September 19th, 2014

Once again there are a myriad of challenges facing the world yet stock markets continue upwards with strength (but not without volatility).

A few examples of recent crises and challenges are:

Scotland voting to stay with Britain, in a nail biter of a vote 55/45
The Federal Reserve and Janet Yellen will continue with low interest rates.
Barack Obama mounts a campaign to destroy ISIS and the U.S. is back at war fighting a new enemy.
The U.S. has just become the world’s largest Oil Producer, and despite all the global conflicts Oil is down in price, as is Gold.

Stock Markets are moving higher on increasing earnings, and an expansion of P/E multiples.

There have been approximately 6 corrections in the 4% range since 2012, but then markets rebound and move higher.  One of the reasons that contribute to this strength is the amount of money sitting on the sidelines waiting for a buying opportunity.

With Money Market and T Bill rates at or near zero, and 10 year Government Bond rates at 2.5% or less, fixed income investors are challenged on what to do with their money.

Currently 53% of global companies are experiencing higher stock prices.  Typically Bull Markets don’t end until this percentage is higher than 70% and 80%.

Europe and Emerging Markets are experiencing much slower growth than North America, and in particular, the United States.

Employment and GDP growth are still challenges to Canada and the U.S., with Canada having more difficulty because of our reliance on Energy and Commodities.  Fortunately, the lower value of our Loonie has helped domestic manufacturers and exporters.  Although this lower loonie makes it more expensive to buy that Florida vacation home!

Jim Prentice recently became the Premier of Alberta, and has been vocal saying Canada needs more pipelines to give our energy products access to new markets.  This includes new east/west pipelines as well as Keystone which is much delayed.  TransCanada Pipeline just announced they expect the cost of The Keystone Pipeline will be double the original estimate.  Yes this is a challenge, but perhaps the bigger challenge is if it is turned down again by Obama.

While all this unravels, Alibaba which is a Chinese e-commerce business that you probably had never heard of 3 months ago, just completed the largest IPO in history, raising $25 Billion.  Alibaba also has a market cap larger than Facebook.  The shares were issued at $68 and rose to almost $100 the first day, and then dropped back to only close up 30% on the day!

Although very few if any individual Canadian Investors were able to participate in this new issue, we all benefited because the Canada Pension Plan was able to secure a sizable allotment.

Chinese GDP growth is slower than hoped, and their Central Bank said they would not implement further economic easing or accommodative monetary policy, and this caused Canadian Resource and Commodity prices to drop in price, including Gold, Silver and Oil.

Our investing theme remains the same:

Preserve Capital, obtain a modest yield of approximately 3% to 5% and combined with a capital gain of 2% to 4% we should end up making a total gain on our investment of between 6% and 8% per annum.  Most of our portfolios have already met and/or exceeded this goal as of today.

Projects we have worked on lately include:

- Clients selling their business and we invested funds using a Family Trust structure.  These investments included both Canadian and U.S. focused Income products.
- Several clients have sold their homes recently, and after downsizing there has been significant money left over, which we have invested and the clients are spending the investment income which is being paid monthly.
- We have bought TD Dividend Growth Fund T-8 series which pays 8% annual income, and in a tax favorable manner.
- Implemented an Investment Lending Strategy that works for Professional Corporations, such as those used by Accountants, Lawyers and Doctors.  Manulife Bank is the lender, and the investments purchased come with life insurance protection and there is no medical required.
- Invested funds with 5 different U.S. focused managers, with a goal to capitalize on the growing U.S. economy.
- We have continued to implement our Investment Lending Strategy for individuals, mostly Husbands and Wives.  Goals we are trying to achieve include:

- To accumulate an additional $1 Million over the next 10 years to help fund retirement income.
- To provide an additional $3,000 per month income for a couple.
- To help accelerate paying down non tax deductible debt.

We are privileged to work with you and thank you for the opportunity to help you with your investments.  Please call us if you have any questions, or would like more information on any of the ideas presented in this letter and how they may be appropriate for you.

 

Best Regards,

 

Fred Banwell