Of course, the situation in Greece has been front page news this week and it has created some choppy waters for investors (it was another volatile day on the markets yesterday – but that was apparently caused by a trading error). Amid the headlines, and the increased market volatility, we thought it might be helpful to take a look at how the sovereign debt situation has evolved and why it is causing so much noise (and by extension, investor anxiety).

Each day, there seems to be a new take on the story and many of the headlines have been conflicting. For example, consider the following:

• Two EU Ministers: No Bailout for Greece – Wall Street Journal (Jan 18)
• Merkel Says Greece Doesn’t Need Financial Support – Dow Jones (Mar 22)
• Fears rise that Greece is days from defaulting – Associated Press (Apr 12)
• Greece begins talks on details of IMF aid deal – Reuters (Apr 22)
• EU: Greece loan package coming soon but worries persist – Globe (Apr 30)
• Greece swallows tough medicine in bailout – Globe (May 3)
• Analysts like Greek bank despite nation’s woes – Bloomberg (May 4)

However, as is often the case when it comes to complex issues, there’s usually more to the story than meets the eye. The situation in Europe is complicated and very volatile and many investment management teams are monitoring new developments closely.

Also, amid the noise, it should be noted that there have been other developments that, while not front page news, are noteworthy nonetheless from an investment standpoint.

For example, the U.S. dollar has strengthened which has benefited U.S. dollar denominated investments, and global bond spreads have widened, creating potential investment opportunities.

Another important note is that many of our favorite dividend growth stocks have returned to profitability. Regardless of the happenings in the world economy, when our dividend growth stocks are making money, we will be rewarded accordingly… But, it will take faith in our philosophy and time for the markets to catch up to us .

Advertisement: ING Direct Savings Account Earn 4.50% on your money without the risk!

More Than Just Resources

Canada has not gone unnoticed by investors abroad. A report last week indicated that Canada has benefited from record net inflows of foreign investment in Canadian securities.

By extension, demand for the loonie has also increased, and this is one of the reasons why the Canadian dollar currently sits near parity with its U.S. counterpart.

Foreign investors purchased $109 billion worth of Canadian securities in 2009, and another $11.8 billion in the first month of 2010. They were particularly keen on Canadian corporate bonds in 2009, purchasing nearly 80% of net new corporate issues. Meanwhile, Canadian investors were noticeably more conservative – nearly all bonds issued or backed by the Government of Canada stayed in Canada.

Why Canada?

There are good reasons for this renewed interest in Canadian investments. Canada has a highly educated workforce, a rock-solid financial system, and one of the strongest economies in the developed world. What’s more, the Canadian stock market has delivered some of the best returns in the world over the past 10 years. (Could this be a warning sign though?)

All of these points underscore the importance of having Canadian exposure as a core holding in a well diversified portfolio.

 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!

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.

1. 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.
2. 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.
3. 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.