In This Issue

MONEY SHOW REPORT

By Gordon Pape

No one knows what lies ahead for the world economy and global stock markets. But there are a lot of opinions out there, as those attending last week’s Toronto World Money Show quickly discovered. We could be headed for economic Armageddon according to some. Or maybe not.

Overall, the cautious optimists appeared to outnumber the pessimists among those making presentations. But then you have to bear in mind that many of these people have a vested interest in encouraging investors to buy stocks.

Three of the most interesting presentations I sat in on were given by the keynote speakers at Thursday’s opening ceremonies. Here’s a summary of what they had to say.

Robert Gorman: moderate growth

First up was Robert Gorman, chief portfolio strategist for TD Waterhouse who offered his investment outlook for 2012. On the whole, he struck a positive note.

On the key issue of whether we are headed for a double-dip recession, he told the audience that while the odds are shortening, he still puts the probability of that happening at only 35%. The more likely scenario, he believes, is a period of moderate growth and moderate inflation, which would be good for stocks.

He pointed out that the key S&P 500 Index is only trading at 12.5 times earnings, “a pretty reasonable valuation”. With inflation expected to remain low, that ratio is not likely to contract significantly, he said. “Stocks are much less expensive than bonds and are good value at this level,” he added.

He predicted a fall rally in the stock market and forecast an advance in the upper single digit range for the S&P 500 in 2012. The best bets will be large-cap, dividend-paying stocks like Johnson & Johnson (NYSE: JNJ), PepsiCo (NYSE: PEP), IBM (NYSE: IBM), and Oracle (NDQ: ORCL).

Mr. Gorman said he expects the TSX to follow the same pattern with a rally this fall and single digit gains in 2012. His picks included Power Corp. (TSX: POW), Shaw Communications (TSX: SJR.B, NYSE: SJR), Royal Bank (TSX, NYSE: RY), and Scotiabank (TSX, NYSE: BNS).

As for bonds, he suggested they have a role to play in generating income and for capital preservation but predicted total returns in 2012 would only be in the 1% to 3% range.

Jim Jubak: trouble ahead

Next up was Jim Jubak, a widely-followed investment columnist and senior markets editor for Moneyshow.com. He chose to look past 2012, in part because he expects the political gridlock in the U.S. to prevent any meaningful action by the government until after the presidential election. Instead, he focused on 2013 and beyond and doesn’t like what he sees. Most of the “solutions” being applied today are really just “delays” that will start to take their toll at that point, he said.

Looking at Europe, he thinks it is inevitable that Greece will eventually default on its debt, perhaps bringing down at least one large French bank in the process. By 2013-14, “the yield on the Greek two-year note will be somewhere north of infinite,” he quipped, noting that it is now over 50%. “There is not enough money in the pockets of German, Dutch, and Finnish taxpayers to continue to fund that debt.”

In the U.S., the failure of government to act decisively will mean the problems plaguing the real estate market will continue while the unemployment situation will worsen because the skills of those out of work for a prolonged time will become increasingly obsolete.

Among emerging markets, Brazil is facing a serious inflation problem while China has to deal with a growing issue of bad loans at all levels of the economy.

Mr. Jubak’s safe havens: gold, strong currency bonds, and dividend-paying stocks.

Dennis Gartman: opportunities in food, fuel, gold

Dennis Gartman is perhaps the most influential investment newsletter publisher in the U.S. His views are widely quoted and closely followed by financial professionals. He is also a compelling speaker with a very strong point of view and his presentation was one of the highlights of the Money Show.

Unlike Mr. Gorman, he does not want to own stocks right now. “They may be inexpensive but I think they may get a lot more inexpensive,” he said. There will be a time to buy aggressively but that will only come after the markets turn around and start moving back up. “Don’t try to catch a falling knife,” he told the audience. “You’ll just cut yourself.”

He does like gold, although he stressed that he is not a gold bug saying “I don’t believe the world is coming to an end.” Rather, he described himself as a trader and a pragmatist: “I’m willing to go with any team that is winning.” Gold is winning and will keep going up “until it stops”. It should not be considered a safe haven, however. “Safe havens don’t lose 8% in one day,” he noted, referring to gold’s recent one-day loss of more than $200 an ounce.

As for other opportunities, he encouraged the audience to look at food and fuel for long-term gains. World demand for food is going to continue to grow, he said, as people in Asia and Latin America move from lower to middle class and change eating habits. “Food is going to get a lot tighter in the next 20-30 years.”

Investment opportunities include fertilizer companies, agriculture-related ETFs, and, down the road, dry bulk shippers, whose shares have been hammered in recent years.

Turning to fuel, he debunked the whole concept of peak oil saying new discoveries and technologies will give us access to a virtually unlimited supply of oil and natural gas. But high-quality, sweet oil will be tight – much of the world’s supply is “junk” including Saudi oil. “It contains too much sulphur and it’s too expensive to refine – no one wants it,” he contended.

This explains why Brent crude, which is sweet light oil produced in the North Sea, is trading at a significant premium to West Texas Intermediate crude (WTI) which is the North American benchmark, he suggested. The spread between the two is likely to continue to widen.

(Although Mr. Gartman didn’t mention it, there is an ETF that tracks Brent crude. It’s called the U.S. Brent Crude Fund and it trades on the New York Stock Exchange as BNO.)

As for natural gas, he described supplies as “vast and getting vaster”. There is no way we are going to see a significant increase in gas prices as a result, he said. “If you’re bullish on natural gas prices, take a deep breath,” he suggested.

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

FOUR THEMES FOR THE YEAR AHEAD

By Gordon Pape

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As readers are well aware, I find it difficult to be optimistic about the prospects for the next 12-18 months. Although many economists continue to believe that another recession can be avoided, my gut instinct tells me a downturn is more likely than not. At the very best, we can expect a period of slow growth.

That’s why I have been advising caution on new equity purchases. There will always be investment opportunities, of course, but you have to be very selective and exercise price discipline.

In this context, I presented four broad investment themes for 2012 during my workshop last week at the Toronto World Money Show. They are gold, bonds, dividend-paying stocks, and income trusts/limited partnerships. Here’s what I had to say about each.

Gold

Gold has passed $1,900 an ounce already this month and could crack through that level to stay at any time (prices in U.S. dollars). A price of $2,000 an ounce by year-end looks very possible. Interestingly, the metals are doing better than the mining stocks. The S&P/TSX Global Gold Index, which reflects the performance of several gold producers, was up just 6.9% for the year as of Thursday’s close.

I have never been a gold bug and I have always been skeptical about claims that it would climb to $5,000 or more. But we are living in extraordinary times. I have seen many crises over the years but I can’t recall the world being in quite such disarray during peacetime as we are experiencing now. Entire countries are teetering on the edge of bankruptcy, people have lost confidence in their leaders, radicals like the Tea Partiers are taking over the political debate, and corporations are stockpiling cash and hunkering down. It’s a mess.

It is in conditions like these that gold thrives. It’s the one universal store of value in a time when paper money is being degraded. It doesn’t matter where you are in the world, gold is accepted as a sound investment and a viable alternative when markets and economies are in trouble. Like Dennis Gartman, I won’t try to predict how high it could go in 2012. Suffice to say that there are still some good profits to be made.

I have discussed the many ways to invest in gold in previous issues so I won’t repeat all that detail now. To summarize briefly, you can buy gold or silver mining stocks (we have four on the Recommended List), an equity-based mutual fund such as RBC Global Precious Metals, a bullion-based fund or ETF, or the metal itself.

Bonds

As of the close of trading on Thursday, the DEX Universe Bond Index was ahead 7.07% for 2011. That is an astounding outperformance when compared to a loss of 5.6% for the S&P/TSX Composite Index. That means that if your portfolio was equally balanced between bonds and stocks that tracked those indexes, you be marginally in the black year-to-date. That result was totally unexpected; back in January hardly anyone predicted a strong year for bonds.

Some investors may be seduced into thinking there is more to come. There isn’t. Interest rates are so low now that there is hardly any upside potential left in bond prices. The yield on five-year Government of Canada bonds is only 1.41%. Comparable U.S. Treasuries are yielding an unbelievably low 0.87%. Since yields can’t fall much further, there isn’t much capital gain potential for bond prices.

I think that at best we can expect a total return of 3% to 4% on bonds in 2012 and even that modest target will only be achievable by including a large portion of corporate issues in a portfolio. But the main reason for holding bonds right now is not to score big gains. It is to protect your capital. Bonds cushion your portfolio against the effect of stock market losses. The more bonds you own, the softer your cushion.

Dividend stocks

Many people are leery about the stock market and rightly so. But high-quality dividend paying stocks tend to be much more resistant to market downturns, and you receive a monthly cash flow while you are waiting. Many of these stocks are in defensive sectors like pipelines and utilities so they tend to be much less volatile than the broad markets.

We have many good dividend stocks on our Recommended List, a large number of which have yields upwards of 3%. I suggested to the audience that they look closely at these in particular:

Enbridge (TSX, NYSE: ENB). Closed Friday at C$31.85, US$31.92. Yield: 3.1%.

BCE Inc. (TSX, NYSE: BCE). Closed Friday at C$38.62, US$38.80. Yield: 5.4%.

Fortis (TSX: FTS, OTC: FRTSF). Closed Friday at C$32.21, US$32.48. Yield: 3.6%.

Telus (TSX: T.A, NYSE: TU). Closed Friday at C$49.02, US$49.25. Yield: 4.5%.

Emera (TSX: EMA, OTC: EMRAF). Closed Friday at C$31.24, US$31.39. Yield: 4.2%. (Emera is an Income Investor recommendation.)

Income trusts/limited partnerships

Many investors don’t realize that there are still a few income trusts and limited partnerships (LPs) despite the imposition of the new trust tax on Jan. 1. Distributions from securities that are based in Canada now qualify for the dividend tax credit, so they are very attractive if held in a non-registered account.

Here are three that I discussed at the Money Show, all of which are Income Investor picks.

Inter Pipeline Fund (TSX: IPL.UN, OTC: IPPLF). Calgary-based Inter Pipeline is in the business of petroleum transportation, bulk liquid storage, and natural gas liquids extraction. The business is recession-resistant, so there is not a lot of downside here.

This LP has performed very well since we recommended it in October 2009 with a capital gain of about 60%. It pays a monthly distribution of $0.08 per unit ($0.96 a year) and raised its payout by 6.7% at the beginning of the year despite the new tax. It closed on Friday at C$15.88, US$16.01 to yield 6%.

Brookfield Renewable Power Fund (TSX: BRC.UN, OTC: BRPFF). This is one of the largest power income funds in North America. The business is the production of electricity from environmentally friendly and renewable resources. The fund indirectly owns or holds interests in 42 hydroelectric generating stations and two wind farms in Quebec, Ontario, British Columbia, and New England. As with all the securities in this group, cash flow and relatively low risk are the main attractions. Any capital gains are a bonus.

We recommended this income trust in July 2009 when it was known as Great Lakes Hydro. At the time it traded at C$16.62. The closing price on Friday was C$23, US$23.13 for a yield of 5.7% based on a monthly distribution of $0.10833 ($1.30 a year).

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This is another Brookfield operation but it is based in Bermuda, not Canada. That means it is not subject to the new trust tax, nor do the distributions qualify for the dividend tax credit.

This LP has interests in such diverse areas as power generation and distribution, coal terminals, ports, timber, railroads, and more. It operates in Australia, Great Britain, the U.S., Canada, and South America.

The company pays out between 60% and 70% of cash flow as distributions and last month raised the payment rate by 13% to US$0.35 per quarter (US$1.40 a year). Most of the distribution is treated as tax-deferred return of capital.

We recommended this LP in The Income Investor in September 2010 at C$18.90, US$18.38. The shares closed on Friday at C$26.02, US$26.14 for a yield of 5.4%.

Of course, none of these picks except the bonds is immune from a severe stock market downturn. But unless you retreat 100% to cash you have to accept some degree of risk. I believe that a portfolio that is strong in these four areas will hold up well in the period ahead while throwing off some cash flow in the process. – G.P.

 

RYAN IRVINE: GOOD NEWS, BAD NEWS

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Contributing editor Ryan Irvine is back with us this week with a look at a previous recommendation that is doing well and some new perspective on Toronto-listed Chinese stocks in the light of the Sino-Forest debacle. Ryan is the CEO of KeyStone Financial (www.keystocks.com) and is based in the Vancouver area. Over to him:

Ryan Irvine writes:

We are often asked about the major reasons behind the current pessimism and volatility in the market. While reams of papers will be written and countless books authored, one of the main causes has been an imbalance in advanced economies. For a number of decades, the U.S., Japan, and Europe have built up excess credit and debt on the consumer side and governments did their part on the public side of the ledger. This came to a head in the 2008-2009 credit crisis and the great deleveraging followed. Thus far we have witnessed an unwinding of consumer debt that is unprecedented in modern history.

Rather than taking a multi-year hit in the near term with austerity measures that likely would have led to a prolonged recession (painful but necessary), governments shifted debt from households to their own books. They did this because they were politically unwilling to accept the economic consequences of the unwinding or deleveraging of household balance sheets. As a consequence, they injected enormous stimulus into their economies that propped up growth for a period in an artificial manner.

But now we have essentially taken the problem of excess leverage off household balance sheets and turned it into excess leverage on government balance sheets. As a result, we are left with a crisis of confidence that continues to drive unprecedented volatility as fear guides the broader market with no clear direction in sight. Governments now have to work down debt. The U.S. in particular needs to put partisan politics aside and come forth with a credible debt reduction plan. The plan can take decades to complete but one needs to be put in place to regain confidence. For its part, the euro zone needs a credible plan as well to restore confidence – be it a Eurobond market, or the default and excising of the weakest of the PIIGS, or some other credible solution.

The reality is we do not expect any of this to occur any time soon, gloomy as this sounds. Volatility will likely remain high near to mid-term so we are using this volatility to take advantage of some great long-term opportunities in solid companies that possess a set of criteria we believe will be profitable to investors over time.

In these fear-fuelled times, a strong company cash reserve is reassuring. Debtors can turn bad, concept stocks may be near worthless, and balance sheet valuations on land and buildings may need to be taken with a pinch of salt. But cash is cash.

In the meltdown that followed the tech stock boom and during the credit crisis of 2008-2009, the receding tide left some companies’ share prices trading at a significant discount to their market value or, in some rare occasions, at a discount to cash value. Many savvy KeyStone subscribers did well from these anomalies during 2001-2003 and the same can be said in 2009 and 2010 following the credit crisis of 2008-2009.

While today’s market situation has not deteriorated to these levels as yet and remains different from the tech meltdown in that it is not as sector-specific, opportunities have and will present themselves. We believe one has already in WiLAN (TSX: WIN, NDQ: WILN), which we recently recommended to IWB readers at a level where 35% of its market cap was cash, despite a profitable growing business.

As we mentioned before, cash is king again. But it goes beyond just having cash in the bank. We look for companies with strong cash balances on a per share basis (from 20% to 90% of their market cap), that generate positive cash flow, have a history of returning capital and increasing that capital return (increasing dividends or distributions), and have a profitable underlying business. When you can buy these kinds of stocks at reasonable prices they have the potential to benefit long-term investors far more than cash in the bank or under the mattress.

We have always had a taste for companies that pay dividends and find this to be even more important in the current environment. We have employed this strategy for years in our small-cap research with great success and we will be focusing on this type of stock in the near term. Examples from our IWB coverage universe that fit this criteria include Boyd Group Income Fund (TSX: BYD.UN), Glentel Inc. (TSX: GLN), and The Cash Store Financial Services (TSX: CSFS).

None of these corporations is the sexiest story on the street but all pay dividends and are producing capital gains. What this tells us is that select North American companies that continue to grow their dividends and have strong balance sheets should continue to serve us well long term despite the near to mid-term volatility in the markets. These are truly a new breed of stocks which we classify as “Dividend Growth Stocks.”

An excellent example of the type of “Cash Rich, Dividend Growth Stock” is the subject of our first update this month.

Enghouse Systems Limited (TSX: ESL, OTC: EGHSF)

We introduced Enghouse to the IWB in the March 7 issue (#21109) when the stock traded at $9.10. The shares closed on Friday at C$9.51, US$9.47.

Enghouse is a relatively unknown small cap which develops enterprise software solutions for a variety of vertical markets. The company is organized around two business segments: the Interaction Management Group (IMG), the former Syntellect Division, and the Asset Management Group (AMG). IMG serves the customer service market segment through the provision of Interactive Voice Response (IVR) systems and speech/voice recognition solutions, as well as an advanced contact centre platform that manages multichannel customer interactions.

On Sept. 1, Enghouse reported that its revenue for the third quarter (to July 31) rose 22% to $31.8 million from $26 million in the prior year. That includes license revenue of $11.7 million compared to $8.4 million in last year’s third quarter. Net income rose sharply to $4.6 million or $0.18 per share on a diluted basis compared to $3.2 million, or $0.13 per share, last year. This was due to increased license and services revenue. On a year-to-date basis, net income was $10.9 million, or $0.43 per diluted share, compared to $6.8 million, or $0.27 per share, in the prior year. While organic growth (before currency adjustments) picked up in the third quarter, revenue growth was driven by the acquired operations Mettoni, Telrex, and CosmoCom.

We were very pleased with Enghouse’s results in terms of revenue, cash flow, and earnings growth, which all significantly beat estimates. EPS came in at $0.18, which was well above the $0.15 that was expected. It was helped along by a particularly strong contribution from Mettoni, which contributed $8.9 million in the quarter compared to $6.1 million last year. Enghouse delivered $7.68 million, or $0.30 per share, in cash from operations before working capital and the company’s total cash flow from operations of $13.05 million was a multi-year quarterly high and compared to $9.1 million in the third quarter of 2010. Cash flow before changes in operating assets and liabilities was $19.43 million, or $0.77 per share, for the first nine months of 2011. The company is now trending well above the $1 per share in cash flow that management had targeted for 2011.

The general economic climate continues to present challenges to the company’s business overall. As such, management is not scaling up investments for internal or organic growth in 2011. We expect single digit organic growth in the near term. Having said this, top and bottom line growth in upcoming quarters will continue from acquisitions made in the first half of calendar 2010 and from the CosmoCom acquisition, as well as slight margin improvements from further integration progress.

Enghouse continues to hold an enviable balance sheet with $88 million in cash ($3.49 per share). This not only will buffer the company in the event of a double-dip recession but allow it to be aggressive on acquisitions, likely at attractive prices. If the very tepid “recovery” continues, the acquisition environment remains relatively favourable so Enghouse should also be able to make accretive purchases at a reasonable pace. The company is also in the process of consolidating its operation under a single brand which should provide for operational efficiencies heading into 2012.

At first glance, with a trailing PE of 16.5 (although down from 19.49 at our last update), Enghouse may not appear cheap. However, when we dig a little deeper we find that the company’s consensus EPS estimate for this year has again been upped to the range of $0.59 while its forward-looking p/e ratio is a more reasonable 15.5, given its growth. Strip out the $3.49 in cash per share the company holds in its acquisition war chest and we are paying closer to 9.59 times forward EPS for the operating business.

Additionally, following initial integration, we expect the CosmoCom acquisition to be accretive to operations going forward into 2012. We also expect the company to generate cash flow in the range of $1.05 to $1.10 per share for 2011, leaving the company trading at a discount to its peers.

As such, we maintain our Buy rating. We have a long-term outlook on Enghouse and expect management to continue to execute its acquisition strategy, driving revenues beyond $200 million over the next 2.5 years. In the near term, be patient, expect volatility due to the relatively low amount of shares available at present, and collect the 2.1% dividend as the company grows and eventually attracts the attention of the broader market.

Action now: Buy.

China stocks

Now let’s take action on two TSX-listed China-based stocks in the wake of the Sino-Forest fraud allegations. As a result of these events, the credibility gap is widening in reference to certain auditing firms and their ability to perform reliable audits on Chinese companies with the degree of accuracy necessary for investment. Therefore, we are issuing Sell recommendations on both Asia Bio-Chem Group Corp. and Boyuan Construction Group Inc.

We originally recommended Asia Bio-Chem (TSX-V: ABC) in May 2010 (#20119) at $1.30, stressing that it was for aggressive investors. Boyuan Construction Group Inc. (TSX-V: BOY) was recommended in February 2010 (#21108) at $3.08. Both have been hit hard with all companies in this segment and trade at $0.45 and $0.75 respectively.

We rarely make Sell recommendations based on circumstances that are not company or valuation specific as we have seen the folly of this approach in the past. However, we believe this to be a unique case and we will act accordingly. What began as a China Flu that could be ridden out mid term and potentially even taken advantage of long term has become a pandemic. Fraud or not, the segment is likely to come under further scrutiny and any semblance of a misstep will be punished in the market. We are not willing to take on that type of risk, particularly given current market conditions. We can find better value elsewhere.

The situation is unfortunate as companies such as Migao in particular appear to be doing a good deal to calm market fears including the pledging of the CEO’s shares, active insider buying, a normal course issuer bid, and the cancelling of prep-payment on the potash supply agreement that investors took issue with. Additionally, 12 analysts have visited this company’s facilities.

However, it is auditors that check inventories, cash balances, etc. The auditors on Sino-Forest and Zungui Haixi are not the same auditors for Asia-Bio Chem and Boyuan. However, market participants have yet to determine whether these cases are rampant fraud, isolated fraud, a problem with a particular auditor on the ground in China, or a systematic failure that makes Chinese entities such as this unreliable to audit in general. In any case, the broader market has not seen this as a high risk for many years. But recent events dictate that this level of risk will now be factored in to pricing and we do not see value in participating going forward as a result. We will take the loss, hold it against current or future gains where possible, and move forward.

Action now: Sell.

Finally, here’s a little tease for next month’s column. We’ll tell you about a cash rich, cash flow producing junior gold company with a growing production profile and a very low cost of production. Stay tuned.

– end Ryan Irvine

 

GORDON PAPE’S UPDATES

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Angiotech Pharmaceuticals

Originally recommended by Yola Edwards on May 20/06 (IWB #2612) at C$18.27, US$15.73.

Angiotech has gone belly-up. The company filed for bankruptcy protection in both Canada and the U.S. earlier this year, wiping out shareholders without any compensation. The Vancouver-based company had been in trouble for some time after a steep decline in sales of its Taxus coronary stent systems. It had been hoped that new products would get it back to profitability but that didn’t happen. The stock has been delisted and the shares are worthless.

This rarely happens with one of our recommendations and we did note that this stock was for speculative investors. That said, a corporate bankruptcy is the last thing anyone wants to see and we will try to ensure this does not happen again.

Crescent Point Energy (TSX: CPG, OTC: CSCTF)

Originally recommended on July 13/09 (IWB #2926) at C$31.65, US$27.19. Closed Friday at C$42.08, US$42.25.

We have done well with this stock. We currently have a capital gain of 33% in a little over two years plus we have received distributions of $5.98 for a total return of 51.8%. However, I do not see much upside for the next several months as the price of oil will likely stay around current levels, or lower, as long as recession fears linger. The yield continues to be attractive but it may be a good idea to temporarily scale back on energy positions. Before you take profits, however, he sure to review the tax implications carefully.

Action now: Sell. This is still a good company and we may buy it back in future, perhaps at a cheaper price. – G.P.

 

YOUR QUESTIONS

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A double bottom?

Q – As I finishing reading your article titled “More Doom and Gloom”. It seems the bad news just keeps rolling in. What I’m wondering is that despite all the gloom in the market the Dow as yet to break below the Aug. 10 intraday low of 10,686.50 and appears to be trying to form a double bottom. Is this just wishful thinking on my part? Also, when you suggesting sitting tight because there could be further bargains to be had in the near future of 20%-30% are you referring to individual stocks or the indexes themselves? Your thoughts are greatly appreciated? – Vito B.

A – I’m not a technical analyst so I pay no attention to double bottoms. I look at the fundamentals and I don’t like what I see. I think all the major indexes will drop in the coming months and that bargains will be plentiful both for individual stocks and for index investors. – G.P.

ETF puzzler

Q – My question is about the Claymore 1-5 Year Laddered Corporate Bond ETF (TSX: CBO) vs. the iShares DEX Short Term Bond Index ETF (TSX: XSB). I have both in my RRSP and I calculated current yield (last month’s distribution/market value divided by 12). The result is: CBO 4.54%, XSB 3.2%. That really puzzles me. I expect yields to be very close. Can you explain why the difference in yields is that high? Will it make CBO a better investment then XSB? – Michael K.

A – This is something of an apples and oranges comparison. CBO invests only in corporate bonds. XSB invests in both government and corporate issues and the mix at the end of July was about 70-30 in favour of federal and provincial bonds. Corporate bonds normally have a higher yield than government issues of comparable maturity.

As for which is the better choice, it depends what you want. XSB is inherently less risky because of the high government content but it also has a lower return over the past year (2.5%). CBO has a one-year return of 3.4% and a higher yield but there is somewhat more risk because of the nature of the portfolio. – G.P.

 

That’s all for this week. We will be with you again on Sept. 19.

Best regards,

Gordon Pape

In This Issue

MONEY SHOW REPORT

By Gordon Pape

No one knows what lies ahead for the world economy and global stock markets. But there are a lot of opinions out there, as those attending last week’s Toronto World Money Show quickly discovered. We could be headed for economic Armageddon according to some. Or maybe not.

Overall, the cautious optimists appeared to outnumber the pessimists among those making presentations. But then you have to bear in mind that many of these people have a vested interest in encouraging investors to buy stocks.

Three of the most interesting presentations I sat in on were given by the keynote speakers at Thursday’s opening ceremonies. Here’s a summary of what they had to say.

Robert Gorman: moderate growth

First up was Robert Gorman, chief portfolio strategist for TD Waterhouse who offered his investment outlook for 2012. On the whole, he struck a positive note.

On the key issue of whether we are headed for a double-dip recession, he told the audience that while the odds are shortening, he still puts the probability of that happening at only 35%. The more likely scenario, he believes, is a period of moderate growth and moderate inflation, which would be good for stocks.

He pointed out that the key S&P 500 Index is only trading at 12.5 times earnings, “a pretty reasonable valuation”. With inflation expected to remain low, that ratio is not likely to contract significantly, he said. “Stocks are much less expensive than bonds and are good value at this level,” he added.

He predicted a fall rally in the stock market and forecast an advance in the upper single digit range for the S&P 500 in 2012. The best bets will be large-cap, dividend-paying stocks like Johnson & Johnson (NYSE: JNJ), PepsiCo (NYSE: PEP), IBM (NYSE: IBM), and Oracle (NDQ: ORCL).

Mr. Gorman said he expects the TSX to follow the same pattern with a rally this fall and single digit gains in 2012. His picks included Power Corp. (TSX: POW), Shaw Communications (TSX: SJR.B, NYSE: SJR), Royal Bank (TSX, NYSE: RY), and Scotiabank (TSX, NYSE: BNS).

As for bonds, he suggested they have a role to play in generating income and for capital preservation but predicted total returns in 2012 would only be in the 1% to 3% range.

Jim Jubak: trouble ahead

Next up was Jim Jubak, a widely-followed investment columnist and senior markets editor for Moneyshow.com. He chose to look past 2012, in part because he expects the political gridlock in the U.S. to prevent any meaningful action by the government until after the presidential election. Instead, he focused on 2013 and beyond and doesn’t like what he sees. Most of the “solutions” being applied today are really just “delays” that will start to take their toll at that point, he said.

Looking at Europe, he thinks it is inevitable that Greece will eventually default on its debt, perhaps bringing down at least one large French bank in the process. By 2013-14, “the yield on the Greek two-year note will be somewhere north of infinite,” he quipped, noting that it is now over 50%. “There is not enough money in the pockets of German, Dutch, and Finnish taxpayers to continue to fund that debt.”

In the U.S., the failure of government to act decisively will mean the problems plaguing the real estate market will continue while the unemployment situation will worsen because the skills of those out of work for a prolonged time will become increasingly obsolete.

Among emerging markets, Brazil is facing a serious inflation problem while China has to deal with a growing issue of bad loans at all levels of the economy.

Mr. Jubak’s safe havens: gold, strong currency bonds, and dividend-paying stocks.

Dennis Gartman: opportunities in food, fuel, gold

Dennis Gartman is perhaps the most influential investment newsletter publisher in the U.S. His views are widely quoted and closely followed by financial professionals. He is also a compelling speaker with a very strong point of view and his presentation was one of the highlights of the Money Show.

Unlike Mr. Gorman, he does not want to own stocks right now. “They may be inexpensive but I think they may get a lot more inexpensive,” he said. There will be a time to buy aggressively but that will only come after the markets turn around and start moving back up. “Don’t try to catch a falling knife,” he told the audience. “You’ll just cut yourself.”

He does like gold, although he stressed that he is not a gold bug saying “I don’t believe the world is coming to an end.” Rather, he described himself as a trader and a pragmatist: “I’m willing to go with any team that is winning.” Gold is winning and will keep going up “until it stops”. It should not be considered a safe haven, however. “Safe havens don’t lose 8% in one day,” he noted, referring to gold’s recent one-day loss of more than $200 an ounce.

As for other opportunities, he encouraged the audience to look at food and fuel for long-term gains. World demand for food is going to continue to grow, he said, as people in Asia and Latin America move from lower to middle class and change eating habits. “Food is going to get a lot tighter in the next 20-30 years.”

Investment opportunities include fertilizer companies, agriculture-related ETFs, and, down the road, dry bulk shippers, whose shares have been hammered in recent years.

Turning to fuel, he debunked the whole concept of peak oil saying new discoveries and technologies will give us access to a virtually unlimited supply of oil and natural gas. But high-quality, sweet oil will be tight – much of the world’s supply is “junk” including Saudi oil. “It contains too much sulphur and it’s too expensive to refine – no one wants it,” he contended.

This explains why Brent crude, which is sweet light oil produced in the North Sea, is trading at a significant premium to West Texas Intermediate crude (WTI) which is the North American benchmark, he suggested. The spread between the two is likely to continue to widen.

(Although Mr. Gartman didn’t mention it, there is an ETF that tracks Brent crude. It’s called the U.S. Brent Crude Fund and it trades on the New York Stock Exchange as BNO.)

As for natural gas, he described supplies as “vast and getting vaster”. There is no way we are going to see a significant increase in gas prices as a result, he said. “If you’re bullish on natural gas prices, take a deep breath,” he suggested.

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FOUR THEMES FOR THE YEAR AHEAD

By Gordon Pape

As readers are well aware, I find it difficult to be optimistic about the prospects for the next 12-18 months. Although many economists continue to believe that another recession can be avoided, my gut instinct tells me a downturn is more likely than not. At the very best, we can expect a period of slow growth.

That’s why I have been advising caution on new equity purchases. There will always be investment opportunities, of course, but you have to be very selective and exercise price discipline.

In this context, I presented four broad investment themes for 2012 during my workshop last week at the Toronto World Money Show. They are gold, bonds, dividend-paying stocks, and income trusts/limited partnerships. Here’s what I had to say about each.

Gold

Gold has passed $1,900 an ounce already this month and could crack through that level to stay at any time (prices in U.S. dollars). A price of $2,000 an ounce by year-end looks very possible. Interestingly, the metals are doing better than the mining stocks. The S&P/TSX Global Gold Index, which reflects the performance of several gold producers, was up just 6.9% for the year as of Thursday’s close.

I have never been a gold bug and I have always been skeptical about claims that it would climb to $5,000 or more. But we are living in extraordinary times. I have seen many crises over the years but I can’t recall the world being in quite such disarray during peacetime as we are experiencing now. Entire countries are teetering on the edge of bankruptcy, people have lost confidence in their leaders, radicals like the Tea Partiers are taking over the political debate, and corporations are stockpiling cash and hunkering down. It’s a mess.

It is in conditions like these that gold thrives. It’s the one universal store of value in a time when paper money is being degraded. It doesn’t matter where you are in the world, gold is accepted as a sound investment and a viable alternative when markets and economies are in trouble. Like Dennis Gartman, I won’t try to predict how high it could go in 2012. Suffice to say that there are still some good profits to be made.

I have discussed the many ways to invest in gold in previous issues so I won’t repeat all that detail now. To summarize briefly, you can buy gold or silver mining stocks (we have four on the Recommended List), an equity-based mutual fund such as RBC Global Precious Metals, a bullion-based fund or ETF, or the metal itself.

Bonds

As of the close of trading on Thursday, the DEX Universe Bond Index was ahead 7.07% for 2011. That is an astounding outperformance when compared to a loss of 5.6% for the S&P/TSX Composite Index. That means that if your portfolio was equally balanced between bonds and stocks that tracked those indexes, you be marginally in the black year-to-date. That result was totally unexpected; back in January hardly anyone predicted a strong year for bonds.

Some investors may be seduced into thinking there is more to come. There isn’t. Interest rates are so low now that there is hardly any upside potential left in bond prices. The yield on five-year Government of Canada bonds is only 1.41%. Comparable U.S. Treasuries are yielding an unbelievably low 0.87%. Since yields can’t fall much further, there isn’t much capital gain potential for bond prices.

I think that at best we can expect a total return of 3% to 4% on bonds in 2012 and even that modest target will only be achievable by including a large portion of corporate issues in a portfolio. But the main reason for holding bonds right now is not to score big gains. It is to protect your capital. Bonds cushion your portfolio against the effect of stock market losses. The more bonds you own, the softer your cushion.

Dividend stocks

Many people are leery about the stock market and rightly so. But high-quality dividend paying stocks tend to be much more resistant to market downturns, and you receive a monthly cash flow while you are waiting. Many of these stocks are in defensive sectors like pipelines and utilities so they tend to be much less volatile than the broad markets.

We have many good dividend stocks on our Recommended List, a large number of which have yields upwards of 3%. I suggested to the audience that they look closely at these in particular:

Enbridge (TSX, NYSE: ENB). Closed Friday at C$31.85, US$31.92. Yield: 3.1%.

BCE Inc. (TSX, NYSE: BCE). Closed Friday at C$38.62, US$38.80. Yield: 5.4%.

Fortis (TSX: FTS, OTC: FRTSF). Closed Friday at C$32.21, US$32.48. Yield: 3.6%.

Telus (TSX: T.A, NYSE: TU). Closed Friday at C$49.02, US$49.25. Yield: 4.5%.

Emera (TSX: EMA, OTC: EMRAF). Closed Friday at C$31.24, US$31.39. Yield: 4.2%. (Emera is an Income Investor recommendation.)

Income trusts/limited partnerships

Many investors don’t realize that there are still a few income trusts and limited partnerships (LPs) despite the imposition of the new trust tax on Jan. 1. Distributions from securities that are based in Canada now qualify for the dividend tax credit, so they are very attractive if held in a non-registered account.

Here are three that I discussed at the Money Show, all of which are Income Investor picks.

Inter Pipeline Fund (TSX: IPL.UN, OTC: IPPLF). Calgary-based Inter Pipeline is in the business of petroleum transportation, bulk liquid storage, and natural gas liquids extraction. The business is recession-resistant, so there is not a lot of downside here.

This LP has performed very well since we recommended it in October 2009 with a capital gain of about 60%. It pays a monthly distribution of $0.08 per unit ($0.96 a year) and raised its payout by 6.7% at the beginning of the year despite the new tax. It closed on Friday at C$15.88, US$16.01 to yield 6%.

Brookfield Renewable Power Fund (TSX: BRC.UN, OTC: BRPFF). This is one of the largest power income funds in North America. The business is the production of electricity from environmentally friendly and renewable resources. The fund indirectly owns or holds interests in 42 hydroelectric generating stations and two wind farms in Quebec, Ontario, British Columbia, and New England. As with all the securities in this group, cash flow and relatively low risk are the main attractions. Any capital gains are a bonus.

We recommended this income trust in July 2009 when it was known as Great Lakes Hydro. At the time it traded at C$16.62. The closing price on Friday was C$23, US$23.13 for a yield of 5.7% based on a monthly distribution of $0.10833 ($1.30 a year).

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This is another Brookfield operation but it is based in Bermuda, not Canada. That means it is not subject to the new trust tax, nor do the distributions qualify for the dividend tax credit.

This LP has interests in such diverse areas as power generation and distribution, coal terminals, ports, timber, railroads, and more. It operates in Australia, Great Britain, the U.S., Canada, and South America.

The company pays out between 60% and 70% of cash flow as distributions and last month raised the payment rate by 13% to US$0.35 per quarter (US$1.40 a year). Most of the distribution is treated as tax-deferred return of capital.

We recommended this LP in The Income Investor in September 2010 at C$18.90, US$18.38. The shares closed on Friday at C$26.02, US$26.14 for a yield of 5.4%.

Of course, none of these picks except the bonds is immune from a severe stock market downturn. But unless you retreat 100% to cash you have to accept some degree of risk. I believe that a portfolio that is strong in these four areas will hold up well in the period ahead while throwing off some cash flow in the process. – G.P.

 

RYAN IRVINE: GOOD NEWS, BAD NEWS

Contributing editor Ryan Irvine is back with us this week with a look at a previous recommendation that is doing well and some new perspective on Toronto-listed Chinese stocks in the light of the Sino-Forest debacle. Ryan is the CEO of KeyStone Financial (www.keystocks.com) and is based in the Vancouver area. Over to him:

Ryan Irvine writes:

We are often asked about the major reasons behind the current pessimism and volatility in the market. While reams of papers will be written and countless books authored, one of the main causes has been an imbalance in advanced economies. For a number of decades, the U.S., Japan, and Europe have built up excess credit and debt on the consumer side and governments did their part on the public side of the ledger. This came to a head in the 2008-2009 credit crisis and the great deleveraging followed. Thus far we have witnessed an unwinding of consumer debt that is unprecedented in modern history.

Rather than taking a multi-year hit in the near term with austerity measures that likely would have led to a prolonged recession (painful but necessary), governments shifted debt from households to their own books. They did this because they were politically unwilling to accept the economic consequences of the unwinding or deleveraging of household balance sheets. As a consequence, they injected enormous stimulus into their economies that propped up growth for a period in an artificial manner.

But now we have essentially taken the problem of excess leverage off household balance sheets and turned it into excess leverage on government balance sheets. As a result, we are left with a crisis of confidence that continues to drive unprecedented volatility as fear guides the broader market with no clear direction in sight. Governments now have to work down debt. The U.S. in particular needs to put partisan politics aside and come forth with a credible debt reduction plan. The plan can take decades to complete but one needs to be put in place to regain confidence. For its part, the euro zone needs a credible plan as well to restore confidence – be it a Eurobond market, or the default and excising of the weakest of the PIIGS, or some other credible solution.

The reality is we do not expect any of this to occur any time soon, gloomy as this sounds. Volatility will likely remain high near to mid-term so we are using this volatility to take advantage of some great long-term opportunities in solid companies that possess a set of criteria we believe will be profitable to investors over time.

In these fear-fuelled times, a strong company cash reserve is reassuring. Debtors can turn bad, concept stocks may be near worthless, and balance sheet valuations on land and buildings may need to be taken with a pinch of salt. But cash is cash.

In the meltdown that followed the tech stock boom and during the credit crisis of 2008-2009, the receding tide left some companies’ share prices trading at a significant discount to their market value or, in some rare occasions, at a discount to cash value. Many savvy KeyStone subscribers did well from these anomalies during 2001-2003 and the same can be said in 2009 and 2010 following the credit crisis of 2008-2009.

While today’s market situation has not deteriorated to these levels as yet and remains different from the tech meltdown in that it is not as sector-specific, opportunities have and will present themselves. We believe one has already in WiLAN (TSX: WIN, NDQ: WILN), which we recently recommended to IWB readers at a level where 35% of its market cap was cash, despite a profitable growing business.

As we mentioned before, cash is king again. But it goes beyond just having cash in the bank. We look for companies with strong cash balances on a per share basis (from 20% to 90% of their market cap), that generate positive cash flow, have a history of returning capital and increasing that capital return (increasing dividends or distributions), and have a profitable underlying business. When you can buy these kinds of stocks at reasonable prices they have the potential to benefit long-term investors far more than cash in the bank or under the mattress.

We have always had a taste for companies that pay dividends and find this to be even more important in the current environment. We have employed this strategy for years in our small-cap research with great success and we will be focusing on this type of stock in the near term. Examples from our IWB coverage universe that fit this criteria include Boyd Group Income Fund (TSX: BYD.UN), Glentel Inc. (TSX: GLN), and The Cash Store Financial Services (TSX: CSFS).

None of these corporations is the sexiest story on the street but all pay dividends and are producing capital gains. What this tells us is that select North American companies that continue to grow their dividends and have strong balance sheets should continue to serve us well long term despite the near to mid-term volatility in the markets. These are truly a new breed of stocks which we classify as “Dividend Growth Stocks.”

An excellent example of the type of “Cash Rich, Dividend Growth Stock” is the subject of our first update this month.

Enghouse Systems Limited (TSX: ESL, OTC: EGHSF)

We introduced Enghouse to the IWB in the March 7 issue (#21109) when the stock traded at $9.10. The shares closed on Friday at C$9.51, US$9.47.

Enghouse is a relatively unknown small cap which develops enterprise software solutions for a variety of vertical markets. The company is organized around two business segments: the Interaction Management Group (IMG), the former Syntellect Division, and the Asset Management Group (AMG). IMG serves the customer service market segment through the provision of Interactive Voice Response (IVR) systems and speech/voice recognition solutions, as well as an advanced contact centre platform that manages multichannel customer interactions.

On Sept. 1, Enghouse reported that its revenue for the third quarter (to July 31) rose 22% to $31.8 million from $26 million in the prior year. That includes license revenue of $11.7 million compared to $8.4 million in last year’s third quarter. Net income rose sharply to $4.6 million or $0.18 per share on a diluted basis compared to $3.2 million, or $0.13 per share, last year. This was due to increased license and services revenue. On a year-to-date basis, net income was $10.9 million, or $0.43 per diluted share, compared to $6.8 million, or $0.27 per share, in the prior year. While organic growth (before currency adjustments) picked up in the third quarter, revenue growth was driven by the acquired operations Mettoni, Telrex, and CosmoCom.

We were very pleased with Enghouse’s results in terms of revenue, cash flow, and earnings growth, which all significantly beat estimates. EPS came in at $0.18, which was well above the $0.15 that was expected. It was helped along by a particularly strong contribution from Mettoni, which contributed $8.9 million in the quarter compared to $6.1 million last year. Enghouse delivered $7.68 million, or $0.30 per share, in cash from operations before working capital and the company’s total cash flow from operations of $13.05 million was a multi-year quarterly high and compared to $9.1 million in the third quarter of 2010. Cash flow before changes in operating assets and liabilities was $19.43 million, or $0.77 per share, for the first nine months of 2011. The company is now trending well above the $1 per share in cash flow that management had targeted for 2011.

The general economic climate continues to present challenges to the company’s business overall. As such, management is not scaling up investments for internal or organic growth in 2011. We expect single digit organic growth in the near term. Having said this, top and bottom line growth in upcoming quarters will continue from acquisitions made in the first half of calendar 2010 and from the CosmoCom acquisition, as well as slight margin improvements from further integration progress.

Enghouse continues to hold an enviable balance sheet with $88 million in cash ($3.49 per share). This not only will buffer the company in the event of a double-dip recession but allow it to be aggressive on acquisitions, likely at attractive prices. If the very tepid “recovery” continues, the acquisition environment remains relatively favourable so Enghouse should also be able to make accretive purchases at a reasonable pace. The company is also in the process of consolidating its operation under a single brand which should provide for operational efficiencies heading into 2012.

At first glance, with a trailing PE of 16.5 (although down from 19.49 at our last update), Enghouse may not appear cheap. However, when we dig a little deeper we find that the company’s consensus EPS estimate for this year has again been upped to the range of $0.59 while its forward-looking p/e ratio is a more reasonable 15.5, given its growth. Strip out the $3.49 in cash per share the company holds in its acquisition war chest and we are paying closer to 9.59 times forward EPS for the operating business.

Additionally, following initial integration, we expect the CosmoCom acquisition to be accretive to operations going forward into 2012. We also expect the company to generate cash flow in the range of $1.05 to $1.10 per share for 2011, leaving the company trading at a discount to its peers.

As such, we maintain our Buy rating. We have a long-term outlook on Enghouse and expect management to continue to execute its acquisition strategy, driving revenues beyond $200 million over the next 2.5 years. In the near term, be patient, expect volatility due to the relatively low amount of shares available at present, and collect the 2.1% dividend as the company grows and eventually attracts the attention of the broader market.

Action now: Buy.

China stocks

Now let’s take action on two TSX-listed China-based stocks in the wake of the Sino-Forest fraud allegations. As a result of these events, the credibility gap is widening in reference to certain auditing firms and their ability to perform reliable audits on Chinese companies with the degree of accuracy necessary for investment. Therefore, we are issuing Sell recommendations on both Asia Bio-Chem Group Corp. and Boyuan Construction Group Inc.

We originally recommended Asia Bio-Chem (TSX-V: ABC) in May 2010 (#20119) at $1.30, stressing that it was for aggressive investors. Boyuan Construction Group Inc. (TSX-V: BOY) was recommended in February 2010 (#21108) at $3.08. Both have been hit hard with all companies in this segment and trade at $0.45 and $0.75 respectively.

We rarely make Sell recommendations based on circumstances that are not company or valuation specific as we have seen the folly of this approach in the past. However, we believe this to be a unique case and we will act accordingly. What began as a China Flu that could be ridden out mid term and potentially even taken advantage of long term has become a pandemic. Fraud or not, the segment is likely to come under further scrutiny and any semblance of a misstep will be punished in the market. We are not willing to take on that type of risk, particularly given current market conditions. We can find better value elsewhere.

The situation is unfortunate as companies such as Migao in particular appear to be doing a good deal to calm market fears including the pledging of the CEO’s shares, active insider buying, a normal course issuer bid, and the cancelling of prep-payment on the potash supply agreement that investors took issue with. Additionally, 12 analysts have visited this company’s facilities.

However, it is auditors that check inventories, cash balances, etc. The auditors on Sino-Forest and Zungui Haixi are not the same auditors for Asia-Bio Chem and Boyuan. However, market participants have yet to determine whether these cases are rampant fraud, isolated fraud, a problem with a particular auditor on the ground in China, or a systematic failure that makes Chinese entities such as this unreliable to audit in general. In any case, the broader market has not seen this as a high risk for many years. But recent events dictate that this level of risk will now be factored in to pricing and we do not see value in participating going forward as a result. We will take the loss, hold it against current or future gains where possible, and move forward.

Action now: Sell.

Finally, here’s a little tease for next month’s column. We’ll tell you about a cash rich, cash flow producing junior gold company with a growing production profile and a very low cost of production. Stay tuned.

– end Ryan Irvine

 

GORDON PAPE’S UPDATES

Angiotech Pharmaceuticals

Originally recommended by Yola Edwards on May 20/06 (IWB #2612) at C$18.27, US$15.73.

Angiotech has gone belly-up. The company filed for bankruptcy protection in both Canada and the U.S. earlier this year, wiping out shareholders without any compensation. The Vancouver-based company had been in trouble for some time after a steep decline in sales of its Taxus coronary stent systems. It had been hoped that new products would get it back to profitability but that didn’t happen. The stock has been delisted and the shares are worthless.

This rarely happens with one of our recommendations and we did note that this stock was for speculative investors. That said, a corporate bankruptcy is the last thing anyone wants to see and we will try to ensure this does not happen again.

Crescent Point Energy (TSX: CPG, OTC: CSCTF)

Originally recommended on July 13/09 (IWB #2926) at C$31.65, US$27.19. Closed Friday at C$42.08, US$42.25.

We have done well with this stock. We currently have a capital gain of 33% in a little over two years plus we have received distributions of $5.98 for a total return of 51.8%. However, I do not see much upside for the next several months as the price of oil will likely stay around current levels, or lower, as long as recession fears linger. The yield continues to be attractive but it may be a good idea to temporarily scale back on energy positions. Before you take profits, however, he sure to review the tax implications carefully.

Action now: Sell. This is still a good company and we may buy it back in future, perhaps at a cheaper price. – G.P.

 

YOUR QUESTIONS

A double bottom?

Q – As I finishing reading your article titled “More Doom and Gloom”. It seems the bad news just keeps rolling in. What I’m wondering is that despite all the gloom in the market the Dow as yet to break below the Aug. 10 intraday low of 10,686.50 and appears to be trying to form a double bottom. Is this just wishful thinking on my part? Also, when you suggesting sitting tight because there could be further bargains to be had in the near future of 20%-30% are you referring to individual stocks or the indexes themselves? Your thoughts are greatly appreciated? – Vito B.

A – I’m not a technical analyst so I pay no attention to double bottoms. I look at the fundamentals and I don’t like what I see. I think all the major indexes will drop in the coming months and that bargains will be plentiful both for individual stocks and for index investors. – G.P.

ETF puzzler

Q – My question is about the Claymore 1-5 Year Laddered Corporate Bond ETF (TSX: CBO) vs. the iShares DEX Short Term Bond Index ETF (TSX: XSB). I have both in my RRSP and I calculated current yield (last month’s distribution/market value divided by 12). The result is: CBO 4.54%, XSB 3.2%. That really puzzles me. I expect yields to be very close. Can you explain why the difference in yields is that high? Will it make CBO a better investment then XSB? – Michael K.

A – This is something of an apples and oranges comparison. CBO invests only in corporate bonds. XSB invests in both government and corporate issues and the mix at the end of July was about 70-30 in favour of federal and provincial bonds. Corporate bonds normally have a higher yield than government issues of comparable maturity.

As for which is the better choice, it depends what you want. XSB is inherently less risky because of the high government content but it also has a lower return over the past year (2.5%). CBO has a one-year return of 3.4% and a higher yield but there is somewhat more risk because of the nature of the portfolio. – G.P.

 

That’s all for this week. We will be with you again on Sept. 19.

Best regards,

Gordon Pape