Interest Rates Beginning to Settle. What's Next for Your Portfolio?

With the Bank of Canada holding the policy rate steady this month at 5% (Financial Post), it might be time to reconsider some of the interest rate sensitive securities that have been beaten down in the marketplace. 

Since reaching a low of 0.25% in 2022, rates have been steadily rising as the Bank of Canada combats inflation (CTV News). With inflation now starting to turn lower, and consumers showing some signs of fatigue, policymakers at The Bank have let off the gas, indicating that there might be some relief (or at least no new pains) in sight for rate sensitive borrowers.

What does this mean for your portfolio? Utilities, REITs, Preferred Shares, and other rate sensitive assets might start to look a lot more attractive on a real return basis. Canadian Utilities (CU.TO), Riocan (REI-UN.TO), and George Weston Preferred Series A (WN-PRA.TO), are down 15%, 17%, and 7% respectively Year-to-Date. Fear of further rate increases have pushed these assets lower. Now that rates have paused, investors might start taking another look. 

Is the Bank set to lower rates soon? Likely not, at risk of stoking further inflation. However, Canadian households are heavily indebted, which makes further rate increases a particularly risk proposition for the Bank of Canada, which is tasked with promotion financial stability. In a report by the CMHC: ""Canada's very high levels of household debt — the highest in the G7 — makes the economy vulnerable to any global economic crisis... When many households in an economy are heavily indebted, the situation can quickly deteriorate, such as what was witnessed in the U.S. in 2007 and 2008" (CBC News). 

This also might mean the return of the 60/40 investment portfolio, which has been a bit of a pariah as of late. This portfolio allocates 60 percent to equities, and 40 percent to bonds, and was popularized by financial gurus of the past, including John Bogle at Vanguard (New York Times). With bond yields rising over the last year, bond prices were getting hammered, and this was leading to poor returns for many 60/40 investors. With yields starting to stabilize, and even turn lower, you have seen much more positive returns for the 60/40 balanced portfolio. 

Remember, don't put all your eggs in the same basket, and maintain caution. 

Happy investing everyone. 

- Matthew. 

Behavioural Psychology and Investing: Be Aware of Investor and Stock Market Expectations.

Behavioural Psychology and Investing: In his book “The General Theory of Employment” renowned economist John Maynard Keynes devoted a wonderful chapter to investor expectations. In the book he notes that investors are generally concerned “not with making superior long-term forecasts of the possible yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.” The basic premise of his theory is that in determining the value of an investment, a lot of fundamental and intrinsic value analysis can be a waste of time when all that really matters is what other people, on average, will think that the stock is worth over the next few months or years.

Of course, if you were buying the whole company, the most important thing to you is going to be earnings, and future earnings, because that is the money that you will put in your pocket. As a short- term investor, however, you only want to know what other people might pay for your stock over the next little while. In this case, the emotion of the investing public plays a crucial and pivotal role. Investors like Keynes have been highly successful at times by trying to predict the emotions of the general public and how this will affect the price of securities.

One very simple, but sometimes very effective strategy is to always buy your stocks on pessimism and sell into positivity. Remember, if everyone is already positive on a stock that means that there might be very few new buyers. If people are largely negative, a shift in company news or opinion could result in a stream of new buyers. Also, if you own a company whose shareholders have high expectations, be careful at the first sign of bad news... it could mean a stream of new sellers. As Warren Buffett always says “Be greedy when others are fearful, and fearful when others are greedy.”


Happy Investing : )

Research in Motion Layoffs. RIM Laying-Off 2000 Employees to Save Costs. Number in Canada not Announced.

Canada's Research in Motion (TSE: RIM) will be laying off 2000 employees in order to save costs. This represents more than 10 percent of the company's workforce, and is more lay-offs than many analysts had previously expected. Some think that this might mean that the situation at the company is worse than expected, but others maintain that it is just an important part of their restructuring efforts to increase corporate profits.

According to RIM, the reduction is: "a prudent and necessary step for the long term success of the company and it follows an extended period of rapid growth within the company whereby the work force had nearly quadrupled in the last five years alone.”

RIM has not announced where the lay-offs will take place, but if the company hopes to save any substantial amounts of money, they will probably be from North America. More information on the cuts will be announced on September 15th, and chief financial officer Brian Bidulka will oversee the cost-cutting program.

The major worry with the investment community is that these lay-offs may not be focusing much on the future, but on quickly shaving costs for short-term gains in profits. However, it is important that the company is moving quickly and indicating to the public markets that it is actively looking after shareholder resources. A major danger, however, is that human capital is crucial in the technology industry, and having your employees move elsewhere means that they can take their valuable ideas and intellectual capital with them.

Happy Investing : )

More Canadians are Expanding into the Wine Business. How to Invest in Canadian Wine.

An increasing number of Canadians are choosing to make their fortune an old fashioned way, in the wine business. In this country, growth in the wine industry is outstripping growth in the other beverage sectors. Having grown at annual rate 7.6% since 1998, growth in wine production in Canada is outstripping many other areas of the economy. But beer, however, remains the beverage of choice for Canadians as this country has about 10 million beer drinkers. 

The dominance of beer in the country, however, is coming under attack, and producers like Molson Coors (NYSE: TAP) are taking note. The stock is essentially flat on the year, but profit margins have been coming under increasing pressure from foreign competition, spirits, and now wine. 

"However, domestic vineyards are facing a number of challenges and are going to have to fight to retain their share of the Canadian market," says the Bank of Montreal. Our industry is heavily reliant on domestic consumption. This basically means that it is mostly Canadians who buy Canadian wine, with little being exported abroad. Indeed, between 2001 and 2010 exports actually dropped from 15% to 4% of production volume. With countries like Australia, Argentina, Italy, and France all producing very good wine, it is difficult for Canada to compete.

But for those investors looking for something different in their portfolio, there are a couple of Canadian stocks you could look at:

Andrew Peller Ltd. (TSE: ADW. A)

Magnotta Winery (TSE: MGN)

The Intelligent Investor Top 10: Growth and Income.

The Intelligent Investor Top 10:

As a new addition to the Intelligent Investor Blog, I am adding a top ten stock holdings list. Updates and news on the top ten companies to own for the longer-term will be regularly and continually updated. As a measure of personal conviction, and for full-disclosure, I will personally have a position in each and every company on the list. 


The list will be for growth and income oriented investors who wish to generate above-average total returns through both capital appreciation and rising dividends. Questions and comments on the businesses, or the list as a whole, are both invited and appreciated as it forces investors, including myself, to defend and reinforce their ownership. As an intelligent investor, if you cannot present a rational and prudent reason for owning a business, SELL IT! 


Some positions in the list are for there for defensive reasons, while others are for growth. It is always important to possess a little bit of both. No matter how right we think we are, it is important to remember that even the Intelligent Investors can never be right 100 percent of the time.


THE INTELLIGENT INVESTOR PORTFOLIO:

1. I SHARES SHORT-TERM BOND ETF XSB
2. RIOCAN REAL ESTATE REI.UN
3. I SHARES S&P 500 ETF - CDN CURRENCY XSP
4. SUNCOR ENERGY SU
5. SHOPPERS DRUG MART SC
6. BANK OF MONTREAL BMO
7. GENERAL ELECTRIC GE
8. IMPERIAL OIL IMO
9. TMX GROUP X
10. JOHNSON AND JOHNSON JNJ

Other personal positions will be added to the list when, and if, they replace one of the Top 10 holdings.


Happy Investing : )