January 12, 2015 Comments

On Monday the S&P 500 was down 0.8% and Toronto was also down 0.8%

Some notable decliners included Canadian Western Bank down 5.4% to $27.73, Stantec down 3.2% to $29.79 and the oil sands ETF, CLO down 5.5% to $8.40.

I will freely admit that I did not predict that oil would decline well under $50 or that it would drag down these Alberta-based stocks so far.

In regards to Canadian Western Bank I have always said that banks can be risky due to their high leverage. But they are also cash generating machines most of the time. Despite occasional sharp declines, Canadian bank share holders have done very well over time. Based on past earnings Canadian Western Bank is attractive at this price. It seems to me that the only scenario where Canadian Western Bank will not recover to new highs is if Alberta and the West go into a very severe and quite prolonged recession. I suppose anything is possible but it is not what I would expect. Meanwhile it is certainly possible for the price of all stocks exposed to the Alberta economy and oil to go lower. At this point that is a function of how fearful investors become. I added to my Canadian Western Bank position today.

At this time it good to remind ourselves that stocks are not mere squiggles on a screen. They represent real ownership in corporations. In the long run it is the profitability and growth of those corporations that will determine the returns made by owners. Buffett, quoting Benjamin Graham has said that int eh short run the stock market is a popularity contest (a voting machine) int eh long run it reflects valuation is a weighing machine). Anyone attempting to beat the market has to be willing act somewhat contrarian at times.

I also can’t predict where the Canadian dollar is headed. Several years ago when the Canadian dollar was around par, and sometimes above, I transferred a significant proportion of my investments to U.S. dollars. Basically it was a Buy the U.S. dollar low strategy. In addition at that time U.S. stock markets looked more attractive than Canada’s and there were specific stocks that I wanted including Wells Fargo and Toll Brothers. Now with the Canadian dollar much lower it seems prudent to me to transfer back some U.S. dollars essentially selling them high in terms of Canadian dollars. In addition at the present time the higher-rated stocks on my list are in Canada. On that note I transferred some money back to Canadian dollars today. This was in an RESP where I don’t have to worry about income tax on the exchange gain.

Alcoa kicked off the 2014 Q4 earnings season by reporting higher-than-expected earnings after the close today. Perhaps the market will focus on that good news tomorrow.

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