Wednesday, November 30, 2011

Up days cushion down days


In my last post, I talked about not getting into a panic as the global markets drop in value day after day. And drag our portfolios with them, I might add. I wrote, the markets have "a long way to go before it is panic time. Corrections, even big corrections, are normal."

Today The New York Times ran an article headlined "Banks Act, Stocks Surge and Skeptics See a Pattern." All very true. The Dow was up 490.05 points. The TSX soared as well. But I agree with the concern voiced by The Times, this rally could evaporate.

I've bought all I'm buying on the dips. I'm keeping whatever cash I've got. I'm keeping, as they say, my powder dry. I would be surprised if we did not see more market volatility in the coming weeks and months.

To put today's rally in perspective let's look at the stocks I mentioned in my last post. These were all stocks that I had bought on recent dips. Four of the six were down when I last checked --- a couple by as much as 5%. That's a lot when you realize I just bought all these stocks at supposedly bargain basement prices.

Tonight, I discover:

  • BMO Equal Weight Utilities Index (ZUT) is up 6.4%.
  • Claymore S&P/TSX Canadian Preferred Share Units is down .4%. Not much, but still it is in the red.
  • REM is also in the red, down .8%
  • PWT-T up 5.4% 
  • AUSE is up 2.1%.
  • RY-T  is up 4.8%.

So, my recent purchases are, as a group, in the black. My income has grown thanks to the extra dividend income and I'm happy --- for the moment.

As I prepare for bed, the Asian markets are up:

  • Nikkei is up 2.12%.
  • Hang Seng is up 5.85%.
  • Shanghai is up 3.43%.

As I went to bed, I thought, "barring any unforeseen problems, tomorrow should be another good day for North American markets." Well, its morning and Europe is essentially flat at 8:30 a.m. EST and the premarket trading in the States is trending lower. I may lose a little of my profits from Wednesday but overall it will be a fine day. My cash reserves will continue to swell as the month end dividends show up in my account.

I'm not gloating over my profits, even though I am up many, many thousands for yesterday. I fear these profits may be ephemeral. I see my growing portfolio as simply being fattened in in preparation of the next famine. If it gets fat enough, it may well weather the coming bear market, and weather it very well.

Whatever, don't panic.

Wednesday, November 23, 2011

The world's not coming to an end --- yet

To hear many in the media tell it, the economic world is crashing and burning. It is in a bit of a tailspin, I'll admit. But, it has a long way to go before it is panic time. Corrections, even big corrections, are normal.
Europe is well off its game, as is the United States. China is slowing. We could yet be in serious trouble. But with some luck, we will be through this rough patch in eighteen months to a couple of years. As a chap on BNN pointed out today, the stock markets are usually the first indicators pointing the way to the downturn's exits. That means the markets could be looking at a return of the bulls in a year or so.

But right now, now bad is it really? Well, I have been buying on dips and two recent buys are still on the plus side of the ledger but the rest are wilting.

  • BMO Equal Weight Utilities Index (ZUT) is still up 4.38%.
  • Claymore S&P/TSX Canadian Preferred Share Units are up .16%. Not much, but still in the black.

Meanwhile the following are all down and showing signs of further weakness:
  • REM down 2.9%
  • PWT-T down 5% 
  • AUSE is also down 5%.
  • The RY-T that I just bought is down 2.7%.

I'm getting slower and slower rising to the bait of new lows. I'm setting goals. If and when RY offers a yield of 5.5% based on the share price, I'm buying. If PWT drops into the $12 range, I'm buying. And CFX has dropped more than 10% since I started following it. I expect a cut in the dividend come the new year and this should result in another price drop; At that point, it may be a good dividend paying stock to buy.

If I'm right, and I've been wrong many times in the past, but if I'm right, buying on the upcoming lows will position one to enjoy some wonderful gains in the recovering markets. Be warned, I'm always the optimist.

(If this gets really nasty, it could be a good time to look at buying: CPG, IPL.UN, EMA and POW. There are others that will be worth a look, but these are the ones on my wish list.)

Tuesday, November 22, 2011

Investing for retirement: Have a goal, have fun

The other night a friend asked about investing. This young woman is already thinking about retirement and is considering a self-guided portfolio inside an RSP as one way to realize her goals. The following advice is for her, but I think it is worth a post.

As I write this, the financial world is in turmoil and possibly heading for another incredible dive along the lines of 2008 and 2009, this promises be a great time to build a solid portfolio for future growth.

The first step in building a good portfolio is to make your first step a small step. Pick up some books on investing and retirement and read them. Your local library will have a slew of these. I especially liked Protect Your Nest Egg by Eric Kirzner and Richard Croft and The Portfolio Doctor by David Cruise and Alison Griffiths. I found both at the library but later bought my own copies. I figured the authors had earned my respect and my money.

At this point you might like to open an online portfolio tracking account with The Globe and Mail, Globe Investor. The basic portfolio tracker is a free service, free being a nice bonus. Build an imaginary portfolio and watch the imaginary profits pour in. If you have dividend paying stocks, the dividends will appear in your imaginary cash balance. This service may be free but it is sophisticated.

Another free feature offered by Globe Investor is the Watchlist. This is handy for tracking stocks in which you have an interest. The Watchlist even tracks dividends. Very slick. (Click on the image below to see my Watchlist at an easy to read onscreen size.)

A partial view of my Globe Investor Watchlist.

I have mentioned dividends a few times now. I am a firm believer in the rewards of dividend investing. Given enough time, dividend paying stocks can dig themselves out of a financial hole. Often investors with a long time frame will put their money in "growth stocks" or mutual funds that promise "growth."

If a mutual fund openly promises lots of upward potential by putting growth in its name, it is also --- but not so openly --- admitting it has lots of downward potential. A dividend strategy vs. a growth strategy is often a contest between the turtle and the hare. The growth stocks will surge ahead at times but then lose momentum and stall; They will probably lose a lot of their value now and then. At the end of decades of investing, the fitful growth of these stocks is often surpassed by dividend investments. Dividend investments will also wax and wane with bull and bear markets, but their losses are cushioned by the steady flow of dividends.

To see this effect in action try playing with this TD Asset Management mutual fund graphing tool.
In my example, I compared the TD Monthly Income mutual fund --- one of my favourites --- to the TD FundSmart Managed Maximum Equity Growth (Premium Series). Over the period tracked, the turtle wins. (Again, click on the image below for an easy to read onscreen size.)

TD Monthly Income delivers $7727.88 more in this example.

I like the TD Monthly Income mutual fund but it is a bit of an anomaly. Generally, I don't like mutual funds. I've owned some good ones over the years but generally I prefer ETFs or even owning stock outright. The fees charged by mutual funds put them behind before the investing race has even begun. Some mutual funds charge from two and a half to three percent for the honour of having them manage your investment. Those charges can make it very difficult for the mutual fund to outperform a competing ETF, which often charge investors only half a percent or less.

So, get some books, do some reading, understand your goals, work out your asset allocation and play with some imaginary investments using Globe Fund. The final step is to talk with a financial adviser. I am not a financial adviser. Reading this does not count.

Many branches of Canadian banks have people on staff to assist investors and they also have associated businesses where they can send you for advice. I talked with folk at the ScotiaBank and at Scotia McLeod. I also chatted with an adviser I had known for years at the TD Canada Trust branch where I do some banking.

I have self-directed RSP accounts with both TD Canada Trust and ScotiaBank. There are things that I like about both. TD Canada Trust gets the nod from a lot of sources over ScotiaBank but I have found that both have their strengths and weaknesses. As I am not a trader, I am happy with both. I have no strong feelings favoring either one.

To get you started, here is a list of some of my investments:
Bank of Nova Scotia (BNS)
BMO Equal Weight Utilities Index (ZUT)
Claymore S&P/TSX Canadian Preferred Shares / Units (CPD)
Crescent Point Energy Corp. (CPG)
Inter Pipeline Fund (IPL.UN)
iShares MSCI Singapore Index Fund (EWS)
iShares Capped REIT Index (XRE)
WisdomTree Trust Australia Dividend (AUSE)

An average risk investment with higher than average yield.

Lastly, only invest if you are comfortable with losing money, lots of money, in the short term --- and maybe the long term. The financial world is very uncertain today. It is unlike anything in my lifetime. Keep your investments within your comfort range.

I was lucky. I retired at the depths of the recent stock market crash. As the market has been trending lower and lower recently, I have been feeling luckier and luckier. If you find a crashing market encouraging, you may be a natural investor with the nerves to ride out financial storms.

Cheers and good luck!

Thursday, November 17, 2011

Money Sense picks 100 stocks for retirement

Money Sense, awarded the title Magazine of the Year at the 34th Magazine Awards, has a November cover that grabbed me, just as it was supposed to: "Best Stocks to Retire On." "We rank Canada's Top 100 dividend payers," the cover said. I bit. I bought. I read.

It seems the Retirement 100, originally named the Income 100, was started in the summer of 2007 by the folks at Money Sense. Since that time the all-stars* in the list gained 39.2%. Impressive.

 * The All Stars
  1. Great-West Lifeco
  2. Husky Energy
  3. Power Financial
  4. Sun Life Financial
  5. TD Bank
A quick check of the 100 revealed, what I would call, a glaring error. Inter Pipeline (IPL.UN-T) is missing. This is a stock that has been listed as an investment in a number of retirement portfolios, and rightly so. I own it and I adore it.

IPL.UN-T has more than doubled its price in the past few years. The shares I own today, in a sense, didn't cost me a penny. You see, I sold more than half of my holdings for more money than my original investment. The four digit annual income the pipeline funnels directly into my pocket is much appreciated.

If you are interest in the Money Sense article, a condensed version is posted online. I think they may be holding back some info in order to encourage magazine sales. Who can blame them? It is certainly not a bad idea.

Monday, November 14, 2011

The Munk Debates


Summers at World Economic Forum, Switzerland
I watched the live feed of the Munk Debates last night. It was a brilliant pairing: Paul Krugman vs. Larry Summers. Krugman was assisted by David Rosenberg and Summers had back-up in Ian Bremmer.

Krugman is a Nobel prize winning economist, writing for The New York Times, Summers is the former president of Harvard University, Secretary of the Treasury under Clinton and until recently director of the White House National Economic Council for President Obama.

David Rosenberg is a chief economist and strategist with an influential Canadian independent wealth management firm. Ian Bremmer, looking every bit the academic, the only one on stage without a tie, is the American political scientist who created Wall Street’s first global political risk index

The topic of the night: Will the foundering global economy usher in a dismal era for North America similar to Japan's lost decade of high unemployment and slow economic growth?

At least, that is how the Globe and Mail saw the debate. Paul Krugman begged to differ. He said, "Canada has not messed up enough to be interesting." This debate will be centred on the United States and not North America.

The Nobel winner saw the States not as entering a lost decade but of already being deep in one. He described the economy as sour, but with a sourness even in excess of that that stalled the Japanese economy. He defended his position by falling back on the PPE approach: The Proof of the Pudding is in the Eating. For  him, the United States clearly is now eating sour, perhaps even humble, pie.

Both Krugman and Summers agreed on a number of things, one being that the U.S. stimulus program was too little and too brief. It was inadequate.

An interesting twist to the Monday evening debate was that both Krugman and Summers come from the left wing of the political spectrum in the U.S. They both agree on a great deal. For instance, they both agreed that the engine driving the American economy is broken; Both made reference to John Maynard Keynes "magneto trouble" metaphor.

In Keynes day, engines had a magneto powering the spark plugs. Keynes famously said, "We have magneto trouble," as he compared the stalled economy of the Great Depression to a broken generator in an automobile engine. According to Keynes, repair the economy's magneto and the economic engine will purr once again.

Krugman sees the American political system as completely dysfunctional and this leaves him feeling deeply pessimistic for the States. If he does start to feel a little upbeat, he said, he watches another GOP debate and changes his mind immediately. America's economic magneto is not going to get fixed any time soon.

Krugman made it very clear that he sees "no reason to believe the U.S. will do better than Japan."

Summers, on the other hand, said that the Japanese problems were far different than those affecting the United States today. For instance, in Japan housing prices tumbled to 15 percent of their previous value. This has not occurred in the States - yet.

Summers pointed out that the U.S. is still "the place where everyone wants to come, where everyone wants to put their money." The world's biggest and most dynamic economy will not be brought to its knees for an indefinite period, according to Summers. The States is simply too economically resilient for that.

Quoting Churchill, Summers said, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” The magneto will get fixed despite of, or in spite of, the present political gridlock in Washington.

Summers argued, "things are never as bad as you think they are," and added optimistically that in politics, "the transition from inconceivable to inevitable can be very rapid."

The panel touched briefly on the Occupy Wall Street movement. I believe it was David Rosenberg who said the movement was partially powered by the strong backlash against excessive CEO pay and the golden parachutes protecting them from falling into the financial abyss like so many others in today's economy.

Summers pointed out that there are brilliant business leaders, like Steve Jobs, who earned their great wealth. He argued that some economic inequality is not only to be expected but it is good. We need "to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage."

Krugman brushed this argument aside: Almost none of the wealthy CEOs under attack are like Jobs. Almost none.

So, what did I take away from the debate. One: it's good to be living in Canada. Canada was mentioned a number of times as a country that has dodged the worst of the present economic malaise affecting the globe. Investing in Canada and Australia, as I am doing, is not a bad idea. One might even add Sweden to the list of countries safely at the head of the pack.

Political scientist Ian Bremmer said he would advise the Canadian government to hedge their bets when it comes to trade. Looking east to China and the rest of Asia is a good plan. He made clear he was not thinking of closely linking Canada's economy to China's in the same way that Australia has done. Canada is positioned right next to the States and an ocean away from Asia. Still, hedging one's bets is often an excellent plan.

I believe Prime Minister Harper and Finance Minister Flaherty are already taking that tack.

Will the Americans suffer a lost decade? They might. Will Canadians be pulled down with them? Maybe, but maybe not. Maybe Canada will motor along a little above the worst of the economic storm. I'm going to keep buying on the dips and praying on the dives. I guess I'm a Larry Summers optimist tainted by Paul Krugman negativity.










Warning: Don't just buy the dividend.

I'm always on the lookout for a good dividend paying stock. The other day I read a blog extolling the virtues of Canfor Pulp Products Inc.

The double digit yield (14.16%) was keeping this dividend-driven investor very happy. Curious, I did some research on CFX.

The following is from the TD Securities Morning Action Notes:
"With a deteriorating pulp market outlook, we expect the [Canfor] Board will reduce the dividend in early 2012. . . . Under our current forecasts (using US$875 per tonne for North American NBSK pulp in 2012), we believe the company can sustain a $0.20-$0.25/share quarterly dividend during 2012. . .

"There has been a significant negative shift in pulp market sentiment in recent weeks – we expect conditions to get much worse before they get better. . . . discounts are widening and spot prices are declining fast. North American spot prices are in the mid-US$700 per tonne range with unconfirmed reports of one-off deals in the mid-US$600 per tonne range. . . .

"Historically, the performance of CFX tracks pulp price momentum (exhibit 2). More recently, the
relationship has decoupled as Canfor Pulp’s dividend has supported the share price. With ourexpectation for alower dividend in 2012, we expect a tighter relationship going forward."

CFX has a target price in the area of $13. If I can pick it up for $9 or less, I might buy a couple of hundred shares. The 20-cent per quarter dividend would then yield about 8.9%. Over the long term, I have problems with owning a pulp products company. It's a business with way too much volatility for my comfort level. I would watch the target price and sell at an opportune moment.

I love a good dividend but a good yield alone is not enough to entice me to buy.

(Note that the investor I'm was talking about at the beginning of this post appears to a bought her shares of CFX at a good discount compared to today's price. It was a good buy for her back then and it may be a good buy for me in the future. But I'm not convinced that it is a good buy for me today.)

Thursday, November 10, 2011

Placed a bet on the Royal Bank

I did it. As I suggested yesterday, I picked up 100 shares of Royal Bank (RY) at $45.01. This should give me a yield of 4.8 percent. As this investment is inside my TFSA, this is untaxed income. I will get to keep, or spend, it all.

Will I lose my shirt in the short term? Should I have waited? (Hey, at the close I had already lost a dollar.) At the best of times it is damn hard to time the market. In the economic climate today, I think it is impossible.

Now, what to buy next? I've still got a little cash itching to be invested sitting in my TFSA.

Tuesday, November 8, 2011

Getting the RSP money out

The recent bear market has given retirees, like me, an excellent opportunity to set the stage for removing some funds from our RSPs. I figure now is the time to buy additional stocks or units of investments that I already have in my RSP portfolio, but I will buy these outside my RSP and inside my TFSA instead.

For instance, I own Royal Bank inside my RSP. Recently it has been selling at levels lower than my book price. Result: I'm buying more RY but this time I'm buying it inside my TFSA. When RY climbs, possibly as much as ten dollars or more, I'll sell an amount of RY inside my RSP equal to what I own outside my RSP. This will bring my portfolio allotment back in line.

I end up with a lot of cash in my RSP to be removed in order to live. Numerically, I retain all the shares of Royal Bank I started with, but some shares are now outside of my RSP, my overall book price has dropped, and my allotment is dead-on. All  dividends are still available for covering living expenses but they are no longer all being taxed. Nice.

Friday, November 4, 2011

DRW_Too good to be true?

_______________________________________________

This info was added Dec. 28, 2011. As of today it appears that DRW will miss paying its fourth quarter dividend. Ouch! The overall dividend yield for the year was more than 10 percent but still I was expecting about $400 come the end of December.


What happened? I found this explanation on the Net:


"DRW holds PFICs (Passive Foreign Investment Companies) in its portfolio. PFICs must mark to market each year (in Q4) and realize a gain or loss in those PFIC shares. PFIC loses are offset against PFIC gains, and then against portfolio income. The PFIC losses for DRW this year wiped out the gains and Q4 dividend income, therefore, no dividend distribution . . . "


I'm holding my position. I'm not overexposed and feel little concern. We'll wait to see what the yield is delivered at the end of the first quarter of 2012 and we'll hope the value of this ETF doesn't continue to lose ground. This missed dividend payment does add a whole new wrinkle to owning DRW.
________________________________________________


 As you know, I'm retired. I need income. Man, do I need income. With my back to the wall, I take a few chances — or what I see as chances.

I own some DRW. I bought some high and some low. I may buy some more if it drops in price in the present bear market environment. I would not put too much into DRW but it delivers a high enough yield to make chance taking seem reasonable. And how much is that? Answer: 13.10%.

Such a high yield has the weird effect of both attracting me and repelling me. I'm a firm believer that you don't get something for nothing. Such a high yield must come with a downside. So I buy some, but I don't buy a lot.

Yet, Morningstar awards DRW five stars, and rates DRW as a below average risk with an above average return. So, do you feel lucky? Eh?