Winter 2013

A Postive Outlook

The first thing I would like to say is that we wish all of our clients the very best for 2013.

Financial markets have had to deal with an endless stream of worrisome news. Since the global recession of 2008-2009, investors have been traumatized by the U.S. elections, the fiscal cliff, Euro zone debt issues, the Japanese Tsunami, the fall of oppressive regimes in the Middle East, and the threat of a breakup of the Euro zone. Yet, despite these disturbing media reports, it was much ado about nothing as investment returns in 2012 have been fairly positive. From the surprise returns of 32% in Germany, 27% in Mexico, to the 7.1% and 15% earned in Canada and the U.S. respectively, stock performance has completely outshined all of the fear-mongering.

As we look out at 2013, this story could repeat again. Corporate profits are stable, balance sheets are in good shape, and companies continue to maintain a significant “cash cushion”. Despite some recurring headwinds, financial markets could continue to deliver pleasant annual returns.
The IMF, Scotiabank, and RBC have all posted similar expectations for world GDP (3.25%), the U.S. (2.0-2.25%), and Canada (1.5-2%). Although these figures continue to remain under their forecasted values for this year, they are expected to improve in the second half of 2013 and into 2014. As of December 2012, Scotiabank’s Global GDP forecast for 2014 is 3.8%.

This would be positive for Canada, as stronger world growth translates into an increased demand for raw materials. As Dundee’s chief economist Martin Mureenbeld points out, “when GDP reaches 4%; this is good for resources”.

Historically low interest rates since the credit crises have created a bonanza for the income paying assets. For the past four years, the income trade has produced some of the best risk adjusted returns. This is comprised of assets with an above average yield such as corporate bond, REITs, and the utilities and pipeline sectors. We have been channeling our clients into these areas over the past 5-10 years. Lower interest rates coupled with a slew of income-hungry investors (from the boomers to pension funds) have loftily bid up prices in these asset classes.

As Scotiabank’s economist Vincent Delisle states “A sustained U.S. housing and employment recovery would lift U.S. 10 year bond yields above 2%”. Other analysts and economists have predicted yields as high as 2.5% (these yields are now at 1.8%). This increase in yields will create a very challenging environment for bonds.

Simply put, a stronger global economy will signal an end to the regime of below-average interest rates, which were originally orchestrated by the central banks to spur economic growth. An increase in interest rates will put downward pressure on bond and fixed income prices. We have profited nicely from these high income assets, however we must be careful not to overstay the party.

Our next step over the next three 3-6 months is to gradually rotate out and reduce exposure to these high-income bearing assets. The plan is to do so while gradually increasing our exposure to blue-chip equities which have come out of favour during the “income-trade”, including the technology, healthcare, energy, and consumer sectors.

While timing is not imminent, we prefer to tweak our portfolios earlier rather than later and capture the extra returns offered by blue-chip equities as the economy improves.

Birbari, Michael, B.A. (Econ)
Director, Private Client Group
Senior Investment Advisor
Branch Manager
DWM Securities inc.

This article was prepared Michael Birbari who is a Senior Investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company. This is not an official publication of with DWM Securities Inc. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessarily those of, with DWM Securities Inc.

Fall 2012

Fall into a routine...

As summer comes to a close, we start to prepare our affairs for fall and winter activities.  The kids are back to school and the structure of daily routine takes shape again.  This routine keeps us sharp and effective.
From a money management perspective, the same is true - the more an investment portfolio is based on a structured strategy, the more efficient it becomes.  To help cope with uncertainty and unsettled times, investors need a portfolio with structure and strategy.  So, for the past three to four years we have been advocating “balanced” strategies where bonds, REITS, utilities and blue chip dividend paying assets take on the primary role of  ‘anchor’ for a portfolio.

This lower risk approach has paid off handsomely and will likely continue to do well into the foreseeable future.  This strategy was necessary in an environment where the European debt issues lingered, U.S. economic malaise persisted and China’s slowing growth rates became a worry to economists. 

This all makes sense when pessimism and uncertainty are high.  However, when pessimism overstays its welcome as the “Thought du Jour” for months on end, we must start to think with a contrarian mindset.  Now’s the time we must consider owning specific sectors which have taken a beating over the past  two years.  We must be alert to sectors ripe for the next bull market.   As Jim Cramer of NBC’s Mad Money says….”there is always a bull market somewhere”.

Today, we believe that a bull market has already begun in sectors like U.S. housing, technology and gold stocks.  The recent launch of QE3, where the Feds have agreed to buy $40 billion/month of Mortgage Backed Securities, is targeting the U.S. economy directly through the housing sector and will ensure U.S. mortgage rates remain low for another two years or so.  QE3 also continues to add to the national debt by printing more money - hence the rally in gold stocks over the past few weeks.

So while clouds of uncertainty still persist with respect to the health of the global economy, there are sector specific bull markets worth targeting to augment performance returns of a conservative portfolio.  For many investors, the U.S. Homebuilder ETF (ITB) is an excellent way to participate in the housing rebound south of the border.  To participate in the positive outlook for gold and precious metals, we will look at mutual funds such as Sprott Canadian Equity or Dynamic Strategic Gold.  There are a variety of ways to embrace technology with the simplest being a Nasdaq based ETF. We'll talk more about these strategies at our upcoming review meetings.

Finally, for vacation planning or just currency diversification, now would be a good time to convert CDN $ into US $ so as to capitalize on the favorable exchange rate at $1.02.

All the best,
Mike

P.S.  Be sure to mark October 23, 2012 on your calendar & attend our client seminar to learn of DundeeWealth’s Fall Economic Forecast, presented by Economist, Stephen Gaskin.

This newsletter is solely the work of Mike Birbari for the private information of his clients.  Although the author is a registered investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company, this is not an official publication of DWM Securities Inc.  The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, DWM Securities Inc.

Summer 2012

Half Way into the Year...

After a decent start to the year, capital markets became increasingly volatile in the second quarter, as Europe’s debt crisis resurfaced again and weaker global economic activity caused investors to take a more cautious tone. 

As the end of June, Eurozone politicians reached an agreement that included providing funds directly to struggling banks, rather than funnelling it through member governments,  The deal was seen as a very positive development, especially for Spain and its troubled banking system, and prompted a rally on global stock markets.

While the pace of growth in emerging economies continued to moderate, it remained relatively strong, with China’s economy growing at an estimated rate 8.5% annually (Scotia Global Forecast).  The Chinese central bank cut interest rates in the second quarter to ensure that this growth rate is sustained.  Chine is also currently dealing with a moderate housing correction and may soon take steps to restimulate its economy through monetary policy.

U.S. growth remained positive, but also slowed in the quarter.  Prices for commodities such as oil and copper dropped in response to the slowdown.  The U.S. Federal Reserve, acknowledging the need for continued economic stimulus, extended its “Operation Twist” bond purchase program to the end of the calendar year.  Canada also continued to experience modest economic and employment growth.

The renewed uncertainty once again led investors to seek security in higher-quality government bonds, and yields for 10-year U.S. and Canadian bonds dropped to record lows (As of July 16th the yield on Government of Canada 10-year stood at 1.6%).  Several major equity markets lost ground for the period, including Canada’s, which is heavily weighted toward commodity producers and financial services companies.  The benchmark S&P/TSX Composite Index declined 5.7% for the quarter was down 1.5% for the first six months of this year.

The U.S. equity market remained a bright spot, with the S&P 500 Index declining just 0.8% for the quarter and gaining 9.4% for the year-to-date (in Canadian dollars).  This reflects America’s relative stability and the strength of U.S.-based corporations.  This helps to remind us that, through the funds in which you have invested, you are buying ownership stakes in individual companies – not markets – and despite the gloomy headlines, healthy, profitable and growing companies abound today both in and outside Canada.
The challenges for investors are likely to continue for several months as developed and emerging economies tackle their complex fiscal issues.  Although the global economic recovery continues, capital markets remain sensitive to every piece of news.

For that reason, I believe the best strategy is to take a long-term view, investing with care in a portfolio that is well diversified by asset class, geography and industry sector and which suits your tolerance for risk.  Again, we continue to focus on good quality assets that produce reliable monthly income.
If you have any questions about your portfolio or your overall financial plan, please do not hesitate to contact me at (905) 336-8600. Thank you for your business and I hope you and your family have a safe and happy summer.

Sincerely,

Michael Birbari

The information in this letter is derived from various sources, including CI Investments, Signature Global Advisors, Globe and Mail, National Post, Wall Street Journal, Bloomberg, Bank of Montreal Economics, Trading Economics, and the Big Picture.  Bloomberg is the source of the index information in paragraphs 5 and 6.  This material is provided for general information and is subject to change without further notice.  Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness.  Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.

Winter 2012

The Year Ahead

First of all, I would like to wish all clients a healthy and prosperous 2012.

The report cards from several prominent financial institutions are now in.  The consensus is for global economic activity to be sluggish again this year.  However, most agree…..while economic performance is disjointed and volatile; there will not be a global recession.  This is fantastic news.  However, investors remain cautious and the stock market has reacted as if we actually are in recession.

As the year evolves, I believe that the European crisis will be resolved, but there will be no quick fix.  This could lead to a period of frustratingly lethargic economic activity as Europeans’ rethink the Unions structure and debt holders agree on the level of losses to accept.

On the bright side, China, India and the emerging markets should continue to grow at 6-8%.  This does the heavy lifting, so the weakness in Europe and the U.S. is offset, and the World GDP figure averages close to 3.5-4.0% (Scotiabank Global Forecast).

For much of the developed world the consumer is fragile.  North America’s growth is forecast at 1.8-2% (RBC Global Forecast).  So consumer spending may remain inconsistent.

In Canada with 5-year mortgages now at 2.99%, many bankers and policy makers have warned that the housing market looks overvalued by 10-15%.  They cite low wage gains and a “household debt to income” ratio of 153% as the highest on record (Stats Canada December 13th, 2011). 

Conversely, U.S. housing appears to have bottomed after falling 33% since July 2006 to March 2011 (Case Shiller Home Price Index).  If you are thinking of speculating on Ontario real estate…..don’t.  If you are considering a U.S. “sun belt” area property….hurry up!

Given the debt and sluggish growth in Europe, the global uncertainties and the general deleveraging in the financial system, we are continuing to recommend a portfolio primarily focused on generating attractive high “Income”!

Our favoured areas are corporate bonds, utilities, telecoms, pipelines, commercial REITS, and banks.  The task is to generate cash flow of 4-6% on investment, plus appreciation potential. With 5-year GIC’s at a low of 2.25%, and 10-year Government of Canada Bonds at 2.2%...dividends and cash distributions of 4-6% is an extremely attractive alternative.  We will continue to use stocks, ETFs and selected mutual funds to augment these strategies for 2012.

Fall 2011

Basic Training

In unsettled economic times like these, it’s easy to understand why so many are anxious.  As an investment advisor, our role often consists of “managing” client’s emotional behavior.  We encourage them to focus on the positives, and to not be mesmerized by negative TV and newspaper headlines to the point where they suffer from “paralysis” from analysis.  The end result is that many financial planning “must-do’s” need to be continued, in order to build long term net worth.

The problems of excessive debt in Europe and a stubbornly anemic U.S. housing market may likely persist for another few years.  We are living in a period of deleveraging, high youth unemployment; Spain at 21.5% (Source: Trading Economics) and slower global economic growth; this means that rates of return from the stock markets are likely to be in the high single digits for several years. 

All of us have had to deal with a correction of 20% in stocks and risk aversion since this years’ high in April.  Anxiety is high, and this has served to make stocks unbelievably cheap.  RBC’s Global Economic report states that “…stocks are 30% undervalued…” while Scotiabank’s Global Outlook published September, 2011 forecasts the global GDP at 4.0% for 2012.  In other words no recession, but moderating of economic activity.  

However; economic uncertainty and volatility are chronic conditions of the markets and as such is a reality all investors must learn to cope with.  Instead of being frozen with inaction, let’s focus on some essential money ‘must do’s’ below:

1) Invest a small amount at specific intervals; known as ‘dollar lost averaging.  It is the best technique to time the markets by not ‘timing’ the markets.
2) Continue saving for your retirement; you will still have to accumulate the capital pool to achieve financial independence. 
3) Top up RRSP’s and Tax Free Savings Accounts (TFSA).
4) Place your savings in assets that you can sleep well with for now.
5) Contribute to your children’s or grandchildren’s RESP account.
6) Reduce non-interest deductible loan balances.
7) As a retirement planning specialist, we stress the importance of updating your wills’ and power of attorneys’ to ensure proper succession planning.
8) If necessary, rebalance your investment portfolio with the help of our financial planning team so you have the confidence to work through the volatility.
9) Remember, it is only when people are scared and worried that great opportunities arise.
10) Follow the lead from the great investing role models such as Warren Buffet, George Soros, and John Templeton.

So, as you can see, essential financial and investment planning never takes a breather!  There is much work to be done even during economic crisis.  It is during these times that we stress the fundamentals and stick to a disciplined plan.  We don’t want to be that deer caught in the headlight of an oncoming car!

This newsletter is solely the work of Mike Birbari for the private information of his clients. Although the author is a registered Investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company, this is not an official publication of DWM Securities Inc. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, DWM Securities Inc.