2013

On Monday I bought some Boston Pizza Royalties Income Fund units based on my update of Friday. I also decided to sell the small holding I had in the Gold ETF, GLD. Gold does not fit into my investment style. Today I placed an order for Bombardier preferred shares at $20.20. The price was up a little from yesterday and I decided to price a bit below the market. On the Bombardier report I just added one sentence under Recent events about them selling the fractional jet division, I had forgotten to mention that. It may possible change the look of the balance sheet by getting rid of both the associated assets and debt.

On Monday, markets were relatively flat. Constellation Software rose 4.4%.

The Canadian dollar rose about a half. This reversed a similar decline on Friday.

Bombardier preferred shares are updated and rated Buy at $22.17.

Bombardier inc. is updated and rated Speculative Weak Buy at Canadian $4.64. Basically it appears to be in a low margin business. Due to extreme financial leverage the P/E is reasonably attractive but extreme financial leverage adds to risks. It may be well as its recent new aircraft production models become mature in several years. Overall it seems like a speculative stock.

Visa Inc. is updated and rated Weak Buy / Hold at $219.67. Visa is a very unusual company. It is basically trying to insert itself as a substitute for money and to collect a toll on every transaction. And it has had great success in doing so. With its powerful “moat” (competitive advantages), it could continue to do very well as a stock. But it is quite expensive with a P/E ratio of 29 and there are risks that regulation or possibly competition will tame its monopolistic pricing habits.

On Friday the S&P 500 was basically unchanged while the Toronto Stock index gained 0.5%. I believe the Canadian dollar fell about a half cent which benefits Canadians that hold U.S. stocks and who track their portfolio in Cnadian dollars. It hurts Americans who hold Canadian stocks.

Boston Pizza Royalties Income Fund is updated and rated (higher) Buy at $20.86

This is actually a rather odd entity. A heavily financially engineered entity that collects a 4% royalty from food sales at Boston Pizza restaurants (excludes alcohol). The units unfortunately do not benefit in any meaningful way from new store openings. That is because new units are issued to basically the founders of BP in exchange for the right to the 4% from these new stores. The unit distribution will rise over time only if same store food sales rise. These units have bond-like characteristics but also offer some possible growth (and risk of shrinkage – and shrinkage is seldom or never a good thing!). Overall the 5.9% yield (and the yield should grow over time) seems attractive given today’s low interest rates. If the yield were to grow at 3% per year (as same-store restaurant sales rise) the total return would be about 8.9% per year, assuming no change in the P/E ratio and that would be quite attractive. The units would however fall in price if interest rates rise.

This entity is not the best fit for my standard template for evaluating stocks. For this update I assumed that the P/E ratio in the long term will range from 14 to 17. (Previously i assumed a more conservative terminal P/E ratio). An entity that distributed all of its earnings and which is apparently lower risk can support a higher P/E ratio at a given growth rate.

Certainly there are no guarantees but this looks like an attractive investment to put into the mix in a portfolio. I had sold my units early in 2013 but I now plan to buy back into this entity.

On Boxing day the U.S. markets were open (’cause Boxing Day does not exist in the U.S.). The S&P 500 was up another 0.5% to a record at 1842. I’d like to see 2013 slip quietly in the record books before we get any kind of correction. But chances are that some down days will arrive before long and as early as Friday. We shall see.

The latest edition of our fee newsletter has been posted and includes a new article. I have liked something called the Dupont Formula ever since I studied it about 20 years ago. And I have included the formula in my spreadsheet for many years but I don’t highlight it or mention it in the stock research reports. I plan to start doing so because it is an interesting and insightful analysis. This may be the first time I have written about it.

On Christmas Eve we had the S&P 500 up another 0.3% and Toronto up 0.5%. It would be great if the market could just coast through to the end of the year. I believe New York will be open on Thursday while Toronto will open again on Friday.

Wal-Mart is updated and rated Buy at $78.01. Growth has slowed somewhat. Not an exciting investment but I would expect it will do okay over a longer term holding period.

Having only trimmed 6% of my Toll Brothers this morning at $35.50, I entered an order to trim another similar amount at $36.50. That has now been hit and I have now entered an order to sell the same amount again at $37.50. I still like Toll Brothers. But all year I have played the volatility on this stock trimming on rallies and buying back on dips and it has worked out pretty well. Toll Brothers was at $32.70 10 days ago and there has not been any company specific news on this rally just optimism on the housing front and optimism that interest rates will stay low.

Checking the markets this morning, I see the DOW is up 63 points. The thought occurs to me, has this market (or at least investors) been drinking? It just seems like a lot of gains in recent days… I certainly welcome the gains but I also know that markets don’t go up in straight lines, at least not for long.

I have had an order in for quite a while to trim Toll Brothers if it hit $35.50. That got hit this morning so I was trimmed there, but only by 6% of what I owned.

I am somewhat inclined to trim other positions except that my holdings are concentrated in stocks that I like…

Bank of America is updated and rated Speculative (higher) Buy at $15.69. It looks attractive on a price to book value basis. The P/E ratio does not look attractive but that may be mostly because of various unusual losses that it is still subject to as it comes out of the crisis period. Many of its business segments are recovering rapidly.

On Monday the S&P 500 was up 0.5% to (what else is new?) another record high. Toronto was up 0.4%.

Toll Brothers was up 4.7% today.

Regarding Dollarama, which I updated yesterday I added sentence to the report today under outlook that the lower Canadian Dollar could hurt its earnings. They do hedge currency but typically hedges only go out a year or so, if that. So maybe the lower dollar won’t hurt just yet. And maybe they can pass along all the extra cost. I just point out that all else equal, a lower Canadian dollar is bad for importers like Dollarama.

Dollarama is updated and rated Weak Buy / Hold at $87.78. It’s a great company. They have built a fantastic business. But the stock price is high now and does not seem attractive to me.

On Friday the S&P 500 was up 0.5% and Toronto was up 0.1%. Most of our stock picks were up. Toll Brothers was up 2.7%.

FirstService is updated and rated Weak Sell / Hold at U.S. $42.79 or CAN $45.52. I have long admired the company. But is has been a very difficult one to value. It has risen a lot since our last update when it was also rated Weak Sell / hold. In part the Canadian dollar price has been pushed up by the lower Canadian dollar. This could be considered for a speculative pick but the achieved earnings at this time do not support a Buy rating.

On Thursday the markets basically held on to the big gains from Wednesday. The S&P 500 was down just 0.1%. Toronto was up 0.4%.

Today I bought some Wells Fargo Preferred Shares. I have not analysed these, but I do know Wells Fargo quite well.

These shares trade as WFC.PRO on New York. In Yahoo Finance the symbol is WFC-PO. Use caution as it may be hard to find the right trading symbol in your particular discount broker software. For TD Direct (Waterhouse) the symbol is WFC.PR.O. They are a perpetual share that pays U.S. $1.2812 per year on a $25 par value. They now trade at about $19.81 to yield almost 6.5%.

There shares are non-cumulative which means that if they miss a dividend it will not be made up later. That may be a large part of the reason for the discount.

Another reason for the discount is simply that long-term interest rates have risen since these shares were issued at $25.

As perpetual shares these would get absolutely hammered if long term interest rise a lot. So that may be a reason to avoid them.

But I figured the yield at close to 6.5% was attractive and I would take my chances. It seems to me that the entire decline from $25 to $19.80 is not justified by how far interest rates have gone up. If there are other temporary factors pushing the price down, then I would hope that will be in fact temporary.

I bought these in an RRSP account to avoid the 15% U.S. withholding tax that applies if Canadians buy these in most other types of accounts.

I don’t know if I will add these shares to the list above because I may not have enough information for an adequate analysis.

A P.S. to the post below, I was reading that US. mortgage applications are WAY down. I understand that is mostly due to a lack of refinancings as interest rates are no longer falling. Wells Fargo was making a lot of money on refinancings. All else equal this could be a reason to trim a position in Wells Fargo to some extent. Still, like I said it has a low P/E ratio and I know it has lots of growth areas so I don’t know if I will trim.

The outcome of the FED meeting was surprisingly positive. The FED announced hat it would moderately taper its bond buying reducing it from $85 billion per month to $75 billion. However the FED also indicated that it would be keeping interest rates low for some time to come. The market initially fell on the news but then almost immediately began to rise sharply and rose fairly steadily through to the close.

The S&P 500 was up 1.7% and Toronto was up 1.2%.

It seems that there must be a strong segment of the market that continues to buy the more it goes up.

I would be a bit surprised if this full gain holds tomorrow (Thursday) but one never knows.

Most of our stocks picks were up. Notably Toll Brothers was up 3.6%, Wells Fargo was up 3.1%. I thought about trimming some positions but did not. Lower interest rates are not good for banks but on the other hand Wells Fargo has a relatively low P/E and so I am reluctant to trim that.

Stantec, Couche-Tard and Constellation software were among the minority of stocks that were down (albeit modestly) on the day.

The Canadian dollar fell about 0.8% (down over three quarters of a cent). This is beneficial to Canadian investors with U.S. investments. (Beneficial when calculated in Canadian dollars, but of no consequence if one intends to ultimately spend their U.S. dollar investments int eh U.S.)

On Tuesday the S&P 500 was down 0.3% and Toronto was about unchanged.

Constellation Software was up another 5.2% to $217.73. on the same news that I mentioned yesterday.

I first added Constellation Software to this site back on February 4, 2011 rating it (lower) strong Buy at $51.40. It quickly went up to about $67 but then a strategic review was announced. For a long time it became very hard to value as it was trading based on being sold. I believe I sold at something like 50% gain. The Ontario Municipal Employees Pension Pension Plan was a major owner with Board representation and they wanted to cash out. They finally did so around April 2012 at something close to $90. Now these were insiders and you would think they would have a clue. Constellation was superbly run and making big profits. Yet these experts sold. I bought back in around that time as the company was one again trading on fundamentals rather than on a sale speculation. I paid more to buy back in than I had sold at. That was tough to do but turned out well.

Somewhere along the line I sold half of what I had to take profits. In recent updates it has looked expensive.

But it is a great company and sometimes it seems these great companies just keep steamrolling along. I sold half my position today at $118.50. I now hold 75 shares on which my gain is 148%. In addition there was more gain from the first time I owned it.

The total gain since it was first added to this site is 324%. Apparently someone forgot to tell it that “buy and hold is dead” (which of course, it is not.)

I mentioned that the experts at Ontario Municipal Pension plan sold way too early. Another example of experts being wrong was when Bain Capital got completely out of Dollarama at prices in the 20’s and 30’s. Now it’s in the 80’s. I guess it goes to show that investing is not so easy.

Visa had another good day up 2.6% to $213.25. It’s a powerhouse that in recent updates has looked expensive. But being a largely unregulated (as to price) monopoly has its privileges. (Sorry to say so American Express), I call it a monopoly because almost every business has no choice but to accept its cards. I made modest gains on this company but let far larger gains slip from my grasp. Still, I can’t complain.

Canadian Tire also did well today. One negative though on Canadian Tire, at some point the lower Canadian dollar could hurt earnings. Maybe not a huge factor but it is a negative for Canadian Tire (which imports most of its products).

Stantec was down 2.6% today despite announcing a modest acquisition. It’s another great company that just seemed to get too expensive.

On Wednesday afternoon I believe the FED will speak about quantitative easing and the timing of when it will be scaled back. The market seems to expect soothing words like it will be later and it will be gentle. We shall see.

It seems like 2013 has been one of the most interesting years in the market in a while (well, then again 2008 was pretty interesting). 2013 seemed to offer excitement in the market almost every week, sometimes every day.

On Monday the S&P captured some attention by rising 0.6% and Toronto was up 0.4%.

Constellation software soared 5.2% on news it was making a sizable acquisition. eBay rose 3.0%. I own some constellation but no ebay. I don’t worry much about what I don’t own. I look at what I do own. I have four large holdings and three of the four were up at least 1% today. Canadian Tire, Toll Brothers and Wells Fargo.

The next update will likely be for FirstService Inc.

Costco is updated and rated Weak Sell / Hold at $117.91. As a customer I really like Costco. And as an analyst I am a huge fan of its business model. It is a low cost leader that must strike fear into the heart of competitors. As a stock, however, it does not excite me. It traded at 25 times earnings. That is high in the absence of even higher growth. At $118, investors are basically assuming that growth in the 10% per share range will continue and that the P/E will not decline much. It is a high quality company and maybe it will turn out to be a reasonable investment. But it seems to lack much up-side at this point (absent a take-over or something radical like that) and the price could drop if it falters for a quarter or more or in a general stock market decline.

Canadian Western Bank is updated and rated (lower) Buy at $37.77. This is probably still a good long-term investment. But I am not excited by it at the moment as it is not longer clear that it is bargain priced. For more information, as always, refer to the full report.

I have removed the Canadian Western Bank preferred shares from the list above. They trade at $25.60 and are likely to be redeemed in April at $25. That is exactly why I have rated those pref. shares a “sell” over he past several years. They are down almost 5% this year, largely offsetting the dividend. The net return was still positive, so they were not a horrible investment, just not a good investment in the past couple of years.

On Friday the S&P 500 was unchanged and Toronto was up 0.1%.

Toll Brothers is updated and rates Speculative Buy at $32.70. It’s speculative because it’s P/E is still very high at 34. But earnings are set to increase very significantly in the next year due to contracts already signed. This will lower the P/E. Home prices will be higher in 2014 on new sales but new sales (which will hit revenue in 2015) have started off slowly in fiscal 2014 which started on November 1. On this stock my strategy will be to trim my position on gains and buy on dips. If I did not already own this my strategy would be to initiate a modest position.

On Thursday, the S&P 500 was down 0.4% and Toronto was down 0.1%.

I will definitely have some updates to the reports in the next few days.

On Tuesday the S&P 500 was down 0.3% and Toronto was up 0.1%

Toll brothers initially rose on its earnings and then fell 0.7% by the end of the day. The earnings were strong but that was already expected. Canadian Tire fell 2.1%.

Markets are set to open moderately to the up-side today.

I will have some updates by Sunday (Canadian Western Bank and Toll Brothers…)

The news of job losses at Kellogg in Ontario gets a lot of press but I would not put too much weight on a few events like that. The success of the overall economy is always hard to judge and and the impact on different stocks is often very difficult to judge. I tend to stick with analyzing individual stocks. The idea is to hopefully find / hold a few things that are obvious bargains or good investments (long term). Buffett calls this stepping over 1 foot hurdles rather than trying to jump over 6 foot ones (he does not try to predict the market in the short term).

On Wednesday the S&P 500 was down 1.1% and Toronto was down 1.4%.

Apparently this was due to some disappointing earnings releases as well as fears that the fed would taper its bond buying.

Almost all of our stock picks were down. A notable exception was Visa, up 3.1% and Couche-Tard up 1.9%.

When stocks decline my thoughts turn to buying. But I am not in a hurry to do so.

On Monday the S&P 500 was up 0.3% to a new high closing price of 1808. Toronto was up 0.2%

Toll Brothers was up 2.1% to $33.58. I understand that they will release Q4 earnings tomorrow morning. We might not get much news since they had already partially released the Q4 numbers a few weeks ago as they announced a big acquisition. There will likely be some news on their outlook and so hopefully their will be some good news.

On Friday the S&P 500 was up 1.1% and Toronto was up 0.6%.

Most of our stock picks were up and Canadian Western Bank was up another 3.2%.

Alimentation Couche-Tard is updated and rated (lower) Buy at $77.50. This has been an incredible and somewhat under the radar success story. The CEO and main founder opened his first convenience store in 1980. He joined with three others who became the long-term management and effectively his partners around 1984. In 1986 a predecessor company went public on the Montreal Stock exchange with 34 stores. Growth through acquisition has been relentless. The company now has 6,215 company-operated stores and an additional 2200 stores which are franchised and/or to which it provides fuel. The founder is a billionaire and the equity market value of the company is almost $15 billion. In 2012 it acquired a chain of stores in Europe paying a 52% premium to the stock price at that time. Despite the premium the price paid was apparently attractive and the acquisition has worked out brilliantly. The balance sheet indicates that the company has taken in a total of $696 million in shareholder capital (via share issues and acquisitions paid in shares over the years). By comparison it has earned more than that amount in the past year alone and the retained earnings are $2,786 million. The company had no usual advantages and I therefore attribute its great success to the drive and skills of management. Today, the share price does not look like a bargain. If I owned it (sadly I sold on the way up) I would probably trim the position. Having sold at much lower prices I personally am not inclined to buy back in. However setting emotions aside a reasonable strategy might be to take a small position and then hope for a price drop to add to the position.

Buying a small amount and hoping for a price drop may seem strange but it hedges the bet. If it rises, fine. If it falls we may regret the initial purchase but the chance to buy more shares of a great company at a better price would be ours.

On Thursday the S&P 500 fell 0.4% and Toronto was down 0.8%.

Most of our stock picks were down today. A notable exception was Canadian Western Bank, up 5.6% on strong earnings. I have had lots of good things to say about this bank over the years. I had sold my own shares this past summer when I worried that it would report losses from the Alberta floods (it has a property insurance division). It seems my fear there was unfounded. And I compounded my error when I failed to buy it back when the bank releases its earnings three months ago indicating no such losses (not material at least). Canadian Western Bank has grown a lot over the years. Despite some major downs as well as the ups, it has been a fantastic buy and hold company over the long term.

Early this morning there was news that the U.S. GDP growth for Q3 had been revised up to a robust 3.6% per year. That is 3.6% real and would be closer to 5% when you add in the official inflation rate. There was also some good news regarding unemployment benefit claims. So, I thought, the market should rise. But it was down instead. The explanations was that the good news is taken as bad news because the FED might taper it’s bond buying. And it is true that higher interest rates could certainly cause stocks to fall despite a strong economy.

Recently I clicked the box to receive all the “new offerings” from TD Securities. I saw an interesting one today, a five year bond paying 4.14% per year from Morguard Corporation. I am not familiar with the company but have heard of it. I clicked on Yahoo and saw it pays a dividend and its share price is up a LOT lately. That gave me some comfort that the bond was safe. The thing with these type of bond issues is that they sell out quickly. There is really no time to do research. It requires a snap decision to buy or not. That’s not my style. I don’t like snap decisions. Anyhow, while 4.1% is unexciting I thought I’d go ahead and buy some as I have some idle cash. I knew that this issue might sell out quickly so there is a certain excitement in the buying process. It would be easy to spend a lot of money fast in a situation like this. In any case when I called in the issue was sold out. I had not seen the email alert until an hour after it came out and the issue sold out in 50 minutes.

If you are interested in bonds for fixed income, I think new issues can be a good idea because you don’t pay any fees to buy and the interest rates may be better than you can find elsewhere on similar risk investments. There are thousands of small bond issues like this and they don’t trade like stocks. Most may rarely trade. If you are a discount broker client (like me) you will likely find that the selection of bonds that you can buy is very limited. These new issues may be the only chance to buy. Having said that, you had better be prepared to hold until maturity because your discount broker may not be willing to buy it from you later and if they do they will charge a fat hidden fee by offering you a low price on it.

As I think about this poor liquidity it is perhaps for the best that I was not able to buy any of this bond today.

On Wednesday the S&P 500 was down 0.1% as was Toronto.

For Canadian investors who own U.S. shares the modest market losses this week have been offset to a certain degree by the lower Canadian dollar.

This morning there was news that would normally send the Canadian dollar higher. First Canada today reported a small trade surplus for the latest month, the first surplus in 22 months. Second, oil prices have climbed this week. The Canadian dollar, however continued to fall due to some indications that the Bank of Canada would not only not raise interest rates but could possibly cut interest rates.

With these few negative days, my thoughts naturally turn to potentially trimming some positions to raise my cash level and lower risks. The thought occurs to me that I could sell some Wells Fargo and although it is down a bit from its highs that is probably offset by the lower Canadian dollar and I would effectively be selling at about the recent highs in terms of Canadian dollars. Again, I don’t really want to to trim Wells Fargo since I rate in the strong Buy range but if the mood strikes me to raise my cash position I may trim that a bit, possibly Toll Brothers as well.

Canadian Western Bank came out with earnings this evening that look quite good.

On Tuesday the S&P 500 was down 0.3% and Toronto was down 0.7%. I never know where markets are headed int eh short term but after weeks of gains it is not surprising to have at least a few weak days.

Most of our stock picks were down but nothing dramatic.

I am still working on the Couche-Tard update. I want to take extra time to understand its success as best I can. I consider it to be one of the most admirable companies in Canada. For one thing, it’s a rare exception to the usual rule that Canadian companies expanding into the U.S. do poorly. It purchased the U.S. circle-K chain some years ago in huge acquisition and this has worked out extremely well. I am pondering its ROE which it says is over 20%. Warren Buffett grew Berkshire into one of the larger companies int he world and himself into one of the riches people in the world by compounding (and retaining) earnings at right around 20% average for the 48 years from 1965 to today. Now, getting 20% for decades is the holy grail of investing, but it makes sense that if you ever want to compound money at 20% a possible strategy would be to climb aboard a company that is making 20% (and expected to continue to do so) and hand on for the ride. The way most people try it is through aggressive trading and leverage and risk (options and such). I actually have never hard of a documented case where that worked out. (George Soros may be one case though I have not seen exactly how he grew all his wealth, it is known that some came from aggressive trading).

Any suggestion that 20% or even 15% is remotely possible is unconventional advice. Conventional and safer (so the conventionals tell us) is to invest in a balanced portfolio widely diversified. Conventional advisors don’t earn that much more if you earn 15% and you might leave them or try to sue if you have a bad year and so conventional financial advisers cannot and will not suggest unconventional strategies even if they happen to think they have merit and are safe in the long run.

I am not 100% sure that we can continue to beat the averages, much less continue to spank the market or to approach 15 or 20% but so far our track record is very good. Follow the advice on this web site at your own risk, however. It is for adults only. It’s for people who are ultimately willing to take responsibility for their own trade decisions. It’s been maybe a couple weeks since I mentioned… InvestorsFriend Inc. (much less myself) offer absolutely no guarantees of investment results. If that is not acceptable, then by all means cancel your subscription. (Note that refunds are not possible after 6 weeks from the date of a payment). Very few people ever ask for refunds.

I did really mean to get into that whole topic, I just write what comes to mind and sometimes the process takes off in unexpected directions. One cannot really talk about 15 and 20% returns without mentioning that such things are by no means guaranteed, nor is any return level guaranteed, but I repeat myself now.

On Monday the S&P 500 fell 0.3% while Toronto was up 0.2%.

Some of the bigger moves included CN rail up 2.9% as the stock split. Stantec up 2.8%. Constellation software was up 5.8% and I have no idea why it has been so very volatile of late. It’s still a bit below its highs reached earlier this month. Dollarrama was up 2.4%.

My own account was down slightly as Toll Brothers fell 1.7%.

I am working on the update for Couche-Tard. That company has had astounding success and growth. But I suspect the numbers will not suggest that it is a bargain at this time.

One more month to go in 2013. I would certainly be happy if we could hold onto the excellent gains achieved so far in 2013.

This month the big market driver may be whether the FED gives any hint of tapering its bond purchases or not.

On Friday the S&P 500 was down 0.1% and Toronto was up 0.2%.

FedEx is updated and rated Sell at $138.70. It’s up 51% this year. At this point it appears to be pricing in too much growth. Perhaps it will deliver the growth. It’s a strong company. But it appears too pricey at this time. As much as I like the idea the the founder Frederick Smith is in charge, he is 69 years old and maybe it is time for new management given a less than stellar track record lately. The air express business seems to offer a fantastic service at a low price but the profits seem too modest in that part of the business in particular. FedEx will report another quarter of earnings in mid-December and perhaps things will look better then.

Stocks are up again this Friday morning.

Canada’s GDP grew at 2.7% annualized in the third quarter. GDP numbers are always presented in real dollars so in dollar terms it would have been a little higher than that after adding in the official rate of inflation.

In terms of the stocks I hold I am inclined to trim positions given that I have had such strong gains. But it’s hard to know what to trim. To me, Melcor and Wells Fargo still look quite attractive, so I will not trim those. With Canadian Tire I had quite a large position a year ago and it seems I trimmed a little too fast on the way up. So I am not inclined to trim more. With Toll brothers having risen lately I may trim that. I have just now entered an order to trim that a little if it hits $35.50.

I am certainly surprised just how well the markets and our stock picks have done this year. Basically I am going to continue to “dance with the ones what brung me”. My cash position is about 34% and if the markets or any of my stocks were to suffer a large decline I am prepared to buy low.

Everyone’s risk tolerances and risk capacities differ based on many factors. These is never a one-size-fits-all answer when it comes to being in the market at all or to buying or selling any particular stock. Markets are unpredictable. But they tend to be rewarding in the long run. By attempting to buy stocks that appear to offer good value based on fundamentals and trimming or selling when they appear expensive relative to fundamentals it seems that one can do quite well over the years.

On Wednesday the S&P 500 was up 0.25% and Toronto was up 0.1%.

Most of our stocks picks were up and there were no particularly large moves in either direction.

This morning I received an email with a press release indicating that Tim Hortons was selling $450 million of ten year bonds yielding 4.52%.

I’ve generally not been interested in long term bonds. On the other hand 10 years is perhaps not so very long and the yield looked attractive compared to the ten year government bond yield which is at 2.62%. A spread of almost 2% looked tempting.

I figured maybe I could put some of my idle cash into this. The idea would be to most likely hold until maturity. Or in the spread (the premium over the government bond yield) decreased I could possibly get a capital gain on the bond.

If interest rates rise, the market value of the bond would fall but the risk of a big increase in interest rates seems to be becoming more remote and in any case I would not have to sell at the loss as I could hold until maturity.

TD Securities was listed as being involved in selling these.

But when I called TD Direct Investing, they said they had no bonds to sell to me. Now, it was a private placement so that might explain it. TD Direct Investing suggested that TD Bank was buying the bonds for its own account or for institutional investors.

I emailed Tim Hortons and they said that accredited investors were eligible to buy. But the issue was already over-subscribed (sold out) in any case.

I suspect full service brokerage clients of TD Securities may have been able to get some of these bonds but not the discount broker clients.

It was interesting to learn a little about this because at some point I will likely want to buy some bonds.

The fact that I could not buy any seems to make the bonds all the more attractive of course.

I may try to get registered as an accredited investor with TD although it may be that as a discount broker client I move not be able to access accredited-investor-only products in any case.

In other news, I note that the Canadian dollar has been falling. This increases the Canadian dollar value of our U.S. investments which is nice added boost. I have no idea how low the Canadian dollar will go but at some point (maybe 93 cents) I would move some U.S. cash back to Canadian dollars and then hope to reverse that if the Canadian dollar rose. In the longer term movements in the Canadian dollar against the American have not been that important. (Consider that a 10 cents move after ten years would only amount to 1% per year, so not that big a deal for investors.

On Tuesday the S&P 500 was flat while Toronto was down 0.9%.

On the other hand Alimentation Couche-Tard surged 3.0% to $76.17. It’s now up 56% this year having started the year at $48.19 and rated Buy. And, it’s up 338% since it was first added to this site almost nine years ago on March 31, 2005 rated (lower) Strong Buy at $17.40. That works out to an average yearly compounded gain of 18% per year for anyone who bought and held that whole time. Apparently, in the case of this company, rumors that buy-and-hold-is-dead are greatly exaggerated. I plan to update the report for this company by Sunday.

Toll Brothers was up 3.5% as the latest Case-Shiller home price index saw additional price gains for U.S. houses in September

On Monday, the S&P 500 and Toronto both ended the day down very marginally – basically flat.

Constellation Software fell 3.6% to $186.55. Earlier in the day it got as low at $178.50. This caused me to ponder why I had not sold my shares last week (at about $200) when I said I was thinking about it. There was no immediately apparent reason for the drop, as far as I know. Possibly this stock illustrates the perils of stop loss selling. What if someone has a stop loss in at $180 and it sold there just before bouncing back to $186.55? That would not be fun. I virtually never use stop losses. I sell based on valuation, not when the crowd is selling.

On Friday the S&P 500 closed up 0.5% (and closing above 1800 for the first time ever) and the Toronto was flat. There were no particularly note-worthy moves in any of our stock picks.

eBay Inc. is updated and rated Weak Buy / Hold at $50.33. The company has strong earnings characteristics but with a P/E of 22 it is pricing in a lot of growth. It may be worth considering as a more speculative pick, but overall seems a bit expensive. I had added it back to this site on March 24, 2013 rated Weak Sell at $53.27. Given that the S&P is up over 26% this year and given that eBay’s earnings have continued to rise it’s somewhat surprising that the stock is down a bit this year. Perhaps investors fear that competitors will steal its market, particularly in regards to PayPal. There are always risks.

Well, Thursday was yet another very strong day in the markets. The S&P 500 was up 0.8%, The Dow was up 0.7% and closed above 16,000 for the first time ever. Toronto was up 0.3%.

As for our stock picks we had Bank of America up 3.0% and Toll Brothers up 2.0%.

Obviously stocks cannot and do not and will not keep going up indefinitely. They can go sideways or down at any time. If we hold some cash and we hold good companies, declines need not be that huge a concern as we can use declines to add to positions. Still, we all hate to lose ground.

When I look at what stocks I own and might trim myself it’s a bit tough. I have Wells Fargo and Melcor rated in the strong buy range and so it’s not that easy to sell any of those two. Regarding Canadian Tire I already trimmed it by about 50% from what I held about a year ago. Regarding Toll Brothers I believe I have trimmed that as well from my peak levels. I already sold all my Stantec. When I look at what I hold there are few I would want to trim. I mentioned earlier the possibility of trimming or selling Constellation Software, so that is one. There is my oil sands ETF which I don’t have a rating on but which also has not risen much. These is Liquor Stores which I rate low but which I am nevertheless not that keen to trim.

Possibly I should enter some hopeful orders to trim most positions if they rise much further…

My cash is sitting at about 37% which has been a drag on my returns but which seems prudent for risk management given I hold no fixed income.

I could decide to raise the cash to 40% or even 50% and just trim all stocks in proportion to achieve that. That might be logical. My cash level should really be set at some target rather than just be set sort of accidentally as I sell stocks and buy.

As of the moment I am not much inclined to take action on trimming but just wanted to share my thoughts on it.

On Wednesday the S&P 500 was down 0.4% and Toronto was down 0.1%. Markets were initially positive on positive economic news regarding consumer spending but turned negative when minutes of the FED meeting disclosed discussions that tapering of the bond buying could begin soon. Among the stocks I keep an eye ion I notice Couche-Tard was up another 2.0% to $73.50. It appears that I sold that one far too early. Then again, it’s hard to say what I put the money into and given my gains these past two years I have no complaints about having sold a lot of stocks at well below today’s prices.

It seems to me that gains on higher price stocks are sort of smaller than they appear to be. A stock rising from $80 to $90 seems great and is great. But at 12.5% it is nowhere near as good as the 50% gain when a stock rises from $10 to $15, though at first glance it may look like a larger gain. We may sometimes feel regret about selling a stock at $80 that soon went to $90, when the fact is we may have put the money received on the sale into a $20 stock that rose to $22.50 or more and therefore it was not a bad thing that we sold but it may feel like it. We tend to “compartmentalize” our investments into individual stocks whereby we can regret the gain we missed out on while forgetting the gain we obtained by reinvesting the proceeds. I know that happens to me, where a sale of a stock feels regrettable but really was not regrettable.. And of course sometimes it truly was regrettable that I sold.

On Tuesday the S&P 500 was down 0.2% and Toronto was down 0.1%.

Among our stock picks there was not much excitement although Bank of America was up 1.8%.

I sold the remainder of my Stantec shares today. I was hesitant to do so because it was in a taxable account. And I am not sure I should have sold. I’d like to buy back in in future if the P/E ratio were quite a bit lower.

In 2007 and the first half of 2008 I watched P/E ratios rise higher and higher. To some extent I responded by using higher assumed P/E ratios in my valuation formula. Essentially what that did was more or less justify the higher stock prices that we saw in 2007 and the first half of 2008. As I have mentioned before , it is always possible to torture the numbers until they confess that any particular stock price is a bargain. I did not get as carried away with that as many others but to some extent I engaged in pushing up my assumption of a fair P/E ratio. I will try to avoid that this time. If markets continue to go higher it should lead me to selling out of or trimming some positions as their P/Es (and price in relation to value in general) seem too high (like Stantec).

I am not suggesting that I am rushing for the exits. In fact some stocks still have low P/E ratios (and also that is not the only thing to consider) so I would not be reducing all positions. In general I am seeing fewer bargains now and that is to be expected as markets have risen.

On Monday, the DOW pushed over 16,000 for the first time and the S&P 500 pushed over 1800 for the first time. Bu then both fell back and we ended the day with the S&P 500 down 0.4% and Toronto was down 0.2%.

Stantec is a great company. But its price now seems to be rising on a momentum basis. It’s up 74% this year. I had earlier sold the shares that I held in non-taxable accounts. I have some shares left in a taxable account and I will likely sell those tomorrow. The P/E ratio is 21 and that’s certainly not extreme for a growth company. But it does seem a little too rich for me. On the other hand Stantec is almost certain to have a higher stock price than this in 10 years. I certainly would not short the stock but I am inclined to sell.

On Friday the S&P 500 rose 0.2% to another record high. Toronto was up 0.3%. The next update here will likely be for eBay.

On Thursday the S&P 500 index rose 0.5% to yet another record high close of 1791. Toronto rose 0.4% to 13,431 which is roughly 6% below its all-time high from 2011.

Most of our stock picks were up today. Notably Toll Brothers rose 2.6% to $33.51.

I have just updated my analysis of the valuation of the S&P 500 index. The trailing P/E on the index is 18.8. That alone suggests it is not attractively priced unless the P/E was based on a depressed earnings level. But the earnings level is not depressed. Unless we expect interest rates to remain low indefinitely (say for decade) and therefore P/E ratios to remain elevated indefinitely the S&P 500 index seems somewhat over-valued. As a point estimate it looks perhaps 18% over-valued. That does not mean it will fall anytime soon. But it does suggest we should be cautious about committing too much of our funds to the U.S. stock index.

In the coming weeks I will update a similar analysis for the DOW (which normally looks like better value than the S&P 500) and for Toronto (which is a more volatile index due to the heavy resource sector representation).

Today the S&P 500 was up 0.8% and Toronto was up 0.3%

Canadian Tire poked its head just above $100 but closed at $99.74.

Liquor Stores N.A. fell 3.2% to $14.07. I was tempted to buy a bit more. I have thrown in a bid at $13.51. I also threw in bids for Melcor at $18.75, Toll Brothers at $30.10. Quite possibly none of these will get filled. I used these below market bids because I already hold substantial positions in these three companies.

On Tuesday the S&P 500 and Toronto were each down 0.2%

I don’t believe markets are predictable in the short term. The strategy is to react to the market. And it is to try to calculate a reasonable value for a selected group of companies that are suitable for such a valuation process (most aren’t as they are too unpredictable) and then buy these quality companies when they are good values and trim or sell if they become over-valued. As Buffet says, simple but not easy. So I am not fixated on what the market will do, no one can predict that accurately. But if one makes rational moves in response to markets then things tend to work out.

In the next few days I may enter some orders to trim on rallies or sell on dips, whichever happens.

Stock markets were open on Monday despite Remembrance day. S&P 500 was up fractionally, up 0.1% and Toronto was down fractionally, down 0.15%.

Canadian Tire was up 2.1% to $99.22. It just about cracked over $100 and if it does (which seems likely) that may generate a bit of news, although in substance $100 is not more important than $99 was.

Constellation Software is updated and rated Weak buy / Hold at $201. It’s a great company. But it does seem rather expensive. It is pricing in a lot of continued growth. Given that other investments seem more attractive I am tempted to sell my shares. I had sold half earlier and may sell the remaining shares. Even if I sell i will keep an eye on this company. It seems to approach the growth-by-acquisition strategy from the most rational approach I have ever seen outside of Berkshire Hathaway.

Canadian National Railway Company is updated and rated Weak Buy / Hold at $116.90. This is a great company that has been growing for years and will continue to do so. Right now it just does not look like a bargain.

Here is some history. The stock up 29% this year. We had rated it a (lower) Buy at the start of 2013. In 2012 it was up 13% and we had rated it Buy at the start of that year. In 2011 it was up 21% and we had rated it Buy at the start of 2011. In 2010 it was up 16% and we had rated it Weak Buy, in 2009 it was up 28% and we had rated it (higher) Buy, in 2008 it was down 4% and we had rated it (lower) Buy. In 2007 it was down 7% and we had rated it (higher) Buy.

Melcor is updated and rated (lower) Strong Buy at $19.71. Basically it looks like a bargain but there is risk because profits would decline a lot if house building activity in Alberta was to take a sudden plunge. It’s also thinly traded, therefore be cautious in placing orders. I would place an order to buy at a certain price rather than to buy at the market price since the market price can be volatile due to the thin trading. This is my largest holding and I am thinking of adding to my position.

Liquor Stores N.A is updated and rated Speculative (lower) Buy at $15.06. This was a disappointing stock pick for 2013. It is down 19% this year. It started the year at $18.56 and had a dividend yield of 5.8%.

Many investors seem to think that a dividend is a very important consideration in choosing stocks to invest in. I have never considered a dividend to be the main factor in investing. A dividend is usually a plus, but it is neither necessary nor a sufficient condition for a stock to be a good investment.

By some measures Liquor Stores N.A. is attractive at its current price. The dividend is attractive but may not hold, it could be cut. The opportunity to buy at 110% of book value is attractive. Book value consists mostly of purchased goodwill. Still, we are able to effectively purchase liquor stores here for only 10% more than the company has invested in those stores and that does seem attractive. But recent results are weak and it is going to take a bit of turn-around in order for the stock price to rise.

At this time, due to lower earnings and a negative trend in earnings I consider the stock to be somewhat more speculative.

Friday was another strong day on the markets with the S&P 500 up 1.3% and Toronto up 0.6%.

Toll Brothers fell 2.3%. This company’s earnings have risen sharply this year but because it started out the year with a very high P/E ratio its share price has been left out of the party this year.

The news of its strong Q4 (which was partially released on Wednesday night) would likely have caused the stock to climb but that was somewhat cut off at the knees by news that they would make a big acquisition and issue shares. The share price was revealed on Thursday night and the price is $32.00. In this case it is not surprising that the TOLL shares traded at about $32 today.

It’s seems unfortunate that the company would issue shares at $32. Luckily it appears this is not that huge an issue. It’s about $225 million while TOLL has a market cap of about $5,700 million. The acquisition is $1,600 million so it will be mostly paid by cash and debt. Hopefully a case of short-term pain for long term gain.

Canadian Tire is updated and rated Buy at $97.15. Its Q3 earnings were excellent. The impact of the REIT transaction is not in the financials statements yet as it occurred after then end of Q3. In any case it really does very little in substance since Canadian Tire still owns 83% of the REIT and since the REIT will be consolidated into the balance sheet at historical cost and not at market value. Canadian Tire seems to have suffered basically no impact from Target and that includes it Mark’s stores. The outlook appears good. I had trimmed my position approximately in half as the price rose 40% this year. However at this time I am more inclined to buy than to trim further.

There was additional news on Toll Brothers later last night and this morning. They are making a large acquisition of a luxury home builder in California. They pre-announced Q4 earnings and revenues which were stellar. Unfortunately they also announced they will sell additional shares (I could not see a price mentioned). The share counted rises by only about 4%, so not too serious. Assets are rising by approximately 15% after deducting cash they will pay. I was hoping for a big price increase here on the news but given the share sale I now don’t expect too much to happen. I might trim my position it it jumps to say $38 which is perhaps not realistic.

This morning the good news was that U.S. GDP was strong. But the market decided that was maybe bad news since it might point to an earlier end to quantitative easing. S&P 500 was down 1.3% and Toronto was down 0.6%.

Toll Brothers managed only a 0.5% increase on its strong earnings. Canadian Tire came out with strong earnings and a dividend increase but the stock did nothing. (Maybe not so bad on a negative day, and basically a lot of good news was already baked into the price of Canadian Tire.) Melcor fell 2.3% on its earnings, but that is on thin trading so may not mean much. Liquor Stores N.A. was also out with earnings which were I guess a bit on the weak side, although not terrible. It’s shares fell 2.7%.

I hope to update the reports for two or three of these by Sunday. Toll Brothers has not yet released it full financial results but I may be able to at least update the P/E ratio.

U.S. jobs report will come out tomorrow (Friday) morning. Perhaps it will be bad given teh government shutdown that happened in October. Never a dull moment it seems.

On Wednesday the S&P 500 was up 0.4% and Toronto was up 0.1% The Dow Jones Industrial Average was up 0.8% to another all-time record high.

Costco was up 3.3% to $124. I have said before it always looks expensive. But what a fantastic operation it is. It appears we should have grabbed some at $112 or whatever even though that did look expensive. It’s one to keep an eye on if it ever falls due to some temporary issue or a general market decline.

Melcor was down 3.1% today. But it’s really thinly traded and it had risen about the same amount in the past couple of days so I consider this to be just “noise”. Melcor released earnings after the close today Wednesday. The headline numbers show a decrease but on an adjusted basis the company indicates a small increase in earnings. The results at Melcor are lumpy by nature and so it should not be expected to smoothly increase earnings every quarter. The company indicates that the outlook remains positive. I will definitely consider buying on Thursday if the price declines but not if it rises. It’s already my largest position and so perhaps I should not be buying. I may also consider trimming if the price rises.

Toll Brothers canceled a planned appearance at an investment conference today. (They canceled today or possibly yesterday and they were to appear today.) Not sure what to make of that. Possibly it canceled pending some news. It just completed its Q4 on October 31 and most companies go into a silence mode between year-end and the release of earnings and so I don’t know why they would be at an investment conference in the first place in early November. I see now after-hours news that they are rumored to be bidding on another company. Sometimes news like that pushes a stock up, more often the buyer’s stock goes down on the news. We shall probably know on Thursday morning. Bidding on another company suggests there are other bidders, so that might suggest they won’t get any real bargain.

Markets started out quite negative on Tuesday but in the end the S&P 500 was down only 0.3% and Toronto was flat.

I neglected to mention yesterday that it was nice to see Melcor back over $20. It was up another 2.5% today to $20.70.

Melcor will report earnings this week and I expect good results. As for the outlook, things still seem to be fairly hot in Alberta as far as home building to my knowledge.

But the news that EnCana is dumping 20% of its staff is sobering. natural Gas prices are very low and while i am not tapped into what is happening “in the field” I understand it is very slow. At some point this could affect the broader economy and house prices in Alberta but so far that is not much sign of it to my knowledge. In any case Melcor looks like a good investment and if were to get hit by a weaker home building market that would most likely be temporary. There are always things to worry about but overall I like holding a good chunk of Melcor shares.

Stocks were up a bit more today… S&P 500 up 0.4% and Toronto up 0.2%.

Blackberry / Research in motion caused some entertainment and grief in the markets today with a 16% fall. I have no idea what it is worth or what its future holds. Might be worth throwing a (very) small amount on it just for the entertainment value. Presumably Prem Watsa and Fairfax financial have some clue that it is worth more than the current price. It’s probably best to focus on more predictable companies. It seems rather disgusting that this CEO Thurston Heins gets a reported $20 million exit fee. All in all he got a nice pay cheque in return for doing apparently nothing much good and perhaps a lot of bad.

If you read the press release from the company including the title, it seems pretty apparent that the company is completely delusional. The financial press took this as “Fairfax buy-out is off” whereas the press release is titled Blackberry receives investment of a billion… Just read the press release and you can see how delusional the company is. Amazing.

http://press.blackberry.com/financial/2013/blackberry-receives-investment-of-u-s—1-billion–from-fairfax-.html

On third thought. I don’t think I would touch this thing even for the entertainment value. Sure it may bounce up, but I don’t want to get involved with this kind of management.

Constellation Software was out with excellent earnings today after close. I will look to update this report soon.

Stantec is updated rated Weak Buy at CAN $65.69 and U.S. $62.81.

Stantec’s share price has risen a remarkable 65% in 2013. In part this is due to achieved earnings growth in 2013. But in part it is due to investors being willing to pay a higher multiple for its earnings. The P/E ratio started out 2013 at 14.7 and is now at 20.2.

Stantec is a great company and has a great future and will likely continue to grow earnings at a strong rate in the long term. However, it is now “pricing in” quite a bit of growth. It is not the bargain that it was before this big price increase.

It does not appear to be the best choice for an investment at the moment though it will likely due okay in the long term. I had recently sold all of the shares that I held in non-taxable accounts. I still hold some shares in a taxable account and am undecided whether to sell those. The stock is not rated Sell, but I could still decide to sell these shares to hold cash or invest in something more compelling.

While the Q3 earnings reported on Thursday morning were very strong, it is not entirely clear why the price jumped quite so much on Thursday and Friday. I did a search for analyst reports and did not see anything that seemed to explain the sharp rise.

On Friday the S&P 500 was up 0.3% and Toronto was down 0.2%.

Stantec was up another 5.7% and is now up a total of 65% this year making it the best performing stock on our list this year.

Berkshire Hathaway is updated and rated (lower) Buy at $115.27.

Berkshire is so huge that it is unlikely to provide an outstanding return. It should do okay and occasionally when it becomes more under-valued it can be a great investment. And right now it is probably a reasonable investment.

I follow Berkshire for what it (i.e. Warren Buffett) can teach me about investing in general.

An interesting point is that of Berkshire’s $458 billion in assets, and despite the fact that Berkshire is known for its huge investment portfolio, almost none is invested in U.S. Treasury BONDS. It has a large investment in U.S. Treasury bills which is where it keeps most of its cash and cash equivalents. But there is  a grand total of just $2.5 billion (0.5% of the assets) invested in U.S. Treasury bonds. This is an especially low figure when you consider that most U.S. insurance companies keep a large portion of their assets in U.S. government bonds. Berkshire has only 6% of its assets in fixed income of any kind. This compares to 23% of assets in equity securities. Most of Berkshire’s assets are invested in wholly owned businesses. Of this 6% invested in fixed maturity investments, most has a term of five years or less and very little has a term of over ten years. Buffett has said that long term bonds are a terrible investment at this time. He practices what he preaches (and also preaches what he practices).

Conventional advice is to always have a significant exposure to fixed income. However, keep in mind that not all fixed income is created equal. Most fixed income investments such as medium and especially long term bonds may be fixed income but they are not, by any means, fixed in market value. To the extent that preferred shares are considered fixed income, they often behave very much like long-term bonds, they are in no way fixed in market value. (Shorter term preferred shares with much lower yields may be relatively fixed in value).

Also keep in mind that the three main asset classes are, cash, fixed income and equities. Dividend paying stocks should be considered to be in the equity category even though they pay an income. Preferred shares are something of a hybrid but should probably be considered to be fixed income. Preffered shares are unlike bonds in that they may never mature and that makes them far different than bonds.

If Buffett is right (and it’s ALWAYS wise to assume that he is) then it would be wise to keep fixed income investments to the shorter maturity and to favor preffered shares over bonds. Personally I have been content to hold more cash than usual and in some ways that is in lieu of fixed income. Cash in my investment accounts pays up to 1.25% in accounts like TDB8150 (see list above), although most of my cash pays me nothing at all. Cash (the portion that pays nothing) gives me instant availability in case I wish to purchase stocks. Cash and deposit accounts provide complete stability since they do not decline in value if interest rates rise.  To my mind those advantages outweigh the tiny extra return I could get by holding fixed maturity investments in the two to five year range. Many preferred shares pay substantially higher interest rates but those that do (perpetual preferred shares) would fall in value if interest rates rise. I consider preferred  shares to be an alternative to equity investments and not an alternative to fixed maturity / cash investments.

At this time (of record low yields) I would avoid bonds and avoid perpetual preferred shares. For income I would favor higher dividend paying equities or simply selling down equities as cash is needed. For the portfolio stability features that bonds are often meant to provide I would prefer cash and deposit accounts. Regarding preferred shares an exception might be if the tax advantages were important, for example where they are held in a taxable account and especially if a lack of other income can result in substantial preferred share income at a low tax rate. I simply see no place at all for long-term bonds at this time.

Thursday saw the S&P 500 down 0.4% and Toronto down 0.7%.

Not a scary day for our stock picks though, not with Stantec up 6.5% to $61.96 on a good earnings release. We rated it Buy in August at $50.46. I’d be more inclined to sell or trim at this price and in fact I did trim my position as noted in the daily comments. I still have some in a taxable account where I have been following a rule of buy and hold because I don’t wish to trigger capital gains to be paid or even the work of reporting the gain on my tax return. But maybe I will decide to sell that… I will update the report before long.

Canadian Tire ended the day down very slightly. But this morning it was up a little and I decided then to trim a little of my position. The more stocks I trim the more I have to think where can I invest the money. (Given I already have big exposures to my favorite few stocks). But it does seem prudent to trim on big gains. I’m content to sit on some cash for a while.

Stantec has been a real winner for a long term buy and hold investor. I first added to this (then brand new) web site in August of 1999 rating it Strong Buy at (split-adjusted) $2.50. And the thing is it was actually a pretty obvious bargain, then selling for 10 times earnings and 1.22 times book value. In those days everyone wanted Nortel and Cisco and their ilk and boring companies like Stantec were unloved. Also Stantec was quite small at that time and therefore was under the radar. Having been originally rated a Strong Buy at $2.50 in 1999, Stantec rose $3.81 today. TODAY!. That is the power of a strong ROE and compounding at work. Note that Stantec was volatile over the years. It was not always easy to sleep for those holding a big position in Stantec. Those who bought on major dips and sold on big rallies would have been well rewarded. But I suspect none in reality would have done as well as someone who simply bought and held. See graph.

It’s been a remarkable year for our stock picks so far. Right now it seems reasonable to be looking to trim positions with big gains and try to catch our breath and see what stocks still seem to offer good value.

Not all the stocks on the lost above have very recent report dates. But the two strong Buys do. I continue to like Wells Fargo and Melcor as the two best picks right now. Note that Melcor is thinly traded meaning you can’t really trust a price change of say 2 or 3%, that can just be noise. You can easily over-pay by at least 2 or 3% if you are careless placing an order for a thinly traded stock like Melcor. Don’t use a buy at market order or sell at market. Enter a reasonable price in an order and try to be patient. Of course there are no guarantees and if the whole market should turn down then these two stocks would be pulled down as well. And of course every company can report bad news at any time. Those are risks we must accept if we are to invest in individual stocks and especially if we run concentrated portfolios.

In investing, it’s probably fair to say that good returns usually require us to take risks. And risk means it might not be a good return, it could be a poor return. And contrary to what some say, it does not work the other way. Taking risks in no way shape or form guarantees a high return. If it did it would not be risk. And also many risks are just stupid risks and are not associated with high returns. Only the right types of risk are (usually) rewarded.

For more information on risk, see my articles on that subject.

portfolio theory

and

Risk and Reward

On Wednesday the S&P 500 was down 0.5% and Toronto was up 0.1%. Apparently the FED is less optimistic about U.S. growth. I did not note anything too exciting in the news regarding the stock picks listed on this site. Visa was reported to have suffered an earnings decline of 28% but that was not really true in substance because it was due to last years quarter having a special gain on income taxes and this year having a normal level of income tax.

It seems likely that there will some negative economic reports in the next month due to the slow-down caused by the U.S. government “shut-down” and borrowing limit debacle.

Target is reporting slow sales in Canada. I have said before that their purchase of the Zellers leases for $1.8 billion seemed to set them up as high-cost operators.

Sears is selling the rights to five big store leases for $400 million. Good for them. This seems a smart move. If they can’t make much money at stores like Eaton Center in Toronto, why not grab that kind of cash?

Another good day for the markets on Tuesday with the S&P up 0.6% and Toronto up 0.5%.

It seems that there are times when the market goes down much further than most anyone expects (early 2000’s and 2008 into early 2009. Then there are other times like maybe now (thinking here of the U.S. markets) and like late 2002 to mid 2008 and most of the 80’s and 90’s where the market continues to rise more than most anyone expects.

Many people look for cycles or market indicators and try to guess the direction of the market in the very short term, the medium term and the long term. For short term they often speak of over-bought or over-sold, or resistance levels, for medium term they may talk of cyclic trends and cyclic bulls and bears and for longer terms it is secular bull and bear. Laughably they call a bear market AFTER the market is down 20% and a bull AFTER it is already up 20%.

I basically studiously ignore all of that. I cannot predict where the market is headed. But I can react to it. I can try to judge if the market is over-valued or under-valued. If we can buy stocks when the market is under-valued then we may lose in the short term but over the years we will tend to win.

We can also pretty much ignore the overall market and simply buy good companies at good prices. That tends to be a winning strategy over time.

In the next month or so I plan to look again at the valuation of the markets. The biggest driver may be interest rates. When the main choices are i) long bonds at 3% o 4% (and no growth), ii) short bonds at squat but hoped for reinvestment at higher rates later or iii) a market with a P/E of as high as 20 (5% earnings yield with growth) the market may be the best of a somewhat unexciting lot.

On Monday I did not note much of interest in the market.

S&P 500 up 0.1%, Toronto down 0.2%.

Stantec was up 2.5%.

Canadian Tire finished flat at $97.90. At one point it touched $99.51 today. There is absolutely nothing special about $100, at least in theory. Still, in practice I think a close over $100 would generate some excitement. Maybe that way all the people who ignored Canadian Tire a year ago at price under $70 can start to pile in. However unless there is news on further “release of value” initiatives such as a partial sale or partnership of the finance operation, I don’t see why we should expect much more here in the near term. The earnings release will hopefully show good same store sales. But will also show the one-time costs of the REIT transaction. And possibly there will be some hit from Target. Obviously, Canadian Tire was a better investment last year at around $70 than it is now at close to $100.

There will be some updates to the reports coming soon.

On Friday I sold what amounted to 6% of my Toll Brothers shares at $33.56. These particular shares had been purchased two weeks ago at $30.43. This is a strategy I have been using with Toll Brothers, buying on dips and selling on rallies. I do not have any strict rules about this but in this case the swing was about 10%.

Yesterday the latest edition of the free newsletter was sent out. If you did not receive that by email then you could try adding your email to the free list.. The system should let you know if your email is already on the list. There is also a “validation” process for the free list. That is not critical because I send out to both validated and unvalidated emails on the list (always with a link to get removed from the list)

My own portfolio breakdown is updated. I continue to run an extremely concentrated portfolio. More concentrated than I have been historically. I have over 48% of my portfolio in just four stocks and that is 74% of the equity portion of my portfolio. That kind of concentration should generally be considered to be HIGHLY risky. I have never recommended that anyone copy my portfolio and have always indicated that it was based on MY risk tolerance and MY capacity to take risks. I happen to have a lot of faith in each of my four largest positions (Melcor, Wells Fargo, Toll Brothers and Canadian Tire). But I have said that Toll Brothers is speculative due to the high P/E ratio. And banks are highly leveraged by nature and therefore can be risky for that reason alone and property development is a cyclical industry. And I have, over time as it rose, sold about half of the Canadian Tire shares that I held around this time last year when the stock was particularly cheap looking. These four stocks could certainly cause me grief at any time. That is a risk I have been taking. I reveal my own portfolio because some people expressed an interest in it years ago and in the interest of transparency. But such a portfolio may not be suitable for others and it is up to individuals to decide that.

A certain amount of concentration should be expected in the portfolio of a stock picker such as myself. As a fellow stock picker recently said, if you can’t pick stocks you should be highly diversified (invest in index ETFs). But if you are convinced that you have a good ability to pock stocks then it makes sense to concentrate in your best ideas.

Subscribers may want to limit the allocation to an individual stock to some lower limit like 10%. Even that is considered quite high by most experts. The limit is up to you, I don’t offer advise on asset allocation or the limit in any one stock since that is highly specific to each individual.

The reality is that it is impossible for the average investor to beat the index. (Just as the average person can not be taller than average). By following a stock picking strategy subscribers to this site are implicitly or explicitly trying to do better than average. Therefore you have opted for a less diversified strategy. But the extent to which you concentrate your holdings is up to you and I wanted to remind you that my own level of concentration is very high and could be highly risky.

Running a concentrated portfolio is part of the reason I have done so well the past two years. That knife could cut the other way at some point. Hopefully these four stocks are not going to decline a lot more than the market at some point while I still own them. But it could happen. This is part of the reason that I am running with a higher-than-usual cash position. If one or more of these four take a big hit due to a company-specific reason but it is a one-time problem, then I would likely be buying on that dip.

I don’t mean to alarm subscribers. I just mean to let people know that blindly following my own portfolio could be very risky. I prefer that my subscribers take more of an a-la-carte approach and pick and choose from the stocks that are rated after reading the reports. Many and perhaps most subscribers will also hold investments not listed above.

The bottom line is that we all invest at our own risk and we should all understand that stocks do go down at times. And some of them stay down.

Another day and the markets were up again. This all seems a bit too easy… I am thinking about what positions I might trim…

S&P 500 up 0.3%, Toronto up 0.6%.

As for our Stock Picks, Toll Brothers up 2.3%, Canadian Tire up another 1.0%, Visa up 2.0% to $203.

Less than 24 months ago Visa was under $100. In early 2011 it was under $70 having fallen on some negative news and developments. Ever since I added it to this site in April 2009 at just over $58 and rated Buy I have consistently described it as virtually an unregulated monopoly and when it rose after falling I said it was “hard to keep a good monopoly down”. In May 2011 I rated it a Strong Buy at $79.41. Sadly, I sold my own shares too early. The point is there are times and there are companies where the value seems pretty darn obvious. Visa at times fit that mold. I don’t like it at $203 but it is even clearer now that it was a wonderful bargain in early 2011.

On Wednesday the S&P 500 was down 0.5% and Toronto was about unchanged.

There were a couple of big gainers today, CN up 4.4% and FirstService up 4.9% as both released strong earnings.

I’ve long considered both to be excellent companies though both (and especially FirstService) had seemed too expensive at last check.

The Canadian Tire REIT CT Real Estate Investment Trust started trading today. It rose marginally above the $10.00 IPO price. I understand that for the first few weeks the investment bankers will “support” the stock price, or attempt to, by buying shares if needed.. That sounds like some kind of “legalized” stock price manipulation and I believe that is just what it is and it done for every IPO. It’s yielding 6.5% as I understand. I don’t have an opinion on its value but I assume it will most likely stay above he $10 level (barring any increase in interest rates which is starting to look less likely)

Canadian Tire Corporation still owns about 83% of CT REIT. The whole purpose of this exercise was to “reveal” the value of Canadian Tire’s real estate and drive up the share price. That is a form of financial engineering and it has worked. I suppose that is okay if the stock price was under-valued previously and I definitely think that was the case. I would have preferred to see at least 50% and as much of 100% of the Real Estate sold since investors are willing to pay so much for REITs.

We can now attempt some interesting math for Canadian Tire Corporation.

The REIT has a market value of $1.76 billion. (I had earlier seen reports of $3.5 billion but I calculate $1.76 billion). Canadian Tire itself has a market cap of $7.7 billion. So the rest of Canadian Tire Corporation minus the entire REIT is valued at about $6.0 billion. This may seem low when we consider that Dollarama is valued at $6.3 billion and Canadian Tire has far more locations (including its Marks and FGL sports locations) and vastly more retail space. Canadian Tire’s financial Services division is worth a great deal. (It accounts for about 41% of profits and is presumably worth at least $2 billion) Canadian Tire also still owns significant real estate outside of the REIT. This appears to leave the retail division not valued that highly. Financial statements for Q3 and certainly by Q4 may reveal that the Canadian Tire stores (The 490 actual Canadian Tire branded stores) are not that profitable after they pay rent to the REIT. The fact that Canadian Tire owned its own real estate may have been masking relatively low profits on the store. But then again Canadian Tire “retail” is really mostly a wholesale operation since its dealers own the actual retail businesses at each Canadian Tire store.

I suspect Canadian Tire is not over-valued at $96 and may remain somewhat under valued. This is going to become more clear as it begins reporting under the new arrangement. Canadian Tire’s next step may be to sell off a portion of its finance operations in order to reveal the value of that component of the operation.

Canadian Tire’s next earnings release, which should occur with a few weeks id going to be interesting and could cause the stock price to move. I’ve taken some profits along the way but I also feel comfortable hanging on to a relatively lasrge position here.

Markets were up nicely today.

S&P 500 up 0.6%, Toronto up 0.5%.

The reason the markets were up was because the employment numbers in September int he U.S. were bad enough that the fear of FED tapering is eased. That is not exactly a sustainable reason for the market to rise.

Markets have risen a lot in the past two yeas. That cannot continue indefinitely of course. It’s anybody’s guess when markets could go the other way for a time. I am thinking of building up more cash and reducing my equity exposure. But it’s hard, after all I like the stocks I hold.

As far as our Stock picks today we had Canadian Tire up 1.7% to $96.30 and Toll Brothers up 2.5% to $32.65.

Given the rise in Canadian Tire I ended up selling what amounted to 19% of my position. As is almost always the case with me this was in a non-taxable account so I don’t have to worry about triggering a capital gains tax. I may regret this if Canadian keep rising. But considering I have made a very good return with Canadian Tire it seemed reasonable to take some profits.

The week has started out not too badly on the markets. The S&P was flat awhile Toronto was up 0.4%.

On the weekend there was a report in the Edmonton Journal about a company that owns a facility that loads oil onto trains just outside of Edmonton. Currently the oil is trucked in but soon they will be loading from a pipeline. 100,000 barrels per day capacity. (Which is a lot). It seems like that could be a good business.

The company is Canexus Corporation. They are mostly a company that manufactures Sodium Chlorate and it looks like they got into the oil loading business simply because they already had a train loading facility. I took a quick look but there were some things I really don’t like. Recently they swung from profits to losses on their core operations the Chlorate operations. The loss is definitely a negative but there was something else that bothered me a lot more. The company talks about something called “Cash Operating Profit”. In Q2, this cash operating profit was $23.0 million despite an actual profit of negative $14.8 million. It turns out that “Cash operating profit” is really EBITDA plus non-cash compensation expense. In my opinion it is outrageous and mis-leading to refer to this as a “profit”. And especially when they focus on this number as the headline number. It is not unusual to refer to EBIT as operating income, but to call EBIT, much less EBITDA profit is just not right in my opinion. I can’t trust a company that does this. I was intrigued by this oil to rail loading facility. It is a large facility and I suspect it could be quite profitable. But it comes along with a commodity chlorate business that is losing money at this time. Possibly I could take another look after the Q3 earnings, but it may just be wise to keep away from a company that takes this much liberty with the definition of the word profit. Also the sight of burning train cars just West of Edmonton this weekend is a worry for all the plans regarding shipping oil by rail. (In this case it was not oil that burned, but still the images are damaging). In addition to all that, the company appears to be trading at close to four times book value.

The U.S. markets finished the week at all time highs. Nothing surprising there, stock markets don’t reach new all time highs every week or every year, but over time all previous highs do tend to eventually get eclipsed. The major reason for taht is taht companies on the stock market are generally profitable and they generally retain a portion of earnings to fund growth each year. Economies and stock markets do tend to grow in the long term. But do remember that stock markets don’t move higher every year.

On Friday our biggest gainer was Liquor Stores N.A. up 3.2%.

This week will bring more earnings reports and who knows what other news. Seldom a dull moment.

The Canadian Tire REIT may also start trading this week. I believe the IPO closes on Wednesday. (Meaning, the money changes hands that day). If the REIT trades up then the Canadian Tire Shares may go up a little as well. I don’t really expect much further impact from the REIT on the Canadian Tire shares at this point. The Q3 earnings report will be important. Also any indications of further financial engineering such as a partial sale of the financial services operation (which has been alluded to) could be positive.

Onwards and upwards (at least for today)

The S&P 500 gained 0.7% on Thursday and Toronto was up 0.6%.

Most of our stock picks were up. The biggest gainer was Toll Brothers up 4.4%.

Canadian Tire was briefly above $95 today but closed at $94.40 up 0.5%. I had mentioned I had an order in to trim at $95 but that order apparently expired before today. I thought about trimming today but did not. (Sometimes it’s hard to pull the trigger and sell when the stock is rising and that’s why automated orders to sell at a given price can work well.).

The Canadian Tire REIT should start trading within about a week and that could possible give us another few cents on Canadian Tire depending how the REIT trades. The next big news for Canadian Tire should be the Q3 earnings which not come out for a few weeks yet. I expect they had a good Q3 except that they will have unusual expenses for the REIT launch so the headline earnings number could look negative. Also Canadian Tire (like most stocks) will always tend to move somewhat with the overall markets and with economic news. Overall, I am not in any rush to sell but still, it may be wise to trim a little given the gains.

Well it appears that the gong show in the U.S. senate and house is about to be resolved positively.

On this news the S&P 500 rose 1.4% on Wednesday and Toronto rose 0.2%.

It’s still possible that the deal could hit a snag yet, but it appears matters are resolved for now. However I understand this thing will resurface by January. Perhaps the market will ignore it even more so the next time. The politicians can only cry Wolf effectively so many times. ‘course we might remember in the Fable the wolf eventually does come around and eat the boy up as his cries are ignored. (But in this case I don’t think the government will ever allow the U.S. to default).

So, if this deal does get done then it will appear that we have done the right thing by staying the course and by picking up some stocks on dips. Volatility is the friend of anyone who invests on fundamentals.

Seeing Liquor Stores N.A down a bit more today I added to my position at $14.90. I checked my report to refresh my memory and while it was rated (lower) Buy at $15.98, the report also said the Value ratios indicated a Buy. So anyhow these things are never guaranteed at all but I decided to Buy some. The recent price decline could indicate bad news is coming and has leaked out. Or it could be just a fairly random drop. It’s interesting to note that Liquor Stores had about the highest dividend yield on our list. A high dividend is certainly no guarantee in and of itself of a good investment. I am familiar with their stores in Edmonton. If anyone is making money with liquor stores these guys should be able to given their scale. So my suspicion is that they will do okay. Only time will tell.

On Tuesday the S&P 500 was down 0.7% but Toronto gained 0.3%.

The big question is what will happen the rest of this week as the U.S. attempts to get past the thatrics of its debt ceiling and budget issues. Futures as of about 10 pm eastern showed the Dow up 70 points, but that could go the other way quickly if it looks like a deal will not get done.

I mentioned Gold recently. (October 1). Today I bought a bit of Gold. I figured it might be a reasonable speculation given it is under $1300. I only put 1.7% of my portfolio into Gold. I bought the ETF that trades as GLD on New York. I am prepared to double my position if Gold drops to somewhere in the 1100’s. And I would add even more if it went lower still.

Also today I added to my Toll Brothers position.

On Monday the U.S. markets were open while the TSX was closed.

The U.S. market opened in negative territory but in the end the S&P 500 closed up 0.4%.

Until the budget and debt ceiling issue is resolved int eh U.S. we can probably expect markets to be quite volatile.

I added to my position in Wells Fargo today.

Wells Fargo is updated and rated Strong Buy. It just reported another excellent quarter of earnings. Revenues did decline in the quarter due to lower mortgage refinancings which generate fees. But overall, the business appears to be still growing. It is one of my larger holdings. And I plan to add to my position, perhaps substantially. It is not without risks and certainly if there is a general market decline it will fall in price. But overall it seems likely to be a very good investment.

On Friday the S&P rose 0.6% while Toronto was flat.

On Friday I was tempted to add to my Liquor Store N.A. position as the price fell. But given the rating was only (lower) Buy and the price is only down 4% since that rating it may be wiser to wait until the next earnings release comes out. Or I may enter some stink bid and see what happens.

In a remarkably strong day on the markets, on Thursday the S&P 500 rose 2.2% and Toronto rose 1.3%. Apparently this was due to meetings that were expected to take place after the close on Thursday. The rumor was that the Republicans would allow a six week extension to the debt ceiling. It seems remarkable that just a (lousy) six week extension could make the market so happy. Clearly the market is not very fearful of the shutdown and the debt ceiling.

Almost all of our stock picks were up, with many rising over 2%.

Early in the trading day there was news that Canadian Tire’s REIT was all set to go and they would be selling 15% of the REIT and keeping 85%. Around noon, the rumor was confirmed.

So with Canadian Tire now at $93.88, it may be a case of “what you see, is what you get”. That is , the REIT may now be fully priced into the stock. The next driver for the share price (aside from movements in the overall market) might be the Q3 earnings release. I expect that it had a strong Q3 but it likely incurred costs related to the REIT and it is not clear whether the market will essentially look through those earnings and focus on adjusted earnings.

Again, I have not looked at the REIT and am not really interested in it.

Stocks rose slightly on Wednesday with the S&P 500 up 0.1% and Toronto up 0.3%. Our stock picks seemed to do a little better than that on average. Notably, Stantec was up 3.0%. Very few of our stocks were down today.

My order to add a little to my Wells Fargo position at $40.10 got filled today as the stock dropped to $40.07. It closed at $40.36.

My buying on this dip caused by the political theatrics in the U.S. has been pretty cautious. Perhaps I should have grabbed CN, Stantec, Costco, Berkshires and others on their dips but I felt it was prudent to be more cautious. No one knows how ugly this little situation could get. I am hoping not too ugly at all and I am not expecting it to be too bad. But it’s nice to retain some cash just in case.

Another down day as the S&P 500 fell 1.2% and Toronto was down 0.8%.

Wells Fargo got down close to buy order of $40.10 but did not quite get there.

Alcoa was out with good earnings to kick off the earnings season today. But it’s probably going to take an end to the political nonsense to turn the market around at this time. Strong Q3 earnings will not likely over come the impacts of the political impasse. But that too shall pass.

The S&P 500 fell 0.9% on Monday but Toronto was up 0.2%/.

Wells Fargo closed down 1.7% to $40.62. I have an order in to add to my position in this company at $40.10. I have a few such “stink bids” in but this is the only one that is remotely close to being “hit”.

This week we should expect more nervousness due to the U.S. government shutdown and the pending debt ceiling limit. As of Sunday night the DOW was projected to open down 74 points.

We should soon hear news about the final prospectus for the Canadian Tire REIT. Presumably things are moving ahead with that. If so we might see Canadian Tire’s shares rise a little on the news. On the other hand it is always possible that Canadian Tire is finding little institutional support for the REIT in which case Canadian Tire’s shares would take a hit. But I suspect the REIT process is going reasonably well. The REIT offering closes the week of October 21, and I am not sure if we hear much news before then. Possibly the final prospectus would come out some time before that.

Also this week we should start to see the first of U.S. companies report their Q3 results.

The market and our Stock Picks have weather the first four days of the government shutdown quite well.

On Friday the S&P 500 was up 0.7% and Toronto was up 0.2%

Most of our Stock Picks were up on Friday.

Toll Brothers however was down 3.2% to $31.06 on concerns that the shutdown would slow or prevent closings on new home sales since they require government mortgage insurance (which is apparently shutdown). Also title insurance may not be possible with the government shut down. This allowed my order at $31.01 to be filled as the stock dropped slightly below $31 at one point. It was a just two weeks ago that I had sold some Toll Brothers on a pop up top $35.01. I am happy to have bought back at $31.01 half of the shares I so recently sold at $34.01. My purchase price is 11.4% lower than the recent sale price.

And so the market was sweating a bit more today…

S&P 500 down 0.9%, Toronto down 0.8%

Most of our stocks were down a bit. I have some orders in to buy on dips but none of my prices were hit yet. I don’t want to get in a big hurry and buy heavily on say a 3% dip instead it’s more like start to nibble on say 5% dips (although I don’t use any strict rules, so my bids were not precisely 5% under recent prices). I would nibble slowly if the market keeps going down since I would not want to spend all the cash too early. And I am not saying the market will go down. I treat everyday in the markets as a surprise. Anyone who thinks markets are predictable in the short term should prove it by using options and leverage to get rich fast. I don’t know of anyone who has done that.

Next week we will start to get a few Q3 earnings reports. Possibly that will take some attention of the government issues.

It seems the market started to sweat a bit today about the shutdown and the pending debt ceiling issue.

The Dow was down 0.4% although the S&P 500 and Toronto were down only very marginally. Actually a good number of out r stock picks were up today. Melcor was down to $19.06 and I believe it is quite attractive at that price.

Futures tonight are suggesting the Dow will open down 32 points. This afternoon Obama said that Wall Street should be worried. So far it is not much worried.

It is certainly possible that we will see some ugly down days ahead. Some people will have sold out of fear. If we did that every time there was something big to worry about we would never own stocks. So, while it could be a rough ride I have always found that basically riding out the storms has worked well. If stocks happen to decline materially I have cash and will be buying. I really can’t predict where the market is headed in the short term and that has never been my strategy. I react to what the market does and I try to buy bargains and do some selling high and buying low. Selling low has never been part of the strategy for me.

Well, it was another interesting day on the markets. How much more interesting does it get than a U.S. government shutdown? But actually the market just yawned and went up. I suspect the market will gyrate around now, this shutdown may be amusing and easy to ignore for a day or so but after a bit the market certainly might get nervous.

Today the S&P 500 rose 0.8% and Toronto rose 0.5%. Most of our Stock Picks were up.

It was interesting too, that the price of Gold fell. I have absolutely no ability predict the price of Gold but clearly today is a better time to buy than when it was at $1800 or whatever. I don’t have any plans to buy Gold but you never know perhaps the mood wills strike me at some point. If I were to buy I would go with one of the Gold ETFs that hold physical Gold. These are listed on my ETF article. But maybe the fact that Gold fell today is telling in that even the doomers are giving up on it.

Given the antics and theatrics to the budget legislation and “government shutdown” in the U.S. the DOW was set to open 142 points down. While anything is possible this is likely to be a temporary situation. It could last most of October giving he pending debt ceiling theatrics that are pending. My strategy would be to buy on dips but slowly, and certainly keeping some funds in cash.

U.S. markets are up a lot this year and so at least a minor decline does not seem like such a big deal to me.

So far the budget show-down and government shutdown theatrics have been something of a non-event for North American stock markets. The S&P 500 fell 0.6% today, so that was not much of a reaction. Toronto fell 0.4%.

Perhaps there will be more reaction on Tuesday if and when the shut-down actually begins. But it looks like there may not be any big reaction. Futures as of almost 10 pm eastern time point to the Dow opening 50 points higher however much can change by morning.

The Dow is down about 100 points or 0.6% this Friday morning. Apparently this is due to concerns about the debt ceiling in the U.S. that needs to be raised. It’s basically impossible to know how much the market will decline as this situation unfolds. I have mixed feelings about it. On the one hand I never like to see my portfolio value decline. On the other hand the dip is likely (but not guaranteed) to be temporary which creates buying opportunities.

On Friday the S&P 500 fell 0.4% and Toronto was about unchanged. U.S. markets have fallen moderately due to concerns that the Congress will fail to pass a budget bill by Monday which would force a shutdown of many government departments. There is a also a looming debt ceiling that needs to be lifted. This all appears to be politics and theatrics and is likely to get resolved. Those positioned with some cash to spend on dips may find some bargains.

Dollarama is updated but rated only Weak Buy at $84.30. This is a great company. One of the best managed companies that I know of. But is simply seems to be too expensive. Admittedly I though the same when I added to this site in early 2012 at $43.49. So, I guess I missed this one. But the reality is that I have a system that seems to work well for me. My system is more likely to identify more obvious bargains than Dollarama. My system tends to assume that a company growing at 30% will not keep doing that. When a company does keep growing earnings per share at 30% it may well be that I will not have bought that company or rated it a Buy. (Though I did rate Dollarama a (lower) Buy in December 2012 at $58). I don’t worry much about the stocks I miss out on. There are always hundreds of stocks rising in price. We can’t own them all or hope to identify them all or anything close to that. My goal is that the stocks I do own or do rate as Buys rise acceptably in value. If that happens on average, we will do okay.

In any case I like keeping an eye on Dollarama since it helps me understand what kinds of things can lead to excellent profitability in a retail operation.

On Wednesday the S&P 500 was down 0.3% and Toronto was down 0.1%.

Most of our stock picks were down.

Canadian Tire was down 1.5% to $92.39. But earlier in the day it reached a new high of $94.93. As mentioned under September 16, I had placed an order to trim my position at $94 and a bit more at $95. So about 10% of my Canadian Tire shares were automatically sold as the price hit $94. My offer at $95 is for about 5% of my shares.

Back on September 5 I had placed an order add a little to my Melcor position at $19.17. Until today the price refused to drop that low and instead seemed to hover around $19.30. But today it dipped below $19.17 and my buy order was filled.

While I can never be sure of where prices will head, Melcor seems like a better bargain than Canadian Tire right now and so I am happy with the above trades.

It seems the market dropped in part due to fears that the U.S. government would have difficulty passing legislation to raise the debt limit and would therefore run out of cash. But I don’t think the market will react all that much this time around. After all we went through this nonsense in August 2011 and it got resolved so the market will likely assume it will get resolved. Still it could be a catalyst for a “correction” (also often know as a buying opportunity but occasionally is the start of something worse).

Apparently there was also a rumor that Wal-Mart had curtailed orders to lack of sales but Wal-Mart denied this.

Tuesday was another decent day for our stock picks.

The S&P 500 was down 0.3% and Toronto was up 0.3%

We had Toll Brothers up 2.2% after reports that house prices continue to rise in the U.S. and after a home builder reported good earnings. Canadian Tire was up another 0.5%. Stantec was up another 1.9%. I sold half of my fairly small Stantec position today. Sadly I had sold a third of my then Stantec position back on January 3 at prices quite a bit lower than today. The Stantec shares that I have left are in a corporate margin account and I don’t plan to sell that since I don’t like to needlessly trigger either income tax or even the burden of calculating the income tax. I make well end up regretting today’s sale of Stantec since it is such a great company. But as we should all be aware markets, and especially individual stocks can surprise us with losses at any time and so building cash and trimming some positions as they rise does seem prudent.

Monday was another interesting day in the markets. It seems like it’s been a few years since we have had even a week where markets were totally boring.

The S&P 500 was down 0.5%. Toronto was basically flat.

Blackberry / Research in Motion has a tentative agreement to be bought out for $9 a share. It’s apparently subject to 6 week due diligence period. Blackberry is free to accept a higher bid if one should materialize before the proposed deal closes or becomes more firm. The current bidders would receive a $150 million termination fee in that event.

The bidding group is led by Prem Watsa at Fairfax Financial. He has been called the Canadian Warren Buffett. Of course, he is nothing of the sort. Buffett generally only invests in companies where it seems reasonably certain that the company will be around and be much larger in 10 years. That hardly describes Blackberry. Also Buffett would require good management in place. That also hardly describes Blackberry. Buffett also says that turn arounds seldom do turn. Good luck Prem Watsa.

Canadian Tire was up 1.7% to $93.25 today. Not a huge jump but certainly interesting on a day taht the markets were generally weak. Canadian Tire jumped around 1% quite suddenly at noon. It’s possible that its planned REIT IPO has moved closer to reality. Or perhaps some analyst up-graded Canadian Tire today. Recent declines in interest rates (a modest decline which occurred with the Fed’s failure to taper) should help bring a higher price for the REIT. For the most part I am holding my current Canadian Tire position but I do have order in to trim slightly at $94 and $95.

Stantec was up 2.3% to $54.42. That is a gain of 37% this year on top of a 44% gain last year. While it does not look overly expensive I am nevertheless tempted to sell or trim my position. This has been a truly wonderful investment over the years. It can be volatile at times but over the years it has grown hugely.

My personal portfolio composition is updated. My four largest positions, Wells Fargo, Canadian Tire, Melcor and Toll Brothers make up a hefty 58% of my equities and 46% of my portfolio. There is no doubt that that is risky. If one or more of these take a significant drop ( a drop unrelated to the overall market) then I may come to ask myself how I let the portfolio become so concentrated. On the other hand I have followed these stocks for years and I am comfortable with them.

If I was not prepared to live with some (perhaps substantial) down-side risk I simply would not be able to hold this portfolio.

Contrary to what I said in my note of September 19, I did in fact sell 12% of my Toll Brothers shares on Thursday morning at $35. These shares closed Thursday at $33.84 and I had not realized that just after the opening on Thursday they had gone up to $35.01. I had mentioned I had put in orders (above market) to trim this position. In this case the order seems to have worked very well. I mentioned earlier that I had added to Toll Brothers as it fell. The 600 shares I sold at $35 were purchased around $31 within the last month. I don’t think this sort of thing would be worth bothering with if I held only say 300 shares in total. When I started this web site in 1999 it was normal for me to own 100 or 200 shares of something like Toll Brothers. As my portfolio has grown I can play the volatility up and down like this. (Though there is no certainty that will work out better than just selecting a good investment and then holding it until the price seems clearly too high.)

My cash position is now 37%. The rest is equities. I hold no bonds or preferred shares at this time. While building cash has lowered my return this year (but I am still up a very satisfying 24% or so), I don’t regret the higher cash position and may try to move it even higher. Perhaps a high cash position makes good sense considering my concentrated portfolio. This way I have the cash to grab bargains if we do see a general decline in the markets or if one of my larger holdings tanks. There are no easy answers to the asset allocation question and certainly the right amount of cash and bonds versus equities varies widely according to individual circumstances.

On Friday the S&P 500 was down 0.7% and Toronto was down 0.9%. Most of our stock picks were down. Visa was up another 2.2% to almost $199. We had thought it was already too expensive. But as I have said many times before in relation to Visa, “it’s hard to keep a good monopoly down”. (See the report for our comments on the extent to which it has some monopolistic characteristics). It’s has not gone straight up by any means, but VISA is up 241% since we added it to this site in April 2009, just after the bottom of the big stock crash, at $58.24 rated Buy. And it is up 150% since we rated it in the Strong Buy category at $79.41 on May 6, 2011. But again at this price of $199 we are not fans.

Not to say that markets are predictable at all, but the fact that the market today gave back some of the previous day’s gains is certainly not surprising.

The S&P 500 was down 0.2% and but Toronto was basically unchanged.

A notable decliner was Toll Brothers, down 2.2%. I did not trim my position in that as I mentioned I might. I have an order in to trim at $35.

Boston Pizza was down 2.5% $22.25. I would have thought it should be rising like most of the other higher yield investments. However our last update was (lower) Buy at just under $20, so I am not a buyer at this point.

I am somewhat inclined to build my cash position a little higher. (I plan to update the page showing composition of my portfolio within a few days). I do have some orders in to trim Canadian Tire and Toll Brothers and it would nice if the prices would rise up and trigger those sells. But it is anyone’s guess if that will happen. We have had a lot of gains this year and certainly further gains are NEVER guaranteed (especially in the short term).

I notice that Buffett remarked today that stock prices were such that finding stocks to buy was not easy. On the other hand I am pretty certain he is not about to start selling Wells Fargo or Bank of America or Walmart. Buffett said that stocks were more or less fairly priced.

Well THAT was unexpected. Fed says slowdown in its bond buying just yet and so the markets rose. DOW and S&P 500 at record levels. Toronto apparently at a two year high.

S&P 500 up 1.2% today, Toronto up 0.8%.

It’s another example of how unpredictable markets are in the short term. That is not necessarily a bad thing at all, it just a characteristic of the markets and one that can be used to advantage as well. I had thought I had an order in to trim some more Toll Bothers at $34 but my order was at $35. I may trim that a bit tomorrow if it remains above $34.

On Tuesday the S&P 500 was up 0.4% and Toronto was up 0.1%.

Markets don’t move up in straight lines and it certainly would not surprise me to see the market turn down. But, basically the short term moves in the market are unpredictable…

I did sell half of my Constellation software today. It’s a great company but I decided to hedge my bet and take half of it off the table.

Monday was a strong day for the markets with the S&P 500 up 0.6% and Toronto up 0.7%.

Most of our stocks picks were up. Most notably Constellation software was up 4.2% to $181.63. I last rated the stock Weak Buy at $142 on May 18. At that time I indicated I might sell half or might not. I did not. Since then it has released an excellent earnings report and I believe other good news. Still, with this rise in price I am tempted again to sell half of my position. Since it is not a huge part of my portfolio perhaps I will just let it ride. Sorry to be non-committal.

Wells Fargo was up 1.7%.

Canadian Tire was up 1.3% to $93.24. I am tempted reduce my position slightly. I had already reduced a fair amount at around $83 but still hold a large position. If I really wanted to reduce I would use a market order. But since I am not that eager to reduce I will instead place an an order to sell some at $94 and $95. If I only owned a small position in it I would not bother with this sort of thing. Since I have quite a few shares it easier for me to trim a little if and as the price rises.

As of Sunday night, markets futures were up on news that Larry Summers is out of the running for the Fed chair job. Also perhaps on confirmation that Syria will not be bombed.

The Summers news seems to illustrate that in the markets news often comes out of the blue. Most investors are better off keeping a relatively fixed percentage of their money in stocks at all times. Market timing does not seem to be a lucrative approach since predicting the future is always difficult.

It’s basically a sure bet that stock markets rise in the long term. So why bet against that?

With roughly two thirds of my funds in stocks and the rest in cash I figure I can do okay no matter what happens. If markets happen to crash I will be buying and eventually it will likely be proven that the decline was a buying opportunity. But meantime I would have to be willing to live with a decline in my investments.

On Friday the S&P 500 was up 0.3% and Toronto was up 0.2%

Walmart is updated and rated Buy at $74.36. This is certainly not a stock that is going to double anytime soon. But it’s a relatively simple (despite being huge) company that seems relatively sure to continue to grow over the years and which is trading at a decent price. I don’t own it at this time but would not be adverse to buying and would definitely look to buy if it happens to go back to the $68 range which it could do if its next quarterly report is a little weak or if the markets in general decline for any reason.

On Thursday the S&P 500 was down 0.3%. Toronto was down (again) this time down 1.0%.

Almost all of our stock picks were down but Liquor Stores N.A. was up 2.0%.

Toll Brothers was down slightly to $32.47 But earlier in the day it was as high as $33.52. This caused my order to sell a little at $33 to be filled. As noted yesterday i will sell a bit more at $34, $35 and $36. No plans to buy any but I suspect I will buy a little if it heads below $30 though with the amount I have I should probably not buy any more unless it heads to more like $28.

Yesterday I mentioned that entering orders above or below the market can take emotion out of the decision. More importantly it can make sure the sell or buy trigger is actually pulled. It’s one thing to make a mental plan to sell at $X or buy at $Y. It’s quite another thing indeed to actually do it. I mean it is not hard to buy or sell (although it can be tough to pull the trigger in real time) but I think we all make a lot more plans to buy or sell than what we actually carry out.

As of yesterday my own account is up 24% for this year, which is rather surreal (particularly on top of the 28% form last year). That kind of return is not sustainable but it does feel nice.

Yesterday, Kevin O’Leary commented on the Canadian Tire REIT and said he would not touch it because it was all one tenant and not diversified. I believe Amanda Lang even mentioned that it was possible that this REIT IPO will be a failure to launch.

I have not been much interested in REITs. I can never get very comfortable with entities that routinely distribute more than 100% of earnings (they distribute the non-cash depreciation expense). I have not given any thought to whether the Canadian Tire REIT will be a good investment. I am not interested in it.

As a Canadian Tire share owner I am interested in selling real estate to the REIT. I’d prefer if Canadian Tire would sell at least 49% of the REIT to the public, not the mere 10 to 20% that they plan.

But in order to sell any the REIT has to be attractive to REIT buyers.

In general there is no shortage of REIT investors.

But Kevin raises a valid concern about the attractiveness of this REIT. If I were into buying REITs, the single tenant would not bother me much, not when that tenant is very stable and profitable and well financed, as is the case here. What would concern me is the fact that Canadian Tire will own 80% or more of the REIT and manage it in addition to being the only tenant. In this scenario the REIT management may be always in a conflict of interest. But Canadian Tire is setting it up with long-term fixed leases so that eliminates much of the concern. (They can’t lese property to the stores at bargain rates). And I suspect the REIT management will be strongly incented to work for the REIT’s benefit, not for the the parent company’s benefit.

But the bottom line is that is some danger that this new REIT will not be well received. That would mean it fails to launch or it gets the properties at a bargain price (a high yield is required).

If the REIT failed to launch then Canadian Tire shares would fall in price. But that would be a buying opportunity. If the REIT is is initially priced too low (yield is too high) then that is not such a big deal since only 10 to 20% of the REIT is actually being sold to new owners. In that case the Canadian Tire shares would fall a little but probably not too much.

The bottom line for me is I am pretty satisfied to have sold some of ]my Canadian Tire shares on the way up but to still be holding a very large position. The stock price may rise or fall and I can react accordingly. (Sell on rallies, buy on dips). There is never certainty, but I am comfortable with this investment.

On Wednesday the S&P 500 was up 0.3% and is just a shade under its record high of early August. Toronto was unchanged. The Toronto stock index remains noticeably below its highs of early 2011. It’s all time high was back in 2008 before the credit crisis. At last check Toronto seemed reasonable valued at this time. I would not chase the higher performance of the U.S. market at this time. I would tend to have investments in both countries. I have nothing against investment sin Europe and many other parts of the world but have simply not looked at individual stocks in those places and have not looked too closely at global ETFs, though what looking I did did not seem to turn up compelling values although some of the countries were deemed attractive.

Most of our stock picks were up today. But as far as my own portfolio goes, the most notable gainer was Toll Brothers up 2.6%.

Recently I had added to my own already large position in Toll Brothers as its price fell. I bought shares at $32.08 (July 24), $31.21 (August 14) $30.53 (August 28) and $30.15 (Sept 5). Roughly, this took my allocation to Toll Brothers roughly from about 9% to about 12% of my portfolio which could certainly be considered risky. (Perhaps over indulging my appetite for this stock as it fell).

Toll Brothers closed today at $32.50.

So I now ask myself if I should start to trim? I think I should and so have now placed orders to sell just these recent buys at $33, $34, $35 and $36. That is, if it happens to hit those prices in the next month. I don’t know if this sort of add on dips and trim on rallies will work out well or not. I often do this to some degree on an ad-hoc basis, but pre-entering the orders will take any further emotion out of the picture and also allows me to sell even if the stock blips above my sell price only briefly. In any case I will still have quite a large exposure to Toll Brothers even if these sells are all hit.

Recent buy orders that I placed to buy Canadian Tire, Costco, CN, Berkshire and Canadian Western Bank below the recent market price (of a week or so ago) now seem rather unlikely to be filled. But one never knows in the markets. Movements can be sharp and unexpected. The notion that markets are ever or were ever predictable is simply a rose colored view of history.

And Tuesday was another good day for the U.S. market with the S&P 500 up 0.7%. Toronto managed to be down 0.2%. The Canadian market has seriously under-performed the U.S. market this year.

Canadian Tire released its preliminary REIT prospectus today. There was no reaction in the Canadian Tire share price. Perhaps there will be a bit more reaction tomorrow after analysts get a bit more time to digest the numbers. I thought perhaps it was showing the real estate was worth slightly more than previous estimates. In any case the REIT transaction is pretty well priced into the stock at this point and so probably we can’t expect much more from the Canadian Tire stock price when the REIT hits the market which could occur with a month I suspect. Canadian Tire is planning to sell only 10 to 20% of the REIT and retain the rest. I’d prefer to see them sell more and cash in while the REIT market is still paying a lot for real estate due to low interest rates. Selling 10% of the REIT does (and has) surfaced value but it is really just financial engineering. Selling half or more of the REIT would be more of a true substantive transaction. Canadian Tire was also looking for some kind of bank partner for its huge credit card operation and that could give us another boost to the share price.

Today I saw that Liquor Stores N.A. was down under $15.50 so I added to my position in that company. I bought at $15.35. I only had a small position so decided to add to it. It is not one of my higher rated stocks but then again it is the highest yielding selection on my list and it gives me some diversification

Monday was a good day in the markets with the S&P 500 up 1% and Toronto up 0.3%. Most of our stock picks were up.

Toll Brothers was up a hefty 4.7% to $31.87. Therefore my recent buys of that stock may have been good timing. It certainly has its risks. Wells Fargo and Bank of America have both indicated that mortgage business will be down noticeably in Q3. Yet both rose today.

Most of the stocks I own (or at least the industries they are in) would seem to be economically sensitive. That is they do better as the economy improves. (I suppose most stocks do netter with the economy but certainly commodity stocks and many individual companies can be disconnected from the economy). One could argue that much of our success in the last 20 months in particular has been based on a certain amount of faith or a bet that the economy was doing better. But I also look at the the valuation of each company and try to avoid being in stocks that are too rich in terms of the P/E ratio (Toll brothers being an exception as it is much more cyclical and still working its way out of a huge profit slump).

The next update will be for Wal-Mart. I try to think of these as companies not just stocks and not just as ratios from financial results.

I find it interesting to try to get a grasp of the size and nacre of the business.

I have read Wal-Mart’s January 2013 annual report and based on that my summary description of Wal-Mart is as follows:

Wal-Mart operates retail stores in various formats around the world based primarily on being a low cost provider of general merchandise and groceries in (mostly) large format stores. It is the largest retailer in the world and groceries account for more than half of its sales. It is the largest grocer in the United States. The company had revenues of $469 billion in fiscal 2013. Total assets were $203 billion and total invested equity was $76 billion.

Wal-Mart’s U.S. stores accounted for 37% of the store count, 60% of the square footage, 59% of sales, 71% of operating income and 49% of assets. International revenue accounted for approximately 57% of the store count, 32% of the square footage, 29% of net sales and 22% operating income and 44% of assets. Sams warehouse clubs accounted for 6% of the store count, 12% of sales, 8% of the square footage, 7% of operating income and 7% of assets.

Operating in 27 countries including the United States with 10,700 stores, 1072 million square feet and 2.2 million employees. Outside of North America it uses about 66 different local banner names. Major Countries outside of the Unites States are (in declining order of store count) Mexico, Central America (Guatemala, Costa Rica, El Salvador, Nicaragua and Honduras) United Kingdom, Brazil, Japan, China, Canada, Africa (largely South Africa), Chile, Argentina and India. No stores in Europe (except the UK) and just twenty in India. It appears from the balance sheet that it owns the great majority of its land and buildings, although it certainly rents a significant number as well.

Wal-Mart may be a boring business and it took over a decade to get back to (and then surpass) its share price high that it set in 1999. In 1999 stupid investors drove the share price far too high. No fault of Walmart’s. I added it to this site in April of 2006 rated Buy at $46.79. It’s up 55% since then. Not spectacular in seven years but certainly not bad at all. Given the recent price increases it may not be much of a Buy at this time. I will evaluate that after I crunch the numbers in the next few days. But I think we can be pretty certain that it will continue to grow over the years. It still has a lot of the world left to conquer.

It was interesting to read today that the Canada Pension Investment plan is a major partner in buying Neiman Marcus for $6 billion. This is a luxury department store chain of some 42 large stores an outlet chain called Last Call. It’s not obvious to me that a luxury department store is a great business. I believe it would sell mostly luxury brands but those same brands would be available in other stores as well like Saks. Perhaps the luxury bands themselves are able to impose rules against discounting and therefore keep the prices up. To my mind it is the various luxury brands that are the better business and not the luxury department stores that sell the brands. I believe people have  a lot of brand loyalty but I doubt there is a lot of loyalty to a particular store. But perhaps Neiman Marcus has a lot of in-house brands as well. When it comes to retail it seems like the Dollaramas, the Costcos and the Walmarts that offer the best value to consumers may be the better businesses by far.

On Friday the S&P 500 was unchanged and Toronto was down 0.2%.

I entered some orders today to move some cash in my TD Waterhouse investment accounts into TDB 8150. I understand this account pays 1.25% per year as noted int he bottom row of the table of stocks picks above. Rooting around the TD site and also on sedar.com I was not able to find the current interest rate but I believe it is still 1.25% per year. Mostly I just leave my cash in the investment account cash category so that it is instantly available for investment. However, at this time I have relatively large cash balances and so I figured I may as well collect some interest.

In my RESP account I only had three stocks (Canadian Tire, Melcor, and Toll Brothers) and a lot of cash (having recently sold some shares in that account) and so I just placed an order to buy some Wells Fargo for that account. In this account I also have orders in to add to the Canadian Tire and to buy Canadian Western Bank – but those orders are below the market and may not be filled.

On Thursday the S&P 500 was up 0.1% while Toronto was up 0.7%

Our stock picks have done well the past few days.

Canadian Tire is at $91.65. That is a gain of 32% this year. Whenever I mentioned Canadian Tire as a good investment over the past few years I was usually met with a look of deep skepticism and confusion. When this stock was trading around 115% of book value last Fall it was pretty clear it was under-valued (see my comments of last December 8 and December 3). Good investments do not have to glamorous. Now at about $92, it’s not the bargain it was. But management is still working to “release value” with its pending listing of its real estate in a REIT. Canadian Tire is up an even 300% since it was added to this Site in February 2000. It happened under the noses of investors and shoppers but few suspected it was one of the better investments to choose in 2000 or in late 2012 and at various (but not all) times in between.

With Toll brothers touching $30 and a bit below I added a few more shares today. Also I placed an order to add to my Melcor position at $19.17.

North American auto sales are back to record levels. There is much skepticism about the U.S. economy but it seems to chugging along pretty nicely.

On Tuesday the S&P 500 was up 0.4% and Toronto was up 0.7%.

Canadian Tire was up 2.2% and Stantec jumped 4.7%.

Shaw Communications fell 5.8% probably because its wireless spectrum that it plans to sell has declined in value now that Verizon will not enter Canada.

Many investors constantly try to predict where the market is headed. Last week many were convinced stocks would fall due to Syria. Over the weekend that got at least delayed and so stocks rose on Tuesday.

I find it better to acknowledge that in the short term the markets and certainly individual stocks can move unexpectedly. I don’t don’t think I can predict short term movements. But I can take advantage of them when they occur. I can trim stocks that rise unexpectedly and buy stocks that fall. Sometimes that won’t work out but on average it seems a reasonable strategy. Another strategy I use is try to be invested in good quality companies. With good companies that seem well priced I am comfortable buying on dips. If I had no idea at all what a stock “should” be worth then I would be like most people and not comfortable buying on dips. The more familiar I am with a company and the more confident I am about its value then of course the more confident I can be in buying on dips. Market volatility can be very much the friend of the informed investor.

Melcor is updated and rated (lower) Strong Buy at $19.36.

Toll Brothers is updated and rated Speculative Buy at $30.61. It’s a good company but the share price is already pricing in a very large earnings recovery. Given the need for earnings to rise rapidly to justify the share price, it is a speculative pick. I originally added it to the site in June 2011 at $21.03 as a way to participate in the U.S. housing recovery. I have quite a large exposure to this stock, it is my third largest position. I have continued to buy as the price fell recently. Possibly I am getting too emotionally attached to this stock.

Recently longer-term interest rates have risen while short term interest rates have remained near zero. In isolation, this bodes well for banks since get higher interest rates on loans and bond investments while continuing to pay very little on deposits. Perhaps higher interest rates will slow mortgage sales. But overall the outlook for U.S. banks seems strong. Our picks there are Wells Fargo and Bank of America. I have not looked at any other U.S. banks and therefore have no opinion on any others.

On Wednesday the S&P 500 was up 0.3% and Toronto was up 0.1%.

A notable gainer was Constellation software up 2.8% to another record high. It’s a great company by seems expensive at this point. I will think about reducing my position.

After the close, Canadian Western Bank came out with earnings. Given the storm damages in Alberta (where they insure some cars and homes), the earnings seemed surprisingly good to me. I would like to buy back the shares that I sold several weeks ago.

Canadian Western Bank was up 4.7% as fears of insurance losses due to Alberta floods were mostly unfounded. I hope to buy back the shares I sold on that fear but it’s hard to buy back at a higher price. I entered an order to buy a bit over $28.

Markets rose today despite Syria. I don’t think it’s worth bothering to try to predict short term movements, instead I focus on trying to take advantage of random movements in individual stocks. Trim a little on gains, buy on dips, or just hold good stocks and forget about it.

With the markets down yesterday, I decided today to enter of a few trades. I bought some Toll Brothers. I also entered hopeful bids on some stocks. Canadian Tire at $83.10, Costco at $105.10, CN at $95.50 Berkshire at 105.10. I just add the 10 cents in case there are a lot of bids at even dollars in which case I will be a bit ahead of those bids.

I have read the Q2 report for Melcor. It continues to do well. I am confident it will continue to be a good investment long term. Shorter term it would drop if house prices drop and especially if new house construction in Alberta slows. There is always that risk. But overall I am comfortable holding it and I am thinking of adding to my position if I can get it around $19 or a bit over.

On Monday

On Tuesday the S&P 500 fell 1.6% and Toronto fell 1.3%. This was apparently due to fears of U.S. involvement in the troubles in Syria.

Such world events have never factored much if at all into my investing. I have never, to my recollection, sold due to fears of such events. Instead I try to trim positions that seem fully or over-valued and I buy what seems to be good value. I try to keep some cash around to take advantage of lower prices when from time to time. In keeping with that I added a bit to my Wells Fargo position today. My inclination will be to slowly add to positions if markets decline further.

On Friday the S&P 500 was up 0.4% and Toronto was up 0.7%.

Toll Brothers fell 3.9% as a report showed that new home sales fell in July. Mortgage rates are still low but have increased quite a lot in recent months. Still Toll Brothers management was quite upbeat in its earnings release last week.

With the Canadian dollar down near 95 cents I transferred some U.S. dollars to Canadian. Generally I view my U.S. investments to be permanently in U.S. dollars but I ended up with more cash in U.S. dollars than Canadian and it seemed opportune to transfer some to roughly equalise the cash in each currency. I don’t really want to transfer any more but I would be tempted to do so if the Canadian dollar fell to 93 cents or especially to 90 cents.

On Thursday the S&P 500 was up 0.9% and Toronto was up 0.8%.

This week Target’s earnings report indicated that its new Canadian stores “contributed” a loss of 21 cents per share. There were also indications that sales were slow and customers were disappointed that prices were higher than in the U.S.

From the start I noted that Target in Canada would not have great prices because for one thing it paid so much for its leases, $1.8 billion paid to take over the Zellers leases, then $10 or $15 million to expand or completely renovate each store. After all of that there was still rent to pay. Target now reportedly expects it may not start making money in Canada until 2015. Some things in business are hard to predict but this seemed reasonably predictable. Though I don’t recall any mention, in Canada’s business news, of the high occupancy costs that Target was facing in Canada.

On Wednesday the S&P 500 was down 0.6% and Toronto was down 0.8%

Market declines are not all bad news since they provide a chance to buy good companies at more reasonable prices. CN and Costco come to mind.

Toll Brothers released good earnings on Wednesday morning but the stock was about unchanged on the day. With its high P/E this stock was already pricing in good earnings growth. The company has been able raise house prices substantially this year and expresses confidence that sales growth will continue for perhaps several years.

Liquor Stores N.A. Subordinated debentures are added to the list above rated (lower) Buy at $104. Yielding 4.6% to maturity in April 2018, and fully taxable these are not too exciting but may be a reasonable choice for fixed income. I note that, for example, Bombardier pref shares have a higher yield, but they also have a higher interest rate risk as they are perpetual. I am not sure I will buy any of these, if I did I might enter an order at $100 and see if I get any. I may buy the common shares instead.

On Tuesday, the S&P 500 rose 0.4% and Toronto rose 0.6%. Canadian Tire rose 2.6%, more than recovering yesterday’s decline.

Toll Brothers rose 3.1% ahead of its earnings release scheduled for tomorrow morning. Stantec was up 2.1%.

Seeing these fluctuations it often looks like one could make money by constantly placing sell orders for a portion of holdings 2% or so above market and buy orders 2% below. I imagine the academics have tested this and it is unlikely to be that easy… also it takes nerves of steel. And the selling on small rises might wipe out the chance to ever make much bigger gains.

I bought a small amount of shares of Liquor Stores N.A. today at $15.80.

Liquor Stores N.A. Ltd. is updated and rated (lower) Buy at $15.98. While the yield is quite attractive, keep in mind that a good yield is nether a sufficient nor a necessary feature of a good investment. I’d be willing to take a relatively small position in this.

I will provide some analysis of its convertible debentures tomorrow. They trade at 104% of par but I would consider placing an order at par and see what happens.

On Monday the S&P 500 was down 0.6% and Toronto was down 1.2%

Toll Brothers was down 3.4% as apparently all the home builders fell on fears that higher interest rates will slow the housing recovery. Canadian Tire was down 1.5%.

Interest rates have risen again this past week. I have no idea whether this is the start of a trend up or just another bump that may soon be retraced. I do think that ultimately interest rates will rise but I can’t guess when.

Preferred shares and all high yield investments tend to decline in price automatically with higher interest rates. Especially longer term and perpetual high yield investments.

On Friday the S&P 500 was down 0.3% and Toronto was up 0.3%.

Our stock picks were mostly up.

I have read the reports for Liquor Stores N.A. and crunched the numbers and will plan to post the report on Monday. As of right now I would rate it (lower) Buy at $15.98. I may buy some. The convertible debentures pay 5.85% and trade at about 103 (103% of par). The conversion price is $24.90 and maturity is April 30, 2018. These are worth considering as fixed income. I might enter a buy at 100 and see if I can get any.

On Thursday the S&P 500 was down 1.4% while Toronto was up 0.5%.

Several companies including Walmart reported weak results which has the market worried about growth.

Most of our stock picks were down. A notable exception was Toll Brothers, up 3.4%.

If stocks go down I will be looking to add to positions. But I don’t want to rush to buy anything.

Melcor released earnings this morning. At a quick look I think the earnings are good and the outlook positive. The headline numbers show a drop in earnings due to the costs of setting up the REIT. However I agree with the company that the adjusted earnings that show an increase in earnings per share are more relevant.

I added modestly to my Melcor position this morning.

With Toll Brothers down the last few days I also decided to pull the trigger and add modestly to my Toll Brothers position this morning.

A few subscribers have asked about Liquor Stores N.A. where the share price has declined noticeably after an earnings release. I have taken a preliminary look at the earnings release but have not yet ran the numbers, which I plan to do. I am inclined to Buy at this price. The earnings release did show some some negative items on an adjusted basis and seemed to indicate the next year had some headwinds. But I suspect that the company will continue to do well in the long term.

Bombardier preferred shares have declined partly due to higher interest rates and partly due to operational issues at the company. These shares do face risks if interest rates rise. Also bigger risk if the company were to really falter badly. But the yield seems attractive at this time and I would be comfortable buying these.

The S&P 500 fell 0.5% on Wednesday and Toronto was about unchanged.

Couche-Tard was down 2.9% to $58.48 and is worth considering.

I expect to have an update for Liquor Stores N.A. and Melcor by about Sunday.

I am off for a family trip early tomorrow to Moncton where I have been many times to visit relatives and then later on to my homeland in the Sydney area of Cape Breton where my family has operated a successful and well maintained Motel business for almost 50 years now. These days I don’t think anyone would be wise to open a single location independent Motel or Hotel but my family’s property has managed to fend off the challenge of the bigger chains for decades now. If you are thinking you would like to own your own small business, you might like my article that compares owning a business to owning shares through the stock market. Both are investing but there are a lot of differences too. (A publicly-traded company you own shares in won’t give you a job just because you own shares, but neither will it call you about a plugged toilet).

On Monday the S&P 500 was down 0.1% while Toronto was up 0.4%. We had Toll Brothers up 1.8%. Melcor was down 2.4% but it is so thinly traded that day to day movements are not very meaningful.

Blackberry was up 10.7% on news that it wants to look at strategic options such as going private or being bought out. It’s pretty sad because this probably means that even the company itself has given up on any real future. This sort of thing is very speculative and I would not be too interested in speculating on it. But but certainly it could see a decent return if the right buyer comes along.

On Friday the S&P 500 was down 0.4% and Toronto was down 0.1%. Our stock picks on average were down a bit more than that.

I reviewed the Canadian Tire earnings release and everything seems to be in order. While the valuation is not as compelling as previously, I am still comfortable holding these shares. The last rating was (higher) Buy at about $84. Now at about $90 the rating would likely be Buy. I don’t particularly give any extra value for the idea that they will seek a financial partner for the credit card portfolio but it is probably a positive factor. Both the REIT initiative and this finance initiative will not happen for some n=month yet. And so possibly the share price could retreat a little just for that reason as the market’s enthusiasm could want due to the wait. I would likely be looking to add to my position is the share price fell to about $83. That’s not to say I think it will go to $83 or should go there. I simply own a lot of shares as it is and would not likely buy back unless there were a pull-back to the $83 level.

I have updated the composition of my own portfolio. I am now at 41% cash and 59% equities. In many ways I would rather have less cash. But as stocks rose I have taken profits and so my cash has risen. Also I sold the Canadian Western Bank shares just to wait and see what happens with any insurance losses due to the Alberta floods and other weather events.

Canadian Tire earnings are out and look pretty decent. Announced intention to do something strategic with the credit card operation (they are not selling the operation). I would imagine the stock would rise on this news.

Sure enough TD is showing the open could be $87 that is the bid / ask right now.

Excitement about Canadian Tire abating , open now projected at $85.28. Well these things usually take a bit of time to settle out, it looks like the headline earnings growth was 16% but was 4% on an adjusted basis, so okay, but not great as far as earnings.

Canadian Tire opened for trading at $86 but then quickly rose to a high of $90.49 and closed the day at $89.45, up 7.1%. The earnings were decent but an added bump came form the fact that they will seek a strategic partner for the credit card operation. In general its seems like the company is trying to do various things push the share price up, namely the REIT and this partner for financial services. I plan to update the analysis within a few days and I suspect it is still a reasonable buy at this price. I did however sell about 25% of my shares at around $89. I may regret that later but I may get a change to buy back at $83 or so if the stock drops. Usually over time stocks do pull back and don’t advance in straight lines. I had earlier sold some shares in Canadian Tire at $83 just to be prudent since I had such a large position.

The S&P 500 rose 0.4% while Toronto rose 1.3%.

Most of our stock picks were up today. The Q2 earnings have come in fairly strong for most companies both in Canada and the U.S.

The S&P 500 fell 0.6% today and Toronto fell 1.1%.

Notably we had Toll Brothers down 2.5% to $32.20. I have consistently indicated that Toll Brothers is a speculative pick because it has a very high P/E which mostly reflects that it is still climbing back from the impacts of the housing crisis. I think the stock tends to get pushed around because it’s hard to know what it is really worth and because of various speculations about where housing prices are headed. I am not much bothered by this decline and I will buy more if it continues to fall. Since I already own a lot of it I put my Buy order at $30.10 though I don’t particularly expect it to fall that far, although it certainly could.

Visa got some bad news today as a judge ruled that the maximum fee on debit transactions should be 12 cents and not 21 cents. Although apparently this make not take affect for quite some months and could be appealed. Before 21 cents was adopted as their cap, I believe Visa was charging more like 28 cents on debit purchases. Also they had some crazy system where they (strongly) encouraged the use of a signature rather than a PIN on debit transactions and then charged the retailer something closer to 100 basis points when the signature was used. I believe retailers sued VISA over that.

Meanwhile in Canada I believe debt transactions have basically always been under about 12 cents and I recently heard they were 8 cents. And that is for the purchase of any amount on a debit card. The retailer pays about 8 to 12 cents per transaction plus I understand the debit machines cost a fixed rate of about $40 per month per machine.

Visa has been trying to expand from its credit cards roots and is now heavily involved in debit cards. Basically Visa would probably like to collect a significant toll on every debit transactions.

But it’s interesting to think about this. It seems to me that the variable cost of a giant electronic network to process payments should be close to zero. And I suspect the fixed costs could be covered if they charged something like one basis point on every transaction (1 cent per hundred dollars). Basically Visa and other payment networks would like to take electronic money transfers that should cost very little and charge very fat margins on them.

Now I am all for making a profit. But I am not in favor of very large profits when the service seems to be a monopoly. And it does look like a natural monopoly situation. One central open network could allow the transfer in either direction from any bank account to any other. We should not need multiple networks. But if its one network then the profit has to be regulated.

It seems to me that until recent years paper cheques were centrally processed for a very low costs. Banks and central banks did this (and still do) in some kind of cooperative fashion. Electronic money transfers should costs a lot less to process than paper cheques and yet the likes of VISA want to charge a lot for it. And they really want to set up as near-monopolies all the while claiming to be subject to intense competition.

In Canada Interac has operated as a non-profit entity owned by the banks. Its costs and charges are very low and it was partly as a result of that that Canada has been at least 15 years ahead of the U.S. in adopting the wide-spread use of debit cards. Visa would like to change that in Canada as well.

Regardless of whether VISA is a good investment at this time (which is not entirely clear), it is not a company whose ethics I respect. The same applies to MasterCard.

Think about it. COSTCO operates on a net profit margin of just under 2%. That is the net compensation to Costco share owners for providing the stores and all that goes with it. Meanwhile VISA and MasterCard seem to think they should earn 2% from retailers for an electronic transaction. Something is wrong here. Visa and MasterCard already charge interest to those who pay late so why do they need this fat 2% from retailers? I suspect they charge it because having established dominant positions as quasi monopolies, they can. With the advent  of electronic transactions why did merchant fees not decline? Something is really quite wrong.

Maybe I am just griping because I sold my VISA too early. But really something is wrong here.

Today the S&P 500 was down 0.4% and Toronto was down 0.5%.

Almost all of our stock picks were down as well. Constellation Software was an exception and was up 4.2%. Toll Brothers was down 3.0%.

Canadian Tire is expected to release earnings before the open tomorrow. It’s my biggest holding and I am cautiously optimistic that it had a good quarter. It was a late Spring and so possibly the quarter will not be so good. We shall soon see. I expect the credit card division will have done well.

I was just taking a look to see if Canadian Western Bank’s insurance customers at Canadian Direct are mostly in Ontario rather than western Canada. I could not see a breakdown (there may be but I did not find it). I did read however that they have reinsurance and catastrophic losses. So maybe they won’t be hurt much by the Alberta floods or Ontario floods. It’s really just not obvious to me if they will hurt much or not. The fact they have not announced any losses would seem to suggest that perhaps it was not a big deal for them. (In which case I sold my shares too hastily). On the other hand perhaps they have no obligation to report any losses until they report earnings which is probably early September. If they do have a lot of customers that were flooded by they have reinsurance then the fight will be on to see if the reinsurance is going to cover them. Overland flooding could be excluded. Alberta insurance companies are being pressured to “honor” claims for sewer backup even when technically a sewer backup associated with overland flooding was excluded from the policy. Things could get interesting. There could also be a fair amount of vehicle damage due to flooding, and that typically is covered as I understand it.

Stantec is updated and rated Buy at $50.46. The stock has risen 13% since we rated it a (higher) Buy on May 25. It is up 27% this year. Incredibly, it is up just over 1900% since we first added it to this site as one of our first ever picks and as a Strong Buy in September 1999. Since that time Stantec has pursued the same strategy of growing both organically and by acquisition. It has been extremely well managed. The stock price has certainly faltered from time to time but the business itself has not skipped too many beats. With the recent price increase the stock is not as attractive as it was earlier this year. However it still appears to offer reasonable value. My plan is to hold the shares I have and to look to add more if it should have a pull-back to perhaps the $45 level. (I don’t have any hard and fast rules on that sort of thing but that is my thinking at this time.

Visa Inc. is updated and rated Weak Buy at $184. (essentially a hold) This is a fantastic company. However its price has already risen spectacularly over the past few years and it now appears expensive and is pricing in a lot of growth. If I still owned it I would be tempted to sell half of what I owned or not to have a huge position in it. But a small position would be okay.

We first rated Visa on this site as  Buy at $58.24 on April 15, 2009. This was near the bottom of the 2008 2009 crash when everything looked cheap but felt risky. Since then I mentioned many times that it had monopolistic characteristics. Most of the time since it was added to the site it has been rated Buy, it was rated (lower) Strong Buy in May 2011 at $79.41 and at one point prior to that was rated Weak Buy. Also at one point it was temporarily removed from the list for a time as the report had gotten very far out of date. Personally I bought on several occasions but then sold too soon.

On Friday most of our stock picks were up. Most notably Toll Brothers was up 2.8%.

I am sitting with something like a third of my portfolio in cash. I have been missing out on some recent gins because of that but that is okay. I don’t need to swing for the fences. And it seems like we seldom go a whole year without something throwing stocks into a bit (or more than a bit) of a panic so most likely there will be opportunities that way at some point. Having cash at that point will be advantageous. But I don’t advocate being out of the market altogether just because it might fall. It always might fall, but over time it rises more than it falls. And if there is not some general panic at some point, there are ALWAYS individual bargains out there to re-deploy cash at some point..

The first day of August was a strong day in the markets. The S&P 500 was up 1.2% to a new closing record of 1707. Toronto was up 0.9%.

I am feeling a bit Giddy about the performance of our stock picks this year given today’s action.

Stantec was up 5.4%. That makes 26% this year (it was rated (higher) Buy at $37.14 to start this year) and a staggering 1903% since Stantec was first added to this web site as a Strong Buy at a split adjusted $2.50 in September 1999. It was one of our earliest stock picks and has been the best overall gainer. Their business model has not changed but they have gotten a LOT bigger. Sadly, it is not one of my own bigger positions but it does represent 4.8% of my equity portfolio. By the way I just don’t go in for the idea of putting something like  1% into a stock. If I can’t put at least 3% in, what is the point? unless it is just an initial buy with a hope to add more. I have not read the latest results and so I don’t know what I would rate Stantec at today. I suspect a Buy rather than (higher) Buy, but I don’t know. I don’t think I would rate it Sell.

Another big gainer was Constellation Software up 6.8%. Based on my latest update (from May) for this stock I suspect it continues to be a great company but looks quite expensive.

Our U.S. bank stock picks were up as well today. Also the Oil sands ETF, CLO up 2.4% on news of TransCanada’s planed pipeline to the east and also the general upward push in the markets on good economic news today.

With all this good news the trick now may be not to get over-confident and too exuberant.

I ended up selling the rest of Canadian Western Bank shares today just because I suspect the next earnings release in early September will be hit hard by insurance losses due to the Alberta floods. I will buy some or all of it back if the the stock does drop several dollars. On the other hand if it does not drop the worse that has happened is I have more cash and will I miss out on some gains in CWB. Well by early September we will see if I have gotten a little too cute in trying to sidestep short-term news on CWB. My usual practice would probably be to just hold on and be prepared to buy on a dip.

And then there is Barrick Gold. I mentioned this company July 1 and July 3 when they pre-announced that they would be having (another) huge write-off for Q2.

Well the numbers are in and they now have negative retained earnings to the tune of almost $5 billion. Now to be fair they have paid about $4 billion in dividends since 1998. But it looks like the grand total of earnings in its entire history is now either negative or some tiny number. This is a company with $18 billion in share capital much of which they have had for some years. They had $13 billion of share capital as far back as 2006. Again to be fair not all of that $18 billion was cash forked over by investors, some it came from issuing shares for a large acquisition (Placer Dome) a few years ago. (it’s unknown how much real investor cash had been put into Placer by actual shareholders and how much was just market gains). Still it appears that quite a few billions (maybe $10 or so, to as much as $13) in cold hard investor cash was placed in the hands of Peter Munk and company at Barrick and their job was to make a return on that money. But with accumulated earnings over all the years since their creation of about zero, they have made no return for their investors. It takes a staggering incompetence to achieve such a record. And to do it over a period where Gold was up hundreds of percent is truly a notable feat of incompetence. (well, in my opinion at least).

Today the S&P 500 was about unchanged while Toronto was down 0.8%.

Our Stock picks had a better day than that with Toll Brothers up 3.2% and Stantec up 2.0%. Visa was spanked down 7.5% on a court case loss involving debt card fees. I hope to update the report for Visa very soon.

I sold half of my Canadian Western Bank shares today on the theory that they will announce fairly significant insurance losses due to the Alberta floods. I hedged my bets by (so far) keeping the other half.

I neglected to mention yesterday that I had sold my small Bombardier position. They make wonderful and exciting products but they seem to struggle to make a decent profit level. I held these shares in an RESP account and and had a decent gain on them and just decided to sell.

On Tuesday the S&P 500 was about unchanged while Toronto was down 0.7%

Potash corporation fell 16% on news that a huge Russian Potash producer, the world’s largest would exit a pricing cartel. I don’t own any potash stocks (or any commodities for that matter save some oils sands ETF units). My sympathies for those that own it. But as for the company itself I am not too sympathetic at all. Potash Corporation had long belonged to a price cartel called Canpotex. I can’t have much sympathy for that kind of price fixing. Especially when Canpotex probably artificially (and significantly) raised the price of fertilizer which is a nasty thing to do in a world where millions go hungry when farmers in Africa can’t afford fertilizer.

I have no idea what Potash Corporation is worth. This development also illustrates the fact that sometimes things can come out of the blue very unexpectedly.

Other news today indicated that TD Bank announced a significant insurance loss due to flooding in Alberta and Ontario. (That should hardly have been considered a surprise however) I alluded to the same happening for Canadian Western Bank in my July 23 comment. I thought I had probably mentioned it earlier but I don’t see it.

Canadian Western Bank has a home and auto insurance business and will surely have suffered significant losses due to the Alberta floods. I don’t think that is any  concern at all in the long-term but it could certainly push the price down temporarily.

I was very tempted today to sell some of my Canadian Western Bank shares. It might even be wise to sell them all and hope to buy back at a lower price when it announces its insurance losses.

Meanwhile we had Canadian Tire up 1.6%. And FirstService was up over 6%. I have long liked FirstService but it did not look like a buy at all in the last update.

The most recent of the free newsletter was sent out…

http://www.investorsfriend.com/nl-july-28-2013

On Monday the S&P 500 was down 0.4% and Toronto was up 0.2%. I did not note anything of much interest happening with our stock picks.

It is in the news that Hudson’s Bay Company will purchase Sak’s Inc.  for some $2.9 billion. Hudson’s Bay will pay $16 per Saks share. Saks shares appear to have topped out with a needle peak at About $36 in early 1999 and then crashed to $5 and then clawed back to $20 and bumped around only to crash to just under $2 in March 2009 (just another of the sweet sweet bargains that were around in early 2009 as the market was predicting the end of the financial world or something). Then it clawed back to the $10 range and finally then on up to $15 on rumors of a sale.

Apparently Hudson’s Bay can extract some value by selling off and leasing back the real estate. Though one wonders why Sak’s could not have done that themselves.

I visited Saks on fifth avenue, Manhattan in March. As I documented in the daily comments below, I was not overly impressed.  The place was snooty. I am not sure why store clerks have earned the right to be snooty. No price tags on the first floor or two. The difficulty is that these days it is too easy to comparison shop and it’s hard to maintain huge margins even on luxury products unless they are proprietary brands. It’s the luxury brands that have the cachet and not so much the luxury retailers.

I don’t particularly see a great future for this combination, but we shall see.

S&P 500 up 0.3%, Toronto flat on the day.

Toll Brothers was down another 1.1% to $31.95 and the low for the day was $31.00.

Visa was up 4.2% to almost $195. Our ratings on this stock for the past few years (as of the start of each year, except as noted) was: 2013: Buy at $151.58, 2012: not on list at start of year but added back on March 28, 2012 rated Buy at $119.35. 2011: Buy at $70.38, 2010: Weak Buy at $87.46, 2009: Added to the site on April 15  rated Buy at $58.24. Over these years I mentioned numerous times that Visa had characteristics of an unregulated monopoly. I sold it too early myself, then bought back and again sold too early. I intend to update the report in the next week or so. I suspect it will look rather expensive at this price.

S&P 500 down 0.4%, Toronto was down 0.6%.

We had Toll Brothers down 6.2% to $32.31. This is a more speculative stock given its high P/E ratio. The market seems undecided about this one as contradictory news comes in about the housing market. I grabbed a small addition to my position at around the $32 mark and placed an order to grab a bit more at $30.10 if it goes there. Other than Toll Brothers it seems our stock picks were mixed today, some up, some down, nothing of much interest.

I notice Empire, owner of Sobeys has announced the sale of 68 Safeway stores to Crombie REIT. I am a bit confused about when this would happen because I would not have thought that the Safeway deal had closed yet. I don’t follow Empire. But I think this is impressive that Empire / Sobeys moved this fast. In contrast it is a bit bothersome that Canadian Tire planed something like none months to get its REIT off the ground. Also i prefer the Empire approach of selling off the real estate to an unrelated party. Canadian Tire in contrast is “selling” its properties to a REIT that it will own 80% or so of. In effect Canadian Tire is in substance not doing much at all but is just doing some financial engineering to “release value”. If REITs are willing to pay silly prices for real estate why not just sell to an unrelated REIT and grab a very long term lease?

Today the S&P 500 was down 0.2% and Toronto was down 0.1%.

Toll Brothers was up 2.1%. Canadian Tire was down 0.4% despite news that Canadian Retail sales were unexpectedly strong in May. CN fell 3.1% on concern about increased regulations. It’s a great company but still seems expensive. My “stink bid” is set at $90 – probably unrealistically low but you never know what strange things can happen in the markets.

Canadian Western Bank fell 3.6% and the chart shows that almost all of the decline came at the very end of the day on high volume. Possibly some news has leaked about insurance losses in Alberta due to the floods. Or maybe some large institution just needed to sell a lot of shares. This drop does not bother me at all. Canadian Western Bank appears to be a well run and reliable operation. It will almost certainly continue to grow over the years. If, in the meantime the market would like to offer up its shares at lower prices, I am fine with that.

I sold what amounted to 60% of my Berkshire Hathaway shares today and now hold 200 shares.

I was reading in this morning’s newspaper that the price for Alberta heavy oil (from oil sands) is about $90 per barrel and that this price had been as low as $50 in January. I can’t pretend to be able to predict oil prices and have not looked at the oils sands companies. Still it seems to me that the oil sands ETF symbol CLO at just under $13 has not moved much on the recent positive news. And it is well below its historical peak and the P/E ratio at 17 is not that high assuming that profits could improve quite a lot with this $90 price. (However, I am not aware what this price was as a year ago. I recollect from news stories that it was considered quite low last Fall but I am not sure about last July). I understand that certain bottlenecks in Cushing Okalahoma had caused the price differential or spread for heavy crude to be especially large. I understand that the bottleneck situation is much improved due to the reversal of flow of an Enbridge pipeline and also due to more oil being shipped by rail. The same situation was causing West Texas crude to trade far lower than Brent crude.  If the spread is now much reduced then if Brent crude stays high (and I have no prediction on that) then the western Canada heavy crude price should stay high and I would thing the CLO units would then do well. The bottom line is that I certainly don’t have all the information or all that much to go on, but with the big recovery in that heavy oil price I feel good about owning this oil sands ETF and may add more to my position.

S&P 500 was up 0.2% to yet another record close. Toronto was up 0.6%.

I may sell some or all of the rest of my Berkshire Hathaway. I have a good gain on it and it no longer looks like the bargain that a year ago or even at the start of this year. Also it’s anyone’s guess what it’s earnings will look like in Q2. Most of its businesses are probably doing well. There should be a gain on the Equity Index puts. But the insurance business is always a question mark. Maybe a mistake to sell…

Here is a graph of how the Stock Picks from January 1 have done. (They have done very well indeed). The graph has all the Buys and Sells but omits the Weak Buys and Weak Sells as those are pretty close to a hold. I have always omitted those on the graphs going back to the year 2000. The fact is that our stock picks are doing usually well this year and are unusually consistent.

Bank of America is updated and remains rated Speculative (higher) Buy at $14.75. As I read the Q22 report, it is clear that many aspects of the operation are improving greatly. I started to plan to buy some more shares. But then spending some time reading the annual report I focused on how complex this bank is. It is not the ideal type of investment because it is definitely somewhat speculative. But it is crawling out a hole and likely will be a good investment at this price. It is nowhere nearly as well managed as Wells Fargo, but it may be the better investment at this price. I may or may not add to my position.

This week we will get a number of Q2 reports for Canadian companies.

Wells Fargo is updated and remains rated (lower) strong Buy now at $44.45. It seems to be a very well run company. It should continue to do well over the years. From time to time it will likely have a bad quarter or year simply due volatility in certain gains and losses. It is my fourth largest position. I lament somewhat that I did not leave it as my largest position but instead I sold a considerable amount of shares as it rose, to be prudent. In reality that was probably a very good decision (given the facts and risks) even though in hindsight it would have been better to keep all the shares.

The S&P 500 was up 0.2% of Friday (to another record closing high) and Toronto up 0.4%.

For our stock picks, overall on average there was not much change but we did have Stantec down 2.2% and  Microsoft was down 11.4%.

Another good day in the market with the S&P 500 and Toronto each up 0.5%. We had Stantec up 2.8%, Fedex up 4.2% (although we had not rated that one highly), Wells Fargo up 2.1%, Bank of America up 3.2%. Generally most stocks on our list were up.

The next update will be for Wells Fargo which probably will remain in the Strong Buy range or possibly (higher) Buy. I may also update Bank of America which is more speculative but will probably continue to be rated fairly high.

Apparently Detroit filed for bankruptcy today. This was not unexpected. Still it could put a damper on the market’s mood.

I note that yesterday’s comment failed to upload until today apologies for that.

S&P 500 was up 0.3%. Toronto up 0.4% as Fed chair Bernanke sooths the markets.

Our stocks picks had a good day with Bank of America up 2.8%, Toll Brothers up 1.8%, and Wells Fargo up 1.1%. Most of our stock picks were up.

2013 has been a great year in the markets for our stock picks so far. It starts to feel like I should have stayed more fully invested. But one should not be too greedy. (Not that greed is any way shape or form a bad thing, let us not be hypocritical about that, but being prudent is also wise.)

The S&P 500 was down 0.4% and Toronto was down 0.1%. None of our Stock Picks moved much and most were sown slightly.

Goldman Sachs and Citigroup both “beat expectations” in earnings releases. Home Builder confidence was higher in a report today which bodes well for Toll Brothers.

Wednesday’s, markets will likely be driven by the reaction to a speech by Fed chair Ben Bernanke.

The S&P 500 was about flat today but Toronto was up 0.5% as it was boosted by the Loblaws / Shoppers Drugmart deal.

Most of our stock picks were up today but Toll Brothers fell 2.2% to $33.84. They don’t report earnings until around August 22. I expect a good report at that time.

It appears that Loblaws has bid about 20 times earnings for shoppers. And the market cheered this by pushing up Loblaws stock by 5.4%. The fact that companies are willing to pay 20 times earnings provides support for stock prices. Canadian Tire is trading at only 13 times earnings.

Much was made of the fact that the transaction will be immediately accretive to earnings for Loblaws. However adding to next year’s earnings per share is neither a necessary nor a sufficient condition to make this a wise investment for Loblaws. I have no idea if it is a wise investment for Loblaws. And knowing that it is accretive earnings does not educate me on that point. Loblaws can borrow money at low rates. Borrowing money at 4% and investing in something that earns 5% is accretive, but not necessarily wise. And it can issue shares, as it is doing in this purchase at 20 times earnings. If I can issue shares at 20 times earnings then any purchase under 20 times earnings is accretive. But 20 items earnings is still only a 5% earnings initially. Whether this works out for Loblaw investors comes down to how well Loblaws can manage the operation in the years ahead.

Alimentation Couche-Tard is updated and rated (lower) Buy at $61.88. This company has rather quietly grown int a giant. It has been a fantastic investment. Thirteen years ago the shares traded under $3.00 and they are now about $62.00. It is very well managed. It has grown by acquisition. I started following it in March 2005 at a price of $17.40 and rated it (lower) strong Buy at that time. In 2008 the share price got as low as $10. Great companies are certainly not immune to large price declines but if they are great companies, then the price recovers and grows over time.

Some companies blow their brains out on acquisitions. But it can also be a very profitable strategy. Two cases that I follow where it has worked extremely well have involved simple businesses that made acquisitions in the very same line of business. These two are Couche-Tard and Stantec. Liquor Stores N.A. may be another example. RioCan may be another.

On Friday, markets were relatively flat. Among our stocks picks most of them fell somewhat on Friday.

Our two U.S. banks stocks were strong with Wells Fargo up 1.8% and Bank of America up 2.0%.

I reduced my position in Berkshire Hathaway. Basically, I am looking at the fact that I am up 21% this year to date on top of 28% last year and therefore thinking of trying to make sure I don’t end up giving back too much of that if I can help it. Looking at what I hold and thinking about what I might trim, Berkshire has one of the lower ratings and had increased further since my last rating. So, I decided to trim.

It seems I would have done even better this year had I not ran with a fair amount of cash. But I think it was prudent to run with cash. Markets or individual companies can drop at any time for many reasons and a decent allocation of cash is useful to take advantage of bargains from time to time.

I have updated the composition of my own portfolio. My portfolio is particular susceptible to a decline by virtue of the simple fact that it is concentrated in so few stocks. Luckily it seems those have been quality stocks but certainly there is a risk to being that concentrated.

Ben Bernanke the FED chair indicated that accommodative monetary policies (probably meaning low short-term interest rates) will remain in place for the foreseeable future (even if QE 3 – the bond buying that pushes down longer term interest rates is scaled back). This pushed the S&P 500 up 1.4% to a new record high. The Toronto stock exchange was up 1.5%.

The big winner for our stock picks was Toll Brothers, up 6.6%. Also, Stantec was up 2.9%.

Very soon the attention in the U.S. will turn to the Q2 earnings releases. They will need to be pretty good to sustain recent gains.

I have enjoyed the rise in stock prices and I am confident that int he long term stocks will continue to rise. But at the same time I see the wisdom of taking some money off the table to be more prepared just in case there is a pull-back or in case better bargains are identified. The percentage on a portfolio that should be in equities is a complex personal matter. Rules of thumb based on age simply don’t cut it.

Berkshire Hathaway A shares have hit $175,644. The B shares are $116.98. We last rated it at (lower) Buy at $111.82 on May 11. I am inclined to maybe trim my position there. It seems like it has up a little too much this year. But good for Warren Buffett. I am not hearing much from all those mis-guided people who for so many years moaned that the stock was not doing well – completely oblivious to the fact that Buffett’s seeks to grow the earnings and value of the company and does not try to push the share price up. He was doing his job all along and now investors have realized it and pushed the stock price up.

Markets were about flat in the U.S. and Canada today.

We had Canadian Tire up 1.2% and Stantec up 2.7%. Couche-Tard made a big recovery up 6% and being down 5% on its earnings release yesterday. What this illustrates is that earnings should be released after the close so that there is more time to digest the news.

My order to trim Canadian Tire at $83 got filled today and that sold about 16% of my shares in that company. It’s my largest holding and so I had lots of room to trim.

I’ll plan to post an update on the composition of my portfolio this weekend. I’m not sure what my percentage cash is at the moment.

In my July 6 update just below I mentioned that I was thinking of buying some of the oils sands ETF, CLO. I did buy some of that on Monday but forgot to mention that in the update of yesterday.

The S&P 500 was up 0.7%, Yahoo is still showing Friday’s price change for Toronto so as far as Yahoo knows, the rain may have washed Toronto off the map. Google Finance Canada indicates Toronto was up 0.7%.

Toll Brothers went up 6.4% on news that foreclosures in the U.S. are way down. It seems I should have bought additional Toll Brothers shares on Friday or Monday instead of merely being tempted to do so. But I already had it as around 9% of my portfolio so I did okay today.

Alimentation Couche-Tard fell 5% on its earnings release. And that was on top of a 2.3% drop on Monday when the earnings news apparently leaked out early. This is a great company and possibly the pull-back is an opportunity. I will plan to update the report within the next week or so. Meanwhile we can let the price settle out. I suspect it will still look expensive but I need to run the numbers.

Most of our stock picks rose today. Many rose about 1%.

On Monday the S&P was up 0.5%. Off hand I am not quite sure what Toronto did because Yahoo Finance seems to think it last traded on July 5. I have mentioned before that I have used Yahoo Finance for at least 15 years. But lately it slow to load sometimes only loads half the page and in general it makes me think that Yahoo is a company that is circling the drain. I really should switch to something else. It’s pathetic when one of the original internet portals cannot even serve up a web site that loads properly.

Wells Fargo was up 1.8% to a new all-time high. You may be aware that over the past few years and especially in 2008 and 2009, it was popular to suggest that the U.S. banks were technically broke. Yet Warren Buffett was telling us that Wells Fargo was a great buy. And gee, it turns out Buffett was right again and the doomers were wrong. Wells is a great company. But I did take the opportunity to trim my position today. It did not quite hit my price of $43 that  I mentioned below under July 6 but when I saw it at $42.95, I figured, close enough and changed my order to a market order and sold what amounts to 23% of what I held.

The whole train derailment tragedy did not affect CN’s price much today. It also did not affect Berkshire Hathaway. It may not be well known that one of the Berkshire businesses in the manufacture and rental of crude oil train cars. This through its Marmon subsidiary. All those cars that we see with PROCOR on the side of them belong as I understand it to Berkshire. And of course Berkshire owns Burlington Northern which carries lots of crude oil these days. And it could possibly have an exposure in insuring or reinsuring the Montreal, Maine and Atlantic railway although I have seen no suggestion of that.  In any event Berkshire is so big that even if crude shipments are curtailed because of this it should not have a very noticeable impact on Berkshire.

I would imagine that the Montreal, Maine and Atlantic will be bankrupted by this unless it has awfully good insurance. Also early indications appear to strongly suggest negligence on the part of that railway and I would also guess that its license to operate may be in jeopardy. I guess it’s natural for the rail road company to deny negligence but it seems despicable that they have pointed fingers at the fire fighters who dealt with a fire in the locomotive hours before the derailment. I am not sure the executive of the rail road would be safe on the streets of that town after saying this.

The train derailment in Quebec is obviously very tragic. It seems clear that dozens were killed. (I find it strange that there were no reports of anyone escaping burning buildings with or without injury. It appears that anyone in the burned buildings had no chance. Hopefully most of those were commercial buildings unoccupied at night but apparently there was at least one night club.)

This will be a big deal for the rail industry. I would expect new safety requirements and possibly restrictions on shipping crude oil by rail. This would seem to bolster the arguments for the proposed pipelines.

It may be crass to mention it but I imagine that rail stocks could decline at the open tomorrow morning. The train that derailed was owned by a small private company. But I imagine that there are some negative implications for all rail companies. The only one I have analyzed is CN. Certainly if it happens to fall to $90, I would be a buyer. Perhaps its more likely to decline just a few dollars in which case I would not likely be a buyer.

Costco is updated and rated Weak Buy / Hold at $112. This is a wonderful business. It’s a simple and predictable business with strong competitive advantages that is almost certain to increase its earnings per share for many years to come. I would like to report that it is a Buy but seems somewhat too expensive. A possible strategy would be to take a small position and then hope to buy additional shares at a lower price. Or just wait and see if there comes an opportunity to buy in at a lower price.

It would be tempting and not difficult to “torture” the numbers until they confessed that this is a Buy. This could be done simply by assuming that the P/E will stay at 24. In which case the shares will rise with earnings and its seems clear the earnings will rise. But assuming the P/E will stay at 24 would be aggressive. It is reasonable to pay a higher P/E ratio for a high quality and growing company like Costco. But a P/E of 24 is difficult to justify. At this price it’s unlikely to be a terrible investment if held for five years or so but also perhaps not that likely to be a great investment.

RioCan is updated and rated Buy at $25.49. It seems like a reasonable investment choice. The biggest risk factor is further increases in interest rates.

On Friday I was thinking about the rise in oil prices and noting that the Oil Sands ETF symbol CLO has not risen much. I was prepared to buy a relatively large amount of that ETF on Friday but the market was just closing and so I will likely buy some on Monday.

On Friday we had the S&P 500 up 1.0% and Toronto down 0.3%. Wells Fargo and Berkshire Hathaway were each up 2.1%. Toll Brothers was down 3.0%. I was tempted to buy some more Toll Brothers but did not pull the trigger. I may place an order to grab some if it sinks some more.

I entered hopeful offers to trim my Canadian Tire at $84 (correction this should read $83) and Wells Fargo at $43.

The lower Canadian dollar has helped out with my returns as measured in Canadian dollars. For the most part that is sort of noise as I intend to leave those funds in U.S. dollars more or less permanently. However if we got down towards 90 cents I would likely move some U.S. cash back into Canadian dollars. I am not sure that I would sell any stocks to do so. So this is noise but nevertheless has a pleasant sound. The lower Canadian dollar will also nbe good for the economy. My understanding is that fundamentally the Canadian dollar should be more like 90 cents U.S. (purchasing power parity) and actually I was quite surprised that the rapid move from 70 and 80 cents up to the $1.00 level and above a few years ago did not do more damage to Canadian industry.

The jobs report came in at 195,000 which is better than expected. Dow futures up 166 points, interest rates up a little. There is a delicate balancing now as the market decides if the jobs report is “too good” meaning that quantitative easing will begin to be tapered off. It’s not at all clear that the market gain will last the full day but so far the reception to the news is quite positive in the stock market. Maybe a day to consider trimming some positions especially for those of us with large positions in certain stocks.

U.S markets were closed today. Toronto was up 0.2%. No large movements among our stock picks but it was nice to see Canadian Tire up 1.1%.

On Friday morning we will get the latest jobs report. The hope is that it will be lukewarm. If it is too cool then the market will worry about a lack of growth. If it is too high then the markets will worry that quantitative easing will end earlier. Or the market may focus on announcements today that England and Europe intend to keep interest rates low for some time. Or maybe the market will instead worry about Portugal’s finances or the unrest in Egypt. As of 11 pm eastern the futures suggest the DOW will open 134 points higher. But a lot can change by the time the opening bell rings.

Today the S&P 500 was up 0.1% while Toronto was down 0.3%. Canadian Tire was down 1.1% to $80.62. At one point today it was up to $82.45. Given this is my largest holding I perhaps should have had an order in to sell some at $82 or whatever just to take advantage of volatility. There did not seem to be any really notable movements in our stock picks today just the usual bobbing up of down.

I had a bit of correspondence with Barrick Gold as I could not resist pointing out to them how abysmal it was that they had achieved so little in the way of earnings over the years. If I understand and recall their telephone response correctly it was along the lines of: yeah we were really dumb in the past and blew a lot of money but now we have a new CEO and are going to do things differently. Does not exactly inspire confidence. In my opinion, they have become a national embarrassment.

This week belatedly starts off with the S&P 500 flat on the day and Toronto up 0.4%. Canadian Tire was up 3.0% apparently for no particular reason.

The next update will likely be for RioCan. If you search back in these comments I have not been a fan of RioCan for a variety of reasons. In the last month or so the unit price declined from the $29 range to the $25 range. This was due to higher interest rates.

The next shoe to drop with the Q2 report will be that they will show negative fair market value impacts which will lower GAAP earnings. This type of mark to market accounting is not something that I am a fan of. It was nice though when it was always a positive factor since it was introduced a couple of years ago. I believe it came along with IFRS accounting. The company will focus on Funds from operations which will probably show growth. And quite possible the market will ignore the fair market value losses on the buildings and may consider that this has already been fully reflected in the lower unit prices.

RioCan reports that Target is spending about $8 to $10 million per store in renovations, at Target’s expense. If baffles me how Target could come in and pay about $10 million per store to take over leases and then pay About $10 million to renovate a store and then still have to pay the rent  and still somehow make money.  And why does it make sense to spend $10 million on a leased store without locking in the lease for many additional years beyond the existing Zellers leases? (albeit the Zellers leases had I believe 10 to 15 years left in many cases). And if they can. what in the world was Zellers excuse for not making money in those locations since they did not face the $20 million in costs that Target has. Obviously Target knew all this going in, but it would certainly not surprise me if they announce some losses in Canada. Also I have said from the start that Target is unlikely to offer any big bargains to customers. It seems to me that Target Cando is a high cost operation. I am not sure what RicCan gets out of the deal. Eventually they should get a lot higher rent when the Zellers leases run out, also the presence of Target will up the rents in the rest of the shopping center.

I have been no fan of Gold companies over the years. I took a look at Barrick Gold’s balance sheet and some history there. The company does pay a dividend. But overall it looks like their performance has been quite poor. They currently have $18 billion in equity share capital and $4 billion in retained earnings. When it reports Q2 it may have zero retained earnings. Even with some large dividend payouts (that total about $3.9 billion since 1998) that looks pretty bad to me. This company has definitely been good at raising money from investors (by share issues for cash and by buying Placer Dome for shares). The record in returning money or growing book value for investors looks relatively poor to me even with the dividends. I have asked the company for some information on that. From about 2002 through 2012 they enjoyed an amazing increase in the price of Gold. And so for this company to have a poor record of profit over this period (which I believe it has) seems inexcusable.

This Barrick Gold situation is what Warren Buffett refers to when he talks about being a wise allocator of capital. Investor capital is scarce and ought to be treated with great respect and good stewardship. Buffett would not have dumped capital into a hole like Barrick has apparently done. Society benefits when investor capital is placed in the hands of skilled allocators like Warren Buffett. As Kevin O’Learly would say, some managers basically murder dollar bills and that is not good for investors or for society as a whole.

Now, none of this is to say that Barrack would be a bad investment today. I don’t know. It may not even be knowable given the uncertainty of both gold prices and exploration costs. But it seems fair to say that management has so far been relatively poor, certainly not stellar. It apparently needs to be “cut-off” from access to additional capital lest it continue to make poor use of capital.

On a share price basis the VERY early investors in Barrick have done okay. Those few who were in the company by January 1986 have seen compounded return so 12.6%. That is very good. This is based on the U.S. stock price. Canadian returns would be worse given that the Canadian dollar was far lower over most of the period.

But those that got in 20 years ago at the start of 1993 have seen compounded average returns (with dividends) of 1.44%. An investor in January 1995 has had a slightly negative return. Investors in January 2000 have seen a an average return of 0.39%.   Those invested at the start of 2003 have seen compound gains of 1.28% (lost in share price but did receive dividends). Investors in January 2005 have lost 3.42% per year.

On Friday the S&P 500 was down 0.4% while Toronto was up 1.0%.

Interesting moves included Shaw Communications up 5.4% to $25.24 on the release of a good earnings report. I have not mentioned it much lately but our last rating was Buy at $21.06 on October 28, 2012.

Then there was Blackbury (formerly Research in Motion) down 26% to $11.08 on a poor earnings report. Our last rating was Highly Speculative Weak Sell at $10.86. I mentioned in the report that the company was difficult to predict but might be considered a highly speculative. Buy for more adventurous investors.

For the First half of 2013 our Stock Picks have done very well.

The three Strong Buy are up 14% (Canadian tire), 21% (Wells Fargo) and 19% (Melcor) for an average of 18%. My own portfolio is also up 18.0%. The 19 Buys were up an average of 11.9% each. There were only three decliners and the biggest decline was 8%.

Here is how our Stock Picks look graphically as of today. (Weak Buy and Weak Sells are considered basically Holds and are not shown in the graph (we have always done it that way) because we were basically sitting on the fence with those.

S&P 500 was up 0.6% today and Toronto was up 0.4%.

Almost all of our Stock Picks were up. Notably, Wells Fargo up 1.3%, Toll Brothers up 2.6%, Canadian Tire up 1.1% and Shaw Communications up 3.7%. It’s surprising how the equity market has bounced back from the recent dip.

Fixed income has not recovered much. I think people with any length at all to their fixed income, such as five year bonds or longer (including in mutual funds and ETFs) are going to be surprised at the losses in June.

My own portfolio is, in theory, highly risky, far too concentrated and not at all balanced. In practice it has been relatively stable and I believe dropped less than the equity market (certainly less than the Toronto market) during the recent dip and it has recovered better than the market as well. But there is no doubt that my portfolio leaves me at risk if something nasty happens to one of my six largest holding.

I don’t hold any fixed income. I do hold cash. I am increasingly thinking about the fact that not all fixed income is created equal. Money market funds, very short term bonds and short GIC or even five year GICs behave pretty much like cash (except GICs are locked in). Longer term bonds are vastly different than cash and at this time expose investors to a lot of downside risk while offering scant returns. There are some equities such as dividend stocks and REITs and preferred shares that can behave somewhat like equities and somewhat like bonds. REITs have some potential to grow since they are businesses but they also behave a lot like long-term bonds and should be viewed with a great deal of caution right now. They WILL get clobbered if interest rates rise much. Perpetual preferred shares also get hurt with higher interest rates but at least the returns are usually better than bonds, so the risk reward tradeoff is better. Some preferred shares face almost certain redemption on their reset dates and if they are trading above the redemption price then a capital loss is baked in. Canadian Western Bank preferred shares are an example.

There was news today that Rona is closing stores and taking a $220 million “charge”, of which $195 million will be “non-cash” (non-cash how comforting!). I am pretty sure the sees of demise were plantedd by Rona years ago went it opened big box stores and tried to compete head to head with Home Depot .

In other news this week Hudson’s Bay is considering buying Saks. Apparently Saks is a beleaguered chain. As I mentioned under March 28, I visited Saks 5th Avenue in New York. A very snobbish place where they did not even seem to have prices indicated for anything on the first floor. Higher floors were less snobbish. The whole concept is probably obsolete. Who wants to pay high prices for snooty service? And why would Hudson’s Bay think they could run these places? I do applaud “The Bay” for abandoning that incredibly stupid name and going back to the Hudson’s Bay name. But nothing else about the place impresses me. The outgoing CEO of Hudson’s Bay has been lauded lately. For what I wonder? Has there been any profits of note?

S&P 500 was up 1.0% today and Toronto fell 0.5%.

Most of our Stock Picks were up today. That includes long-time favorite Wells Fargo up 1.8% and relatively recent speculative pick Toll Brothers up 1.9%.

With the recent partial recovery and with some recent buying on dips and with the decline in the Canadian dollar helping out, it seems my own account is down only about 1.5% form its late May peak, which puts me up about 17% this year to date which is an excellent return (particularly given how bad the Canadian market has done).

But what of Gold? I never have any opinion on where the price of Gold is headed. I have never invested in Gold or Gold companies or Gold ETFs. (Well save for one ill-fated small investment in Bema Gold back at the time when BreEx was flying high.) From that I learned how Gold companies tended to have little or no profits and were basically priced as lottery tickets and I never touched the stuff again. And I really never regretted that, since why should I abandon a system of picking stocks of profitable companies that has worked fairly reliably for me just because some people won a small lottery prize with Gold in the 2000’s.

Possibly Gold will recover, I have no idea. It is clear that it is cheaper now than it was in about three years. Technical traders who by definition love to sell low and buy high will not consider buying now. If I were interested in Gold (which I am not) I would be more inclined to buy today than at the the former high prices.

As far as Gold Miners it’s hard to get interested in that when I see that Barrick Gold has become a national embarrassment. I wonder how much money Peter Munk ever made for investors as opposed to what he made from investors? According to its Q1 balance sheet it has $19 billion of shareholder invested capital just $4 billion in accumulated retained earnings from its total history. And I seem to recall reading that it facing a big write-off so that may wipe out the retained earnings. Unless it has paid out a LOT of earnings as dividends (and it has paid at least some) this is a very pathetic record indeed. If the purpose of Barrick was to create jobs for many people and to create big salaries and esteem for its executives it has done well. If its purpose was to create returns for its share owners, it seems to have failed pretty badly. And let’s not forget we just finished ten years of strong Gold prices. The real damage in terms of wealth destruction may lie ahead.

The efficient market hypothesis suggests that none of this can be predicted from looking at balance sheets or past history or anything else and that the ability to beat the market is purely random. Well, there is SOME truth to it but it’s certainly not 100% true and I have found some value in actually looking at fundamentals and financial statements.

Well, I suppose I should not get over confident, else the investment gods will smack me down.

The S&P 500 was up 0.9% and Toronto was up 1.4%.

Among the stocks I follow there were impressive gains from Boston Pizza, up 4.1%,  RioCan up 3.7% and Bank of America up 3.0%. Almost everything was up today.

With some good economic figures from the U.S. the market turned its attention away, at least for today, from Bernanke and the  possible tapering off of quantitative easing. Soon the market will turn attention to the Q2 earnings reports.

It was a negative day on the markets with the S&P 500 down 1.2% and Toronto down 1.3%.

For whatever reason Canadian Tire managed to gain 1.2%.

Despite some recent losses, I don’t feel bad about how our Stock Picks have done.

I think it is fair to say that I have mentioned the concept of taking profits a number of times and that I have done some of that. So I sit with a good amount of cash right now for bargain hunting and I assume that many subscribers may be similarly positioned. I think it is fair to say that I warned that long-term bonds were in a a bubble and should be avoided.

High yield entities have been very popular but I have never had a big exposure to them and was not a big fan, especially lately as yields crept lower. That has worked out well.

I mentioned on Thursday that I had placed an order to buy some Canadian Western Bank if the share price hit $27.10. That order was filled near the open today.

I have updated the article on long-term historical asset class performance for the first half of 2013. Given the weak performance of bonds and especially Gold in the first half of 2013, I thought it was worthwhile to update this article.

FirstService is updated and rated Weak Buy / Hold at U.S. $29.75 or CAN $31.10. I have followed this company since 2002 and I respect the management. Around Edmonton its Colliers International signs are ubiquitous. I currently having one of its franchise companies College Pro painters do a little exterior painting for me. So I was hoping the numbers would look good. Unfortunately the profitability does not look strong and the accounting is quite complex. Things could look a lot better going forward since it has just eliminated its preferred shares which were an expensive form of financing (They paid 7% and were not tax deductible to the company, meanwhile it si able to borrow 12 year money at 4%). On the other hand they may face a goodwill write-off their operation that looks after foreclosed houses in the U.S. Overall it looks best to give this company a pass. Any buying would have to be considered quite speculative.

The composition of my own portfolio is updated.

On Friday the S&P 500 was up 0.3% and the Toronto index was up 0.2%.

Canadian Tire was down 2.4% to $77.75. Seeing this decline I bought back (at $78.12) some more of the Canadian Tire shares that I had recently sold at $86.50 and $82.23.

The market may be predicting that Canadian Tire will decide not to sell a portion of its Real Estate into a REIT after all or that the valuation will be lower given recent declines in REIT prices. Most assuredly the valuations would be lower. As far as the ability of selling a portion of the real estate into a REIT to “surface” or make apparent the value of the real estate, that is not overly important. A transaction to “surface” value does not create value. To the extent that Canadian Tire has attractive real estate the value is going to show up either more quickly in the REIT transaction, or more slowly over time in the form of a competitive advantage and higher profits over the years. The proposed REIT transaction is supposed to make more apparent the value of Canadian Tire but it is going to have minimal impact on the consolidated profit or balance sheet because they are planning to retain about 80% of the REIT and only sell 20% to outside shareholders. My thinking was that if fools were willing to pay extraordinary values for real estate, then Canadian Tire might have been wise to lock in very long term leases and sell all of it to the fools. But they wish to maintain control of the real estate. Selling 50% to 100% of the real estate at the top of the market would have locked in value rather than merely surface value.

In any event Canadian Tire looks like good value to me.

Year to date, the S&P 500 is up 11.6% and Toronto is down 3.5%. Our Three strong buys are up an average of 16.3% year to date. Our average for all 23 stocks rated (lower) Buy or higher is 9.8% year to date. My own portfolio is up 15.8% this year to date.

The S&P 500 fell 2.5% today and Toronto fell 2.4%.

I did a bit of buying in the morning, which was early because the markets fell further in the afternoon.

I bought some Toll Brothers at $31.21, it closed at $31.70

I bought some Canadian Tire at $79.57, it closed at $79.65

So my prices on those worked out okay even though markets in general were down quite a bit more in the afternoon.

I also placed an order for Melcor if it should fall to $17.90 and for Canadian Western Bank if it should fall to $27.10.

While no one can predict markets in the short term, I don’t see any reason to expect a real dive in the markets. As documented in these daily updates I had sold some shares in recent weeks in order to reduce risk and to have cash for buying. If and as stocks fall my strategy will be to look to buy.

I think it is fair to say that in these comments and in articles updated recently I have indicated that long-term bonds were likely to be a bad investment. In the last couple of weeks long-term bonds have been falling as interest rates rise.

Stocks also fall with higher interest rates, all else equal. But while 30-year bonds were yielding 3% not long ago, stocks were never priced so high as to reflect 3% interest rates. Stock P/E ratios were a bit higher than historic averages. Bond P/Es (the reciprocal of yield) were basically at all time highs. So long-term bonds have a lot more to fear from higher interest rates than do stocks

So, apparently the FED has signaled that the “quantitative easing” consisting of the Feds buying $85 billion per month worth of bonds and mortgage securities will taper off sometime this year and end around this time next year. And all this will occur only if the economy is strong enough. Although totally expected the S&P fell 1.4% after this news and Toronto fell 0.8%.

I am not convinced that this is anything to worry about. Markets are always unpredictable. But if interest rates rise somewhat and the economy continues to recover that does not really portend disaster for stocks. If markets decline much, my thoughts will turn more to buying.

It was another strong day on the markets with the S&P 500 up 0.8% and Toronto up 0.6%. Most of our stocks picks were up.

Yesterday I listed the 10-year compound average annual earnings per share growth rates for all the companies currently on my list for which I had 11 years of adjusted earnings data in my spreadsheet. The growth rates were very strong. Now that would not be at all impressive if these were mostly new stock picks that I had recently added to the site. (Since I could have simply added stocks with strong past growth rates). Instead many of these stocks have been on the list for over ten years. Few of them are particularly recent. The one with negative earnings “growth” Toll Brothers, however has been on the list for only two years. RioCan another low earnings grower (albeit it has a large dividend) has been on the list for less than two years. The highest grower, Couche-Tard has been on the list for eight years, it was first rated as (lower) Strong Buy. Since then it is up 239%.

If a stock grows its earnings at 15% per year (three of the stocks below were higher than that) then its earnings grow by 305% in ten years. If that stock was purchased at a reasonable P/E and if the P/E has remained stable or not declined much then the investor is going to have seen returns pretty close to that 305%, plus dividends.

When you boil it down to basics the key to big returns on stocks, is big earnings per share growth (combined with buying at a reasonable price). And the key to big earnings per share growth is (believe it or not) LOW dividends and (most importantly) a high ROE.

If a company has and maintains a 15% ROE and no dividend then its earnings per share will grow at 15% per year. (If it paid a 50% dividend it would grow at 7.5% instead.)  And if it starts out with a reasonable Price to book ratio or price to earnings ratio and if that ratio is stable then the stock price must rise at 15% per year. Now, in reality the P/E ratio and P/B ratio will bump around and it will fall went the whole market’s in a slump. But as long as the P/E eventually recovers, 15% ROE and no dividend generates 15% returns per year as long as the P/E ratio eventually is as high as it was at the start.

This is the very simple math that sent Buffett looking for companies that he figured could be relied upon to deliver growth in earnings per share of 15% or more. And he found that PREDICTABLE growth was available in some (but certainly not all) boring low-tech companies and often companies with very strong consumer brand names.

Having observed as (literally) a little boy that if one could compound money at a rate like 15% one would become very rich, Buffett soon set out to gather the seed money (from massive paper routes as a teenager and some early employment and from performance fees on a hedge fund partnership). He worked like a dog and ferreted out a few companies where he could make 15% plus on his own money and for the hedge fund. Then he kept doing that for 60 years (but stopped the hedge fund partnership when he was 39). He was very wealthy by age 30. He was beyond wealthy by age 40 and on his way to becoming for a time the wealthiest person in the world. His long term average return is around 20% per year compounded in the past 50 years and somewhat higher than that in the early years.

It seems to me that Buffet’s simple formula is worth trying to copy. Find stocks that can be predicted to grow earnings per share at relatively high rates and which sell for reasonable prices. Buy, wait, reap rewards.

To a good extent I have been doing this, but Buffett’s approach would probably suggest more focus on the the company being high quality (high ROE) and not as much focus on it being a bargain. The great company will grow to offset a somewhat (but not ridiculously) higher price paid.

This formula will tend to work. But meanwhile the stocks prices may jump all over the place and predictions of gloom and hyperinflation and all manner of calamities keep most people from staying in the market through the ugly times or buying more shares at the ugly times. But a few brave people will persevere and become rich with simple thinking like this.

It was a strong start to the week with the S&P 500 and Toronto both up 0.8%. Notably, we had Canadian Tire up 2.5%, and Toll Brothers up 2.4% and Couche-Tard was up 4.25%.

It’s worthwhile to think about what kind of stock returns to expect going forward. Firtsly the short term is alwasy unpredictable so it’s anyone’s guess. But in the longer term earnings per sgarea growth pushes up stock prices. If we start at a normal P/E level llike 15 or so then if earnings grow 10% per uyear for a decade we could expect our stock price to grow at 10% per year on average. ANd the total return would be expected to be the 10% plus the dividend yield. Which sounds pretty good.

The difficulty is project earnings growth. For individual companies earnings growth is very hard to project. But what Warren Buffett teaches is to focus on a select group of stocks for which it is more predictable (ideally almost certain) that over a decade or so the earnings will grow at an acceptable rate. This is why Buffett famously loves things like Coke and America Express and Wells Fargo and his rail road, Burlington Northern. Buffett did not “miss” any tech stocks like Apple, he simply chose to invest only in companies that he felt were relatively certain to grow earnings and which were available at decent prices. Based on his own knowledge he was just not as certain about Apple, or it was not available cheap enough buy the time he saw that it was a predictable stock.

For the stock market as a whole, we can say that logically we don’t expect earnings per share to grow much differently than the growth in the economy. And the data shows this is correct over the long run.

Unfortunately at this time the economy appears set to grow at only perhaps 3% real GDP. But that may translate to 4 to 5% nominal GDP. Not great but not too bad if we add in a 2% average dividend. (And I suspect in a low growth scenario companies will be able to increase dividends as they have less need to invest in growth). When look at the valuation of the S&P 500 I use growth in the 4 to 6% range.

But when I look at individual stocks I often use growth of more like 6% to 12% for the next five years. Perhaps I am being optimistic. (But this growth is just one input into the stock rating process, it does not determine the rating it is just one factor.)

But then again what has been the past average growth of adjusted earnings per share for the companies I am looking at? In the past ten years GDP in the U.S. has risen at an average compounded nominal rate of just 4.0%. Yet during that time here is the adjusted earnings per share of the companies on our list. These are the ones I have ten years of data for.

Canadian National 12.5% per year average

Canadian Western bank 14.4%

Stantec    17.7%

Canadian Tire 10.2%

Melcor 8.0%

Alimentation Couche-Tard 29.6%

First Service 8.7%

MicroSoft 19.1%

FedEx 11.9%

Berkshire 12.0%

Costco 10.3%

Wells Fargo 7.7%

Toll Brothers minus 10.5%

RioCan 2.8%

S&P 500 7.8%

Don’t get too hung up on the individual numbers but the point is that the stable of companies that I am following appear to have grown significantly faster, on average, than the economy did in the past ten years.

Therefore I am perhaps not out of line expecting them to continue to do so. But at the same time it is impossible for a ANY company to perpetually grow faster than the economy. That is why I am also often assuming that the P/E ratio will decline in the next five years. If I start with a P/E above average, I tend to expect that to come down to about the average P/E in five years.

Markets rose substantially on Thursday but then fell and gave back about half of that on Friday. Still the S&P 500 remains up 14.1%. But Toronto is down 2.0% year to date. With our Strong buys up 17.0% and our overall buy or Strong Buy average up 11.6% we are once again well ahead of the Toronto market. As of Sunday evening the U.S. markets are set to open to the upside (based on futures markets which trade on Sunday evening).

As you may have seen, we released the latest edition of our free newsletter on Saturday.

The S&P 500 was down 0.8% today and Toronto was down 0.9%.

Almost all of our stocks picks were down today with the Market.

I am fairly certain that Melcor went ex-dividend today meaning that if you bought yesterday you would get the 75 cent dividend on June 28 and if you bought today you don’t. So in theory, all else equal,  the stock should have declined 75 cents today. It was basically unchanged despite the down market. Possibly that is due to its being so thinly traded and not enough people realize it was ex-dividend today. Ooops ignore what is in yellow, Yahoo finance mis-led me.  Correction, it did fall 79 cents today so pretty much as the theory said it would. But this may be a buying opportunity as all else equal I expect it will creep back up. The 75 cents they are paying out does reduce the book value. But it will have only a tiny impact on earnings… But maybe this dip with the dividend just shows how dumb it is for people to always think dividends are so great. It’s our OWN money they are paying out and money paid out does not compound and grow. Which is precisely why Warren Buffett never paid out a dividend at Berkshire going back to 1965. (Actually that is a lie, ironically enough he paid out exactly one thin dime per share in 1969 and never another dime)

Canadian National Railway is updated and rated (lower) Buy at CAN $100.44 or U.S.$ 98.54. It’s an excellent company with excellent economics and well managed. It could be bought for the long term but the share price does seem somewhat high at this time.

Markets were down on Tuesday, the S&P 500 fell 1.0% and Toronto fell 1.3%. At this time I am peronally neither inclined to sell nor to buy anything. (But I reserve the right to change my mind at any time.) I’ll keep you posted each evening if anything changes. And based on the ratings above there are certainly some stocks that appear to be good choices for the long term. The short term AS ALWAYS is anyone’s guess. I have generally never let short term fears keep me out of the market. That has at times made for a bumpy ride but has worked out very well overall.

I believe that Melcor will trade ex-dividend tomorrow (25 cent regular dividend plus 50 cent special dividend payable June 28 to shareholders of record on June 14) . Therefore in theory it probably should drop about 75 cents tomorrow, all else equal. Unless the market falls in general tomorrow, I am not so sure Melcor will fall much, but we shall see.

I’ve completed and update for Canadian National railway and will upload the report tomorrow evening. The rating will be (lower) Buy at $101. It’s an excellent company. Possibly worth paying up for but in general seems a little expensive.

The S&P 500 was about unchanged today and Toronto was up a tiny 0.1%. Toll Brothers slipped 3% to $32.58 and is worthy of consideration.

On Friday the S&P 500 rose 1.3% and Toronto fell 0.3%. Given the rise on Friday I considered if I should be trimming some positions. I considered that I have a large percentage of my portfolio in Wells Fargo and Canadian Tire. I then sold what amounted to 20% of my Canadian Tire shares and 15% of my Wells Fargo. I concluded it was prudent to trim these positions and also it gives me cash to look for better investments. I definitely like these stocks long term or I would have sold all. I have no idea where they will head in the short term but there is always a risk they could fall. There is also a “risk” they will rise but if so I still own a lot of them both. I have a lot of gains in the past 18 months and despite being confident that stocks will rise long-term, I would not feel good about leaving all my money in equities at this time. I want some in cash. I won’t touch long-term bonds.

My next update will be for Canadian National Railway. It looks to me like a great company but the stock may look expensive.

It was not a bad day in the markets. The S&P 500 was up 0.8% while Toronto was down 0.3%.

Toll Brothers was up 4.5% and Wells Fargo was up 2.3%.

As always the market gyrates with each piece of good or bad news.

Apparently Friday’s market tone is expected to be set by the U.S. May jobs creation report. Markets probably should not fixate on the net jobs created (or lost) in a single month when that number is probably only a rough estimate of reality, but fixate they do.

Okay, so stocks were down two days in a row.

S&P 500 down 1.4%, Toronto down 1.2%. With the U.S. markets up so much this year the notion of a decline two days in a row seems foreign. But really it is nothing more than a small dose of reality. Stocks do not go up in straight lines and sometimes they go down. Sometimes a lot.

At this point people who have no idea what their stocks are really worth and who think of stocks as nothing but squiggles on a screen start to panic. As far as they know a stock is worth what someone will pay for it in the next two minutes and it has no intrinsic value. Wiser investors however know that stocks are shares in companies. And if they have chosen their companies with care and if they are confident that those companies are likely to continue to make growing amounts of money not every quarter or year but most quarters and years then these investors are much less likely to panic.

Personally I am not only not panicked I am barely bothered at all by this level of market decline. Sure it’s always nicer to see stocks rise. But I do have cash on hand to take advantage of dips. And I do have some sense that the stocks I own have fundamental value and are likely (but not guaranteed) to rise in price in the long term. Buying shares on dips is part of the reason I have made an average of 16% per year over the past ten years. Often I have bought too early on the way down. But I have tended to keep buying as my favorite stocks declined. And this has paid off in most (but not all) cases. And I have tended to trim positions that seemed to be fully valued or over valued. And I have tried to move money into stocks that seemed the best bargain I could find while also staying mostly with large stable companies. And I have sometimes increased my cash allocation when stock markets rose. (Like I did last week).

That has been a recipe for success for me. So no, I will not be panicking even if markets continue to fall. And I am not suggesting they will continue to fall. They might or might not.

But not everyone can take the heat and volatility of being in stocks. If you can’t take the heat then by all means sell some or all of your stocks. I don’t advise on individual asset allocation levels or risk capacity or risk tolerances. Our Stocks are mostly up a lot this year and if you sell some now you still most likely have good gains on them. There is nothing wrong with moving at least some cash to the sidelines if that is what you wish to do.

Our report on global exchanged traded funds has been updated.

Most of our stocks were down today. The S&P 500 was down 0.6%, Toronto down 0.1%.

Toll Brothers was down 2% to $32.92. We last rated it Speculative Buy at $34.13. And it is speculative given the high P/E ratios but would definitely be inclined to buy if I did not already own quite a heavy position in it. There is chatter about the housing recovery being “fake” because homes are being bough by investors or because the market is propped up by the Fed. On the other hand I read that homebuilders have a hard time finding enough workers and Toll Brothers reported it was increasing the home prices. There are ALWAYS reasons for fear and there is ALWAYS The possibility of a sharp market correction / crash. But many investors have learned that over the years accepting risks and accepting that portfolios will decline from time to time is usually quite rewarding in the end. Being too fearful and too worried about capital preservation is a mindset that can forego a lot of gains. You end up sleeping better I suppose with strategy but you seldom end up ever sleeping in real luxury with a too cautious approach.

For Canadian investors, the decline in the Canadian dollar today was beneficial to U.S. holdings.

With Toll brothers down today I decided to buy back 500 shares. As mentioned under May 29, earlier this month I sold 500 at $37. Around May 29 I placed an order to buy 500 at $32.10. But just now I decided to grab them at $33.30. Toll was down as low as $32  At the same time a headline today was “Homebuilders struggle to find workers.” With my trimming of positions last week my cash position had reached 27%, the highest in quite some time. So that also made it easier for me to grab 500 shares. I now hold 3600 shares of Toll, it’s around 9% of my total portfolio. I tend to hold a much more concentrated portfolio than most people. My approach would be considered quite risky in that respect.

At the end of the day the S&P 500 was up 0.6% and Toronto was down 0.3%.

We had Toll Brothers down 1.7%. But most of the stocks on our list were up.

I like to think that you the customers of InvestorsFriend Inc. are smarter than the typical investor. As do your selfers (albeit with a little help from your (Investors)Friend) I think you are more savvy then average.

Here’s what average looks like:

A bank employed senior financial advisor friend of mine was explaining to me today that he puts the vast majority of clients into pretty bland portfolios with usually a heavy allocations to bonds. He thinks they would be better off with more equity exposure in most cases. But he explained that when client accounts are up 20% in a year, no one calls to thank him. When they fall 5% they all call in to gripe and some leave. So investors have trained the advisor community to act very meekly and to travel in a herd. If you bet against the herd and win your client benefits and congratulates himself on his astuteness in choosing you. If you bet against the herd and loser, the client screams, calls you idiot, tells all his friends you are an idiot and then leaves with his money. So, investors who wish to do well on management fees and who want a sane life act meekly and follow the herd. Failing with the crowd, you still get yelled at but maybe not as loudly and the client may stay put as he sees most everyone failed.

This is not that intelligent. For one thing, long term bonds may be riskier than equities. Almost all long term bonds (except very recently issued ones) are trading above par. Some trade well above par like 30% above par. They WILL mature at only par. They WILL decline in price and market value. That is a mathematical fact. They could gain in value in the next year. But any bond that currently has a market value above par WILL suffer a capital loss eventually as it matures at par. (I set aside convertible bonds, I speak of plain bonds). And long term bond funds will be affected by this as well. Now perhaps the yield on the bonds will still make them acceptable investments but I doubt it.

Now it is possible that in say the next ten years equities will decline even more than a long term bond with 10 years left on it (Say a 30 year issued in 1983 that is trading way over par today). But I highly doubt that will be the case. For my money, equities are a safer bet than long-term bonds over say the next ten years.

And maybe rebalancing and investing new money will mean that the bond portion of the portfolio will do okay. But the math suggest to me that equities held today will almost certainly (but its not guaranteed) outperform long term bonds held today if we check back in say 10 years.

But Advisors are mostly going to recommend a hefty allocation to bonds including some long term bonds. That’s because the customers trained them to do so and when the long term bonds eventually fall in value at least the Advisors will fail with the herd and not on their own.

More intelligent investors (like most of you, I think) know that occasional losses, maybe even sizable percentage losses is just a part of the winding road up the hill to wealth. And if we are going to have losses either way (I’ll bet even balanced portfolios have some substantial losses in some years over the next ten years), then why not choose the route with the higher expected returns (more equities)?

With markets at record highs (at least in the U.S.) it’s a reasonable time to ask yourself if you can stand the heat and the volatility off equities. I am not in the business of setting asset allocations (the percentage of your portfolio in bonds, cash and equities). That is a personal decision and I don’t give personal advice. Periodically, it is good to reflect on what exposure to equities you are comfortable with. I would put the non-equity portion in cash and short-term stuff and I personally would avoid long-term bonds and most perpetual preferred shares for that matter.

On Friday the TSX fell 0.8% and the S&P 500 fell 1.4%. In the U.S. the declines came in the afternoon. For the moment the trimming of positions that I did on Friday morning and in recent days seems to be good timing.

I never claim to be able to predict short -term market moves but in general I don’t see that anything has occurred that would lead me to particularly expect a market decline.

A subscriber just emailed and asked me if I would trim Berkshire. On May 11 below I mentioned I would consider that. It was last rated here as (lower) Buy at $111.82 on May 11. Now it is at $114.75.

So perhaps being in a bit of a selling mood this morning I have now sold 400 of the 1200 shares I had. In my kids RESP account I had 200 shares and was up 57% and sold 100. In another account I had 1000 shares (B shares obviously) and was up about 32%. I sold 300. Logically having a gain or a loss on a share in a non-taxable account should not enter into the thinking about selling it at all. Selling should be based on the current price of the stock versus its perceived value and prospects. But emotionally it does always seem easier to sell something with a gain on it. Obviously I may regret selling these because Berkshire is doing very well on its various businesses. Also many Johnny come lately analysts are suddenly much more fond of the stock and Buffett now that it has risen so much. But I think trimming this after recent gains is prudent. It’s up 28% this year. It was up 18% in 2012. That is a HUGE amount of gains for such a large company.

A note to our American subscribers: Are you able to easily buy stocks on the Toronto stock exchange? Canadians can buy on the major American exchanges as easily as they can on Toronto and for the same low commissions. But over the years I have understood that American investors could not easily buy on the Toronto Stock exchange. It was possible but involved higher Commissions. This was due various regulatory factors that required a Canadian broker to get involved and perhaps also a lack of interest by U.S. brokers in making the Toronto stocks available to their customers. But I wonder if anything has changed? Are those treading through American discount broker systems able to easily buy on Toronto and with low commissions? Let me know your experience at shawn@investorsfriend.com.

The reason I ask is that over the years I have been hesitant to market this site to the American audience since only about half our stock picks trade in the U.S. (that includes American stocks plus a number of Canadian companies that also trade on the big American exchanges.)

I sold what amounts to 54%of my Bank of America shares this morning. It probably still has strong potential for gains because its price to book value is still low. But looking at the comments in the summary of our last rating it, we were considering it speculative and we were not impressed with management. Anyhow I have had a relatively large exposure to U.S. banking and I have made strong returns and it just seemed prudent to reduce this holding. As always it is a struggle to decide these things as one weighs the possible upside against the possible downside. It is seldom easy to decide.

Markets were relatively flat today. However, several of our Stock picks did very well.

Wells Fargo was up 1.2% to $41.25. Seeing it was up I decided to sell some just to be prudent.  I was not sure I should sell, after all Buffett was still buying fairly recently (and may still be). And it was rated (lower) Strong Buy at $37.21 as of April 13 on this Site. But I own it mostly in non-taxable accounts and I have good gains on it and I was stubbornly buying in the past when it swooned. So it seemed prudent to sell some and so I sold what amounts to 20% of what I held. I got $41.50.

Bank of America was up 2.6% to $13.83. Quite possibly I should be trimming that as well.

Berkshire Hathaway was up 1.8% to $114.84. Yet another new high for that stock. The A shares closed at $172,200. As I have mentioned before, these are the very same shares that were trading in the $14 to $18 range in 1965 as Buffett was accumulating enough to take control of the company. I don’t think it has really sunk in for most people just how remarkable that is. This stock is up over 10,000 fold! That’s over one million percent since 1965!

It would be one thing if Berkshire started out in 1965 as a penny stock with few assets and then had a moonshot through some kind of invention or gold discovery or valuable patents or the invention of an immensely popular software or product(s) or the like. Instead Berkshire was already a large company in 1965. It then had an equity book value about $20 million, $19.46 per share. Not a small amount in 1965. And Berkshire has never owned anything that really rocketed up in value in a very short period of time. Berkshire is a testament to the power of compound returns. When the time involved is 48 years, it “only” takes a return of a little over 21% per year to compound up to a 10,000 fold gain, that one million percent gain. It’s not the 21% that is particularly remarkable. It’s achieving that kind of return on a compounded basis for 48 years that is remarkable. A huge part of the success came from insisting on retaining ALL the earnings over all those years. A company that pays out a dividend when it could have kept that money invested at 21% does its investors a huge disservice.

The profitability of its various ventures has generally ranged from quite good to superb. But there was nothing the likes of Facebook or Google. A major key was the avoidance of losses. Berkshire has had a decline in its book value per share on just two occasions since 1965. And those declines were due to market value declines of its stocks. I am not sure if the company has ever had negative earnings since 1965.

In many ways what Buffett has done is merely to observe that if money is compounded at a reasonable return for a long period of time it will grow dramatically.  That truth was evident and well known when it came to bonds. What Buffett did was look for equity investments that had returns higher than bonds and where in fact this result was highly certain to occur. Buffett famously avoids the technology sector and most commodity companies because the returns are not predictable enough. He has described his stock picks as being like “equity bonds”. This is the simple and extraordinarily powerful concept that we are all free to copy from Buffett. Growth at a reasonable price is NOT enough. Buffett insists on highly predictable growth at a reasonable price.

A moderately negative day on the markets with the S&P 500 down 0.7%. But Toronto was down only 0.1%.

Toll Brothers was down 5.2% to $34.47. On May 22 I had sold 500 Toll Brothers at $38.58. With the lower price today I bought back the 500 at $34.80. On May 14 I had sold 500 at $37 I have placed an order to buy those back at $32.10 should the price go that low. Also I have placed an order to buy a few more Melcor shares at $18.51 but only until June 11 because I want to buy before the ex-dividend date.

It seems crazy just how good the U.S. market and out stock picks have done this year, especially after doing so well last year. I’d appreciate it if you could spread the word to friends and family about this web site.

It was another strong day on the markets. This was due to positive economic reports. The S&P 500 was up 0.6% and Toronto was up 0.4%.

We had Microsoft up 2.2%, Berkshire up 1.3%, Wells Fargo up 0.8% and Bank of America up 0.7%.

Toll Brothers was down 1.0% despite the strong housing price report. This is most likely due tot he fact that Toll Brothers has a very high P/E and is already pricing in a huge increase in earnings.

Melcor is set to pay a dividend of 75 cents on June 28 to shareholders of record as of June 14. 25 cents is the regular twice yearly dividend and 50 cents is a special dividend.

With the shares trading at around $19 that is a dividend of 3.9% on June 28. That seems attractive on its face. But, in theory, Melcor shares should decline about 75 cents right after June 11 (or so) when it goes ex-dividend. In theory those of us who own shares should not be at all excited by the dividend since the company is in effect giving us what we already own. But practical reality may be different than theory. I am not sure Melcor will decline much due to the dividend. I believe it is easily worth the $19 with or without the extra 50 cent dividend. I own quite a few shares. When it pays the dividend that will be the largest dividend I have ever received all at once by a factor of about three. My own money or not, it will be nice to receive it into my accounts.

U.S. markets were closed today for Memorial day. Toronto rose 0.2%.

It’s interesting that Valeant Pharmaceuticals has risen so much on the announcement it will buy Bausch and Lomb for some $8.7 billion. More typically when one company acquired another the one being bought has an increase in the share price and the one doing the buying sees its shares sink somewhat.

One explanation for the rise in Valeant’s shares was that it will be immediately accretive. Well of course it will. It’s financed mostly with debt. If you can borrow at 4% then buying any company with an earnings yield of at least 4% or a P/E under 20 will be accretive. And if you can forecast huge synergies that can make most any deal accretive.

But, a transaction being accretive to earnings per share is neither a necessary nor a sufficient condition for a wise acquisition.

The following statement seems rather ambitious (but then again I know nothing about Valeant)

Valeant expects to achieve at least $800 million in annual cost savings by end of 2014. Bausch + Lomb expects to have revenues of approximately $3.3 billion and adjusted EBITDA in 2013 of approximately $720 million .  The transaction is expected to be immediately accretive to Valeant’s cash earnings per share.  Assuming the transaction occurred on January 1, 2013 and assuming the full realization of synergies, the acquisition would have been approximately 40% accretive to Valeant’s expected 2013 Cash EPS.

However growth by acquisition can indeed be an excellent way to create value for shareholders as long as it is done properly. So perhaps the market is correct here.

FirstService Preferred is removed from the list because the company has redeemed them. Investors in the preferred shares received cash and or common shares. FirstService common shares remain on the list above. The common shares are a far different investment than the preferred shares were. I very much like the management at FirstService and it may do well long term. But the valuation did not look attractive as of our last update. Things may look better going forward as they will no longer face the expense of the preferred share dividend and I believe their balance sheet has been strengthened. However they did send some cash out of the company and the common share count has increased. It will take some time for all of this to work through the value ratios. We will start to reflect it with our next update on the company.

Stantec is updated and rated (higher) Buy at $44.50. I have now been watching this company grow steadily for fourteen years. The share price is occasionally volatile but the earnings have been marching upwards at a high and relatively steady rate. In recent updates I have added a cell to look at the economics of each company. Stantec does seem to have excellent economics. I believe its client customers are “sticky”. It would be false economy for its clients to switch to a cheaper consulting firm when the clients are undertaking very expensive projects.

Perhaps I am becoming complacent but it occurs to me that it is a good thing to own a stable of companies like the ones I own which seem to have good economics which it seems reasonably certain will grow their earnings at some reasonable rate over the next decade or so and furthermore for the most part have reasonable price to earnings ratios. Sure, their share prices would drop if the economy slows but these do seem like the type of companies that can be predicted to recover and grow their share prices over time. Of course I make no guarantees of that, but that is my thinking.

Today the U.S. markets showed some resistance to negative manufacturing data from China and worries about a slowdown in the FED’s money printing initiative. The Dow was down just 0.1%. Toronto was down 0.7%.

I thought about trimming my large positions in Canadian Tire and Wells Fargo in case they drop. But I decided not to. If stocks drop I do have some cash ready to go.

Toll Brothers was up 1.4% today. The surprising news in the U.S. is that new home prices are at record highs.

Canadian Western Bank was up 1.8% today despite the fact that TD Bank reported disappointing earnings including an increase in bad debt provisions. Most of our stocks were down somewhat.

Today started out with markets up substantially as Ben Bernanke signaled he would keep on stimulating the economy. But markets cooled significantly in the afternoon after Fed meeting minutes revealed some Fed members want start to phase down the stimulous.

Toll Brothers had excellent earnings and got as high as $39.25. It closed at $37.07 up 2.9%. I took the opportunity to sell about 16% of my Toll Brothers at $38.56.

I don’t pay too much attention to the market trends (I focus on individual stocks and valuation). But it does seem like we have had a very good run here. It may not be a bad idea to trim some positions. We should always be comfortable with the fact that  markets can and do drop. The trick is to be confident in what you hold when markets decline and to be ready to take advantage of bargains even as the crowd runs scared.

Markets did well today with Toronto up 1.0% and the Dow up 0.3%

Toll Brothers will report earnings before the open tomorrow (Wednesday morning). Toll Brothers fell 1.6% today, presumably on nervousness about the earnings.

Toll Brothers is pricing in a lot of growth and so any sign that it is not growing earnings (and especially any sign that the outlook is not rosy) could send the stock down. I show the adjusted P/E as a whopping 68, which means it has to grow earnings a lot to justify its price. I do expect it to grow earnings a lot but that’s not a certainty. And note it was last rated Speculative Buy at $34.13. As I contemplate what the stock might do tomorrow and as I recall that the stock got as low as $30 in mid-April I start to wonder if I should have sold more than I did at my $37 price where I did sell some last week on May 14. But that is the nature of markets especially if we get fixated on the short term. We second guess ourselves a little (or a lot). Anyhow if it rises tomorrow I will smile and probably sell some more and if instead it happens to drop toward the low thirties I imagine I will buy some. Toll Brothers strikes me as a well managed company. I expect it to do well, but that does depend on the rebounding housing market in the U.S.

I was reading that analysts expect 7 cents per share earnings this quarter and 28 cents per share next quarter. I find the notion of analyst earnings projections to be preposterous. In my opinion there is no way for analysts to predict earnings to that kind of implied accuracy unless it is a very predictable company (which Toll Brothers is not) or unless someone inside is whispering the number to analysts. As others have pointed out it is completely backward to suggest that a company has missed or beat analyst expectations. Instead it should be said that analysts over-estimated or under-estimated what the earnings would be.

We’ve just pretty much ended the annual season for voting our shares. I used to vote my shares years ago. Then I gave up because really it is usually a waste of time since the recommended slate usually gets in with 99% of the votes or something. Also, in Canada, we only get to withhold our vote; we don’t get to vote against a director. And rarely is there ever a competing slate of directors.

But it is easy to vote online once they send you the ballot. So sometimes I would go in and withhold my votes on someone if I had a reason to. But I was never sure if anyone really saw or cared that my few votes were withheld.

But this year there seems to be a new development. All the companies now issue press releases showing the results of the vote including the number of votes withheld for each director. Well, let’s face it you or me withholding our votes is not going to change the result. But in most cases there are few votes withheld and so even a few hundred votes withheld may add noticeably to the withheld number. It might be 14,600,000 votes for and 14376 votes withheld but that means you can almost see your contribution to that 14376 or whatever. And it seems to me that it is embarrassing for a director to get too many withheld votes. And especially when it is selective. I am seeing cases where most directors had 1% or less withheld but one or more directors are singled out and have 5% or more withheld. Everyone sees that. It sends a message.

So the bottom line is that withholding your votes (especially selectively on a few directors you don’t want) is now a bit of an interesting spectator sport. So, hopefully more people will get involved with voting.

The Canadian markets were closed today. New York was open. Wells Fargo climbed a little and is now over $40. But generally it was a quiet day in the U.S. markets.

Yahoo is paying  one billion for Tumblr which is apparently exceedingly popular but apparently has little revenue let alone profits. Well, a quick glance at the balance sheet of Yahoo suggests they can afford to throw away a billion if they wish. They have a couple billion cash and essentially no debt. But meanwhile I have used Yahoo Finance for over 15 years and these days I often have to hit refresh multiple times just to get the web page with my portfolio to load. Years ago their web pages used to load at least. I am certainly not impressed. But it seems they are profitable so perhaps they do know what they are doing.

Canadian Western Bank preferred shares are updated and rated Sell at $26.38. I believe the bank will redeem these next April 30 for $25, therefore I don’t think they are a good investment. Bombardier Preferred shares are updated and rated Buy at $24.75. At 6.3% these seem worth considering. They could fall in price if Bombardier faces problems but I suspect the dividend would continue to be paid. I would not put a large percentage of my portfolio into these. But certainly I would consider putting in 5% or so. I don’t think Bombardier would be interested in redeeming these at $25 even if they begin to trade somewhat above $25. The reason is that Bombardier has a realtively weak balance sheet. There are updated stock market valuation “Special Reports” articles in item 2 in the list of Links just above. My personal portfolio breakdown is updated. Constellation Software Inc. is updated and rated Weak Buy at $142.48. This is a great company. It is very well managed. It has great economics and it will grow. For that reason it should be a good long term investment. But the recent share price increase makes the stock somewhat expensive. This company makes up about 3% of my portfolio. I am not going to add to my position at this price but would consider adding at a lower price. I may sell half of my position or I may just hold on.

My analysis of the valuation of the Dow Jones Industial Average is updated. It suggests that the DOW is about fairly valued  (3% over-valued as a point estimate). For whatever reason the DOW valuation has generally looked more attractive than the S&P 500 for some year s now. The S&P 500 valuation paints a less benign picture.

My analysis of the S&P 500 valuation has been updated. It’s a bit scary since it suggests that the S&P 500 index may be 18% over-valued. The trailing P/E on the index is a hefty 19.0. That is troubling. However, not all U.S. stocks have such high P/E ratios. I invest in individual stocks and not in the S&P 500 index.

Friday was another strong day for the markets and our stock picks. We had Toll Brothers up 2.2%, Wells Fargo up 1.6%, Berkshire up 1.3%, The Dow and the S&P 500 are at record highs (as they probably should be – given record low interest rates, an economy that is growing, albeit slowly, and the passage of time and the retention of earnings since prior market peaks). But the Toronto index is well below record highs and lags due to its heavy weighting in the energy and commodity sectors.

Melcor is updated and rated (higher) Buy at $18.62. I may add to my position in this company.

Constellation Software rose 4.5% today. I don’t know the reasons that it is has been rising. I will plan to update the report on this company in the next few days.

I have mixed feeling about the markets. My analysis of the S&P 500 dated March 24 suggested that the S&P 500 looked about 12% over-valued at 1557. Sine then it has risen 6% to 1650. It’s trailing earnings are just a little higher than they were in March. This analysis is meant to be a long-term indicator but it does suggest that the S&P 500 is somewhat over-valued.

Meanwhile I like the U.S. stocks I hold, Wells Fargo, Bank of America and Toll Brothers. I like Berkshire as a company but its shares no longer look particularly attractive. And I like the Canadian Stocks that I own including Canadian Tire and Melcor. Also Canadian Western Bank and probably Stantec (this one not updated recently). I am not sure about Constellation until I update it. These are all the stocks I own in any meaningful amounts.

So, it’s hard to know if I should add to the stocks I like or instead take some profits since the overall S&P 500 seems somewhat overvalued. There is also the option of sitting tight and re-evaluating as time goes on.

It was yet another day where the American markets did much better than Toronto. The Dow was up 0.4%, the S&P 500 was up 0.5% but Toronto was down 0.8%.

Canadian Tire slipped 1.2%. However Wells Fargo was up 1.4% to a new high.

Our next update will likely be for Melcor. I have read its Q1 report and its very positive. I definitely like this company and will consider adding to my position. The report did not mention the outlook and that is always uncertain but over the long term this company just keeps adding to its book value per share. Earnings and the share price can be cyclical but the underlying growth trend seems strong. The new Melcor REIT seems to be trading well and will be a positive factor in keeping the Melcor share price up.

I notice a lot of positive articles about Berkshire. This seems to be a case of Johnny-come-lately. Most analysts were a lot less excited by Berkshire when it was at much lower prices.

Today was surprisingly strong on the markets. The Dow was up 0.8%, the S&P 500 was up 1.0% and Toronto was up 0.4%

Many of our favorite stocks did well, Bank of America up 2.8%, Toll Brothers up 1.7%, Wells Fargo up 1.5%, Canadian Tire up another 0.5%. Stantec up 3.0%, Melcor up 1.4% (but Melcor has tiny volumes and so tends to move somewhat randomly).

20% of my Toll Brothers shares made a quiet exit from my account today. Automatically sold at $37 based on an order I had placed about two weeks ago to trim that position if the shares hit $37. I have mixed feelings on that but it did seem the prudent thing to so.

Greece had a debt upgrade today. Fitch raised it from CCC to B-. The rating is still very much in the high risk junk category. Nevertheless if is a welcome  change in direction. Estimates of the U.S. deficit for this year fell sharply to $642 billion. That’s down from 1100 billion last year and down from a peak of 1400 billion. Slowly but surely the financial world is recovering and all those doomsday predictions are proving to be wrong. But worry the prophets of doom will continue to predict the end is nigh.

The S&P 500 ended the day about unchanged while the Dow was down 0.2% and Toronto was down 0.5%

Canadian Tire did okay, up another 0.6%.

Canadian Tire is updated and rated (higher) Buy at $83.78. It is obviously not the buy it was at my last update on February 24 at $68.65. But it is still not an expensive stock and I am not in a hurry to sell any more at this point. The sale of real estate to the REIT is maybe six months off and so meanwhile the stock may fluctuate with the market, with its earnings and with fears of competition. 

Friday was another good day on the markets with Canadian Tire up another 1.7% and Melcor up 1.9% and Bombardier was up 5.4%.

Berkshire Hathaway is updated and rated (lower) Buy at $111.82. With the recent strong gains in this stock (it is up 25% this year) I am tempted to sell some of my holding. It is not going to rocket ahead and could suffer a decline. But generally anytime I have sold this stock it has been a mistake.

The story of Berkshire is well beyond remarkable. Buffett took control of the company in 1965 and he measures its growth based on the growth in its book value per share from September 1964 which was the last annual report before he took control. The share price was driven up over $19 as he took control but was apparently in the $14 range earlier that year. The same shares now trade at $167,780. The increase in the share price since 1965 is just under or somewhat over one million percent (10,000 times increase) depending what price you take as the starting point.

I have not seen this one million percent ,milestone mentioned in the financial press. It seems like the press are not quite able to comprehend this figure. Buffett very quietly mentioned in a CNBC interview that the stock was up 10,000 fold but the journalists failed to pick up on this.

Buffett has ALWAYS judged the growth of Berkshire by the increase in Book Value per share. This has grown at about 615,000% since 1964. I have it on the very best of authority that Buffett “likes that one million percent figure”. I think he would like to see that mark reached before his time as CEO ends. That could be done at the end of 2017 if the growth averages 11% per year, which is a stretch but possible. Buffett is an EXTREMELY competitive man (though he comes across as low key).

Berkshire also reached number 5 on the Fortune 500 list this year. Although Exxon and Walmart are much bigger, you can bet he has his eye on the number 1 spot, or at least on moving up another spot or two.

At the annual meting this year Buffett noted that Berkshire had reached number 5 as well on the list of most valuable companies in the world by market capitalization. Again, he will have his eye on the spots above him.

With all of this, I think I shall ride the Buffett coattails for a while yet and hang onto my shares. If the shares should drop say 10% I would then likely add to my position.

As most will have heard, Canadian Tire came out with decent earnings today but more importantly announced plans to spin off the real estate into a REIT which they would continue to own 80 to 90% of. But the existence of the REIT would make the value of the real estate more obvious. Canadian Tire shares ended the day up 11.2% on the news at $82.36. The stock opened at $86.50. I sold what worked out to 15% of my shares at the open based on an order I placed just before the open. I only heard the news a few minutes before the open. I might have sold closer to 20% but actually did not know off hand how many shares I owned across several accounts and was in a rush.

Selling some at $86.50 looks good right now, and may look even better tomorrow if the stock slips lower. Or perhaps before long I will regret selling at that price.

The actual REIT IPO will not take place until the Fall and so there is a lot of time for the market to digest the news and to worry about other things. So I don’t necessarily think the stock will rise over the summer. But really nobody knows and it depends on many things. The best that we can hope is to understand that the stock is probably still selling below a reasonable value and for that reason (and not for short term gains) I am comfortable holding it.

I have to wonder who were the buyers today especially at the open. It actually reached a high of $87.45 just after the open. Ya gotta feel like a chump if you bought near the open today and you end up losing money on this company today when 99.99% of its owners were making money on the stock today.

I had been advocating for Canadian Tire to do something like this. Still, in many ways the whole thing is strange. They plan to retain 80 to 90% of the REIT. But the 10 to 20% that trades is expected to fix a value on the real estate that is far higher than the common shareholders of Canadian Tire were apparently fixing on it until now. But the existence of the 10 to 20% that trades will effectively cause the common shareholders to now fix a higher value on the real estate as they can see its market value transparently due to the REIT. In the limit if they retained 99% of the REIT, you have a situation where basically NOTHING has changed in substance and yet the company jumps in value. It is financial engineering. In a pure efficient market this sort of thing would not increase the share price. But markets are not 100% pure and efficient. Thank goodness since if they were 100% efficient it would not be possible to find under-valued companies except by random luck).

In other news Melcor came out with earnings after the close. The earnings were good and they announced a 50 cents special dividend. I suspect that with push Melcor up tomorrow but we shall see.

Another decent day in the markets.

Thursday should be interesting as a some of our companies will report earnings. I believe Canadian Tire and Melcor will report, although Melcor will likely be after the close.

I have not looked at Tim Hortons in quite some time. They announced today that they have a new CEO coming from outside the company. To me, that is not a great sign. Tim Hortons is a unique and highly successful Canadian company that has built itself up remarkable over almost 50 years now. There should be someone in-house capable of being the CEO. An outside CEO could be some kind of prima donna (aren’t they all?) who will look to do things differently. Also it announced earnings today and everyone is disappointed same store sales are down a bit. Same Store Sales gets a bit too much attention for restaurants and retail. Imagine you own a golden goose. Do you complain because the size of the egg does not grow each year? Or do you contrate on getting the goose to reproduce itself. Tim Hortons can still grow by opening new locations. Obviously the gallons of coffee or pounds of food that can be served at one location cannot increase forever. And if same store sales are flat due to no inflation, what is the problem with that? All that Tim Horton’s needs to do is study its own history and if it has gotten off-track of historic methods then fix that. It certainly does not need any new ides form the Nestle executive that they are bringing in. That is my opinion. I would send this new CEO guy on a road trip across Canada to visit at least a 100 Tim Hortons locations and get him to read the several books that have been written about Tim Hortons and do that before he is allowed to step foot in head office. And he should seek out the advice of Ron Joyce who is the former owner who largely built the comapny.

Okay, so I know that technically we are not supposed to get excited about day to day moves in the market. In fact for those still in the early savings phase of life, lower stock prices are what you should rationally cheer for. The ideal scenario is low stock prices as you save money followed by soaring prices in retirement.

But anyhow even if it is not rational to get too excited by short term stock price increases it nevertheless always feels good.

Today we had Canadian Tire up 3.0%. I guess the negative analyst report that pushed it down 1.8% was now yesterday’s news.

Wells Fargo up 1.3%.

A little here and a little there, and no real big losers and it’s been adding up nicely so far this year.

I am considering buying some of the Claymore Oil Sands ETF , CLO on Toronto. This is listed in our Canadian ETF reference article.  I don’t try to predict oil prices but the ETF has a reasonable trailing P/E and has declined in price significantly in the past two years. Almost down tot he 2009 lows… And also I rather like the idea of having some skin in the oils sands game.

Our stocks picks did better than the market today.

Bank of America was up 5.2% after it settled a dispute with a major credit card company.

However Canadian Tire was down 1.8%. Apparently this was due to an analyst downgrade predicting that the Q1 report will be weak. Perhaps it will be weak. We had a later Spring in most of Canada and perhaps Spring sales in march were weak. And certainly in Western Canada April was still winter and so the early sales in Q2 may have started out weak. If the recent to sell is merely due to Q1 earnings, that does not seem a great reason to sell. The stock appears cheap based on trailing earnings. Possibly its earnings are going to decline material but I’m don’t see the basis to assume that is so.

Warren Buffett was on Squawk Box this morning for three hours. This followed his huge annual meeting weekend that just took place. Some of his comments illustrate how incredibly hard he works and how passionate he is about business. He reported that sales at his Nebraska Furniture Mart will likely come in at around $40 million for the weekend up from $36 million last year. And he reported that the carpet and flooring department was up 36% and drove the sales increase. It is incredible to me that as busy as he was this weekend he took time to review and memorize these figures. He will know as well the sales that took place on the meeting convention floor and at his Borcheim’s jewelry. He reported (from memory) on the number of carloads that Burlington Northern is carting today and what it carried at the peal in 2006 and how far it dropped at the bottom in 2008. The point is he is still an incredibly hard working individual who has a photographic memory and still has incredible passion to see all of his businesses succeed. I would bet that the average small business owner hardly knows his sales from last week and somehow Warren Buffett tracks such numbers for numerous businesses.

Weather is always interesting… Here in Edmonton Spring refused to arrive in April and winter hung on strongly. We got a good bit of snow this past Monday and Tuesday and freezing temperatures. Spring then arrived on Thursday and by today we moved straight to Summer (at least temporarily). I used the opportunity to sit outside on the deck and read the Berkshire Hathaway Q1 report. What could be better? I will update the report for Berkshire before long.

A word about Bonds and Bond funds.

As I updated my ETF article I noticed that under bond ETFs the cash yields were significantly higher than the yields to maturity. This could cause investors to think they are getting say 4% when it is really more like 2%. A similar situation would occur if you bought a bond at par some years ago at higher interest rates. You now have a capital gain on that bond because interest rates have declined. It is still paying you a high interest rate but really your yield to maturity is far lower. The capital gain on that bond WILL disappear by the time it matures at par.

Also if you buy such a bond today at a premium it will still give you  a cash yield that is higher than the yield to maturity. You have to have higher cash yield now to make up for the fact that it will decline in price by maturity. If you think of that cash yield as being really a return, that is wrong since part of it is in effect a return of the premium over par that you paid.

I had a question from a subscriber and I want to share the response here. This is for those interested in bond ETFs.

Question:

In your article about Bond ETFs, you didn’t mention symbol CBO.  This is a five year laddered bond ETF.  I think it is a good place to park cash.  It pays 4.5 plus interest.  I would be interested in hearing what you think. Thank you.

Response:

I think the 4.5% yield is true but is misleading.

All bond funds today hold some bonds that they bought a little (or a lot in the case of long bond funds) earlier when yields were higher. There bonds now trade above par and that tended to push the bond ETF price up as interest rates fell.  As these particular above par bonds approach maturity they will fall to par value and be redeemed at par (barring bankruptcy). So, these ETFs will fall a little in price if interest remain stable and fall further if interest rates rise. A five year laddered  fund suffers less from this issue than a longer fund.

ishares is showing a yield to maturity of 1.76%. They do show current yield of 4.41%.

http://ca.ishares.com/product_info/fund/overview/CBO.htm

I believe the 1.76% is the best guess at what you would earn over the next few years on this fund. You should expect the trading price of CBO to fall a little, offsetting your 4.5% yield.

The price of CBO has trended very slightly down over the past five years despite declining rates.

http://finance.yahoo.com/echarts?s=CBO.TO+Interactive#symbol=cbo.to;range=5y;compare=;indicator
=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

I don’t hold any fixed income and so am not a good person to have a view on whether 4.5% with expected capital loss and 1.76% net expected return is attractive. Things will work out a little better than 1.76% over the next few years if interest rates continue to decline.

Looking at their holdings, everything is showing coupons in the 4 to 6% range.

That seems odd to me as interest rates are lower now. But they don’t show yield to maturity for each bond.

For one year bonds or two year they appear to be buying the tail end of bonds that were originally much longer. These bonds boast high interest but they pay a premium above par that quickly withers away as the bonds mature in one or two years or three etc. This is the issue I mentioned above except I did not realize they are sort of manufacturing that issue by buying the tail end of long bonds rather than new one year bonds and two year etc.

http://ca.ishares.com/product_info/fund/holdings/CBO.htm

However, they are following the DEX 1-5 year index so it seems the issue appears to be embedded in the index, it’s not ishares that creates the problem.

At the end of the day I find the 4.4% cash yield to be highly misleading.

End of response, but a few more thoughts…

It is disturbing that people may be buying this 5 year laddered ETF and think they are actually earning 4.4% yield. It’s not true, not unless you count return of your own money (represented by the falling ETF price) as your money.

Personally I see little or nothing to attract me to invest in bonds. I believe you can find Guaranteed Investment certificates from banks that pay more than this laddered 5 year appears to pay (more than the yield to maturity, that is). I had never looked into this but I looked just now and TD Waterhouse offers GICs from a number of banks. Unfortunately the rates are pretty low, but at least the product is very straightforward. You cannot cash these prior to maturity.

Or buy individual bonds. I just don’t see anything of interest (no pun intended) in bond ETFs.

Markets were strong on Friday. Our Stock picks have done well year to date, up 11.1% on average. My own account is up 10.6%. This compares to the Toronto market which is “up” 0.0%. In the U.S. the S&P 500 is up 13% and the DOW is up 14%.

I just updated my reference article that provides Canadian ETF symbols along with P/E ratios and dividend yields for a a selection of equity segments and also Dividend ETFs and Canadian Bond ETFs and also ETF for Gold, Silver, Oil and Natural Gas. For this update I added direct links to show the holdings of each ETF.

I consider this to be a very valuable reference article. I know of no other similar reference article for Canadian ETFs. Most lists of ETF symbols don’t even mention P/E ratios. http://ca.ishares.com does contain mucj of this information but my article includes additional ETFs and also is easier to use especially for non-experts. And I include some indication as to the attractiveness of may of these ETFs.  It takes me a full day just to update all the links and figures in this article.

Looking at the P/E ratio of the Toronto Stock Exchange it is about 19. Therefore the Toronto market does not appear to be attractive even though it has lagged the U.S. market. Some of the segments however appear to be attractive.

Markets recovered the ground lost yesterday. Our Stock Picks had a particularly good day with Toll Brothers up 3.1%. Almost all of the stocks on the list were up.

Canadian Western Bank is updated and rated Buy at $28.42. I am comfortable holding it. I did not own it I would be comfortable buying some at this price. Since I already hold it I would be more likely to add to it if the price falls.

After an extensive look at its annual report I can boil down the economics of how it makes money as follows:

The bank takes in depositors at a weighted average interest of 1.88% and lends out money at an average of 4.77%. The net interest spread was most recently 2.62%. This spread (unfortunately) is falling as market interest rates drop but 0% interest deposits cannot decline any further. The range of deposit interest paid is 0% to 2.53% with most of the deposits being in the 2.53% category. The 2.62% gross profit is then reduced by the banks operating costs. The net interest after operating costs and income taxes is about 1.0%. With such a thin margin it becomes very important to avoid defaulting loans and where defaults occur to have security so that at least some amount is recovered. CWB’s allowance for bad debt runs at about 20 basis points. The 1.0% net profit on loans is then leveraged up by the fact that the loan assets are financed with only about 8% common equity (they are mostly financed with deposits) This results in an ROE on the lending business of about 14%.Residential mortgage loans average 4.06% interest while the much larger category of all other loans averages 5.57%. Business is competitive but some of it tends to be sticky to a good degree.

(Some of the math above does not work out exactly but the above represents the economics as I understand it)

Markets were down today. They can’t rise everyday.

The Melcor Real Estate Investment Trust started trading today. It was issued at $10.

It traded all day around $9.96, $9.97.

It’s interesting… With an IPO like this the company and the IPO investors hope that it will trade vigorously and for a price higher than the IPO.  But really why should any of the IPO buyers be eager to sell today especially for under $10. They bought this for yield so why sell? And why should Melcor want the new IPO owners to abandon the REIT to be replaced by new owners? (especially if it is donmne below $10). The REIT price should tend not to fall much (if any) since the IPO buyers presumably are happy with it and can hold for the dividend rather than selling at a loss. Ideally new buyers who missed out on the IPO will come in and bid the price up to pry some shares loose from the hands of the IPO investors.

I would expect this REIT to gravitate to being quite thinly traded (like Melcor Corporation itself) . And if interest rates stay low and as the market gains comfort with this REIT and as it grows the price should rise. Today’s trading was probably orchestrated by the investment banks that sold these shares. They probably trade it back and forth to generate some liquidity in the units.

Melcor will release Q1 earnings on may 9. I would expect decent to possibly quite good results in their sales of building lots and a reasonable outlook for that. They may report modest gains on investment properties as interest rates continue to decline. They will likely report unusual expenses due to the issue of the REIT. For Q2 outlook (or as an event subsequent to Q! quarter end)  they will likely indicate that they made just a very small gain in selling properties to the REIT. The trading of the REIT could pull Melcor up a bit since Melcor trades below book value and this REIT should reveal that the investment properties are worth the full book value.