Newsletter September 18, 2007

InvestorsFriend Inc. Newsletter September 18, 2007


Wow, look at Canada’s loonie (dollar) soaring to 98.8 U.S. cents today. This is the same dollar that reached as low as 62 cents U.S. just over five years ago in early 2002. The same loonie dollar that started this year at about 85 cents!

So… what to do?

First, I think the Canadian currency needs a new name. When Canada’s dollar coin debuted in 1987 with a “loon” etched on it, it was never the intention that the Country’s currency take on the ignominious and embarrassing moniker “loonie”. This was followed up in 1995 by the two dollar coin which horrifyingly and unimaginatively enough became known as the “toonie”.

The now mighty Canadian dollar deserves a new name and I propose we call it the “Maple”. Actually, I stole this idea from the bond market where bonds issued in Canadian dollars by foreign companies are known as “maple bonds”.  This name could catch on quickly if the mint issued a new coin with a maple leaf etched on it. After all the internationally recognized symbol for Canada is the maple leaf and certainly not the “loon”.

At the same time Canada should in fact drop the word dollar from its currency and officially re-name the currency the maple. I am dead serious on this. After all, this would build on the maple leaf as our world recognized national trademark.

Also, there is a mistaken notion that the Canadian dollar “should” be worth one U.S. dollar. That is simply not true. In a world of floating currencies the Canadian dollar floats up and down against the U.S. dollar. If the name of the currency is changed to the “maple” then the wrong-headed notion that it should be equal to a U.S. dollar will eventually fade away.

But if you don’t like the above idea, I have another one. Canada now has an absolutely glorious opportunity to adopt the U.S. dollar. If Europe can get by with a single currency, then surely North America can as well. This rise in the Canadian dollar is absolutely wreaking havoc with Canada’s huge trade with the United States. A unified North American currency would bring many benefits. After a one-time (and admittedly painful) adjustment to this higher dollar Canada would never again have to worry about fluctuations against the U.S. dollar.

It would have been impossible to adopt the U.S. dollar when the Canadian dollar was at say 75 cents because Canadians would have had to take huge pay cuts and housing prices would have fallen precipitously etc. Those kind of changes worked in Europe partly because they changed to the (new to them) word “dollar” or “euro” for their currency. In Canada it just never would have been acceptable to have a typical salary go from $50,000 Canadian dollars to $37,500 U.S. (or even North American) dollars. Actually, there were serious and widespread calls for Canada to adopt the U.S. dollar when the currency was 62 cents, and that would have been a political disaster of major proportions.

But now, for the first time in 30 years we could, if we wished, adopt the U.S. dollar with no changes needed to wages or house prices.

If the Americans were game we could switch to a new North American currency, the “Noro” or the “eagle”. But in the absence of that, Canada should seriously and immediately consider unilaterally adopting the U.S. dollar and ending the madness of constant currency fluctuations with the United States.

But meanwhile, who is going to be hurt by the high dollar?

I am not at all sure that the Canadian dollar can or will sustain at this high level. Consider just some of the implications.

North American manufacturers that export a large proportion of their products to the U.S. are getting slaughtered. Talk of them “adjusting” to this is ludicrous. How will they adjust to about a 50% drop, in five years,  in the value of each U.S. dollar that they receive for their goods? Oh, I know, they can just drop their wages by 50% and ask their landlord or bankers to take a 50% cut!

It’s hard to imagine why the American car makers are still making cars in Canada. Unless Canadian costs were previously 30% lower than  the U.S. costs, I would think that the U.S. costs are probably lower than in Canada. And, under free trade, U.S. cars can come into Canada duty free. Sorry, but watch for major auto layoffs continuing in Ontario.

Importers meanwhile are smiling. The costs of goods coming in from the U.S. is dropping like a stone.

Speaking of imports, if you need a car why not go and buy it in the U.S.? Canadian car prices have not yet adjusted to the higher dollar and there is a golden opportunity right now to arbitrage by buying cheaper in the U.S. This can be for your own use or to re-sell at a profit.

The tourist industry will be hit hard. Why should Americans come to Canada when their dollar no longer converts to $1.20 or even $1.50 as it did not so long ago? Canada may think it has unique tourist attractions, and there is some truth to that. But actually the U.S. has a lot of fairly similar areas. And if you are talking about wilderness, ever heard of Alaska?

And a lot of Canadians are also going to skip that Canadian vacation and head for the U.S. now that the loonie has soared. Better book that Florida or Phoenix condo early!

Admittedly, all this pain would also happen if Canada did adopt the U.S. dollar now. But at least then it would be a one-time pain and then there would be no more fluctuations against the U.S. dollar.

What about Stocks?

Investors need to be careful about investing in Canadian companies that are being crushed by this dollar. Again manufacturers that export to the U.S. are at obvious and huge risk. The Q3 earnings reports could be down-right ugly. Oil producers are probably okay, because the higher price of oil has probably offset the loss on the currency. Natural gas producers are not as lucky. The pain in forestry companies is severe.

Also, I worry about Manulife. It earns most of its profits outside Canada and I believe that it has only been spared to date because its growth has been so tremendous. If its earnings have slowed down then it should be hit by the currency to some extent. Any company that earns substantial revenues outside of Canada is directionally hurt by this dollar. But they are certainly partially hedged in that their costs are also often outside of Canada. For the benefit of subscribers to our Stock Picks, I will soon provide my thoughts on the individual companies on our Stock Picks list.

Canadians who have invested in U.S. stocks over the past five years have generally seen all their gains wiped out by the currency move. But now is not the time to throw in the towel and give up on U.S. stocks. In fact Canadians have a golden opportunity to move some funds into U.S. dollars. Sure I said that too at 94 cents or lower. It was a good idea for Canadians to average into U.S. dollars as the Canadian dollar rose. Most Canadians will eventually spend some money in the U.S. and it makes sense to have a U.S. dollar account and place some savings in the U.S. to cover those future U.S. expenses.

The Canadian dollar could continue past par. But at some point the pain on the manufacturing and tourist industries in Canada is going to be too severe. The dollar got to 96.5 cents on July 24 and then slipped to 92.8 cents on August 15. So, it is also very possible that the Canadian dollar will slip back. The prudent move for Canadians is to gradually move some funds into U.S. dollars and/or U.S. stocks taking advantage of a lower U.S. dollar cost than we have seen in 30 years.


Shawn Allen, President
InvestorsFriend Inc.

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