Archive for the ‘Investment News’ Category
Friday, September 11th, 2009 |
In spite of the many articles published here at Dividend Money and the powerful rally that took place over the summer across global equity markets, some investors are still not ready to plunge back into equities.
However, long-term Investors who choose to sit in perceived ‘safe’ investment like savings accounts, CDs and money market funds should realize that the historically low yields are likely going to leave their portfolio returns flat for some time.
In response to the low yield environment, it seems that some are taking innovative (albeit somewhat questionable) measures. That said, an interesting investmetn vehicle has popped up in France that gives a whole new meaning to ‘alternative investing’. It seems that investors over there are turning their attention to an age old option – cow lease contracts!
Cow Lease Contracts
The process goes something like this:
Buy a couple of cows and rent them out to professional farmers for milk production. From a cost perspective, this is a plus as it helps the farmers generate cash flow and frees up money for other necessary expenditures like buildings and machinery. This type of meat market may sound extreme but promoters of cow leasing suggest that the potential yields are 4 to 5 times that being paid on savings vehicles today.
As the herd grows, each new cow represents a new source of cash flow. New offspring cover deaths in the herd, some cows are sold off to cover maintenance costs and in particularly fertile years, the return on investment for each cow can be as high as 7%. Investors can sell the new cows for cash or continue to build up their herd to then draw a regular income at retirement.
Cow Lease Risks
Although it may sound like a nifty little investment strategy, as with all investments these cash cows are not without risk. Fluctuations on the price of meat, milk and animal feed as well as unexpected disease are just some of the considerations for cow contract investors.
While environments of change often motivate innovation (did you know that Disney, FedEx, Microsoft and Apple were founded during periods of economic recession?), discipline remains the key to long-term investment success.
As dividend growth investors, we must remain confident that we are on the right track to achieving our long-term goals. Whether those ultimate investing goals are growth or income. It also means that we won’t need to follow the herd on the latest investment fad or have to convert our houses into cattle ranches anytime soon!
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Wednesday, September 2nd, 2009 |
As we head into the fall and we look forward toward next year, it is important to take a look at the general econimc landscape, assess the data that we have access to, and develop our views on the performance of our investments going forward.
The following are three high-level economic data points that we can use, along with our other tools, to further assist us determining our views on equity market investments.
1.) U.S. Housing
As the root of the credit crisis, healing in the U.S. housing market is a precondition for sustainable recovery. Recent data has confirmed that the worst is behind us and the residential real estate market is stabilizing.
The inventory of unsold houses while still high is heading in the right direction towards clearing and sales of existing homes have recently turned positive on a year-over-year basis. And an index which measures year-over-year price changes of houses in 20 major U.S. cities (the S&P/Case-Shiller Home Price Index) plunged 33.6% from its June 2006 peak to the April 2009 trough, but has now climbed 1.9% over the past two months.
2.) The U.S. Consumer
The resurgence of the U.S. consumer will be key to watch as recovery unfolds since consumption is 70% of the American economy. Despite the ‘hit’ that the housing crisis has exacted on their net worth, American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade.
However, the process of deleveraging (winding down debt) has begun and this will impact spending patterns in the near-term.
3.) The U.S. Manufacturing
The level of manufacturing has historically followed an inverse path to the Fed funds rate but on a 6-month lagged basis – as the fed funds rate drops, six months later, manufacturing activity picks up.
However, in fall 2008, although rates declined to historically low rates, the credit crunch intensified and that typical relationship between low interest rates and increased manufacturing activity did not materialize. More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.
And further improvement just yesterday with the latest ISM level better than expected at 52.9 – the first reading above 50 since January 2008 and hit the highest level since June 2007. This is further indication that while not yet normal, the economic environment is normalizing.
These are three key areas of the market to watch when assessing the high-level economic situation and it’s relationship to the stock market trends and valuations.
Of course this isn’t the be all and end all of data you should include in your due diligence, but it certainly plays a role as you calculate your risk tolerance moving forward.
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Wednesday, August 5th, 2009 |
Just a few days into August and markets seem to have picked up where they left off in July.
Here’s a summary of market action and key developments from last month, including monthly benchmarks.
- Investors saw more data indicating that healing is underway in the global economy. Increased optimism paved the way for a fifth consecutive month of gains across world markets.
- International stocks advanced. The MSCI World Index returned 8.4% (in $US terms). Since March 9th, the MSCI Asia Index has risen about 58% in local currency terms.
- Commodity prices rose. Copper is up more than 80% year-to-date supported by increased demand from China. The S&P/TSX Composite Index benefited, adding 4%. The S&P/TSX has climbed 45% since hitting a five-year low on March 9th.
- In the U.S., stocks made up more ground. The Dow Jones Industrial Average (DJIA) had its best month since 2002, up 8.6% . The S&P 500 Index advanced for the fifth consecutive month (the longest streak since 2007) gaining 7.6% . The S&P 500 is now up more than 40% since March 9th and Monday, it closed above the 1,000 level for the first time since November 2008.
- Volatility continued to be a key theme in currency markets. After falling more than 6% against the U.S. dollar in June, the Canadian dollar appreciated by 7.4% versus its U.S. counterpart in July. This cut into returns on investments denominated in $US. Case in point, the 7.4% gain on the S&P 500 was essentially wiped out when converted back to C$.
With much of the latest economic news continuing to look less bad (over 70% of companies beat expectations last quarter and it appears US housing may have found a bottom), the economy looks to be on the mend.
However, we must realize that the rate of recovery that we are seeing is not normal and likely cannot be maintained long-term. That said, as an investor looking out 5+ years I belive valuations in the equity market are still low and the potential remains for double-digit returns heading forward over a 5+ year horizon.
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Thursday, July 16th, 2009 |
If you’re still standing on the sidelines in cash at the moment, here are three good reasons that you should be invested in stocks right now.
- An investor’s choice of asset allocation is the single largest factor that will influence the probability of long-term success. Historical evidence suggests that cash investments return the least amount over the long run.
- There is significant upside potential in equities for long-term investors right now. Stock valuations are, despite Q2’s rebound, well below their highs and have a long way to go to be back in line with what we consider to be fair value.
- Sustained low interest rates and dramatic increases in money supply combined with increased deficits have many fearful of the inflationary impact once economic recovery takes hold. Money market investments, non-market linked CD’s and high interest savings accounts offer little protection against the wealth eroding effect of inflation.
That is not to say that there is no downside. In fact, there is an inherent risk when investing in equities. However, I beleiive the risk vs. reward payoff still favors the equity investor at this time.
Posted in Investment News | 8 Comments »
Friday, July 3rd, 2009 |
With the end of June comes the start of summer: warm air, hot beaches and, sometimes, choppy waters. The following is a recap of last month’s market action and key developments from “30,000 feet” .
The month of June saw North American stocks end up in slightly positive territory. On a total return basis, the S&P/TSX Composite Index gained 0.3% and the S&P 500 Index was up just 0.2% .
However, volatility in the C$/US$ exchange rate was a big story yet again as the return on the S&P 500 in C$ terms was 6.6%. The story was similar for international equities. The MSCI EAFE Index (Europe, Australasia and Far East) was down -0.8% in US$ terms but up 5.6% in C$.
In June, the C$ lost ground against the US$. This was in stark contrast to May when the loonie posted its biggest monthly advance versus the US$ since 1950. We expect currency movements to continue to be hot topic in the weeks ahead.
Energy and Materials were a drag on performance for the S&P/TSX last month dropping 2.2% and 6.6% respectively (these two sectors represent 46% of the index currently). Even with the 2.2% pullback in Energy, the sector still posted an almost 22% gain to close the second quarter. Solid gains in Industrials, Consumer Discretionary and Financials (in particular banks which were up 9.8% this month) were sectors that kept the S&P/TSX in positive territory in June.
Key Messages
While uncertainty still looms, the data suggests that the worst of the economic and credit crisis appears to be behind us. Although U.S. consumer confidence numbers released earlier this week fell to 49.3 from 54.8 last month, the confidence index remains well above February’s low of 25.3. Many other indicators are now suggesting an easing in the pace of economic contraction in the aftermath of the deepest, most synchronous recession in the world economy in 60 years.
Most analysts expect continued volatility in stocks, currencies, and economic indicators as, although many agree we have embarked on some type of recovery, the timing and pace of that recovery may prove to disappoint investors.
For investors this means that our balanced, long-term view is as important as ever. There is still value to be found in dividend growth stocks.
Dividend Money purchases in the past month include:
Transcanada Pipeline (TRP)
Sun Life Financial (SLF)
Royal Bank (RY)
Bank of Nova Scotia (BNS)
Power Corporation (POW.TO)
Posted in Investment News | 1 Comment »
Thursday, April 2nd, 2009 |
In a downturn of this magnitude, before things start to look ‘good’ we first look for them to be ‘less bad’ than they have been over a broad number of indicators. Although not necessarily over a broad range of indicators, the ‘less bad’ theme is becoming more evident as we move into the second quarter of 2009.
Below are a few summary points including a couple of references to the ‘less bad’ concept.
U.S Housing
Real estate, which has been at the root of the credit crisis, needs to stabilize before a sustainable recovery can happen. Here are some things to consider with respect to the current situation:
- Housing to Income ratio: At its peak, the ratio of house prices to household incomes in the U.S. was 27% above its long-term average. It is now down 30% from that peak. While seemingly ‘ugly’, this has brought housing prices back to their equilibrium level. That in itself doesn’t generate new buying, but it does create “capacity” – something that’s important for recovery. With housing affordability at its best level in a generation, once household balance sheets are restored and confidence returns, people will then take advantage of this more ‘normal’ house price to income relationship and go back to buying houses.
- Housing Sales: Although existing housing sales are still falling – they are falling at a much slower rate compared with last year, which suggests that the situation is getting ‘less bad’.
Corporate Balance Sheets
One of the bright spots in the decline of the economy until now has been the health of corporate balance sheets – things like corporate debt to equity ratios and ability to cover interest payments on outstanding debt. With continued contraction in the economy, we are now starting to see meaningful erosion in corporate balance sheets as business profits continue to come under pressure. However, despite this erosion, corporate balance sheets are still relatively healthy.
Manufacturing
The U.S. manufacturing index (ISM) tends to respond favorably six months after interest rate cuts. This is because manufacturing orders are dependent on consumer demand, which is stimulated by low interest rates. Although possibly a long way off, there’s some evidence that we may be seeing a positive response to historically low interest rates.
Earlier this year, the manufacturing index in the U.S. (the ISM) was moving sideways instead of falling and yesterday, data showed that the ISM improved modestly in March. While the ISM data was still weak, recent trends suggest that the health of manufacturing is not getting any worse (i.e. the situation is ‘less bad’ than has been previously been the case).
Inflation
Although inflation may likely have to be dealt with longer-term, it’s not a near-term issue for policymakers. There is risk of “transitory/temporary deflation” (the opposite of inflation and a situation where prices of goods are declining over time) but we believe it is unlikely to develop into a sustained period of falling producer/consumer prices. As the credit crunch and deepening recession continue to dominate policy, rates are expected to hold at rock bottom levels.
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Saturday, February 21st, 2009 |
Yes, I used it…the dreaded “M” word.
To be honest, I am sick and tired of everyone and their dog running around spouting off about the housing market and sub-prime mortgages etc. Aren’t you?
The fact of the matter is that for the average person, the only mortgage that actually matters is their own!
A mortgage is a tool used for financial leverage. In fact, it is one of the best wealth creation tools available to the general public. It’s true…if you don’t believe me just try to go to your bank and borrow $100K to invest in the stock market.
Furthermore, the majority of the general public could not afford to “buy” a home without the assistance of a mortgage. A mortgage is a contract between you and your financial institution that says you promise to make the payments in certain intervals for a certain period of time and that you are using the real property as security for that contract.
It is really pretty simple when you break it down.
The key component of the mortgage lies in the fact that it is a financial tool of leverage. You are leveraging the power of your own funds (down payment) and the bank’s funds to purchase real property.
Leverage Can Be Good Or Bad
The leverage that a mortgage provides can be good for you when home prices are rising because if you sell your home for more than you purchased it for, the bank just wants the original mortgage paid off. In this instance you are left with a tidy profit (one that also has tax advantages…but we’ll leave that for another day).
Let’s say we purchase a home for $200,000 and decide on a 5% down payment. Our investment in the home is now $10,000 (plus some incidental closing costs etc.). If home prices were to rise by 10% and we decide to sell our home for $220,000 ($200,000 + 10%) we are left with a profit on the sale of $20,000. A 10% return isn’t that bad! But wait…we actually only put in $10,000 of our money to start with, so we actually doubled our money! This illustrates the positive power of financial leverage.
(please note that this is a very basic example)
Let’s take a look at the negative effects of leverage.
Supposed now that we purchased the same home for $200,000 and decided again on a 5% down payment of $10,000. In this instance home prices drop by 10% and we are forced to sell the home for $180,000. In this instance, not only have we lost the $10,000 down payment, but we still owe the bank $10,000! ($200,000 purchase price – $10,000 down = $190,000 mortgage)
As you can see, the mortgage is a VERY powerful financial tool and has the ability to create exponential wealth if used correctly. It also has the power to decimate wealth as well.
Margin Vs. Mortgage
Leverage can be utilized when purchasing stocks as well; this is called “margin”. Margin has the same basic effect as a mortgage, but is not nearly as much of a concern to the general public. Margin, as a tool of financial leverage is granted to those investors who have proven themselves to be worthy of such credit.
What makes mortgages so dangerous is that they are granted to most anyone in the general public regardless of any evidence of knowledge of the effects of financial leverage. Sure there is a credit check and the bank assesses your capacity to make the payments, but when banks start offering interest-only ARMs and other product to try to make homes affordable, there is bound to be trouble.
Know The Score
In fact, a lot of your ability to qualify for a mortgage and the interest rate you will pay is based on your credit score. The banks have access to your credit score and place a lot of faith on that number when making decisions. Qualifying for a mortgage and getting a great rate can be easy when you have a good credit score. However, the average person doesn’t even know what their credit score is – let alone how to improve it.
Do you know what your credit score is? If you don’t, you can access it here for no cost through Experian. I highly suggest that everyone identifies what their credit score is and learns how to maintain and/or improve it.
On The Other Hand
It is unlikely that large stock brokerages will offer enormous margin accounts to “Joe Common” because he decides it’s “time I started investing in stocks”. Why then should mortgage lenders offer up hundreds of thousands of dollars in “leverage” simply because Joe decides it’s time to buy a house. Or, to make this worse Joe decides…”Buying a house is a great investment”!
I’m not going to tackle the subject of whether or not one’s home should be viewed as an investment; that is best left for another day.
However, if you’re itching for some good discussion, you can read a great debate on this subject at Ramit’s I Will Teach You To Be Rich and a breakdown of the financial decision to Buy vs. Rent from Jim at Blueprint for Financial Prosperity. Trent over at the Simple Dollar also unleashed a similar discussion while reviewing Rich Dad Poor Dad.
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Wednesday, February 18th, 2009 |
In yet another sign of the times, the three Atlantic City casinos once run by Donald Trump filed for bankruptcy protection yesterday. Although Trump maintains that he has little to do with the businesses other than having his name on the buildings, it does reflect the fact that things are pretty tough out there for everyone – even “The Donald”.
Trump Is Not Alone
Of course, Trump Casinos are not alone. Businesses the world over are feeling the pinch of a global economic downturn. And in recent days, word that Japan’s economy contracted at its fastest pace in over three decades in the final quarter of 2008, disappointing corporate earnings, renewed talk of bankruptcy in the U.S. auto sector and continuing skepticism over the $790 billion dollar fiscal stimulus package proposed by the Obama administration once again have investors fretting over the future. This concern has weighed on stock markets in recent days. The MSCI World index has closed down for six straight sessions and in North America, while the S&P 500 declined 4.6% to it’s lowest level since November.
These days, it seems like the negative headlines are relentless. But in my mind, that simply means that we have to dig a little deeper to maintain an emotional even keel in today’s environment, which for a good year now has been solidly tilted to the negative side of the dial. I saw an article about the “misery index” in yesterday’s Globe & Mail that I think put some of the doom and gloom into perspective.
The Misery Index
The Misery index was devised by a Yale professor back in the sixties who was also an economic advisor to Presidents John F. Kennedy and Lyndon Johnson. It’s calculated by adding the unemployment rate to the inflation rate – two key factors that can damage a country’s economy. The premise is that adding the two together paints a picture of how bad things are.
Many comparisons have been made between today’s situation and severe economic downturns of the past. But if we consider today’s misery index within a historical context, it’s clear that things are different now. Case in point – because inflation is so low, the misery index is far below its peak levels from the 1980s when unemployment was sky high and inflation was rampant.
In both Canada and the United States, the misery index peaked well above 20 in the early 1980s. Today, while unemployment rates in both countries have moved above 7 percent, low inflation is keeping the misery index at around 8. Although this may not be any consolation for thousands of people who have lost their jobs, it does comment on the bigger picture to some degree.
While the misery index certainly shouldn’t be considered the definitive indicator of economic health, given all of the negative news that’s out there, it’s another way to help maintain a balanced perspective in today’s environment.
“The key to your success in the bull market is what you do in the bear market”.
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