In This Issue
Turmoil continues IWB Defensive Portfolio reviewed Members' Corner: A useful web site, balanced funds, the future for royalty income trusts Putting things in perspective Hostellerie de Crillon-le-Brave Database discount for IWB members
Dear Member,
So I go away on holiday for a couple of weeks and what happens?
Everything. Or nothing. It depends on your point of view.Since the last IWB we have seen more stock market turbulence, with big
swings up and down as investors overreact to the latest news
developments. Monday's big rally on international markets, sparked by
Japan's moves to deal with its banking crisis, is a classic example.
The
Tokyo exchange had a huge day, and the optimism that generated drove
the
Frankfurt Dax Index to a record one-day gain and boosted New York as
well. Unfortunately, given the way the markets have been performing, we
may see those gains given back just as fast on the first piece of bad
news that comes along. This whiplash effect, which we've been
experiencing for the past several months, is what makes investors so
nervous.While I was away, three of my Fearless Forecast headlines came true.
The
U.S. Congress is pushing ahead with its impeachment inquiry in the face
of public opinion and all sanity. The U.S. Federal Reserve Board has
cut
interest rates once and investors expect another such move to follow
quickly. Consumer and business confidence in Canada and the U.S. is
plummeting.We haven't yet seen the collapse of a major Japanese bank, although a
subsidiary leasing company has gone down. One might argue that
hyperinflation has already gripped Russia, but I expect worse to come.
As for the food riots I predicted, the government is attempting to
forestall that terrible possibility by appealing to the West for food
aid. How the mighty have fallen!In short, it's all unfolding as I feared it would, and it's not over
yet
despite the latest developments in Japan.Have you been paying attention to the economic forecasts for 1999? The
trend pattern is scary. First, we were told that the strong North
American economies would not be much affected by the turmoil in the
rest
of the world. Then this optimistic view was tempered somewhat as
economists allowed that, yes, there might be some affect on our growth
rate. But it would be mild.The next stage was a paring back of the projected growth numbers. Month
by month, the targets for 1999 were reduced. Now, for the first time, a
few economists are going out on a limb and predicting a recession next
year.I am afraid this small band may be right, and that more economists will
be saying something similar as we move deeper into the fall. The signs
are not promising and no one seems able to find any solutions to the
global economic malaise. Last week's meeting of the International
Monetary Fund was a virtual bust as far as the development of an action
plan was concerned. A lot of concern was expressed, a lot of good
intentions put forward, but where's the meat?
Meantime, President Clinton will continue to be distracted by events in
Congress, Russia continues to spiral downwards, and the Y2K crisis, if
there is to be one, draws closer.In these conditions, the watchword should continue to be capital
preservation. This is not a time for bravery or even for
bargain-hunting
on any large scale.Over the next few months, I'll be taking a cautious approach in the
IWB.
Stocks will be recommended only very selectively, and in many cases it
will be a matter of adding to holdings in good quality companies we
already own. The IWB Defensive Portfolio and IWB Blue Chip Portfolios
will be the lynchpins of this approach, however I also intend to add an
IWB Ultra-Conservative Portfolio to our line-up for members who want
maximum safety.There will be opportunities again to prosper greatly from rising
markets, but at this stage I cannot predict when that will be. Don't
get
too excited by short-term rallies; it is possible we won't see a
sustained new bull until after the uncertainties surrounding Y2K are
removed. In the meantime, my aim will be to protect capital and to
generate the maximum possible returns consistent with that.IWB DEFENSIVE PORTFOLIO
The last time we looked at the IWB Defensive Portfolio in detail was
immediately after the August market tumble. Given the magnitude of that
drop (Dow down 15%, TSE 300 down 21%), it stood up quite well with a
loss of 5.7%.September wasn't anywhere near as bad - in fact, the TSE 300 managed a
1.5% gain during the month. But it has given that back and more in
October, losing 2.4% to date. In that context, let's see how the
Defensive Portfolio is faring.15% - Phillips, Hager & North U.S. $ Money Market Fund. We originally
purchased 1,000 units at par, at an exchange rate of $1.5111 for a cost
of $15,111. As of Friday, the exchange rate was 1.5465, following a
week
of violent ups and downs for the currency. Interest earned to the end
of
September was $125.23. We'll use this to add 8.1 units to our stake (at
US$10 per unit) to bring our total to 1,008.1 units. Total current
value
in Canadian dollars: $15,590.27. Gain: $479.27. Action now: Hold. The
loonie is swinging so wildly that it's impossible to know where it's
going next. Yankee dollars look much more attractive in these
circumstances.15% - AGF Global Government Bond Fund. We own 1,216.3 units of this
fund, which were purchased in mid-September at a price of $11.23. The
closing price on Friday was $11.61. We also received a distribution of
0.379c per unit at the end of September, for a total of $46.10. We will
use this to buy another 3.971 units, to bring our total to 1,220.271.
Current total value: $14,167.35. Profit on this fund is $508.30 in less
than a month. However, we are down from the original cost of this
position, which was $15,090, invested in the AGF U.S. Short-Term
High-Yield Fund. We sold that fund off quickly after the North American
junk bond market went into the dumps as investors poured money into
high-grade government bonds. Action now: Buy. Government bonds took a
hit last week, creating an excellent buying opportunity here. This is
exactly the type of fund you'd like some of your assets in during times
like these.10% - Scotia CanAm Income Fund. Our original purchase was 650 units at
$15.58 for a cost of $10,127. Valuation at the close on Friday was
$16.33 a unit. We received a September distribution of 6.07c per unit,
for a total to date of $80.80. We'll use this to buy 4.948 more units,
to bring our total to 654.948, with a current value of $10,695.30.
Gain:
$568.30. Action now: Hold.10% - Phillips, Hager & North Bond Fund. We bought 1,000 units on Aug.
1
at $9.42 for an investment of $9,420. We received a quarterly
distribution of 15c a unit on Sept. 30, worth $150. We will reinvest
this in 15.823 new units at the current price of $9.48, bringing our
total holdings to 1,015.823 units. Current value: $9,630. Gain: $210.
Action now: Hold/Buy. If you don't have a position in this fund, this
is
a good time to acquire one.10% - Ivy Canadian Fund. We bought 500 units at $20.60 for an
investment
of $10,300. No distributions to date. Unit value on Oct. 9: $18.06.
Total value: $9,030. Loss: $1,270. Action now: Hold.10% - Templeton International Stock Fund. Original purchase was 600
units at $16.85 for a cost of $10,110. No distributions to date. Unit
value on Oct. 9: $13.74. Total value: $8,244. Loss: $1,866. Action now:
Hold5% - Riocan REIT. We bought 500 units at $10.50 for a cost of $5,250.
There is a monthly distribution of 7.75c per unit, so the total earned
to date is $77.50 which we will hold as cash. Market value as of Oct.
9:
$8.00. Total value, including distribution: $4,077.50. Loss: $1,172.50.
Action now: Hold.5% - Altamira Bond Fund. We bought 300 units at $17.03 for a cost of
$5,109. A quarterly distribution of 17c a unit was paid on Sept. 30,
for
a total of $51 to our account. We will use this to buy 2.945 additional
units at the current NAV of $17.32, bringing our total holding to
302.945 units. Current value: $5,247.01. Gain: $138.01. Action now:
Hold/Buy. I expect this fund to perform well in the coming months.5% - Trans-Canada Power LP. We bought 180 units at $27.85 for an
investment of $5,013. A quarterly distribution of 54c a unit was
declared for shareholders of record as of Sept. 30, and will be paid on
Oct. 30. That is worth $97.20 to us. Closing price Oct. 9: $26.00.
Total
value, including pending distribution: $4,777.20 Loss: $235.80. Action
now: Hold.5% - AIC Value Fund. We purchased 100 units at $49.27 for an investment
of $4,927. No distributions. Closing value Oct. 9: $38.98. Total value:
$3,898. Loss: $1,029. Action now: Hold.5% - Phillips, Hager & North U.S. Equity Fund. We own 80 units at an
original price of $62.44 for an investment of $4,995. Closing value
Oct.
9: $52.58. Total value: $4,206.40. Loss: $788.60. Action now: Hold.5% - AGF American Tactical Asset Allocation Fund. We purchased 225
units
at $21.99 for an investment of $4,948. Closing unit value Oct. 9:
$20.75. Total value: $4,668.75. Loss: $279.25. Action now: Hold/Buy.
This fund is standing up very well in these tough conditions and has
actually gained a bit since our last review. If you don't have it in
your portfolio, add it now.Summary: Original portfolio value: $100,400
Portfolio value Oct. 9/98: $94,231.81
Change since inception: -6.1%Comments: The total value of the portfolio hasn't changed a great deal
since we last reviewed it in early September. Given the state of the
markets, I consider that a good result.MEMBERS' CORNER
One of the problems with going on holiday is that the e-mail doesn't
stop flowing in. There were almost 100 messages awaiting me on my
return. So let's deal with a few of them now.First, a tip on a useful web site from a member.
"The following site may be of interest to IWB members who are
interested
in technical analysis of Canadian and US stocks and their quotes. It is
free with no subscription:
http://www.askresearch.com"The teck analysis is under the heading of 'daily
charts' when one is in the site." - H.K.Q - I've been following your defensive portfolio recommendations in
your
newsletter. I was wondering if you had any advice for people like
myself
who have a contributory pension plan, RRSPs, and non-RRSP investments
in
various balanced funds. The holdings in these funds are pretty close to
the asset mix you recommend. Should a person with a portfolio
consisting
primarily of balanced funds have to make any further defensive moves at
this time? - G.T.A - Probably not. If the balanced funds are being properly handled, the
manager should do that work for you. Keep a watch on them, however, to
see where the asset mix is positioned and how the funds are actually
doing.Q - I invested a fair amount of money in some of the long-term income
trusts you recommended (Labrador Iron Ore, Westshore and Luscar) in the
first several months after you began publishing the newsletter, when
prices were pretty high (along with an investment in the Guardian
Monthly High Income Fund).The good news (I hope) is that I invested the funds for income, not
capital appreciation. And I've always had quite a long-term perspective
(over ten years). And to avoid sleepless nights over volatile price
fluctuations, I've tried to avoid checking values on a regular basis.However, I have to admit that after all the doom and gloom in the
newspapers lately about the possibility of global disinflation (and
maybe even conditions akin to the Great Depression), I checked this
weekend.Oh dear. I was prepared for the worst. But I must admit that the worst
in the case of Labrador Iron Ore, Luscar, Westshore and the Guardian
Monthly High Income Fund was a bit worse than I expected.Obviously, the values of these investments have dropped in response to
real dangers (disinflation, falling commodity prices and falling
revenues) and in response to pure market panic. And obviously things
could still get worse in the next few months.However, just to help us long-term income investors sleep a little
better at night, is there anything POSITIVE you might be able to write
about the long-term prospects of the income trust vehicles, price-wise.I know that they must be viewed from their role as income vehicles. But
they are still "equity" investments too. So their overall value is
still
a real concern.I also realize that no-one can know for certain what's going to happen
and that the market can be an irrational entity. However, it looks
like
a lot of the income trusts (and REITS) are now selling for below
break-up value.The irrational fear (and I think most investors succumb to it at times
like this) is that these investment vehicles will never recover
(especially since the income trust market is so new and untried).So if there are any "rational" arguments to the contrary - reasons why
the price of income trusts (and mutual funds investing in income trusts
and REITs) will return to their former levels (even if we're talking
five to ten years), I for one would be glad to read about them.I think that if there is any positive, calming advice you give (even if
we're talking about the long-term future), it would be much appreciated
by most of your subscribers. - M.S.A - Obviously, M.S. is not alone in his concerns. Many investors who
purchased royalty trusts on the basis of their attractive yields have
been shocked by what has happened to their market value. We have
already
have several discussions about this in the IWB, and I'm sure there will
be many more to come in the future.Let me start by going back to the beginning. In the second issue of the
IWB, way back in December 1996, I told members that the market value of
royalty trust units would be affected by three main factors: the value
of the underlying assets, the yield, and commodity prices. In
hindsight,
I could have added a fourth element to that: investor psychology. At
least part of the reason for the current depressed state of royalty
trusts is the fear that has driven many individual investors to sell
and
lock in their losses.This is the first bear market that these trusts have experienced since
they became popular in the mid-'90s. We are witnessing just how
savagely
they can be treated in adverse conditions. However, (and here are the
requested soothing words) bear markets do not last forever. In fact,
historically they tend to be much shorter than bull markets, although
it
seems like a lifetime when we are actually enduring one.We have not traversed this bear yet, and in fact we may have several
months to go. But M.S. has asked me to take a long-term perspective and
on that basis I can say with absolute confidence that, yes, these
royalty trusts will recover their market value and probably more.To expect otherwise would be to assume that the laws of capitalism have
been repealed and that we have now embarked on an economic dark age
that
will last for a generation. I don't believe that for an instant.We are in the midst of a severe economic upheaval that has wreaked its
worst havoc on the countries with the most fragile economies. Europe
and
North America have escaped relatively unscathed for now, except for the
damage to the stock markets. Conditions may worsen in 1999, as I said
at
the outset, perhaps even to the point of slipping into recession. But
unless the Y2K problem causes far more havoc than most experts predict,
I consider a 1930s-style depression to be unlikely.As always happens when economies slow down, commodity prices decline,
especially those related to manufacturing such as iron ore, oil and
coal. This is not a new phenomenon, it has happened repeatedly in the
past.Conversely, when economies start to pick up steam, commodity prices
rise
and so do the values of the stocks (and royalty trusts) associated with
them. They aren't called "cyclicals" for nothing, after all.I see no reason to expect anything but the normal pattern of every
capitalist society to reassert itself. After a long period of
prosperity, we are entering a slowdown time, as we did in the early
'80s
and again in the early '90s (although hopefully this time it won't be
as
severe). Back then, investors were asking exactly the same questions:
"Will my stocks ever recover?" Well, of course they did - the problem
was that some people, so relieved to be made financially whole again,
then rushed and sold only to watch in wonder as the stock they had
dumped on a break-even basis went soaring on to record heights.Yes, the royalty trusts will come back. It will happen when world
economies return to relative calm and commodity prices start to move
back off their current lows. I don't know when that will be, but, as
M.S. points out, these trusts are held for income purposes. Let the
income continue to flow, and let the laws of financial markets take
their course.PUTTING THINGS IN PERSPECTIVE
Sometimes when everything seems to be falling apart, it's useful to
find
a get-away where you can be at peace and put things into some
perspective. I experienced that sensation last week, and I'd like to
share it with you.The place was a tiny hamlet in Provence, France, that you have probably
never heard of. Crillon-le-Brave lies at the foot of Mt. Ventoux,
north-east of Avignon. It's a classic perched village, sitting high on
a
hill-top, with ancient stone houses and narrow streets. There is
absolutely no commerce in the place except for a remarkable hotel that
I'll tell you more about in a moment and a small restaurant recently
opened by one of the hotel's former employees. The only sounds you hear
at night are the whine of the mistral and the bells of the old church,
tolling the half hour and the hour. (Even they are shut off between
midnight and 7 a.m. so as not to disturb your rest.)The vistas in all directions are spectacular. No matter where you look,
you gaze over peaceful vineyards, farmhouses, other perched villages
with their inevitable church towers, windy roads, olive groves, castle
ruins, and mountains. The sense of time is suspended. Most of what
you're seeing hasn't changed in hundreds of years, and the scene will
probably look much the same two or three hundred years from now.In the face of such eternal beauty, apprehension over markets recedes
and is replaced by a realization that the ups and downs of stocks and
bonds is a passing phenomenon. It's somewhat like the flood that
devastated part of this region in 1992. It caused great damage and
distress at the time. But today, barely a scar remains.Standing on the belvedere off the village's main square, it's easy to
apply a similar perspective to today's markets. Like the flood of '92,
we're going through a lot of distress. But a few years from now, it
will
all seem like a blip. Hardly a scar will remain.Try to mentally put yourself on that village belvedere the next time
you're feeling panicky about markets and money. See if you can
experience anything like the calming effect I did. As M.S. reminded us
in his e-mail, it's a long way to the horizon.HOSTELLERIE DE CRILLON-LE-BRAVE
The unusual hotel that hosted our wine tour was created and is owned by
two imaginative Canadians, Peter Chittick and Craig Miller (who is
currently in full-time residence with his wife, Susan). In 1988, they
acquired the property immediately adjacent to the church and set about
converting it to a small, elegant hotel. The Hostellerie opened in 1989
and a few years later was granted status as a member of the Relais &
Chateaux, an international mark of distinction.Don't expect a lot of glitz and glamour, however. This is rural
Provence, after all. The high points of the hotel are its tasteful,
comfortable rooms, its lovely gardens and pool, the excellent
restaurant, and the unique ambiance. Stroll through the streets at
night
and it is almost like being back in the Middle Ages - except everything
is neat as a pin and street lights illuminate the way.There are only 23 rooms and they're usually fully booked, so if you
want
to go be sure to reserve well in advance. If you want to know more,
visit their web site at http://www.crillonlebrave.com - you can even
inquire about space availability through the site if you wish. The
suites are especially nice.If you are planning to travel to that part of the world at any time,
and
love peace and quiet, I strongly recommend you spend some time there.DATABASE DISCOUNT FOR IWB MEMBERS
The circulation director has asked me to remind you that IWB members
are
entitled to a 50% discount when they subscribe to the On-Line Mutual
Funds Database ($19.95 plus tax instead of the regular $39.95). But you
must subscribe through the IWB Member Page to get the special rate, not
through the Bookstore.That's all for this week. I'll be with you again on Oct. 19.
Best regards,
Gordon Pape