Buildingwealth.ca

In This Issue

Hong Kong plunges, bullion follows, New York
staggers - what to do
Members' Corner - foreign content rules, NAV
figures for BPI Opps II,  
saving for a home
Updates - BPI Opps II Fund (BOI.IR), Freehold
Royalty Trust (FRU.UN),  
Hurricane Hydrocarbons (HHL.A), Moore Corp. (MCL),
Research in Motion  
(RIM.W), Tesma (TSM.A)

Dear Member,

This issue of the IWB is coming to you a day early, as I have to be on a

plane early Monday morning, winging my way to Thunder Bay en route to

Kenora, Winnipeg and Saskatoon. If you live in any of those three

communities, check out last week's issue for details of my seminars

there and drop by.

Well, it was quite a week! First the big plunge in Hong Kong, then the

huge drop in gold, then the first time since October, '97 that the Dow

lost more than 100 points for two consecutive days. Talk about a wake-up

call for anyone lulled into the dream that these markets would keep

going up forever. I know I've been sounding like a broken record for

some time in my urgings to take a more defensive stance in your

portfolios, but weeks like the one we've just experienced remind us of

the vulnerability of markets to unexpected shocks and the importance of

maintaining a balanced approach to investing.
As I said in the special bulletin I sent out on Thursday, I expect the

situation in the Far East to continue to be unstable for some time. If

you own mutual funds that specialize in the region, I suggest you hold

at this stage. There could be some further declines to come, but the

worst of the losses are probably behind us. 
However, I do not see this area as a big buying opportunity yet. There

are still too many question marks, especially relating to the Hong Kong

currency and whether its peg to the U.S. dollar can be maintained. As we

saw in Mexico in '94 and again in Asia now, there is nothing more

unsettling to markets than currency uncertainty. That's because the

international value of any assets priced in local money will decline if

that currency falls in value against the U.S. dollar. That could still

happen in Hong Kong. There have been the usual public statements that

the peg will be maintained, but as we know from past currency crises,

that's nothing more than posturing. The louder the declarations that all

is well and nothing will be done, the more likely devaluation becomes.
So stand clear of this turmoil with any new investment money for now.

There will be a time to commit new dollars to the Far East. It will

still be one of the strongest growth regions of the world as we enter

the next century. But this is not that moment. I don't mind investing in

markets that have been beaten down; I just don't like investing in

chaotic ones.
Speaking of chaos, what about gold? At least we had some advance notice

that Hong Kong was unravelling - stock prices there had been drifting

down for the past few months. But gold seemed have stabilized after

taking a tumble earlier this year. And then, pow! A drop on Friday of

$15.70! Startled gold experts pointed the fingers of blame in two

directions. One finger was pointed at Asia, with the suggestion that the

currency declines in countries like Thailand and Malaysia (and perhaps

Hong Kong to come) would push the local price of gold higher, thereby

reducing demand. The other was pointed at Switzerland, where rumours

emerged that the Swiss government, long a staunch gold bug, is preparing

to sell half its bullion reserves. (If the Swiss are anywhere near as

smart as claimed, they'll probably put any such plans on hold until the

price recovers.)
Predictably, the IWB gold stock recommendations took it on the chin.

Hardest hit was Euro-Nevada (EN), which fell a dizzying $4.65 on Friday,

to close at $22.20. Blue Chip Portfolio holding Franco-Nevada (FN) fared

better, off $2.45 to close at $34.50. The only good news in this

otherwise bleak picture is that both stocks are still slightly above

their original recommended purchase price.
Gold Reserve (GLR), which I added to the IWB Trading Portfolio just last

week, lost $1.05 on Friday to close the week at $8.55. Not an auspicious

debut for this newcomer, but I still believe this one will turn out well

over time.
My philosophy has always been never to sell good companies in a general

downturn, either in their specific sector or in the market as a whole.

Sound firms will eventually rebound, and I believe all three of these

companies fall into that category. 
But I would not counsel adding new gold stocks or precious metals funds

to your portfolio at this time, for exactly the same reason that I

suggest holding off in the Far East. Precious metals markets are in

turmoil. I can't predict what will happen next (who can?), so I would

not want to add new money at this stage. As with the Far East, a buying

opportunity will come, but wait for the markets to stabilize first.
As far as New York is concerned, surely no IWB reader was surprised to

see the Dow come off. It's been clear for several months that the New

York market is overvalued. You've heard it from me, Alan Greenspan, and

almost everyone else who hasn't been caught up in the "sky's-the-limit"

syndrome that always seems to take hold when bull markets are

approaching their peak. 
However, it appears that at least some IWB members have not been

reducing the risk in their portfolios as I've been advising and are

suddenly very nervous. Here's a partial excerpt from an e-mail I

received on Saturday: "Although you said hold, we got out of Sceptre

Equity last year (the fund has gone up $9 since), but got back in a

couple of weeks ago, just in time for what's going on now. I keep saying

hold, the market will improve but my husband says sell and wait for

better times. We're just at the break-end point. If the market goes down

starting Monday, we're going into a loss position. I really need some

input from you and would greatly appreciate a reply before Monday if at

all possible."
There are some worrisome things about this plea. Most important, this

couple is trying to practice market timing to a degree that not even the

most seasoned professionals can manage. They sold out of a great mutual

fund (which was actually recommended in Mutual Funds Update, not here)

at exactly the wrong time, because they were nervous. Then they bought

back in, at what they now worry was again the wrong time. Now they want

to know whether to sell again, at what could once again be the wrong

time. And they wish to base that decision on what I think the market

will do next week.
I don't know what the market will do next week. No one does. All I know

is that prices in New York are still high and investors are nervous.

That is a recipe for volatility, which we are seeing. The Canadian

market is not as overvalued, but since gold is such an important part of

our mix, we will continue to experience the volatility as well. 
But whatever the markets may do in the week ahead (or any given week)

should hardly be the deciding factor in whether to buy, sell or hold a

top-notch mutual fund. The way to deal with this type of volatility is

not to panic and trade in and out of securities at every market twist.

It is, as I have said all along, to maintain a well-balanced portfolio

which includes a solid core of income securities along with the equity

component. I'm sure you've noticed that while stocks were going down

last week, bonds were moving up. If you are holding some in your

portfolio, those gains will help offset stock market losses. For

example, the Centrefund convertible debenture (CFE.DB.A) that I

recommended for your self-directed RRSP in IWB #9701 at $107 was up $1

last week, to $122. If you're unsure how to set up your portfolio in a

more defensive way, check back to IWB #9727, Aug. 4.
One other point that comes out of this message. I cannot provide

individual investment counselling of this type, and it would hardly be

fair to other IWB members if I did. Any comments I have on the market

and appropriate strategies to follow will go out to everyone at the same

time.
MEMBERS' CORNER
Although I thought I was being very clear, some members have asked for

more clarification of what I meant in IWB #9736 when I said that the 20%

foreign content rule applies to RRSPs (and RRIFs) on a per plan basis.

Here's one such query:
Question - You made me panic a bit. I have one RRSP plan with TD Green

Line. In the past, I transferred and grouped

all my RRSP accounts into one solely RRSP Green Line account.
I'm not exceeding the 20% foreign content with Green Line but when you

mean by plan, I hope you mean for my Green Line plan. I recently bought

BPI American Small Cap $US Fund.

I'm just wondering if the plan is established for Green Line or for BPI.

In other words, do I have to buy for $20000 of BPI Canadian funds to

regulate my situation with fiscal authorities under a BPI foreign

content limit? - N.C.
Answer - No. The BPI fund is only a security held within your overall

Green Line plan. It is not a plan in itself. When I refer to plan in

this context, I'm talking about a plan that is registered with Revenue

Canada. It doesn't matter if a specific plan holds assets from several

mutual fund companies. Foreign content calculations are based on the

total book value of each registered plan. However if, for some reason,

you had two separate plans with Green Line, each would be treated

independently for foreign content purposes. I hope this clears it up and

that the panic attack has now subsided.
Question - In the IWB you mention the BPI Canadian Opportunities II Fund

and its market and NAV value.  I

have been watching the market price of this fund, but I have been unable

to find any info regarding the NAV. Where might one might get such

information (especially on the Internet)?
As a side note, I was wondering how many members the IWB now has and if

any of your readers have responded with opinions on E*Trade Canada? -

W.C. 
Answer - I don't know about the Internet, but the NAV for Opps II

appears daily in the Globe's Report on Business. It's in the mutual

funds section, under "other funds". IWB membership is now over 1500. No

recent input on E*Trade, but now that it has been around for a while

perhaps members who have been using the service would like to send along

some comments for publication here.
Question - Just a quick note to tell you how much I am enjoying the IWB

and look forward to the 1998 RRSP Guide. I currently have $5000 that I

am planning to use to buy a house in 2 years.  I figure that I can

contribute another $400 a month over the next 2 years.  Where in your

opinion would be the best place to put this money while I wait?  As a

client of Green Line, I was thinking of placing it in the Green Line

balanced fund (no commissions). Do you think this would be a good idea

or would another type of fund be

more appropriate? - J.M.
Answer - It depends how much risk you're prepared to take. Don't forget,

a balanced fund is vulnerable to short term loss if we experience a

serious correction in the stock (or bond) market. Since you're only

looking to place the money for two years, you should perhaps invest in

something that has minimal risk, even if the return is quite low. CSBs

perhaps.
Finally, thanks to the many members who sent notes of appreciation for

the special bulletin on the Far East that went out on Thursday. I can't

react instantly to every twitch of the market, but when a major

development like that occurs I will endeavour to provide a quick,

up-to-the-minute commentary when feasible. Of course, there may be times

when I'm sunning myself on the deck of a cruise ship, blissfully unaware

of the cares of the world, so please don't expect I'll always be in a

position to send out a quick bulletin. But when I can, and the situation

warrants it, I will. 
UPDATES
There's been a lot of activity recently involving several of our

recommendations, so let's do a quick run-down. You won't find Luscar or

Westshore here however; several members have asked for updates and I

have checked with both companies, but neither has anything new to

report. Recent weakness in the trading price appears to be a reflection

of general market conditions rather than an indication of any problem

with either royalty trust. I'll keep tracking them.
BPI CANADIAN OPPORTUNITIES II FUND (TSE: BOI.IR; originally recommended

in IWB #9705, Feb. 3/97, as an IPO at $10, with $5 payable on closing

and $5 on Oct. 31. Closed Friday at $3.90.) As I predicted might happen

in IWB #9735, the market price of this fund has drifted lower as the

date for the second instalment approaches. That deadline is coming up

this Friday (Happy Halloween!), and by now you should have received a

notice from your broker of the second payment being due if you own

units. 
Action now: Don't turn into a pumpkin by letting your units go at what

could well turn out to be their low. The current net asset value (NAV)

is $5.51, so the units are trading at a discount of almost 30%. Pay the

second instalment, even if you plan to sell soon afterwards. I expect

the discount to NAV to narrow once this is behind us. Members who don't

yet have a position may be able to snap up a bargain early this week.

But if you do, remember that second instalment will have to be paid

almost immediately.
FREEHOLD ROYALTY TRUST (TSE: FRU.UN; originally recommended in preview

issues #01, Nov. 12/96, as an IPO at $10. Closed Friday at $11.15.)

Freehold announced third quarter results (to Sept. 30) last week, and

they were somewhat disappointing.  Distributable income was just over

$6.7 million, or 25c a unit. That was down from about $7.4 million (28c

a unit) in the second quarter and $8.4 million (32c a unit) in quarter

one. Freehold blamed about 20% of the decline on a drop in production as

a result of pipeline constraints, which it says have now been removed.

For the rest, I talked with president David Sandmeyer, who explained

that several forces are at work. One relates to a slippage in oil and

natural gas prices, which were unusually high in the first quarter,

contributing to the high distribution for that period. The second

involves a $22 million deal for new properties that was concluded in

May. The acquisition was backdated to Jan. 1, and the revenue taken into

second quarter earnings, accounting for about 2c a unit in the

distribution for that period. The third factor is a complex accounting

issue relating to the manner in which royalties from producing companies

are calculated. You don't want to know the details (and I'm not sure I

could explain them anyway) but some adjustments in the third quarter

knocked about 1c a unit off the distribution.
Looking ahead, Mr. Sandmeyer projects a fourth quarter distribution of

25c - 27c. The projection for '98 is between $1 and $1.10 a unit if the

status quo is maintained and there are no new acquisitions. However, he

says the trust is actively pursuing new acquisition opportunities, so

there could be some upside to those numbers.
When I originally recommended this trust, I stressed it was for

tax-advantaged income. The original projection was for a first year cash

distribution of 9.75% to 10.75%. All distributions are received on a

tax-deferred basis until at least the year 2000.
Assuming a fourth quarter distribution of 25c, the total cash payment in

'97 will be $1.10. That's an 11% return on the original $10 price,

slightly above the high range of the projection. But there was a bonus,

a stub distribution of 13c a unit that covered the period from the

closing of the deal on Nov. 25/96 to the end of the last year. Add that

in and the total cash return in a little over 13 months works out to

$1.23, or 12.3%. If you also add the capital gain to the total, your

return on the IPO price will come in at 23.8% when the final

distribution for the year is paid. So far, this trust is delivering on

its promise, plus a little more. 
Action now: Hold. Based on the current price and using the low end of

the '98 projection, you're looking at a cash yield of about 9% next

year, and possibly more. And remember, it's all tax-deferred. 
HURRICANE HYDROCARBONS (TSE: HHL.A; originally recommended in IWB #9707,

Feb. 17/97, at $6.45. Closed Friday at $12.60.) I finally received some

official fourth quarter numbers from Hurricane to the end of June, and

they are somewhat different from the extrapolations I made in IWB #9736.

The most important variation is in net income. I had pegged it at $6.1

million, whereas the actual was just under $4.9 million (all figures in

US$ as per their new reporting policy). Reason for the difference was an

unusually high tax rate. Hurricane CFO Richard Norris says this is due

to the fact that some of the company's expenses (issue costs, interest

charges, etc.) are incurred in Canada, but there is no Canadian income

stream against which to write them off (all the income is earned in

Kazakstan). However, he adds that he expects there will be adequate

Canadian income in subsequent years to charge these expenses against,

thereby recovering the tax overages.
In another development, Hurricane announced plans to make a private

placement of $100 million worth of seven-year notes in the U.S. next

month. The money is to be used to accelerate the upgrading of the

Kazakstan field, a priority the company has already announced.
Finally, the Board has approved a shareholder rights plan which will be

submitted to the annual meeting on Nov. 25. The company stressed the

plan has not been adopted in response to or in anticipation of any

take-over bid. Still, it's interesting. . .
Action now: Hold
MOORE CORPORATION: (TSE: MCL; originally recommended in IWB #9718, May

19/97, at $29.10 as part of the Blue Chip Portfolio. Closed Friday at

$24.90.) One of my wise friends was very sceptical when I recommended

this stock. Hindsight says I should have listened to him. You

undoubtedly saw the news reports this week about the sudden departure of

chairman and CEO Reto Braun. But that really didn't come as a huge

surprise, given the pressure that had been building on him from the

powerful shareholder group represented by TMI-FW Inc. of Texas (the Bass

Brothers et. al.).
To me, the real stunner was the news that the company came in with an

unexpected third quarter loss of US$7.9 million. That one blind sided

everyone. It was clear that Moore's results were coming in below

projections, but a loss!!!??? The markets reacted predictably, with

Moore stock ending the week off $1.10. It might have been worse.
I've given a lot of thought about what to do here. This stock is part of

the IWB Blue Chip Portfolio, which is intended to be a buy and hold

approach to investing. However, the approach only works effectively with

well-managed companies that are industry leaders and which have solid,

long-term growth potential. When I originally recommended Moore back in

May, I felt that was what we had here - a company with strong management

that was a leader in the traditional business forms field and was

aggressively diversifying its market so as to play a dominant role in

the big move into electronic forms. 
The past couple of months have revealed the company was having a lot

more trouble than was apparent. Now, with Braun's departure and the

revelation of a third quarter loss, there's no doubt that this is a

company in disarray.  The new CEO is only a caretaker, and it may take

six months to find a permanent successor to Braun. There are serious

marketing problems, and without firm leadership from the top, it may be

some time before they are addressed. 
Of most concern to me is the recent quarterly loss. Moore's share price

is now being supported only by its generous dividend (current yield is

5.25%). Most analysts believe the board of directors will maintain that

dividend, knowing that to cut it will send the stock into freefall. But

if earnings don't bounce back very quickly, that may prove difficult to

do. And right now, no one seems to have any real idea of just where

Moore's earnings are going to settle over the next year or so.
One of the investing lessons I learned long ago is to cut losses when

the underlying condition of the company changes for the worse. This is

quite different from selling off a good company in a general market

decline; quality will eventually resurface. But in Moore's case, we are

now faced with all kinds of uncertainty - where are earnings going, what

will happen to the dividend, who will take over, when, how will he/she

change the firm's direction, and on and on.
I could make several arguments for holding. There's a good core business

here, the company is doing some exciting new things on the electronic

side, the pressure from the new investors should eventually bring about

changes that will benefit shareholders, the dividend is attractive (as

long as it is paid). 
But at the end of it all, a Blue Chip Portfolio should not be holding a

stock that has so much uncertainty attached to it.
Action now: Sell. For purposes of portfolio tracking, we'll record the

$420 loss, treat the cash proceeds as an asset, and reinvest the money

elsewhere in due course. 
RESEARCH IN MOTION (TSE: RIM.W; originally recommended in IWB #9736,

Oct. 14/97, as an IPO to be priced between $6.50 and $8. Closed Friday

at $8.45.) I hope you were able to get some of this one. The pricing

came in at $7.25, the mid-point of the previously announced range.

Trading began on the TSE last week on an "if, as, and when" issued basis

and the shares jumped 26% on the first day. By Friday, however, some

measure of reasonableness was restored and the stock ended the week at

$8.45, or 16.6% above the issue price.
Action now: This company has excellent long term prospects, however like

many IPOs in the high tech field I think the premium that was

immediately attached to the shares was excessive. Had it ended the week

over $9, I would have advised you to take your profits and run. However,

at current levels I recommend you hold. But if the price pops back over

$9 in the week ahead, sell.
TESMA INTERNATIONAL (TSM.A; NASDAQ: TSMAF; originally recommended in IWB

#9730, Aug. 25/97, at $21.30 as part of the IWB Trading Portfolio.

Closed Friday at $22.50.) The company announced this week that it has

reached an out-of-court settlement with Stant Manufacturing Corp. of

Indiana relating to patent rights on a fuel cap. Tesma agreed to pay

C$2.75 million, in return for which they received clearance to continue

to supply the fuel caps to GM. The company said it would absorb the cost

in a one-time hit that would knock an estimated 19c a share off

projected 1998 earnings. The markets reacted well to the news, with

Tesma stock ending the week up 80c.
Action now: Buy. This particular cloud has been removed with apparently

minimal damage. The company continues to offer great growth potential. 
That's all for now. Back on Nov. 3.
Best regards,
Gordon Pape

(gpape@istar.ca)

(circulation matters: kimpape2@rogers.wave.ca)
ADDENDUM
Dear Member,
As the old song goes, what a difference a day makes. Or, in this case, a

few hours. At the end of the trading day on Monday, it appeared we were

heading towards a market crash that would rival that of 1987 in its

scope. Only the application of the "circuit breakers" in New York that

suspended trading prevented the Dow from spiralling down to a loss of -

what? 700 points? 1,000? 1,500? When the selling psychology takes hold,

there is no telling where it will all end.
I arrived in Kenora Monday afternoon, in time to catch the end of the

day's action. Last night, my two main messages to the audience there

were not to panic and to stress the importance of portfolio

diversification - themes IWB members have been reading for some time.
This morning, just before I headed out on the road to Winnipeg, I caught

the market opening and watched the continued precipitous drop in New

York. Just went it seemed we were heading for round two of the Great

Plunge, with the Dow down over 180, the dramatic turnaround began.

Within the space of about 20 minutes, the Dow was back to almost even

and I was able to head out on the highway in a more relaxed frame of

mind.
You know the end of the story, or at least the end as of the closing

bell today. After the biggest one day loss in history, the Dow recorded

its biggest one-day gain in history, with the largest trading volume

ever. Wow! I warned you about volatility in the markets but no one,

absolutely no one, could have predicted anything like this.
So what now? Was it all a one-day wonder? I don't think so. The

instability in the Far East remains. With today's big recovery, an

argument can be made that New York is still over-priced. Greed took over

from fear on Tuesday as money managers scrambled to pick off what they

perceived as bargains and some companies bought back their stock at

discount prices. But investors are still nervous, as well they should

be.
In these circumstances, I suggest you take one of the following two

approaches, depending on your personal situation:
 1) If you have already adopted a defensive stance in your investment

portfolio along the lines I recommended in August, sit tight. Your

portfolio should be able to absorb any further shocks the market may

have in store in the coming weeks with minimal negative effect. I do not

advise aggressively taking new positions in the current climate. I find

it hard to believe that North American stock markets, having had a

near-brush with disaster on Monday, are now going to turn around and

head straight back up. Of course, anything seems possible these days.

But my expectation is for a lot more volatility ahead. In those

conditions, I would rather sit tight with a well-diversified portfolio.
2) If you haven't yet taken steps to reduce your portfolio risk and

Monday's events left your stomach in knots, take action right now to

make whatever changes are needed. That means reducing your exposure to

stocks and/or equity funds and adding to the cash and fixed income

components in your portfolio along the lines I previously recommended.

In short, treat Tuesday's market bounce as a opportunity to reduce risk

through better diversification.
My bottom line is that this is a time for prudence and caution. I'm very

happy that the markets rallied back today - for one thing, it means I

won't lie awake tonight, as I did last night, deciding what to say in

this letter. But I don't regard it as a signal that all our troubles are

behind us. There is more turbulence ahead. Count on it.
Best regards,
Gordon Pape