The Week Ahead – June 8, 2009

The economic calendar and earnings announcements in Canada are relatively slow. Housing starts in Canada come out on Monday with the consensus targeted at 130,300.

On Monday, there are no announcements while Saputo (SAP) and Major Drilling Group International (MDI) report Tuesday. Viterra (VT) announces results on Wednesday.

MDS, Transcontinental, Transat, and North West Co. all report on Thursday.

To view all consensus estimates and economic reporting, you can click on the following link here. US earnings can be found by going to www.earnings.com .

To get our daily commentary with podcast updates and analyst rating changes, you can visit our site here or even subscribe to get on our email list.

Have a great week.

Consumer Confidence Index…What is it?

Market in North America rallied after the consumer confidence index was materially higher than expected. That’s great but what does it mean?

The National Bank put out a report on May 22nd that answered this question as the index in Canada is quite different than the index in the US. Why are they different?

Well, each index asks different questions and they compile their results on different dates. Once the answers are compiled, they are input and calculated differently to come up with their number.

Marc Pinsonneault of National Bank Financial provides some ideas on how to reconstruct the US index to compare it more closely to the Canadian index. To find out what questions are asked, when they are asked and how the index is caluclated, you can click on the following link here.

Your comments and thoughts are always appreciated.

Why This Market Upturn May Have Legs

The TSX has moved from its low of 7479 to over 10,000 in less than two months. Market sentiment has improved and bad news seems to be ignored by investors driving stocks ever higher.

I was emailed a very interesting chart relating to current and historical amounts of cash sitting on the sidelines in money market funds. In February, there was rougly $3.9 Trillion in US money market funds that represented 60% of the value of the S & P 500.

Today, with the markets increase, money market funds still have over 50% of the value of the S & P. Historically this percentage has averaged18.2%. 

As well, money market funds totalled approximately $2.0 Trillion. With rates nearing 0%, this money will eventually flow out creating tremendous upside potential for the market.

What are your thoughts? Do you think this market has the legs to continue higher?

Look for Value in Convertible Debt

In some of my previous posts, I discussed the value available in the Canadian preferred share and investment grade corporate bond markets. Over the last couple of months, typical preferreds have risen 20% – 25% while investment grade corporates and Tier 1 Capital Trusts have increased 10% or more.

An area to consider for some decent value right now is the convertible debenture market.  A convertible debenture of a publically traded company usually trades on the TSX so pricing is very transparent. The debentures are usually unsecured so they are based solely on the creditworthiness of the underlying company.

The debentures pay a fixed rate of interest with coupon payments being made semi-annually in most cases. Unlike trust units or commmon stock, the interest payment is fixed on the debentures which gives a level of comfort to investors as companies will do whatever it takes not to go into default.

The debentures are convertible into common shares at the investors option at a pre-determined price when issued. This provides the investor not only the interest but an opportunity for capital gains as well should the underlying share price of the company rise over the term of the debenture.

At maturity, the corporation usually does one of two things. It can pay the investors back in cash or shares. If the payment is made in shares, the price used is usually 95% of the average trading price over the 20 days prior to maturity.

Typically speaking, you dont want to be faced with this scenario as the share price will drop continuously over those 20 days. I will get into this in more detail on another post.

Currently most convertible debentures are yielding in excess of 10% with some yielding in the 20% range. The lower yielding convertibles have been able to raise capital in these markets to shore up their balance sheets reducing the risks of holding them. A company like Cominar REIT has a 2014 debenture yielding in excess of 10%. Primaris REIT has one yielding 12%. Debt laden Harvest Energy has debentures yielding in excess of 20%. The debt looks considerably more attractive than their trust units and the debt has increased in value by 30% in the last month.

Look for institutional investors to start picking away at them as the yields on other fixed income investments continue to drop and money markets with all time records amount of cash flow out to find higher yields.

Your comments are always appreciated.

Legal Bills in Madoff Case Will Be Over the Top

Investors with Bernie Madoff have not only lost most of their life savings, whatever is left to salvage will be eaten away in legal fees.

An article posted on Bloomberg.com indicated that U.K. regulatory lawyers advising clients on the financial crisis and the Bernie Madoff scandal will bill as much as as 1,000 pounds per hour ($1,800 Cdn). With multiple lawyers working on a given case at the same time, the legal bills will be astronomical.

Perhaps the SEC can cough up some funds for investors and pay for the legal bills in this case after being warned about Madoff for many years.

 

Your thoughts and comments are appreciated.

Quebec Stock Savings Plan II Should Be Copied

The Quebec government announced plans of introducing a revamped stock savings plan allowing small to medium sized public companies located in that proivnce to raise capital and provide investors with a tax break of up to 150%.

In todays economy it is nearly impossible for smaller companies to raise any capital regardless of industry. Manufacturing companies in Ontario, junior oil and gas companies in Alberta, and mining companies in B.C. could all benefit from a similar program being implemented as a tax break like this would do much to offset the risk  investors seem unwilling to take in todays environment.

Do you think a savings plan with a 150% tax break would benefit small business in other provinces?

Your comments are greatly appreciated.

Steps Being Taken to Prevent Another Meltdown

One of the most difficult things for investors both professional and amateur to do is analyze some of the structured products that are now being called Toxic Assets. Pricing them has become difficult because in alot of cases, the assets backing them are hard to identify and disclosure documents can contain hundreds of pages of data that can take days and even weeks to analyze.

In order to analyze the data, a more efficient reporting framework is being developed to extract the releveant numbers so one pool of mortgages or asset backed securities can be analyzed and compared to another.

This will allow investors and analysts to compare investments and make informed decision in a very timely matter. The reporting system being worked on now is called XBRL that stands for eXtensible Business Reporting Language. For more information on it, I have added a link to the CFA Institute website.

When the government can stop worrying about which company will fail next and concentrate on prevention, you will hear alot more aboout XBRL. Your thoughts and comments are greatly appreciated.

Actively Managed ETF’s Coming to Canada

Up until now, Canadians have had access to Exhange Traded Funds known as ETF’s that give exposure to an underlying stock or bond index, commodity index, or commodity.

Horizon BetaPro launched a class of ETF’s that provide double the daily movement up or down on a variety of indexes or commodities. They are going one  step further taking a page out of ETF’s available in the US for quite sometime offering Actively Managed ETF’s which will allow investors to invest with a particular manager or strategy in a format that gives people intra-day pricing and lower fees.

The Horizon AlphaPro Gartman Fund is being launched later this month witgh an opportunity to have some funds managed by Dennis Gartman. This closed end fund will convert to an ETF no later than March 2010.

You can get more information by clicking here. More ETF’s are sure to be launched in the coming months. Don’t be surprised to see another ETF manufacturer, Claymore Investments, launch their own line of actively managed ETF’s in the months to come.

Do you thing actively managed ETF’s will catch fire in Canada? Your thoughts and comments are greatly appreciated.

Bank Rate Down…Line of Credit Rate Up

Most Canadians with a personal line of credit (PLC) or Home Equity Line of Credit (HELOC) are rejoicing as rates come down as our Bank Rate dropped to an all time low 0f 0.5%  that should ultimately lead to a 0.5% reduction in the Bank Prime rate that is currently 3%.

Hold off on re-doing your budget as your interest costs may be going up rather than down. Most people believe that their line of credit adjusts up or down with prime and the premium above prime stays constant.

This is not the case as I found out recently that the small print in some line of credit contracts indicate that the bank can increase the premium above prime at their discretion. I read one contract that indicated the bank could increase rates to as much as 6% above prime and intended to increase their premium by 1% on all lines of credit in April.

While the government is trying to encourage consumers and businesses to spend our way out of recession, banks are taking steps to increase margins and profitability. There is nothing wrong with wanting to increase profitability but one questions the timing based on the struggles that our economy is currently facing.

What are your thoughts on this interest rate increase? Were you aware of a banks ability to increase rates at their discretion? Your thoughts and comments are greatly appreciated.

Canadian Banks: Don’t Invest for Yield Alone

Canadian bank stocks have become extremely tempting with dividend yields at levels that I cant remember. Bank of Montreal had a yield of over 11% yesterday while other banks are yielding in the 7% – 8.5% range.

On the surface, those looking for yield will choose Bank of Montreal. The next question one should ask after looking solely at yield is how safe the dividend is in the future.

Rob Sedran, Bank Analyst at National Bank Financial, discussed the outlook of the Canadian banks on a conference call today. He believes that the dividends are safe for now on all of the banks without any guarantees.

That being said, the dividend payout ratio should be looked at closely to determine how safe a particular companies dividend may be. We can just look at income trusts and how distributions get cut when cash flow or net earnings drop.

Bank of Montreal’s dividend is the highest but their payout ratio is also the highest as 75% of their net earnings right now go to pay dividends on their common shares. This leaves 25% of earnings to grow the business which is not a great use of capital in the long-term.

The other major banks have payout ratios in the 40% – 59% range of forecasted 2009 earnings giving them a greater cushion to maintain their dividend that will allow them to increase their dividends quicker when things turnaround.

What are your thoughts on the Canadian banks? Will they cut their common share dividends or will they maintain them going forward?