February 2009

Manulife Financial Corp has lost its triple AAA credit rating. MFC had its credit rating downgraded slightly to AA - by S&P on February 24 2009. Standard and Poors said the outlook for Manulife was “stable”.

According to Rob Carrick, writing in the Report on Business on February 24 2009 'Advisers talk tough on fund fees' “Fees [on money market mutual funds] can be significantly higher than returns.” IMAGINE! So where do your put your money when interest rates are low? That was covered briefly on page two of my February report. the answer is just one word. When and whether you have the gutts to do it are the questions.

7.0% vs 4.5%: Over the 20 years ending January 2009, the TSX index grew 4.5% a year. If your include dividends, the total return of the TSX was 7.0%. Over 20 years, that's a huge difference. Dividends do matter. By the way, over this period, of the thousands of mutual funds, only 13 beat funds the index. The winner has a MER of 4.09% and its return was not double digit. So much for professional management, eh! (G&M Feb 21 2009 S.Won)

BASIC STOCK ANALYSIS: Suppose you see a stock recommended someplace or that you notice a stock with a high dividend growth rate (RCI.B's dividend is up 16% in 2009 from .25 to .29). What do you do? I'd check the P/E first off. You want to know how expensive the stock is. If the P/E is high, forget it. (RCI.B's p/e is 19. Too high. Forget it.) Average P/E of my list is 9, as of February 21 2009. If is stock is not over valued by P/E, the next step is to check it's dividend growth record. If the stock does not pay a dividend, forget it. Next step if it's a dividend stock, another valuation test. The Graham number, for instance or yield in comparison to historic yield. My neighbour, Dr. Peter Kirkham would not buy a stock if it above trend. If you buy an expensive stock one that is not value priced, your returns, most likely, will be poor.

Last February (2008) my front page headline was “Things are not ridiculously cheap”. I went on to quote Warren Buffett, George Soros, James Montier, John Maldin, Stephen Jarislowsky, Bill Gross and Jeremy Grantham about the condition of the market. They were correct, pyramids would be crumbling. By September 2008, Lehman Bros, among other, was gone. This page Feb08front is available under Archives as a PDF file. (I can't get the link from here to work)

Ten years ago, in my February 1999 list, TransCanada was on top of our list will a yield of 5.3%, a dividend of $1.12 and a price of $21. In my February 2009 list, a decade later, TransCanada is on the bottom of the list (expensive) with a yield of 4.30%, a price of $33.50 and a dividend of $1.44. In between, just after TRP's dividend reduction in early 2000 (down from $1.12 to .80) I bought my TransCanada for a few cents over $10. I still hold TransCanada (TRP is one of four stock in my portfolio. I'm been waiting years to buy a bank. Patience is needed with dividend growth investing.) In spite of what happened to the markets in 2008, my TRP price is still triple what I bought it for and my yield is over 14% (1.44/10.08). Me sell? No. Me buy bonds? Never. Dividend growth investing works even when the market throws its worst at us.*

“Waiting for the bubble to burst” was my from page headline of February 1999 Connolly Report issue (see below the horizontal line on this page). It did! A year later. 1998 was the nadir of yields in the bank stocks, and the start, in my view, of the great bear market. (1998 was the year LTCM, the fancy hedge fund failed. In retrospect, it was a sign) The banks were on the bottom of my list in 1998(RY the lowest at 2.3%), very overvalued (You'll bne able to see this in the two long term yield charts (back to 1985) I have in my February report. Three banks now have yields higher than any since 1985, three have not yet passed previous high yields. I'll select one of each). As I write this in February 2009, the banks are on top of the list (RY's yield is 6.71%, BMO is the highest and priced, by the market, for a dividend reduction). Ten years ago, my list was in order of yield: now it's in order of yield difference from a stock's own average. That seems to work better.

Twenty years ago, in February 1989, the Connolly Report featured bond funds on the front page and my FLIGHTS plan, my way to analyze any investment proposal. (I must outline and detail that ‘magnificent seven' FLIGHTS list again. FLIGHTS is an acronym I created to help my students remember the seven characteristics of any investment: fees, liquidity, income, growth, health, taxes and security. Look for that Royal York hotel speech Tom) More on FLIGHTS below on this page. The List in February 1989: BMO was on top with a yield of 7.5%. Intercity Gas was on the bottom at 3.2%. If you can't explain why you lose your guarantee of getting you money back from a bond when it's in a bond fund, you should not buy a bond fund.

* In November 2006, John Heinzl asked me if the dividend growth strategy works so well, why don't more people follow it. Heinzl, who writes for the Report on Business, asks probing questions which is why his columns are so good. After I got off the telephone and I thought about it, I e-mailed him my list of reasons. People don't know it works or understand how dividend growth builds wealth, most don't have the discipline needed to execute the strategy, they can't wait for the results (it takes years for yields to build), yields start low, story stocks lead them astray, the method is dull and boring, they fear doing it on their own, they feel they need help, (a broker even, imagine), they don't believe they can do better.

Waiting for the bubble to burst February 1999 Volume 19 No.1 page 428

Since the trough of the recession in March 1991, America's economy has entered into its 95th month of uninterrupted growth. When will it end? As they so often do, The Economist, in their December 5th issue, aptly summarized it this way. (I love reading the Economist: they write so beautifully.)

(Note added Feb 09. I taught a course in Business Communications for a few years. If I was still doing it, I would dictate the first paragraph or so of this excert from The Economist, and discuss the structure and use of words. It's beautiful writing…a work of art. He or she could have started off: Expansions end three ways. But instead, well read and enjoy. And not only is it terrific writing, The Economist was correct. In 1999 they said a financial crash when a speculative bubble bursts. The Economist is expensive, but worth every cent. And it's not American. We get too much of our material from south of the border. We need a broader perspective.)

“Expansions tend to succumb to one of three assailants. The most common in recent decades is an overheating economy with rising inflation. This forces the Federal Reserve to raise interest rates, which chokes off growth. A second common culprit is an external shock, such as the sharp rise in oil prices, as in the mid-1970's. But inflation, interest rates, and the price of oil are all now low or falling. The usual suspects are not in evidence.

This leaves the third: a financial crash when a speculative bubble bursts. Several unsustainable imbalances are evident today in America: a negative savings rate as consumers shop till they drop, and an unusually high level of investment, which has been growing at its fastest rate since the 1920s. Both have been fuelled by cheap credit and big gains in equity prices. It is possible that these excesses could unwind gently, causing a slowdown rather than a slump. But this would require a lot of luck, especially against a background of falling profits. If share prices tumble, consumer spending and investment might fall.”

Also February 1999 Connolly Report (page 425): “WAITING: With the flat yield curve, there is very little to be lost waiting, with cash in short term certificates, for better stock prices. Stretching for higher yields usually involves more risk. I wish to be positioned for some buying when the bubble bursts. Hopefully, a bank or a telco ( BCT + T = BCTelus) will be cheaper then. ” —-

from April 2008 Connolly Report - more about FLIGHTS

The Basics of Investing: Because UBS AG, a Swiss bank, lost $38 billion betting on American mortgaged-backed securities, The Swiss Federal Banking Commission demanded an internal investigation. The bank has released a summary of their 400 page report. There are lessons in the report for us too. The main explanation for the bank's woes, according to The Economist (‘Wealth mismanagement' April 26 2008) “was the investment arm's preoccupation with growth”. The push for growth, emphasised revenue at the expense of risk. UBS miscalculated risk and “liquidity was simply assumed”. There was no effort to analyse the quality of the underlying assets. They believed “that the bank's hedges were foolproof”. And the industry touts professional management. Pshaw! FLIGHTS. When I used to teach this material, a few years after the release of the Magnificent Seven film, I called my list of seven basic investment characteristics The Magnificent Seven. My students still had trouble remembering them. One summer after visiting Baddeck, I thought of the acronym FLIGHTS and subsequently instructed them to do a FLIGHTS plan before investing. I often wonder if they do. FLIGHTS stands for: fees (how much will it cost me), liquidity (can I get out), income (does it provide any), growth, health (worry-free), taxes (less on Canadian dividends) and security (get your money back). With all their fancy formulae, the UBS professionals neglected the basics of investing

february_2009.txt · Last modified: 2009/05/11 00:48 by tom
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