October 1st, 2013

Hold on, because the next few weeks are going to be bumpy!

Starting with the U.S. government partially closing last night and 800,000 government employees off work on unpaid leave and who knows when the U.S. budget will be passed and they get back to work.

Then, or during this impasse the vote on raising the U.S. debt ceiling will take place. Remember when this happened one year ago, S&P downgraded the U.S. credit rating.

Yet, the stock markets are doing well, and company’s earnings are growing.

Amazon.com just announced they will be hiring 70,000 seasonal workers which is a 40% increase over last year.

Unemployment in the U.S. has fallen from 8.1% to 7.3% which is still unacceptable to Ben Bernanke, which is one of the reasons why he is not tapering his asset re-purchase program.

Another reason he is not tapering is because expectations for economic growth are still in the 2% per year range.

The Canadian market has not performed as well as the U.S. because of our dependence on resource based industries. Barrick Gold is a good example of what has happened in Mining. Barrick was trading at $52 per share, then dropped to under $15 per share and is now just over $19 per share.  Weaker and smaller companies than Barrick, no matter whether they are Silver, Copper or Base Metals have performed similarly and/or worse.

As we lament about the severe drop in share prices of companies like Barrick, the former Chairman of Xstra PLC has now raised $1 Billion for a new company to be called X2 Resources whose goal is to pounce on undervalued mining assets! This reminds me of Sir John Templeton’s adage: “It takes courage to buy when others are fearfully selling.”

On the topic of courage to buy when others are fearfully selling, Mr. Prem Watsa of Fairfax Financial (who is sometimes referred to as Warren Buffet of the North) has just announced an offer to take over BlackBerry (formerly RIM) at $9 per share. Yesterday bb closed at $8.10 per share. What does he know that the rest of us don’t?

Our income oriented portfolios held up well during the summer months as the markets responded negatively to Bernanke’s comments about possible tapering in the fall. It was the fear of liquidity which drove this selling frenzy. Markets have recovered, and there is confidence that interest rates will stay where they are for the foreseeable future.

There is an interesting new product available now called “ING High Income Floating Rate Fund”.  This would be a suitable replacement for an investor who wants to own Bonds but does not want the duration risk.  Major features of this IPO are:

- Comprised of senior secured loans on Bank Balance Sheets
- Initial income of 6.5% per year, paid monthly
- Potential for rising distributions if/when interest rates rise.

Trades like a stock after purchase. If you have any interest please call or email me, and I expect this new issue to close by the end of October.

Our Platinum Investment Program is performing well.  Here is how it works:

- Invest $100,000
- Borrow $300,000 from TD Investment Lending at ½% above prime
- Annual interest costs are $10,500 per year, which is tax deductible
- Invest the $400,000 in TD Dividend Growth Fund, T-8 series
- Annual income is $32,000, of which 75% is treated as return of capital

Our clients have used this program as a strategy to:

- Accumulate additional funds for retirement
- Use the surplus monthly income after paying the interest costs for personal purposes
- Provide additional funds for relatives as an enhanced estate planning strategy

If you are interested in how this program may be suitable for you, and in what amount please phone me to discuss.

Richardson GMP to acquire Macquarie Private Wealth:

On September 10, 2013 RGMP announced they had reached an agreement to acquire MPW Canada, and the deal is set to close November 20th or earlier.

It was a big surprise to me.

I believe it will be business as usual for us after November 20th. Same offices, same support staff, same investments, but with a different name and logo on the letterhead.

The combined company will be the largest independent investment dealer in Canada (non bank owned) with assets of $28 billion (RGMP at $15 B plus MPW at $13 B). I anticipate that at this size the new business will be profitable.

You will be receiving additional correspondence on this shortly. In the meantime please do not hesitate to call me if you have any questions or concerns.

 

Thank you for being a client, and giving me the privilege of working with you.

Sincerely yours,

 

 

Fred Banwell