Wednesday, October 3, 2007

be like the banks?

I tend to think that I know a little bit about investing, why currencies fluctuate, and how to spot value in the stock market. Even given this confidence in my modest investing acumen, I am obviously no match for the superior thinkers that are employed in the mergers and acqusitions departments at large institiutions like the Toronto Dominion Bank (TD), Canadian National Railway (CNR), or the Royal Bank of Canada (RY). It seems to me that those involved in making these high level decisions at these large companies have decided that now seems like as good a time as any to be buying U.S. assets. Recently these three companies and others in Canada have all been involved in takeovers of U.S. companies using our strong Canadian Dollar to buy up Uncle Sam's own.

I've often thought that a great metaphor for one's household expense system might be a corporation's. We all have cash flow as earnings, capital expenditures, debts, and investments that we want to grow or product income, just like corporations do. If Ed Clark from TD Bank thinks now is a good opportunity to buy a 8 Billion dollar U.S. bank, and the high Canadian dollar is at least one of the reasons for doing so, should I be taking a bias to buying U.S. assets as well, to try to grow my capital? To be fair, part of the reason that TD decided to buy Commerce Bancorp (CBH) was probably because of the weakness of the U.S. banking sector currently as a result of the ongoing credit crunch, but it is hard to imagine that the tremendous strength of the Canadian Dollar doesn't have anything to do with this trend. A trend that we may see continue, if you believe a certain MSNBC loudmouth with rolled up sleeves.

11 comments:

Anonymous said...

If you are investing for the long run why not. People say that due to our dollar gaining on the US we loose out on the returns. That is true if you are looking at short term scenario. If you are a buy and hold investor and think that the loonie will probably fall back in the long term, investing in the US is a no brainer.

Especially in those big multinationals that have their earnings spread through out the globe.

My long term portfolio: is 80% invested in such companies

FourPillars said...

A great question...

It's hard to argue against investing in the US with the dollar being the way it is. I wouldn't necessarily align my investing strategy with a large company since I only buy small pieces whereas they can buy the whole thing but regardless it doesn't hurt to see what the big guys are doing.

Mike

telly said...

My thoughts are similar on the USD longterm so I'm taking action as well.

As I'm currently earning a salary in USD but save a good portion of it, I've started investing a larger chunk of it in my USD retirement account. Even without the tax deduction (until next year anyway), tax deferred growth, very low MERs on ETFs, and the current value of the USD give me reason to buy & hold more US investments rather than make the exchange today.

Seeing these companies look at this exchange rate as an opportunity over the past couple weeks make me feel better about these decisions and my view of the USD long-term.

Of course if the USD is worth less than the peso by the time I'm 59 1/2, I'm screwed!!

Mr. Cheap said...

I had some old accounts with a bit of cash in them in the US, so they've taken a hit with the strong dollar. I keep being tempted to buy some good US dividend payers right now (and take advantage of the currency difference). The high taxation on dividends bums me out though.

samson said...

I think that if you have money to spare, now is a good time to buy U.S. Stocks or other Assets.

Reason is simple, we haven't seen this high Canadian dollar in such a long time. And for some strange reason, like I forecast on my blog, the U.S. economy is heading for a Recession that is at least comparable to the 1990's recession (Remember? that one that caused all the McDonald's cheeseburgers to drop from a high price of 2.50 to 79cents). The Canadian Dollar shouldn't be able hold above the U.S. for long. Not to mention, if the U.S. economy falls, we'll most likely go with them. No matter how much resources we have, and how safe we think that barrier is, if there is no buyer, then the demand would drop.

optionsnut said...

I liked the metaphor. If everyone or most people had that mentality this 'credit crisis' might just never happen. ..

Then again we have companies that are fiscally irresponsible too..

DH

Brip Blap said...

I think, too, it depends on whether you are buying shares in a corporation that's really and truly heavily "American" like Wal-Mart, or one that's only nominally American because it's so globally diversified like Exxon or AIG. Personally I'd steer clear because of the exchange rates, but then again there's a disadvantage when the dollar is strong, too - in other words, you might never find a good time to buy if you worry TOO much about x-rates.

Anonymous said...

When a bank goes out and buys another bank, they only contribute a very small amount of capital. Thus, in the whole scheme of things, TD buying a US bank doesn't really cost them much more irregardless of where the Canadian dollar is at, because the currency exposure is almost entirely hedged out.

But that certainly doesn't mean that some Canadian, at-home, investing with a RRSP or cash account, gains access to the same hedging strategy or risk/return profile as TD when they invest in shares of "insert American bank here".

You do have a convincing arguement that its probably not a bad idea for a Canadian to borrow US dollars to buy US bank stock though.

Anonymous said...

samson, most of the 'goods' (mainly energy products) that the US purchases from Canada are fairly inelastic, and the volumes would continue irregardless of a recession in the US.

Also, Canada avoided recession in 2002, while the downturn in the US was much more severe and prolonged. So there is definitely historical precident for Canada to emerge in somewhat better shape.

Nurse B, 911 said...

I think its important to take perspective of what advantages or alterior motives these large CDN companies may have in making those purchases. My own take on each of the three you mentioned was that they offered strategic benefits to the company that might not have offered much value to another firm. CNR's entry into a logistical solution for transport, TD's USD dilution issue, etc

MG said...

thanks for the comments...lots to think about there...