Author name: Shawn

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.

Well, today seemed to be another case of another day, another few dollars gained.

S&P 500 at a record high. Most of our stocks were up…

Case Shiller home price index shows U.S. house prices rising.

Melcor had some strange trading today. About 200,000 shares in smaller lots traded over the noon hour (eastern time) and pushed the price over $18 to briefly $18.30. But then the stock fell to $17.70, albeit on just one trade and  it closed at $17.90. This trading is strange because Melcor often only has only a few thousand shares trading in a day. About half the time less than 10,000 shares trade. So, I figured maybe there was no news on the REIT front. But there was no news. So it may have just been that someone bought about 100,000 shares and had to bid up the price to get them and after that the price retreated again.

Melcor is so thinly traded that it’s price really can’t be trusted. It can move several percent just because someone is in a hurry to buy or sell 10,000 shares.

I already have a lot of Melcor but have toyed with the idea of buying more especially if I could get it under $17.50.

I believe the REIT should start trading as early as tomorrow (Wednesday May 1) and that should may have some impact on the Melcor shares one way or the other. (I suspect the impact would be positive).

It seems that the Market works in mysterious ways. We see lots of stories warning about slow growth and slowing earnings and too much debt. And yet the DOW rises over 100 points today. And the S&P 500 hits a new high.

Most of our stock picks were up today. With the markets have done so well in the past 18 months or more (at least if you had a good exposure to U.S. stocks and little exposure to commodities) the danger now is perhaps in becoming over confident.

Toll brothers at its high today was up over 50 cents but then closed down 50 cents at $34.19. I just entered an order to trim my position if it hits $37. At least that way if it rises that high some will be sold automatically. I find that if I see a stock I own has risen it’s not that easy to pull the trigger and trim the position. After all when seeing that a stock has just made you money it’s harder to get in the mood to sell it. So perhaps when it comes to trimming on rallies and buying on dips, an automated approach is best.

This weekend I studied the annual report of Canadian Western Bank closely. It’s a well run company and is very likely to be a good investment over any longer period of time.

A big issue facing banks at this time is compression of their net interest margins. Traditionally banks earn a “spread” by taking in deposits at say 3% and lending out at 6%. In that scenario a 1% drop in interest rates might change that to 2% and 5%, so no big deal. But many deposits have been paying about 0% for several years now. In that case when lending rates go down the spread has to go down since the deposit rate of o% cannot be lowered.

Banks today have many loans outstanding that were made when in interest rates were higher. As those loans are paid off new loans are made but at lower interest rates and lower spreads . That squeezes profits. At Cnadian Western Bank in 2012 they grw loans by a robust 14%. But adjusted earnings per share were only up by 6% due to interest margin compression. 6% earnings per share growth plus a 2.5% dividend is  not bad, but it would be better without the margin compression.

As examples of the margin compression that may occur at Canadian Western Bank, residential mortgages averaged 4.06% in 2012. But new five year mortgages are going out at closer to 3%, so I have to think this 4.06% figure is declining. However most of Canadian Western Bank’s loans are commercial loans where they face less competition and they may be able to hold their interest rates up better than is the case for residential mortgages.

It’s interesting to note that Canadian Western had invested in the preferred shares of other banks. These had attractive yields which were taxed at a lower rate. But bank regulators in their “wisdom” have passed new rules that effectively limit CWB from investing as much in those preferred shares.

Despite any struggles that CWB has in the short term, it seems reasonable to forecast that it will continue to grow and be a good investment in the long term.

Toll Brothers rose 2.4% on Friday which was nice to see after my recent comments about it and purchases of the stock. This builds on the bigger gain of Tuesday.

I have updated my article that compares the long-term performance of stocks, bonds, cash and Gold. It was back in the Summer of 2001 that I first was able to obtain the data to calculate for myself the after-inflation gains from the various asset classes over the long term. Since then I have updated the graphs each year. Little did I know that stocks were going to do quite so poorly in the years since the stock market bubble peak of 1999. Nevertheless the data gives me confidence that stocks do win out in the long run. Besides that with judicious stock selection some investors can make good returns in stocks even when the stock indexes do not do well.

Today was another decent day in the markets. There were no big gainers among our stocks but a little bit here and a little bit there and overall a good day.

In the short term our stocks rise because other investors bid up their prices. That always feels good. But much more importantly in the long run our stocks rise because the businesses in which those stocks represent tiny slivers of ownership increase their earnings and improve their future prospects.

I find myself increasingly drawn to the Warren Buffett style of restricting investments to good companies. If we can buy good companies at good prices we can win with that one decision. We can potentially just hold that stock thereafter. Or we can layer on some trading, trimming or selling positions when stocks rise and being a buyer on dips. And migrating to the best companies and values over time.

Buffett no longer plays the trading game with stocks at Berkshire. When it came to entire companies he decided about 40 years ago that it was just too unpleasant to buy a company and then sell it. He would be dealing with real people -managers and employees.  He decided he would only buy companies for keeps. Then he turned that into an advantage becoming the buyer of choice for anyone who had built up a large business and who wanted to sell it but who wanted it looked after properly in a permanent home. And even with stocks, Berkshire is so large and Buffett’s influence is so huge that he can’t very well buy a stock today and then turn around and quickly sell it. He would be accused of manipulating markets if he did that. And while Buffett has said that selecting stocks very wisely and trading infrequently is a good plan for most people, he has also said that more money could be made by an astute investor if some trading and arbitrage is layered onto that.

Toronto had a good day, up 1.5%, while the DOW was down 0.3%. It seemed a decent day for our stock picks with Bank of America up 2.0%. Toll Brothers gave a back 1.35% after its big gain yesterday. It seems I sold my Microsoft too early as it was up 3.8% to $31.86. Still I have nothing to complain about overall.

It was certainly a pleasant surprise to see Toll Brothers up over 9% today to $34.13. Yesterday morning it had been under $30 briefly. It seems for a day at least the market shared my enthusiasm for the company. Apparently this move was due to an “upgrade” from Barclay’s and perhaps others. That’s a bit scary. It prefer stocks to go up based on earnings rather than based on an upgrade.

The Dow was up just over 1% today.

Wal-Mart was up1.4% today to tie its recent highs at just over $79. For several years I had explained that while Wal-Mart’s stock had not done well since its peak of $60 back in late 1999 that was simply not Wal-Mart’s fault. The market had stupidly bid Wal-Mart way too high back then. The stock then fell to the $50 range and it has taken years of steady earnings growth that has now allowed the stock to set new highs. We rated it (higher) Buy in 2010 and (higher) Buy to start 2011 at $54. And also (higher) Buy at about $60 to start 2012. It was mentioned many times over that period as worthy of consideration. Many analysts considered Wal-Mart to be dead money. It seems they were dead wrong. I recently sold my Walmart to buy more Toll Brothers and to raise cash.

On Friday, Melcor‘s new Melcor Real Estate Investment Trust posted its final prospectus. The REIT will yield 6.75%. It appears that this  Initial Public Offer has successfully closed (has raised the money it was targeting). This created some transaction costs for Melcor and may mean that Melcor’s Q1 will not look that great. But Melcor has done this to benefit Melcor share owners and certainly if all goes according to plan, Melcor’s share price will benefit from this. I do not have any opinion on the REIT but I continue to like the Melcor shares.

Regarding Toll Brothers, I note a headline tonight that says: Home sales Begin to Slip as Buyer Demand Outpaces Supply. That does not exactly look like bad news for Toll Brothers.

Another headline tonight reports that News Corp will receive $139 million from its Directors and Officers insurance in regards to the phone hacking scandal. That is bizarre. It makes me wonder what companies are paying for directors insurance fees if these kind of payouts are possible. That’s not an expense item I have ever seen disclosed – with one exception. Berkshire Hathaway has disclosed that it pays zero for directors insurance because it does not provide any to its directors. If they mess up they are on their own. And I would bet that none of Berkshire Hathaway’s insurance companies are involved in paying out this money to News Corp. To be sure, they do offer that insurance but I suspect they know how to pick which companies to insure and were unlikely to have insured News Corp. And if they did they will have had the amount capped as they always do.

Bombardier Inc. is updated and rated Speculative (lower) Buy at CAN $3.89. This is an interesting company that certainly makes fun stuff – It makes Lear jets, other business jets, smaller commercial jets, high-speed trains and subway cars. But the profits seem inadequate and highly unpredictable. Management has managed to destroy large amounts of invested capital in the past dozen years. However it does have a very good order book at this time and so the short-term outlook while speculative could be considered fairly strong. I have about 1% of my portfolio in these shares. I’m not planning to sell that. I would consider adding to that as a speculative bet but would not want to place a very large bet on this company due to its poor earnings history.

It has received a very large order from Warren Buffet’s Netjets subsidiary. I have wondered in the past if Buffett might be interested in the company. I think he would definitely like the idea of owning a producer of planes and high-speed rail cars. He would also like the long-history of the company and the fact that the founding family still runs the business. But I am not convinced that he would like the economics of the business at all or that he would be be at all impressed by management.

Our stocks had a good day on Friday. Overall our average Buy or higher rated stocks is up 7.4% this year to date. This beats the TSX by over 10% but trails the U.S. markets by a few percentage points.

Bank of America is updated and rated Speculative (higher) Buy at $11.66. For this update I read the front section of the annual report where the business segments are described and the President’s letter if given. I did not attempt to read the voluminous material on risks nor review all of the very numerous tables of figures. The analysis is necessarily at a high level. As always, I entered the key financial numbers for our analysis. Unfortunately, in this case the net income is relatively unreliable due to numerous adjustments and the lack of any reported adjusted earnings figure. What I read did not impress me. I listened to the Q1 conference call. The CFO read through a pile of material in a completely monotone and robotic fashion and using a copious amounts of acronyms. The CEO then came on with a discussion that sounded a lot less scripted. This bank is nowhere near as strong and well run as Wells Fargo. But it is trading cheaply. There is probably an opportunity for a good return on these shares as the bank continues to recover from the financial crisis.

Most of our stocks were down today but Canadian Tire was up 0.8%. The company has reached a new 10 year agreement with its dealers. The dealers operate each store as business owners in a manner that is similar to owning a franchise. I thought about trimming my Canadian Tire a bit today. I know I was adding to my position a while back on dips so it may make sense to trim. But I decided to just hang on. As I have mentioned before the market seems leery of the impact that Target will have on Canadian Tire and that is simply not going tobe known for some time. Meanwhile the stock looks like good value.

Toll Brothers however went down 4.0% today.

Today’s market decline seems more sensible than yesterday’s gain…

It is perhaps an encouraging sign that Toll Brothers managed a small gain today (0.5%) given the market was down. Canadian Tire was also up (0.6%) despite the TSX being down 1.4%.

Fed “beige” book came out at 2 pm eastern and indicated U.S. economy continues to grow but the market did not seem to react to that.

Bank of America was down 4.7% today on disappointing earnings. I will plan to update that report by Sunday as I now have the annual report and the Q1 report.

Well, I don’t think too many people were expecting this big rebound (or any rebound for that matter) today. It goes to show markets are very unpredictable, particularly in the short term.

One of the bigger gainers were Berkshire Hathaway up 2.5%. This was partly due to Coke being up 5.7% and Berkshire owns about 8% of Coke.

Toll Brothers was up 2.9% on larger-than-normal volume. Every stock on our list was up with the exception RioCan pref shares which were down 1.0%.

I plan to have more updates before long as the Q1 reports come in.

One trading idea would be to enter orders, for the stocks you own to trim positions at say 10% above the current price and orders to buy more at 10% below. (Or you might choose 5% or 15%…) You can leave orders like that in place for 30 days and see what happens. I have done a bit of that on occasion. It can be a way especially to trim positions without emotions getting in the way  since it would be on auto pilot. This obviously is more applicable to those of you that have larger positions. For example if you hold 1000 shares of something you might place an order to sell 100 to 200 on a 10% rise and buy 100 or 200 on a 10% dip. But there are absolutely no rules around this. And I can’t say if this tends to work better than buy and hold. It seems like it would be a good way to take advantage of volatility. But if the stock rises 10% and then keeps on going you may regret selling. It’s just an idea that you might sort of layer on top of whatever else you are doing just targeted to take advantage of volatility. And you could also decide to do it on just a few stocks.

It was a nasty day in the markets. The TSX was down 2.7%, the Dow was down 1.8% and the S&P 500 was down 2.3%.

In particular Toll Brothers was down 7.7%. Apparently this was mostly due to a report that home builder sentiment was down.

Higher costs for building materials and rising concerns about the supply of developed lots…

Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,” said Rick Judson, National Association of Home Builders Chairman and a home builder from Charlotte, N.C.

However, Toll Brothers has said that it has an advantage in that it has its own large supply of developed building lots and has access to credit due to its strong balance sheet. Also its customers are higher end and have less difficulty obtaining mortgages. Toll Brothers is not a company that is “unable to respond to the rising demand for new homes”.

Overall I suspect Toll Brothers is  doing well. But perhaps the stock had gotten too high. I was aggressive in buying on the recent dips and should have bought slower or waited to see if this bigger dip would happen. Nevertheless I added again to my position in Toll today.

The other day I wanted to check the P/E ratio of the Toronto Stock Exchange Index. My ETF article has links to where the TSX shows the P/E ratios for the index and all the segments. But the links had changed and I can no longer find the P/E ratios. It would not surprise me if they simply stopped publishing it. Few investors are interested in such matters. I will look into this with the TSX. Possibly the data is still available on a paid subscription basis.

I suspect that the sharp drop in Gold was partly responsible for a nervousness in the market today that led to equities falling. And certainly the explosions at the Boston Marathon later in the trading day would have added to the fear.

This sort of thing is in the nature of markets and it’s why investors need to be able to handle risk and to take advantage of dips rather than fearing them.

Wells Fargo is updated and rated (lower) Strong Buy at $37.21. Although I have a large exposure to this, I may add to my position. There are many companies where it would be difficult to guess if they can continue to grow earnings over the years. But Wells Fargo seems to be a company where it seems quite safe to predict that it will continue to grow its earnings over the long term. And it appears to be under-valued. Still, earnings and particularly revenues and net interest margins could decline in the shorter term and there is certainly no guarantee that the share price will not fall. But in the long term it seems a good bet that the share price will rise. At last last report Warren Buffett was still buying it.

MicroSoft was down 4.4% today on news that PC sales have fallen. It has risen about that much in the past few days. I decided to sell my shares and move on. I had been wanting to raise cash anyhow. MicroSoft is a complicated company and basically I did not have that much conviction or emotional attachment around owning it and so is easier for me to sell that as opposed to something like Wells Fargo that I have rated higher and bought often. Also MicroSoft seems like a difficult company to predict given technological changes.

In general the U.S. market was positive today and Canada lost ground.

Tomorrow (Friday) morning Wells Fargo will release earnings. I suspect they will have done well. Interest rate spreads (net interest margin) will likely be a little lower however. Credit losses should be steady or improved. There will be some expenses to settle litigation and related matters around the whole mortgage fiasco situation of circa 2008 but much or all of that will have already been booked in previous quarters.

So far this year it has certainly been a good time to be in the U.S. market. Despite various worries and warnings the DOW and S&P 500 are up a lot this year and the DOW was up 0.9% today and the S&P 500 was up 1.2%.

Prudence would suggest trimming some positions for those of us with high exposures to equities. I thought of doing that today but ended up not selling anything. And with Toll Brothers down 2.3% today, I added to my position in that company.

Constellation Software was up 3.3% today.

In the next few weeks we will have earnings plus the usual economic reports and various world events all of which ,the reality is, can push the markets around unpredictably.

After scaring people last week, the markets have surprised with a strong start to this week. A new record for the DOW today. 

Microsoft was up 3.6%. 

I was reading Canadian Tire’s annual report which arrived in the mail a few days ago. Management does seem very energetic and confident regarding growth. While there are never any guarantees, I feel good about my investment in Canadian Tire.

Meanwhile in the U.S. J.C. Penny has fired the CEO it hired about a year ago. The guy was a Prima Donna who changed absolutely everything at Penny’s and rolled out the changes without bothering to test them. He had apparently been responsible for Apple’s retail stores. What he did not realize was that Apple stores worked because they were selling a unique and hot product. It was not the stores that sold the products. It was the products at Apple that made the stores successful. And even to the extent that the Apple stores were in fact hip and very well designed, it was a mistake to think that similar concepts would appeal to J. C. Penny customers, who apparently were mostly an older crowd, or that hip young people were going to rush to a fuddy duddy old brand like J.C. Pennys. It is one thing to sell a hot proprietary product that you make yourself and quite another thing to try to make it selling the same stuff as numerous competitors. The simple fact that Penney’s went outside for a new CEO last year tells me they had no confidence in themselves at that time.

Monday ended up being a decent day in the markets for our stock picks. Most notably Toll Brothers was up 2.9% and Bank of America was up 2.0%.

Canadian Western Bank was down slightly and closed at $27.63. I am tempted to add to my position at or below this level.

We are now into the Q1 earnings reporting season. First the U.S. companies start reporting this week and then in a couple of weeks the Canadian companies will start reporting.

FirstService is updated and rated Weak Sell at U.S. $33.50 or CAN $ 34.01. I like it as a company and would be interested to buy on a speculative basis at $30 or less. It announced this week that it would eliminate its preferred shares. This could cause some selling pressure as the preferred holders are likely to sell the common shares that they will receive in early May. Also the outlook for the first half of 2013 is weak. The company expects very good results after that.

I will remove the preferred shares from the table above fairly shortly. I did indicated in the report on the preferred shares that it was possible the preferred shares would be redeemed.

It was a bit odd that FirstService introduced preferred shares some years ago since the move almost eliminated its common equity. It will now have a stronger balance sheet.

Friday was a down day in the markets although a late day rally eased the losses. In keeping with my April 4th comment I sold the remainder of my Walmart at $75.73 and bought more Toll Brothers at $31.17. I honestly don’t know if that was wise though Toll Brothers did end up closing at $32.16. My portfolio is perhaps dangerously concentrated in a few stocks at this point.

The composition of my own portfolio has been updated.

I saw a story that indicates that Target’s prices at its new Cnadian stores are higher than Walmarts. That is not a surprise. I mentioned in previous comments that with the lease purchase from Zellers and the renovations they did to those stores it did not appear that they would be a low cost operation. Also the story talked about empty shelves at the newly opened stores. That seems surprising and would seem to indicate that they don’t have the supply chain in Canada figured out.

Ouch, markets took a drubbing today. Dow down 0.8%, S&P 500 down 1.1% and Toronto down a painful 2.1%.

Our stocks did not escape and almost all were down. Boston Pizza was one of the rare exceptions as it rose a bit more.

My recent purchases of Toll brothers yesterday and today were a bit pre-mature as I bought above the current price of $32.48m down . But that is what happens when one buys on the way down. If it is a good company buying on the way down tends to work out in the end.

I notice SNC Lavalin will hire an outsider as CFO. It’s rather pathetic that a company does not have the faith in its own staff to hire from within. Or the sense to have groomed a successor. This could get interesting though as an outsider will have no vested interest in protecting past accounting. Maybe he will come in with the perspective of an auditor and find more transactions that reek. The old refrain is that where there is one or a few cock roaches, there are many.

I don’t know what to make of the threat from North Korea. If they actually could strike North America with nuclear weapons (which I understand they say they can’t but which experts dispute) then I suppose we would have bigger things to worry about than our portfolios.

I would like to have some cash or buying power in case markets decline for whatever reason. But I don’t think I am prepared to do much if any more selling.

It was another day of the U.S. stock market doing better than the Cnadian market.

A notable winner was Wells Fargo, up 2.0%.

The stocks that I have the most interest in buying at this time are Toll Brothers, Melcor and Canadian Western Bank. If I sold anything, perhaps the first thing that comes to mind would be my remaining Walmart shares.

Part of the reason Toll Brothers has fallen this week appears to be an announcement that it will borrow $300 million. I did not see the borrowing as a negative since they are a growing company. This company hunkered down and sold assets as house prices declined with the real estate crash. Now with the recovery they are investing in growth.

I note that chairman Gwyn Morgan and three others will leave the SNC Lavalin Board. I had mentioned under February 11 below that I expected Gwyn to bail ASAP. And I really don’t blame him. He is a relative newcomer to SNC and Did not create the mess and did not sign up to fix a mess. He does not need the money from this gig and it is really not worth it. Plus he did not seem to have the stomach and/or talent to do much about really digging into the rot at SNC and getting this mess put behind it. Next we may see the company sell off its infrastructure investments. The new Board is independent and new enough to go after the rot more aggressively. And the new members come in knowing what they have signed up for. (Which is to clean house.)

As mentioned yesterday I wanted to raise some cash today. sitting at home after my trip I took the opportunity to so some selling this morning. I sold half my Walmart. I then sold my Shaw Communications which has risen about 18% since my last rating which was Buy at $21.06. It may have risen on faint hopes of a Rogers take-over. Certainly I may regret selling this, but I needed to sell something to raise some cash as it seems prudent to have some cash around in case better bargains emerge. I also sold the rest of my Boston Pizza. It will continue to do well as an entity and the cash flows I think are secure and will grow although only quite slowly. But it would fall if interest rates rise and I just was not sure it should be this high ($22.25) my last rating was (lower) Buy at $19.96. Also some of its price rise seems a bit financially engineered when they borrow money to buy back shares. We could all borrow at low rates and buy this stock and make money on the dividend but it is risky. Having the company do it is convenient as we don’t have to make the payments. Still it somehow smacks of risk and a bit of a free lunch. The strategy made a LOT of sense when the units were clearly under-valued but I am not sure it makes sense now. I then bough a bit more Toll Brothers as it was down 2.25%, perhaps I am being stubborn there as it is not clearly a bargain but I do think the U.S. housing recovery will continue.

I saw some figures yesterday that indicate that loan delinquencies in the U.S. are WAY down from what they were a couple of years ago – with one important exception. Mortgage delinquencies are still VERY high (30 day delinquent around 10%). But I wonder now it that is an artifact of the past. These loans may have been delinquent for a very long time and we are looking at the same loans. Banks are allowing the delinquencies under various government programs and also due to the very slow foreclosure process. I think the current mortgage delinquencies may far overstate the situation on a go forward basis.

I spent some of my travel time carefully re-reading a book called Buffett the Making of an American Capitalist. Buffett’s feats of wealth creation are truly extraordinary. And his methods are well chronicled and can be copied. Few bother to try.

A plan is starting to gel in my mind to somehow get together a pool of money to be invested in ways that copy Buffett. More details will follow although it could be a few years yet before I get this off the ground.

It was a strong day for our stocks. Berkshire up 1.6%. Not really any big gainers but certainly most of our  stocks were up.

I have little cash in my accounts. I will look tomorrow to see what I might trim to raise some cash, maybe Shaw and Walmart, not sure yet.

Final thoughts on Manhattan as we left this morning.

LaGuardia Airport is so close to downtown, it is great. The airport is old and crumbling. Yet it was very functional and we fairly whizzed through security. The flight left a bit early! And this was Air Canada.

As far as businesses in Manhattan and especially Times Square. Well known brand names are what people flock to. Many independents are there but the brand names are gaining ground. That applies to just about everything. Hotels, drugstores, candy stores, jewelry, restaurants, clothing. Both brand name stores (Macys, Saks, Levies..) and brands themselves do very well.

A  moderately weak day in the markets. Most of our stocks were down. Melcor, Boston Pizza and Walmart were among the winners.

Day 7 in Manhattan

Walked up to see the Touraine a luxury condo building owned by Toll Brothers (units range from $3 million to $20 million with only the $20 million penthouse as yet unsold. A nice building in a great neighborhood. Several blocks off south end of central a

I am thinking of placing an order to buy more Toll Brothers but I may try to get cute and go a bit below the market price.

Also today, shopped at Macy’s. Much of it is very price but they also some deals. With the traffic they get through the store they must be selling a lot. Then shopping on Fifth avenue including FAO Schwartz (toys) which is worth a visit, some unique and quality items there and finished with Dinner at Bubba Gump’s Shrimp Company.

Day 6 in Manhattan:

NBC studios tour, SOHO, Chinatown and a show (The Book of Mormon).

One disappointment the green hop-on-hop-off bus service had very poor service. Buy the red hop-on-hop-off by Gray Line or just take taxies and subway.

Another minor disappointment, the McDonalds next to our hotel is the slowest ever. Tonight they were horribly slow and also out of Coke and out of chicken snack wraps. It goes to show that businesses have to work to stay on their game.

But overall Manhattan is great. Well worth a visit.

In terms of Canadian businesses, TD Bank has a huge presence in Manhattan. Tim Hortons is here but nearly invesible. ALDO shoes has a good presence. Did not notice any other Canadian companies here.

In regards to Melcor, as I mentioned, market interest in the Real Estate Trust spin-off may not be that high. In any case the real estate was already marked to market (unlike their development lands) and therefore there may not be any material value gain when the REIT starts to trade. So, perhaps the January pop in Melcor’s price to $21 and higher was overdone. But anyhow I think Melcor is still good value at around $18 or $19 and will be a good long term investment. There is always the risk of a housing slow down in Alberta but in any case that would be temporary.

Day 5 in Manhattan (March 30)

Museum of Natural History, Central Park and Ground Zero. We continue to find everyone to be very friendly to and patient with tourists.

The stock markets were closed today, but Manhattan was certainly open.

Day 4 in Manhattan:

Short bus tour of downtown… water taxi tour of Statue of Liberty (view only) and several stops of interest. Excellent tour guides. Did some shopping. Grimaldi’s pizza at Brooklyn bridge Visited Wall Street (and met Grimaldi himself who actually sold the original pizza store and opened a new one next door (presumably after a non-compete ran out)). Walked the Brooklyn bridge. Visited Wall Street and the nearby famous Bull. Rode the subway for the first time. (The rest of the time we just walked since so much was so close).

P.S. Goodbye to Ralph Klein.

S&P 500 reached an all time closing high today. And will reach many more in the years to come.

Canadian Tire was up 2.0% and that is on top of recent gains. This seems to be fairly random. Why investors would ignore it for a while and now bid it up is a mystery — though not unusual. To me, it looks like good value. Canadian National Railway was also up 2%.

Melcor was down 2.9% today and had been down over 4%. Possibly the market knows that Melcor may be having trouble marketing the units in its proposed new Real Estate Investment Trust. Or it could be just normal volatility on this thinly traded company. I grabbed 600 shares at good prices on this decline.

Day 3 in Manhattan included the following:

Saks 5th Avenue – worth touring through and has great brand names. But outrageously over-priced. It’s probably coasting on its history and brand value. Rather snooty and pretentious.

Then off to the Museum of Modern Art. This place is the very definition of pretentious. Some of the art was literally garbage. But to each his own.

Went through Grand Central Station (Grand Central Terminal) which is truly grand.

Also the Waldorf Astoria on Park Avenue which was grand and would be a nice place to stay.

Finished with an off Broadway Show “Avenue Q.”

Markets were a little negative today. My American Banks and Berkshire were down. No big losses overall though.

Day Two in Manhattan… Rockefeller tour, skating rink, buildings, history and art work. Observation deck is better than Empire State but one HAS to do both. Staff were great. We had New York pass book which includes both. Lunch at a little Chinese restaurant $8.75 lunch special included soup, very generous beef and vegetables (lot’s of other choices) and rice. Excellent value. Lots of staff on hand they do a huge phone order business. Excellent service they knew how to maximize revenue over that lunch period.

New York Knicks game tonight… sold out… almost bought fake scalper tickets but were warned against it. Bought from Tickets Now affiliated with Madison Square Gardens and ticket master. Everything about Madison Square Garden was first class.

A strong day for the markets. Right now I am just holding and enjoying gains.

As far as my trip to New York I have the following notes.

United Airlines rep in Edmonton was exceptionally good. United Airlines flights were smooth and even arrived erarly.

United Airlines terminal in Houston was a bit gross, not that clean, even the service at a Wendy’s there was strangely slow and confused.

New York LaGuardia is in a run down area. American Airlines buildings looked circa 1940. Lots of crumbling infrastructure.

Taxi was low cost and traffic was light, cheaper to get downtown NYC from LaGuardia than downtown Edmonton from the Edmonton (actually in Leduc) airport.

Empire State Building staff were very effective at ushering people in. Very friendly and good at what they do. It’s a slow process because they do such a booming business. Down town New York seems great. Holiday Inn Express has been great. Visited M&M world store (part of the Mars empire) in Times Square, friendly and busy. Tony’s Italian restaurant in Times Square was excellent.

I leave tonight for a family vacation in New York City. I hope to visit the New York stock Exchange among many other attractions. It’s my first trip to New York City unless I count visiting Coney Island and the Bronx Zoo in 1972 when I was twelve years ago.  I expect to be able to update the daily comments from New York. But if I am not able to, I am back on April 3.

It should be no surprise that markets were down on Monday. This business of depositor “haircuts” for Cyprus bank depositors may not be any big deal at all for North America but it certainly is not a positive development.

I think there will be some ripples from this. Depositors in any weak bank especially those with deposits above the insured levels should be looking to move their deposits to more solid banks.

Banks hit with large deposit withdrawals may have problems unless central banks lend them enough money to cover all withdrawals. Most banks will have their assets tied up in loans.

These weak banks facing deposit withdrawals will call call in all the loans they can. Corporations and individuals who have borrowed from weak banks may find themselves scrambling to get new loans and new lines of credit.

All of this should mean that short-term interest rates on treasury bills of the strongest countries will go down and even go negative. The bond interest rate for these countries may go down as well. Tresury bill interest rates for and bond interest for weak countries will rise.

Costs for corporations to borrow should rise as many banks will not have money to lend.

Weaker banks will face nationalization or a forced takeover or in some cases even failure. Virtually none of this will affect the big banks in Canada. Smaller banks or weaker banks in Canada could face some deposit withdrawals.

Deposit insurance and implicit government guarantees have made people largely indifferent to which bank they had deposits with. These latest developments should make people, especially very large depositors including large corporate deposits more selective in choosing a bank.  And that is a good thing. We may see the emergence of small banks with much higher equity ratios. Possibly the higher equity will be invested in equities but it would still be there to provide security to depositors while also earning decent returns for bank shareholders.

It is sad indeed that Warren and Buffett, Berkshire Hathaway is not allowed in the banking business in the U.S. Berkshire owned a small bank in the 70’s and was forced by regulators to sell it.  If it were it would be showing how banks should be run.

I considered reducing some of my positions today but in the end decided rather than do something, I would just stand there.

Meanwhile Walmart and Canadian Tire did well today.

Visa was up 2.4% today. It has looked quite expensive for a long time but as I have said before it is hard to keep a good monopoly down. It is not on our list at this time.

My article on the valuation of the S&P 500 is updated and now suggests that as a point estimate the S&P 500 is about 12% over-valued. Basically the as reported earnings on the S&P 500 have remained stable over the past six months (since the last update) while the index has risen significantly. Although the particular stocks that I hold seem to offer good value this analysis may cause me to consider taking some profits and reduce my equity exposure somewhat.

I have added eBay back to the list of stocks in the table above. It is rated Weak Sell at $53.27. The company has many strengths. It is expensive but possibly the growth will take care of that. I am troubled by its excessive executive compensation and by an irrational insistence that stock options are not real expenses.

I had last rated this only a Weak Buy/ Hold at the start of 2012 at $30.33. So it seems I missed an opportunity to invest in a winning stock in 2012. That really does not bother me at all. I made excellent returns in other stocks in 2012. And even though my return would have been better had I invested in eBay, I don’t regret it. If I have developed a method of stock investing that works well on average that is all I need. Investors who would insist on never missing out on any stock that moves up strongly are simply being unrealistic and really showing a lack of knowledge and/or an immaturity.

Some subscribers may wonder why I would return a stock to the list that is rated Weak Sell. The main reason is that I did not know what rating it would have until AFTER I completed my analysis these past two days. The alternative of only adding stocks that are Buys would cause me to bias my ratings toward Buy. Also some of you may read the report I have compiled and conclude that you would in fact like to buy based on the strong growth and notwithstanding a high valuation and the executive pay.

Friday was another strong day on the markets with the DOW up 0.6%. Most of our stock picks were up.

Overall, my own account is up 8.5% since January 1. Our average stock that was rated in the Buy or Strong Buy range (everything above Weak Buy) has risen 6.8% since January 1. The Toronto Stock Exchange index is up 2.6%. The DOW is up 10.7%.

I sold 900 of my 1900 Boston Pizza Royalties Income Fund units. I am not sure it was wise to sell. But is was only last month that I rated these units a (lower) Buy at just under $20 and they went up another 7.5% since then. I believe they raised the distribution 4% since then and also resumed borrowing money to buy back shares. There is probably no reason to think the units will not continue to do well. But they were starting to look expensive and so I pulled the trigger and sold half. I am up 45% on these units (which I believe I have held for several years). That is in addition to the distributions received. These units briefly went under $8.00 in the despair of December 2008. We rated it Strong Buy at that time.

With Walmart now above $74, it is probably still a good investment. Still, it is one that I may consider trimming to raise cash.

For the most part I am inclined to remain near fully invested. But I do recognize that markets can always decline at any time. I focus on owning businesses. I like owning shares in profitable companies that I frequent like Canadian Tire, Walmart, Boston Pizza and Shaw Communications. I also enjoy owning shares in well known companies like Berkshire, Wells Fargo, Bank of America, Stantec, Melcor, Canadian Western Bank and Toll Brothers. Even if the market declines I will still own the same number of shares in these great companies. And I will have the opportunity to buy additional shares at lower prices. I’m confident that these will be good investments over the long term.

Melcor Developments reported today that it has filed a preliminary prospectus for the proposed partial spin-off of its rental properties into a REIT. This will not likely lead to an accounting gain for Melcor since the real estate is already marked to market. But if the REIT trades above book value then that could push the Melcor stock up. When I saw the press release today it looked like good news to me and I was able to buy more Melcor before its price rose much today. Melcor was up 4.0% on the news today. Possibly it will rise further as this news gets reflected in the stock price. It’s thinly traded and so does not instantly reflect news.

Boston Pizza was up 2.4% to $21.40. I find it expensive at this price. It recently announced it will borrow money to buy back shares. That is accretive to the yield. But it feels a bit forced. Also since our recent update they raised the distribution by 4%. It has done very well indeed but it does seem expensive at this point. I am more inclined to sell some as opposed to buy more at this point.

Canadian National Railway was down 2.5% today. It does not look cheap but possibly the decline is a buying opportunity. CN should do well long term.

Toll Brothers was up an impressive 5.8% today. I added a bit to my Melcor position today based on an order that I had placed a week or so ago. 

Our stock picks did okay today. Canadian Tire was up 1.1%. I did not sell any of my Shaw at least not yet and it rose 1.3%.

The whole business with Cyprus is not something that would cause me to sell any stocks but it was a very stupid situation.

Cyprus, for whatever reasons, had a huge banking industry with substantial foreign deposits. Those banks lost a lot of money when Greece defaulted. Banking regulators in their “wisdom” encourage banks to hold government bonds and usually consider them to be risk free. Left on their own these banks even if they were short capital would almost certainly have recovered. Now the IMF and European Union or whomever have basically waved a huge red flag that tells everyone to pull their money out of the Cyprus banks. If the banks and Cyprus got into trouble die to the banks losing money on Greek bonds then destroying the reputation and business of these banks is hardly going to help matters. What must be done in the event of weak banks is for government officials to to either nationalize the banks or profess great confidence and financial support for the banks. What was done here (or attempted to be done) just seems idiotic.

As expected, markets were weak today due to the Cyprus bail-out situation. But overall the reaction was modest and not as bad as many feared. I have not seen any good analysis of exactly what was being proposed there or why the banks were involved. What was the financial health of the banks? How did the banks relate to the government which was being bailed out? I understand that the terms of the deal may change… The idea of “taxing” bank deposits does seem like a singularly stupid idea. Just how broke was Cyprus what were the consequences if it defaulted on its debt? Surely some $12 billion is not really that much money, surely the government had some kind of assets it could sell instead? Why not issue a series of Cyprus patriot bonds to be sold to Cypriots at home and abroad who would buy the bonds as a show of patriotism?

I’m tempted to take some profits on Shaw Communications which has done very well as far as the stock price in past six months. Profits and free cash were strong in Q1 (our last update was Q4). It appears that the company was not predicting much growth in 2013 overall and so subsequent quarters may not look as strong as Q1.

As of late Sunday, it appears that the markets will open down 1% or so due to events in Cyprus whereby depositors in apparently insolvent banks will have to give up about 7 to 10% of their savings deposits in exchange for shares in the banks. (Which shares might or might not be worth anything.). Shock and anger is apparently the reaction from financial commentators. But really, banks have historically been known to be risky ventures. It’s precisely because of that high risk that they generally have some amount of deposit insurance. Bank depositors, especially those in Canada and to a lesser degree the U.S. have forgotten that banks are highly leveraged and therefore risky. There is a ton of misconceptions about events like this. It seems likely that Cypress simply did not have the money to make good on the guarantees (They use the euro and therefore can not simply print money). Presumably the banks were very weak and this was about the best that could be made of a bad situation. Also, apparently much of the money was deposits from outside the country. Do we really need to have all that much sympathy for people who put their money into foreign banks on tiny island countries to earn the extra return or to avoid taxation or whatever?

This could indeed have unintended consequences as bank depositors in other countries may rush to remove cash.

I think this is only a big deal if the financial commentators and traders make it out to be such.

I certainly would not be selling my stocks on this news. Others likely will which could push markets down further.

I will mention though that I had occasion in late November to need about $7000 in cash to make a large purchase (of a shiny object) from Costco. Costco, being the crafty devils they are, would not take a cheque that large. And debit cards only go to $1000 it seems. And I don’t carry American Express. And Costco does not take Visa. I went to TD and tried to withdraw $7000 from my account. They said sure, it will be ready first thing in the morning and the maximum allowed today was $3500. But interestingly I could get $3500 from each of two branches on the dame day, which I did and I made the purchase. It was an interesting learning though. We do trust our money to the banking system and it may not be as accessible as we think. (The fine print states they can require notice to withdraw cash from most accounts).

And early this year I was moving a large amount of money around and I found that about $25,000 was the limit for an electronic transaction. If you had the idea you could instantly scoot a few hundred grand to the Caribbean or someplace on a whim you might find it is not that easy.

I don’t think any of that really needs to be something to worry about. But it was an eye-opener.

Toll Brothers is updated and is rated Speculative Buy at $34.13. As the report indicates, this luxury home builder is not an obvious bargain. But as it roars back (in terms of sales) from the depths of the U.S. housing crisis it appears set to show much larger earnings over the next couple of years. The issue becomes whether or not the growth is already priced in. Personally I plan to add to my position but not go overboard. I will be prepared to add to my position if the share price should happen to decline by say 10%.

On Friday our stocks had a particularly good day. Bank of America was up 3.8% and Wells Fargo was up 3.3%. The banks were up after having passed the Fed’s Stress Tests and having announced stock buy backs. Canadian Tire was up 2.2%. While some of the stocks were down, it was a strong day overall.

Today, Thursday saw another good day in the markets.

Most of our stock picks were up nicely although nothing spectacular. Boston Pizza certainly had a good gain up 1.9%to  $20.99.

It is amusing watching the stock market television channels attempt to analyst the market. Is there a stock market bubble they ask? Really? since when does an S&P 500 trailing P/E ratio of 16.2 constitute a bubble? And especially when interest rates are at record lows. Yes, the stock market can always fall hard on bad news but it’s clearly not in a bubble. And the notion that the market should fall because it has reached a new high would defy a couple hundred years of history whereby the market always eventually surpasses its old highs and moves on. Though sometimes that takes a long time. And sometimes there are gut wrenching declines. But by what logic would we expect the market to necessarily fail to move past its 2000 and 2008 highs at this point? Maybe the market will fall but it won’t be because of a triple top or any such nonsense.

It seems like for years we listened to many commentators on television tell us we were in a long-term bear market. Now that the market has already risen and left these geniuses behind, now many of them are suggesting we are in a bull market. I have no use for such concepts. In fact bear market and bull market theories are just another form of sell low and buy high which does not make a lot of sense to me.

I am pretty sure that there is a strong negative correlation to watching stock market television channels and investment performance. They are just far too fixated on short-term matters.

I am often asked if one needs to watch their stocks very closely after buying. My reply is not at all. Firstly watching will not usually provide any clear signal. Secondly the effort should be on buying carefully in the first place.

I seldom ever watch BNN, although I am sure they have some good segments. Same for Bloomberg and CNBC.

I do record and watch Lang and O’leary almost every day. They have a good variety, great guests and are not fixated on micro movements in the stock market. And I always find Kevin O’Leary to be entertaining. I certainly don’t agree with everything he says but I do agree with a lot it. And I marvel at his quick wit. He is very sharp.

The Dow and the S&P 500 were both about unchanged today but the Toronto Stock Exchange Index was down 134 points or 1.0%. For many years I have found that my stock picks tend to move more with the broad U.S. market indexes and not Toronto. I pay little to no attention to the Toronto index. Except I do use it as a benchmarked to compare my performance each year. I have not paid a lot of attention to the components of the Toronto Index. My understanding is that it is heavily weighted to resources (oil & gas, minerals, forests…) also a heavy weighting to financials. Many other sectors are not well represented in that index.

It was a mixed to slightly down day for our stock picks.

If anyone knows of any seminars on stock picking and investing using fundaments I would be interested in knowing. I’d like to find one where I could participate as a presenter. The type of seminar or course I am thinking of is probably two full days or more and charges a fee to participants. (Free courses would likely be trying to see something rather than provide education). Obviously, I am totally not interested at all in anything to do with technical analysis, charting, or foreign exchange trading. Also I am not interested in options or derivatives (not as a presenter anyhow). My interest is to participate in a seminar that focuses on fundamental analysis and also asset allocation. If you know of anything, let me know at Shawn@investorsfriend.com

Our banks stocks lost some ground today as did Toll Brothers and Canadian Tire. The noise to signal ratio from this as far as I am cornered is a great deal of noise and no signal. I take signal from earnings reports not stock price blips.

As far as Canadian Tire goes, I like it because (among all the other reasons mentioned in the report) it appears to have decent earnings with a P/E of just under 11. And it trades at just 1.2 times book value. And I suspect some of the assets are quite a bit under-valued. Overall it looks like good value to me with some safety margin that should mean it is quite unlikely (but always possible)  I would take a loss if I held it several years. However there may not be any catalyst to push the price up any time soon. It could take a year or more before the impact from Target is known. On the other hand it has said it will be buying back shares. (none yet reported since the Q1 report came out). There are also possible catalysts in terms of acquisitions and divestitures. Overall I think it has good value and I plan to ride along with it. Around 2002 my feat was that Walmart was then moving out of the Woolco stores into much larger stores. Canadian Tire did not seem to miss a beat on that. Canadian Tire has its large auto service operation. Target is not competing there. (I keep waiting for Canadian Tire to start selling a line if Indian or Chinese cars, low priced ones. They are ideally positioned to do it.)

Speaking of the auto service, I took our 2005 Volvo cross country wagon there last Thursday night because my wife had complained it was making unhealthy noises after starting. They diagnosed the problem in about 30 minutes and explained it was the starter failing to fully retract but did advise replacing the (volvo= expensive) starter yet as the situation was harmless. In fact we then realized it mostly happened when we used the auto starter and we are soon out of that season. My point is, I got excellent very speedy service and no up selling. And I like shopping where I own shares. They charged me the agreed upon diagnosis fee, and I was perfectly happy with that. (Car problem diagnosed = happy wife = happy Shawn)

Retailing can be a tough business. So it’s interesting to observe that the single greatest family fortune in existence is that of the Walton heirs. On billionaire lists they rank as high as number 11 as individuals. Christy Walton $28 billion, Jim Walton $27 billion, Alice Walton $26 billion, Robson Walton $26 billion. All told for the Walton family that is $107 billion and WAY ahead of the ostensible number one, Carlos Slim Helu who scrapes by with $73 billion. Naysayers will complain that the Waltons were retailers who did not add value to the products and who destroyed the Mom and Pop shops. The other side of that argument is that they brought huge economies of scale to retail and have improved the lives of millions upon millions by lowering the cost of everyday goods. I certainly make no apologies for owning some Walmart shares and I hope the Walton’s don’t either. Anyhow, it’s not like that family is ever going claim the $107 billion dollars of goods and services that they could buy and go waste that money. Most of it will go to benefit society one way or the other. Anyhow my intertest in Walmart and its history is to study how retail makes money and how I can apply that in buying shares of other retailers.

Of note today was Wells Fargo up 1.7%. I like the prospects for this bank and also for Bank of America.

I added a small amount to my Canadian Western Bank position today after it fell 1.4%.

Melcor Developments is updated and rated (higher) Buy at $18.61. This is a very well-managed Edmonton-based company that has traded on the stock exchange since 1968 and which traces its roots back 89 years under the ownership of the same founding family. Earnings are cyclical and the stock price can be highly volatile. I first added it to this site in late 2002 rated Strong Buy at $3.60 (Actually at $36.00 but it later split its stock 10 for one). Since 2002 the assets on the balance sheet have increased from $209 million to $1447 million (boosted somewhat by mark-to-market valuations on rental properties). This company illustrates how owning shares in companies can work. The company does pay a dividend. But it retains most of its earnings to grow the business. And those retained earnings have greatly benefited share owners. Anyone who argues that companies should always dividend out as much of their earnings as possible (or even pay any dividend) is dead wrong in the case of companies like Melcor.

By simply hitching a ride at a time when the share price is reasonable investors who bought and hold did very well indeed.

However, Melcor’s shares did soar to the unreasonably high price of just over $30 in the Spring of 2007. The shares rose about 500% in just over two years. The shares were over-valued at that point.  In late 2008 through early 2009, Melcor shares traded as low as under $4.00. This was during the financial crisis (which turns out to have been the financial opportunity of a lifetime). At $4.00 Melcor shares were extremely cheap and far cheaper in relation to book value than at any time since I began following the company in late 2002. This illustrates the fact that both the quality of a company and its price are very important factors.

With a company like a Melcor a reasonable strategy is to have a default position of buying and holding. But also be prepared to buy on dips and be prepared to sell if the market exhibits irrational exuberance about the stock.

I am comfortable holding this stock although I realize it can fall significantly in times of recession in the home building industry in Alberta.

Two of our Stock Picks were down noticeably today. Canadian Western Bank was down 4.8% and Constellation Software was down 4.4%. On the other hand, Bank of America was up 2.8%. 

Canadian Western Bank released earnings this morning and the stock fell 4.8%. At a quick look, the earnings were not bad. Adjusted earnings per share were up 2%. Not great but not awful. The market does not like that the net interest margin is lower. But the lower margin should not be a surprise with interest rates so low. I believe that the shares offer reasonable value at this price and that a Buy rating remains applicable. I don’t think a person would go too far wrong in buying and holding these shares.

Constellation Software released earnings this morning and the stock fell 4.4%. At a quick look, the earnings were quite good. I am comfortable holding this stock.

U.S. banks stocks may do well in the wake of the Fed’s stress tests taht were released today. Apparently further results are due next week and by the end of next week there may be indications of increased dividends at some U.S. banks.

Melcor showed little reaction to its earnings report. It is thinly traded and not followed by many analysts and so that may explain the lack of reaction.

Well, it was yet another strong day for our stock picks. But we should not get over confident. There will be down days as well and down months and even down years. But right now, all the painful down days (like 2008) seem like a distant memory.

Bank of America was up 3.2%. Toll Brothers was up 1.8 %, Canadian Tire, which is my largest holding was up 0.8%.

The down-side is that many of our stocks have risen substantially since the last updates, and so the bargains are less obvious now, and so I am eager to get more updates done. But it’s a nice problem to have.

Melcor Developments came out with earnings after the close today. The earnings and the report looked quite strong to me. At this point I would wait and see how the market reacts. (Although I will probably trim my position if it rises). I will update that report by Sunday after first seeing where the price settles on the earnings news. However it does trade quite thinly and so the price may take some time to react to the earnings news. They also have a new CEO promoted from within but that does not appear to be a disruptive event at all. (The best run companies usually do promote from within. If a company’s  board of directors can’t find a new CEO from within it means they don’t respect their employees and they don’t think the company has much proprietary knowledge or culture to build on.)

So the Dow Jones Industrial Average reached a new all-time high today. Not a big deal, but it does seem an encouraging sign.

I have a very heavy weighting in equities (around 90%). For that reasons I may look to see what positions I should trim a little as prices rise. But for the most part I am content to let things ride.

Warren Buffett was on CNBC’s Squawk Box for three hours on Monday before the market opened. He said that equities remain good investments compared to other assets. He never makes predictions about the stock market except that he thinks it will rise in the long term. He said a long-term government bond was the dumbest investment around. He encourages Americans who need a house to buy ad to take a 30-year locked in mortgage rate. He does think that at some point the FED will begin to reverse its easy money policy. When that happens he believes most institutional stock investors w will be looking to sell some stocks. (Basically he is saying stock prices will fall then, perhaps a lot). Berkshire will not be looking to sell stocks at that point.

I notice that lower mortgage rates in Canada are in the news. In some ways it is surprising that banks have not always been more competitive. People say the industry is an oligopoly with only five major competitors. Actually five is plenty to promote competition. Consider, three airlines in a market will usually beat each other to death. Banking should be very competitive in that their products are the ultimate commodity. And with the internet the old convenience of the local branch is not much of a factor. But there remains an inconvenience and a high a=switching cost (in time and effort) to se=witch banks. Big banks are very silly to offer mortgages through brokers. That is a low profit business. Smart banks will try to capture you as a customer and have you using five or more of their products. When they do that they don’t have to be as aggressive on prices.

Speaking of airlines/ I saw an ad today where Air Canada will match prices and give you an extra $50 off if you find a cheaper flight within 24 hours of booking. This is a really stupid strategy for Air Canada. It’s seldom a good idea to compete on price. And I don’ think it is ever a good idea to price match since that means you are agreeing to match whatever stupid price your competitor offers. And it’s really dumb to compete on price when you are not the low cost operator. Air Canada should try to compete some other way like convenience, comfort, safety service and on-time travel. On top of an already stupid idea, this will create  a customer service nightmare when people start trying to phone in and prove they saw a cheaper flight. As Buffett also said yesterday, Airlines have all the characteristics of a really bad industry. Encouraging customers to shop even harder for the lowest price every time is not going be a money making strategy.

It was a decent day at least in the American markets with the DOW up 0.3%.

Walmart was up 2.2%.

Some people figure that stocks are expensive simply because the DOW is near its record high. But that is totally normal. The last high was five years ago. S&P 500 as well as DOW earnings are somewhat higher than they were five years ago. The U.S. GDP is higher than it was five years ago. Interest rates are lower. So we should fully expect the markets to surpass their old highs. That’s what markets do.

On the other had growth expectations are low and that does act as a gravitational force on the markets. And if interest rise that is also a gravitational force. Investors may be wise to keep some cash ready to buy bargains should they appear. Or be ready to use new savings to do so.

Overall the fact that markets are at record highs is far from any clear danger signal. Markets are unpredictable. In the short term, they will rise and they will fall unpredictably. Over long periods of time they will rise due to profitable businesses retaining earnings and growing.

..

Berkshire Hathaway is updated and rated (lower) Buy at $102.05. For the reasons given in the report this rating may be conservative. By my reading, Buffett has hinted (but not stated) that the intrinsic value is closer to the $130 range.

Buffett’s much anticipated annual letter came out after the close on Friday. As always it was chock full of investment wisdom.

Berkshire had an excellent year although Buffett, in typical fashion called it a sub-par year because it slightly trailed the S&P 500 this year in terms of the increase in book value per share.

The entire annual report runs to 109 pages (not excessively large by the standards of large companies and considering it includes the 24 page letter form Buffett). I read the entire thing. Years ago I had assumed that Buffett himself was not much involved in the writing the official parts of the annual report. I was wrong. Buffett’s fingerprints are all over the report including even the notes to the financial statements. He has a particular succinct style of presenting information. No words are wasted. No doubt, his CFO and controller write much of it, but they follow the Buffett format and it seems clear that he edits it.

Over the years I have read a huge amount of negative comments about Buffett. The indisputable fact is however that he is one of the greatest investors and CEOs in history. People would be wise to spend their time learning from him and not bashing him.

A subscriber asked about whether U.S. stocks should be purchased in a U.S. dollar investment account. The answer is yes. Unregistered accounts (taxable accounts) usually offer the ability to set up a U.S. dollar account. The strategy then would be to move some money to that account and then buy the U.S. shares. You will incure a currency conversion fee. But thereafter the money can be left in that U.S. dollar account even if you later sell the stock or dividends are received. This avoids further currency conversion costs. In registered accounts, TD Waterhouse offers the ability to automatically do “wash trades” whereby U.S. stocks are funded from a U.S. dollar money market account and no further currency conversion costs apply. If the U.S. stock is sold the money goes automatically back to teh U.S. money market account. Other discount brokers may require you to call in each time to request the wash trade (as TD used to require) or may not offer this.

Strong gainers today included Canadian National Railway up 3.0%, Couche-Tard up 2.7% and Melcor up 2.4% (but it is thinly traded and tends to jump around a bit). Also RioCan up 2.8% although that is similar to its price at our last update.

Canadian Western Bank was down 2.1%. It will likely release earnings soon. I certainly like it longer term.

Warren Buffett will release his annual letter tomorrow at about 4 pm eastern time. Also the Berkshire Hathaway annual results will be released. Berkshire will have had a good year.

Markets were very strong on Wednesday with the DOW up 1.25% and Toronto up 0.6%.

Berkshire Hathaway was up 2.5%. Toll Brothers was up 2.0%.

At lunch time on Monday I bought additional Berkshire Hathaway shares paying $99.54. It ended Monday at $98.58. On Tuesday it opened at $99.05, got as low as $98.25 and closed at $98.72. Today, Wednesday it opened at $98.58, but closed at $101.21. So I did not get the best price this week and certainly I should have been buying quite some weeks ago. But nevertheless I am happy I bought some on Monday.

Target indicates it will spend $1.5 billion in capital in Canada in 2013. (possibly that was meant to include the 2012 spending). That would be on top of the $1.8 million they paid to acquire the leases (though some was recouped selling some leases to Walmart. They presumably also spent a lot in 2012. They say the stores they acquired “were in very poor physical condition”. I know the Zellers near me was stripped to the bare steel and concrete. Even the exterior walls were torn out for an expansion. They will open 124 stores. It sounds like they will have spent at least $3.3 billion on the 124 stores. That’s a remarkable $27 million per store — and they will still be paying rent. That strikes me as expensive. I don’t know how that fits in with expectations that Target will offer low prices. Consumers should not expect anything close to the U.S. prices. For may reasons they will face higher costs in Canada.

Perhaps it is a great deal for the landlords like RioCan. Target apparently pays for all these capital costs. It will be quite some years before the leases come up, but at that time the landlord would have the benefit of the renovations and be able to charge a high rent to Target.

Markets were generally strong today.

Toll Brothers was up 3.3% on strong reports regarding U.S. housing prices and new home sales. It should really be no surprise that U.S. house prices are rebounding given record low interest rates and given that houses were often selling below replacement cost less an allowance for depreciation and obsolescence. Stories of shadow inventories had many convinced that U.S. house prices would not rebound. But last Spring, Warren Buffett was saying that houses were among the best investments possible for U.S. citizens due to their low prices. When Warren speaks, smart investors listen. Uniformed people disparage him despite his 60 year record of exceptionally astute investment moves.

Melcor has fallen to $18.25, down 2.7% today and down from recent highs of over $20 on news it will spin off some investment properties into a REIT. I suspect there are fears that the Alberta market is cooling. And fears that the REIT plans could fall through. I am holding this stock with excellent gains on it and will re-evaluate after it releases earnings around March 7.

I have been thinking of adding Proctor and Gamble to the site. I like their brands and I don’t think the stock will look overly expensive. But a fortune magazine article has painted a disturbing picture of the CEO. Apparently several years ago he was involved with some 18 outside organizations and commitments including sitting on various boards. Now he has culled that back to about six. I guess I would have thought that being CEO of a huge company would be a full time job. It would seem to take a special kind of idiocy to be involved in 18 outside organizations. I would seriously question his judgment on that. I would think that about 2 outside commitments would be enough.

There was an interesting story today about the Ontario Teachers Pension Plan. Indexing of the pension for inflation, for service earned after 2013, will only occur if the plan is fully funded. Past service will apparently remain fully indexed. Even though it is being made on a go-forward basis this change apparently entirely eliminates the pension’s deficit calculation as at January 1, 2012. The plan had a relatively modest deficit of 8.2%.

I believe this is a wise and fair move. It’s not that pensioners do not “deserve” inflation protection. They do. But from now on it will be paid only if investment returns are such that there is no pension deficit. Currently all the pension investment performance risk has been with the still-employed teachers and the employer. There has been zero risk for the retired teachers. This change puts some of the risks on the retired teachers but only on a go-forward basis. In fact it appears to have no impact on current retirees and will only affect those that retire after 2013. For retires in the next five years or so the impact should be very minimal. But those retiring in (say) 20 years will only receive inflation indexing if the fund is fully funded. In hind-sight the plan has been too rich and the contributions were too low. Contributions have already been increased about as much as feasible and there was really no choice but to deal with the benefits. This change appears to be a good one although it might be described as the lesser of the possible evils.

A graph of today’s markets shows that they started out strong, but reversed to losses by mid-day and then fell heavily at the end of the day.

Apparently part of the reason was election results in Italy.

As an investor I pay little attention to things like elections in Italy. I figure if I own stocks at reasonable prices I will do okay long term. The shore-term is anyone’s guess.

With the market down today, I decided to add to my position in Berkshire Hathaway. I should have been buying it before Christmas…

I’m tempted to add to my positions in Wells Fargo and Bank of America but I may not given I already have a relatively large allocation to each of these.

Canadian Tire is updated and rated (lower) Strong Buy at $68.65. There are risks with any investment and I would urge subscribers to read the report. Subscribers may wish to place more emphasis on the risk posed by Target and a more competitive retail market. For a wide variety of reasons I conclude that it is likely, but certainly not guaranteed, to be a good investment.

My personal portfolio is updated. My cash component is lower than the last update due to some buying and due to withdrawing some cash from my non-registered account.

Markets were up strongly on Friday.

It’s been interesting to see the Canadian dollar fall to 98 cents. Ever since the Canadian dollar soared some years ago I have felt that the risk had been more to the downside than the up side. At this point I have no strong feeling at all as to whether it will rise or fall. There is actually no reason why our currency should trade at par with the American dollar although it does make it easier to compare prices across the border. My approach has been to move a certain amount of money into U.S. dollars and leave it there.

Canadian Tire earnings came out prior to the opening of trade. The fourth quarter was okay, at best, not terrible, certainly not great. The full year was pretty good. They are doing a modest stock buy back and emphasized that. If the share price drops on this news I would be a buyer.

I plan to update a couple of the reports this weekend based on earnings reports. I also plan to update the composition of my own portfolio. It has not changed a lot since the last update and I don’t recall any new stocks being added, just additions to existing positions. I see little need to hunger for new picks if the existing ones seem good. Some subscribers have asked for more guidance on what to buy. At the end of the day I provide information and opinion here. Each company has a report. My opinion of the company is not totally captured in just the rating. Subscribers should, ideally, read the report on any stock they are interested in. There are never any guarantees in the investing world. Many investors become comfortable with volatility. If you own shares in good companies they usual recover but once in a while a company can really collapse. And occasionally the overall stock market takes a dive. I don’t pretend to be able to predict those things. I simply try to buy some good stocks at good prices. I then sell some if I need to raise cash for better opportunities or if the overall market is seems too high in relation to earnings and interest rates.

After posting the note on Canadian Tire this morning I went into TD Webroker and the stock was set to open down modestly somewhere under $68. So I placed an order for a small additional amount at $68 which meant I would get the opening price to a maximum of $68. (If it opened and stayed above $68 my order would not be filled). It ended up opening at $67.30. It closed at $68.91 so, with one day down and forever to go, it looks like a good buy so far. I am happy to hold this stock but as mentioned just below I don’t expect any sudden surge in the price. Maybe a little positive move due to the share buy back and that assumes all else is equal like the overall market remains pretty stable.

Bank of America was down 3.2% to $11.42. I still think of this stock as being a good investment but somewhat speculative.

Walmart was up 1.5% to $70.26 after it reported earnings. I mentioned under February 16 that I added to my position on a price dip that day at $69.29. I am comfortable buying or owning this stock at this price.

Markets fell today on fears that the FED would stop buying back bonds and interest rates would rise.

Well, maybe that is a legitimate reason for the market to fall but I am not so sure. Interest rates are at record lows and I don’t think the P/E ratio on the market indexes is too high for thee low rates or even somewhat higher rates. The end of FED bond buying would also signal some return to a more normal state of affairs. Personally, I just can’t see panicking and selling overtime the market might fall. It always might. But long term good companies rise in price.

Toll Brothers fell 9.1% after lower-than-expected earnings and lower-than-expected home deliveries. Both were above last year but lower than expected. I have been saying that Toll Brothers looked expensive though I did hang onto my shares. I expect to update the report by Sunday.

Constellation Software is down to $115. It has fallen in recent days and weeks from the $124 level. When I look at is recent press releases I don’t see any bad news. It will releaase earnings March 7. It is always possible that the market has detected a negative report coming. But I do not see cause for alarm. I don’t particularly plan to buy at this point but I would be more inclined to buy than sell.

I expect Canadian Tire to release earnings before the open tomorrow (or at least by end of trading tomorrow). This my largest holding. I own it because it looked like it was bargain priced to me. But earnings reports are always unpredictable. I certainly have no idea of what might be in the works. Generally I expect that they had a decent Q4. The credit card portfolio should have done well. The stores, I can’t predict but see no big reason to be worried. The wild card might be if they announce some cost-cutting efforts (unfortunately these are usually associated with costs for severance) and how the market might react to that. By the time most of you read this, we will likely know how things turned out. The conference call is scheduled for 4:30 pm so that may mean the release is after hours instead of pre-opening. I find it rather bizarre that they would issue a press release about the conference call and not indicate the time of the earnings release. This seems to be standard but dumb practice.

If the stock happened to drop several dollars or more on bad news I would be inclined to buy but I would also want to first be aware of the news.

On the positive side if they happen to announce any strategic moves like selling real estate or the credit card operation or a heavy share buy back then it could rise in price.

If there are no surprises in the earnings news then I expect the stock might rise a bit but not much as the market is going to be waiting to see the impact from Target though that won’t really be apparent for up to a year.

Well, a pleasant start to the markets this week. ‘course we’re supposed to be thinking longer term but still a gain always feels good. Stantec up 3.3%, Shaw Communications up 2.5%, almost everything was up, but Constellation software was down 3.1%.

And a good day for Buffett, Berkshire A shares were up 1.6% to $152,498, a new record high. The B shares were up 1.25% to $101.02. These are basically the same shares except one A share is convertible into 1500 B shares (but not vice versa).

I have not seen much mention of the fact that Berkshire closed at a new record today, nor that it is up over one million percent since Buffett took over the company. His average cost of acquisition was $14.86. His first buys were at $7.60 per share in 1962. These are the same shares that are now worth $152,498. I don’t know what the shares traded at on May 10, 1965 when Buffett took control, perhaps it was a bit over $15. But most assuredly the shares were under $15 in early 1965. Buffett tracks his performance back to the start of fiscal 1965 which was October 1, 1964. I believe he was already influencing, if not controlling the company by then.

It seems to me that this kind of gain (one million percent or more) is worthy of a bit of recognition.

As many of you saw, I sent out an email today intended only for former (not current) customers. The email went to everyone on the free and paid lists by mistake. There was a link there to subscribe at a special price. If anyone who was not a current customer used the link that is completely fine.

It does create a bit of an issue where any existing paid customers used the link as they may end up with two subscriptions in PayPal. That can cause login problems as well as double billing. If you did that it’s fine except please understand we may have some issues to get through in regards to any billing or login problems.

If anyone has a big issue with some other people getting a special price, email and tell me what you would like done. I think the service is great value at the regular price and so I am hoping not too many people will be upset that someone else got a discount. But if you are just tell me what remedy you would like to see.

My apologies for the confusion created by the mis-directed email.

As you will see just below, one company on the list has been updated. And accordingly it is highlighted in yellow on the list. It will remain in yellow for about one month.

There had been a total lack of new updated reports in 2013 to date and that was related to the fact that basically everything had been freshly updated near the end of 2012. There have of course been comments about five days per week.

There has been a flurry of new subscribers due to some newspaper media coverage of my self and this site in Edmonton.

New subscribers should read the short article (the link to this article is also near the top of this page and many of you will have already reviewed it) with some information about using research page.

Occasionally people email to ask if I can review their portfolios. No, that is not a service we offer. InvestorsFriend Inc. and myself as its editor owner cannot give any personal advice. All of the advice here is generic. It’s not tied to anyone’s particular circumstances. Also, I also cannot comment on any stock or company not on the list here. My approach has always been that analysis must precede opinion. Unless I have analyzed a company in at least some detail I try to refrain from forming much less sharing an opinion. Analysis, of the sort that I undertake, cannot always prevent mistakes but it certainly helps.

Updates to the stocks on the list will come. I believe that over the course of several months or a year there will always be sufficient updates. Occasionally a new company will be added.

Boston Pizza Royalties Income Trust is updated and rated (lower) Buy at $19.96. In this case notice that it is not a corporation. This is actually a rather odd entity. A heavily financially engineered entity that collects a 4% royalty from food sales at Boston Pizza restaurants (excluded 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 seems attractive given today’s low interest rates.

I own units and sometimes toy with the idea of selling as the price has risen. I have excellent gains on these units and so I worry about losing that gain. But overall it seems a good investment. If the unit price should fall due to perhaps a weak quarter or just lack of buying interest then I might buy more. If an investor is truly looking for yield and truly would not be bothered by a unit price decline as long as the cash distribution was unaffected then this might be good choice. But it is very hard to not be bothered by price declines. Those are always a risk.

Subscribers tell me they value me giving my though process. I probably should have bought more Boston Pizza even as the price rose. I believe I probably got (back) into this stock in the $11 something range. When I buy at $11 it simply becomes hard to buy later at say $13 or $15, much less $18 or $20. This is especially the case given that the share price did not rise because of any great earnings or dividend surge at all. To acknowledge that these units are still a (lower) Buy today  at $20 is to admit that they were probably a steal at under $12 in 2010 rather than the Speculative Buy we rated it at. Even there we had to contend with our own history that called it a Strong Buy on December 13, 2008 at just $7.15. That was after it fell hard in the financial crisis, like everything. It would have been hard to keep calling it a Strong Buy after a swift rise the the $12 range. (I do try to make the ratings independent of past history but one can’t simply erase their memory of prior prices).

Although these units seem to be a reasonable investment, if one needs cash for other investments or purposes I certainly don’t see an issue with selling this one.

Our ratings history is:

Today (lower) Buy at $19.96

December 12, 2012 (lower) Buy at $19.05

May 13, 2012 Buy at $17.87

December 24, 2011 (higher) Buy at $14.18

November 28, 2010 Speculative (lower) Buy at $13.78.

May 16, 2010 Speculative Buy at $11.45

The difficulty in 2010 was that we knew the distribution would be sharply cut when it became taxable at the start of 2011. We also knew that the lower dividend would then be eligible for the dividend tax credit. But it certainly seemed a more risky situation given the then pending distribution cut.

November 28, 2009, Buy at (about) $11.40

August 15, 2009 (higher) Buy at $10.20

February 9, 2009 (higher) Buy at $8.65

December 13, 2008 Strong Buy at $7.15 (financial crisis, err… financial opportunity days)

Our initial rating was (lower) Buy at $14.47 on January 9, 2005.

We dropped it from the list in 2006 after our report got outdated and the price rose very steeply and I sold my units at a gain. It briefly soared to $20 in 2006 but we were not rating it  at that time.

All this detail I got just from looking back at the links to my old comments. Anyone industrious can check it out if they wish. Just do searches for comments on Boston Pizza. For past years scroll to the bottom of this page for a link to past years’ comments. Of course there is always the risk that I backdated the old comments and ratings. Anyone who has the slightest suspicion of that should shop elsewhere for advice.

Berkshire Hathaway A shares closed Friday at a record closing price of $150,141.

This exceeds the previous high close of $149,200 on December 10, 2010. It did however reach $151,650 on December 11, 2007.

Regaining a high from five years ago is nothing to brag about. But still Berkshire has certainly done well of late. There will likely be some news about it reaching the all time high.

What I find fascinating it consider that these shares were in the $15 range as Buffett took over the company in 1965. He paid an average $14.86 for his controlling stake. The shares have since risen  a staggering 10,104 fold. That is just over one million percent. And yes, the math is correct. What is equally remarkable is that it “only” took a compounded gain of 21.2% per year to achieve that. This illustrates that absolutely stunning results can occur if you compound money at 21% for say 50 years. (Even at 10% your gain is 117 fold in 50 years. Each extra tiny bit of return after 10% adds a staggering amount over 50 years. A 1000 fold gain in 50 years (100,000% gain) requires 14.8% per year compounded. It also suggests that getting much over 10% for 50 years is no easy feat. Only a few people can possibly accumulate huge wealth otherwise there would be nothing left for others. But don’t begrudge Buffett. His fortune represents “claim checks” on the goods and services produced by society (including produced by Berkshire) But he is never going to cash these claim checks he is giving it ALL away. He lives on the modest half billion or so that he has accumulated outside of Berkshire, and he will apparently give much of that away as well.

Walmart fell 2.2% to $69.30 on Friday on news about an internal email describing February month to date sales as a total disaster. And the executive wrote “The worst start to a month I have seen in my ~7 years with the company”.

When I saw the price down My reaction was to think about buying and certainly not selling. This was an internal email and no doubt was at least a bit exaggerated. Anyhow, I don’t think one should change their outlook on Walmart based on an email about sales over a two week period.

I don’t know if I honestly say I would have preferred a 5% or larger decline (I own some Walmart) but given the decline had already happened I figured the thing to do was to consider buying. I looked at my last rating which was (higher) Buy at $68.03. I had also been wanting to perhaps deploy more cash into the market. So I ended up adding 50% to my Wal-Mart position. Wal-Mart at 2.9% of my portfolio (prior to the add) was only my 12th biggest holding and so I also considered that. It had been a much larger share of my portfolio but I had sold some at about $72 and so this was also just in some way restoring the position. There are always lots of complex reasons to buy or not and in the end one just pulls the trigger or not. But those were some of my thoughts as I bought on Friday. I bought on my lunch time at $69.29. It had gotten as low as $68.13 earlier.

I have looked it up in the comments below and I note I had sold all my Walmart on October 3 at $73.63. (And I would have had good gains on that). I had previously some some on July 10 at $72 based on an order placed some days earlier to sell at that price. Also I sold some on June 12 at $67.70. The notes below indicate I bought some Walmart on April 12 at around $58. At that time it was one of my five largest holdings. I don’t know what my average price on Walmart was. TD Waterhouse shows my my average price paid for stocks I hold but it does not show me a history for a stock like Walmart that I owned and then did not own and then own again.

I also bought some Walmart back on November 19 at $68.09.

One way to pick up possible bargains without having to monitor the market at all is to enter “stink bids” below the current price. The discount that you apply in the stink bid strategy would depend on many factors. It might be just 2% low in one case and 20% in another case. Anyone who had a buy order in on Walmart at say $68.50 or $69 (which can be left as an open order for a maximum of 30 days) would have been filled at that price while being blissfully unaware of any news or price decline. That works well if the decline is temporary and rather sucks if the decline is larger and the stock falls well below your buy price. If the bad news happens when the market is closed and it opens at a price lower than your buy order you will get that lower price.

In general stink bids can be a decent way to buy and to take advantage of volatility. I have done this on occasion. If you really want to buy a stock then you probably should just buy. If you kind of want to buy but are a bit ambivalent this can be a good strategy.

In today’s news, Warren Buffett’s Berkshire Hathaway is partnering with another outfit to buy Heinz. This is not a huge surprise considering it fits much of the profile Buffett likes. It’s sells branded consumable products that are not likely to change much in the next two decades or longer. It’s simple, stable and predictable. It has a very long history. Buffett likes his history. It was a family company though I am not sure there is any family involvement left. I have no idea about the valuation. I do know that the fact that he is paying some 20% more than the market place is no indication that he is paying too much. He has always held that he can calculate the value of a company like this better than the market can.

I usually don’t have any short term predictions about share prices. But I did mention in my January 20 note below that I expected Berkshire to hit a record price this quarter. It’s just about there. It’s up 4.2% since then. Not huge put the thing is the upside seemed predictable and there did not seem to be a lot of downside risk over a reasonable holding period. I own Berkshire but I should have bought more. I was cheaping out hoping it might fall a bit.

Today we had a number of stocks falling in price. But that is nothing unusual.

Boston Pizza was up 2.5% to $20.40. It just released earnings last week which at a quick glance were pretty good. I’ve toyed with the idea of selling some of what I have (It’s in RRSP so no capital gains tax to worry about). But then again I see no reason for it not to hold up pretty decently and so I just hold it. (Of course it always COULD fall).  When it was at $14 about 16 months ago I never expected it to jump so fast or to anything close to this $20. From here I really see also no reason for it to increase much if at all. The yield already seems a bit low for an entity that will not grow dividends per unit fast at all (for the reasons indicated in the report). Longer term if interest ever finally rise its yield will rise meaning the price would drop.

With Canadian Tire down, I bought a bit more. This may in fact be sheer stubbornness on my part. The stock just looks cheap to me. If in fact earnings do stumble than I am hoping for some kind of action like a change of management to release value. I think the value is there (in the credit card portfolio, and the real estate in addition to the actual retail business)  so that provides some downside protection. But hopefully earnings do not in fact stumble. In December the company started buying back its own shares for the first time in a while (outside of smaller buys to offset stock option grants). They did not buy any since year-end but often companies are not allowed to buy shares between the end of a quarter and when they release earnings. The share buy back gave me some hope that management as of December saw the stock as cheap and therefore were not likely expecting to report bad news. We shall see around February 21 when they report earnings. But even if earnings are good, the market may not push the stock up until and unless the company proves it can maintain earnings after Target gets in operation.

Mortgage rates:

About 14 months ago I did a lot of digging into why Americans can lock in mortgages for 30 years (30 years!) at really low rates while in Canada the normal maximum lock-in was five years, although seven and ten years were available at rather exorbitant interest rate premiums. A 25 year lock in was available at a huge premium. I never did get any satisfactory answer to the mystery.

The interest rates I saw at that time were:

5-year fixed 5.29% but 4.09% special deal (so similar to U.S. 30-year fixed rate)

10-year fixed 6.75% but 5.45% special deal (39% higher than U.S. 30-year fixed)

25-year fixed 8.75% (call for special deal) I called and the mortgage specialist was not aware what the special deal might be and had never heard of anyone locking in for 30 years. The posted rate is more than double the U.S. 30-year fixed rate.

Well some things have changed.

Today a number of banks are offering very competitive 10 year locked in mortgage rates:

Scotia Bank has the lowest at 3.69% locked in for 10 years.

For the Canadian market, that is phenomenally low. Many people with large mortgages who cannot afford it if rates rise should consider locking in. The lowest posted rates are around 2.4% locked in for one year. So it is tempting to take that lower rate.

Maybe you can get even lower than 2.4% through a mortgage broker. But there are certainly people who might want to consider that 10-year lock-in.

Interest rates have gone lower than almost anyone thought they could and they have stayed low. But things can happen fast in the finance markets. Rates can rise. Rate are at record lows and they will rise at some point.

At 3.69% I almost tempted to take a few hundred thousand out as a mortgage and invest that. I would be very surprised if I could not make more than that 3.69% on average over the the next ten years by investing. But in the end, I don’t need the stress. Markets can fall and one way to add a lot of stress to your life is to be in the markets with borrowed money during a major market decline.

I suspect banks are able to do this because they have in turn found investors willing to lend money to the bank for ten years at something like 2.5%. If they can securitize these mortgages and fund them from investors locked in at say 2.5% then that is okay for the banks. (A 1.19% spread for the banks is not great but not horrible). 10-year Canada bonds pay investors 2.0% so I can’t see any sane investor offering ten year money to the banks at less than about 2.5%.)  If on  the other hand the banks are funding these mortgages with non-locked in deposits (on which they pay approximately nothing) then the banks are playing a very dangerous game. Higher spreads now but massive risk if deposit rates rise in the market.

Then there are the American banks who manage to offer 30-years locked in at 3.5%. The 30-year treasury in the U.S. pays 3.23%. So we have homeowners somehow borrowing at nearly the same low rate as the U,S, government. This is only possible due to a phenomena that I would call “stupid investor tricks”. In order for a bank to lend at 3.5% for 30 years it needs someone (investors) willing to lend it money at less than that. (And, no, despite what you heard about fractional reserve banking, they don’t get to print up the money in the basement of the bank)

Part of the game here is that mortgage investors expect a lot of the mortgages to be paid out early and so they don’t expect their money to really be tied up for the full 30 years. These investors will be sorry if rates rise, as their money will be locked up for a long time at low rates.

Warren Buffett has advised that it is wise idea for American’s to buy houses and to lock in at these ultra low 30-year rates. What is smart for the borrower will not ultimately be smart for the investor who funds that mortgage . (The banks tend to be in the middle hopefully collecting a spread and fees and not taking the risk).

Markets were higher today… In particular we had Toll Brothers up 4.4%. It looks expensive at this point but I continue to hold it. Also we had Bank of America up 3.2%.

Stocks were generally down a bit today. The Q4 earnings for many Canadian companies should be rolling in shortly.

I note today that the former CEO of SNC-Lavalin has been charged.

http://ca.finance.yahoo.com/news/former-snc-head-pierre-duhaime-formally-charged-fraud-152714437.html

Wow, that is certainly a fall from grace. From rich and powerful CEO to looking at possible jail time and certain large legal bills, stress and embarrassment.

I don’t know much about SNC. But my understanding is that huge bribes were paid in Libya  (and possibly elsewhere including even possibly Canada). And it seems that the top people knew about this. In the case Libya it may have been sort of excused as a cost of doing business, a case of “when in Rome”. They may have felt they were doing this for the good of shareholders. But it is illegal under Canadian law for Canadian companies or Canadians to offer bribes anyplace in the world.

While not knowing anything except the few news stories I have read, I think SNC faces a lot more trouble over this yet. I think they had some connection to that Canadian woman who is in a Mexican Jail accused of helping to try to smuggle out Saadi Gadhafi. From all appearances the company (or at least some former executives) were involved but now they have abandoned her. Nice. With several men now charged someone will sing in turn for a lower sentence and perhaps many more will be implicated. Possibly the company could be given a large fine. That would punish innocent shareholders but still it could happen I suppose. There is even the ridiculous possibility that some shareholders who bought more recently will win a class action suit and the company (i.e. indirectly other quite innocent long-term shareholders) would have to pay that.

I am not impressed with chairman Gywn Morgan’s handling of the whole affair and I expect him to try to jump ship as soon as he can. He is newer at the company and he never signed on for this crap. He seems to be too optimistic that the rot has now been removed. I would doubt that. To me, it seems more likely that rot had invaded quite deeply. We shall see.

I don’t know if SNC is a reasonable investment or not. I understand it has good assets and a good break-up value. But I tend to think its future is very unpredictable. I would not be comfortable investing in it. (Though it turns out that one would have been wise to got in at the lows a few months ago and yet I felt the same way then, too uncertain.)

Greetings and welcome to a new group of subscribers who joined this weekend after seeing an article in the Edmonton Journal.

For the benefit of the new subscribers I will mention that I usually post some comments here five times per week. Usually it is Monday through Thursday evenings and then sometime on the weekend, often Sunday evening. Sometimes I don’t have much to say, other times I will comment on one or more of the stock picks or comment on something that has been in the business news or something related to investments. I rarely have anything to say about where I expect the markets to head in the short term since I don’t believe I have any ability to predict that. Markets tend to rise in the long term and be unpredictable in the short term. It’s better to focus on trying to identify and buy some companies that are likely to do well in the future (in terms of earnings), that are well managed and that are available at good prices. With this type of company purchased at a reasonable price the future stock price may vary but will ultimately tend to reflect the growth in earnings.

Dividends are nice but are neither a necessary nor a sufficient condition. Berkshire Hathaway has made a return of literally one million percent for its investors since 1965 and without any dividend (well ironically enough it did pay a single dime out in 1967 but nothing since then). Of course many investments do pay excellent dividends. And there are examples of companies that were paying good dividends until suddenly suspending the dividends and then plunging in value. Sustainable earnings drive returns for investors over the long run. If the earnings are not growing then the only way the return is going to be acceptable is with a good dividend yield.

Subscribers often ask which stocks to purchase from the list above. I can’t make that decision for investors. I hope that subscribers will pick and choose from the list  based not only on the rating (and noting if the current stock price has changed since it was rated) but also based on reading and contemplating the reports on each company.

Of the companies on the list I tend to like all of those in my own investment portfolio but certainly can’t make any guarantees. In particular I like the prospects for Wells Fargo, Bank of America and Canadian Tire. Canadian Tire is facing increased competition and so maybe it will suffer. But my expectation is that it will report reasonable good earnings for Q4. It reports on February 21, I believe. It basically seems to be priced as if the outlook is somewhat pessimistic.

Almost all of the stocks in the list were updated near the end of 2012. The ratings were our opinion as of the date and price indicated. Some of them have subsequently risen quite nicely in price which makes it more likely that if we were to update today, then the rating might be a bit lower. In particular, Melcor is up significantly and while we still hold it we would not likely consider it to be a Strong Buy at the current price. Similarly Toll Brothers is up significantly compared to the price at which it was rated in early December. Some others have had fairly strong increases and in some cases the increase has been quite modest (making it more likely that the rating would still apply).

There will be some updated ratings over the coming weeks and months. In some cases I will update for the Q4 earnings reports. I tend to focus first on the higher rated companies in terms of doing updates. I will also keep you informed of any trades in my own account.

Patience is a virtue in investing. New subscribers should not necessarily be in any powerful hurry to make trades based on the information on this site. It makes sense to get familiar and comfortable with our approach.

I’m featured in the business section of the Edmonton Journal tomorrow.

http://www.edmontonjournal.com/business/Lamphier+sides+coin+this+stock+picker/7940653/story.html

Our stock picks have ended out the week in decent shape.

As always the signals from the economy are mixed. The U.S. economy continues to recover.

Canadian multi-family housing starts dropped a lot in December. Single family housing starts were also a bit lower I understand. In general house prices in Canada appear to be slipping a bit.

In Alberta things seem strong. But we do have the issue of a low oil and gas prices and eventually that couold cool the economy in Alberta. So Melcor faces that risk. On the other hand I expect Melcor to release good Q4 earnings (around March 6) although it may report a weaker outlook. Melcor had of course risen about 20% last month when it announced it would spin off its office and retail rental properties into a REIT (which is would continue to own a majority of that REIT). If that plan were to fall through then presumably Melcor would decline. And if the plan goes ahead perhaps it would rise a a bit more on that news. It is tempting to sell or lighten up on Melcor. On the other hand it’s probably going to be a good long-term hold. My strategy at the moment is to hold and I would probably buy if there was a significant pullback.

A notable winner among our Stock Picks today was Alimentation Couche-Tard, up 4.7% to $52.60.  I did not see the news that prompted this. This company is an incredible (and under-reported) Canadian success story. I am not eager to buy at this price but it has been a good stock pick for us over the years. It has certainly not gone up in a straight line. But is has done very well indeed over the years. It was under $20 at the start of 2010. 

Most of the stocks that declined yesterday recovered today. There does not seem to be much sign of fear in the markets.

For the moment my strategy might be described as “Don’t just do something, stand there!”

Markets were negative today. It’s certainly not something that worries me. I think any pull-backs right now might prove to be more of a buying opportunity than anything.

So, we got a surprise 150 point, 1.2% jump in the DOW today. Which goes to show that in investing half the battle (actually 100% on average) is just showing up. The market tends to rise over the years. A buy and hold index investor can get the average return just by showing up and staying put. These are the passive investors. All other investors try to beat the index by stock selection and various forms of timing strategies. The passive investor grabs every 150 point day just by showing up, but also gets the down days but does make the average return over time, which works out okay. The markets timers try to side-step the down days but more often than not also miss too many of the big up days.

This web site is dedicated to beating the market by superior stock selection. In order for some people to do that others must trail the market. (That is harsh but it is the math of the matter.) Luckily there is a large pool of people who can be expected to trail the market because they follow non-sensical methods and jump in and out of the market at the worse times.

When you think about it, value based investors ended up experiencing more of a “financial opportunity” than a financial crisis. It felt ugly a the time but the financial crisis allowed the smart money to scoop up stocks at very attractive prices from the panicked dumb money. (Again, harsh but true). Or perhaps more kindly it allowed those willing and able to take risks at the bottom of the market to scoop up bargain stocks from those who would not or could not bear the risk.

Most of our stock picks gained today. About the only notable loser was Toll Brothers down 3.1%. I have said that Toll Brothers does not look like any real bargain to me. Still, in it could do okay with the recovery in house prices. And I do hold some Toll Brothers.

Markets were generally down on Thursday. This hardly seems surprising after all the recent gains.

There was unfortunate news for employees at Best Buy / Future Shop and Sears Canada with layoffs announced.

Sears Canada was smart in 2012 to have sold off some leases for huge gains. If they have any long-term leases at good rates on large stores they would likely be best to try to sell the lease holds if they can.

I don’t have any good opinion of Sears Canada. At West Edmonton mall a week after Christmas, I walked through one of their stores at 3 p.m on A Saturday and the floors were full of mud that appeared to be left there from previous days. If they can’t even bother to clean the floors they are toast. Simons of Quebec has opened in West Edmonton Mall. I had seen their store on St. Catherine’s Street in Montreal several years ago and liked the prices and merchandise (like Canada Goose jackets). The new Simons in Edmonton is carved up into boutique areas within the store and in general seems to be a good shopping experience. In retail I think you either have to be a low cost operation (Costco) or go for higher end brands and service. Trying to compete on price while not having low costs is a losing strategy.

I suspect Best  Buy / Future Shop can survive but Sears is probably circling the drain.

Markets were moderately down today. Notably (especially to me, since it is my largest position) Canadian Tire was down 1.8%. But I consider that to be basically just normal volatility on a negative day.

U.S. GDP was down 0.1%. I don’t know how that is measured. But I feel safe in saying that the accuracy of measuring the output of the entire U.S. economy is not likely more accurate than a half percent or so. So I don’t put a lot of faith in numbers showing quarterly growth to the nearest tenth a percentage point. In addition there were apparently temporary factors including Super Storm sandy at work. I understand military spending was down quite a bit. That may have been more a case of deferring expenses rather than real cutbacks. But, who knows? it is certainly possible that the U.s. will cut back quite substantially on military spending. But overall I think the slow but steady growth pattern in the U.S. is well established.

We continue to be in the middle of the Q4 earnings release season with many reports yet to come in, especially for Canadian companies.

Today was another decent day in the markets with modest gains in most of our stock picks.

Dow up a half percent. Doomers are still waiting for end of financial world and have missed relatively massive gains since the bottom in March of 2009. I think you subscribers are on average much more intelligent than the average investor. Sure we all have our moments of fear when listening to doomers and talk of currency collapse but for the most part I suspect few or none of you are certified doomers who want to sit close to 100% in Gold and want to avoid all “paper” assets. (Actually I would argue that many “paper” assets are in fact quite real and that some so called real assets are just as much paper as are stocks that represent ownership of real companies with real asset and real earnings power. Ownership of my house is indicated by papers. Gold coins in my safe would admittedly be quite real if I had any. Gold kept by a custodian may be evidenced by paper.

On January 27 I mentioned the topic of unconventional wisdom.

Warren Buffett has pointed out that it is very dangerous to fail with an unconventional strategy. You can be fired or sued often. Filing conventionally or with the crowd is not as dangerous. Because of this not many people will succeed unconventionally because they don’t like the risk of unconventional failure. This is true in all aspects of life.

Buffett said in his 1984 letter:

(Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.)

Buffett went on to say that he was willing to risk unconventional failure.

The risk of failing unconventionally is why advisors seldom or never encourage a client to go in too heavily on any given stock or to go all equities. I also try to avoid giving any personal advice to do that. I reveal that I am not running a diversified portfolio but I will not accept the risk of advising any individual to do what I do. My advice is generic. I rate stocks. I show evidence of what running 100% equities has resulted in the past (basically higher returns over the long run but gut-wrenching losses from time to time). You subscribers decide your own asset allocation and exposure to each stock and indeed whether to buy any particular stock. I do not know your particular individual circumstances nor would I want to be responsible for your decisions.

And I should hasten to add that you subscribers as a group have been very mature over the years and with extremely rare exception (like about three people in thirteen years) have never even hinted at blaming InvestorsFriend for any bad outcomes in the market. (There were some additional subscribers who expressed concern about the results from time to time but without hinting that they considered InvestorsFriend or myself in any way responsible for their trade outcomes, much less financially responsible). You subscribers (with the three or so exceptions in thirteen years) have been grown ups and have accepted the risk of your own trades. The requirement to do that is posted on this Site in several places (including the login screen) and you have agreed to that and I am grateful for it. I (technically InvestorsFriend Inc.) could not provide this analysis on any other basis. Our disclaimer of course disclaims any financial responsibility for trades made on the basis of the information provided). There is no possible way that advice purchased for $15 per month or less could come with guarantees even in the event of errors or omission. If anyone happens to disagree with that, please unsubscribe.

I did not intend to get into all of that, it just sort of popped out of my brain as I wrote tonight, but perhaps it is good to point this out from time to time.

For any comments about this, email me at shawn@investorsfriend.com

Our stock picks lost a modest amount of ground on Monday. Following up on yesterday’s comment I added somewhat to my Wells Fargo holdings today.

Moody’s debt rating service downgraded six Canadian banks today. I doubt that this is anything to worry about at all. These banks are still very highly rated.

As I troll around several financial sites on the internet it is scary to see the number of comments posted online from people who mis-guidedly believe that “the end is nigh”. That gold is only real money. That paper currency will be worthless. That fractional reserve banking is evil. That central banks will print their way to hyperinflation. These people often gravitate to hard assets especially gold. They usually seem to forget that owning shares in, for example, Canadian national is also a fairly hard asset in itself.

In my 52 years of life the Canadian dollar has lost somewhere close to 90% of its value. That would be a big problem for me and my parents if we had kept our money under our mattresses. We did not. Myself and my parents before me invested in businesses both as direct owners and through the stock market. Our wages, dividends and retirement cheques, as the case may be, have on average far more than kept up with inflation.

We were seldom much bothered by the fact that the dollars in which we were paid did not have a fixed value in relation to gold, or to gasoline, or anything else. Sure, we wished we our wage increases were not partly offset by inflation but as long as we were running ahead of inflation we were okay with it.

I can’t guarantee it but I suspect that inflation is not going to be any great concern in the next several decades. I figure if I focus on accumulating higher amounts of wealth as measured in dollars, I will do okay.

There is, by the way, a vast difference between financial wealth and money. Financial Wealth consists of real goods and services and the ability to buy same. Financial Wealth is measured in money, but is in basically independent of money. Money may be slowly declining in value in terms of the wealth each dollar will buy. But wealth can nevertheless grow, in real terms, as long as wealth grows faster than inflation when measured in dollars. If a new currency were adopted tomorrow, the wealth of our nation would not necessarily change much less evaporate even if all the old currency was burned. Some financial wealth is held as money or the equivalent (cash, term deposits, bonds), but much financial wealth is not invested in money as such but is merely measured in money (houses, clothing, stored food, vehicles, shares of companies, and even gold are examples).

Friday was another decent day in the markets. Toll Brothers was up 2.4% to $37.98. That’s a 23% increase since we rated it a Speculative Buy on December 8 at $30.77. With a 23% increase our report has effectively become out of date. I have a position in it and would be more inclined to trim that position than to buy at this price.

Based on the ratings above, and current prices, I think the best buy would be Wells Fargo and Canadian Tire. Also to a lesser degree Bank of America. Both banks reported Q4 results and our analysis is not updated for that but I don’t think the ratings would have changed. I don’t offer any advice on what any investors exposure should be to the banking, retail, or any other sector since that is very much dependent on a host of personal factors.

Conventional wisdom might suggest never getting too high of an exposure to any one sector and certainly to any one stock. On the other hand I can point to some individuals, including myself, who have long ignored conventional investment wisdom and things have worked out nicely. Perhaps there is something to be said for unconventional wisdom. Often being unconventional may be very unwise. But there are times when one can be both unconventional and very wise.

Not surprisingly, Constellation Software recovered from the little dip it took yesterday, rising 3.7%. Canadian Tire did well, up 2.1%. The lower Canadian dollar has also helped out the value of American stocks when measured in Canadian dollars.

Constellation Software was down 3.3% today. This occurred in the last hour of trading and was on relatively small volume. It could well be that someone was just a bit impatient in selling and wanted to sell today and that could have pushed the price down. I don’t see this as reason for concern. Those with a trader mentality however, might.

Couche-Tard was down a modest 1.1% after Metro Inc decided to sell half of its very large stake in Couche-Tard and did so by way of a secondary offering of the shares tot he public. This naturally tends to push the price down at least temporarily. This also does not appear to be any cause for concern.

Toll Brothers was up 2.1% on continued strength in the U.S. housing market. There were many doomers who were calling, over the past six months to a year or more  for U.S. house prices to keep falling (oh the debt, oh the unemployment, oh the shadow inventory). Meanwhile Warren Buffett was calling houses the best bet around (household formations were much higher than home construction and the excess inventory was being whittled away, he said, and oh he mentioned too that people could and should borrow at the dirt cheap rates for 30 years locked in). That was about nine months ago, I believe. One bets against Mr. Buffett at one’s peril.

Overall it was not a very eventful day for our Stock Picks.

Today we had Bank of America up 1.9%, Melcor up 1.6% to $19.75.

CN fell about 1% despite a dividend increase and good earnings released today. I am tempted to buy some CN. It does not look particularly cheap but I am attracted to the quality of its business.

Wells Fargo announced, after the close, that it was increasing its dividend by 14%. And apparently is is hoping to increase the dividend again in 2013 pending permission of the Fed. This bodes well for Wells Fargo and for other banks as well.

U.S. markets were closed today for the Martin Luther King holiday. The Toronto stock exchange index rose 0.5%.

With Canadian Tire down 1.3% I added a small amount to my position.

Research in Motion was up another 11% to $17.41. Regrettably I had sold my shares on December 26. (It looks like I “cleverly” sold in the U.S. market since Toronto would have been closed that day). In any case, I cant worry about what I don’t own. There will always be many rising stocks that we miss out on. As long as we can make a good return overall, that is what counts.

Canadian National Railway is scheduled to release earnings at 9:00 am tomorrow (Tuesday). I don’t know why it would release only 30 minutes ahead of the opening of trading. That does not give sufficient time for the market to digest the news before the start of trading. It could indicate that there will be no big surprises in the numbers. I think it should have a good report. One area of possible concern would be its increased pension liability, but that will not likely flow into earnings. (I believe it will be reported in comprehensive earnings). The pension expense in 2013 will also likely rise. Overall CN will probably continue to do well.

On Friday we had an okay day in the markets with the Dow and Toronto each up about 50 points. Research in Motion continues as a surprise winner this new year, up another 7% on Friday.

I’ve been reading a few annual reports and hope to have a new company to add to the list before too long.

Warren Buffett in an interview on Sunday morning once again expressed his optimism for the the U.S. and its prosperity over the long run. Those who have dismissed Buffett and his optimism over the past few years (or over the past 60 years for that matter) have generally lived to regret it.

Berkshire Hathaway has had a good year in 2012. I expect it will have had a strong Q4 although Super Storm Sandy may have put some dent in the results. I expect Berkshire shares to hit an all time high this quarter. But that is nothing to brag about. The best companies reach all time highs on a relatively frequent basis. They retain a portion (or even all of ) of their earnings and grow their book values per share and earnings per share and so it is logical that the share price should march higher.

Toll Brothers was up 3.6% to $36.16.

Bank of America was down 4.3% after a disappointing earnings report. Given the price drop I decided to by back (in a registered account) the 1500 shares I had sold at a slightly higher price when I cleared out my margin account a couple of weeks ago. Bank of America is a huge and complex business and I consider it to be more speculative than most of the stocks I own. However, I am hopeful that it will increase its dividend sometime in the Spring and that it will continue to slowly recover from its various wounds (from the financial crisis).

Although the Dow was down we had Bank of America up 2.0%.

We are now entering a period where many U.S. companies are releasing their December 31, 2012 results. Obviously the market will react to those depending if they are better than expected or lower than expected. The other thing driving the markets will be the usual political madness in the U.S. and whatever unpredictable random events happen around the world. As always, seldom a dull moment.

Today ended up being another good day for our stock picks. Notably, Toll Brothers up 3.8%, Canadian Tire up 1.6%.

I’ve been thinking about adding to some positions. But overall I am already heavily invested in equities and I am just going along for the ride with the companies I own for now.

Shaw Communications announced after the close that it had sold its Mountain Cable franchise in Hamilton to Rogers for $400 million. Also Rogers bought for $50 million an option to buy Shaw’s wireless spectrum. Shaw bought the one third of TVtropolis from Rogers for $59 million (possibly Shaw already owned the rest of it?). The total deal was indicated to be $700 million after deducting the $59, so that seems to leave $300 million unexplained by the press release.

There was no indication if there was a loss or gain on the transaction. In any event whether it is a gain or loss, positive or negative, the share price should adjust for this at the open tomorow and there will likely be no opportunity to trade based on this information even if we knew if this was positive or negative. I would guess that it is at least slightly positive.

Shaw also announced the results of its election of directors. The main trading shares of Shaw are non-voting. I would have liked to vote and I would not have voted for Sheila Weatherill as a director. She is the former CEO of of the capital region health authority in Alberta who got a rather obscene severance package severalk years ago and then soon got a job on the Board of directors of Alberta Health.  And under her CEO watch (and signature) it was recently revealed that totally obscene expense claims were routinely approved and she was recently forced (that is my interpretation of her “resignation”) to resign from the Alberta Health Board. And oh yes she has just finished testifying before an inquiry that as health CEO she routinely informed hospital staff when VIPs were in their care but insisted unconvincingly that this was not preferential care. So she seems a rather tainted board candidate for Shaw Communications. And all this was in the news just in the past few weeks. So how did the vote turn out? Well, 12 of the board members received 100% approval with zero votes withheld. Four others including the (in my opinion) rather tainted Ms. Weatherill received over 99.99% approval with just 785 of 20,888,380 votes withheld. That kind of support sounds like something out of the Russian elections of the 1970’s. False democracies everywhere would be proud of such a farcical result. Some of the voting shares do trade and so it is incredible that only 785 shares were withheld from such a relatively notorious candidate. With online voting it is getting easier to vote our shares (when they carry a vote) and I have recently been voting my shares and typically withholding my vote from some candidates. Realistically it’s a total waste of time but maybe it will send a message in a few cases.

My popular article on the valuation of the Dow Jones Industrial Average is updated. I see the Dow as about fairly valued.

On Friday we had Constellation Software up 3.7%.

I no longer have Research in Motion on the list, but it was up 13%, again indicating that rumors of its death may have been premature.

Wells Fargo came out with excellent earnings although just a hair above expectations) and dropped 0.9%. Apparently bank analysts were disappointed that its net interest margin fell to 3.56% from 3.66% last quarter. So let’s examine that. The average 30-year mortgage rate in the U.S. is 3.4%.

Now, if Wells pays nothing on deposits it still can’t make 3.56% on a mortgage sold at 3.4%. Wells Fargo has about the highest net interest margin in the business. Part of the reason its margin fell is that it took in a lot of new deposits on which it is paying nothing or next to nothing (that’s the good news for the bank) but it has parked those deposits at the Fed earning 0.25% because it can’t find suitable people and businesses to lend all that money to (that’s the bad news, but keeping cash on hand is better than lending it to those who can’t pay it back).

And remember Wells is not making this 3.56% on its own equity. It is making a gross margin of 3.56% on lending out depositors money. It’s own ROE is MUCH higher due to leverage.

I am no expert on bank finances, but I do know a little bit. And I think these analysts get too focused on particular ratios. In this case it is net interest margin. In other cases it is same store sales for retailers. I may be naive but when I see a 25% increase in profits like Wells has posted here, I tend to think that is pretty good. I am a happy Wells Fargo owner.

It was another strong day for stocks…

Melcor continues to bounce around.

Yesterday I mentioned that having seen Tuesday’s closing price of over $20 most of us would be reluctant now to sell much below that. Of course another option is just to keep the shares indefinitely. After all at $20 the shares would certainly not seem over valued. The company is well managed and even by the is REIT action demonstrates an interest in making sure the share price does not languish below a reasonable value if they can help it. Sure, there is always a risk that Melcor shares will dip with a slow-down in housing construction in Alberta if that occurs  and may dip if the REIT plans fall through. But long-term there is no reason at all to think that this will not continue to be a good buy and hold company.

Speaking of buy and hold, in a 2009 newsletter I explained why any suggestion that “buy and hold is dead” is a mathematically challenged view. i.e it’s demonstrably and mathematically wrong.

I read today that Warren Buffett had explained how U.S. banks wee now in better shape financially than they had been in years. That is in contrast to thousands upon thousands of articles and comments on the internet about how the banks are technically insolvent. So who are you going to believe? Those comments usually based on old articles from 2009 and parroted by financially illiterate doomers or will you believe Warren Buffett?

Of course the doomers and doubters then say that Warren is talking up his own book since he owns banks shares, oh and he is also a tax evader, they gripe. It it all so tiring to read such drivel. Any fair minded person who has actually studied what Buffett has said and done over his 60 year investing career has to conclude he is a man of the highest intelligence and integrity. But you know each to his own. Frankly if it were not for mis-informed people using poor strategies to invest and using twisted thinking there might be no one for us to “beat” in the stock market. Those who still believe that most U.S. banks are near insolvency are easy prey for more intelligent or more informed investors.

I understand that Wells Fargo will report earnings on Friday morning.

Canadian Tire confirmed to me today that they are buying some shares based on the price. They did so in December. I don’t see any buys yet in December (correction, January) however which is disappointing.

Today would have been a mildly negative day for our stock picks except for one stock.

Several alert subscri9bers emailed me this afternoon to report that Melcor shares were up sharply (almost 20%) this afternoon (closed at $20.37) after announcing that it would look into the idea of spinning off its commercial rental income properties into a Real Estate Investment Trust that it would retain significant ownership of. This sounds similar to a plan that Loblaw recently announced.

There are several points to consider here:

1. This is not a done deal. Then again there is little reason to think it can’t or won’t be done.

2. These properties represent about 43% of Melcor’s assets, the raw land and developed land is not included here.

3. We can’t be too sure where the share price ought to settle out on this news. Melcor is a quite thinly traded, most days less than 10,00 shares trade, some days there are no trades. Only 93,000 sga=hares traded today. Many Melcor investors were likely unaware of this news. The share price could easily slip back as people take profits in the coming days. Or maybe it will rise.

4. I certainly have no idea where the price should be in terms of fundamentals. The REIT structure saves income taxes and that alone does add some real value (even considering REIT distributions will be not qualify for the dividend tax credit).

5. Fundamentally the value of Melcor should in theory not be changed by this excect for the income tax savings. But practically speaking it’s value is increased in the market.

6. Melcor was under valued before this announcement.

7. Having bought Melcor at an attractive price it is not surprising that an event has happened to release value. In some ways the REIT does not so much create value as release value that was already there.

8. I had not thought of Melcor doing this, but now that it is announced it seems almost obvious that this is something that they might have looked at.

9. I don’t think there is much reason to think that this in isolation would increase Melcor’s dividend much. The partially spun off REIT will trade independently and will have a high yield. But Melcor itself will not see its cashflow per share rise much from this. Melcor would get a cash infusion from the partial spin-off but may use that for new investment or debt repayment rather than dividend increases.

10. It’s really anyone’s guess whether an investor should take profit at this time either fully or partially. I am inclined to sell half or so especially if the price stays over $20. I doubt that we have to worry about it falling back to say $17 anytime soon.

11. I am not sure why they don’t consider selling off the entirety of this into a REIT and not retaining any. After all if the market offers really high (stupid high?) prices for real estate why not sell? And it if makes sense to sell some, why not all? Perhaps the market would not take up all the shares if all were offered. If they sold all they could do a special dividend. But companies are usually reluctant to do things that materially reduce their asset base since that diminishes the domain of mangement.

By the way ,I emailed Canadian Tire several times over the past months suggesting they do something like this. I wonder though if the moment has passed for Canadian Tire given it seems so many others are doing this. Loblaw and I believe the Bay might be doing this as well. I can’t recall them all but I believe there has been a relative flurry of this type of announcement just in the past month or so.

Melcor gave back 8.2% today closing at $18.70 But it is still up about 19% this brand new year. As I mentioned yesterday the trading is thin and it was not cleat that yesterday’s close of $20.37 was where the stock really ought to settle out after the news about the REIT plans. Today only 36,000 shares traded so again it may continue to be volatile. Today at least will have benefited from at least some time for those few analysts that watch this stock to have done some calculations. They will probably try to estimate what the REIT will trade at and what Melcor will trade at after the planned spin-off. (That is not an approach that I use).

Perhaps the best move was those who sold yesterday. Time will tell.

It’s interesting that having seen the $20.37 price yesterday that tends to put price in our minds and we may tend to be reluctant to sell much below that. It’s mostly an irrational feeling. After all the $20.37 price (and the high yesterday of $21.25) were reached in a moment of excitement on thin trading and with a lack of much information or time for analysis. And maybe it is wise to hang on for that $20+ price/ Melcor would not likely have looked into doing this REIT business if they thought that the price was not going to go up significantly. And I am not sure that a 20% rise really would have been enough for them to do this. So certainly it is very possible indeed that before long we could see that $20+ price again.

But keep in mind there are other factors that can drive the stock higher or lower including interest rates, the outlook for home building in Alberta and its Q4 earnings report and outlook for 2013.

Overall, I inclined to hold on at this point though I also see nothing wrong with selling a portion to grab some gains.

In other developments… Bank of America was down 4.6% apparently after being “downgraded” by Credit Suisse analysts. Perhaps it is ironic but I tend to pay zero attention to what other analysts think about any stock. It may be a sign of over confidence but I very rarely even read much less pay attention to any stock research reports other than my own (I make an exception for anything Warren Buffett says). If I do happen to pick up a hint from some analyst that I respect, I first run the numbers myself before deciding if a stock is a buy.

It’s somewhat bizarre that yesterday there was MAJOR news about the big banks in terms of settlements of litigation and a favorable change in the amount of cash or “liquidity” that banks have to keep on hand and yet bank shares barely budged. I would have thought that all that news would be either positive or negative overall but not neutral. And then today the stock sinks simply based on the opinion of some analyst.

Bank of America had risen quite a bit lately. It is a volatile stock and in this context I don’t think a 4.6% price drop is any particular big deal.

Shaw Communications came out with earnings that were apparently a bit better than expected. Also I believe there was a dividend increase. I have not looked at that report yet. I tend to have a slower approach to analysis and trading. It’s just not in my temperament to make a snap decision by glancing at earnings news. There are many people who would argue that success in trading comes only from keeping an eagle eye out and fingers on the trading keys. It’s been my experience that old fashioned buying good stocks (that is, companies) at what appears, after thoughtful analysis, to be good prices and then simply going along for the ride as earnings (hopefully) rise or (hopefully) the P/E multiple rises, can be a good way to invest.

Markets gave back a little today after the recent gains. However Melcor was up about 2% on decent volume and Toll Brothers was up 2%. Based on the rating above I would not be an enthusiastic  buyer of Toll at today’s $34.35 given it was rated only Speculative Buy at $30.77 on December 8, though it is certainly possible that our rating was too conservative. Certainly it’s a bit more speculative at $34.35.

As I have tried to make clear many times the ratings above apply at the date and price indicated (and certainly there are no guarantees). Whether the rating still applies some days, weeks or months later as the price changes and as earnings and other events unfold at the company is unavoidably a matter for your judgment since I don’t/can’t update the ratings any more frequently than I do.

Also, as you can appreciate, each report provides numerous facts, figures, and observations that are ultimately distilled into a rating. What is provided is both the rating AND the report with all the reasons for the rating. Some of you may read the report and conclude that a different rating should apply. Or you may just see some factor in the report (or from your other sources of information and general knowledge) that causes you to avoid a certain stock for whatever reason.

At the end of the day if the stock ratings here have helped you pick winners it was in large measure because you ultimately agreed with or trusted the rating and pulled the trigger on certain trades, knowing that it was at your own risk. Congratulations to all those subscribers who have done well with these stock picks.

The big U.S. banks made some settlements regarding foreclosure and mortgage issues stemming from the financial crisis of several years ago. Their stocks did not seem to react much indicating that the news was about as expected. But in general it should (all else being equal) pave the way for continued gains in Wells Fargo and Bank of America. There was also a  favorable development that delayed a planed increase in the amount of cash they have to keep on reserve. Such cash tends to earn very little or no interest for the banks and so they like to hold minimal reserved of cash on hand. In this case cash does include deposits at the Federal reserve bank (hence the name I guess) which these days does pay 0.25% – I believe it historically may have paid nothing.

The earnings season will kick off this week with Alcoa which somehow manages to get its December 31 year-end numbers out extremely quickly after year-end. In Canada Shaw Communications reports its Q1 results on Wednesday.

I have updated the table showing the percentage of my portfolio that is is invested in each stock I own and in cash.

Friday was another positive day in the markets.

I finished selling out everything in my margin account. 200 shares of Canadian Tire were sold but were replaced with an equal buy in an RRSP account. 3000 shares of Melcor were sold. 500  shares of Shaw Communication were sold. Again, this selling was to clear out the margin account. I would have preferred to keep these stocks.

I mentioned I had a problem accessing TD Waterhouse when I updated to Windows 8. That was resolved by added TD to a short list of sites that are to be opened in compatibility mode. This is available under tools on internet explorer.

At the moment I am down to about 75% equity (and 25% cash).

My next step is to withdraw some of that cash in the margin account and to use it also for contributions to RRSP and TSFA. Also will move some more business cash into the business investment account. I plan to update my portfolio break down (percent I have invested in each stock) in the next day or so. I will be looking to buy a few of the higher rated stocks that I don’t already own and perhaps replace some of what was sold from the margin account.

It would not upset me to see a pull-back in the market to facilitate some buying. On the other hand if stocks continue to rise in value I can certainly live with that.

The TSX finished down 0.6% today. The Dow had been up but finished down 0.2% after the market began near the the end of the day to fear that the FED was going to stop buying bonds. (FED minutes revealed a worry about all this bond buying).

The markets never seem to focus on any one thing for long. So the euphoria over the fiscal cliff deal was unlikely to last too long and now we are moving on to the next worry or opportunity. None of this is predictable. Markets tend to move higher in the long term and are unpredictable in the short term.

Canadian Tire was down about 1.4% today. It’s always possible that my assessment of the value of Canadian Tire is too optimistic. Time will tell. But the fact that the share price declines is in no way convincing evidence that it is not a good investment. Some of the best opportunities in the markets (and perhaps some of the worse) will always be found among unloved stocks.

Dollarama was down 2.1% to $57.65. Possibly that had to do with poor results at a U.S. Dollar Store. It may be an opportunity to nibble at Dollarama.

My thoughts today again turned to selling. In particular I want to get rid of the margin I have been using in my margin account and may also end up withdrawing some money from the margin account for other purposes and so I may end up selling most or all of the stocks in my margin account. This will reduce my equity exposure and give me cash to be ready in case the market does dip. However, since I like the stocks I hold I will try to replace some of what I sell in the margin account by buying the same in the RRSP accounts.

I sold some Berkshire in the margin account today. Also I sold 500 shares of Stantec in the margin account. I still hold 1000 shares in other accounts. My gain on those 500 shares was 107% and so that made it easier to pull the trigger and also it has jumped quite a bit in the past six weeks.

I would like to update my personal portfolio breakdown but am having a technical problem even seeing my portfolio details in TD Waterhouse. I updated to Windows 8 because Microsoft had a special $40 deal on the Windows 8 update (for Windows 7 customers) until January 31 and now it seems some sites I visit are not yet compatible with Windows 8.

It may not have been wise to update to Windows 8 so soon. There was a promise that my machine would be faster. Yeah, not so much. Also my machine was trying to to add some newer Windows 8 updates tonight and then reported that it failed and was reverting and then it almost looked like it was not going to boot up at all and so overall I would caution people not to update to Windows 8 just yet. Possibly you could buy the update for the $40 but not install it yet.

I don’t think too many people expected today’s big market rally. After all we already got a big rally on Monday when it looked like this fiscal deal would go through.

Today we had the DOW up 2.3%, Toronto up 0.9%. We had Berkshire up 3.9%, Toll Brothers up 3.6%, Melcor up 3.7%, Stantec up a scorching 4.9% and loads of other nice gains. Canadian Tire was among the few that managed to go down a bit today.

Our Stock Picks have done very well lately. But it’s starting to feel a bit like manna from heaven. And it seems wise to remember that stocks don’t go up in straight lines. We will have our down periods as well. And it would be nice to have some spare buying capacity when that happens.

So on that note I forced my mind to think about trimming some positions today. I have a margin account where I have been making some modest use of margin and had some Wells Fargo and Bank of America sitting there and it was bought with margin (borrowed money). I was waiting until this new tax year and with the arrival of a new tax year and with all the pleasant gains of late I decided to get rid of those stocks in the margin account (I have plenty left in the RRSP accounts and in a cash account). While I was in a selling mood I decided to reduce my Toll Brothers position as well. It’s about the highest P/E ratio stock I own and also one of the lower rated ones. But I still have some. I sold 700 and have 1050 shares left.

None of this means I have turned negative on these stocks. I added heavily to Wells Fargo and Bank of America when they fell and so I became rather over-weighted in them and it just seems prudent to trim as they rise. And more importantly it seemed prudent to find something to trim given the recent market gains. I chose Wells Fargo and Bank of America mostly because they were in that margin account and I really don’t need to be using any borrowed money.

(Before anyone emails me about this “revelation” that I had a bit of margin, it has been disclosed before and only very briefly did it ever get the the point where I was more than 100% in equities. I think I got to 102% or something very briefly. Almost always my net cash has still been positive (I was using margin in the margin account but there was more than offsetting cash in the RRSP accounts).

Well, the 2012 year is now over. Our Stock Picks this year had an excellent performance. Click to see the detailed performance by company for 2012. The six Strong Buys were up an average of 19.6% each. The 17 Buys were up an average of 14% each. Only 3 of the 23 Stocks rated in the Buy or Strong Buy range at the start of the year fell in price. Meanwhile, the the TSX was up only 4.0%. The Dow was up 7.3% and the S&P 500 was up 13.4.

My own portfolio benefited from being concentrated in some of the better performing stocks and from buying on dips and a certain amount of selling on rallies and in general a certain amount of trading during the year. I managed a 27.6% gain (subject to the final numbers on my December statements which tend to differ very slightly from the online figures).

All the Performance figures are updated for 2012.

There is really no such thing as a typical gain in the stock markets. Some years will assuredly be negative. But overall stocks do tend to rise in the long term. Add overall our approach has beaten the market. But we make no guarantees or promises about the future.

Every year at this time I make a special effort to update as many of the reports as possible. This has now been completed.

It is also appropriate at this time to remove a few companies. The Brick is deleted from the list because it was taken over by Leons.

I am removing E-Bay because it is out of date. It rose a surprising 68% in 2012. I do not have an interest in updating it at this time.

I am removing Walgreen because it is out of date. I may update it and add it back at a later time.

Omni-light industries is removed because it is out of date. This was our only micro cap company last year. It did not work out well. It may be a good company but I am not too interested in updating it.

Costco is updated and rated Weak Buy at $98.73. It always seems expensive as a stock. As a company it is a fantastic business. It has co0st advantages over stores like Walmart, Target and all specialty retailers. It has the ability to open new stores that will instantly draw traffic and be profitable.

It has recently paid a special dividend and also has been buying back shares. It is not the case that buying back shares or even paying dividends is automatically a good thing. It may be that Costco has excess cash and/or has made too little use of debt. It borrowed the money to pay the special dividend. Cost co shares trade at 3.4 times book value. If it came down to a choice between building a new store at 1.0 times book value or buying back shares at 3.4 times book value, then shareholders would clearly be better off with the new store. If it is the case that Costco can build all the new stores that it can comfortably manage in a year and still buy back shares and pay special dividends then it does make sense to do so.

As a customer I am increasingly a fan of Costco. I know they mark up products by  maximum of 15% over their cost for the goods. Therefore I am confident that I am getting a good price on anything I buy there.

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

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

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

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

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

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

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

Bank of America was up 2.6%.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I thought about trimming some positions today but did not.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nothing too exciting happened with our stock picks today.

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

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

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

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

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

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

Here are some additional thoughts on Canadian Tire.

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

The following Table provides a comparison:

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

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

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

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

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

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

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

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

Markets were modestly higher today.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dow down 0.3%, Toronto down 0.2%

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

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

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

See the editorial here:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I am glad I don’t own any shares.

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

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

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

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

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

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

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

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

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

Markets were reasonable strong on Friday.

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

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

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

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

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

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

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

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

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

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

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

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

And Canadian Tire was down another 0.8%.

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

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

I bought a modest amount of RIM today.

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

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

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

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

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

A Tale of Two Lenders…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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