1. How is the business positioned relative to it’s competition?
2. How is the business positioned relative to it’s sector and the market in general?
3. What are the prospects for growth?
4. Are they profitable?
5. Are the balance sheets strong?
6. Do they generate free cash-flow?
7. Are they carrying excessive leverage?
8. Is the price to earnings cheap relative to the market?

To some this may seem a bit much but this analysis is needed to make an informed decision on whether or not to buy a company and hold it for the long-term. Clearly this is not happening in today’s environment. Fundamentals are pushed to the side which in my view is illogical and irrational. Once Governments around the World act on the structural issues of Sovereign Debt, which in my view is resolvable, investor confidence in the market will return only to realize companies with excellent fundamentals are trading at a discount… they will buy them.

I want to leave you with some food for thought. Take a look at the Reuters link below. Nike just released their corporate earnings for fiscal 2012. They reported an increase in both revenue and earnings. Clearly the consumer is still buying shoes, shirts, and apparel even though the headlines paint this grim picture. If things are so bad, then how can this happen? You would think a somewhat discretionary item like Nike shoes would be scratched from the list of needs and wants wouldn’t you? Please understand my message is in no way intended to belittle some of the challenges out there, specifically with high unemployment in other parts of the World-namely the U.S. The intent is to bring reason back into the fold in order to appreciate that investing is about fundamentals and the fundamentals of the business’ we own have never been better.

http://www.reuters.com/article/2011/09/22/idUS230549+22-Sep-2011+BW20110922

Having said that, take a look at the Reuters article below (click on link below). Ed Clark, the CEO of TD Bank, is envisioning that TD Bank will be growing their U.S business in the next three years whereas Bank of America is selling their Canadian credit card business (to TD Bank ironically) and the U.K’s HSBC wants to sell their Canadian Brokerage business. The good news is we participate in TD through our managed portfolio’s so it is only fitting that I forward this information to you. In today’s volatile trading environment, professionally managed money benefits by diversifying opportunities, reducing risk, and having dividends reinvested to buy additional units while invested.

http://www.reuters.com/article/2011/09/07/us-torontodominionbank-idUSTRE78648Q20110907

Keeping on this theme, I enclose a link below from CNBC.  It is an interview from Dennis Gartman of “The Gartman Letter”.  I follow Dennis closely as he is an investor in global natural resources and commodities, and is an expert in these sectors.  The reason why I am sending you this piece is he specifically mentions Canada and the benefits of investing there.  Good news is we are already ahead of him.  Please click on the link below:

http://www.cnbc.com/id/15840232?video=1784481819&play=1

These measures include:

• Amortization period capped at 30 years
• Reduction of government backing for home equity lines of credit
• Maximum refinancing reduced to 85% from 90% LTV

I enclose the link to the CRA for your review.  

http://www.fin.gc.ca/n11/11-003-eng.asp

Now let’s look at the fundamentals that can put wind behind the sails of the stock market in 2011.  Corporate balance sheets globally are sitting on $3-4 trillion , their balance sheets have never been stronger, earnings continue to grow, interest rates are favourable, quantitative easing II is in gear, and emerging market households want our lifestyle thus creating a spur of demand for food (can afford to consume meat and fish), automobiles, cell phones, computers, I-pads, and the list goes on.  So where do we make money?  Focus on the asset classes that benefit from all the points listed above.  For example, the population is growing and people need to eat.  Developing countries now want to consume more expensive items such as meat products, so how will farmers meet this demand?  They need fertilizer.  Which companies supply fertilizer?  Potash, the largest in the world, is one of them.  But there are other players such as Agrium, Monsanto, and Mosaic.  North American consumers are accustomed to several smartphones, and computers in their households.  In Emerging Markets, some don’t have any yet they will be buying them.  I instantly think of Apple and Microsoft.  We haven’t even touched on the energy story yet.  From the bottom of 2009 to present, the price of Oil more than doubled but the oil producers have not.  Consider Cenovus Energy or Canadian Natural Resources.

Most analysts are calling for a pullback due to the recent surge in Global stock markets.  This is normal and I would be a buyer when this happens.  For those sitting in cash, unless you have a short-term ”time horizon” for investing, you may consider dipping your toe into the markets.  Perhaps in a balanced portfolio to start.  Most balanced funds carry a combination of dividend paying stocks and bonds which pay a monthly distribution.  I can say that most of these funds have a higher yield than guaranteed deposits.  Yes, they don’t guarantee your principal but I believe there is greater risk not participating in the markets moving forward than sitting on the sidelines.

Next week is the start of earnings season.  You know the saying…”so goes January so goes the year”.  Let’s see what happens!

For this reason I continue to emphasize that we must stick to one certainty, getting paid to wait!  Having a balanced approach whereby a part of our portfolio is in income producing investments such as dividends and bonds that pays an income stream which in turn dollar cost averages back to buy more units……….Simple right?  You bet!

Equities then rebounded with a strong rally. The Canadian market recorded a 10.3% gain for the quarter, reaching a two-year peak. In the U.S., the S&P500 Index had its strongest September since 1939, boosting it to an 11.3% increase for the three-month period. Most world markets also posted double-digit returns, with the MSCI World Index rising 13.9% (in U.S. dollars) during the quarter.

The turnaround surprised some observers given the tepid economy in the U.S. and other developed nations. What galvanized markets included signals from the U.S. Federal Reserve that it would take whatever action it deemed necessary to support the economy, continued strength in the corporate sector and increased merger and acquisition activity. One notable example is the battle over Potash Corp., whose shares jumped on news of a takeover bid from BHP Billiton. Potash is one of Canada’s 10 largest companies by market capitalization.

As a result, markets appear to have taken the view that while the global economic recovery remains slow, the prospects for a renewed downturn or double-dip recession have receded. In North America, Canadian growth moderated, and was 2% for the second quarter, while growth in the U.S. was revised downward to 1.7%. U.S. industrial and manufacturing output improved, and the private sector continued to add jobs, though at a lukewarm pace. Meanwhile, Statistics Canada reported that the 417,000 jobs lost to the recession had been recovered by August, and wage growth reached a 29-month high.

Canada’s better economic situation was reflected in the Bank of Canada’s decision to raise its key bank rate twice during the quarter to 1.25%, and in the strength of the Canadian dollar, which rose over 3% in the third quarter to US$0.97.

As we move into the final quarter of the year, the tone in financial markets is much improved. Positives include continuing low interest rates and low inflation. Businesses, having taken steps to reduce debt and trim excesses during the recent downturn, are experiencing earnings growth and are in a position to boost dividends and undertake transactions that will benefit shareholders. The robust growth in the economies of Asia and Latin America are leading and supporting the global recovery.

These developments are very encouraging, though we remain mindful of the risks in the current environment.

The new global banking reform (Basel Accord) is one of the many mechanisms being put in place worldwide to avoid another financial crisis moving forward.  In this accord, banks will be forced to have higher capital reserves to cover illiquidity, bad debt, etc.  One way to do this is by putting money aside each quarter (as banks report their earnings) towards loan/loss provisions (which has been happening since the beginning of the crisis – yet has been lessening each quarter).  

Some analysts are anticipating that Deutsche Bank is raising this capital for this very reason yet Deutsche Bank is saying this is for strategic acquisitions.  Either way this strategy dilutes shareholder value and can be viewed as a negative.  Bottom line, there are too many mixed signals when it comes to predicting if we will enter into an economic and stock market recovery or not.  It is for this reason that we must maintain a core position in fixed income, dividend paying balanced funds – getting paid while we wait

Mortgage rates in Canada are derived from the Bank of Canada Rate, both the bank rate and mortgage

rates over the past year have been at decade lows.

- Bank of Canada rate currently at .25%, bank prime rate at 2.25%

- 5 year posted mortgage rates at 5.25%

- Decade average for 5 year rates is 6.76%

Who is taking advantage of these rates?

New home buyers

- Following the market crash of 2008, deflated home prices as well as great mortgage rates convinced many Canadians to purchase new homes.

- Unfortunately for our new home buyers, there were demand factors working against them

      * New housing starts did not dramatically increase. January 2009 in Ontario there were 54,700 new home starts. In January 2010   there were 55,500

      * 800 additional new houses per month were not enough to satisfy the demand so resale prices rose. In January 2009 the  average MLS resale price in the GTA was $343,632. In January 2010 the average price rose to $409,058.

- Although new home buyers are receiving great mortgage rates, the prices they are paying for homes are inflated due to increased demand.

Home owners refinancing or renewing mortgages

- The greatest opportunities lie with exiting home owners looking to renew or refinance  existing mortgages.

- This group enjoys the savings associated with the lower rates but does not faced with increased prices of new homes.

Let’s look at an example

 Mr and Mrs Smith have a balance of $250,000 on their mortgage. They have 2 years remaining on their term with 15 years remaining in their amortization. They currently have a rate of 5.54% and their penalty for breaking the deal is 3 months interest. Redwood Capital Management has found them a rate of 3.64%.

 If the Smith’s refinance their mortgage now, over 2 years they will have increased their net worth by $5,796.23, over 5 years they would have increased their net worth by $12,069.43.

 If you are currently paying a mortgage with a rate greater than 3.64% fixed or any variable rate contact us to see if there are savings available for you.

Daily Rate Update

Rates Effective as at: April 23, 2010

Information provided by Centum Financial Group Inc.

*Rates subject to change without notice. E&OE.

Just when you were getting comfortable with the unprecedented market rally from March 2009 to early January 2010, one had to wonder when we would have a breather.  Well the events of last week are a stark reminder that we are not out of the woods just yet.  An unexpected increase in the unemployment claims in the U.S, earnings reports that outperformed expectations yet failed to deliver in their stock price…look at Google, GE, JP Morgan, Goldman Sachs.  All reported better than expected earnings yet their stock price was punished.  Is the market pricing this news in the stock price already?  I would say yes…

Throw in some political uncertainty and we have a three day sell-off!  What do I mean?  Well President Obama, who by the way inherited this mess, is trying to bring in some regulatory measures so that this financial crisis will never happen again.  Tough language from the White House suggesting that the “too big too fail” motto will dissipate as the new policies may curb the size of financial institutions in the U.S.  Not to mention a few Democrats suggesting that they cannot support Ben Bernanke for another term as the Chairman of the Federal Reserve.  A person who is considered the most important figure for the financial system around the world not being elected again sent a wave of uncertainty into the market.  Lastly, growing concern from China that their banks will raise interest rates and tighten credit to avoid a bubble (which is not necessarily a bad thing) sent fear into the market as this may undoubtedly stall any hope of a global economic recovery.

As a reminder, the worst is behind us so please do not despair.  Yet keep in mind that there is still a lot of work ahead to get back to economic growth.  The unemployment rate is still high and until this rate begins to diminish, we will still have a slow and sluggish recovery.  You can bet that policy makers around the world are working frantically to get back into job creation mode.  The challenge is it takes time!  If your time horizon for investing is long-term, do not let the short-term noise impact your long-term decision to invest!