2012

MicroSoft is updated and rated Buy at $26.55. It has a few weak quarters but the next couple of quarters could be quite strong with the upgrade cycle of Windows * and other product upgrades. I own some and may add to my position.

RioCan preferred shares are updated and rated Weak Sell / Hold. The company has the right to redeem these at $25 in March 2016 and for that reason we don’t think this is a good investment.

RioCan Real Estate Investment Trust is updated and rated (lower) Buy at $27.52. The biggest risk here is probably a rise in interest rates. The real estate is marked to market value. That creates huge volatility in the GAAP earnings. The units could fall in price if retail real estate prices fall. The price to boo ratio of 1.31 seems high given that the real estate is marked to market. However the company has been successful at growing over the years. I have no plans to buy but it may be a reasonable investment for the yield.

U.S. markets were down over 1% at times today but ultimately closed down only slightly.

The outcome of this fiscal cliff episode remains quite uncertain. I perhaps should have sold some stocks today to reduce my risk. But I decided to just let things ride. If stocks decline I will be looking to buy.

Alimentation Couche-Tard is updated and rated Buy at $48.19. This Canadian headquartered company operates mostly gas stations with convenience stores. Major banners include Couche-Tard, Macs and Circle-k and the recently purchased Sat Oil operations in Europe. It’s a surprisingly large and profitable operation. It is extremely well managed. The stock is up 52% in 2012. We had rated it (lower) Strong Buy at the start of 2012.

U.S. markets were open today. The Dow fell 0.2%. So far the market is basically brushing off fears of the possible tax increases and spending comes due to come into effect on January 1 unelss lawmakers make a last minute deal to avert that.

Bank of America was up 2.6%.

I sold my small position in Research in Motion today. It was up 11.4% in U.S. trading.

I considered selling other stocks just to lower my risk and to take profits in the face of this fiscal cliff issue. But I could not seem to identify anything I wanted to sell (even partially) other than RIM.

Canadian National Railway Company is updated and rated (lower) Buy at $90.48. I like CN as a company and I think it will continue to grow. I would not mind owning some. But it does not seem to be a bargain. Also I have concerns about its pension expenses.

Canadian Western Bank Preferred shares are updated and rated Sell at $26.87. This preferred share is included because 1. When it was first added to this Site, near the market lows in 2009, it traded at $21.80 and was a good investment. 2. Looking at how the probable redemption of these shares at $25 in April 2014 affects the investment is instructive and may be considered as a reminder that a nominal yield that looks good does not always tell the full story.

Canadian Western Bank is updated and rated Buy at $28.80.

Melcor Developments is updated and rated (lower) Strong Buy at $15.60. It’s my third largest holding.

FirstSerivce preferred is updated and rated Weak Buy at U.S. $25.41 to yield 6.9%. I could rate this higher based on the yield. But the company has the right to buy these back at $25 and so i see really no room for price appreciation. But the 6.9% yield seems attractive. On a GAAP basis the company does not appear to be all that strong financially, but that be more to do with conservative accounting rules than anything. I would be comfortable owning these.

FirstService Inc. is updated and rated Weak Buy at U.S. $28.20 or Canadian $28.10. It’s value ratios do not look very strong. But it is very well managed and appears to be well positioned for continued growth. Despite the low rating on this stock I may buy shares in this. I have owned it in the past but not very recently.

Berkshire Hathaway is updated and rated Buy at $89.83. It does not look like a real bargain based on earnings. But the fact that Buffett is buying shares for Berkshire up to 120% of book value (it’s currently at 121%) gives a lot of confidence. The 120% of book value is likely to become a floor price. I suspect it will report strong earnings in Q4 although the impact of Super Storm Sandy is unknown. I may add to my position in this company.

Dollarama is updated and rated (lower) Buy at $58. Dollarama is a testament to the impact of good management. Competitors could have done what Dollarama did but simply did not. With a P/E ratio of 21 it is no obvious bargain. But if it can continue to grow at the rates at all similar to those it has been posting then may be a reasonable investment. I would be inclined to nibble at it rather than buy it aggressively.

Today was a negative day on the markets and for our stock picks. In particular RIM was down 22%. Bank of America was down 2.0%, Wells Fargo was down 1.7%, Toll Brothers down 2.0%. Stantec was down 2.9% erasing most of its rather strange 4.1% increase from the prior day. The falling Canadian dollar cushioned the blow in my own portfolio somewhat but I was still down 0.7% overall. It was still quite a strong week.

Research in Motion is updated and rated highly speculative Weak Sell at $10.91.

It was interesting that the stock at first rose in after hours trading when it released earnings after the close on Thursday. But then fell hard as it was realized that it would begin discounting its monthly subscription fees to some customers and that these would not even apply to some customers on the Blackberry 10. That seemed to catch the market off guard. But as I did this update I noticed that our report from last June had stated at the end of our Outlook cell that “The Q1 report indicated there is pressure to reduce the subscription charges. That is ominous in itself.” So perhaps this should not have been such a big surprise.

This company and stock has of course been very volatile. After plummeting for about two years it did manage to rise over 100% from its lows of $6.22 reached in September.

I considered removing this stock from the list. The reason for that is that it is highly unpredictable. My methods are simply not suited to extremely speculative companies that have negative earnings.

I decided to keep the stock on the list as a highly speculative weak sell. That way it won’t affect my performance statistics since I measure performance based on the Buys and Sells and not the neutral ratings of weak sell and weak buy.

Warren Buffett has always said that he looks at hundreds of stocks and then ignores almost all of them except for a few that jump out at him as obvious bargains. He has been extraordinarily disciplined in simply ignoring companies that he finds too difficult to predict. That has famously included most technology companies. When RIM had positive trailing earnings it looked like a bargain based on its earnings. But of course it has been well known for some time that its future earnings and sales were very uncertain. Perhaps I should never have included it in the list here. I did rate it highly speculative.

When I originally started this web site in 1999, I was willing to put a rating on any company. However I learned fairly quickly that my methods and knowledge were simply not suited to a number of industries that were highly unpredictable and often featured negative earnings. Those included most of the entire resource space (mining, oil and gas, forestry, agricultural commodities). It also included all early stage research companies. And most penny stocks. I have largely excluded all those from this site over the years.

My goal is to make money and to identify winners to help you make money (but with no guarantees and at your own risk). If I can do that with the sub-set of companies for which my methods have a better chance of working, then that is fine. The experience with RIM is another reminder for me to stick with more predictable companies. No company is completely predictable. But some are simply unpredictable, at least for me.

It was a good day for our stocks picks. In particular Bank of America was up 2.9% to $11.52. And Stantec was up 4.1%.

Tomorrow may be a down day as hopes for solving the fiscal cliff apparently took a turn for the worse after the close today. It seems to me that Obama is in a strong position having just been re-elected and having been very “presidential” in the school shooting incident. The Republicans have already compromised on their no tax increase stance and I am hopeful that they will compromise a bit more and accept the next position that Obama offers on this deal.

Stock futures as of just after 11pm eastern are suggesting the Dow will drop some 200 points.

After two very strong days our stock picks slipped a little today. The Dow was down 0.7% as hopes for an agreement on tax and spending changes (to avoid the so-called fiscal cliff) start to fade. Toronto was up 0.6%.

Markets may slip further unless a deal if reached this week which seems unlikely. More likely is some kind of deal on or about December 31. So, it could be another “interesting” week or so yet in the markets.

GM’s decision to move some production out of Canada should be considered sobering in terms of the competitiveness of Ontario as a manufacturing center. Trying to subsidize companies to stay in Canada is no solution. Better news was GM’s decision to buy back a huge amount of shares from the government. Apparently GM believes its share price is attractive.

I was at a large shopping center tonight. The discounting seemed vicious and absurd. What should customers think when prices are discounted by 40%, 50% and 60%? To my mind it completely erodes trust and cheapens the products. Why should anyone pay full price at any time at these stores?

Clothing retail in particular seems to be a vicious business. I don’t predict a strong future for Sears Canada or the Bay. Thinking of Canadian Tire, I don’t think they are as subject to that kind of discounting on most of their products. I worry somewhat about their Mark’s chain. What was the wisdom of getting into such an ultra-competitive line of business. Their sporting goods stores are probably less prone to discounting. I know I have never seen too many real bargains when it comes to hockey equipment for my son.

To my mind the better areas in clothing retail are the higher priced brands which tend not to have to discount heavily. Also things like the more expensive skates and bikes. They don’t have to discount as much. Dollarama does well with its strategy (not that I like the stock). Costco and Walmart will also do okay as low-cost and therefore low-price leaders. It’s the vast middle area that is very tough. Trying to compete to sell non-luxury brand items when you don’t have a cost advantage as a retailer is tough.

It was another very strong day for many of our stock picks. Bank of America up 3.3%, Wells Fargo up 1.7%. Stantec up 2.4%, Canadian Western Bank up 2.0% Looking at the overall markets the Dow Jones was up 0.9% and Toronto was up 0.4%.

I thought about trimming some positions today but did not.

Markets were up largely on hopes for a solution to the so-called fiscal cliff in the U.S.. With time running out before the Christmas break, it is certainly possible that hopes for a compromise on that will fade and if so the market could easily retrace its recent up-steps and more. Such is life is life in the markets.

Well, I was pleasantly surprised at some of the gains today. Wells Fargo up 3.7%. Bank of America up 4.0% and Toll Brothers up 4.4%. I understand that this was mostly due to hopes for a deal on the fiscal cliff. Therefore the gains could evaporate if the deal collapses. And most of the upside of a deal may be priced in now. Word tonight is that Obama will move off his position to increase taxes on incomes over $250,000 and instead go to $400,000. The republicans have said it ought to be a million. Perhaps we will see a deal somewhere around $500,000.

If markets are up again tomorrow, then perhaps i will look to trim a few of my positions. Not that I think they are getting too high but it just might be prudent to build up a bit of cash.

Buffett always says that if we are still in the accumulation phase of investing (as opposed to retired and drawing down the portfolio), then we should rejoice at market declines rather than increases. I can see his logic and certainly agree with it for younger investors. (Most investors under 40 would certainly benefit from lower stock prices today since that leaves more room for gains in future and gives them a chance to buy at lower prices). If Buffett owns 10% of Coke he focuses on the fact that he owns 10% of Coke rather than focusing on the value of the shares. He has his own idea of the value of Coke and does not rely on the stock market to tell him. If Coke goes much lower than intrinsic value he would tend to buy more. If it went much higher than his idea of its true value he would tend to think about selling. (Although in his case there are special barriers to selling, if word got out that he was selling Coke its shares would plummet, so he is not as free to sell as are you and I).

I have not reached Buffett’s level of zen about such matters and so I still like to see the stocks I own rise. Also of course, higher stock prices help my performance stats. The ideal scenario for me is to see my stocks and stock picks rise while the overall market is down or flat. That may sound selfish but the goal of a stock picker is to out-distance the index. I am confident that the index itself will do well over time, but declines in the index provide opportunities.

Canadian Western bank was down 2.2%. I took advantage of that and bought additional shares in it.

I was at “The Bay” tonight. Foolishly it had largely dropped the use of its iconic and historic “Hudson’s Bay” name years ago. More recently and more so in future it is going back to that venerable brand name. Walking through the Bay I was attracted by advertisements of 40% off several brands of watches for today only. In fact the store was replete with 40% and 50% off signs. This makes little sense to me. The message it sends to me is, never pay the regular retail price at the Bay since they will soon have a sale. Also the message it sends to me is that the regular markups must be in the order of 100% if they can afford to go 40 and 50% off. And that is not to clear surplus merchandise. The is to sell their mainline products. I presume they are still making a profit at 40% and 50% off.

Much of the Canadian retail scene is addicted to sales. And they work. But we have long since reached the point I think when all these sales are counter productive. I would rather shop at Costco where I know the mark up is only about 15% maximum and I know that if I buy today, I don’t have to worry that the item will be 40% off tomorrow.

I think The Bay and Sears (in Canada) should be very worried about Target.

Constellation Software is updated and rated Buy. This company has done very well. This past Spring it completed a process that was designed to boost its share price by putting the company up for sale (that was later canceled but it succeeded in pushing up the share price). It is an excellent company that should continue to do well.

The market was generally down somewhat today. This is not surprising and probably represents a sort of exhalation after the build up to the FED move yesterday. I should have few more updates for our stocks in the table above by Sunday.

Notable stock price movements today included, Berkshire up 2.3% (about which, more below). Research in Motion up 5.8%. Toll Brothers up 3.9%. This made for a good day for our stock picks even with Wal-Mart down 2.8%.

The reason Berkshire Hathaway rose is that it announced it would raise the price at which it would buy back shares to a maximum of 120% of book value. That puts the buyback ceiling, for now at $89.37 for the B shares and $134,062 for the A shares (using the $111,718 book value reported by CNBC). Basically the price rose to about that buy-back ceiling level today. I believe that places a floor under the actual stock price at about that level since as soon as it falls below that Berkshire is likely to be buying.

All indications are that Buffett believes Berkshire is worth something more than this 120% of book value.

As far as whether we should buy Berkshire, the fact that Buffett is buying it back for Berkshire ought to be sufficient evidence that it will likely be a good investment.

Apparently what triggered today’s announcement was that an estate of a long-time Berkshire investor had 9,200 A shares for sale (which Berkshire bought for some $1.205 billion). I would suspect that these share belonged to perhaps even one of the original partners from back in late 50’s or 60’s who would have received Berkshire shares on the windup of the partnership in 1969. Or it was someone who obviously bought at around that time. I suspect we will hear about it in the annual letter at the end of February or he may talk about it sooner than that.

And I suspect that this estate had the paper share certificates. Buffett loves his history, especially his own history and Berkshire’s history and I think would have been attracted to the idea of buying back these old paper share certificates. Most shares these days exist only electronically and there is little romance in that. Buffett’s own Berkshire A share certificates sit in a safe deposit box in Omaha. Which, by the way maybe he should not have revealed since that would probably make it by far the most valuable safe deposit box in the world. (Although I suspect a thief would not have much luck cashing those in and maybe it would require Buffett’s signature, I don’t know how that works).

Many investors and analysts pretty much ignore book value. And truly in many cases it is a useless indicator of value. And in virtually no case can book value be counted on alone to indicate the value of shares. But if the assets of a company are conservatively stated on the balance sheet and if the assets are being used productively in and producing a reasonable return on equity and if there are no serious risks in play (and a risk could include excessive leverage) then in those cases book value can be a useful indicator of value.

Recently I have been talking about Canadian Tire trading at 1.15 to 1.20 times book value. Given that its assets are indeed conservatively stated (in particular real estate is at historic cost, not market value) and it is reasonably profitable and despite the threat of Target its not exactly clear that its profits are about to be decimated, then it just seems under-valued at that small premium to book value.

In other news we had the FED as expected announcing it will be printing money to continue buy bonds and mortgage backed securities. I think this is supposed to stimulate the economy by pushing down or at least holding down interest rates. (Which does seem odd given that they are already at record lows). The market reacted by dropping a bit because this move was already totally expected and apparently because of some comments about the fiscal cliff. I mention this because it was in the news but I don’t let FED moves decide my investments. I try to follow Buffett’s advice of buying well managed good companies at good prices.

Canadian Tire had a good day and rose 3.3% to $69.70. This puts it 6.8% above its closing price from December 3. Not spectacular ,but not bad. While there was always the risk that it could go lower, this stock certainly looked attractive at $66 and $67 etc. Most people I talk to are certainly not excited by this stock or this company. It’s no Apple. But what it is is a nicely profitable company that trades at an attractive looking price.

Apparently Wednesday’s market mover may be an announcement form the Federal Reserve Bank that i9t will buy more bonds. I will admit to the doomers that this sounds a bit scary. They are literally creating money out of thin air to buy these. They keep interest rates down artificially by buying up huge amounts of bonds. What I don’t get is why others buyers like pension funds and banks and insurance companies and investment funds don’t go on strike and stop buying or holding long term bonds. But they find it hard to stop. They have continuously made capital gains on bonds for years. So they buy more even though they should know the capital gains will ultimately reverse even if interest rates stay low since the bonds will mature at par. Many insurance companies and banks are somewhat forced to hold bonds by archaic regulations that consider government bonds to be risk free (apparently ignoring the certain capital losses on any government bond that trades above par.).

It seems crazy but more Fed bond buying is likely to be treated as good news by the stock market.

Nothing too exciting happened with our stock picks today.

Toll Brothers was down 1.4% and Canadian Tire was up 1.4%.

Bank of America is updated and rated Speculative (higher) Buy at $10.64. This stock is up 32% since we officially added it to this site last March 11 rated Speculative Strong Buy at $8.05. It is also up 48% since we updated it (and noted that I had added to my position in it) at the same rating at a price of $7.17 on July 27. I had first mentioned in the daily notes back in July 26 and August 2, 2011 that I was buying Bank of America. That was at about $9.50. As I have said before, I bought too much on that first buy. That prevented me from taking full advantage of the big price drop through to the end of 2011. Still this investment is now “in the black” and I ultimately did almost double my position in it with both buys below that initial $9.50. This investment is now well “in the black” and hopefully with more up-side to come. Recently I was inclined to trim my position in this stock. But right now, after this update, I am more inclined to add modestly to it. However, I am already heavily exposed to U.S. bank shares and I should perhaps avoid getting too greedy.

Many of you will have read the words of various doomers over the past couple of years that claimed “all the big U.S. banks are actually bankrupt on a mark to market basis” and “the U.S. is bankrupt as well”. And paper currency is doomed. And the “U.S. house prices have not bottomed yet” (beware the shadow inventory of foreclosed houses etc). Most of the doomer comments were from people who had no understanding of these matters but yes there are some highly educated people who agree with the doomers. Maybe the doomers will ultimately be proven correct. But I doubt it. And maybe the world will end this month as the Myan Calendar runs out. Whatever, the end of days has been continuously predicted since the beginning of days. It’s not very logical to invest based on doomsday scenarios.

Banks will likely continue to be volatile investments. Those who can’t handle investing in shares that might well drop significantly in price should stay clear of stocks or educate themselves on the risk and reward tradeoffs involved. Personally, I have accepted and lived with significant volatility over the years and it has been financially rewarding. In fact price drops have often been to my advantage as I added to my positions at lower prices. Of course, that only works out if the prices eventually recover and grow, which, more often than not, but not always, they have done.

Toll Brothers is updated and rated Speculative Buy at $30.77. It is speculative because its earnings need to grow a lot to justify its share price. I have about 4.5% of my portfolio invested in Toll Brothers. I am not that keen to buy more but I would consider doing so if it dips to about $28. This stock is up 51% in 2012. We had rated it Speculative Buy at $20.42 at the start of 2012.

Liquor Stores N.A is updated and rated (lower) Buy at $18.40. This company yields 5.9%. It has done well , rising 8% since we added to this site last April 10 rated Buy at $17.01. And this is in addition to the dividend. It seems like an okay investment at this time. But it is not one that I particularly plan to buy.

Here are some additional thoughts on Canadian Tire.

Consider how it has done since way back in February 2000 when I first added it to this Site.

The following Table provides a comparison:

Back in February 2000, we rated this stock a Strong Buy. Since then the stock has almost tripled, rising 191%. That’s a gain of 8.7% per year for a total return of around 10.5% per year counting the dividend. (So much for the tired and tiring mantra that “no one has made any money in stocks since the year 2000”).

Today, our rating is (lower) Strong Buy at $69.81. Considering the price is now lower at $66.59, that is pretty close to the same Strong Buy rating we had in February 2000.

The reason the rating is the same is that many of the ratios are about the same. The adjusted ROE is not quite as high at 11.6%, the P/E is very similar. The price to book is more attractive today. The yield available on a 10-year bond is dramatically lower today.

Canadian Tire has done a very good job of growing its business over the past 13 years.

These figures add to my confidence that Canadian Tire is a good investment.

The market however appears to see danger ahead for Canadian Tire. The market is worried about the impact of Target moving into Canada. There are simply never any guarantees. But Canadian Tire simply looks like it is priced below its intrinsic value.

Perhaps the biggest news in the Canadian markets today was Loblaws Companies plan to spin off its real estate into a separate Real Estate Investment Trust. Loblaw’s shares closed almost 14% higher on the news. Canadian Tire rose 2.3% today, probably because it is also in a position to sell off real estate in some manner.

Costco fell $7.48 today but that was simply because yesterday was the last day to buy and be a shareholder of record by Monday December 10. Those who buy today will not get the special $7.00 dividend.

Markets were modestly higher today.

The strongest performers included Bank of America up 5.7%, Walgreen up 3.8% and Stantec up 1.8%. On the other hand Toll Brothers was down 3.9%.

I noticed that Canadian Pacific did not release any estimate of its “charge” for all the layoffs. It will be a big number but perhaps the market has already anticipated that.

I added 25% to my Canadian Western Bank position today.

Canadian Western Bank fell 3.5% to $28.00 today after announcing good but not-quite-as-good-as-expected earnings. I will consider adding to my position at this price.

Toll Brothers was out with good earnings but the stock price fell 1.8%. Keep in mind it has a very high P/E and its earnings need to rise a lot to justify the price. (In other words the stock has for a long time already been pricing in a lot more earnings).

There was another report from the U.S. showing that existing house prices have risen since last year. House prices are too low in the U.S. and in my opinion there are few safer bets than that house prices in the U.S. will continue to rise over the next several years, recession or no.

The news that CP rail intends to chop almost a quarter of its workforce is shocking and interesting. It goes to show that when management really wants to, big changes can be made. I think we can certainly conclude that Hunter Harrison and company are VERY serious about raising profits here. I don’t think I would want to be a long-time employee there because evidently the culture change there is radical. I don’t know anything about the valuation of the stock but I certainly would not bet against the stock.

Canadian Tire continued to sink today. Down 1% to $65.25. This is (at least temporarily) unfortunate for those of us that own it but may prove to be an opportunity for buyers.

In my experience it is unusual for a large cap company to trade down near book value (1.15 times in this case) at a time when it is making good earnings (over 11% in this case). Apparently “the market” expects its earnings to drop quite a bit when Target comes into the market.

In order to beat the market one has to sometimes go against the market. I believe that Canadian Tire which has been thriving for 90 years now is likely to continue to increase its earnings over time and that it is therefore a good investment at 1.15 times book value and currently earning about 11% on book.

If the price stays this low then I believe that it could be become a target for a take-over offer, despite its multiple voting shares. I am starting to wish that Martha Billes would see if Warren Buffett might be interested. How about it Warren? come in and offer $85 or $90 per share and I will sell to you. Problem is it is not clear that Canadian Tire has the top notch management in place that Buffett would insist on.

Toll Brothers was up 1.8%. Markets overall fell about 0.5%

Greece is buying back some bonds at some 30 cents on the dollar. This is exactly what it should do. Whenever any company or country can buy backs its debt at way less than par value, that seems like a good idea. Another good idea for Greece would be to rally its citizens and expatriate citizens to buy the bonds as a matter of national pride. If foreigners are the enemy for charging high interest rates then Greece should fire up its citizens and expatriate citizens to buy the bonds from these bad foreigners. But Greece itself should buy all it can. Who would not want to extinguish debt at 30 cents or 40 cents on the dollar?

In other news Spain was requesting a bail out. I recommend the same strategy for them. Buy back their own bonds at a discount. And encourage their richer citizens to do the same (though the latter does not extinguish the debt but it might push interest rates down).

Anyhow, I don’t pretend to understand much about the European debt crisis. But I doubt it will all much impact on the long term value of Canadian Tire or most other Canadian companies.

I mentioned just below the Costco special dividend. It turns out this will be funded by debt. So taht means it won’t impede the growth plans of the Company. I had mentioned in the notes on January 15, 2012 (and possibly on other dates as well) that “Costco could probably increase its profits at will by raising prices (since its markups are so low) or by using more debt financing“. Well, this increased debt financing is exactly what they are doing. Apparently taking the debt to equity ratio from 11% to a still relatively low 40%. However, I still think that the fact that the company is paying a special dividend rather than buying back shares may indicate that they do not view the shares as undervalued. Or possibly they just view this special dividend as the fairest thing to do.

There are theories that suggest that a company cannot ever increase its value simply by adding debt, much less by simply paying OUT cash to shareholders (paying out cash lowers book value per share). The theory suggests that risks rise with debt to offset the higher earnings per share. In this case the market is suggesting the theory is wrong.

Boston Pizza Royalties Income Trust is updated and rate (lower) Buy at $19.05. I own some. I think Q4 could be weak given the “tough comparable” from Q4 last year. Also the lack of NHL hockey could harm sales. I may possible see some or even possibly all of my shares at $19 or higher and then hope to buy back at a lower price if the Q4 report sends the share price down in February. Or I may just hang onto what I have. I am not looking to add to my position unless it falls perhaps two dollars or so.

With the Dow down about 100 points at this moment, I would be inclined to consider buying as opposed to feeling at all panicky. Sure, the market may continue to fall and for that reason I am not in any great rush to grab bargains, but overall buying on dips makes more sense to me than the opposite.

U.S. housing prices continue to recover which is a definite positive for the markets.

Canadian Tire in particular continues to look attractive to me with a P/E ratio around 11 and especially the price to book ratio around 1.2. There are ways that Canadian Tire could “release” value if it wanted to by selling off its land and buildings to REITs and leasing them back or by selling its huge credit card operations. Its own shares would be a good investment for the company and it could do a major share buy back. On the other hand it may do none of that and maybe it is is going to suffer from added competition. I happen to think there is value there, but certainly no guarantees.

This morning I see they have announced they are buying Pro-hockey life for $85 million for 23 stores.

I’m a bit concerned that they don’t do some share buy backs instead of just acquisitions, but overall this is small acquisition and is probably a good move.

I’ll show my confidence by grabbing a few more shares today.

The Dow ended the day up 107 points or 0.8% but had been down about 100 points earlier in the day. Toronto ended the day up 0.2%.

Costco announced a special $7 dividend and rose 6% today. It is truly a great company. But it never seems to look cheap. Investors should perhaps consider why Costco is paying out the cash this way instead of buying back more of its own shares. And the reason could well be that the company considers the shares to be over-priced. With Charlie Munger on its Board I would think it would have bought more of the stock back if it thought it was any kind of bargain. So investors may be taking the the wrong message here. Another consideration for investors to ponder ist ath special dividend to reduce cash might indicate that growth will be slower. Then again the press release states that the share buy backs are ongoing… but this special dividend appears to be 10 times higher than the annual share buy backs.

Visa Inc. is updated and rated Buy at $147.29. This stock is up 45% this year. It was not on our list at the start of the year. The latest update in 2011 had been on May 6, 2011 (lower) Strong Buy at $79.41. It got added back to our list on March 28, 2012 at $119.35 and rated Buy at that time. It is up 23% since then.

With all these increases I was rather expecting that our analysis at this time would show it to be no better than a Hold. But as its earnings have risen we can justify a higher price. The trailing P./E is high at 24. But the P/E based on the next fiscal year earnings is more reasonable at 20. As we have perhaps seen in its earnings performance a company like this that has almost monopoly characteristics has what Buffett calls “wonderful economics”. Therefore it cab justify higher P/E than companies that face much stronger competition.

So it looks like this can be justified as a Buy. At the same time I would not load up on it. It may be a good stock to pick up on dips. The fact is that I sold this stock too early at much lower prices. Because of that I face certain emotional barriers to buying it at this higher price and so I have no plans to buy but i would reconsider on a significant dip. A reasonable strategy might be to take a small position and to hope for a dip to add to that.

Many times over the past couple of years I have remarked about the monopoly-like characteristics of this company joking when it rose that it’s hard to keep a good (largely unregulated as to price) monopoly down. It could face further price regulation in future which is another reason I would not go over board on it at this price.

And so begins another week in the market as the year rushes to a close now…

Dow down 0.3%, Toronto down 0.2%

Our stocks picks appear to be down a bit more than that, notably Stantec down 2.1% and Shaw down 1.8% and it seems almost everything on our list was down.

But tomorrow will be a new day and perhaps a better day. Apparently Greece has some kind of new debt deal (yawn).

Warren Buffett had an op-editorial piece in the New York times today. This was about asking he Us government to cut spending and to raise some taxes, especially on the rich and to enact the higher taxes on the rich, right now. It’s wonderfully written. Withering logic really. Many of the other members of the Fortune 400 are going to hate this.

See the editorial here:

http://www.nytimes.com/2012/11/26/opinion/buffett-a-minimum-tax-for-the-wealthy.html?smid=pl-share&_r=0http://www.nytimes.com

Reading the comments below the editorial is a bit scary. Most of those speaking against Buffett appear to have mis-read the editorial. A few others fall to the old advise for Buffett to just send in extra taxes if he wants to. Or complaints that Berkshire sometimes (horrors) tries to minimize its own taxes. Of course it does and has a fiduciary duty to shareholders to take reasonable and always lawful actions to minimise its income taxes. No one ever mentions though that almost all insurance companies have re-insurance subsidiaries in tax havens where they transfer most of their profits to. Berkshire does not do that and in fact its overall tax rate is pretty hefty.

Buffett is trying to solve an important problem here. Dopey suggestions for billionaires to just mail in some extra money don’t cut it.

Quite honestly whenever I frequent areas where people post comments on line it is very frightening. Either most people are bitter anti-free market types or those people are simply over-represented in the community of people who post comments on line. I suspect it is the later. On-line posting is a wonderful invention for the lunatic fringe of society. And if you notice about 99% of people who post online tend to use screen names. (I suppose they would say they would be crazy not to, but some are definitely crazy either way).

And in case the Buffett editorial is not excitement enough, we got news of Mark Carney moving to become governor of the Bank of England and Toronto’s mayor kicked out of office. Never a dull moment it seems.

I have updated my personal portfolio composition. I find that tracking my portfolio composition and including the value ratios is quite useful for me. And unlike most stock pickers I am willing to share that information. You know not only what I say, but what I do.

It’s always hard to say what the markets will do in the short term. I would be quite satisfied to end the year as things stand right now since I am up 22% for the year and since our Buys and Strong Buys are well ahead of the TSX market index.

Today’s star performer was, once again, Research in Motion. Up 17% to an even $12.00. It started this year at $14.50, so it is still down 17% on the year. But it is up 97% from its low of $6.10. Clearly there was money to made and money to be lost by buying and selling at the right time. I don’t advocate a trying to trade rapidly in and out of stocks. But even a strategy of having bought at the start of the year or at any price over the past 18 months or so and then adding on the major dips and perhaps trimming on major rallies would have worked out reasonably okay. The thing is the stock was less risky at $7 than it was at $14. As I have explained previously, this company had no debt and has a huge installed base of subscribers. It is not was not and will not “go to zero” in the foreseeable future because there is too much real value there.

I’ll mention a word on Stop Losses, which I don’t use and have only ever used on extremely rare occasion in my 24 years of investing. Last week a company called Poseidon Concepts Corp. (which I knew nothing about) was in the news because it opened on Thursday morning at $5.79 after closing on Wednesday at $13.22. Anyone with a stop loss below $13.22 and above $5.79 was automatically sold at the open at $5.79. So, if an investor had a stop loess at $13 they got sold at $5.79, which did not stop much of the loss. (it did stop some since the stock is now at $5.26 and had a low of $4.76).

And the way the Stop Loss worked was perfectly as designed and was perfectly fair. The bad news came after the markets closed on the Wednesday. No one got to trade at a high price before the stock plunged. The bad news was “priced into” the stock right at the open.

Now admittedly the stock had come down in the previous weeks from highs of near $17. So some people may have been nicely protected by stop losses that had triggered on the Wednesday or earlier. But that is tough to do. A tight stop loss can be executed just due to sort of normal volatility and sell you out needlessly. A wider stop loss may turn out not to work if there is major bad news and the stock “blows through” the stop loss price and well below before it can be sold.

The bottom line for me is I don’t use stop losses. That’s because I don’t buy or sell based on what the market thinks a stock is worth. Using Stop Losses smacks of “Sell Low”, which is the opposite of what I am trying to do.

Stop losses are for traders who trade stocks. I analyze companies not squiggles on the screen. Some people may be very successful simply looking at price charts (squiggles). That simply is not my approach. I talk about earnings, traders talk about momentum and support levels and 52 week moving averages. I basically don’t even speak that language and have no interest in learning it.

Stop Losses are also more appropriate for more risky stocks where it seems conceivable that a loss of 50% or whatever could happen at any time. For many larger and more stable companies it may simply be very unlikely that the stock would plunge by a huge amount. Therefore there is less need to protect against the risk.

For those who use and swear by Stop Losses, that is great, to each his own. I simply point out that I have little or no use for them. I am more likely to be buying on dips than selling.

Research in Motion was up another 5.5% today to $10.23. It is only a week ago that I had bought 700 shares at $8.48. And I probably should buy some more but I always find it hard to buy higher. And of course it is a speculative pick.

There are many who have predicted RIM is toast. And possibly they will be proven correct. But it is a dangerous business to predict the direction of markets.

You may notice I never mention target prices. I simply try to buy what seems like good value. I try to buy good companies at good prices. I have some hope of doing well over the long term. I certainly make no claim that I will do well every week, every month or even every year. Many people seem to think markets and stocks are predictable in the short term. Maybe they are at times. But mostly not.

I took a quick look at the Board members of HP. It appears to be top heavy with private capital type people. Also perhaps top heavy with prima donna former CEO types. There appeared to be little representation from the brainy PhD’s who ought to be the heart of HP’s soul. There were only two members who have been on the Board since prior to 2009, one was 2009, one from 2010 and the other six only since 2011. For whatever reason this Board has not been able to rectify the same horrible mistakes HP has been making for years.

Of course the proxy statement has all the usual useless garbage about corporate governance and director independence. Just a load of useless drivel.

I find it telling that the proxy does not list the academic credentials of the Board members. That is an insult to all the highly educated people who really built HP. The founding Hewlett and Packard families must shudder to look at what these clowns have done.

Incredibly enough, this company now has a tangible net worth on the balance sheet of far less than zero. The net value of the company is in goodwill, which they have busily writing off. Their long term debt is about equal to their equity. With that amount of debt it is not inconceivable that they could go broke. Or at least that the debt investors could end up owning the company. Monstrous incompetence! They are however still generating significant cash flows and so perhaps are not in any dire straights.

This Board ought to be tossed holus bolus. Maybe let the CEO stay and get a new Board consisting in good measure of long-time employees and some representation from the founding families. Some representation from LONG term shareholders as well. They need to look up the criteria that Warren Buffett has described for selecting directors.

I am glad I don’t own any shares.

I mentioned a couple of times that the Hudson’s Bay IPO looked to be proceeding quite slowly. It has finally closed. They sold I understand $365 million of shares rather than the hoped for $400 million. And the price at I believe $17.50 is lower than hoped. (hyped?)

Most larger share issues in Canada are “bought deals” whereby the investment banks basically gurantee that they will sell all the shares. Whatever they don’t see they buy. Many of these sell out in minutes due to marketing and/or investor interest. Hudson’s Bay was a “marketed deal” whereby the investments banks just sell what they can. It seems to me that Hudson’s Bay was open for close to two weeks. It appears that they had to flog this hard to get it sold. Much of apparently going to American buyers. Canadians, probably unimpressed with the stores were not much interested. Especially with Target coming in.

I only mention Hudson’s Bay as a sort of curiosity. I have not analysed it at all. I just have no interest in it. The company was very clever in selling off its Zellers leases for $1.8 billion to Target. It’s a bit strange that so soon after that they want to raise money. They had years without much competition to make money and mostly did not make that much. Now with Target coming in they ask you and I to buy it. No thanks.

I noticed the big ($8.8 billion!!!) write-down at Hewlett Packard. To put that in context the company has a total equity market value of $23 billion. So this is a HUGE writedown. Again, this is just a curiosity, I have no knowledge of HP’s value as an investment. But I will say it seems to take CEO’s with huge inflated salaries to screw up like this. Apparently they just completely stupidly over paid for a huge acquisition even after rumors of accounting problems had already surfaced. Absolutely stunning incompetence. Years ago the paid big dollars to acquire Compague Computers (or however you spell that). Another complete disaster, as I recall. A while ago they apparently had a good CEO but then fired him because he had affair with a secretary (I forget why that was such a big deal). I remember Kevin O’leary saying the Board should all be fired and I think he was right. Apparently there was another even huger write-down in August related to the acquisition of Electronic Data Systems. Unbelievable that CEOs get paid millions for losing billions and then we have to hear crap about having to pay big dollars for talented CEOs. The latest occupant of the CEO chair is Meg Whitman. I believe she largely built up eBay so definitely has some credentials. But it is sad that HP could not find talent in their own ranks.

This HP writedown is so big it will likely even make a noticeable little dent in the S&P 500 earnings figure.

Okay, so the Dow was up 1.6% today and Toronto was up 1.4%. This gain today is not something I expected or could have predicted. Nor is it much a surprise. Stock markets rise and stock markets fall. Luckily, they mostly rise over time. An investor with a bias to being in the market (at least partially) at all times is always there to benefit from the rises. And yes, is there to be hurt by the declines too. But there are more rises than declines. That’s a fact.

With the market up a lot at the opening, I did not expect to be able to grab any Walmart at around the $68 price. But when I looked a little bit after the open, Walmart was only up a couple of pennies. So I bought 400 shares, paying $68.09. Looking good so far as it closed at $69.02.

Just about everything on our table above was up today. Particularly notable were RIM up 3.9% and Bank of America up 4.1%.

Walmart is updated and rated (higher) Buy at $68.03. If it stays at this price on Monday I plan to buy back some of the shares I sold a couple months ago at higher prices.

Markets were reasonable strong on Friday.

Notable winners among our stocks included Toll Brothers up 4.2% and RIM up 4.9%.

I took a quick read of the Walmart Q3 report that caused its share price to drop 3.6%. I could not see the bad news. It all looked good to me. Continued modest growth is what I saw. I would be inclined to buy Walmart on this pull-back.

It was a weak day in the markets with Toronto down 1.0% and the U.S. markets down slightly.

Toll Brothers closed down just 0.1% at $29.73. However the Buy order that I placed yesterday got filled at $29. So with one day down and the rest of eternity to go, that looks like a good buy so far.

Boston Pizza closed down 2.9% to $17.99. This may be due to fears that the Hockey strike will affect, which is probably true although that will be temporary. I’d consider nibbling at this price.

Walmart was down 3.6% to $68.72. I had sold my Walmart On October 3 to raise cash. It was sold at $73.63. I will consider buying back at this price.

Bombardier is down to $2.99 after getting a credit downgrade to BB (which indicates high risk) and canceling a debt issue. It might be a good investment but is speculative. I don’t know enough about it to really understand the risks. I own a small amount.

Tuesday was another negative day in the markets. Canadian Tire was down a bit more. I can not give any assurance that markets will not continue to all. I do know that Canadian Tire at $67.40 is a better investment than it was at recent prices in the low 70’s. At times like this my thoughts turn more to buying than to selling.

I am thinking of buying a modest amount of Research in Motion in the hopes that it will turn higher on the Blackberry 10 news. I do consider RIM to be speculative since its fortunes are ties to hard to predict battles in winning the hearts of fashion and technology conscious consumers.

Another down day on the markets. Dow down 1.5%, Toronto down 1.7%.

Well, the fact is that all the days of our investing lives cannot be happy days (nor all the weeks, all the weeks, all the months or all the years).

Notable losers included Bank of America down 3.6%, Toll Brothers down 3.5%, Fedex down 3.3%.

And Canadian Tire was down another 0.8%.

I don’t think it is possible to predict what the market will do next. The whole fiscal cliff issue may certainly be a negative factor until it gets resolved around the end of the year. And beyond that the feared recession in 2013 is certainly a possibility. Things should be relatively quiet on the earnings front until late January. Various positive or negative news can come in at any time from economic reports (jobs, housing consumer sentiment, retails sales, producer price index and other).

What has worked for me over the years has been 1. A bias to remaining mostly invested in equities. 2. Investing in the higher rated stocks from our analysis here, and 3. leaning a bit against the market, taking a bit of money out of the market as it rises and buying gradually as it falls. That has worked over time but admittedly is scary during the dips.

I bought a modest amount of RIM today.

I am inclined to buy more shares in most of what I own.

To that end I have placed some bids modestly below today’s closing price for Berkshire Hathaway, Toll Brothers, Wells Fargo and Canadian Tire.

The majority of my cash has been in U.S. dollars, simply because it was mostly U.S. stocks that I sold this Fall. I moved a bit of that back to Canadian just now to provide funds to buy Canadian stocks. Also with the Canadian dollar below the U.S. the exchange rate is better than it has been. If the Cnadian dollar goes several cents lower I move a bit more cash out of the U.S. dollars.

I notice on the TD Waterhouse new issues page, Hudson’s Bay is still open for buying. I believe this means that the banks are having a hard time flogging this. If it was a bought deal then the banks are stuck with it. If it was not a bought deal then the offer could even be pulled. I suspect it won’t be pulled at this point.

I notice too, three mortgage investment corporation offerings are still open. I believe those are all relatively small. And apparently not meeting with much appetite from investors.

A Tale of Two Lenders…

There is a very interesting contrast between a mortgage investment corporation and a mortgage bank. The mortgage investment corporation takes in equity and lends it out with little or no leverage at 8% or more. The investors may treat their investment as more of a fixed income investment since it funds loans and pays a high yield. The mortgage investment corporation is largely lending out its own money (the equity it raises). It does not have access to deposits from customers that it can lend out. In order to make 10% return on equity the mortgage investment corporation would have to lend at an interest rate probably above 10% since it typically has modest or no leverage. It therefore is going to be targeting commercial borrowers who are will pay that kind of interest rate. The loans may be far riskier than the residential type mortgages targeted by a mortgage bank but then the Mortgage Investment Corporation does not face much risk from its own leverage (its own debt).

The mortgage bank is typically HIGHLY leveraged. It may have 90 cents of customer deposits and other liabilities for each 10 cents of equity. It is largely or almost completely loaning out other people’s money. It can turn take in deposits at 1%, lend at 3%, for a spread of 2% and use 1% of that spread to cover costs and be left with a 1% net profit on the loan and still make 10% on equity due to the leverage. It’s really a totally different operation than the Mortgage Investment Corporation. The Mortgage bank has to target very safe loans like government insured residential mortgages. With it’s high leverage it has to take on low-risk loans.

It’s a Tale of two lenders and they really are quite different. Both can be good or bad investments.

I had said I would buy back some of the Toll brothers that I had sold if the price got down to about $31. The price today was $31.30 and so I decided to buy 300 shares.

Today is a holiday for some, but the markets are open.

The big news among the stocks on our list was a friendly take-over offer for the Brick Ltd. at $5.40 per share. The stock is up 52% form it’s close on Friday. And it is up 126% from the $2.35 at which we added it to this site and rated it a Speculative Buy on October 11, just over one year ago.

Admittedly we only saw it as sort of luke-warm and it was not one we kept on top of.

It does illustrate that sometimes good things can happen when you buy something out of favor as long as the company is capable of surviving to see better days.

It also illustrates that sometimes companies are worth a lot more than the market would indicate.

Canadian Tire fell another 2% today. On that news I bought 200 more shares at just under $68.50. Possibly that is just an act of stubbornness on my part. My modus-operandi has always been to buy what looks cheap to me.

Stantec is updated and rated (higher) Buy at $37.14. It is up 35% this year. And is up 1386% since we first
looked at it way back at the inception of this site in 1999. While it is not as attractive today as it was then or on the several occasions when it got back down to around the 10 times earnings that it traded at in 1999 it still looks like a good investment today. It’s growth by acquisition model is still in place and still working. (It also grows to some degree organically).

Canadian Tire is updated and (still) rated (lower) Strong Buy at $69.81. The market appears to be discounting the value here due to fears of the impact of Target coming to Canada.

Toronto was down 0.3% and the Dow was down 0.9%.

Among our Stock Picks, Canadian Tire got pushed down 3.3% despite releasing what seemed to be a reasonably good earnings report and despite increasing its dividend. I took the opportunity to buy 200 shares and now hold 2,236 shares. I continue to see this as a good investment. One does not beat the market by always agreeing with the market’s view of a company.

The excitement of the lead up the U.S. election has quickly dissipated in the realization that the election has not changed the government.

The Dow was down 2.4% and Toronto was down 1.1%

Bank of America was particularly hard hit down 7.1% I would view that as a buying opportunity. RIM was down 8.2% and that stock looks attractive but is quite speculative (risky).

In positive news, Constellation Software was up another 2.5%.

I am considering placing some buy orders, perhaps a little below current prices on a number of the stocks I own. Or, I may just sit the cash I have and see what develops.

In what seemed to be a surprise, U.S. markets were quite strong this U.S. election day. The Dow was up 1.0%.

The attention now will turn to what is next including the “fiscal cliff” of potential tax hikes and spending cuts at the end of December. Futures as of about 1 am eastern time show the markets down moderately. So perhaps out little election rally will be short lived indeed.

Melcor came out with earnings after the close today. The earnings were strong, particularly on a GAAP basis.

This week starts out with Toronto down very slightly and The Dow up slightly. Toll Brothers was up 3.7% today to $33.39. I had said I would consider buying back some of what I sold a while back at higher prices if it gets down to $31. Obviously, I may not get that chance.

Perhaps the big excitement for the market this week will come on Wednesday after we see the election results.

Canadian Tire will release earnings on Thursday and I am eager to see that. I don’t see why they would not have had a good quarter, but one never knows.

Melcor is scheduled to release earnings tomorrow, Tuesday. My guess is that they will have had a good quarter. But apparently new home permits were down in September and so perhaps they will be a bit cautious in their outlook.

At the bottom of the stock list above, I have listed, courtesy of a Globe and Mail article, the fund trading symbols for several bank deposit accounts that pay 1.25%. Over the years I have generally kept my investment account cash in literally cash. This allowed me to have that money instantly available for trading. I tend not to have a high allocation to cash and with money market funds paying very little it just did not seem worth the bother. I have however used a U.S. money market fund because TD Waterhouse allows me to move money between that and U.S. stocks in an RRSP account without paying any currency conversion fee.

Today’s Globe and Mail article indicated that bank account rates of 1.25% can be accessed directly from our brokerage accounts. (A couple years ago it was 0.75% so this increase must be due to competition). At 1.25% and given taht I am currently sitting on more cash than normal at about 18%, I decided to move some money into one of these bank accounts. These actually are insured bank accounts, insured up $100,000. The banks have set these up with mutual fund trading symbols so that we can invest from our brokerage accounts. The interest rate that TD Waterhouse was paying me was precisely nothing and so 1.25% may not be much but it beats nothing. I chose the TD Bank fund TDB8150. I also put some excess U.S. dollars into TDB8152. However, I did leave about half my “cash” in cash or in the U.S. money market account since both are available instantly for buying stocks and I don’t ever want to have to wait even a day to buy a stock.

I notice that the Hudson’s Bay IP is still marked “open” on TD Waterhouse. Normally a successful IPO is sold out and marked closed within a few hours of opening. I believe this indicated the brokers are having a hard time selling the Huidson’s Bay IPO. And no wonder, I remarked on October 18 that I was inclined to avoid this and gave some reaons why.

Also on the IPO list at TD Waterhouse are two Mortgage Investment Corporations. The one I looked at briefly was only trying to raise $50 million. It had a ten year history. It would lend the money at 8 to 10% and hope to earn something close to that for investors. They pay out close to 100% of earnings and are effectively like Income Trusts, they pay no income tax as long as they pay out all the earnings. It’s interesting to note that while banks are leveraged at least 10 times and lend out depositor money, these Mortgage Investment Corporations do not take in deposits, may use little or no debt. They lend out their own equity rather than depositor money. They might not be a bad investment. But I would be cautious with these. I would worry about mortgage defaults if the economy cools off or if certain real estate projects like residential condos run into problems. They out you somewhat into the position of lending out your money on mortgages. But unlike a private mortgage lender you don’t have to find or screen the borrowers and you diversification. But the company obviously has expenses that must be paid before you. The good news is that as long as they avoid debt they seem unlikely to get into financial difficulty. (Banks, in contrast, can get into difficulty easily due to the massive leverage). There are three mortgage investment corporations looking to raise money on TD right now. This certainly indicates a hunger for money on their part.

Markets were down on Friday with Toronto and the DOW both down about 1.0%. Our stock picks seemed to fare a bit better than that assisted by Bank of America up 1.1%, RIM up 0.5%

My own account is at its high for the year (save Thursday when it was higher still) and is up 24.2%. I wondered on Friday if I should not sell something but could not seem to bring myself to do so. I do have orders in to trim Bank of America, Melcor and Wells Fargo if moderately higher prices are reached as I mentioned a week or so ago.

Berkshire Hathaway was out with earnings yesterday. As I expected, it was a good quarter, at least GAAP wise. However operating earnings adjusted for gains were down somewhat. I was surprised that the famed equity index put option position had not gained in value (it would have gained on the higher stock market values, but lower interest rates pushed up the mark to market liability under the arcane formulas that are used.). I could find no mention of any early estimate of the loss from hurricane Sandy. I will probably update our report shortly. Buffett bought a “little” Omaha-based internet mail-order company on Friday. At $500 million it’s a not enough to move the needle at Berkshire but instead I expect was a chance for Buffett to work with people he knows, likes and respects and was in a simple business that struck his fancy. And you can be assured that he thinks he can make a decent return with it. This company might be a sort of shiny new toy for Buffett, but he always makes sure his train sets, newspapers, candy shops, jewelry stores and all the other toys make money. (At least they are intended to make good returns when he buys them, but occasionally the economics turn against him).

Stantec was a big gainer today, up 8.4% to $37.29 after it released Q3 earnings. Our last update had rated it (lower) Strong Buy at $31.25 on May 27. See the detailed comments under May 27. It was rated Strong Buy at the start of this year at $27.57 and has risen 35% since then. I plan to update the report within a few days. I have not looked at the earnings report as yet.

Other notable gainers for us were Bank of America up 4.5%, MicroSoft up 3.4%. Visa up 3.7% and Research in Motion up 10.1% (rumors of its impending death having been greatly exaggerated, apparently).

Markets in general did very well due to reports of a rise in Consumer Confidence and two favorable jobs reports out this morning. Another jobs report come out Friday morning and will likely set the tone for the market on Friday.

Markets did not move much today. RIM was up 3.7%, but that is just “noise” for this company. Bank of America was up 2.2%. Toll Brothers was down 2.2% to $33.01. This despite the fact that house prices are rising. I has some some earlier at higher prices. I might be tempted to buy back if it happens to go down to about $31.

With the U.S. markets closed there was not too much excitement on the markets. But Toronto was up 0.5%.

The latest Case Shiller Home Price index is out and showed a 0.9% increase. The fifth monthly increase in a row.

I was wondering if Berkshire Hathaway would take any losses due to this storm. I would think the answer is definitely yes. Berkshire will probably let us know with their earnings release expected out around the end of this week or next week. Buffett does not enjoy paying out big claims. He is however very proud of the fact that Berkshire is ALWAYS in a position to pay its claims and to do so without ever putting much a dent in balance sheet of Berkshire Hathaway.

With the U.S. markets closed for a “storm day” today (and tomorrow, Tuesday) not too much seemed to happen in the Canadian markets.

I saw some discussion that Canadian Tire needs to reduce costs. I am not sure how true that is. I do worry tht is’s dealer-owned stores while benefiting from entrepreneurialism at the store level, also leads to a sharing of profits. I did observe that Canadian Tire has higher gross margins (sounds good but means higher costs since profits are not that high). But it’s not clear that Canadain Tire should ever have the lower gross margins of a Walmart or Costco since those sell groceries, a notoriously lower gross margin business. Overall Canadian Tire looks cheap and I will take my chances on what Target does to it. Also it appears to me that Target is setting up in quite expensive digs having paid top dollar to take over the Zellers locations, that to my (limited) experience were a bit old and tired mostly and now paying to renovate (re-build) those tired old locations.

Shaw Communications is updated and rated Buy at CAN $21.06. It’s also a high yield stock at 4.6%. Shaw is up 4% this year to date, which combined with the dividend of 4.6% has been a good investment. It trades at 13 times earnings which is ostensibly reasonably attractive. However some accounting issues lead to an earnings figure that is not that reliable. Our overall rating is Buy. Subscribers should look at the full report to understand the basis for the rating.

I have added a new row to the report. This is a row to comment on “Long Term Predictability”. This new row is just under Outlook near the bottom of the report.

Ten years ago I wrote an article for this site that indicated that what we were really after was not just Growth-at-a-reasonable-price, but Predictable-growth-at-reasonable-price. Recently someone reminded me about that article. Also I recall how many times Warren Buffett has said he is looking for companies that he is reasonably certain will have materially higher earnings in 10 or 20 years. I have always shown the graph of past earnings growth and commented on outlook. But this new row in the analysis will make sure that I always turn my thoughts to the predictability of the company. It’s one thing to say that a company should continue to grow. It’s another thing to consider whether it is a company that might face major obsolescence, regulatory or fashion issues that make its growth inherently uncertain.

A major strength of the report format that I use is that it is consistent. The same list of numeric and non-numeric items always gets addressed in each report. Perhaps that takes away from the ability of the report to be customized for a particular industry or company, but I think the requirement for each report to always address a standard list of ratios and non-numeric topics has been a good approach.

By the way I use the term numeric and non-numeric here. In college I was taught to use quantitative (being numeric) and qualitative (a measure of quality and also usually being non-numeric). I think the terms numeric and non-numeric are far more reader-friendly.

The Canadian dollar had declined about two percentage points recently. This increases the value of U.S. stocks when measured in Canadian dollars. And it decreases the value of Canadian stocks when measured in U.S. dollars.)

By the way, stock investments in American companies (like investments in U.S. houses) are NOT investments that are “in” U.S. dollars. Instead they are in investments that are “measured” in U.S. dollars. There is a difference. An investment in a U.S. bond, is truly an investment “in” U.S. dollars.

When it comes to U.S. funds versus Canadian, I generally try to think of my U.S. investments as being permanently left in U.S. dollars. When i sell a U.S. stock, I keep the funds in U.S. dollars. That avoids a currency convserions fee which I would incur if I transferred that back to Canadian dollars.

However, today I am thinking of entering an order to convert some of my American cash back to Canadian. The reason is that most of my cash is in U.S. dollars and it might make sense to balance that out. And with the Cnadian dollar down, (or the U.S. dollar up) it seems like it might be a opportune time to transfer the cash. (I would not have been inclinded to do it when the Canadian dollar had recently risen rather than fallen).

Toronto was up 0.9% while the Dow was up 0.2%. Constellation Software was up another 1.8% to $116.20. We had last rated it (lower) Strong Buy on April 1 at $89.35. They will release earnings after the close on Wednesday next week and I plan to update the report with a few days after that.

Shaw Communications was up 1.8% after releasing earnings this morning that were about equal to the prior year on an adjusted basis. Apparently, this was better than expected. I plan to update that analysis before Monday.

Yesterday I provided a link to a lengthy transcript of an interview of Warren Buffett. It is astounding how good his memory is for figures. When the host made a disparaging remark about Dairy Queen, (Berkshire Hathaway owns 100% of International Dairy Queen), Buffett bragged that its same store sales were up 5.8% in September. Berkshire owns about 79 businesses and yet Buffett happens to know this figure from memory. He also is able to condense various economic events into a few crisp sentences that explain a lot and to do that on the fly/ It’s truly remarkable. I have already said I expect Berkshire to report good earnings for Q3. I suspect it will report a week from tomorrow.

I was just noticing one thing, Berkshire owns virtually no rental type real estate, no REITs, no office towers, no shopping malls, no commercial space, no farm lands and no forest lands. Even its own operations including head office are often in rented space. I don’t think he would view real estate as a bad investment. But he has found better investments and apparently does not choose to tie up Berkshire’s capital in real estate.

It is often claimed that “most of the great fortunes of the world were made in real estate”. Andrew Carnegie said: “Ninety percent of all millionaires became so through real estate.” I don’t know if that was a true fact when the quote was stated. I do know that this quote is around 100 years old or more! (Carnegie died in 1919) Every real estate promoter since has quoted it. It’s categorically false today. The great fortunes of the world are made in many ways. Most billionaires today certainly did not make their fortune in real estate. By the way it may be debatable whether 50 is the new 40, but there is no doubt that billionaire is the new millionaire, given inflation since Andrew Carnegies’ time.

Buffett does however think that individuals in the U.S. who have stable jobs and who do not own a house would be making a terrible mistake not to buy one now, at today’s low prices, and lock in a 30 year mortgage.

Markets were down just slightly today. As for our stock picks, we had Toll Brothers up 2.0%. We have already had big gains on this one this year, and it does look expensive at this time. But it certainly may continue to rise if the U.S. housing recovery continues.

I am looking forward to seeing the Q3 earnings. Canadian Tire will not be out until November 8th. Melcor and Berkshire will also be most interesting to see. And Shaw Communications should be out with their Q4 report before too long.

Warren Buffett was on CNBC for some two hours today. I have not seen it or read it (yet) but here is the transcript. I am sure it is worthwhile reading.

http://www.cnbc.com/id/49537172?__source=RSS*blog*&par=RSS

As most you will have noticed, the DOW was down 1.8% today, Toronto was down 1.4% and the S&P 500 was down 1.4%.

These kind of days are not unusual and simply reflect the realities of stock investing. And I am afraid I can offer no comfort that the market will not continue on down. But I am not suggesting I particularly think it will go down. I have never claimed to be able predict the market especially in the short term.

I don’t believe that the stocks I own are over valued and I believe that our stock picks will continue to be good investments over time. As for the stock picks in the table, the ratings are as of the date and price indicated and as it states above subscribers would have to make a judgment call as to whether the rating might still apply given how old it is and how much the price has moved (or not) and what other events have taken place. I simply can’t sort of reaffirm each rating without doing the updated analysis.

There will updates coming before too long and there will be definitely a flurry in December as I always try to get everything as up to data as possible for the start of the new year. There is nothing special about a new year but I do measure performance from each January 1 and it is best to measure the performance of a Buy or Sell rating from a fresh update.

Canadian Tire was down a little today to $70.08. Yahoo indicates that is a P/E of 11.3. My analysis agrees with that. I can’t make any guarantees but I note that Walmart was trading around $50 to $55 for much of 2010 and 2011 and I believe the P/E was around 11 at times. It took a while but now Walmart is at $75, not because its earnings soared but because the P/E rose to 15.8. Buying good companies at 11 times earnings (an earnings ratio of almost 9%) will likely work out well over time in a world where the 10-year bond yield is under 2%. I considered adding to my already hefty Canadian Tire position today but I probably have enough already.

The Canadian Q3 earnings season has begun with Canadian National Railway reporting slightly better than expected earnings. We had last rated it as a Buy on July 27 at $88.40. While we have not updated it for this latest earnings release I see no reason why the rating would change given the price is now $87.07. As a very long term investment, I like CNR. Its tracks and right of ways are irreplaceable assets. People talk about Gold or land as a real asset and seem to think stocks are “paper” assets. A railway seems pretty real to me.

The Dow was down 1.5% on Friday and Toronto was down 0.4%. But our stock picks held up quite well. We did have Microsoft down 2.9%, but we also had Toll Brothers up 1.1% and Canadian Tire and Melcor unchanged. And given the big drop in the Canadian dollar on Friday and also Thursday, I think it turned out to be a very good week for our stock picks as measured in Canadian dollars. (But not when measured in U.S. dollars). Next week we should begin to get the Canadian companies reporting Q3 results. CN is usually among the first Canadian companies to report.

I notice the outrage of the Bell Canada CEO, George Cope over the disallowance of the Astral media take-over. He said Bell could not have done anything differently. Really? In fact it appears they bungled their application to the regulator and it appears they suffered from kind of group think. Now they are appealing to the federal cabinet. Good luck with that. I am no fan of the CRTC but I don’t exactly feel outraged by this decision.

While the markets were down very slightly today, our stock picks did reasonably well.

Hudson’s Bay Company is going to go public again. It was founded through the issue of a charter by King Charles II on May 2, 1670 as the Governor and Company of Adventures of England Trading into Hudson’s Bay and continued as a Canadian Corporation around 1970. I do like the history. I don’t like that it called itself the Bay for years and that it sold off its fur operations some 25 years ago (by my recollection). That was under old management but it seemed to be forgetting its proud heritage rather than celebrating it. Very dumb.

My inclination would be to avoid the shares. The Bay has had years to renovate its stores if it wanted to. Now it apparently wants to spend money on renovations just when Target is coming. I think it was very smart indeed to have sold off the Zellers leases at the huge price of $1.8 billion. But that is done and I believe some of all of that gain has already been pulled out of the company. As a shopper at the Bay over the years I have certainly been under whelmed.

To try to analyze this by reading the prospectus would be a daunting task. (I took a quick look at its statement of equity and see that it had a reduction of stated capital in 2010 — I don’t know what that means, it has had returns of capital to the owner rather than dividends in some years — which sounds like the owner extracting money such as leveraging the business up. In short there are many complexities.

And it would seem to me to be in direct competition with Target.

So, while it might turn out to be a good investment, my inclination is very much to stay away from it.

With another strong day in the markets we should keep in mind that there will be down days as well. Overall invesing in stocks tends to be rewarding but it can and will have its downs as well as ups.

The TSX was up 0.4% while the Dow was up very slightly. The S&P 500 was up 0.4%. As far as our stock picks go, Constellation Software was up another 2.0%. It has been rising nicely. I don’t know the reason but a quick look shows that they continue to grow and make acquisitions and they have announced winning some new customers. They will release earnings after the close on October 31.

Toll Brothers was up 1.8% on news that U.S. housing starts were up 15% to an annual rate of 872,000. That is still low compared to Canada which is I believe around 185,000 units and the U.S. is often regarded as roughly 10 times larger.

Wells Fargo was up 2.2%.

I neglected to mention that on Monday I did buy back the Wells Fargo shares that I said in the October 13 post that I was tempted to buy back. They were down on Monday and I bought.

Another good day in the markets… It was good in particular to see Canadian Tire up 1.8%.

The Q3 earnings season is just in full swing in the U.S. and about to get started in Canada. So between that and the usual economic news there is lots to push the markets to and fro which will keep investors guessing as always.

It seems there are few dull days in the market. Today we had the Dow up 95 points or 0.7%. But Toronto was only up 0.2%. The larger gains among our stock picks were Bank of America, up 3.5%, Toll Brothers up 3.4%, Stantec up 2.4%, Constellation Software up 2.8%.

Also Wal-Mart up 1.8% to $77.15. I suppose it was a mistake for me to have sold recently but I was looking for something to sell to raise cash… Wal-Mart is now up 29% this year. Over the past few years (before this big gain) I explained how Wal-Mart the company had strongly outperformed Wal-Mart the stock. You may recall many analysts harping that the stock was still (then) down from its historic high of around $69 back around year 2000. Many analysts said it had been “dead money”. Yes it had, but that fact was not relevant to what the stock was worth in 2010 or 2011 or 2012. I would not likely be a buyer of Wal-Mart right now since it has gained 18% since we rated it a Buy back in May. (but I might change my mind on the next update, depending how the analysis looks then). I notice when I read the analysis that we knocked it down a bit due to the scandal in Mexico at that time. That seems to have gone away at least for now and so while I am not going to buy, I don’t think the stock is a bad one to hold onto.

No doubt the market will continue to thrash to and fro based on the latest economic news and earnings news. The low points always test our resolve and courage while also often providing opportunities. That is the nature of the markets.

FedEx is updated and rated (lower) Buy at $90.40. While the near-term outlook does not appear to be strong, this is a company that I think we can be reasonably sure will grow its earnings per share over the long term. The stock rose about 5.5% late last week on a cost-cutting announcement. However that particular bounce could prove to be short lived as the cost cutting will not be fully phased before about 24 months.

Wells Fargo is updated and rated (lower) Strong Buy at $34.25. This appears to be a good investment. I recently sold some shares at $36.46 and $34.90. I did that to raise cash. Still, I am very tempted to buy those back at this slightly lower price. But I still have about 12.8% of my portfolio (and 15.5% of my equity investments) in this company and so perhaps I should not be too greedy about buying more of this one. Most people would think I am already taking a lot of risk having $147,000 in this one company. But then look at how many people with a net worth of under $200,000 have $400,000 of mostly borrowed money invested in a house. Who is really the risk taker?

Friday’s markets were about flat overall but my own stocks took a minor hit as Bank of America and Wells Fargo declined.

Wells Fargo released earnings before the open this morning. It opened down roughly 3.5% and remains down roughly 3.5% at this time. (This illustrates why earnings should never be released during trading hours, by releasing before the open, no one got to trade a single share (unfairly) before the earnings news was reflected in the market price).

The earnings and operations were actually very good, record earnings. The problem was that expectations were even higher for certain aspects of the operation.

With the stock at about $34, I am tempted to add to my position. However, it is not down that much from its recent high of $36.60. I will likely hang onto my cash and see if better opportunities emerge in the weeks ahead for Wells Fargo or other stocks.

The Dow was down 1.0% today and Toronto was down 0.5%

Many or most of our stocks picks were down

Fedex was up 5.1% after announcing some cost cutting moves. Coincidently I intend to update the report on Fedex within the next few days.

Alimentation Couche-Tard rose 6.2% late on Friday as I mention below, Tuesday when the market opened again after holiday Monday it was down a bit but today was up 3.0%. Basically it appears something positive was said at their annual meeting on Friday or some analysts have upgraded the stock. I find it odd and have emailed the company asking for some explanation. I don’t expect them to give me one however. It’s an excellent company a real Canadian success story. But it looks about fully valued to me.

With the markets having been down for several days in a row now, and with talk of lower world growth and a poor Q3 earnings season it is natural to be worried about where the markets are headed.

I have always explained that I cannot predict market direction. I doubt anyone can. What I have had some success at is trying to recognize when the market and especially individual stocks appear to be good value. Also I have had success in keeping calm during market dips and trying to buy on dips rather than sell.

At the same time I try to be positioned with some cash on hand to take advantage of dips.

It’s interesting that the U.S. markets in particular have done very well in 2012 and that is despite all the things there are to worry about. At the start of September many were predicting a down month. Yet is was a very strong up month.

At this point, yes, of course, markets may fall. That is always the case. If you are overly nervous and not prepared to hold on come what may then consider reducing your equity exposure. Personally I have already reduced but I still have a high equity exposure. I also find it hard to reduce further at this point because it is I suppose an admission that I should have reduced more in the last several weeks. So I may or may not reduce anything at this point. But if markets were to fall more significantly (and no one can predict that accurately) I will be holding come what may and buying on dips as I have done for the past 13 years or more since starting this web site and even prior to that.

Well perhaps the next few days will bring glad tidings of earnings and the outlook will brighten. As always time will tell. I look forward in particular to Wells Fargo’s earnings report on Friday. They are expected to be about 20% higher than last year. If more than 20% or so the stock may rise. If less, well, you know.

Markets were weak on Tuesday with the TSX down 1.2% and the DOW down 0.8%. Most of our stock picks were down. RIM was a particularly notable loser, down 5.5%.

After the close earnings season has kicked off in the United States with Alcoa moderately beating expectations and Yum Brands as well.

Market will likely focus on whether Q3 earnings are better or worse than expected. Expectations are generally low. Other events that will push to market up or down are developments in the U.S. election and well as in the European situation and world economic growth. In other words, markets will continue to be uncertain. But the fact is that markets are never certain. Uncertainty is simply a fact of like in stock investing.

I think there is reason to be hopeful of good earnings reports from Wells Fargo, Bank of America, Canadian Tire and Melcor.

Markets on Friday were mixed with Toronto down 0.2% and the Dow up 0.3%. However many or most of our stock picks were down. One interesting gainer was Alimentation Couche-Tard up 6.2% in the final hour of trading. The company held its annual meeting going on on Friday afternoon hosted by the company. At first glance here it appears there was some kind of selective disclosure going on (with news leaked to to this group but not generally disseminated) . The meting seems to have conveyed some kind of good news even though there had been no press release. If so, this action is reprehensible.

It was another strong day for our stock picks. The Dow was up 0.6%, and Toronto was up 0.7%. We had Bank of America up 3.3%, Wells Fargo up 1.5% .. almost everything seemed to be up today.

I should probably be looking to trim a bit more to raise my cash and be a bit more defensive. But it is hard to think about selling when things are rising. What I may do right now is stick in a few “stink offers”, that is offers to sell but only if the the stock rises another 5% or whatever. We certainly can’t be sure that stocks will continue to rise or even that we won’t get a “correction”. I have some hope of analyzing which stocks appear to be good value. But I have never claimed to be able to predict short-term market direction. As far as I am concerned the overall market is fairly random in the short term. I don’t follow any seasonal indicators, presidential cycle indicators, or anything of the kind. I am always at least partly invested in equities. I doubt I have ever been less than 50 or 60% invested and even that low was only briefly. I am often closer to 95% invested in equities. I try to pick stocks that look like good value. When markets fall I try to find some cash to buy at the lower prices. So far it has worked out okay, but certainly with some major bumps along the way.

I have just placed some orders to trim Wells Fargo (at $37.95), Melcor (at $16.95 – correction that should have read, $16.75) and Bank of America (at $10.95). These are a good bit higher than the current market and there is a good chance none of these will sell. But at least if the market happens to sort of rocket higher I will automatically trim a little here. And if markets go the other way, I have some cash ready to Buy.

Our stock picks did well today even though the Dow was only up 0.1% and the TSX was down 0.3%.

We had Toll brothers up 3.7% (although that is not one our top picks now), Bank of America up 2.0% and Wells Fargo up 1.8%. Berkshire Hathaway up 0.7% and there were other gainers as well. Of course there were some picks that were down as well such as Wallgreen down 1.5% and RIM down 2.2%. But overall our stock picks did well today.

I’ve just been listening to the U.S. presidential debate. In my opinion, Romney is the hands down winner tonight. He seemed to have Obama back on his heels. Obama seemed to have a look of guilt on his face as Romney went over his record. Romney seemed to have more facts at his fingertips to use. Before tonight it was said that that Obama was the clear front-runner, but if the debate has any impact then Romney will have closed the gap tonight.

Canadian Tire continues to lag and I am almost tempted to buy back some shares in it that I sold very recently (as explained below).

One interesting thing I took note of today was that Hewlett Packard fell 13%. It fell hard starting at noon and this was due to comments its president, Meg Whitman made at its annual securities analyst meeting. This was HIGHLY unfair to retail investors who are not in a position to trade on this breaking news. There is a reason that earnings are almost always released after the markets close. The reason is that it puts on all traders on a level playing floor. When news is released after hours the share price adjusts in one step change fashion and zero shares trade at intermediate prices. In contrast today millions of shares traded at intermediate prices as the news slowly wafted (like a great stink bomb) into the market. I don’t know if companies that release news like this at analyst meetings are unaware of the unfairness, or do they just not care? They could have done the analyst day but should have pre-released the bad news after the close yesterday. This is highly shameful. Similar things have happened in Canada and I have made official complaints on occasion. In fact my complaints have directly helped lead to a situation where in Canada we seldom see earnings released during the trading day now, whereas a few years ago that was common.

Update to this comment:

It’s not that obvious, so let me explain the mechanics of why releasing news during the trading day, without a halt hurts the retail invest. HP opened today at $17.23. It’s price over the past week was consistently over $17, although with a few little dips to right around $17 or a tad under. Now imagine that you, a retail investor wanted to buy some but you decided to place an order to buy at $16.95, hoping to shave off a few cents on the buy. Well at noon today, bang your order would have been filled and you would have bought at $16.95 as these analysts heard the bad news and sold to your order that was sitting there while you went about your life. By the end of the day the stock was at $14.91 due to the bad news released and you were already down 12%.

In sharp contrast, if that news had been released after the close yesterday, here is what would have happened. The stock price would have opened well under $17, perhaps as low as about $15 because the active traders would adjust their bids and asks to reflect the news. Remember stocks don’t open at the same price they closed at the previous day. If the stock had opened at $15, then zero trades would have taken place at intermediate prices between $17 and $15. As a retail investor had you noticed the bad news overnight you could have pulled your offer to buy. But far more importantly, even if you were totally unaware of the bad news, your offer to buy at $16.95 would have executed at the opening price of $15 and you would be about even, instead of down 12%. Kapiche?

This is detailed on my Investor Advocacy page.

Most stocks were down somewhat today as markets focus on various risks including lower earnings and the Europe situation and excess government debts…

One stock on the rise was Research in Motion (RIM), up 6.0% to $8.15.

Regarding Corporate earnings, the trailing earnings on the S&P 500 as of Q2 reports was $87.92. At the end of Q4 2011, that figure was $86.95. So that is only an annualized gain of 2.2%, which is pretty weak. On an operating earnings basis the annualized gain in the first six months of 2012 was 4.6%. Projections are that Q3 earnings will be up only 2.9% versus 2011 and on an operating basis will be down 1% from the prior year. All else equal this could put negative pressure on stock prices especially as the Q3 earnings get reported. In theory these projections are already baked in tot he current market index level and so what really matters is whether the earnings come in lower than or better than expected. However, all else is never equal and often reported earnings are not the biggest drivers of stock prices in a particular quarter of the year.

Keep in mind that some companies will continue to report strong earnings. I expect (but certainly can’t guarantee) that the higher rated companies on our list above and certainly those which I own most heavily will tend to report higher earnings growth that the S&P 500 index average.

Stocks had a surprisingly good day after a report showed stronger U.S. factory activity and also apparently becasue Spain signaled it might ask for a bail-out (which, for whatever reason is apparently a positive thing).

Stantec was particularly strong up 3.9% to $34.82. It’s a long-term winner.

Bank of America was up 1.5% despite announcing on Friday (after the close, I believe) that it would pay $2.4 billion to settle a class action lawsuit regarding its Merrill Lynch Division. The fact is that $2.4 billion (pre-tax) is simply not that huge for Bank of America which has a book value of $235 billion. The market has reacted positively because the settlement reduces uncertainty about this liability.

And this brings me to address the topic of Bankruptcy and how the “death” of Bank of America and all the big U.S. banks has been greatly exaggerated.

For the past few years, even after they were bailed out I have read countless claims that all the big American banks were broke and worthless and insolvent if they were honest and marked their assets and liabilities to market. The implication being that a bankruptcy announcement is forthcoming and that one should certainly not buy their shares.

I won’t dispute that some of the banks might have had a negative net worth on market to market basis. But that did not mean they were necessarily worthless or that they were about to go bankrupt.

Banks are generally profit generating machines. Even is they have a negative net worth due to some unusual crisis, they will generally recover if left alone. Basically you just let them sit there and keep the machinery turning and they will crank out profits to rebuild equity. This is in fact what has happened.

In general corporations do not necessarily get forced into bankruptcy just because their net worth falls below zero. They may get forced into bankruptcy but this negative net worth alone is not sufficient to cause it.

In general all three of the following conditions must be met before a corporation would be forced into bankruptcy.

1. It is making losses and as a result runs out of cash to pay its bills
2. It does not have assets that it can sell off to raise cash to pay the bills
3. Its lenders refuse to lend more money or they call in the existing loans.

As long as lenders keep lending money a corporation can go on for a very long time with a negative net worth on the balance sheet and with annual losses. If lenders believe it its future and continue to lend the company money to pay iots bills then it has no reason to go bankrupt.

P.S. (update to comment) I had forgotten to mention in this post that on Friday I sold my Walmart shares. I had indicated in Thursday’s remarks that I might sell my Walmart shares.

Friday marked the end of the third quarter of the year.

While, you might not know it with all the talk of the difficult stock markets, 2012 to date has provided good stock market returns, particularly in the United States, with Toronto up 3.0%, the Dow up 10.0% and the S&P 500 up 14.5%. Our Stock picks returned an average of 11.1%. By some combination of concentrating on our highest-rated stocks (to some degree), and having invested only a tiny amount in what has been our worse pick (Research in Motion) and by trading in and out of certain positions, my own return has been 21.5%, year to date.

This past Summer provided quite good stock returns with Toronto up 7.9%, the Dow up 4.3% and the S&P 500 up 5.8%.

Berkshire Hathaway’s earnings each quarter are affected by mark to market changes in its index options “bet” that markets will rise by around the year 2020. I suspect that the strong summer markets will add perhaps a billion to Berkshire’s earnings this quarter. That is significant because Berkshire’s total quarterly earnings tend to be in the 3 billion range. Also it will likely have done reasonably well in its insurance businesses since I don’t think that there any particularly huge storms or other catastrophes in the quarter, although certainly there were some karge ones. On a book value basis it’s investments will also have done well which should generate a strong increase in Berkshire’s book value. Much of this good news about Berkshire (to the extent it is confirmed in earnings) may already be reflected in Berkshire’s stock price. It’s not as much of a bargain as it was this past Spring but it is still probably a decent long-term pick.

Research in Motion only managed an 8% gain on Friday which is a lot lower than the almost 20% gain it was showing in after-hours trading on Friday just after releasing earnings. Despite a lot of gloom and pessimism around this company, it still has 80 million subscribers and it has no debt. The market is valuing it at about $49 per subscriber. I certainly offer no guarantees. But I believe it is hard to go bust without first getting into debt. I think this is a rational speculative pick. It would rise in price if it starts to appear that Blackberry 10 will do well or if it gets a buy-out deal or can license its messaging service to others. Alternatively it could continue to bleed.

Canadian Western Bank was one of few stocks that rose on Friday (up 2.0%). I continue to like this as an investment.

Canadian Tire is up 7% this year. With a P/E ratio of about 11.1, it seems to me that this stock has room to rise on that basis. I don’t see any reason to think it will not have had a good Q3. It continues to be held back by fears of what Target will do to its business. On the other hand many Canadian retailers should be getting a large boost in Q3 and Q4 since many or most Zellers locations have been closed for conversion to Target. Target is certainly spending a huge amount of money on its move into Canada. First, it paid an amazing $1.8 billion just to take over leases from Zellers. And now it is completely gutting and even expanding at least some of the old Zellers stores. I am curious whether Target’s landlords including RioCan face any expenses with these extensive renovations. Presumably the expansions are paid for by the landlord in return for additional lease payments. I have no idea if the landlord has to pay for any of the massive renovations within the existing store footprints. It would seem odd that Target would take over an existing store and pay Zellers huge dollars for that (due to an attractive locked in lease rate) and then turn around and gut the place and re-do everything but the frame and concrete floor of the building (that is what I witness at a local Zellers) at its own expense. And if RioCan pays for it does it get to increase the lease rate?

I have updated the composition of my own portfolio to reflect recent trades.

It was a decent day in the markets with Toronto up 0.9% and the Dow up 0.5%.

I had heard this morning that some of the economic reports out today related to housing and GDP were weak but tht the market was up on rumors that China would stimulate its economy. A source I see tonight says markets were up because of an austerity plan in Spain. These reasons for the market going up do not fill me with confidence. I’d rather see it rise on earnings gains.

So it seems my thoughts are turning more so to selling than buying at the moment.

I reduced my Toll Brothers position again today, this time by 25%. My thinking on that is that it is at $34 having fallen from a recent high of $37. But it was only a month a go that I rated it Speculative (lower) Buy at $32.28. So it was not really a favorite of mine at $34 and so it becomes a candidate for reduction given I am in a selling mood. I am in a selling mood in order to reduce risk, lock in gains and raise cash for possible opportunities ahead.

It was a bit hard for me to sell today given that I could have sold more on Monday when I sold only about 12% at $35.75. So it feels a bit dumb to now sell at about $34. But I also considered that I am still up about 42% on the stock in the account it was sold in. That’s not really a rational reason to sell but it helps emotionally. Rationally stocks should be sold due to risk or valuation or to move to something else. The price paid for a stock is rationally irrelevant to the sell decision. But emotionally, the price paid always comes into play.

This evening I am looking at the fact that I last rated Walmart a Buy at $65.31. Now it is 13% higher at $73.98, down just a little from its high of $75.24. So I think that qualifies as a candidate for sale as well given it is not looking like a bargain. Emotional factors that make it easy to sell include that I have a profit of about 30% on it. Also I have not owned it all that long and I not emotionally attached to it. For some stocks I have to admit that after owning for a long time, perhaps buying on dips, and perhaps after having analyzed a company many times over a period of years I do get emotionally attached to the stock. I combat emotional attachment by trying to be unbiased when I update the analysis. Sometimes my heart says keep or Buy and the analysis says sell or don’t buy and I try to go with the analysis in those cases.

Research in Motion reported earnings after the close. It did lose money, but apparently less than feared. The subscriber count was up to 80 million as its CEO reported a couple days ago. Its cash on hand increased when it was feared to decrease. The stock rose 20% in after-hours trading in the U.S. and so would be expected to pop up about 20% in Toronto tomorrow morning. Sadly I did not buy any today. The reason it is sad is not just that it was a missed opportunity but that in retrospect, at least, it seems like it was a pretty good bet that that the earnings were going to be okay. The CEO would never have mentioned that the subscription count was looking good if he knew that the earnings coming today would be bad news.

Markets were a bit weak again today. Toll Brothers was down 3.8% to $34.16 and its recent high was just over $37. New house prices continue to rise in the U.S. but the number of new home sales in August failed to rise as expected from the July number. Overall the housing market in the U.S. continues to recover. But as indicated in our updated report of late August I thought that Toll Brothers was starting to look expensive since it is already pricing in a lot of growth. So I have trimmed my position in Toll Brothers as noted in several posts in recent weeks.

Research in motion was up 5.8% today but has been very volatile. I continue to think it might be a good speculative pick but I have not so far added to my very small position in this company. It releases earnings after the close tomorrow, Thursday.

New figures are out for Canadian credit card delinquencies and the figures continue to show improvement. Which indicates that either 1. More people havve the earnings to pay their credit cards on time or 2. More people can borrow from other sources to pay their credit cards on time (or some combination of the two). Anyhow, it is a small positive indicator.

http://www.cba.ca/contents/files/statistics/stat_creditcarddelinquency_en.pdf

Also just released today are the latest Canadian mortgage delinquency statistics. One again the 90-day delinquency figures seem unbelievably low at just 0.33% or just 1 in 300 mortgages. The fact that the number is low and getting better is a positive sign. But I frankly don’t believe this number is really accurate. I suspect what happens is the banks don’t like to report a 90 day delinquency. So by day 60 they make some deal with the homeowner to let a couple missed payments get added to the mortgage principal if he makes one payment and this probably starts the 90 day clock over. Or Canadians simply have great access to lines of credit and the unemployed make the mortgage that way. I just don’t believe that delinquencies can be this low. I understood they were at least 10 times higher than that in the U.S.

One reason delinquencies are low however is that house prices kept rising. In a rising market a homeowner that gets in trouble with job loss can just sell the house. I wonder what will happen in a flat to declining house price market? I just don’t see delinquencies staying quite this low. At the same time there is certainly no sign of any real trouble for the banks and after all these mortgages are insured (mostly) by CMHC, so the banks will tend to get paid come what may.

Markets were down somewhat today. I was thinking about the fact that I really should reduce my high equity exposure. So I sold a small amount of my two largest positions, Wells Fargo and Canadian Tire. I also sold some Toll Brothers. This just seemed to be a prudent actions just in case markets head down

In today’s action, Melcor was up 4.3% to $15.90. But this is very thinly traded stock that tends to jump around like that, so this is fairly meaningless.

I bought a small amount of Bombardier today. I have mixed feelings about it. It’s balance sheet is very weak and so I suppose it could run into trouble if the recession deepens. On the other hand it is a huge industrial company employing thousands in a relatively high-tech environment and so it would likely get support from government even if it did run into trouble. It looks like a decent speculative pick to me but I am not planning to bet too heavily on it. I was tempted to sell some shares to lock in some of the recent gains but could not decide what to sell. (I like what I hold).

Bombardier Inc. returns to the list above rated Speculative Buy at $3.71. I wanted to look at it again because the price is well down from its early 2011 level when it reached $7.00. Sometimes a significantly lower price can be a good place to look for a bargain. Upon reading its reports, I was almost ready to forget about it due to its low profit margins. It had an earnings-before-interest-and income-tax “profit” margin of 5.9% in 2011 and 5.1% in the first half of 2012. This seems frightfully low for a manufacturing operation. Although I don’t know the margins of other manufacturers, I would have thought they would be higher than for retailers and some retailers certainly have better margins than this. Even the 8% EBIT margin that Bombardier aspires to seem low to me. However I saw that its P/E ratio was attractive despite the low EBIT margins. It definitely seems like a Speculative Pick but there is certainly some possibility of a good return if the outlook brightens.

I note that Warren Buffett’s NetJets placed a very large order for business jets earlier this year. Although Buffett does not personally manage NetJets, he does approve large capital spending and would have nbeen involved in this decision.

Years ago I though Bombardier might fit the bill for a Buffett buy-out but I am not sure it has either the profit history nor the management team that he would need. I think he would most definitely be attracted to the products it makes. I think it is an interesting company to follow.

I am planning to grab a small position in this company and then see what happens.

A mixed day on the markets, Canada down a bit, the Dow up a bit. Canadian Tire did well up 1.4%. I don’t see any reason that Canadian Tire will not report a decent quarter for Q3. But it seems the stock is probably not going to do all that much until it becomes more clear if Target is going to hurt its business starting next year. Meanwhile it appears to offers good value, but there are never any guarantees.

Melcor was up 2.4% to $15.72. But that was on a very small volume. Just a few days ago some shares traded at $15.00 This is is a company where being patient and putting in an order below the current market can work out at times. (If it is at the higher end of of where it has traded over the past month then you can try an order say 50 cents or 75 cents lower and see what happens). Lately it has been in the $15.20 to $16.00 range mostly and so unless one is very hot to buy, I don’t see much reason not to try to get it under $15.40 or so. right now it is showing $15.15 bid and $15.80 asked. That brings up the point that some investors want to know the full depth of the market meaning, how many shares are bid at $15.15 and then how many at the next lower price and so on and how many shares offered at $15.80 and how many at say $15.90 etc. Some people also want to see real time prices. These people are traders and not long-term investors. They buy “stocks” (squiggles on a screen) as opposed to shares of companies. Both traders and investors buy the same thing but it’s just a completely different mentality. Investors tend to add to positions on dips. Traders consider that to be madness and use stop losses to sell on dips. Depth of the market and real time prices would just be distractions to me. I especially don’t care to see real time prices. (Actually I do see it if I place an order and that is fine but I would consider it madness to sit and watch real time prices). And while depth of the market might be interesting especially on a thin trading stock, it’s not something I particularly want to see.

Toll Brothers was up another 3.5% to $36.41. It’s now up 177% from its low of $13.16 that occurred just about 12 months ago. But it’s “only” up 78% from the $20.42 at which it was originally put on this site. This just goes to show that the gain is a LOT more when you buy the stock at a somewhat lower price. But it is not realistic to think that we can buy at the absolute bottom .

Our latest update for this stock, just three weeks ago, rated it only a Speculative (lower) Buy at $32.28. I am not a buyer at this price but may hang onto my position or may trim to take profits.

Our history with this stock is it was added to the Site as a Speculative Buy at $21.03 on June 5, 2011. The idea was that it would rise in price when the U.S. house prices started to recover. I had no cash to Buy at that time but bought on August 3, 2011 at about $19. (This turned out to be just before the debt ceiling crisis of August 2011 and so not great timing).

Subsequently it did fall as low as $13.16.

I updated the analysis to Speculative Buy at $20.42 on December 22 and I bought some more on December 23 , 2011 at about $20. Apparently I did not take advantage of the lower price in September. I bought some more on March 6, 2012 at about $22. And more on April 9, 2012 at about $23. (There may have been another buy as well at a higher price, I am just going from searching the daily comments). TD shows my average price was $19.50 in one account and $23.77 in another and $22.60 in a third account (possibly that includes impacts of currency changes, I am not sure how TD Waterhouse reports average prices for U.S. stocks held in a Canadian dollar RRSP or RESP account)

I sold 20% of the position on June 29 at about $30. Sold another 20% on August 28 at $32.39. Perhaps by selling I have turned what could have been a VERY good gain into just a quite good gain. But I thought it prudent to trim as the price rose especially in this case where the P/E ratio is very high because the earnings still have a long way to go to recover.

I don’t think my buying and selling pattern in Toll Brothers was all that clever. But what did work out is that I identified it as a probable bargain. I bought and then bought more when it continued to look like a good bet. Sadly, i failed to buy near its low, perhaps due to lack of funds or just out of fear. Then I trimmed slowly as the price rose. I don’t always trim at higher prices and I have no “typical” buying / selling pattern. All of my trading tends to be ad-hoc. But it also tends to be driven by the ratings above.

The market seems fairly quiet as it settles back after the FED’s latest action waits for the next bit of news.

Fedex announced lower expectations. That truly is disappointing because delivery of packages would tend to go up if the economy is improving as hoped.

Microsoft just increased its dividend by 15%. It recently had a 2.6% yield So now it looks like about 3.0% if the share price does not react. The stock was unchanged after hours and so maybe the market is unimpressed.

I notice in the news last week about some GIANT hog farm going bankrupt near Winnipeg. Apparently the second time bankrupt. They blame it on high feed prices.

This hog farming issue was in the news a few years ago in 2007 and part of what I learned was that a huge portion (two thirds at that time!!) of Canada’s hog production gets exported to the U.S. That made no sense to me then or now since I doubt we can produce cheaper than Americans, not with a dollar at parity.

In 2007 some hog industry person wrote to the newspaper asking for support for government loans for hog farmers. I wrote them to say I was sorry but I voted no on the loan. I said that I very much sympathized but that:

I am sorry to say it sounds very clearly like your industry in Canada needs to shrink dramatically. Individual producers will likely want to sell the land or convert to grain production immediately.

Some things in economics are predictable and the continued hardship of hog farming in Canada was predictable due in good measure to the high(er) dollar. (Whether our dollar is high or not is debatable, but it is certainly higher than it was for some decades prior to about 2007.) Loans to hog farmers can’t change the poor economics of their business.

I am basically against all subsidies at all times.

Markets fell moderately today as the excitement of last week’s FED stimulus action wears off. Melcor was down to $14.90 but is thinly traded. I am tempted to add to my position.

Our reference article on Canadian Exchange Traded Funds is updated. This gives you ETF symbols and valuation information for about 48 ETFs. It can be a good way to pick up sectors that we don’t have on the list like energy stocks and oils sands stocks. Also it can be a good way to move quickly into and out of the market. The list includes a number of higher yield ETFs. This also includes ETFs for buying Gold, Silver, Oil and natural Gas for those so inclined. There are also Bond ETFs on the list. These ETF can also be used to bet against certain market segments or commodities, for those so inclined.

I am just reading the annual report for Boston Pizza Royalties Income Fund..

This company (actually entity) is an example of how a share price can increase for reasons not much related to the performance of the company itself. These units have risen 34% this year. We had rated them (higher) Buy at $14.19 for the start of this year and now they are at $19.08.

So why the big rise?

The distributions have risen from $1.104 annually to $1.176 annually. So that’s a 6.5% increase and that does not go very far to explaining a 34% rise in the price.

The mechanics of this fund are such that for the most part new restaurants do not add to the distributions per unit. The owners of the franchise company receive units of this fund when they increase the restaurant count in a year. Roughly speaking the franchise company (which is not the fund) gets 92.5% of the benefit of the increased restaurant count and existing fund unit holders get 7.5% of the benefit. A doubling in the restaurant count, all else equal would only increase the distributions per unit by about 7.5%. So prospects for new restaurants cannot possibly explain much of the 34% increase in price.

A possible risk the fund faces is if the number of restaurants declines. The franchise company only gets new units for net new store openings. Fund unit holders are basically unaffected by closures, EXCEPT if the number closed exceeds the number opened. Fund distributions per unit would decline (all else equal) if the number of operating restaurants ever declines. This has never happened, but in 2010 there were 6 closures and six openings and so it almost happened. But in 2011 there were seven openings and four closures and this risk does not seem to be a serious risk, but it could be at some point.

The distributions will increase roughly in line with same store sales growth over the years. A very good year in same store sales growth is on the order of 6%. In the first half of 2012 same store franchise sales are up 4.9%. And that presumably was the basis for the distribution increase of 6.5%.

And I don’t think the outlook for future all-important same store sales growth has really changed much since January 1, 2012.

So, again we can explain about 6.5% of the increase in price of 34% and some 27.5% remains to be explained.

Part of the increase is possibly related to the fund’s unit buy-back operation. About 5% of this year’s increase came after they announced in late August that they would buy back some units. The fund can borrow money at quite low rates and then use the money to buy back units which saves it the 6.2% yield on those units. This operation can increase the distributions per unit over time. Buy backs are not magic and are not always beneficial. But in this case it does seem like a beneficial operation. It is particularly wise to do this when the units are under-priced, which was probably the case early this year and may arguably still be the case. While the fund wisely bought back units in 2008, 2009 and 2010 at an average price of $10.10. It apparently did not buy any back in the last 18 months or so until it announced a buyback on August 22. It’s not clear why buying back at $18 or $19 is considered wise when apparently they were not willing or able to buy back at much lower prices in 2011. Reports so far do not show any actual buy-backs under the this new program that commenced on September 4. (They may simply have not reported it yet, or maybe they were hoping to buy at the $18 price

Here is the rest of the explanation.

At the start of this year the units had a yield of 7.78%. Today the yield is 6.16%. The yield percent had dropped by 21% even though the distribution went up by 6.5%.

What has happened is that the while the fund distribution has grown about as expected and its outlook for growth has not changed much, the market has “decided” to place a higher value on the units. Previously the market wanted 7.78%, which was a pretty fine yield considering it could be expected to grow at perhaps 2 to 4% per year based on same store sales growth. But there was some risk that same store sales could fall in a recession or even worse that there would be a net reduction in the number of restaurants if closures exceeded openings.

Now the market has determined that even at 6.2% yield this is a reasonable investment given that the yield might be expected to rise at say 2 to 4% per year. And if it did rise at 6.2% and if the yield and P/E ratios remain the same then this would provide a 10.2% return so that does seem attractive.

Part of the reason the price increased was probably related to the general decline in interest rates. At a 7.78% yield and where the distribution could be expected to grow these fund units were increasingly attractive as interest rates fell and so the price was pushed up. Perhaps the market also became more confident that the unit distributions would in fact grow. In particular the risk of the restaurant count declining may be viewed as being lower now.

The thing to remember at this point is that the price of these units would likely fall if there was a major increase in interest rates. And this would happen even if the restaurant same store sales continued to increase.

At a 6.2% yield (and with probably but not guaranteed growth and with some risk of distribution decline, however unlikely) these units still seem attractive. They may well continue to increase in price even faster than the 2 to 4% per year underlying expected increase in distributions. But at some point if interest rates rise they could fall in price for that reason.

I own some and though I trimmed my position recently to take some profits, I have no particular plan to sell any. And I am wondering now why I did back up the truck at much lower prices when they were available.

I am certainly feeling “pumped” about my investment returns and the performance of the stock picks on this site this year. My own portfolio is up 22.6%. Almost all of the stock picks have done well. A notable exception is Research in Motion. But we did include the word speculative in that rating and subscribers who follow this site were aware that I personally invested only a small amount in that one and that it was discussed as a speculative stock. Also it is far from a dead company yet. Our best gainer this year is Toll Brothers the U.S. land developer / home builder up 78%.

On Friday the market managed to continue going up due to the FED’s action. But the highs in the market occurred Friday morning and there was a moderate give-back by the end of the day. I felt it was prudent for me to take a little money off the table and so I trimmed back my Wells Fargo and Bank of America positions by a modest amount. With these two companies my history has been to buy on dips (although not every dip) and trim modestly when they rise. This has worked out well.

For example my first Bank of America buy was at $9.50 on August 2, 2011. That was very poor timing as the stock immediately fell a lot ultimately getting as low as$4.92. Also I compounded my timing error by, in a spasm of over-confidence, buying way too much all at once in that first buy. Having bought so much it was very hard for me to buy more at lower prices, but I did so, although slowly. The buys at lower prices have resulted in the fact that I now have a decent profit position in this stock despite the fact that the price today is almost exactly the same as it was on my first buy. With Wells Fargo I certainly did not trade it perfectly but I made no major mistakes and I quite stubbornly bought it on dips over the past couple of years (at one point it was over 20% of my portfolio) and I (reluctantly) trimmed some on gains and that has all worked out well.

One reason for trimming positions is I want to have some cash on hand just in case there is a general stock market decline or in case I find a company that I don’t already own (or own much of) and that looks very promising. The other reason is just risk management. I don’t expect a large decline in these stocks to happen but anything is possible in the markets.

I have updated my personal portfolio composition.

As you likely noticed, today was a blow-out day in the markets. The Dow was up 1.5% and Toronto was up 1%.

This, of course , was due to the FED’s announcement of additional stimulus consisting of printing money to try to lower interest rates (even though they are already insanely low…)

Notable winners from our stock picks included

Bank of America up 4.8%, Wells Fargo up 3.5% and Berkshire Hathaway up 2.1%.

Will this last? I don’t know… It certainly is no guarantee that it will last.

I considered taking some profits today, probably should have. It would be prudent for me since I am almost 100% invested in equities. But most or all of the stocks I own still seem reasonably priced and so I hesitate to sell. Perhasp just greed wanting more… It’s easy to feel fat and happy after all the recent gains.

Yesterday I was not able to post any comment because my ancient FrontPage software refused to open the site. I got it open today by creating a new copy of the site. I hope to move the site to a more modern software before too long. FrontPage has been out of production for years. But it still met my needs. I have no interest in loading this site up with very fancy components which tend to be slow to load. I keep the site plain and readable. Still it looks like FrontPage has to be replaced.

I believe a highlight of yesterday was Toll Brothers was up again.

So the FED is going to try to lower mortgage interest rates again. I think the safest bet around is that the price of U.S. houses is going to rise. If you know a way to invest in that through the market, let me know. (Toll Brothers might be okay, but I would prefer to find a company that is buying up a load of U.S. houses to rent and later sell and which is doing so with a strong balance sheet.). If you are in a position to buy a house in the U.S. (say you are retired and want to use the house four months of the year or more, then I don’t think you can go far wrong buying now). For most of us Canadians who are still working the idea of buying a house in the U.S. to try to rent out is not particularly feasible. It would probably work out but requires a lot of accounting and you would need to put it with a property management company and you would need to buy for cash if you are a Canadian.

Americans in a position to get into rental houses should probably jump at the chance. It looks like a generational opportunity in many cities.

It was a decent day on the markets with the Dow up a half percent although Toronto was flat.

The most notable winner among our stocks was Bank of America up 5.2%. This seemed to on talk that it would start to grow its loan base now that it had jettisoned some other assets and gotten its capital ratios to an acceptable level.

Pension Math:

Yesterday I discussed the case where an investor was going to earn a zero real return on investments (and this is about what is available in real return bonds (0.5% before investment costs) and in probably in 30-year government bonds that pay 2.4% or so before inflation). In this case if the investor wanted to fund a $40,000 per year retirement for 30 years in real after inflation dollars then he or she was going to have to save $40,000 per year (and adjusted up for inflation each year) and do this for 30 years in order to fund that retirement.

This is actually what an investor who goes 100% government bonds appears to be facing today if interest rates and especially real return rates remain as is. My conclusion is that young people looking at that would say “forget it”. It shows that a retirement period as long as the savings period is just not feasible, and far from it if real returns will be 0% (which they are for bonds and which some suspect they will be for stocks). And let’s face it starting the savings much before age 30 is not a feasible answer either in most cases. The only solution here would be to plan to work basically forever. Or to find a way to make more than that 0% real return.

I have done the calculations and as I suspected it takes a real return of about 4% to fund a 30-year retirement in 30 years of saving.

It turns out if you save $12,400 per year for 30 years (say 12.4% of a $100k salary) and you make a 4% real return then you can fund a $40,000 per year retirement for 30 years. That’s a stiff savings rate but at least within the realm of the possible.

If you can get 5% real returns then $9400 per year will do, or 9.4% of a $100k salary.

(If the salary is $50k per year then you can reach 40% of that or a $20k per year pension with that same 9.4% savings rate assuming the 5% real return.)

So basically, the math shows you need at least 4% real returns to fund a retirement of at least 40% of your salary assuming 30 years to save and 30 years retired.

This 4% real return used to be accepted as a reasonable (even minimum) real return to expect. In fact you could have locked in over 4% on long-term real return bonds back in the 90’s.

While many doubt it, I believe that the real return from stocks is likely to average at least 4% per year over a period of many years. That would make funding a retirement with stock investments feasible by saving 10 to 12% of wages. And many government and corporate pension plans are closer to contributions of 15% with say 7.5% each from employer and employee).

Current bond yields are simply too low to fund a retirement at any kind of reasonable savings rate.

I believe current long-term bond rates represent some kind of break-down in the financial markets. It simply does not makes sense that the cost of borrowing (and therefore the return available on savings) is at historic lows at a time when debts are so high. Between governments trying to push rates down and institutional bond investors being so stupid as to invest a dime at these low rates, interest rates are unsustainably low. It will not last. I would avoid long term bonds and wait for the inevitable increase in interest rates. Basically I am advocating that in our capacity as lenders we go on strike and we refuse to lend for long terms at rates that are totally inadequate.

I would (and do) invest in some combination of equities and cash and would (and do) avoid long-term bonds.

For more detailed reason why long term bonds should be avoided see our newer article on that topic (with some edits over the past few days adding in words from Buffett about how attractive bonds are (not) at very low interest rates)

Not surprisingly, markets today gave back some of the big gains from last week.

Apparently the big item this week is an expectation that the FED will announce more “easing” on Thursday. If the FED does not come through then I suppose markets would drop somewhat on Thursday and maybe rise somewhat if it is announced. But all of that is just short-term noise in any event. What really counts is longer term earnings and growth and dividends.

I am thinking about doing some analysis about the viability (or possible lack thereof) of retirement savings these days.

The historic assumption was that one could invest say 10% of earnings over the working years and it would grow after inflation at at least 5% per year. The result was that it was possible to amass enough wealth to retire on by age 65 or even as young as 55 and the investment would provide a comfortable living on top of things like the old age pension (or Social Security for Americans).

Today the real return yield on government bonds is a meager 0.5%.

Imagine if today’s fears come true and people basically make nothing on their investments after inflation and after money management costs. (And if you want to guarantee this is the case, and you are ready for retirement just take all your money and buy real return bonds at 0.5% and pay a fund manager 0.5% to do it for you.)

If zero real return is expected (or locked in) and you wanted to retire at age 60 and let’s say draw out $40,000 per year and adjusted up for inflation each year (assume you have no company pension and so $40,000 may be needed on top of the government plan just to enjoy a good retirement with some travel). And imagine you plan to have enough money to reach age 90, so 30 years retired.

In the case of making no money on investment other than inflation you are going to need a starting pot of 30 years times $40,000 or $1.2 million.

And let’s say you are age 30 today and you are going to save that $1.2 million (in today’s money) over the next 30 years. And let’s say that again you are not going to make any return on your money except enough to keep up with inflation and to cover investment costs. Well laugh (or cry) out loud you would have to start saving $40,000 per year (and adjust that up for inflation each year). And that is completely and totally out of reach for probably well over 99% of people.

The conclusion from all this is that if it were the case that people can’t make any positive real return on their investments then the whole notion of saving for a long retirement completely falls apart.

I will do some calculations but I am sure that it will show that a reasonable scenario of saving for retirement requires investment to earn at least 4% or more in real after inflation returns. And it all works out better and better as the real return goes up.

Today’s real return on government bonds of 0.5% simply makes no sense. At that rate people will basically stop saving and have to plan to work (much) longer and have (much) shorter retirements.

My belief is that the real returns we can expect are in fact a lot higher than recent low levels. Just because markets have returned little in the past dozen years does not mean the same will be true of the next 10 or 30 or 60 years. Just as the high returns of the 80’s and 90’s were an aberration so too are the low returns of the 2000’s to date.

What to do now?

I must plead guilty to very (very!) much enjoying the fact that I am up 20.8% this year to date. After quite few years investing my investments have grown to the point where a 21% gain is a very good chunk of money (just under 200k). (In an email to subscribers yesterday I said it was almost 22%, actually it was almost 21%)

Some of my accounts a reasonable amount of cash in them (the RRSP and RESP) Offsetting that I have a margin account that is using margin and some of the capital in the margin account is from a small line of credit.

All told, the net cash in the investment accounts is about 6%.

Based on my results it is tempting to put even more money and get my net cash to maybe minus 6% (invest everything plus use margin).

On the other hand maybe I should be thinking of taking some profits.

If I take some profits I do so for risk management reasons, not because I think my stocks will go down. But of course they could go down.

So maybe I will force myself to sell down some of what I have and raise some more cash.

I have not decided what to do yet.

As of Sunday evening, markets are expected to open down about 25 points on the Dow. Not surprising given the gains last week. But probably nothing to worry about either.

Our popular article that analyses whether or not the S&P 500 index is fairly valued at this point in time is updated.

Alimentation Couche-Tard is updated and rated Weak Buy / Hold at $49.95. This was a great stock pick for us this year since it is up 58% since the start of 2012. It has had its share of volatility over the years but is up 187% from the $17.40 at which we rated it a (lower) Strong Buy in March 2005.

Management has been very impressive and the earnings should continue to grow over the years. At this time it looks expensive although it is possible if business remains very good in north America then the added earnings from the recent big Scandinavian acquisition could justify this share price. Personally, I will not be a buyer a this price.

Friday was another good day in the markets for our stock picks. Bank of America did well, up 5.4%, Canadian Western Bank was up 2.2%.

In 2012 to date our Stock Picks have done well. For ease of calculation we have always measured the gains from the start of each year. Our 23 Buy and higher rated stocks from January 1 are up an average of 12.6% each. That compares very well to the TSX index which is up 2.6%. In the U.S. the Dow is up 8.9% and the S&P is up 14.3%.

My own portfolio with a heavy weighting to a few of our higher-rated stocks is up 20.8% in 2012 to date.

Subscribers who have invested based on our stock ratings (at their own risk) have also presumably done well. I’d be interested in hearing about that at shawn@investorsfriend.com (If so, let me know if I can use your results as a testimonial, I publish those with just initials, not names of subscribers).

It was a very strong day on the markets. Apparently this was mostly due to the announcement that the European Central Bank would support European countries and keep their borrowing costs low by purchasing unlimited amounts of their debt in the market (printing money to do so). Other reasons for the rise included a better-than-expected labor market survey report. These kind of gains can be quite temporary unless followed up by more good news.

Stocks that were particularly strong included Bank of America up 5.0%, eBay up 3.7% Stantec up 3.3%, Wells Fargo up 3.2% and Canadian Tire up 3.1%.

Alimentation Couche-Tard released earnings today. Reading through the report the earnings look very good. However the share price has risen a lot since our last update and I will have to crunch some numbers before I arrive at an updated opinion on this stock. I expect to update this report by Sunday. As I have mentioned before, I got a bit trigger happy on this one and sold all my shares too early when they “popped” on announcing the big Statoil acquisition some months ago. It would have been more logical to sell only half my shares at that time. (In retrospect I should have kept all, but regardless of where the price went, it was not that logical for me to have sold ALL my shares on the announcement).

New numbers for loan delinquencies and credit losses were released today for Q2. The numbers indicate that delinquencies and bad debts while still high in the United States are improving slowly but steadily. This is positive news in regards U.S. lenders including Wells Fargo and Bank of America.

These delinquency and charge-off figures are available at the following link.

http://www.federalreserve.gov/releases/chargeoff/

One of relatively few stocks that were up today was Wal-Mart, up 1.25% to $73.51. It’s up 12.5% since we rated it a Buy at $$65.31 on May 28. Considering these facts, and the fact that I have only a small cash position, I decided to sell half my holdings in Walmart today. I also note that Walmart is up 23% this year to date. It may still be a good investment but it’s not as good an investment as it was in may and I just decided to take some profits on this one.

Canadian Tire fell 2.7% to $69.32.

RioCan Real Estate Investment Trust is updated and rated Weak Buy / Hold at $27.62. It has been a good investment in 2012 since it rose 4.5% and also yields 5%. However, I am not convinced that a 5% yield is attractive going forward given that distributions per share are likely to grow only slowly at best and given that there are risks that the units would fall in value if interest rates rise. Perhaps not a bad investment but I don’t find it attractive.

The series A preferred shares of RioCan Real Estate Investment Trust are also updated and rated Weak / Buy / Hold at $26.00. These yield 5.0% per year. However it appears that in 3.6 years from now they will be redeemed at $25. So the effective yield is closer to 4% which does not seem very attractive.

Bombardier series four preferred shares BBD.PR.C are updated and rated Buy at $24.73. They are higher risk than some preferred shares. The 6.3% yield seems attractive. These shares will not likely trade above their redemption price of $25 and can move lower. Therefore it may not be a good place to park money that you may need on short notice or on a certain date.

Canadian Western Bank is updated and rated (higher) Buy at $28.13. This has been a steady performer over the years. It is up 9.0% this year and that is in addition to a modest dividend yield of 2.3%. Since we first looked at it 13 years ago (and rated it a Strong Buy at that time) it has risen a total of 470%. I don’t expect that kind of performance over the next decade, but I would be surprised if it failed to at least double in price over the next decade. But it will have its downs as well as ups over that period as well. Before to read the full report.

Canadian Western Bank also has a preferred share.. This is updated and rated Sell at $26.92. The yield appears quite attractive at about 6.7%. However it seems almost certain the bank will redeem these shares at $25 on April 30, 2014. Some investors may not be aware of the redemption and so the share price may remain somewhat elevated. In 2012 it had declined 1.6%, but still have a decent annualized return of about 5%. The current price appears to reflect an expected yield of about 2.4% and we don’t consider that to be an attractive yield for a bank preferred share. Possibly those who have a need for the cash around May of 2014 would consider it a reasonable investment.

I have updated the composition of my own portfolio.

North American markets were down about 1% today…

I did not have a very large position in Canadian Western Bank and I doubled my position in that company today.

Stocks overall did not do much today as the North American stock indexes were approximately unchanged on the day. Canadian Tire however was up 2.5% and Constellation Software was up another 2.1%

Canadian Western Bank released earnings after the close today that were quite strong. Our report was last updated in December and I plan to update within the next week. I have mentioned it quite a few times this year as a stock that I bought this year and that I would consider buying more of. (I should have been buying more rather than just considering).

I notice that Canadian Western Bank released its earnings this week at the same time the big banks are releasing (we had big banks yesterday and will have four tomorrow). This may start to get Canadian Western Bank more noticed. It is indeed still tiny compared to the big five or six banks in Canada but it is growing.

I sold about 20% of my Toll Brothers position today based on the updated rating which indicates it is not longer the bargain that it was. The latest Case Shiller home price index came out and showed gained but Toll Brothers stock did not react much. I reinvested the money into additional Melcor shares.

Toll Brothers is updated and rated Speculative (lower) Buy at $32.28. I had hoped it would look better than that. Even assuming house prices and new home sales continue to recover the stock looks expensive. It may continue to rise as the housing market recovers. However I think it is prudent to take a smaller weighting in this than my current 6.6% weighting. I will consider selling half of what I hold and leaving the rest to speculate on higher prices

Back from my travels… I am looking tonight at the Toll Brothers report and will update that company in the next day or so.

Our performance figures year-to-date as of today are very good. The way I measure performance is explained under the individual years in the performance links. I have always measured performance on a calendar year basis.

Our average stock in the Buy or Strong Buy ranges from January 1, 2012 is now up 11.2%. That compares very well to the TSX which is up 1.1% and the Dow which is up 7.7% and is similar to the S&P 500 which is up 12.2%.

My own portfolio which was heavily weighted to a few stocks from the list (as fully documented all year on this page) is up 18.8%.

So stocks were up nicely today, after being down yesterday.

Many people complain that “these days” stocks are unpredictable. They seem to think stocks used to be predictable. That is utter nonsense. Volatility in stock prices is normal and in fact provides opportunities for those who invest based on the value of stocks rather than on trying to simply guess or predicts short term stock price directions.

We are in Seattle today back to Edmonton tomorrow.

Visited Berkshire Hathaway’s See’s Candies again and bought some product. Excellent customer service. It’s educational to see how these tiny stores make out-sized profits in tiny retail spaces.

Next over to another Buffett company, Ben Bridge Jewelers. Walked in and they soon charmed us into making a small purchase, though they suggested that a $3k watch would look great on me. We did not go there but they were happy to sell us something very small while treating us as if we were buying the bigger item. We would be happy to shop there on a future trip.

Shopped in Walgreen’s as well (a company that is on our list above). I find their stores pretty densely packed and sort of down-market (no fancy floors or displays in those I have seen). That keeps costs down. Prices don’t strike me as being at bargain levels, yet they are busy. So looks like (and is) a money-making operation.

Lots of other nice retail operations; Stormteck in Victoria (a private company) and Patagonia in Seattle).

Loads of tourists around. It seems clear that many people do have discretionary cash to spend.

I wonder what will happen to the sports business given recent developments.

Lance Armstrong apparently stripped of titles earned years ago. College football cancels league titles for crimes taht while heinous, were totally unrelated to the game on the field. Why should anyone pay to watch a sporting event if the winner can be declared the loser years later? Not a business that I have any much interest in. I think sporting bodies are completely out of control at least as far as football and anti-doping go. I don’t know the solution but it just removes from me any interest in most sports.

Still cruising towards Victoria for a 6 pm docking.

Stocks were down today and our stock picks were almost all down. A notable exception, Constellation Software up 1.8% to $99.90, it has risen up a fair amount in the past month or so.

Stocks fell because of less hope for a FED interference (I mean intervention). Whatever, I think the FED has done enough damage since it began its ultra low interest rate policy a decade or more ago.

If stocks fall due to lack of FED interference, I consider that a buying opportunity on selected stocks.

On board the Celebrity Infinity cruising to Victoria from Skagway today. Stocks were down a bit but our picks did okay with Toll Brothers up 3.8% and Boston Pizza up about 2%. I have nothing to complain about regarding the markets this year. I have not been trading much but then again what I hold has been working out well.

I am just leaving Skagway, Alaska tonight. Will arrive Victoria, Thursday at 6 pm. While the Dow was down modestly today, Toronto was up and our Stock picks did okay. Walmart had been down a bit which is probably a buying opportunity and certainly is not something that worries me.

Greetings now from Juneau, Alaska. Shaw and Bank of America were both up about 2% today

Greetings from Cape Fox Lodge in Ketchekan Alaska. Internet on the cruise ship is not only expensive but I could not get it to work. I may not be anle to post this week, but probably will find some hotspots in Juneau or Skagway. Stocks did well on Friday. Stocks that I would buy now if I did not already own include Melcor, Canadian Western Bank, Stantec. Those are the three that come first to mind. Canadian Western Bank I feel is a conservative choice in particular. (No guarantees ever, but CWB seems lower risk). Refer to the table above for other ideas but keep in mind the stock ratings are always as of the date written. You would have to judge for yourself whether the rating still applies (which it likely would if price not much changed) or wait for an update.

Stocks had a strong day. Toll brothers was up 5.8%. Microsoft was up 1.9%, Canadian Western Bank up 2%.

So far I am hanging on not taking profits or adding to positions.

Walmart however was down 3% after reporting earnings that were good but not quite as good as hoped for by the market.

I am in Seattle today, Alaska cruise starting tomorrow.

Checked out some of the Berkshire Hathaway companies today, See’s Candies and Ben Bridge jewelers. Saw a Burlington Northern train and bridge that both looked rusty.

Saw also a new Target store downtown. When Target comes to Canada it could put some pricing pressure on some Canadian retailers including drug stores and general merchandise.

Our stocks did well today. Notably Canadian Tire up 1.1% and therefore hanging onto the strong gains it made after reporting earnings last week. Couche-Tard up 1.9%. Melcor was up 1.9% but can be somewhat volatile due to thin trading volume. Walmart was up another 0.6%. Fedex was up 2.2.

Wal-Mart was up 0.8% today to $74.01. That puts this company up 23.8% this year to date. For a number of years I Have been explaining that the fact that Wal-Mart was trading under it previous high of about $70 from 1999 was not any fault of Wal-Mart’s. Wal-Mart did its job and increased earnings year after year. Stupid investors had bid the stock to ridiculous levels in 1999.

Wal-Mart is up 58% since I first added it to this site as a Buy in 2006. It’s also up close to 50% from recent lows just under $50 in August a year ago and under $50 in July 2010 and in much of 2009. The point is sometimes significant gains can come from the most boring companies.

Our stocks hung in okay today with the markets down a little.

I notice that the TMX Group was down 5.5% today.

This is not at all the same TMX Group as it was. Firstly it is in fact a different company. The Maple Group Acquisition Corporation bought the former TMX Group along with some other things (Alpha Trading Systems Inc. and the Canadian Depositary for Securities Ltd. Then they changed the name of Maple to TMX Group. But it’s actually a different corporation with different Board members.

Not only is this new TMX Group a different corporation (albeit the old TMX Group is its biggest asset and operation be far) but he new company is different in that it has been leveraged up with a lot of debt used to buy out 80% of the old shares for $50 each.

So, the point is that once this offer to buy 80% of the old TMX shares for $50 cash each was done there was no strong reason for the new company to continue to trade at $50. Perhaps management estimated the new company to be worth $50 so yeah somewhere close to $50 might be right.

From a share valuation perspective we have little to go on now as to what these new shares are worth. The history of the earnings per share under the old TMX will not be of much help. Earnings could be higher as there are new operations involved. But there is also debt now. I am not sure what is happening to the share count. It will take a year or so with the new structure to establish a new earnings level. (Though I suppose the buy-out offer gave some estimates).

Even the old TMX Group value of around $50 was not reflective of earnings it was simply reflective of the buy-out offer for 80% at $50.

To the extent the new TMX is free to set its own prices it is a monopoly an could be quite valuable indeed. But from murky details I read, the Ontario Securities Commission will have a hand in regulating the prices it charges. In that case the value of the new entity depends a lot on how it will be regulated.

My point is that just because the same trading symbol applies here, it is not really the same company. Technical analysts will be completely lost because (as in one article I saw today) they may assume it is the same company.

At this point I simply have no idea what the new TMX Group is worth. If I add it back to the list that will probably not happen until 2013 after the next annual report so that I would have something to go on.

I have been dismayed by what I perceived to be the poor and even misleading disclosure of TMX Group and Maple throughout this process. Given their position as regulators it is disturbing.

Canadian Tire is updated and rated (lower) Strong Buy at $69.57. The Q2 earnings report was very strong.

We closed out the week with a relatively flat day for our stock picks on average.

The year to date however has been a lot better than flat.

As of January 1 we had 23 companies rated in the Buy or Strong Buy categories. Notice we use the word companies which conveys ownership in a business rather than the word stocks which conveys investing in something abstract. We also like to say share owner or just owner which conveys more permanence and reminds that we are owners rather than share holder which conveys something temporary and perhaps external to the company.

Anyhow of those 23 companies, 19 are up in price and just four are down. The average gain for the 23 (including he four that are down) is 10.7% and that excludes returns from dividends. The only loser of note was Research in Motion which we had labeled as speculative.

The list included a lot of retail stocks. These tend to be unexciting most times. I don’t know how many dozens of times in the past year that I read that “the consumer was dead, tapped out”. So how could retail do well in 2012? Well the fact is that most of these retailers looked under-valued to us. And here are the results, year to date:

Costco up 14% ( but we had rated that a Weak Sell)

Walmart up 23%

Walgreens up 9%

Couche-Tard up 58%

(The) Brick Inc. up 29%

Canadian Tire up 6%

After the start of the year we added two more:

Dollarama up 45% (but we thought it was too high already so missed this one)

Liquor Stores NA up 16%

So that is a very lovely performance from a boring group of retail companies. Sometimes great returns lie in the most unglamorous and boring places.

Another area we talk a lot about is Banks.

Wells Fargo, it’s up 23%

Bank of America up 39% (I owned it and it was talked about but was not officially on the list)

Not that many people were excited about investing in U.S. Banks. How many times have I read in the past year that they are technically bankrupt? That is not true but was and is often stated.

We also had Canadian Western Bank which is up 3% this year to date.

Related to both retail and banks we had Visa, it’s up 27%

So much for the death of consumer spending…

But we did not select these stocks because of a bet on retailing or banking, they were rated individually as companies. They happened to look like good value (except Dollarama and Costco which looked too expensive for our taste)

Canadian Tire earnings came out before the open and appear to be quite strong.

Canadian Tire came through with good earnings and the stock was up 4.8% today. The actual Canadian Tire stores had about flat sales versus last year but the former Forzani Group stores did well, Marks also did well and financial services did very well. The market is probably going to continue to be somewhat cautious due to worries about Target coming in and Lowe’s. Certainly the company looks like quite good value. I do worry somewhat though that it appears to have a somewhat higher cost structure than some competitors. Possibly its convenient locations offset that sufficiently. I will delve into the earnings to study the details over the next few days.

The Canadian stock market was down 0.7% today but the U.S. markets were about flat. Toll Brothers was up another 1.9% as a report showed that U.S. house prices are now slowly rising. It reports earnings on August 22.

It is interesting to watch RONA claim that it is adopting a new strategy of smaller stores and therefore Lowe’s should go away and not buy it up. The thing is though RONA had only small stores some years ago and then made the bone-headed decision to try to compete head-on with Home Depot. It seems to me the solution is for Lowe’s to buy up all the RONA box store locations and leave RONA have the small stores.

RONA also claims it buys most of its products in Canada. Well that is laudable, but if they can’t make a good return, it is simply not sustainable.

Canadian Tire will report earnings tomorrow (Thursday). The conference call is at 4:30 pm eastern but it is not clear what time the earnings will come out. Hopefully it will be before the open. I am hopeful but also apprehensive about the results. They already said they will take a “charge” to close some of the Forzani sports stores that they bought. That news should be baked in. Other than that they will have to show good results or else the market price will be under pressure due to fears of competition from Target and Lowe’s.

Canadian Tire has a P/E of only about 11.3 and a Price to book ratio of 1.3. It seems to have been well managed. And I think its Board is strong.

I think it could improve its earnings if it wanted by doing a sale and lease back of its stores to a REIT. Canadian Tire is trying make an ROE of I believe 12% or so and REITs seem satisfied with much less than that so it might make a lot of sense to sell the stores and sign 20 year leases to rent them back. Their would be a large profit on the transaction and the cash could be used to buy back shares and raise the dividend.

Unfortunately Canadian’s Tire dual class shares may allow it to refuse to take this step. It may be immune from any kind of take-over attempt.

Today was a strong day for the Toronto Stock exchange which was up 1.7%. The Dow was up 0.4%.

Lots of modest gains today… among the larger gainers, Stantec up another 2.1%. Toll Brothers was up 2.1% as the market continues to see that the U.S. house market appears to be past its bottom and on the mend. I own both of these as indicated in my portfolio composition at the link above.

Canadian markets were closed on Monday. U.S. markets were up modestly.

Bank of America was up 2.8% to $7.64. While it is speculative and is also very complex it does appear to offer good value. Housing markets in the U.S. appear to edging up and this will bode well for banks. On the other hand recor-low interest rates do make it harder for banks to make money. I am comfortable holding this stock but I am prepared to accept the risk as well as the potential reward.

Markets were up strongly on Friday mostly due to a better-than-expected jobs creation number and I think partly due to comments that Germany would not stand in the way of the European Central bank’s meddling in the markets.

Whatever the reason it was a nice way to end the week.

Stantec came out with earnings after the close on Thursday. In response to the good earnings the stock was up 9.9% on Friday to $31.22.

We had last rated it a (lower) Strong Buy at $31.25 on May 27. On May 29 I noted I had bought some more as the price dipped somewhat. Subsequently it fell to as low as $26.50 on July 24. On July 27 I mentioned that I would definitely consider buying it and that it was at $27.85. I own 1500 shares and I wish I had bought more after talking about it on July 27. It’s still a good buy for the long term.

Warren Buffett’s Berkshire Hathaway announced earnings after the close on Friday. The earnings were good with operating earnings before gains and losses on investments up 38%. Along with realized gains on sales of investments of just $81 million there was unrealized market gains of about $6.1 billion. (This is not recognized as earnings.) This is shown in the increase in other comprehensive earnings. This tends not to get noticed much in the financial press.

What will get noticed by the financial press is that Berkshire lost $693 million on mark to market value of derivatives. Those who like to try to knock Buffett down a notch always have a field day with this one. In reality it certainly has no more meaning than the $6.1 billion in other comprehensive gains that go unnoticed. Buffett will almost certainly ultimately make money on these derivatives.

Berkshire’s book value per share has gained 7.5% in 2012 and stands at $107,377 per class A share. (Incredibly enough, these are the same shares that had a book value of $19 when Buffett assumed control of the company in 1965.) The B shares have a book value of $71.58. Berkshire is authorized to buy back shares if the price goes lower than 110% of book value, so $78.74 per share. Berkshire closed on Friday at $85.58. Although our report is not updated I would continue to consider it a (higher) Buy at that price.

Today the market was down because the European Central Bank did not promise to meddle in the markets immediately. It did however warn (err promise) that it would get ready to meddle before too long.

I view dips caused by this sort of thing as more of an opportunity than anything.

Melcor released earnings yesterday and the report was quite good. This is an under-valued stock that flies under that radar screen. The trading volume is too little to attract much attention. This is a boring company that has been listed on the stock exchange since 1968 and which traces its roots to 1923. It’s still controlled by the founding Melton family. It’s trading at 0.8 times book value and 10 times adjusted earnings. It’s a well managed company. It will have its ups and downs but I would be very surprised if it did not turn out to be a good long term investment (and perhaps good in the short term too). I had an order in to sell some of shares if it hit $15.90. It almost got there yesterday but not quite. I have now canceled my order to Sell. I was only selling to raise cash and maybe play the volatility a bit. Actually, I more inclined to buy more at this price rather than sell.

Facebook (or faceplant) hit $20 today. Linked in reported better-than-expected numbers after the close. I would think facebook should be close to a bottom here. But one never knows…

Yesterday there was a sort of mini flash crash as Knight Capital Group a U.S. market maker had a computer program go wild. It looked to me though that the real error was in their panic selling of some stocks they had bought by accident. Perhaps they could have sold more slowly.

Some investors feel that these events make stock markets more dangerous. I would argue it was nothing but an opportunity. I never use stop loss orders because I don’t believe in the “sell low” strategy. Value investors don’t use stop loss orders, those are for traders. Value investors would be more likely to have “stink bids” in. For example some lucky buyers picked up Berkshire yesterday at as low as $82.12. Not a huge discount but it was over a $2.00 instant drop that quickly recovered. If you have confidence in the value of the companies you own then the fact that the stock falls even further below a reasonable value is merely an opportunity to buy more. Admittedly it is a worry when it happens but in the long run it is often advantageous.

The market was disappointed that the Fed did not come through with some economic stimulation today. Whatever, the FED has done quite enough meddling. I think it is tomorrow that the hope turns to the European Central Bank to do some meddling.

Overall the market did not react much to the disappointment.

We’ll see what tomorrow brings…

I am eagerly awaiting a number of earnings reports due out around the end of next week. Canadian Tire in particular. They already pre-announced they would take a hit on closing some of the Forzani stores they bought. But other than that I am hoping they have done well. If not then I hope someone lights a fire under then with a takeover offer, that would be nice but I guess is not in the cards.

I don’t know why Rona ever opened big box stores. Did they really think they could compete with Home Depot? I think Lowe’s should just buy their big box locations, after all they were closing about 8 of those so might as well sell. I don’t see why Lowe’s would want their many smaller stores. (Although sometimes those small stores are the only game in a small town and can be lucrative).

Speaking of Retail, when I looked at RioCan the figures show that they have some leases with Target (former Zeller locations). And sure enough those leases have a good number of years left and are below market. That is why Target paid $1.8 billion for those leases. But I still think that was a Huge amount of money. And how incompetent was Zellers that they could not make decent money even with the low cost leases? Far as I am concerned Zellers were junk stores and should have turned themselves into giant dollar stores. Oh well, too late now.

The Case-Shiller report today showed that U.S. house prices rose in May.

We are past the bottom of house prices in the U.S. House prices are higher than the bottom on all 20 Cities in the survey / index. The increases range from 1.7% in New York and 2.5% in Detroit to 11.7% in Phoenix, 11.8% in Washington and 14.9% in San Francisco. The average for the 20 Cities is an increase of 3.6% above the lows. I use the raw non-seasonally adjusted figures because I believe that seasonal fluctuations are tiny compared to the trend in increases.

Facebook was down to $21.71. That is just 57% of the $38 Initial Public Offer (IPO) price. So a 43% decline.

It’s interesting to take a look at the share price and valuation of Facebook since just prior to the IPO until today.

As of December 31, 2011 Facebook had paid in equity of $2.684 billion. There was also retained earnings of $1.606 billion for a total common share equity of $4.29 billion. The founders and very earliest investors had paid essentially nothing for their shares and later private investors had paid in substantial amounts. It was not clear what the company was worth.

After the IPO The paid in capital rose to $11.684 billion. So $ 9 billion was raised by the company. The total IPO amount was $16 billion and so it appears the company got $9 billion and early investors sold $7 billion and walked off with that cash. After the IPO there were some 1880 million shares.

At the IPO price of $38, the company was valued at $71.4 billion.

But now at $21.71 the company is worth $40.8 billion. The book value per share is $7.08 consisting mostly of cash.

That is a loss of $30.6 billion in a few weeks.

It’s interesting to think about where the money went. In fact the $30.6 billion of wealth of the owners of facebook simply evaporated. That’s bad. On the other hand most of the original $71.4 billion of wealth was conjured from thin air. After all as June 30, 2012, facebook had raised a total of $11.684 billion from investors, it had earned another $1.654 billion. So that is a total $13.3 billion. (There was also another $7 billion raised at the IPO that went to former shareholders but that was just a trade some investors sold to new investors. Of the $71.4 billion total value, $58.1 billion was the estimated value of future profits on top of the $13.3 billion book value. That $58.1 billion in wealth essentially came from thin air.

What has happened since the IPO is that the estimated value of future profits has fallen to $27.5 billion from $58.1 billion. The difference $30.6 billion has simply disappeared into thin air from whence it came in the first place.

But all of that is just a matter of interest.

The real question is, should we buy facebook?

I don’t know. But I think it might be worth nibbling at. It is speculative and it could certainly fall further. I would not place a big bet on it. But a small position in it would be okay. According to analysts it is trading at 34 times estimated 2013 earnings. Not cheap certainly. But perhaps not totally outrageous. On the other hand the 2013 earnings are only a guess.

The big story on Wednesday will be whether of not the Fed stimulates the economy. If they don’t the market will fall, I suppose. I’m at the point where I really don’t care what the Fed does. The value of stocks will ultimately not be determined by the Fed. They can influence the short term but not so much the longer term. If the market falls substantially, I will be adding to positions.

Markets were somewhat weak today. There is some anticipation that the Fed further “stimulate” the economy at a meeting this week.

To my mind it is idiotic for the Fed to continue to try to drive down interest rates. They are already about the lowest in recorded history.

And low interest rates, while they help borrowers and stock prices and house prices inflict enormous pain on those trying to live on the interest from money in the bank. Low interest rates have succeeded in killing off many defined benefit pension plans and severely wounding most of the rest. (At least if the ultra-conservative methods of calculating the pension liability are relied on). Similarly low interest rates are almost death for life insurance companies and make it harder for banks to earn profits.

A far more logical form of stimulus, if that is what is wanted would be federal spending on public works such as roads. Unfortunately the federal government is already over-spending and in many cases not getting much for its dollar (wars in foreign places, rescuing large corporations…)

I suspect the Fed has caused quite enough damage already and not continue the madness of buying up U.S. government bonds and should think about unwinding some of what it has already done.

It’s also very hard to fathom why the Fed should care about the stock market. It is no part of the Fed’s job to stimulate the stock market.

And mature investors know that stock markets fall as well as rise even if over long periods of time they do rise. Trying to stop natural dips in the market is idiotic. If the Fed is trying to do that, its leaders should be fired.

It is ironic that in a so-called free market, the price of money itself is being manipulated down.

Some of you may want to consider our longer term and/ or lifetime subscription offers. We now have over 12 years of history of beating the market quite consistently. We can’t guarantee to keep beating the market, but we will be using the same methods that have worked well so far.

Bank of America is updated and rated Speculative Strong Buy at $7.17. ( As I post this it is up to $7.31 today) As mentioned in the report, this is a very large and complex company and our analysis is relatively superficial. I don’t claim any special ability to forecast bank earnings or analyst there many risks. However, on the face of it, this company is recovering and appears to offer compelling value. It has been volatile and will likely continue to be volatile. There are no guarantees but this is a company that could double in price within a year if things go well. On the other hand financial troubles in Europe could certainly send this and other bank stocks down at least temporarily. As disclosed below I added to my own holdings in this company earlier this week.

Stocks had a good day on Thursday and as of Friday morning are having another strong day.

Daybook however is down 14% to $23. I have said it does not have the advertising power of Google. But it certainly does have a tremendous amount of web traffic. I have not analysed it all all. Yahoo is showing it at 35 times 2013 earnings, which is still expensive. (And of course the 2013 earnings are no more than a wild a$$ed guess). It is certain that it is a better investment at $23 than at $38. It is a purely speculative stock at this point. Anyone wanting the excitement of “playing” it should probably stick to putting only some “play” money into it.

As always the market will continue to react to the latest earnings and the latest musings from Europe.

I am just taking a look at RioCan‘s annual report. I am looking at this company with some suspicion. It seems to me it is to some extent a work of financial engineering. It has a high yield. But the dividend appears to be higher than its earnings (setting aside market gains on the buildings). Some 22% of the distributions flow right back to the company under the dividend reinvestment plan. On top of that the company tends to issue a significant amount of new units each year. So how real and sustainable are the distributions when in the net the company is not really sending out much money?

But the company is growing its assets as well, so that is good.

I am not saying that the new units sold are used to pay distributions, in fact most of the new money is certainly used for new buildings. But does some of the new money go to pay distributions? I don’t know.

Companies that grow by issuing new shares are harder to analyze. The Book value per unit grows not only because of retained earnings but because of issuing new units at higher prices than book value. And RioCan is allowed to mark its building up for gains in market value, so that is vastly different than traditional accounting where buildings were kept on the books at cost.

RioCan tends to rely on the idea that its buildings only increase in value. But at some point don’t buildings basically wear out?

It may be easy to send out distributions as long as money is flowing back in from sales of new units/shares. But what would things look like if they stood still and did not sell new units and did not add new buildings for a while. Would the existing properties be able to support the distributions (after paying building capital maintenance costs)? That is part of what I struggle to understand.

Maybe RioCan is just fine, but I do look at it with some suspicion.

They report Q2 earnings on August 10 and I hope to update the report shortly after that.

Friday was a strong day in the markets. Stantec was one of the bigger gainers up 4.6% at $27.85. This is a stock that I would definitely consider buying. In fact I am wondering why I did not add to my position at recent prices. In recent weeks I was more in the mode of selling stocks to raise some cash…

Canadian National Railway is updated and rated Buy at $88.40 on Toronto or U.S. 87.98 in New York. It is a very strong company with an excellent history. It does not look that cheap but it will likely continue to be a good investment over time.

There was not too much excitement happening with our stock picks today.

Not surprisingly we continue to get mixed signals. Bad news from Spain. But Caterpillar earnings way up.

A lot is riding on the slow recovery in the U.S. housing market. With higher house starts comes lower unemployment. And higher house prices help the banks as well. Rumors of the-end-of-the-financial-world-as-we-know-it continue to be greatly exaggerated.

10 year bond yields in the U.S. are at 1.41%, so let’s see that’s a 70 year payback at that rate. Count me out. Anyone who can’t find a better expected return than that is not trying very hard.

A comment on Pensions…

These low bond yields could be the final nail in the coffins of many defined benefit pension plans. Hopefully this is the darkest hour before the dawn of higher rates. Even government plans are going to have think about closing the plans to new employees. And giving people the right to walk away with commuted values based on these low rates is becoming just too generous.

The Alberta government employee pension plan has seen its contribution rates more than double since 2001. In 2001 it was 4.675% of wages up to the Canada pension maximum (then $39,100 per year ) and 6.55% above that. It has risen sharply since then and in 2013 is set to go to 11.7% up to the Canada pension maximum (now $50,100 per year) and 16.72% above that. So quite a bit more than doubled.

The Alberta government matches these “employee” contributions. (And really the government pays both sides since it pays the employee’s wages). These are staggeringly large pension contributions. It’s driven by an assumption interest rates will stay low. The Alberta government plan uses a discount rate of 6.35% which was as of December 31, 2011. If they did it today the rate would be a good bit lower and increase the pension deficit even further. The current deficit is estimated at 23% on a going concern basis. A large chunk of the current contributions are to make up for a belated realization that past contributions were too low.

Non-government pension plans have to use discount rates that are even lower, they must use government bonds wile government plans are allowed to use corporate bond yields. Canadian National Railways for example used a discount rate of 4.84%.

If pension plans were allowed to discount the liability at the expected return on assets rate their “deficits” in many cases would turn into surplus. This would not be as conservative, but to my mind would be more accurate. Why should C.N. calculate it’s pension deficit on the basis that it would invest ALL the funds in bonds at 4.84% when in fact it expects to make 7.5% on assets? Now you can argue that 7.5% is too optimistic but to me the deficit should be calculated on some best estimate of the expected return on assets not some nonsense about investing ALL the money in bonds.

If rates are as low or lower at the end of 2012 as they are now, then pension deficits calculated on bond yields are going to be even more eye-popping. And contribution rates will have to rise once again.

This hit to government finances never seems to make the news. At some point it will. And while Alberta can handle this, what about Ontario, other provinces and the Federal government? It’s truly becoming unsustainable.

The whole notion of pensions starts to break down if have a model of working 35 years and being retired for 30 years. If pension returns are so low that one-third of wages needs to be set aside (Alberta is close to that) then something has to give. Either pension returns have to be higher or the retirement age has to increase a lot. Freedom 75 anyone?

Those in retirement now or close to it should be thankful that they can get their pensions before the retirement age rises.

And it may not be implausible that the government could simply make an arbitrary change to some of its pension plans. If features like unreduced pensions at age 55 were taken away, or phased out, the public would support that. Government workers would howl.

A weak day in the markets…

Lots of earnings reports coming in to push individual stocks in one direction or the other… Also of course news from Europe. It never ends.

I have tracked my portfolio on Yahoo Finance for something like 15 years now. I way soon try something else. Amazingly enough it does not work nearly as well today as it did 15 years ago. The Yahoo finance page is slow to load and often comes in with errors. At times I can’t even get it to show my portfolio. The news feature used to be great since it showed all the news for every stock in a portfolio on one screen with no need to click each stock. But these days there is so much news on just onebig name like Walmart that it tends to fill up the page with news on the big stocks and so I can miss news on the smaller companies.

Yahoo truly seems to be circling the drain. It’s quite sad when an internet company can’t even manage to have its pages load quickly. And I never did understand the idea of portal pages that years ago were supposed to be big money makers. (most of the old portal pages like America online and Yahoo have faded away. One of the few real money maker I am aware of as a web site is google because it gives you ads for topics you are actually searching on. Facebook, I don’t think holds a candle to the powerful idea of serving up ads on items you are actually searching for at that moment. PayPal is also a great money maker because it takes a cut on transactions and has a leading market share. eBay also is a great model because once nearly all the buyers and sellers got to eBay years ago it was almost impossible to entice them to go elsewhere. Buyers want to be where the sellers are and vice versa.

High traffic is neither a necessary nor a sufficient condition to make money on the web.

As a long-term investor I really should not be concerned with daily market fluctuations. Yet it seems impossible to keep our eyes off the market. I obviously prefer my stocks to go up. I don’t mind if the general market or any stock I don’t own or have not rated as a Buy goes down. And I don’t get too upset even if the stocks I own do go down. That can be an opportunity. As long as the earnings power of the companies we own goes up, the market will eventually recognize that. Meanwhile we should use the volatility of the market to our advantage, selling high and buying low. (Most investors seem inclined to do the opposite)

As for today stocks had a down day. I added to my Bank of America position. It is a speculative stock. The price to book value ratio looks very attractive. But the ROE is still too low. If the U.S. economy continues to improve even slowly then Bank of America will do okay. But it may be a bumpy ride.

Yesterday I tried to explain the sheer lunacy of a 30-year bond rate at 2.25%.

Let me put it in perspective a different way. I explained that with a 30-year bond at 2.25%, you get your money back on average in 24 years.

This is equivalent to investing 59 cents today to receive a dollar in 24 years. Does that make any sense? This would be a return of 71% in 24 years. But that is before inflation. You would have to hope that inflation was lower than 2.25%. If inflation was 2.25% you would have traded 59 cents today for the equivalent of 59 cents after waiting 24 years. And except in certain tax free accounts you would have to pay tax on your princely gain of 2.25% per year.

And what about buying a 10-year bond that pays 1.5% like the U.S. treasury bond. That is equivalent to paying 86 cents today for a dollar to be received in 10 years (and taking the inflation risk on that). What investor would admit to taking such a deal? And yet these bonds are being traded by the hundreds of millions daily. It’s simply not rational.

I read this morning where a 2% return might not be so bad because we might get 2% deflation, for a total real return of 4%. But investing in long term bonds will be a terrible investment if it turns out inflation is positive. And you can get the benefit of deflation by simply holding cash.

If it is truly capital preservation, without risk that you seek then consider the following:

1. For periods of more than about a year there simply IS no investment that can guarantee capital preservation in real terms. Even real return bonds can’t guarantee capital preservation because the real rate of interest can rise. There is no asset, be it paper, real or hard etc. that can be guaranteed to hold its purchasing power over a period of years. Not gold, not silver, not diamonds, nor houses, nor stocks. Some of these may be more likely than not to maintain or grow purchasing power and thus preserve capital in real terms. But none are guaranteed.

2. For shorter periods such as less than a year where (let’s say) inflation is of no concern (because you are confident inflation will be tiny) cash will preserve your capital. For safety’s sake cash is normally kept in a bank account or (for large amounts) in short-term paper such as a treasury bond.

3. Over longer periods of time cash will decline in value by the amount of inflation (offset by any short-term interest you can get) or will increase in value if there is deflation. With cash you don’t have to worry about market interest rates changing. Cash does not change in value based on supply and demand. Rather its purchasing power changes only with inflation.

If it is truly capital preservation that you crave then recognize that for very short periods only cash can achieve that. ANd for longer periods recognize that guaranteed capital preservation without risk is simply not possible.

It’s hard to see a role for long-term government bonds at today’s rates of 2.25%. Why would you lock into such a paltry return which will only protect your capital if inflation is less than 2.25% per year and which will subject your asset to possible large market value drops even if it will eventually give you a set amount of nominal dollars in the end?

Stocks on average are trading at P/E’s around 14. So that is an earnings return on market value of 1/14 or 7.1%. AND the earnings are likely to grow. What is the probability that over the next 10 years a portfolio of stocks that starts out earning 7.1% (and which can reasonably be expected to grow) will fail to out-earn a bond earning a fixed 2.25%. And what is the probability of the bond outperforming over 30 years?

Yes, 30-year bonds bought back around 1980 did about equal the performance of stocks. But stocks at around 1980 had a P/E of about 10 or an earnings yield of 10%. Long term bonds (20 years) had a yield of about 12%. So yes indeed bonds did beat stocks but they started with a head start. Today stock earnings yields are about three times the bond returns. Now stock earnings are typically only partially received in cash. But the retained portion is usually invested at an average of at least 7%, and often higher. Even the cash dividends on stocks is higher than the bond yields and the dividend is expected to grow. With such a massive head start it is hard to fathom that stocks will not easily out perform bonds in the next 10, 20 and 30 years.

But, none of this implies that stocks can’t crash very hard at any time. That is always the case. With stocks, you pays your money and you takes your chances. Or go ahead and sit in cash and give up on the idea of good investment returns. Depending on your risk tolerance (both emotionally and financially) sitting in cash may be the best option for some people.

My efforts are dedicated to the more enterprising investor who is willing to make an informed (but never guaranteed) risk / reward trade-off.

Friday was a weak day on the markets. Bright spots included Toll Brothers, up 4.4% and Walmart up 1.0%.

Also Liquor stores N.A up 2.4% and now up 17% since it was added to this Site as a Buy on April 10. eBay was another winner on Friday up 2.0% and up a stunning 48% this year (However we had only rated it a Weak Buy / Hold). Although I have not updated the report I am very doubtful that we would rate it a Buy at this point.

I am currently looking at Bank of America and hope to update shortly. While it has risks it appears to offer compelling value. I may add to my position in it.

I looked closely at Canadian National Railway’s annual report and Q1 report. I like what I see. They will report Q2 very shortly and it should be a good report. This is a good long-term bet.

Interest rates continue to plummet to extraordinarily low levels.

When it comes to long term government bonds, I would not consider owning them. Yes, everyone who invested in these bonds in the past 30 years has made out well and generally saw capital gains. Bonds rise in value as interest rates fall.

I went into this in detail in one of my articles.

Mathematically a perpetual risk free bond can continue to precisely double in value each and everytime interest rates fall in half. The theoretical maximum value approaches infinity as interest rates (on perpetuals) approach zero. But for 30-year government bonds there is an upper limit to the capital gains.

Consider a 30-year government of Canada bond issues at $1000 at today’s 30-year yield of 2.25%. The total cash flows from this bond over $30 years will be ( a whopping) $22.50 per year in interest for 30 years totaling $675. Plus the original $1000 for a grand total of $1675. But this money will received on average some 24 years from now. (^75 in interest payments received on average in 15 years and $1000 received in 30 years).

If 30-year interest rates somehow fall all the way to zero, then yes there remains a big capital gain on this bond, theoretically as high as 67.5% if that interest rate plunge happened tomorrow. More realistically if the interest rate falls immediately to 2.0% the capital gain would be only 5.6%.

It’s hard to imagine that anyone would buy a 30-year bond today for the sake of getting back their $1000 in 30 years and collecting a measly $22.50 per year in interest. First it would take only a little bit of inflation to make this into an investment that destroys purchasing power. Second, it is hard to imagine that there are not better investm,ents available.

Holding long-term government bonds on the speculation that interest rates will continue to fall could work out. But it comes at the cost of holding an investment that could plunge in value if interest rates rise.

If the 2.25% rate goes swiftly back to 4.0%, this bond would suffer a 30% drop in value.

10-year government of Canada bonds currently yield 1.62%. Even if rates plunged now to 1.0% this bond would only gain 5.9%. Whereas if rates returned to a more normal 4.0% then the bond would suffer a 20% loss in capital value.

It boggles the mind to think that certain investors are voluntarily accepting these flea-sized yields. Pension funds and insurance companies may be virtually forced to invest in these. Banks might also do it. There becomes a certain institutional habit where all these big players continue to invest in an irrational fashion and justify it on the basis of habit and the fact that all the others are doing it. Retail investors are free to think more independently and should think long and hard before investing at these low yields.

I would sooner short these bonds than hold them. However shorting can be emotionally challenging and it is not something that most retail investors should even consider.

I don’t pretend to understand why interest rates are so incredibly low. One possible explanation is actually that there is a huge surplus of money available to be loaned and few borrowers. That does not exactly seem to be the case however. Another possibility is that governments have somehow been able to force the rate low by having their central banks, federal agencies and possibly convincing banks and pension funds to buy these despite the tiny yields. If that is the case I don’t know that it can last indefinitely. At some point lenders are likely to demand higher interest rates.

Stocks did well on Thursday but our picks suffered with declines from Walmart and Bank of America.

Walgreen, rated (higher) Buy at the start of this year at $33.06 and had languished this year. But yesterday it announced some good news involving a contract with a large benefits plan that it had lost and now has regained. The stock jumped about 10% yesterday to $34.62.

Today was a strong day for U.S. markets with the DOW up 0.8%. This was driven by some good earnings reports and by comments from Ben Bernanke that the U.S. is not likely going into another recession. And, notably due to stronger housing stats in the U.S.

On this occasion our Stock picks failed to get the good news memo. I personally got somewhat clobbered by Bank of America being down almost 5%. But certainly I know that is a volatile and more speculative holding holding. (But that does not mean it may not be a great investment, time will tell)

Somewhat surprisingly Toll Brothers fell today despite the higher housing starts.

Earnings season is now in full swing in the U.S. and will get going next week in Canada. Hopefully some good news here can carry the market along although there is always the specter of bad news that can come from Europe at any moment. (including the LIBOR mess)

Markets rose today based on a positive interpretation of Ben Bernanki’s comments. Also positive earnings reports from Goldman Sach’s and Coke.

Based on an order I placed last month and then more recently renewed, I sold some of my Boston Pizza today at $18.10. This selling is just to be prudent and raise some cash as and if markets rise.

If I decide to buy anything it will probably be Canadian Western Bank. It’s always possible it could suffer loan losses due to a recession or from natural gas drillers, but overall it seems like a very safe bet for the longer term.

The Dow was down 0.4% today (Monday) while Toronto was very slightly up.

A small portion of my Wells Fargo shares sold today based on an order I had placed about a month ago to sell a few shares at $34.00.

Alimentation Couche-Tard released earnings last week. At a quick look the stock seems expensive now. If I still held I would sell. I would worry how the stock price will react after the next earnings release when, for the first time, it will be showing all the debt it has taken on to acquire Stat Oil retail stores. Long-term it should continue to do very well as a company, but the share price seems too rich at this time. Or at least the evidence is not clearly there yet to support this stock price.

Costco is updated and rated Weak Sell at $94.81. It also looked expensive at the start of this year but has risen 14%. It’s an extremely good company. But it simply looks expensive. Possibly there is an argument to pay up for quality but there is also a risk that the P/E ratio could decline despite the stores doing very well. I am not a buyer at this price. I might sell or hold if I already held it. I certainly would not “short” the stock.

Wells Fargo is updated and rated (lower) strong Buy at $33.91. While there are always risks, especially in the short term. this bank has competitive advantages and is likely to continue to do well.

This company has been my top holding for some time and represents about 18% of my portfolio. I am wondering if it should be more than that. I did have an order in the trim my holdings by a small amount at $34. That almost got hit on Friday but not quite. I am tempted to pull that sell order but may just leave it in as a matter of prudence.

Friday was a strong day in the markets. China apparently reported lower growth and paradoxically the market took this as a positive signal since the Chinese might then stimulate their economy. At least that is what analysts said happened… The market also reacted positively to J.P. Morgan’s earnings results. Overall, the DOW and S&P 500 were up 1.6% and Toronto was up 0.8%.

On Friday, Wells Fargo reported earnings and rose 3.2%. Bank of America which has been very volatile was up 4.6%

I heard an Analyst on Friday state that the U.S. airlines business was weak due to slow economic growth. That is completely laughable. The airline industry is weak because it is inherently a commodity product with no customer loyalty, and brutal competition. In such an industry it takes cost advantages to make even reasonable profits.

Interest rates are at historic lows and stock markets seem at least reasonably valued. It is dangerous to borrow to invest. Nevertheless, today may represent a generational opportunity to do so.

I have been disappointed with the performance of Canadian Tire. This quarter I understand they will have some unusual losses due to closing some of the sport stores they acquired from Forzani’s. If they do not do quite well other than that, then I may have to re-evaluate my faith. I am starting to wonder if they are competitive enough on their costs. (Some preliminary calculations indicate that their retail mark-ups are far higher than the likes of Walmart. I do think they have the opportunity to realize value by selling and leasing back stores. But there is no indication that they will do so.

The Dow was down 0.25% today and the S&P 500 was down 0.50% and Toronto was down 1.0%

I probably don’t need to say this, but as a reminder I have never said that I could predict the direction of the market. What I can do is analyses whether the market as a whole seems to be reasonably valued. You can check that valuation analysis and the assumptions used and see the results based on other assumptions in my articles about market value for the S&P, the Dow and Toronto

What I also do is analyze whether the stocks in the table above seemed to be good value as at the dates indicated in the table and analysis.

I view market declines as being simply the nature of investing. I think investing over the years will be rewarding. But yes, we will certainly have our share declines in individual stocks and in the overall markets. Anyone who can’t deal with that should not be investing in stocks, or should limit their exposure to stocks.

The fact is that over 99% (maybe even 100%) of the subscribers to this page seem to be very mature and don’t expect to escape declines from time to time. Nevertheless I think it is good to remind people once in a while that as investors we do risk at least temporary declines.

Very few of our stock picks were up today. Toll Brothers however rose 2.7%

Warren Buffet was on CNBC for a long interview this morning. I saw some reports indicating he was pessimistic. I certainty did not detect any pessimism when I watched the interview. He said most of his companies were growing but at a very slow rate, a little slower than recent growth. His housing related businesses were starting to show noticeable growth but from a low base. His sources indicated that Europe which had still been growing was now really slowing down. He was very optimistic about the future of America.

He also said that the U.S. debt problems are very large but that the solution is very clear (raise taxes and cut spending) but congress has failed to act.

As of just after midnight the futures are up because apparently Chinese GDP numbers were good.

Friday morning Wells Fargo will report earnings before the open. Also J.P. Morgan.

It should be yet another interesting day to close out the week.

In today’s “action” the Dow was down 0.4%, the S&P 500 was flat and Toronto was up 0.3%

Our stock picks did okay… Notably Berkshire was up 1.25% to $84.09. The order I mentioned two days ago to sell 100 of my 1300 Berkshire shares at $100 went through. Bank of America continues to be volatile and was up 2.0% today.

Alimentation Couche-Tard announced earnings today and jumped 4.8% to $48.10. Our last update on the stock was December 11 rated (lower) Strong Buy at $29.29. So, it is up 64% since then. Sadly I had sold my shares at around $38 when it initially jumped several months ago. I hope to update this one within a week. It’s a great company and I respect management a lot. But I suspect it is going to look rather expensive at this price. Couche-Tard is a huge convenience store owner operating under the banners Winks, Macs and Couche-Tard in Canada and mostly under the Circle-K brand in the U.S.. Most of its locations are in the U.S. The recent pending (and large) acquisition that ignited the share price is in Norway. This is a case that proves that sometimes the most mundane of businesses can make big money for investors. (And RIM meanwhile has proven that the most exciting technology companies can sometimes lose big money for investors).

There is no great correlation between excitement and return in the stock market.

There will be some interesting earnings releases on Friday. I am looking forward to Wells Fargo’s earnings on Friday. The market in general seems keen to see what kind of trading loss J.P. Morgan will post on Friday.

Walmart went over $72 today and so my order to sell 300 shares went through at $72. It got as high as $72.58 but closed at $72.11.

Most of our stocks picks were down along with the market but Boston Pizza was up 1.4%. The Canadian dollar was down a third of a cent which amounts to a gain on Canadian’s U.S. investments.

My order to trim 1000 of my 8200 Melcor shares at $15.90 almost got hit today, but not quite. That order as well as a further order to trim an additional 1000 at $16.90 expires today but I will likely renew those orders. The other order I have in (besides the Berkshire mentioned yesterday) is an order to sell some of my Boston Pizza at $18.10.

Today there was news of a small futures broker having scammed some $200 million from customers.

A few thoughts on this.

Firstly there is no reason for a rational INVESTOR to be involved with speculating on futures. First, it’s a pure zero sume game. You can only win what another trader loses. (In stocks all owners can win from profits serving customers of the companies owned). Second, probably 95% of the population would not be able to do the math to think about how to speculate on futures. Thirdly, of the few people who could do the math almost none of them would have any rational reason to think that they are able to predict the direction of futures. Currency futures in particular seem like a total speculation. It MIGHT be possible to predict that corn prices will go up due to a draught. But currencies fluctuate for many reasons and I just don’t think anyone can consistently predict those (and certainly not over periods of less than about a year). To my mind, one does not invest in futures markets. One hedges or one speculates. But investing is not involved.

Also I don’t understand why any investor would want to place their funds with some small brokerage. It seems far preferable to stick with the biggest names in the business. Canadian might not like their big banks. But they do trust big banks not to literally steal their money. The big Canadian banks can easily handle almost any size investment portfolio. I just see no reason at all to start writing cheques to small companies. It’s a risk that is easily avoided.

Markets were down modestly today, but our stocks picks held in quite well. Walmart, Wells Fargo and Berkshire all edged up a little.

I had an order in to trim my Berkshire position by 200 shares (from 1400) if it should hit $84. With Berkshire at about $83.60 today I decided to sell 100 at the market. The other 100 is waiting for $84.

I also have an order in to trim my Walmart position by 300 shares (from 1100) if it hits $72. It was not far from that that today and I considered selling those 300 shares at the market but then decided to just wait and see if it gets to $74.

I probably should be more aggressive about trimming positions just to raise some cash and hedge my bets at least a little.

Alco came out with Q2 earnings that were quite weak but which beat expectations marginally.

There continues to be news about acquisitions taking place at good premiums. Thomson Reuters is buying FXAll at a 40% premium to the recent traded price. This suggests that acquiring companies are perceiving some bargains in stock prices.

Our reference article on Global Exchange Traded Funds is updated. Many argue that the best investments are to be found in emerging markets. However most emerging market ETFs do not appear to be obvious bargains, although they may be when the growth is considered. For this update the China ETF appeared to be quite attractive. And a number of other countries are attractive as well. Personally I have restricted my investments to Canada and the U.S. in the vast majority of cases although I currently own a very small amount of the Japan ETF and have in the past briefly owned small positions in the UK and, I believe, the Europe ETF.

Markets fell on Friday due to weak job growth.

Walmart was one of the few gainers, up 0.4%.

Research in motion was also a gainer, up 5.2%

On Friday I read an interesting story about a company that offers satellite internet service in rural areas. With their newest satellite just launched they are able to offer high-speed internet at prices comparable to those paid in the City (although there are limits on the amount of usage).

See www.xplornet.com

I really don’t know anything about cell and internet technology but it seems to me that cheap satellite service could one day give cell phone and cable companies a run for their money. Could be a game changer.

But perhaps I don’t need to worry about Shaw Communications too much, I see that they are offering services in partnership with xplornet.

xplornet is a private company out of New Brunswick. It sounds like a nice success story.

Saturday’s Edmonton Journal indicates that home building is still growing in Alberta. I do have orders in to reduce my Melcor holdings at $15.90 and $16.90 but I really not sure I should be selling any.

Even with some news of stimulus and rate cuts from Europe and China, markets were down somewhat today. Well, that was to be expected after the recent strong gains.

Toll Brothers managed a gain of 2.3% today to $30.25. This stock got as low as $24 only three weeks ago (and I added to my position at that time). It’s been a nice run. It does look expensive but I think the U.S. housing market is in slow recovery mode. I consider it speculative because the earnings still have to increase a lot to justify the share price.

Tomorrow’s market will apparently hinge on the jobs repot to be released tomorrow morning. And then next week we will be starting to get into the Q2 earnings season.

U.S. markets were closed today. The TSX gained another 0.5%

Well before the market opened this morning, the TMX group and Maple group announced positive news about the deal being approved but indicated the Competition Bureau approval, although looking positive, was still needed. TMX Group rose a little on the news.

A few hours into the trading day the Competition Bureau issued a press release that it was not going to oppose the deal. The price then shot up some more. The total gain today was 3.3% with about 2% coming on the Competition Bureau press release.

It’s hard to understand how a regulatory body like the Competition Bureau could be so irresponsible as to release this news during the trading day. This kind of thing caused harm to those few trades that go through just after the news comes out with the buyer aware of the news and the seller unaware. It’s not fair. However, it was just a few shares traded before the price adjusted to the news so not that big a deal. Still it is shameful conduct, in my opinion.

The other concern about this deal is how a near-monopoly like TMX can be allowed to join with its largest competitor. If this is how things are done, then, in my opinion, the Competition Bureau should certainly be shut down as an apparently worthless government agency. If you consider whether any large company in Canada has any real alternative to listing on the TMX, I think the answer you will arrive at is “no”. No choice would imply a monopoly on the listing business. It’s interesting that the head of the Competition Bureau announced her resignation a week or so ago. I wonder if she was pressured to approve this deal?

Turning to Research in Motion, RIM, I read the editorial by its CEO in today’s Globe and Mail. While every CEO can be counted on the say everything is fine even as the ship sinks, this CEO did strike me as knowledgeable and sincere. I am tempted buy some RIM shares but have no immediate plans to do so. It’s going to be about 8 months (or more) before we see the launch of Blackberry 10. On the other hand a takeover deal could come at any time. Even if Blackberry 10 is as valuable as the CEO seems to think, I suspect the apparently unknowledgeable Board at RIM would jump at any takeover offer. Other than the CEO I don’t think any of them have an technical knowledge or even any consumer goods experience.

Okay, so the Dow was up another 0.6% today. Toronto was up 2.2%. Oil was up… The Canadian dollar was up.

Walmart powered ahead by another 2.0% today to $70.75. No one seems to have noticed that it has passed its lifetime high from way back in 1999. That is really of no relevance but I find it interesting. Canadian Tire was up 1.7%. Shaw Communications (which has been weak) was up 2.4%

Here are my thoughts on some of this…

Personally I am up close to 17% this year to date. That kind of gain is not sustainable. Basically my stocks are doing better than the underlying companies. That is mathematically something that can’t continue for too long.

I have a very heavy exposure to equities somewhere around 95%.

But the stocks I own don’t seem over-valued. I am loathe to sell.

But from a portfolio management perspective (as opposed to from the perspective of individual stocks) it would seem prudent pare back my equity exposure. After all we all know that markets can go down quickly at any time.

I had entered some orders to reduce a few positions a few weeks ago and those never got hit. (Walmart, Melcor, Wells Fargo, Boston Pizza and Berkshire Hathaway. Those orders are still in place. But as reported below I did go in and trim some Walmart and Canadian Tire and Wells Fargo and Toll Brothers.

Even if I sell down a bit I am still going to have a very heavy exposure to equities. I almost always do. I accept the risk of it. It has worked out well over the years. But not without some heart-stopping declines from time to time.

July 4th, Wednesday should be quite given the U.S. holiday, but then again one never knows what news will arise out of Europe.

The U.S. markets were open today and closed about unchanged. I would have expected at lest some decline after the big gains late last week.

I have added a new edition of the free newsletter. However, I was unable to email it out due to a system problem.

This newsletter includes a link to my new article about how Warren Buffett motivates his managers.

My personal portfolio composition is updated

After Thursday’s market surge, my own portfolio is up a surprising and rather satisfying 16.4% in 2012.

Here is a summary of how all our stock picks have done since the start of 2012.

Research in Motion is updated and rated Highly Speculative Strong Buy at U.S. $7.39 (Canadian $7.54). This company is obviously now very unstable and difficult to predict. It really is not the type of company that is at all well suited to our analysis techniques. (Due to earnings which appear to be turning negative).

This company may represent an opportunity but it is certainly not for the faint of heart.

On the conference call the management seemed optimistic for how Blackberry 10 will do once it is launched in about 8 months. But also they seemed a bit robotic (not showing a lot of emotion) and not that forthcoming on some questions.

Update 11:30 am eastern. I decided to also sell 20% of my Toll Brothers. Toll should do well certainly as a company, but I worry about its high P/E ratio and I have had a nice gain already. I always find that once I get in selling mode it’s a bit hard to stop.

The market rally is surprisingly strong this morning on positive news out of the summit of Europena leaders. Hopefully it continues, but often these relief rallies have been very short lived.

I decided to modestly reduce my holding in Wal-Mart and Wells Fargo this morning. I very much like both companies. But it is prudent that I raise a bit of cash in case of a market down-turn and also because there are always better opportunities to be found. And if I find some I will need cash to invest.

I’ll probably leave the proceeds in U.S. dollars, though it will be tempting to transfer some money to Canadian dollars especially if the Canadian dollar falls more (today it is up strongly).

Well it was certainly a banner day on the markets today to end the second quarter.

The DOW was up 2.2%, Toronto was up 1.5%. Oil was up 9% (although one figure showed a staggering 18% late Friday).

The Canadian dollar was up a remarkable 1.6%.

Walmart was up 2.2% to a new closing record of $69.72. I have not seen this mentioned yet in the financials web sites that I view (mostly Yahoo)/ The last record close was in 1999! Not Walmart’s fault it took so long. Idiot investors has WAY over-priced Walmart back then.

Among our stock picks the biggest gainers were Bank of America up 5.7%, Stantec up 4.8%, Toll brothers up 4.7%, FirstService up 4.6%. Research in Motion was down 20%.

Shaw Communications is updated and rated Speculative (higher) Buy at $19.24. It reported a 3% decline in earnings and revenues in its latest quarter. It continues to lose basic cable customer at a rate of about 1% per quarter. Meanwhile telephone customer growth has slowed to the point where it only about offsets the loss of cable customers in termns of numbers. Internet growth is about zero. The television business also declined about 3%. This is of concern. I believe the television shows are strong but it may indicate advertisers switching away from television as people increasingly have the ability to speed past commercials as they watch. However Shaw blamed it on the weak economy. Shaw has the ability to increase earnings by lowering their advertising dollars and are doing this but this could worsen the sales outlook. Overall however Shaw appears to be offer good value. We call it speculative due to technology risks.

Our stock picks managed to do okay today. U.S. investments were helped in terms of their Canadian dollar value by the drop in The Canadian dollar today. Toll Brothers and Canadian Tire did well today.

Shaw Communications came out with an earnings report that after adjusting for unusual items was a bit weak. Research in Motion came out with terrible results after the close. I plan to update both of these by Sunday.

As of 11:30 pm Thursday evening it appears that the Dow futures are up about 100 points probably on some hopeful news out of the European meetings. Recently the positive reacting to such news has melted away pretty quickly.

The take-over of Provident Energy at some 77% premium to the last stock price is another indication that buyers of entire companies are finding the stock market to be cheap. As Buffett has preached, when you can buy small pieces of companies at prices well below the price s that would be paid for the entire business, you are likely to do well.

On the other hand there is certainly no shortage of negative news around and it is going to take mental toughness to stay in the markets to (most likely) reap long term gains.

Pleasantly enough (and a bit surprisingly) the market has given back the losses of Monday over the past two days. Well at least that is the case for my own account, and the American market DOW has recovered quite a bit, although not completely. But Toronto has still not recovered much from Monday.

Today Toll Brothers was once again a notable winner, up 3.9% as more data suggests the U.S. home market is improving.

Hopefully, we can get through the next week or two without losing ground. (But one never ever knows). By the second week of July we will start to get the Q2 earnings reports and they should be mostly good and will probably provide support for the market.

Note that I plan to update many of the reports during July and early August. And some new companies will be added.

Today the market gave back some of yesterday’s losses. A notable winner was Toll Brothers up 5.3%. The latest Case Shiller report shows that U.S. home prices rose 1.3% in April. Also yesterday there was a report that new home sales were up.

As most will have noticed, Monday was a down day on the markets.

Walmart was up 1.3% and was one of very few winners today.

While stocks are generally falling in price, one positive indicator is seen in corporate transactions. Microsoft is buying a web business called Yammer for $1.2 billion, Dell computer has outbid another buyer for Quest software for $2.3 billion. I believe that the indications from corporate transactions is that corporations see many stocks as being bargains.

Dollarama is updated and rated Sell at $61.81

I highly respect this as a business but simply find the share price to be too high for all the reasons indicated in the report. As a business it is an amazing success story. And it may continue to do well as a stock. But I have to go with what the numbers tell and that is that it is too rich, a Sell.

On Friday markets recovered somewhat from the gloom of Thursday. Our stock picks did well.

Most notably, Visa was up 4.6% to $125. As I have often said in regard to this stock and a few others. it’s hard to keep a good unregulated-as-to-price monopoly down. And I have explained in the report why I consider Visa to have monopolistic features. And most of its prices are largely unregulated.

The Dow ended the day down 250 points or 2.0%. Toronto was down 351 points or 3.0%.

The market had reacted positively this week to news of the Greek election outcome and to the Fed’s operation twist. But the positive reaction has been short-lived. Today the market focused on the weak economy.

I am neither surprised nor particularly worried by today’s market decline. No doubt markets will continue to be volatile. But markets seem attractively priced. I am comfortable holding. However I would like to have some cash ready for bargains.

Canadian Tire was one of the few stocks that was up today. I sold a small portion of my holding in Canadian Tire today just to raise some cash.

Moodys down-graded some 15 large international banks today. They had telegraphed some time ago that they would do so. It seems like a non-event. Credit rating agencies have little credibility these days.

I was just reading the Canadian Business magazine article about SNC Lavelin and it’s Libyan scandal. I know very little to nothing about this company. But based on the magazine article its international operations are complex. It seems clear that some of its top employees in were involved in bribes in Libya and there were connections to Ghadaffi. While the company has terminated a few employees and distanced itself from (itself?) this story is not over. Personally I would stay away from this stock. I would say also that over the past few years watching the SNC chairman Gwyn Morgan on BNN and Lang and O’Leary he impresses me not at all. He seems too smooth, even too well groomed for my taste, (looks like an actor or something to me, that’s just my impression) and is perhaps infatuated with himself. I don’t know his history at EnCana and its predecessor which I think (from memory) was Alberta Energy ltd. EnCana came from a merger of Alberta Energy and Pan Canadian Energy and I think Gwyn came from the Alberta Energy side.  Maybe he is highly competent. I don’t know.

Markets held up well today after the Fed extended its “Operation Twist” whereby it would sell short term bonds and buy longer term bonds which would push long term interest rates down even further (or hold them down).

Tonight there are indications that the market will decline tomorrow. (Futures are down slightly)

Market were surprising strong today (Tuesday) with the Dow up 0.75% and Toronto up 1.6%.

Almost all of our stock picks rose. Notably Bank of America up 4.5%.

This market rise was partly on expectations that the Fed will “ease” monetary conditions on Wednesday. That being the case if it does not happen we certainly give back the gains on Wednesday.

I mentioned a few days ago that I had some orders in to trim some positions. I was hoping some would sell today but perhaps my prices were a little high. I may regret not selling a little bit on today’s rally, we shall see.

Walgreens however was down 5.9% on news that it was making a big acquisition in the U.K. BUT also on news that its earnings in the latest quarter were down 11%. I have not looked at any of this information yet.

I was in Costco on Sunday and again today. I seldom shop there (I am not the shopper in the family) but always marvel at the place when I do. As a stock it seems expensive. As a business it is exceptional.

It is by far the most efficient retail operation in getting goods to consumers at the lowest cost. It has a limited selection of goods but it has low costs and low prices.

I had heard someplace that Costco marks up everything a maximum of 15 to 18%. In fact on Sunday a clerk told me it 14%. I was not sure I believed that, but maybe. I had calculated its markup to be 17%. By comparison I calculate that Walmart marks up an average of 33%. And small stores like Reitman’s mark up by an average of some 200%!!

The notion of a competitor that can make a decent profit despite marking up by only about 17% (or 15%) must strike a deathly fear in the heart of other retailers.

In the retail business it would be strange to mark all items up by the same amount. Imagine Jewelry. I would guess that most jewelry stores mark up by an average of perhaps 100% or more. How can they compete with 17% (or 15%) (The difference is that I count the membership fees as revenue so it is perhaps 15% actual markup and they get another 2% from membership fees).

I believe Costco has pricing power on may items and could mark up by a higher amount but they choose not to.

The bottom line as an investor the stock looks too expensive but I certainly would not bet against it.

As a customer I trust Costco. In most cases you will get at least a fair price at Costco and I think very often you will get the best price around. Occasionally others may beat it with a special sale but overall Costco simply has a low markup and low costs and the consumer wins with that.

The tiny blip of excitement over the Greek election that drove the DOW futures up 66 points on Sunday fizzled out by morning. We ended up down 25 on the Dow but up 76 on Toronto.

The best performer was Stantec up 4.2%.

Stock markets were up of Friday despite fears over the outcome of the Greek election.

It appears the outcome of the election is favorable. The Dow futures were up 66 points as of mid-night Sunday night / Monday morning. Not huge but at least it is positive.

Markets may bounce around this week depending whether the proposed coalition government in Greece appears to be coming together or falling apart at any point in time. And depending on news of what policies the new Greek government will follow.

Stocks ended up doing well today on rumors / news that certain central banks would take some kind of coordinated efforts to deal with matters in Europe. For our stocks the best performer was Toll Brothers up 3.3%. Friday should be yet another interesting day as the market digests the rumors or news about central bank action and as the market focuses on the Greek Election this weekend.

A glance at the graph of today’s trading shows the Dow started out down but was modestly in positive territory much of the day before falling to a 0.6% loss at the close. The TSX started out in negative territory and then traded higher much of the day and finally closed unchanged from yesterday.

Canadian Tire was down 2.3% for no apparent reason.

Dollarama was out with very good earnings and rose 6.6% to $60.36. I will update the report on this company shortly. I thought it was over valued in January at $43.49. So I suspect my analysis will continue to suggest it is too pricey. I do however have a great deal of respect for it as a company and for its management. They are clearly doing very well indeed.

Dollarama now has an equity market value of $4.6 billion while Canadian Tire is at $5.5 billion. While Dollarama is very profitable and has established a lot of brand recognition and drawing power it’s really hard for me to believe it should be worth anything close to what Canadian Tire is. I will looking further into this comparison very shortly.

As expected my order to sell 20% of my Walmart shares went through this morning. I had placed a limit order to sell at no lower than $67. The stock opened at $67.68 according to Yahoo finance. My shares sold at $67.70 (I am not sure why it would not have been the $67.68). My shares sold at 9:30 exactly when the market opened.

None of my slightly optimistic orders to sell (a portion of my holdings) at prices a few dollars higher than Monday’s closing price got filled.

The Dow was up 163 points gaining back the near 150 point loss from Monday.

Canadian Western Bank was down 3.3% (to $26.25) for no apparent reason (other than perhaps making up for the fact that it rose yesterday when almost everything else fell). While no stock is free of risk, this one looks like a very good bet to me. Unless the western economy and house prices take quite a beating this stock seems unlikely to decline much. I would suspect that over the next seven to ten years this stock should double but will do so in an irregular fashion. (I may just talk myself into quickly reinvesting my Walmart proceeds into this, except I sold the Walmart to build some cash).

Update: earlier tonight I posted some thoughts about selling some shares to raise cash. I have now entered an order to sell about 20% of my Wal-Mart shares at a minimum price of $67. And another 20% if we happen to get to $72. I also entered orders to sell some Canadian Tire if we get to $71 and some Boston Pizza if we get to $18.20. And some of my Berkshire at $83. Also some Wells Fargo and some Melcor. With the exception of the first 300 Wal-Mart shares the rest of these are rather optimistic asking prices. It’s entirely possible perhaps very likely that these will not be triggered in the next 30 days (the orders will expire after 30 days unless renewed). But if these stocks do happen to get a material little bump then I will have taken some money off the table automatically. I usually find that on days the markets is up my brain fills with some sort of endorphins that make me feel very good about stocks and my thoughts don’t much turn to selling on those days. By placing these orders, I take any further thinking and emotions off the table. (well unless I later change my mind and cancel the sell orders).

I don’t know if this strategy makes sense. If I was really serious about raising cash I should simply sell at the market price to make sure I get some cash. But anyhow, this seems to be a way to convince myself to take at least some money off the table though that will only happen if the market rises (except the first 20% of my Walmart will sell if the price is remains above $67 anytime tomorrow.

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Well the positive reaction to Spain’s bank bailout did not last long. Futures were up close to 150 points on the Dow yesterday but in the end the Dow was down close to 150 points today.

Canadian Tire and Canadian Western Bank  both managed to rise today. The rest of our stock picks were down or about flat.

Yesterday i mentioned I might sell some Walmart to raise cash. I possibly would have sold some Walmart if had been online Monday morning near the open. What I should have done was entered a sell order last night at say $68 or $67. That way my shares would have sold a the opening price today of $68.39 (this assumes that my oder would have not have affected the opening price, which in the case of huge heavily traded company like Walmart, it would not have). And the lowest I could have been sold at was my price of $68 or $67. Had the stock opened at $66 and went lower for example I would not have been sold.

The type of buy or sell order that I am talking about here (Place a sell order below the last traded price or a Buy order above the last traded price and do this off hours) can work well but ONLY with heavily traded stocks. If the stock opens higher than your limit sell price you will get that price and you cannot get less than your sell price. If the stock opens lower than your limit Buy order you get to buy at the lower open price. This makes sense when you consider that these orders are called limit orders. When I place an order to Sell Wal-Mart at $67 it means I will sell at no less than than $67. I think this sort of strategy can make sense especially for investors who are not online to place trades during the trading day.

This strategy of pricing a bit “off the market” would not make sense during the trading day. If I am willing to sell as low as $67 but the current price offered to buy is $68 then it usually makes no sense to do anything other than place a market order or a limit order very close to the $68. If however the stocks is both very liquid and the price is moving rapidly you can do an order to buy a material bit below the offer price and it has been my experience that you will still be filled at the offer price or something very close to it.

One danger with this type ofs strategy. If you really want to buy or sell then any kind of limit order could mean =you don’t get a fill if the price moves too fast. On the other hand market orders can be dangerous especially with anything other than highly liquid stocks. With a market order it is always possible you will be filled at a price much different than you hoped, that is if the market moves rapidly.

Perhaps I will enter a sell order on some of my Walmart shares tonight. But, I don’t know, I may decide to hang in there.

With my very heavy exposure to equities (104% since I am using a bit of margin) it may be wise for me to think about raising some cash by taking some profits. Therefore I will consider selling some Walmart, of my five largest positions, four are rated (higher) Buy or in the Strong Buy range while Walmart is rated “only” Buy and is also now moderately above the price where it was rate Buy. I probably should reduce some other positions to get the cash up to around 20% in order to be well positioned just in case the market declines and also to have funds available for any other stocks that I may want to buy. But I find it difficult to sell stocks that seem to be somewhat under-priced.

As of late Sunday evening, the futures are suggesting a positive reaction to news out of Europe on the weekend. Dow futures are up 129 points but earlier had been up somewhat more.

Our average stock in the Buy and Strong Buy range is up 5.9% in 2012 which is better than the TSX which is down 3.9% and it is similar to the S&P 500 which is up 5.4%. My own portfolio is currently  69% concentrated in just five stocks and has managed a 13.0% gain this year to date. However, my approach is relatively risky.

FirstService Inc. is updated but is rated Weak Sell at U.S. $26.30 or $ CAN $26.95. While I like the company and its history, it is complicated and its earnings were negative in Q1. At this time I prefer to avoid it and stay with what appear to be more obvious winners. It is not a company that I would bet against however. And by-the-way, selling a stock and certainly choosing not to hold a stock is a very far cry from shorting a stock. “Sell” does not mean “short” for this company or any other company that we rate.

Walmart was our big winner on Friday up 3.7% to $68.22. I don’t think such a big one-day jump was particularly justified but it was nice to see. It represents about 10% of my portfolio. If it gains a bit more it will surpass its all-time closing high of $69.44 set way back in 1999. Investors were basically idiots to have bid it up so high back in 1999 when it earned just under $1.00 per share. Now it is earning $4.63 per share and so this time its price is quite rational.

Our recent rating was Buy at $65.31.  Because I have 10% of my money in it and because the rating is not one of the higher rated stocks on the list I should probably reduce my position at this point. It will probably be a good but not great investment if held over the next 10 years.

The big market gains on Wednesday were apparently due to rumors of further “easing” by the Fed and  perhaps some bank rescues in Europe. Today (Thursday) the Fed chairman more or less poured cold water on the idea of immediate Fed easing. But China did some easing. All in all the market held up not badly on the disappointment from the Fed. The Dow was up 46 points but the S&P 500 was down slightly and Toronto was down 41 points.

Canadian Tire was up 1.5%.

Thursday afternoon there was news that a Montreal-based company called Genivar Inc. was issuing shares and was buying a British company WSP Group PLC for $442 million. This was a whopping 67% premium to the share price. Yet with WSP having 9000 employees, the price does not seem all that huge.

I know nothing about Genivar and had never heard of it and I would have no reason to have ever heard of WSP Group. What I find encouraging is that companies are being taken over at HUGE premiums like this. Basically on standard present value analysis a lot of companies look very cheap and that is why we see takeovers at premiums.

Well, who’d a thunk the DOW would rise 287 points today, 2.4%? or the TSX 126 points or 1.1%

Apparently the market rose on hopes of government intervention (interference?) into the economy including bank bailouts in Spain and additional monetary easing in the U.S.

When we get gains based on rumors of government actions, those gains can certainly reverse in a hurry. In the long term what matters is holding good companies at reasonable prices.

I am currently reviewing FirstService. It had a good 2011 but its Q1 was weaker. I expect to update the report within a few days.

Canadian dollar rose almost 1 cent today to 97.35 cents after getting down close top 96 cents lately. If the dollar rises that hurts the U.S. investments of Canadian Investors. But long term I don’ think the level of the dollar is that big a deal as far as investments. If a stock doubles in ten years and the dollar moves 15 cents that is not a huge big deal.

I figure the Canadian dollar has an equal chance of rising or falling from here. If it fell to low 90’s I’d be tempted to sell some American stocks but then again my plan was just to keep those funds in U.S. dollars so why should I speculate on the currency? It is easier to find stocks that will be good investments (there are lots of them) than to try to predict currency movements. so why noit play the easier game. In stocks the average investor can win (average investor collects profits from customers of the business) and get a positive return. In currency trading there is a loser for every winner and it is a zero-sum game, negative after costs. Currency trading is more like Vegas, stock investing is more like being a business owner.

Markets were a bit more cooperative today with most of our stocks rising. This despite continued negative news out of Europe.

With Toll Brothers down another 5% today I added to my holdings. Over the years I have found that by trying to select good companies and generally holding though the down times and buying at lower prices I have been able to beat the market averages. But it has been stressful at times.

As of 9 pm eastern on Sunday evening, the Dow futures were down 100 points… I imagine markets will continue to lurch around and that sometimes they will lurch upwards and sometimes downward.

Yesterday I mentioned Toll Brothers which got fairly clobbered the past few days. I was looking today at its annual report. It strikes me as a very well managed company. The type of company Warren Buffett would be interested in if it ever came up for sale. However as a public company with no controlling shareholder it is unlikely it would ever be offered for sale to Berkshire (he avoids bidding wars). I would consider adding to my position in this company. But right now I a, already fully invested.

Friday’s market was certainly a reminder that the road to stock market wealth does not proceed in a smooth fashion.

The Dow was down 2.2% and is now down 0.8% in 2012 or about even after considering dividends. The S&P 500 index was down 2.5% on Friday but is still up 1.6% or 2012 of about 2.5% with dividends included. The Toronto market was down 1.3% on Friday and is down 5.0% in 2012.

Our stock picks seemed to enthusiastically join in the misery on Friday with, notably, Toll Brothers down 7.5% and Wells Fargo down 5.9% and Stantec down 5.0%.  (I did mention under May 2 that Toll was looking expensive and note that it was marked Speculative Buy and the word Speculative was obviously there for a reason)

Rare bright spots were Canadian Tire up 0.9% and Liquor Stores N.A. up 1.2%

The value of a Canadian dollar in terms of U.S. currency plunged about 4% in May and this cushioned the decline in U.S. stock values for Canadian investors.

Our Buys / Strong Buys are up an average of 4.0% in 2012 (without considering currency impacts or dividends) and that handily beats the markets. My own portfolio, which is heavily concentrated in relatively few stocks is still up a very satisfying 10.5% in 2012 as of today.

It is of course hard not to be worried about the world economy at this point. I certainly don’t offer any guarantees or even predictions regarding where stock prices will head. I simply try to identify companies that appear to be good investments and which logic suggests will be good investments over the longer term. Buffett has always said that he can’t predict the short term direction of stocks nor does he think anyone else can. But he has had a certain modicum of success by buying good companies at reasonably (or better yet unreasonably) low prices.

Our stocks picks did fairly well today. Walmart at $65.82 could soon reach a new all-time high surpassing its old record close which was just under $70. If so it has been a long time coming since its record high was in late 1999. But as I have often said that is not Walmart’s fault. Walmart’s earnings per share are up a staggering 370% since 1999. In 1999 the earnings were 99 cents per share. It was sheer investor stupidity that drove its share to almost $70 and more than 70 times earnings in late 1999.

It is not always the case that a company should be blamed for a share price that under-performs. Investors in late 1999 simply drove the share price far too high. Walmart did its job of growing earnings. Companies cannot be responsible for investor stupidity.

Markets continue to be very skittish and unpredictable (in hind sight markets seem like they were more predictable in the past but looking forward they are actually ALWAYS unpredictable). Tomorrow, Friday, the market may focus on the jobs report. As investors we are probably well served to keep our eyes on corporate profitability. We can’t control the markets but we can choose to be invested in stocks that appear to offer good value.

You know, it is fair to say that the 2008 financial crisis was largely precipitated by faulty notions of risk measurement. This continues today as sovereign debt is counted as zero risk for banks. It’s ludicrous. Pension funds and banks rush to put money into long-term government bonds that are guaranteed to be, at best, very mediocre investments. Regulations and faulty notions of risk prevent the banks and pension companies and insurance companies from investing in equity shares which are virtually certain to provide better returns than long-term government bonds in the next two decades or so.

On Tuesday the market gaveth and on Wednesday it tooketh that away and more. Such is the nature of markets.

Canadian Tire announced it will close a almost 100 of its  sports stores (former Forzani Group Ltd. stores). This is 20% of the FGL stores. But it will replace those with new and expanded Sport Chek locations. This seems like a logical move, they had too many different store names. As much as anything it seems to be indicative of Canadian Tire aggressively managing this business. There will however be a $26 million pret-tax unusual expense for this matter booked in Q2. This move could result in Canadian Tire shares continuing to languish unless the rest of its business reports strong growth in Q2 (which is quite possible).

Canadian Western Bank will release earnings very shortly. I suspect they will report good numbers.

Shaw Communications looks quite attractive on a P/E basis and for its dividend. And the Shaw family is buying more shares. However, the market is worried about the “game-changing” impacts of the availability of television through internet streaming and also the issue of competition with Telus TV. If my own cable bill is any indication, Shaw will continue to do well. But I don’t claim to be able to predict the impact of technology longer term. I am comfortable holding some Shaw shares. It would be nice if they would sell off their wireless phone spectrum for a profit…  Canadian Western Bank is probably the safer bet it has up-side and probably not a lot of downside in the longer term.

I have updated the composition of my own portfolio.

Perhaps surprisingly, amid  the gloom, stocks did well today.

With Stantec down somewhat yesterday, Monday, I added to my position in that stock.

Walmart is updated and rated Buy at $65.31. While Walmart’s stock is “knocked” for still being below its 1999 peak of about $70, the company itself has performed very well. Earnings per share have increased relentlessly at about 12% per year on average in the past decade. The stock unfortunately had gotten way over valued by 1999 as investors were projecting growth closer to 20%. I feel comfortable owning it. We could have rated it (higher) Buy, but there is a scandal hanging over it in regard to paying bribes to acquire licenses to build stores in Mexico.

Stantec Inc. is updated and rated (lower) Strong Buy at CAN $31.25 or U.S. $30.15

Stantec has been growing its earnings per share relatively steadily for many many years and appears set to continue to do so, although probably at a somewhat lower rate than in the past. It seems like a good bet to forecast that the share price will be double in ten years.

Stantec’s history can be used to dispel several stock market myths.

Note that Stantec’s stock price has risen 1,150% from $2.50 to $31.25 over the 13 years since it was first added to this web-site in September of 1999 (This web-site was started in June of 1999). At that time, Stantec’s earnings per share were about 25 cents per share (split adjusted) and now are $2.46 per share (on an adjusted basis where a recent goodwill impairment is added back and a small amount of amortization of customer lists and purchased backlog is also added back).

Myth one: It is popular among relatively uninformed investors to proclaim that only dividends matter. This is patently false. It is true that a strategy of investing only in dividend stocks can be a very good strategy. But it is completely wrong to suggest that there can be no return without a dividend. In fact a dividend is neither a necessary nor a sufficient condition to insure a good return. Stantec rose 1150% in 13 years before only recently implementing a small dividend. Any suggest that the returns from the capital gain are some how “paper” or not real until an investor sells is completely bonkers and shows a lack of knowledge. Even more dramatically Warren Buffett has taken Berkshire shares from $15 in 1965 to $120,000 today and no dividend has been paid (actually there was a single dividend of 10 cents in 1967 when Buffett controlled the company but was not acting as CEO). To suggest that Buffett and the other Berkshire shareholders have only made “paper” gains is sheer madness.  On the other side of the ledger, the fact that Yellow (pages) media was paying a hefty dividend not so long ago did not stop that entity from being an abysmal investment.

Myth two: In order to really prosper a company has to have some competitive advantage. Stantec does not appear to have enjoyed any particular inherent competitive advantage over the years. It was basically management skill that led to its success.

Myth three: Organic growth is what really counts, growth by acquisition is not as valuable. Well it is certainly true that often growth by acquisition does not work out well. (See Nortel). It is easy to destroy value by over-paying in acquisitions. But Stantec has grown largely by acquisition and has achieved exceptional success. Not only has it grown net income hugely, but much more importantly it has gown net income per share hugely.

I suspect that this is a company that Warren Buffett would look upon with favor.

Our stock picks made modest progress today.

The lower Canadian dollar has helped out for Canadians holding U.S. stocks. At 97.3 cents I don’t have any particular idea of where the Canadian dollar will head. I did conclude that buying U.S. stocks when the Canadian dollar was over $1.00 would probably work out okay. Over a long period of time the fluctuation in the Canadian dollar is probably not going to be a big factor in our returns. It’s much more important to be in good stocks then it is to worry about the U.S. dollar versus the Canadian.

Toll brothers reported earnings early this morning. The earnings and sales figures were good. However, Toll Brothers is already pricing in a lot of good news and will need to continue to improve to justify its current stock price of $27.75. I bought it almost a year ago at around $21 and added later mostly at lower prices for an average cost of about  $20. I bought it a way to “play” a U.S. housing recovery and it has worked out so far. The results from Toll brothers do show an improved U.S. housing market. This bodes well for Wells Fargo and Bank of America (and indirectly for most U.S. companies).

Melcor (real estate) Developments is updated and rated (higher) Buy at $15.55. If you wish to own a real estate investment, Melcor seems like a good choice. It does not have a high dividend but instead invests most of the earnings for growth (and has not issued any new shares in at least a decade). I would far rather own this at 82% of book than RioCan at about 150% of book. Both companies mark their rental buildings to market value. But Melcor’s largest asset is a land inventory that is not marked to market and is likely worth more than its book value. Both companies would post losses on market value if interest rates rise significantly. Melcor however could suffer a larger decline in adjusted earnings because its earnings depend largely of sales of building lots rather than collecting rent. If one is confident that the Alberta economy will remain strong then Melcor looks quite attractive. Note that the Melcor shares are thinly traded. with patience you may be able to buy at a better price. Click the price in the table above and study the trading prices in the past few days or weeks before attempting to buy.

It would seem that markets are vulnerable to the continued madness in Europe. However that has continuously been the case for many months. It may be wise to position with some cash in case a market “correction”. However, I am not prepared to put my investing on hold due to such fears. The time to buy shares is when the money available and they seem well priced. The only time to reduce equity positions substantially is probably during stock market bubbles. Stocks are certainly not in bubble territory. Yes, they could decline regarding the Europe situation but other than perhaps some trimming to have cash available I am not going attempt to guess the impact of the situation in Europe.

Between yesterday (with U.S. markets open) and today, our stocks picks did quite well.

As of 12:30 am eastern time markets are set to open about 50 points down on the DOW (never a dull moment, it seems).

Canadian Tire is updated and rates (lower) Strong Buy at $65.82. The valuation here looks excellent with the shares trading at only 1.2 times book value despite the 11% ROE. And the company owns substantial amounts of real estate that is carried at lower historic values.

Today’s winner was Walmart, up 4.2% after reporting strong earnings. Honorable mention to RIM, up 4.0%. And consolation prize to Liquor Stores N.A. up 1.9% perhaps on the theory that recent market declines will drive us to drink. Just about all the rest of our stock picks were down.

Among the very few bright spots for our Stock Picks in today’s trading was Constellation Software which was up 3.1% to $90.74. Canadian Tire was down another 0.9%. Showing the courage of my convictions I bought another 200 shares.

While in an ideal world, all our stock picks would rise steadily, that is not realistic. I certainly don’t believe that the market always gets it right when it comes to stock prices. If I did, I would have to stick to buying a broad stock market index fund.

The stock market gives us opportunities by often under-pricing or over-pricing stocks. While it is not easy to do, that feature of the market can be taken advantage of by buying what is under-priced and then selling if it happens to become clearly over-priced or relatively over-priced compared to other opportunities. Given that our stock picking service would have no reason to exist if not for mis-pricing in the market, I can hardly get upset by Canadian Tire’s little swoon here.

Of course it may be the case that Canadian Tire is not under-priced at all. My analysis suggests it is. Others disagree. The consensus of the market opinion is of course that its current price is fair. I have found and documented over the past 12 years that buying stocks that appear under-priced has worked out well for me. But even if my batting average is pretty good, it is certainly not 100%. I happen to think (based on the analysis) that Canadian Tire will be a good investment. But the validity of that belief will only be known over the future months and years (perhaps many months). Meanwhile the market will, if nothing else, provide excitement along the way.

In other news it was reported today that U.S. house starts are running at an annual 715,000, well above the 578,000 of a year ago although down from the 749,000 annualized figure from last month. Home builder sentiment also rose to the highest level in five years. This bodes well for Toll Brothers and also for the U.S. economy in general.

Lower oil prices are hurting the Canadian stock market but will help the North American economy.

My TSX valuation article suggests that the TSX index as a whole is under-valued. That article suggested that a fair value was 13,216 which is some 17% above the current level. That certainly does not meant that the TSX can be expected to rise soon. What it does suggest (but not guarantee) is that buying the TSX index at this level is a rational move supported by analysis and should turn out to be a good investment.

I also added 1000 more shares of Bank of America to my position today at about $7.11.

As I write this around mid-night eastern time the Dow futures are up 49 points, suggesting Thursday will be a better day in the markets.

It was another weak day in the markets.  A few of our stock picks did manage gains. Toll Brothers the U.S. house builder was up 1.8% and is up a total of 33% this year to date. It does look quite expensive because earnings have certainly not recovered. So far it has been a good way to bet on the U.S. housing recovery. It would be a more speculative pick at this point.

Boston Pizza was up 1.6% and has recovered from its unjustified swoon of last week.

Canadian Tire was down another 1.1%. It’s trading at 1.24 times book value and its assets include some land and buildings that are surely worth far more than book. It is trading at 11.5 times earnings and has been exhibiting reasonable growth. I believe it is a buying opportunity with a good risk / reward profile.

A couple of our stock picks that have declined somewhat and that I think are attractive include Visa and Canadian Western Bank. 

As you will no-doubt be aware, Monday was a poor day in the markets. And our stock picks certainly got hit. Most notably Canadian Tire was down 3.1%. I don’t see the justification for that. I have read their Q1 report from last week and they appear be firing on all cylinders. It seems the threat of Target coming into Canada is holding back the stock price. Also I did see that certain expenses were up in Q1 more than perhaps they should have been. Some of these may have been temporary. But there was also some indication of facing higher rents at the former Forzani Group locations as leases expire. But overall the Q1 report seemed very positive.  With this company trading at 12.5 times earnings and still growing, I am tempted to add to my position. If I did not own own it I would definitely consider buying.

Much is being made of the trading loss at J.P. Morgan. I have no real basis to have an opinion on that stock but I know Buffett owns it personally and I suspect this swoon is a buying opportunity. It seems like a far-fetched exaggeration to suggest that this loss to this giant company is really indicative of risks to taxpayers.

I would also consider Bank of America now at $7.35

Boston Pizza Royalties Income Fund is updated and rated Buy at $17.87. Basically it pays a cash distribution of 6.6% and the distribution should grow with inflation but not much beyond inflation.  We were pleasantly surprised to see the units rise 26% this year to date. Investors should not expect too much in the way of gains. This investment is attractive for its yield.

Last week there was a strange development in these units . On Wednesday morning it announced a loss on A GAAP basis but indicated that the cash distributions were unaffected by this “loss”. Upon investigation, we agree, this particular “loss” is a strange accounting artifact and is not a true loss at all. The stock opened almost 10% lower at $16.00. By t  the time I attempted to place a trade it was back up slightly to $16.35. I placed an order for 500 at $16.50. A few minutes later it was back to $16.15 so I placed an order to buy at that price. Strangely enough my $16.50 order actually got filled at $16.21 and I got 400 at $16.15 as well. This worked out well as the units recovered to $17.35 by the end of Wednesday and $17.87 by Friday.

In fact the Q1 earnings were quite strong and the little swoon in the price was unjustified but just reflected the fact that some people (quite understandably) got spooked by the loss on a GAAP basis. It would be complicated to explain it but the loss resulted from a liability being marked to market higher due to the higher prices of the units. But in substance this particular liability is not a liability at all and represents effectively ownership by Boston Pizza International and is just an accounting artifact. (I realize that is about as clear as mud, but it’s the best I can do without getting into a long story). I don’t ignore GAAP accounting lightly, but in this case it did a poor job of reflecting economic reality.

Canadian Tire reported strong results this morning and was up 4.2% to $70.23. This is my second largest holding. It has done reasonably well. I feel very comfortable that the earnings and particularly the assets support the share price with a reasonable margin of safety. “The market” appears to fear it will get clobbered by Target. We shall see, Target for one thing has bought into high-cost leases but may still price aggressively. I am not sure there is all that much overlap with Cnadian Tire but clearly Target will pick up business from many retailers and does increase the competitive landscape somewhat. Still, I think Canadian Tire remains a a good investment. If you do a search for Canadian Tire on this page you can see I have been quite bullish on it. Especially last August when it was briefly under $53 (remember the debt ceiling fisaco that sank stocks in August?)

Melcor reported after the close today and had good although not spectacular earnings. But Melcor trades just under book values and appears to be a good investment. With the continued strong economy in Alberta it should do well. In the ling run it will be cyclic however and profits can be hit hard in recessions. Also its rental building values will drop if interest rates rise and this will flow to earnings as a loss. But I would certainly rather hold Melcor trading at just under book value than RioCan trading at 1.5 times book value (Both have their rental buildings fully marked to market, and RioCan profits (but not cash flows) would be hit hard if interest rates rose). I have been consistently positive on Melcor for some time.

I plan to updates the reports for Canadian Tire and Melcor within a few days. Also likely Walmart.

After the close today it was announced that JP Morgan had experienced some kind of unexpected trading loss of $2 billion. To me it’s another example of why I have never believed much in the whole concept of risk management. Many risk management procedures may in fact add to risk because they make people think they can measure the unknowable. They make people too reliant on black box systems and formulas.

All big American banks may get hit on this news on Friday. But Wells Fargo does not engage in much if any of the proprietary trading activities and hedging that led to this loss. It could be an opportunity to add to Bank of America.

I added to my Boston Pizza units this morning. The company has reported earnings. It lost money under GAAP rules. However distributable cash flow was okay and same store sales were up 7.5%. I have not analyzed it in detail but it appears the loss is due to a revaluation on the liability to issue certain shares. The liability is higher due to the higher unit price that has occurred since December 31. There are indeed some strange accounting features on this entity. The main driver of the share price is interest rates and same store sales increases. Same store sales are up and interest rates remain low. Therefore I don’t think the little swoon in share price today was necessarily justified and I bought more shares. It is thinly traded so place fixed price orders rather than market price orders.

The market down-draft that was supposed to happen Monday came a day late.

In Canada we had news that housing starts are running at 245,000 per year. Meanwhile the U.S. is running at about 680,000. If you consider the usual rule of thumb that the U.S. economy and population is about 10 times that of Canada you see that Canada is enormously stronger than the U.S. Most observers feel that Canada’s housing starts are running too high while America’s are probably half where they should be. The U.S. is forming new households about twice as fast as it builds new houses and this is slowly bringing down the excess supply of houses in the U.S.

In Canada the strong housing starts bodes well for Melcor. It should report Q1 earnings before long and I expect a good report and probably a good outlook.

I was tempted to add to my Canadian Tire position today with the stock down 2.3%. It reports earnings on Friday, so I will most likely wait to see the earnings.

As of Sunday and even as of Monday morning it looked like markets would be down noticeable on Monday. Instead they ended up fairly flat on the day.

Banks including Wells Fargo and Bank America were up (1.4% and 2.8%, respectively). Berkshire Hathaway was up 1.9%.

Yellow Media reported today and wrote off all of its goodwill. What a sad story this is. I have not looked at it too closely but basically it appears it way over-paid for various business and blew its brains out (assuming it had any) with debt. As of the end of 2009 it reported equity of $5.2 billion but assets included $6.3 billion and another 2.0 billion in intangibles. So it had no tangible equity. Sometimes, that is okay, goodwill can sometimes be worth what was paid for it and more. But not in this case. Today it reports negative equity, in other words it reports its net worth to be significantly less than zero. Disgusting. But I suspect Mark Tellier and his top managers will still have done okay over the years. Must not be a proud moment for his dad, Paul Tellier (former highly competent CN President, among many other accomplishments)

There are probably a lot of lessons in there for investors.

And Yellow Pages was to some degree a product of the financial engineering and tax evasion scheme called Income Trusts. Many of those defined gravity by paying out more in distributions than they made in earnings. Well, for a while they did. When something can’t go on forever, it doesn’t.

Election outcomes in France and Greece this weekend are considered negative for markets. Dow futures were down 131 points as of 11 pm eastern time. Perhaps Buffett will get his chance to buy back some Berkshire shares tomorrow. This is going to create some bargains but will feel painful.

Berkshire Hathaway is updated and rated (higher) Buy at $80.94. The Q1 earnings just come out today and were quite good. In particular, the book value per share soared about 6.5% in the quarter due to gains on various investments. Berkshire will buy back shares if the price falls below $78.17 which is 110% of book value. If the economy keeps improving, even slowly, Berkshire should continue to have a strong year in 2012 and since the shares are only at 114% of book value, the shares would likely rise as earnings rise.

It was a weak day in the markets. Markets however are volatile by nature. It’s not something that should particularly concern long-term investors.

The TSX was down another 1.8% today. The Dow was down 0.5% and the S&P 500 was down 0.8%.

Constellation Software was down 6.9% today, presumable because its earnings while pretty good were not high enough for the lofty expectations of this stock. We have seen volatility in this stock before and that will no doubt continue.

RIM has continued on down. It looks very cheap but of course the fear is that its sales are going to plummet. It’s not clear if they can turn it around or do some kind of sale of the company or major partnership.

Tomorrow’s (Friday) market will depend a lot on how the jobs report comes out… expectations are weak at this point. Hopefully the report can beat the now lowered expectations.

Tomorrow or Saturday morning Berkshire Hathaway will report earnings.

It’s looking like the TMX deal will go ahead although there are certainly still some hurdles.

The troubles at SNC Lavalin seem to be growing. Veritas Investment research has suggested that the earnings may even have been manipulated for some years. I have never looked at the company but this looks ugly. It is surprising to see this sort of thing at a large Canadian engineering company. One thing that always comes out of these events is some kind of shareholder lawsuits. That would be okay if it meant that any guilty managers or their insurance company would pay. But more often we get the perverse situation of the company (its continuing long term shareholders) paying out a smaller group of transient share holders. And usually the lawyers take much of the money. For example some shareholders got money out of Nortel while long-term shareholders in effect paid for that. Totally perverse.

The Canadian market was down 0.8% today at 12,230. This market has not done well at all after reaching levels over 14,000 in early 2011. The trailing TSX P/E ratio is 15.7 which suggests that the index is perhaps fairly valued at this time.

The U.S. market was down much of today but ended up down only modestly.

Constellation Software reported Q1 earnings after the close that seems reasonably good but probably no better than expected.

Visa reported earnings growth after the close of 30%causing me to ask myself why I don’t own this company which I have often said is basically an unregulated monopoly (from the point of view of merchants). I had sold my shares sometime last year just to raise some cash at a time when markets seemed especially vulnerable (remember the debt ceiling crisis last August?) Well I probably put that cash mostly to good use in the interim but nevertheless wish I had ben able to hold the Visa.

In general we continue to see good earnings reports but the market also worries about the economy and Europe and so the direction of the market is uncertain (but then again, when was it ever certain except in rose-colored memory?)

Given the uncertainty I am somewhat torn between trimming some positions, especially if they rise further and just staying put or even throwing into equities what little remaining cash is in my accounts.

Toll brothers was up 1.6% today and at one point was up over 3%. It has done very well and may continue to do well as new house building recovers in the U.S. However it does look expensive at this point.

It was a strong day in the markets. Looking at our stock picks we had Bank of America up 2.5%, Toll brothers up 2.1%, Wells Fargo up 2.0%.

I am taking a look at Genworth Financial which is a private mortgage insurer and a competitor to CMHC.

On the surface it looks like a good investment. But it is risky. It does have very good disclosure of the mortgage insurance business. From what I recall CMHC’s annual report does a terrible job of explaining the business.

As I read Genworth’s material, the problem I am reflecting on is that it has no way of knowing the true probability of a house price decline combined with a recession and what that could do to its claims experience. In an extreme scenario it could be wiped out. Now the same is sort of true for Canadian Banks except that the banks actually benefit from insurance on the vast majority of their residential mortgage loans. And banks have pretty good experience with how commercial loan losses behave in a deep recession.

Canada actually does not appear to be under any material threat of a deep recession,. But it most definitely faces the threat of a relatively significant decline in house prices especially if interest rates rise back to normal or even rational levels. And basically no one knows how home owners would react to that. Yes, we have had significant house price declines in the past. But I think we are something of a new paradigm now with house prices that are far larger multiples of income than ever before. And with household debt at huge levels due to both high mortgages and due to the availability of lines of credit. Homeowners in the early 80’s recession and the early 90’s recession, with few exceptions, buckled down and managed to pay their mortgages even when house prices declined. But how relevant is that experience this time when the mortgages are so much larger compared to income and other debts so much higher as well? A lot more people may declare bankruptcy if we get a big house price reduction.

My point is not that I am worried about a house price crash. My point is that under that scenario the rosy financial picture at Genworth could deteriorate rapidly (to the point of being wiped out) and I am not sure that the probability involved is even something anyone could reasonably estimate.

So, despite Genworth looking cheap, I just don’t know that I would want to invest in it. I am attracted to companies that make strong profits. But really, Genworth has only a vague idea of what its real profits are. Its future claims are estimates by nature.

The TMX Group appears to be moving closer to an acquisition by the Maple Acquisition Group.

They had a press release on Friday afternoon at 1:43 pm which although a bit cryptic seemed to indicate takeover was progressing and that the Competition bureau concerns might be overcome. The stock shot up about 5.5% on that news. (This was material news released by a company and in my opinion there should have been a trading halt. I have filed a complaint with the regulator about this). Today Monday, after the close, the TMX and Maple released further information which again seems to indicate the acquisition may proceed (although hurdles remain).

Monday’s press release indicated that Maple would acquire 70 to 80% of the TMX shares at $50. The market has at least until not not been totally convinced that the sale would happen. The shares had been $42.75 on Friday before the afternoon press release an closed today at $45.10. As I said below on February 26, it may have been a reasonable speculative pick at around $42 (and that is possibly true  even at the $45, but I will not be buying any). It will likely rise tomorrow so I suppose the time to buy may have passed. If it is bought for $50, I believe one option will be to take the maximum possible shares int eh new entity rather than cash. And the new TMX / Alpha should continue to be a big money-maker.

I have been skeptical that the Competition Bureau would allow this transaction. To my mind the TMX itself is pretty close to a monopoly and I am don’t think it ever should have been allowed to operate as an unregulated-as-to-price monopoly. And it beggars belief to think that the competition Bureau can now allow it to combine under common ownership with its main competitor which is an alternative exchange called Alpha. (What are they going to do? make a rule that the two exchanges will still compete despite common ownership?) But the parties to this take-over seem to think it will go ahead although they also seem to indicate that they may not know before the end of July. So no one should hold their breath expecting a rapid payout of any $50 amount per share from Maple.

In the next couple of weeks we should get earnings releases from some of our higher rated companies. I am eager in particular to see the results for Melcor (should be strong but I am not sure about the outlook), Canadian Tire and Walmart.

A nice day on the markets… Toll Brothers was a notable winner up 3.9%, also a partial recovery on Walmart.

Natural Gas

Natural gas prices have fallen to a ten year low. (And now recovered a little bit) Now I don’t know anything at all about the economics of producing natural gas either conventionally or from shale. But it seems to me that buying this commodity at a ten year low would not be a bad idea.

Ideally the investment might be a company that has a strong balance sheet and has vast stores of low-cost natural gas (shale) in the ground. Unfortunately I don’t know of any such company.

What I would consider doing as a bet on natural gas would be to look at one of the natural gas ETFs on my list of exchange traded funds

http://www.investorsfriend.com/Canadian-Exchange-Traded-Funds-Canadian-ETF/

There is the Alberta natural Gas ETF from Claymore under symbol GAS

There is also January NYMEX contract under HUN and the symbols on my list include a natural gas double bull ETF for braver souls.

Both of these have of course fallen drastically in the past year. Perhaps it is a pure speculation to try these and I don’t know if I will bother at all. But if one has a strong itch to bet on a gas price recovery this is one way to do it.

I would also mention that if natural gas prices stay very low then I would think that at some point it would start to hurt the Alberta economy. I have not heard anything but at some point I would think a lot of gas is going to get shut in and a lot of gas drilling rigs are going top go idle if they have not already.

And by the way Buffett / Berkshire Hathaway made a bad bet buying the bonds of a Texas utility whose prospects depended heavily on natural gas. He wrote off $1.4 billion of that in 2010 and 2011 but has another $0.9 billion left that he said could be wiped out if natural gas stayed low. So we may see some write off of that in Q1. Still, I think Berkshire Hathaway will most likely report a decent Q1. Bufffett made a bet linked to natural gas that has turned out bad, but that bet was made at substanitally higher gas prices than today.

We continue to see mixed signals in the markets. North America and earnings doing well, some of Europe seemingly circling the drain…

Couche-Tard has continued to do well now at $41.50. It may well have been a mistake for me to have sold at around $40. I did well on the company. But I have quite a high opinion of its and I may have snatched only a small victory here when a larger victory was possible. I did place an order to buy half back at $37.60 and it subsequently did get as low as $38.60 a couple of days ago but it does not appear to be headed back to $37.60 anytime soon, if ever. I sold partly just because I have a very high exposure to equities. At first I sold only half the day it “popped” but then it initially started to slip and then recovered and I sold the other half (oops). Anyhow, there probably are better investments… the problem is though to find them. Buffett often suggests when you find a well managed company that seems to have a competitive advantage, just stick with it and don’t be too eager to sell.

Walmart dropped a further 3.0% today to $57.77.

Walmart, today, during trading hours, released a statement on this matter. To me the statement is very weak in that it was not delivered by the CEO or Chairman. It points to the excuse that these matters were from six years ago and basically says the audit committee  is looking into this.

The stock may start to recover if and when more concrete action is seen from the Board. The main executive involved is scheduled to retire in July. At the least he should be sent packing right now. Also I don’t know why any company would keep a former CEO on the Board (because they will often tend to try to still act like a CEO). Former CEO Lee Scott who is on the board should be sent packing as well because he was CEO at the time of the allegations and apparently swept them under the rug at that time. Current CEO Duke also probably has to go because he was involved in the sweeping up as well.

I added a little to my position in Walmart today because I don’t think this matter has long term impacts on Walmart’s profitability or growth. They can deal with it and move on.

In other news, corporate earnings are continuing to come in higher than expected. In particular Apple reported very stron results after the close and this should push markets higher tomorrow (all else equal).

I sent out a newsletter yesterday with a link to a new article on how much money has to be saved and for how long, to amass one million dollars in stocks.

It feels a bit elitist to talk about getting one million in stocks. But then again we live in a world where 20-somethings are buying their first homes at a half million dollars and more in many parts of the country. That being the case any middle class person without a good pension plan who plans to stay middle class probably needs a million dollar portfolio by the time they retire. (With a good pension plan, nothing else is truly needed, but is certainly nice to have).

Walmart dropped 4.7% today to $59.54 on news that it had not only bribed officials in Mexico several years ago but (more seriously) that top management swept the matter under the rug when they learned of it.

The trading action here offers a lesson or two. 1. Once this news hit on the weekend there was no escaping it, the stock opened down about 4.8% this morning. By the time the stock opened for trading, this news was well known no one was able to sell their shares before the news spread. that’s fair. (I assume the same occurred in the oxymoronic pre-market trading (the market before the market?) but I am not sure about that.

2. This is described as investors sold off Walmart. Well sort of… except that for every share sold there was a buyer. So really investors pushed the price down. Some investors sold at around $59.50 and some bought. In the net no money was “pulled out” of Wal-Mart. Wal-Mart is worth 4.7% less than it was on Friday but the money was not “pulled out”. Rather that money (or more properly, that wealth) simply evaporated into thin air).

3. This illustrates that unexpected crap can happen at any time to any stock.

In the long run it’s unlikely this will have much impact on the value of Walmart but it could stunt it for a while.

Hopefully the Board of Directors will step up and “whack” some people. It may very well be that the CEO has to go.

In other news it was a generally down day in the markets due to concerns about Europe and world growth.

As much as doom sayers wail about the U.S. government debt and money printing, the yield on U’S. bonds was actually down today as people clamored to buy 10 year bonds at a yield of 1.96% which is below expected inflation. It makes no sense really, it just “is”. I certainly don’t think the U.S. government debt is a good thing at all, but that does not mean that the collapse of its currency is in the cards.

I added to my Bank of America position today, taking advantage of the lower price.

Comment on Bank of America.

Bank of America released earnings last week. This is a complex company. After reading its earnings press release and looking at the financials in the supplemental release and looking at its Q1 presentation, I conclude the company is really too complex for the type of analysis that I do. It’s earnings have not yet recovered from the credit crisis and are subject a number of large unusual gains and losses.

I own it and I am interested in it because the shares are selling well below book value. If, as expected, it continues to recover then the share price should rise substantially. I normally don’t look at analyst forecast earnings as they tend to be optimistic. In this case the actual recent earnings are not reflective of what it will likely be earning in the next year or two. It trades at 8 times projected 2013 earnings which is an attractive price if those 2013 earnings do in fact materialize. It trades at 42% of book value and 65% of tangible book value (which deducts goodwill).

It definitely has risks including the outcome of litigation related to mortgage activities. If the U.S. housing market and economy continues to slowly improve this stock should do well although it is also subject to company-specific risks that could cause it to lag even if the economy and other banks do well.

I consider it to be definitely speculative I also consider it to have a good probability of being a very good investment over the next year or two.

I am considering adding to my holdings even though it already accounts for 5.1% of my portfolio (I have a very concentrated portfolio).

If things go well and this stock recover significantly then my longer term plan would be to sell and to not keep this company on our list in the long term.

It was a moderately negative day int eh markets. Couche-Tard went down a bit to $38.75. I threw in an order to buy back half of what I sold at $37.60 if it happens to dip down. (I sold all my shares on the big jump yesterday).

I notice eBay took a big jump today. I had only rated eBay a weak Buy /hold at the start of this year. But I did certainly have some good things to say about it in the report as well.

There was a large take-over offer in the biotech filed today with Glaxo SmithKline bidding a big premium for Human Genone Sciences (I believe it was around a 70% premium to the stock price or more). What I take from this ist aht we are seeing take over bids well above share prices. Buffett has often said over the decades that when shares are trading in the market at big discounts to what buyers will pay in acquisitions that is usually a good investment. Buffett’s ultimate calculation of value involves the outlook for free cashflow growth, how much cash a company will spit out from now to eternity. But he has suggested that the price paid by in acquisitions is a measure he has looked at as well, at least in his earlier days.

I have basically never looked at any of the big pharma stocks although it seems like a growth sector for sure. The difficulty might be to find a pharma stock that is predictable and not overly dependent on finding the cure for cancer sort of thing. It may not be an area where financial statement analysis works well.

The big news today was that Alimentation Couche-Tard was making a huge acquisition of Statoil Fuel and Retail fuel / convenience stores in Scandanavia / Eastern Europe. Couche-Tard closed up $15.4% on this news. And this was on top of being up several percent in the past few days before this announcement.

It is more usual for the price of an acquiring company to decline rather than increase. In this case “the market” is pleased with the acquisition.

Our last update on Couche-Tard was December 11 and we rated it (lower) Strong Buy at $29.95. It closed today at $39.60. I have a high opinion of management.

I was not sure if I should sell my shares at this point or continue to ride along with the good track record here. I decided to sell. So I am not holding any now but made a very nice gain today. And I was up very close to 100% on these shares since I bought in July 2010.

Logically and mathematically, the price I paid for the share should not enter into my decision to sell. But like most investors I can’t help being influenced by the fact that I had a large gain. It made it easier to decide to sell.

I may well regret selling since Couche-Tard could very well continue to grow at a good rate for amny years. Buffett’s approach would likely be to hold.

I don’t have an updated rating on the company.

I am not completely impressed by the fact that the company focuses on the price as a multiple of EBITDAR, rather than price to earnings. However, they certainly have a very strong track record and so one has to give them some benefit of the doubt.

It’s rather astounding to think that yesterday we could have bought shares in this company for Norwegian 35 and yet today we are all excited because a company will buy it at 53. So excited that we drive the price of the buyer up 15%. If in fact Statoil Fuel and Retail is any kind of bargain at 53 then it must have been a screaming bargain yesterday at 35, but apparently few noticed. These kind of acquisitions suggest that many stocks are indeed quite cheap.

Meanwhile stocks were mostly down a bit today… Well., tomorrow is a new day and we shall see what excitement that brings, if any.

Our stock picks did well today, notably Walmart up 2.0%, Toll Brothers up 2.0%,  Walgreen up 5.3%, Fedex up 2.6%.

After the close of regular trading (but during the period of that oxymoronic activity “after hours” trading) Warren Buffett announced that he has stage 1 prostrate cancer. Apparently not a very big deal at his age. Still, it may be an indicator that he won’t still be running Berkshire into his nineties. All good things come to an end eventually. But Berkshire will go on and continue to grow after Buffett is gone. And Buffett will stay as long as he is able which could be another decade for all we know.

Berkshire is unlikely to be down much tomorrow but if it should fall more than 3% on this news, I will probably grab a bit.

Cheap articles are written that accuse Buffett of not having a successor in the wings. That is simply false. He has said for many years that the Berkshire Board regularly has an heir in mind but it is never announced because it changes over time. The opposite approach is the clever one where Conan O’Brian was announced as Jay Leno’s successor about five years in advance. Remember how that worked out?

Markets are set to open higher this morning on good earnings and other economic data. We are in the middle of Q2 earnings season now and markets are reacting to the daily reports.

Markets were down noticeably on Friday. My level of concern about this is approximately zero. Yes, markets could fall further, that is always the case. But at the end of the day it is a distraction to the larger picture which is that I am confident of growing my wealth through investing over the years.

Wells Fargo is updated and rated (higher) Buy at $32.84. This is my largest holding and I am quite comfortable holding it. I expect but certainly can’t guarantee good returns from this company.

Wells Fargo is up 27% since we rated it a Strong Buy at $25.86 on October 18. Of course you might also point out that it declined 11% in 2011 and we had rated it Speculative (higher) Buy that year.

Shaw Communications earnings were somewhat disappointing and the stock fell. I have not updated the rating. It’s alue hinges on how competitive the future is going to be.

Most everything was up today, the Dow was up 1.4%, Toronto up 1.6%.

Canadian Tire was up 1.6% and sits at a 52 week high. Earnings season continues tomorrow with J P Morgan and Wells Fargo which I suspect will report good numbers. More important will be what they say about the outlook. Most everything that was down a few percent a few days ago has recovered it seems. Never a dull moment it seems.

Cogeco cable in Ontario reported lower profits due to faster write-offs (depreciation) on set top boxes. Possibly the same thing will be true for Shaw Communications. In any event we will know tomorrow (Friday) morning.