May 3rd, 2013

Last week, Apple Inc (AAPL) issued $17 billion in investment grade, double A plus-rated corporate bonds. According to ft.com it was “the largest corporate bond issue ever, despite having $145 billion in cash”. So it isn’t that Apple needs more cash to fund share repurchases and dividend payments,
both of which they are undertaking now. However, retail and institutional investors alike continue their “chase for yield” buying almost anything with a dividend, and urging companies to distribute more. Hedge fund manager David Einhorn filed a suit against Apple in February suggesting the creation of a perpetual preferred as a way to use its massive cash reserves. So it does come as a surprise when Apple decides to raise even more cash.

CNBC’s Fast Money contributing panelist, Brian Kelly likened the issue to “Ponzi financing”: the borrowing of money from one set of investors – in this case, the bond holders – in order to buy back stock and fund its dividend requirements for another set of investors – in this case, the common shareholders. An illegal Ponzi scheme (remember Bernie Madoff?) is where the returns for the initial investors are derived from the money paid by newer investors rather that from any organically generated profit. Mr. Kelly isn’t saying that Apple’s actions are illegal but exhibit similar characteristics. Ft.com reported that Apple’s strategy does provide a substantial tax benefit but in the U.K. there has been “moral outrage increasingly whipped up over the issue.”

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April 30th, 2013

What Happened

• US equity markets continued to rally. Investors looked beyond “sequestration” and the “fiscal cliff” and invested in large multi-international companies with strong balance sheets and large cash positions. The rally was supported by investments in companies who outperformed lowered financial outlooks.

• The US equity rally was further buoyed by projected low interest rates which continued to drive investors and savers to seek enhanced returns by investing in dividend paying US equities.

• The underperformance in Canadian markets further supported the rally in US equity markets. Concern about fragile recovery in commodities proved a drag on commodity based markets such as Canada and BRIC markets. Despite improving fundamentals in commodity based companies, investors looked to US equity
markets for investment opportunities.

• The Cyprus banking crisis dominated global news. While a small country, the EU’s decision to force Cyprus to tax bank deposits to support banking bailout costs rattled European markets. Initially, the EU proposed all banking deposits in Cyprus be taxed. Ultimately, deposits under the insured maximum of 100,000
Euros were protected from tax.

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February 5th, 2013

What happened on Friday is as unusual an event as I’ve encountered in some time. Two well known hedge fund managers, William Ackman and Carl Icahn went head to head in a public television debate. Ackman is short Herbalife (sym: HLF), calling it “a well managed pyramid scheme”. Icahn is long.

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January 7th, 2013

Happy New Year to all of us! This is a new column put forward by BBSL written by various members of the firm. It will give the reader multiple opinions and multiple methods from which to choose. Keep in mind there is no such thing as “the right method”. You determine that yourself through trial and error. As respected trading psychologist, Van Tharp says, we don’t trade the market. We trade our beliefs about the market. I believe that price is truth. What price an investment trades at represents the collective belief of all investors, traders and speculators. That is the only true “value” of that investment. The market could care less what you – or anyone – believes value to be. An investor has two functions to perform; the first is the assessment/selection of an investment. But once an investment has been entered into, the second function relates only to the management of the capital invested. When you enter the market, always invest with a pre-established exit strategy because your assessment will not be right all the time.

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November 30th, 2012

What will happen if we topple over the “fiscal cliff?”

Oh dear, what will happen if we topple over the “fiscal cliff?” Over the past few weeks, you may have noticed a strange term in the headlines – one from which market pundits shiver with fear. Since the end of the US Election, the market seems to have discovered it was stuck in yet another quandary; a terrifying new metaphor known as the “fiscal cliff.” Conjuring an image of a dark chasm is not necessarily the best way to maintain investor confidence in an already shaky global economy, it could not come at a ‘better’ time as we enter the tax loss selling season. Needless to say, with all this focus on a completely intangible threat, I have to ask myself, “does anyone really know what the ‘cliff’ is, or even how we got here?”…

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The following information is directed toward clients of financial planners and advisors who use professionally managed funds.

After a few weeks of wild markets and bad news, we thought that some comments and an overview of our management of your investments is very appropriate.

Is this different than the ‘08/’09 decline?

It is different. The banks situation is much better. In 2008/09 there was excessive leverage and distressed balance sheets. We are now seeing corporations actually flush with cash and in some cases buying back their stock at depressed prices.

Professionally Managed Portfolios.

In taking a managed money approach to your investments, the decision making is left to the professionals. As planners, we set up a prudent asset allocation based on your investment objectives and risk tolerance for your income needs. If you are retired or need to access cash to meet your lifestyle, you should have a portion of your portfolio in stable assets (like cash, GIC’s, money markets, bank accounts) to provide for these short term cash needs. That way, the cash is there when you need it (and you do not have to ‘sell low’ to meet those cash needs). Typically (depending on each situation) we recommend that clients have 1 – 3 years of annual cash needs available. (Cash wedge)

Your Mutual Fund Portfolios.

Mutual funds (aside from being pooled investments of cash, stocks, bonds, etc.) have fund managers and are mostly designed as longer term investment vehicles. Fund managers have access to many research analysts whose sole responsibility is to analyze trends and financial reports of hundreds of listed corporations. Many of these managers have varying levels of cash at different times.  We leave any market timing or other transactions to the mutual fund managers (as long as your asset allocation and short term income needs are addressed.) Mutual funds are NOT vehicles designed for short term trading. Our job is to understand our chosen fund managers and evaluate if they are sticking to their investment style and discipline. We speak with these managers daily (especially in times of market volatility).

Tye Bousada, Edgepoint Mutual funds answers this question: How can we possibly get any sleep these days given the barrage of (financial) bad news? 

Answer: “we don’t get too fussed by macro headlines that the media is focused on at the moment. Instead, we focus the majority of our attention on the performance of the businesses that make up our portfolios. The reality is that nobody knows if the markets will experience a further pullback, how sharp it could be or how long it might last, although the media would like you to believe otherwise. We don’t waste our time trying to forecast such things. Rather, we consider the facts surrounding the underlying businesses we own.

What about the USA?

First of all, Portfolio managers buy companies not countries and economies.  There are great companies all over the world to pick from.

Geoff MacDonald, fund manager at Edge Point Wealth Management states: “It is incredibly positive that this (the US debt debate/crisis) has become a very topical topic. Japan, Greece, Italy, Spain, Portugal and many others have simply kicked the can down the road without addressing their fiscal mess.  Both Democrats and Republicans are trying to fix the US’s fiscal mess, they simply have various and different views as how to fix it.  But positively, they both want to fix it and the political will and population support appears to be there to do something.  The fiscal deficit is easy to address as well.  The US is the least taxed developed country in the world.  We all know this when we go down there.  The cigarettes, booze, and gasoline seems free compared to what we pay here in Canada.  All due to their low taxes.  Think about how hard it is going to be in Europe with their high tax rates.  Europe has much less room to manoeuvre.”

“The US situation is easy to fix.  Canada was in a worse position not so long ago.  Mulroney put in a GST and then Martin earmarked a slice of tax revenue to debt reduction.  Our debt to GDP was almost cut in half and our dollar has gone to 65 cents to 1.05”.  Geoff MacDonald, fund manager at Edge Point Wealth Management

Please browse our website for additional resources, as well as:

1) Let’s talk volatility www.fidelity.ca/volatility provides perspectives on what is happening right now.  Learn about emotional reactions that hurt long term growth. Review the site.

2) Why do we Invest in Stock based portfolios?  Most clients need them to meet their long term financial goals. For additional information please click: Are Mutual Funds and ETFs for Me?

3) Follow this link to read up on Mackenzie Financials Stand: Norman Raschkowan, Chief North American Investment Strategist and Team Lead of the Maxxum Funds: Company fundamentals remain solid as Q2 earnings are expected to grow meaningfully, and corporations typically have strong balance sheets with low debt levels. Equity valuations remain reasonable, so this recent sell off has afforded the team with an opportunity to reduce cash and upgrade holdings within the Funds. The team continues to favour equities within balanced portfolios.

4) For investment history since 1934 we offer our Financial Calculators – Click here to see how your investments could be working for you.

A Question to Ponder.

One of our Managers asked us, “Would you be happy with a return of 47 times your money in 41 years?” That is, if a client had invested $1 in 1970, as of the end of June 2011 they would have $47.  Unlike a bank account, the stock market doesn’t go up in a straight line.  Over those 41 years where the market increased 47x you had seven periods (including the current period) where you would have lost approximately one third (33%) of your money. An excellent resource on our website showcases Financial Calculators. One we feel may be of particular interest to you at this time is entitled: Long Holding Periods Reduce Risk – Click here for different scenarios.

Call us today for additional input and outlooks.