 or 15 year guarantee that you will at least get your principal back if you hold the fund for that period of time.
• There is some creditor proofing so that funds held in a segregated fund are not accessible if someone were to sue you.
• When someone passes away, you can name a beneficiary so that the assets pass directly to that person and avoid probate fees on these assets.
• In some cases, there is a ‘death’ guarantee whereby if the owner passes away while owning the funds, there is a 100 per cent principal guarantee.
• In some cases, there is also an ability to ‘lock in’ a new base for a principal guarantee. This means that if you put in $100,000 and the account is now worth $110,000, you can lock in $110,000 as your new guaranteed amount. This means that if you hold the fund for 10 or 15 years or pass away and the value is less than $110,000 at that time, you will get $110,000.
It is these last three features that are extremely valuable – especially in a volatile stock market. It is ideal for someone who is in their 70s, and possibly not in the best of health.
Here is a way to use this opportunity.
Take 5% to 10% of a portfolio that has meaningful non-registered holdings. Let’s say $100,000.
Invest this money now in uncertain markets into 100% stock segregated funds with the greatest chance of meaningful gains. If the portfolio goes up, then we lock in the balance. Let’s say $108,000. This is the new guaranteed minimum. The account will continue to move up and down with the market. If it goes up further to say $115,000, then we would lock it in again. If the portfolio drops below this minimum, you would hold on to it, because you have the guarantee. If it goes higher, you can always take the funds out and invest it elsewhere or spend it, or simply lock in a new floor. In Ontario, the other benefit is that the funds will not be part of the estate. They go to the beneficiary and avoid probate fees. In most cases this would be 1.5% in Ontario.
If someone is 50 years old this can still work, but the likely principal guarantee period might be 15 years. This is a long time to simply break even. Assuming they make money – which is the likely scenario over 15 years, the higher fees will erode some of the benefit.
The reason this makes more sense for someone much older is that it isn’t unreasonable that a 77-year-old will pass away in less than 15 years. This shorter guarantee period, along with the ability to lock in a new minimum, and the ability to take bigger investment risks with little downside is a powerful combination.
For this situation, you don’t want a safe investment. This is where you would take the most aggressive part of your portfolio to invest but with the safety net of the guarantee.
Despite a segregated fund being insurance, there is no health test or physical required.
If someone is 77 and has an illness that will shorten their life expectancy, they could shift some of their investments into segregated funds with a 100 per cent death guarantee (which means that they either gain or get their money back over a short time period) and avoid probate fees.
In the right circumstances, this strategy is only a piece of the overall picture but it is a unique and powerful piece.
It is an example of how you can’t judge all investments by their cover.
Prepared by Ted Rechtshaffen – TriDelta Financial
With all the occupying going on, and dissatisfaction everywhere, I thought I might do my part to give the movement some direction.
Last I checked, one of the best ways to influence a corporation is to impact its bottom line.
With the ability of social media to influence behaviour, there is now greater power than ever for consumers to quickly support one company over another. Is there a way for investors to get in front of the curve on this?
I believe there might be, but first we need to understand how a company can be affected by being seen as a ‘good’ company versus a ‘bad’ company.
If you want to see this influence in action, check out Goodguide. This site has been gaining a lot of attention from the media and from large, multi-national companies, as it rates consumer products on their “degree of sustainability practice compliance,” against their competition. The site and others like it can potentially have a huge impact on sales by educating shoppers about the ramifications of buying a particular type of soap, shirt, car, investment, or other good.
 Photo by schmopinions
Now that these types of sites or social movements can act so quickly and in such scale, a smart company might start focusing more attention on ways to make their products and services more sustainable – in a way that this large segment of the market will approve of. If as an example, the “Occupy” movement, believes that Bank A is the best of the big banks and Bank B is the worst, based on how they treat employees, how they treat the environment, the companies they partner with, and other measures, there is a real possibility of Bank A gaining market share. This can apply to grocery stores, gas stations, deodorant makers, and car manufacturers. Almost any consumer-related business. Keep in mind that these opinions can now take shape very quickly.
So what is sustainability and how might it impact how one invests?
According to David Wright, a leading sustainability and brand expert, “Sustainability not only looks at how an organization impacts the environment, but it also looks at its human resource policies, its social and community support initiatives, what company it keeps in terms of partners, and how its business efforts will influence others positively or negatively.”
Mr. Wright is president of Toronto-based Corbrico Consulting, and works with Canadian companies on their sustainability strategies, branding and implementation. “Sustainability has gained significant traction in Asia, Europe and the U.S, but has been slower to take hold in Canada. This is starting to change in a big way,” Mr. Wright said.
Of particular interest to investors is the growth of sustainability indexes across the globe. In Canada, there is the Jantzi Social Index, and globally you would find the Dow Jones Sustainability Index, the NASDAQ OMX CRD Global Sustainability Index and the FTSE4Good Index (U.K.), with all at differing stages of maturity.
As an example, the Dow Global Sustainability Index (DJSI) has been in existence since 1999. On their 40-company North American index, you will find six Canadian companies (Bank of Nova Scotia, Manulife Financial, Potash, Royal Bank of Canada, Suncor and Toronto-Dominion Bank).
Now to the bottom line for investors. Does sustainability lead to investment performance?
Certain studies claim that corporate sustainability practices correlate positively with investment return. Why might this be? Here are some potential reasons:
Well, so far in many cases, the numbers have not clearly shown outperformance.
For instance, the DJSI-United States Index has had a five-year performance of -1.56 per cent. versus the Dow Jones Industrial Average which performed at -1.4 per cent over the same period.
The DJSI-World Index, has had a 10-year performance of 3.79 per cent in U.S. dollars. While the Average World Stock Fund returned 4.75 per cent over the same period, according to Vanguard.
Over the past five to 10 years, the numbers wouldn’t suggest any investment magic, but I think that might be changing. With greater awareness, and most importantly the speed of Twitter and Facebook to alter public opinion, I believe that sustainability can be a tool for outperformance in the future.
Companies that want to impact what is important to a growing segment of their market, will be placing more time, resources and attention in this space. Of course, the service industries and web-based businesses that support the sustainability movement may be some of the best places to invest your money.
If the “Occupy” movement wants to focus its efforts on impacting share prices – they may just have the ability to do so. Then they will have definitely Wall Street’s attention.
In this Globe and Mail article, Shelley White writes about whether you should consider life insurance for you children. She speaks to our vice president of Estate Planning, Asher Tward, as well as Tom Drake of the Canadian Finance Blog to present different sides of the issue:
Does your child need life insurance?
By: Shelley White at the Globe and Mail (October 19, 2011)
“In the first week of September, I received a surprising handout from my kids’ school – a pamphlet about getting life insurance for your children.
I tossed it into the recycling, thinking why the heck would I ever get life insurance for my kids? It seemed morbid and useless and a waste of money, frankly.
The value of life insurance for children is a subject of some debate. While some financial experts say it’s totally unnecessary, others see it as a useful way to ensure wealth and peace of mind for your offspring.” READ MORE AT SOURCE…
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