Tuesday, May 24, 2011

All the same old fears


Inflation is coming and the economic growth in the BRIC countries will stall. Europe's debt crisis is back on the front page, including a volcanic eruption in Iceland. The latter is sure to bring down the world economy if the other fears don't. We have been hearing this stuff now for some years; do you really believe that this has not been discounted in the stock market?

Ladies and gentlemen, may I re-introduce to you the Wall of Worry. Yes we had a great run from Mar 2009 until today along with some interruptions or minuscule corrections. Yes inflation is on the increase, in particular in China where it hit close to 5% - Wow!




Dow Jones and TSX over last 3 years. Sourced from GlobeinvestorGold

 Compare that to the 1970s when inflation in North America exceeded 10%. I guess everything is relative. In the meantime the Chinese and other BRIC governments have combatted the threat of inflation for nearly 2 years now and later in the year inflation is expected to peak along with decreased GDP growth. So now that we reach the point where we see some of the effects of these government efforts, we're worried that world economic growth collapses. If you believe the pundits, things always seem to be too hot or too cold and never just right!

I am not saying that one has to see the world through rose coloured glasses. But neither should we panic when we go through a period of profit taking. To some degree, as pointed out in earlier posts, all this worrying is reassuring because we are definitely not in a state of blind euphoria. After the positive earnings reports of the most recent quarter gave us enough confidence in the recovery and with no new news coming out, it is time again to worry about the Europeans, just like last year. Morgan Stanley feels we have already had enough of a correction in oil and other commodity prices and it is time for $130 oil.

Well, I don't know whether they're right and neither do I know whether the stock markets will fall no further. I do notice though that over the last number of weeks, a fair number of companies are priced at quite attractive levels and I am on the war path again. My cash levels are around 15% and it is itching as coins in the pockets of a little boy in the candy store. But itching is not the same as buying and there is still a lot of risk in the market.

Basically, I still focus on the short term parking of my cash in preferred shares which, especially on an after tax basis, pay a lot more than GICs or savings accounts. Don't buy perpetual preferreds or bonds with fixed rates – inflation is likely to pick up over the coming years and that will erode the value of those instruments. But preferred shares that expire in 2 or 3 years and that trade well below par while paying good dividend yields look yummy! Avoid companies that are not of blue chip quality. You want to be sure that they're around when their preferreds are due.

Oh, and don't invest in those European financial institutions. The risk is too high right now and Canadian Banks, although not stellar performers this year, are a lot safer. I still expect a significant upturn this coming fall, so be prepared to buy some finger licking equities when you come across it while maintaining a comfortable cash cushion (10-15%).

Monday, May 23, 2011

A bit off the beaten track


As an investor you're always looking for new trends. Not necessarily for direct investment but to better understand where society and money is moving to. Portland is often mentioned as the U.S.'s greenest city and Calgary's SID21C (Sustainable industrial Development for the 21st Century) organized a tour led by SID21C's founder Nattalia Lea (http://sid21c.com/).

SID21C is a Calgary based networking group for business people interested in creating a more sustainable world. At SID21C's monthly luncheon meetings in the Danish Canadian Club guest speakers from all over the world present sustainable ventures that range from … Virgin Airlines' green initiatives, to Ben Santarris of Solarworld reviewing solar panel manufacturing, to Alberta developed technologies that increase the growth rate of algae. The latter form the basis for e.g. the generation of biofuels.


Keen store in Portland

OPT schematic of PB150
  Last week's tour included a visit to Keen (http://www.keencanada.ca/default.aspx ), a sports shoe designer with a funky, new HQ and store constructed out of mostly re-used materials located in an old army warehouse. Also included was a visit to Oregon Ironworks which together with Ocean Power Technologies  ( http://oceanpowertechnologies.com/tech.htm ) is in  the process of building a buoy to generate energy from ocean waves (see photos); and a tour at solar panel manufactor SolarWorld. We met representatives from Nike which creates flooring from shredded recycled sports shoe soles and City of Portland municipal representatives. The latter told us about that city's extensive green initiatives ranging from an extensive public transportation system to storm sewer management using planters to regulate and filtrate excessive rainwater. The city actively promotes walking and bicycling as alternatives to commuting by automobile. Portland vies with Seatle over the U.S.'s highest number of LEED qualifying buildings per capita.




PB150 construction site at Oregon Ironworks.



PB150 top buoy assembledge. Use the person in the foreground to estimate the size of to buoy
 The beauty of all these initiatives is that it is not driven by a group of stereotypical climate-change activists. Rather, the major driving forces are a strong sense of community with associations providing extensive input and initiatives from the business community. City Hall's emphasis lies on facilitation rather than mandatory regulation. Large portions of Portland's MAX light rail system are sponsored by local businesses. The business community benefits not only through offering its employees a better lifestyle but also through cost savings that help the bottom line. SolarWorld has plants employing hundreds of local employees and its sales volume grows not in percentages but by multiples! A new facility has the capacity to output nearly a solar panels every 18 minutes. Nike is headquartered in the area with a playful and highly sustainable campus that even holds fishing ponds. Other light industries such as Intel provide numerous employment opportunities.

Portland's carbon foot print has been reduced to 1990's levels; not quite the original target of 10% below the 1990 level. But this should be seen in the light of a population increase over the last decade or so by nearly 18%.

SolarWorld is a publicly traded company listed in Germany (DAX – symbol XETRA) and as an over the counter stock: SRWRF:OTC US.


BTW. Photos were taken with my new Blackberry Playbook. I am currently losing money in RIM shares. :)

Saturday, May 14, 2011

A diversified portfolio enables you to take the long view

As a budding investor I watched the stock market day by day. I got concerned when a stock did not keep up with the market because it affected my portfolio significantly. Today, I couldn't care less. Only when an investment hasn't panned out for several years do I start to wonder if I should get rid of it, or hold on, or to buy even more.

Last month oil prices were sky rocketing and oil stocks peaked. This month we have a large correction. The earlier media screams about buying the hottest oil stock in town have been replaced by cries ranging from the end of the 'oil bubble' to changing your portfolio significantly away from commodities. As if one could do that when invested in only the Canadian stock market! Look if commodities prices crash, so will real estate and so will manufacturing and so will Canadian banks. In Canada, all is intertwined. Never forget that!

When looking at the masters most take on the longer view, whether it is W.B. (the oracle of Omaha) or John Templeton or Jim Rogers who was recently quoted in the Globe and Mail.

On the 'collapse of silver', Rogers states: "I hardly see how silver could be a bubble when, even at its [recent] top, it's still below its all all-time high. That is not much of a bubble. A bubble is when things are screaming up every day and they go to new highs, two to three times their old highs. We'll have a bubble, we'll have a bubble in commodities, we're not there yet."

Question: So silver fell 27 percent last week, was it enough for you to buy more?

Rogers: "Well, I'm too lazy, I'm doing other things right now, but I hope at some time in the next month or two if it goes down or stays down then I will get the energy to go around and buy some more silver, yes. Or maybe it will go to $25, I don't know".

Question: But didn't you sell anything?

Rogers: "No, no, no I have not sold any commodities. I protect myself by being short… in other things. I am nearly always short in something. I'm nearly always long something, fortunately my shorts went down too last week."

Question: So what are you short versus long?

Rogers: "Well, I'm short emerging markets and I'm short American technology stocks cause those are two areas of the world stock markets that have been very over-exploited in the past two to three years. They're not great bubbles, they're not great shorts, but they're better shorts than nothing."

[Godfried's comment: does that mean that he is overall bullish?]

Question: Then what are you long? Commodities then?

Rogers: "I'm long commodities, mainly its commodities and currencies.

[Godfried's comment: Here comes the crux regarding the long view of a seasoned investor]

Question:" Now you've been saying that there is no oil and that's why oil prices are going up. What did you specifically mean by that?"

Rogers: "Well, there have been no new elephant discoveries in over 40 years. All the great oil fields in the world are in decline now and unless we find a lot of oil quickly then we're not going to have any oil at any price. The international Energy Agency is going around saying "look, the world is running out of known reserves at 6 per cent per year."

Well say its 4 per cent per year, say they're wrong. I mean in 25 years, Ms. Steel, we won't have any oil at any price unless someone does something very quickly that's all I mean, there's no oil, there's no new oil."

Question: It just seems like if that's the case then natural gas price should be through the roof in preparation of a lack of oil?

Rogers: "Well, there is a short term glut of natural gas, but you're exactly right, people are going to have to use other forms of energy and if I were looking at energy markets right now I would start by looking at natural gas because its way down and oil is way up."

Question: So how high will oil go on this supply issue?

Rogers: "Oh, if I told you how high the price of oil would go over the next decade, you'd stop talking to me, you wouldn't believe me. 'He's finally lost it, he's gone over the deep end.'

Do the arithmetic. If reserves are going to continue to climb [Godfried: should be 'decline'] at 4 per cent-5 per cent-6 per cent a year, in 10 years there is going to be very little oil left. Now we would have brought in alternate sources such as natural gas and other things but we are still going to be in a bad bind. Prices are going to be very high.

Eventually prices will go so high that people will probably start finding new oil ... if oil goes to $200, they'll drill on the White House lawn, $300 drill at Buckingham Palace. Hopefully, someday, we'll find more oil, or more sources of energy and people will cut back at the same time."

So natural gas would be the one you'd focus on?

Rogers: "I would start by looking at natural gas or maybe uranium. Uranium has been pounded down recently for obvious reasons. It will probably have to sit around on the bottom for a while but that's another place that's very depressed. And we are going to have to have nuclear power whether we like it or not. "

But say wind and solar don't make it on your list?

Rogers: "No, of course it does ... but wind and solar are not economically competitive at these prices. Now if prices go higher and higher of course, they'll be very competitive and, of course, governments love wind and solar, so they will subsidize. If you can find competent people in that business, you'll make a fortune. "

I know I've been harping on gold, silver, and oil but what is your favourite commodity? The one you think that has the most upside long term?

Rogers:" If I were looking for new commodities now I would start by looking at the things that are depressed. Natural gas, you picked an obvious place to start, I would look at things like rice, rice is very depressed ... silver's cheaper than gold on a historic basis.

I would start looking at those places. I don't like to start with the things that are making new highs. By the way, there are plenty of great investors who do invest that way, they are momentum players. They jump in and get on a moving train. I'm scared to death to get on a moving train and if I do I always get hurt. "

Godfried's final comments: If you have enough investment funds you can afford to buy low now, e.g. natural gas, and wait for several years for this investment to come to fruition. It does not take a genius to figure out that gas is selling at prices below which it can be explored and produced. So it is just a matter of time for prices to double or even triple. Can you wait for 5 years for the price to double? As Jim Rogers says: "Do the math" and use the rule of 72. Divide 72 by the number of years it takes for your investment to double and the result is your annual compound rate of return. So 72 divided by 5 is 14.4% compound ROI per year.

You can look at real estate the same way. Prices in Calgary rental condos are depressed but on average over the last 40 years or so they appreciated at a rate of 4 to 6%. Using leverage that would translate in a return of nearly 20% as shown in earlier posts. So can you outwait an undervalued real estate market?

With a small portfolio waiting five years while it does not grow or even declines may seem interminable torture. But over the long term holding on will bear its fruits. If you have a diversified portfolio, other investments may take up the slack and it may be easier to be patient.

Also, larger investors have learned that this approach works. That is why the Warren Buffetts and Jim Rogers of this world have the fortitude to stick with their bets unless there is a truly fundamental change such as the discovery of a cheaper alternative energy than oil. For now that is a risk far out at the investment horizon; even for Jim Roger's investment horizon. Jim is in his seventies and Warren Buffett is in his 80s, so how long an investment horizon can you have when you're 25? Especially if you're thinking family net worth, this may include future generations!


 


 


 

Saturday, May 7, 2011

Conrad called it right


I have been enjoying my new Blackberry Playbook immensely. With painless updates, it gets better and better. Analysts may sound grumpy about the need for a companion blackberry phone, but that is just what I love so much about my playbook.

I don't need an extra wireless subscription! With Playbook I connect by Bluetooth to my cell for which I already pay a subscription and download my e-mails. When at home, I lock into my wireless network, just by walking through the door!

I also love the on-line news services, paid for by the newspaper advertisers. I have now access to the Globe and Mail, the National Post, the Calgary Herald and the Edmonton Journal while sitting at the breakfast table. Talking about green! No more newspapers in the recycling bin. Well, that is when I can convince my wife to switch to her own Playbook!

And then there is Conrad! "Who is Conrad?" you may ask. Well, Saint Conrad is a visionary columnist, I swear he is so good, he forecasted the Conservative majority and the rise of a two party system in Canada while all the pollsters and other pundits in the newspapers were scaring the crap out of us little investors (sorry for the liberal word 'crap') by telling us we're gonna have a NDP-Liberal minority government supported by the Bloc. But Conrad knew better. Not only that: Conrad's linguistic skills are much more erudite than this poor blogger's disastrous rumblings.

Hat's off to our partly exonerated, very persistent ex-jailbird. Lord Conrad may have been at times arrogant and pompous, especially in his days as invincible CEO or Chairman of a wide variety of corporations, but he has seen the light. I guess, in his older more-confident days he pee'd off the wrong people and poor Conrad was dragged into jail for whatever reason the accuser could dream up. In the end Conrad was convicted (if I got it right) for carrying out some boxes in the dark while being recorded on video. Even bringing back the boxes, no matter what they actually contained, kept Conrad out of jail. Too many in this society, love seeing a successful person paying the price! Not that we're all socialists or fans of Jack Layton, but seeing one of the powerful elites bite the dust gives a sense of satisfaction to us members of the grey masses.

Conrad has changed in jail. He laments the poor jail conditions and has become a proponent of jail-reform. There are here many considerations, one of them is that putting a large portion of your population in jail does not necessarily lower the crime rate or drug use. Strangely enough, drug use among the native Dutch population (i.e. excluding tourists) has declined with the legalization of some drugs if memory serves me right. It is not that Stephen Harper is right in everything – the topic is just too complex to be solved with a few headlines. But Conrad is standing up for the people that are incarcerated and he speaks from hard experience. I respect that. Maybe Conrad has seen the light and is a somewhat changed man with a softer outlook on life – will he end up with aristocratic sainthood? I doubt it, but Conrad's pre-election analysis and now again his interpretation of what a Harper majority may mean is very instructive and full of interesting insights that go clearly beyond the average newspaper blabber. So hat's off to Conrad and here is the link to his last column. Yes! Conrad called it right.

http://fullcomment.nationalpost.com/2011/05/07/conrad-black-the-full-measure-of-harper%e2%80%99s-triumph/

When is the price right?


Market timing is near impossible according most of the big investor names. Earlier I presented you though with some ideas about how to value stocks and to buy at the right price. Opportunities to buy at the right price occur much more frequently during depressed markets or in recovering markets while they become exceedingly rare during speculative market bubbles or raging bull markets. So we're buying good companies at good prices not at any price!

BTW most stocks that I like, I do own myself. I have been muttering about Microsoft, Johnson and Johnson, CNRL, the Canadian banks, XIUs and many others. When I write about them there is a good chance that I own them as well.

I do not make recommendations; I just use these stocks as examples. However, If I write here on this blog that I like a stock why wouldn't I buy them? This is also true for today's example: Manulife (MFC). In fact, I owned MFC for many years and collected faithfully the dividends.

But the events in 2008 disgusted me and I sold because I saw better places to put my money elsewhere. I sold it all. The reason for my disgust was that Manulife's management, in its arrogance or pure stupidity, had sold investments where they guaranteed its performance without the appropriate back up. That was done during a BULL market – how stupid do you get? They had sold so much of this investment type that when the market tanked the company got into big trouble.

Well, they have hopefully learned. In the meantime their sales of many other products haven't declined. Manulife is still a 'play on the stock markets and on interest rates'. A little like Berkshire Hathaway! Manulife uses its insurance premium income to invest. So that is the ultimate form of using 'other peoples' money to make a profit.

The company does extensive research to determine its risk exposure to the numerous hazards their premium payers may experience. Once the potential damage pay-outs and the operating costs (admin, marketing, etc.) are taken care of they can use the remaining money for investment. Since the damage claims do not happen all at once, they can also use that portion of the premiums that is not due right away for investment. Same like Mr. W. Buffett does.

In 2008, MFCs investment acumen was far from perfect and many years of profits where gone out of the window; their stock was punished accordingly (see figure). As of today, their share price is not far off the lows reached in 2008-2009.
Chart is from GlobeInvestor

In the meantime, the company has rebuild a lot of its capital, its revenues have kept on increasing (see figure below) and soon its profits will recover as well (one certainly hopes so). Manulife makes money from higher interest rates and an appreciating stock market – that is where most of their money is/will be invested. Consider it a mutual fund that is highly levered using other peoples money (and hopefully this time with better risk management).

If you are a long term bull, like me, especially when you think we're at the beginning of an era of higher inflation and interest rates, then Manulife is the place to be. Below is a screenshot of the Manulife data as provided by the Canadian Share Owner Association – I highly recommend membership and also subscription to their data base.


The chance that this stock will go down a lot  is, in my judgement, low. Based on my assumption of a P/E high of 16, average annual earnings growth of 10% - once its earnings have recovered to their old levels, and a dividend yield averaging 2.5% (better than after tax GICs by itself), the share price might go as high as $95 per share in the coming 5 to 10 years.

So for more aggressive investors who want to diversify away from Gold and Oil, here may be an attractive investment opportunity. This is just an example as to 'how to buy at the right price'. It also shows that this type of investing is not risk free and that you should only do it when it forms a small part of a larger portfolio.