Newsletter October 7, 2007

InvestorsFriend Inc. Newsletter October 7, 2007

Our Stock Picking Performance

It’s been a volatile year, but our Stock Picks are having a reasonably good year. Our three Strong Buys from the start of the year are up an average of 17.7% each. The overall average for the 24 Buy or higher rated Stocks from January 1 are up an average of 9.3% each. So a reasonable year, but not our best year. When you look at our performance over the last five years, it is truly exceptional. Our Buy and Higher Rates stocks have more than tripled each dollar invested just since the start of 2003. It’s not really realistic to focus only on only our Strong Buys (because there are not enough of them) but since the start of 2003, the Strong Buys from the start of each year are up a cumulative 294%, which is almost a quadruple in value in less than five years.

Realistically, we don’t expect to keep up that kind of blistering pace in the future. But we do expect to keep on beating the market over the longer term.

Realistic Returns from Stock Investing

It’s  wise to have realistic expectations regarding returns from stock investing. The bad news is that it is extremely difficult and rare to maintain returns as high as 15% over the long term. The good news is that a return of around 12% is more than enough to allow ordinary wage earners to become quite wealthy over the longer term. A 10% return is certainly more than adequate to fund an enjoyable retirement, if a reasonable amount is invested over a working career.

The Hulbert Financial Digest has been tracking the returns of investment newsletters since 1981. Their latest issue shows that only two of 16 newsletters tracked for the entire period managed to return a compounded return greater than 15% over the past 25 years. Five of the 16 returned 12% or better. And keep in mind that the past 25 years the market averages did very well. It would have been harder to achiever 12 or 15% at other periods in the last 100 years.

Any investment source that is promising long-term returns of over 15% and certainly over 20% is basically promising something that is probably too good to be true.

Don’t be Overly Skeptical in Life

When it comes to investments you have to be somewhat skeptical. We all know that there are scams out there. But if you become overly suspicious then you will miss many opportunities in life.

For example, it’s not a good idea to fail to buy life insurance if you have dependents, on the basis that you are afraid that someone is just trying to make a commission by selling you the insurance.

The vast majority of business transactions can be “profitable” for both you and the vendor. Commerce is definitely not a “zero sum game”. It’s not the case that for every dollar won in business, someone else lost a dollar.

Even the most honest and ethical of salespeople need to and deserve to make a profit on their transactions with you. So be cautious but don’t be so cautious that you see the world as full of nothing but crooks. That will only cause you a life of misery and will cause you to miss out on many profitable investments and opportunities.

The Canadian Dollar Soars!

In Canada, the business and economic story of 2007 is clearly the astounding rise in the Canadian dollar against the U.S. dollar. The Canadian dollar is up 19% to U.S. $1.02 from just 86 cents at the start of this year.

That is a huge and absolutely stunning gain in the Canadian dollar. The economic impacts of this are also going to be rather large.

From a “pride-in-country” point of view, it seems like a good thing. For example, surveys of world incomes are often done in U.S. dollars. During the period from 1977 to 2001, Canadians’ average salaries in U.S. dollars dropped WAY behind the Americans. On some of those surveys Canadians looked like paupers. Now, in terms of U.S. dollars, Canadian average incomes are absolutely soaring and a “typical” Canadian wage may soon surpass a “typical” U.S. wage. (But the average will likely remain higher in the U.S., since the U.S. has a higher percentage of people earning in the million dollar range, which pushes the average up past a “typical” level).

What impact will a high dollar have on the Canadian economy?

The impact on any country of currency exchange rate changes depends largely on the importance of international trade and travel to tat country. Canada is a trading nation. I understand that trade with the U.S. alone accounts for over 30% of Canada’s GDP. It’s clear that Canadians and Canadian companies do a huge amount of spending in the U.S. and that the U.S. spends a huge amount in Canada (Although these amount are absolutely  huge as percent of Canada’s GDP they are actually quite small as a percent of the GDP of the U.S.)

Clearly a 19% rise in the value of the Canadian dollar in one year will have a large impact. And is this is particularly the case given that the dollar had already risen in recent years about 29% from the U.S. 68 cent level it had spent a number of years hovering around.

CIBC World Markets has stated that the high dollar will not damage Canada’s economy all that much because manufacturing is only about 5% of GDP. I find that to be optimistic thinking. All natural resource industries including oil, gas, timber and minerals are big exporters are hugely impacted by the huge drop in the value of U.S. dollars that they receive. In some but not all cases that pain has been eliminated by soaring commodity prices. Every company that sells a product made in Canada, has just experienced a devastating deterioration in its competitive position against U.S. producers. Even many service products could be affected as some services can be obtained from outside of the Country.

I am expecting a huge increase in cross-border shopping by Canadians. I live in Edmonton, which is over 8 hours drive away from the nearest U.S. shopping destination. And yet, I know several people who have imported a car from the U.S. in the past few months. Everybody seems to know somebody who is bringing in cars and other major items from the U.S.

This is sure to create huge pressure for prices to drop in Canada. Canadians are not going to put up with paying 20% more when our dollar is worth more than the U.S. dollar. This pressure to reduce prices is surely going to hurt many Canadian businesses.

It’s abundantly clear that a Canadian manufacturer selling products to the U.S. could be crushed by this huge drop in the value of the U.S. dollar. But what about a Canadian manufacturer selling to Canadians? Previously imports from the U.S. were perhaps not a threat. Now they will be. So even manufactures selling strictly to Canadians may be badly hurt due to competition.

What Should Canadians Do?

Most Canadians should take advantage. Most of us prefer to support our local merchants. But markets thrive on competition. It’s basically our economic duty (and certainly our economic instinct) to shop across the border if prices are far lower there. So… open a U.S. dollar credit card account to avoid the 2.5% fee that the credit card companies take if you purchase U.S. goods on a Canadian dollar credit card. Plan shopping and vacation trips to the U.S. Shop in the U.S. via the internet. Make friends with your L.L. Bean catalog. On every major purchase research the U.S. price on the internet and refuse to pay more (locally) than a small premium over the U.S. price.

As the Canadian dollar rises, it is prudent for Canadians to transfer some of their retirement savings permanently into U.S. dollars. That makes sense for diversification purposes. And it especially makes sense if you have any plans to eventually spent part of each winter in the U.S.

Some Canadians will even be thinking about buying real estate in the U.S. It does not look like there is any rush, given that U.S. real estate prices are falling but prices in the U.S. already look attractive to Canadians.

No one can say with certainty that the Canadian dollar will keep rising or that it will not slip back substantially. Therefore, I believed that Canadians should begin to take advantage of the high dollar right now.

It is the Best of times in Stocks, but are bad times around the corner?

Heading into 2007, most experts did not expect stock markets to rise more than about 8% and in fact a lot of experts thought that after four years of strong market gains, a negative year in 2007 was a distinct possibility.

It’s been a volatile year in the markets but rather surprisingly we are sitting now with the Toronto Stock Exchange index up 10.3% and the Dow Jones Industrial Average up 12.9%.

Lower interest rates seems to be the main thing that is moving the market higher. And in Canada we very well might get an interest rate cut as a way to stop the rise in the Canadian dollar – and that would boost Canadian stocks.

But I am rather cautious on the markets in the short term. In Canada the Q3 earnings reports could show a number of companies that are hurt by the high dollar. And as Q4 rolls along we may get evidence of major losses with the dollar suddenly above the U.S. dollar.

And in the United States there certainly could be a recession caused by mortgage defaults and by a drop in consumer spending linked to falling house prices. And financial companies at any time could announce large losses linked to defaulting mortgage loans.

My strategy is to raise my cash position so that at least if I lose money on my portfolio, I will have cash to take advantage of bargains.


If you are interested in Subscribing to our Stock Picks, here is the link.



Shawn Allen, CFA, CMA, MBA, P.Eng.
InvestorsFriend Inc.

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