Claymore Gold Bullion Trust – A Great Way to Buy Gold

With India adding 200 tonnes of gold to their reserves, gold has hit an all-time high. It was highly anticipated that China was going to purchase this block of gold. With China publicly expressing its wish to increase its gold reserves over the coming years, one can only imagine that gold might appreciate significantly over time.

So what is the best way to play gold? You can buy gold producers but that takes on the risk of an individual companies performance. Some will outperform bullion while others won’t. For those that want exposure to bullion, consider the Claymore Gold Bullion Trust. The symbol is cgl.un on the TSX.

The units trade at a discount to its Net Asset Value (NAV). Today’s closing price was $10.00 and the NAV is roughly $10.40. Most Gold Trusts trade at premiums. Claymore will convert the units into an exchange traded fund if the units trade at a 2% or more discount to its NAV for 10 consecutive trading days starting at the end of November. Once this happens the discount should disappear.

If you buy gold outright as a retail investor, expect to pay a premium over what is quoted in the press. Couple that with any storage costs associated with buying bullion and you will see that Claymore’s product has merit. Another benefit for Canadian investors is that the units are hedged into Canadian dollars.

Typically, commodities move inversely with the US dollar. As gold goes up, the US dollar goes down potentially negating any upside to Canadian investors. In the interest of full disclosure, I do own some of the units personally.

Your thoughts about gold and where its heading are greatly appreciated.

 

 

Life Settlements in Difficulty in Canada

I have seen some ads in the Calgary Herald advertising life settlements yielding 10%. The ads definitely peaked my interest as this was something different than real estate, commodities, equities or even the bond market.

To have a different asset class paying a 10% yield would be quite attractive. Of course, with the rash of real estate deals going south and ponzi schemes rearing their head, one can only be skeptical.

The underlying concept behind life settlements is that a company offers an individual that is diagnosed with a life threatening illness a lump sum while they are alive in return for the proceeds from a life insurance policy upon death.

The company raises money from individuals paying them the 10% interest rate. They are supposed to pay the individuals from the proceeds of the policies which is difficult to pinpoint as they cannot guarantee when a policyholder will die.

The industry is growing in the US with about $12 Billion in policies sold in 2007 according to an article in this weeks investment executive. In Canada, the purchasing of policies is illegal in most provinces so the ones being offered for sale are from jurisdictions outside of Canada.

The main issue that is now plaguing this sector is similar to other unregulated industries. The individuals selling the policies are not registered to do so and are not offering proper documentation to potential investors outlining the risks.

Two companies in Ontario selling these policies have been shutdown while one in Alberta is currently being investigated.

All one needs to do is visit the Ontario Securities Commission or Alberta Securities Commission websites and do a search on life settlements to get more details on some of the issues.

If you have had any positive or negative experiences in this area, your feedback would be greatly appreciated.

 

 

 

Headline Deflation Number Not Worth Reporting

Media outlets have been reporting that inflation was -0.9% for the last 12 months in Canada. Many people will listen to that one number and not look any further.

The headline number includes food and energy prices with energy prices being the main reason for the decline since a barrel of oil in July 2008 was trading as high as $147 a barrel compared to $70 today.

As a result, gasoline prices dropped 28%. The decline in energy prices was quick and steep and will quickly disappear from the deflationary number being reported.

Core inflation which excludes these items was 1.8% and right in line with the 2% target of the Bank of Canada. There was nothing in this report to indicate a change in Bank of Canada interest rate policy.

Going forward, expect energy prices to contribute to the headline inflation number. Just like my post of a couple of weeks ago disecting the jobless numbers, it is always important to read more than the headline in order to say informed.

Your comments and inquiries are always appreciated.

Bonds Are Not Stocks

Bonds are not stocks.

The title of this post seems quite obvious in nature yet the amount of calls we received after Manulife cut the dividend on its common shares and how it affected the pricing and interest payments on their corporate debt was quite astounding.

Earnings per share for the company increased to $1.09 in the second quarter compared to $0.66 for the same quarter last year which is a positive.

The dividend cut will save the company $800 million per year. The savings is a positive for bondholders as there is more money available to make interest payments on their debt and pay principal back at maturity.

Unlike common shares or stock where a company can cut the dividend as it sees fit, the company cannot decide to stop making interest payments as part of a change to its strategic plan.

This is why bonds of a corporation are safer than common shares of the same corporation. There is limited upside but you have layers of downside protection. So what happened to the bonds on the day of the announcement? Not much. Manulife’s 10 year bonds dropped about 1% compared to 15% on their stock.

Corporate bonds move up and down in value based on several factors including interest rates, creditworthiness, and the spread between government bonds moving up or down. To learn more about bonds and how they differ from stocks, you can click on the following link HERE on our website that has an educational piece on bonds.

Your comments are always appreciated.

Jobs Numbers Better Than Headlines Suggest

The latest monthly job numbers in Canada showed a 44,500 decline while the economic consensus was a 15,000 exepected decline. The National Bank Financial Economic & Strategy Group pointed out some figures that suggest some very good takeaways.

Half the job losses were in the food and accomodation area in Quebec. The decline was also among 15 – 24 year olds in the province as harsh weather conditions contributed signficantly to the decline.

Ontario on the other hand created 13,700 jobs, the best number since September 2008. The other very interesting number is that total hours worked in Canada increased for a third consecutive month by a robust 0.3% contradicting the job loss number.

These number suggest that Canada is on track to show 3% GDP growth for the quarterand National Bank expects the employment situation to improve in the next couple of months.

The moral of this post is that it is important to read more than the headline. Your thoughts and comments are always appreciated. Have a good weekend.

Fundamental Indexing Outperforms in Last Year

Fundamental Indexing is a strategy which ranks and weights companies, not by market capitalization but instead by four fundamental financial data points (cash flow, dividends, book value and revenue).

The portfolio gets rebalanced annually and typically overweights companies that are considered value oriented vs. growth oriented.

The strategy was developed by Rob Arnott and his company Research Affiliates. Many have argued that fundamental indexing is a flawed form of indexing. This post is not going to get into the case for or against fundamental indexing but the returns have been compelling against major indexes.

As of June 30, 2009, the TSX Total Return Index was down 25.69% while the FTSE RA Fundamental Canada Index was down only 12.22% outperforming the market by more than 13%.

The US equivalent outperformed the S & P 500 Total Return Index by more than 5% and the global equivalent outperformed by just under 2%.

The 10 year numbers are also quite compelling with fundamental indexing outperforming its benchmark by 2% – 4% in each of these markets. With these results, ignoring fundamental indexing as a viable strategy can cost you performance over the long run.

To learn more, you can click on the following link here.

To find out how to add fundamental indexing to your portfolio, please do not hesitate to contact me.

Your comments are always greatly appreciated.

The Week Ahead – August 3, 2009

The TSX is poised to show a 5% + increase for the month of July with less than 2 hours to go in the trading day while the Dow Jones Industrial Average is up almost 9% for the month.

On the economic front next week, US ISM Manufacturing  numbers come out on Monday. US Pending Home Sales Month over Month and Year over Year for June will be reported on Tuesday, August 4th and June Factory Orders are being reported on the 5th.

In Canada, June Building Permits Month over Month are being reported on Thursday August 6th. The July Unemployment Rate, Net Change in Unemployment  and the Ivey Purchasing Mangers Index are all being reported on Friday.

It will be a very busy week on the earnings front with too many companies to list. For a complete list, you can click on the following link with the dates and earnings per share estimates.

Earnings Estimates

New Research Podcasts

Have a Great Weekend

Get Your Spousal Loan In Place While They’re Hot

When one spouse is in a much higher tax bracket than the other, one income splitting technique to help reduce taxes is to lend a lump sum of money to lower income earning spouse.

By having a formal lending agreement in place, the lower income spouse can start to generate income from the funds at a lower tax rate. This strategy makes more sense than ever right now.

The lower income spouse must pay interest at the prescribed rate to their partner so the interest earned must exceed the interest that has to be paid on the loan. The prescribed rate is at an all time low of 1% making this strategy imperative if you and your spouse are in significantly different tax brackets.

You can even lock in the 1% prescribed rate for life if your loan agreement is set up properly through a lawyer.  Don’t procrastinate on this strategy as it may not last forever at current rates.

Your thoughts and comments are always appreciated.

Buffett Hits Home Run with Goldman Sachs

A short eight months ago, the media was asking whether Warren Buffett, the worlds most astute investor according to many had lost his touch after placing large bets on Goldman Sachs through his investment fund, Berkshire Hathaway.

Goldman Sachs reported a record profit for the quarter as its stock has gone from a low of $47.41 to its current high of $165  giving Berkshire investors a return of 44% in just  a few months. Ordinary investors shunned the thought of sinking funds into a US based financial firm and financial advisors would be fired by their clients for recommending such action.

Give credit to Buffett for placing his money where his mouth was. He was one of the few and these bets are why he continues to do well. On one of my previous blog postings, I attached a New York Times article that Warren Buffett wrote outlining his conviction for investing and Buying American which you can read by clicking here.

Only time will tell if he is right but 60 years of following his conviction and being one of the richest men in the world because of it provides some backing.

Your thoughts and comments are always appreciated. Have a good weekend.

Microsoft and Google Fight to the Finish

Google and Microsoft look to bury each other with damage to each being a certainty. Microsoft earns most of its revenue from two sources, Its Office software suite and Windows operating system licensing fees.

Google earns most of its revenues from paid search advertising. Both firms have been encroaching on each others territory and both will probably become weaker due to it.  Google launched its own suite of software via the web challenging Microsoft as the suite is offered at no charge creating some painful decisions for Microsoft.

 Google also announced it would be launching its own operating system for computer users and the system would be free as it tries to do what Microsoft has done to many competitors in the past. Offer services for free that would bury the competition as there revenue source dries up.

 Microsoft is fighting back however as it announced that there will be an online version of its Office suite available to compete with Google’s version. They have also stepped up their search engine presence with Bing which has been starting to gain market share on Google although it is too early in the game to know if it will be successful.

If Microsoft can gain market share and generate a greater share of paid search advertising revenue, it can put a dent in Google’s bread and butter. As each encroaches on each others territory, the costs to each will be painful but ultimately better for computer users around the world.

Your thoughts and comments are always appreciated.