October 1st, 2012

Only 6 weeks to go until the U.S. Presidential elections, and we should expect the stock markets to continue their up and down gyrations that continue to lead us sideways until the outcome of the elections are determined.

The fiscal cliff looms ahead in the U.S. as The Bush Tax Cuts are set to expire at the end of this year, and my expectation is this will be a non event as there will be political initiatives to eliminate or at least delay this potential threat to economic growth.

S&P 500 companies have record amounts of cash on their balance sheets, yet are distributing a near record low percentage of this cash in dividends.  As investor demand for income continues to increase, companies are likely to increase their dividends.  As dividends increase, share prices should also increase reflecting investor appetite for companies that pay healthier/larger cash distributions.

Europe will continue to be a problem for a long time, but I suspect that as more time goes by North America will become less sensitive to daily market news.

China has made moves to get their economy growing at a faster rate which now is somewhere in the 6% to 7.5% GDP range.  As their economic incentives take hold we should see Canadian Resource based companies benefit because of increased demand for their products.

The global slowdown in demand for resources, combined with continued stock market malaise has significantly hurt the share price of all resource companies, and also made it more difficult for them to raise money.

If there is a bright side to this, it is the opportunity presented now for investors who are buying Flow Through Shares.

Many resource based companies are trading at discounts of 50% or more to where they were recently.  If you need to reduce your 2012 income, now may be an awesome time to invest in Flow Through shares.  I am reminded of John Templeton’s adage about how he always wanted to buy when sentiment was the worst.

Flow Through Shares are 100% tax deductible in the year of purchase.  As a rule of thumb, the amount of flow through shares you buy each year should not be greater than 30% of your gross income.

Our clients have used Flow Through Shares to reduce annual income taxes, reduce taxes owing on one time bonuses, withdrawals from RRSP’s and RRIF’s, as well as, recovering income taxes paid over the previous 3 years.

At present and in our opinion, there are 3 quality Flow Through Share issues available.  If you have any interest or questions, please phone us to discuss your particular circumstances in more detail.

Earlier this year Sun Life completely withdrew their Income for Life product from the market, and Manulife made a significant change in their product by reducing the guaranteed annual income from 5% to 4% per year.

However, in the Manulife scenario they still guarantee the minimum 4% income for life or a higher amount if required by the government.  This benefits RRIF investors who are required to take annual payments greater than this amount.

In our opinion, the Manulife Income for Life product still provides significant benefits to RRSP investors who are approaching age 70, and who are looking for a guaranteed annual return of 5% per year, and will be able to take advantage of the guaranteed annual income features once the RRSP is converted to a RRIF.  If you have any interest in this product and how it may be of benefit for you please call us.

There is a competitive product to Manulife offered by Empire Life, and we can describe the benefits of this as well.

Our Platinum Investment Loan Program is of interest to many of our clients.

The 2 main applications of our investment strategy are to either increase your monthly after tax income by approximately $3,375, and/or, increase your retirement assets by up to $1.0 Million.

If you have enough income, and you have enough capital for retirement this program will not be of any value to you.  Call us if you would like more details on how it may be appropriate for you.

Our High Income Portfolio continues to plod along, and we are now up approximately 7% YTD 2012.  Not exciting, but steady and comforting in unpleasant markets.  I believe this will continue to be the focus of our investment strategy for the next several years as this long term Bear Market which began in 2000 wears itself out, as well as, most investors.

Fixed Income Strategies:

Bond and GIC’s may be dangerous to your financial health with inflation becomes an issue and interest rates rise.  Here are a couple of ideas to protect yourself.

If you would like to hedge your Bond or GIC Portfolio against interest rate increases, Fierra Capital has a product you may be interested in.  Their product is called Fierra Tactical Yield Bond Fund, and they use a unique strategy of being able to own bonds with negative duration, thereby, profiting when interest rates rise.  Call us to see how this may be suitable for you.

On this same theme, Picton Mahoney uses a hedge fund strategy in an income focused portfolio to provide positive returns when interest rates rise.  They do this by owning short positions on fixed income securities.  This product is called Picton Mahoney Income Opportunities Fund.  Please call us for details if you have any interest.

Going Green:  If you would like to receive your statements from Macquarie electronically email Bonnie and she will take care of details.  Her email is: Bonnie.wilson@macquarie.com

 

On behalf of our team of professionals, I wish you a great fall and December holiday season.  Thank you for the privilege of working with you.  We take the responsibility of protecting and growing your capital, and saving you money in income taxes very seriously.  We commit to providing you consistent investment advice and the best service we are capable of at all times.

 

Best Regards,

 

Fred Banwell BA, CFP, TEP

Associate Director and Senior Vice President, Investment Advisor