how my crystal ball has worked

I don't really shy away from making predictions and bets when it comes to the stock market because I don't mind being wrong, and hey...it's fun. I wanted to check up on a few of the predictions I've made on this blog to date and see how I made out.

Prediction #1 Canadian Financial Stocks Have Bottomed
On April 18, 2008, I declared the bottom on Canadian financial stocks to be March 17, 2008 ($21.50 was the level of XFN, an ETF that tracks these stocks). Well I was wrong on this one as currently the bottom is looking more like it actually occurred on July 15, 2008 ($20.00 on XFN). Or is the bottom yet to come...?

Prediction #2 The Candian Dollar Will Weaken To Levels Well Below $1USD in 2008, & Buying UPS, JNJ, and MO Now Might Be a Good Way To Benefit From This
On November 9, 2007 I posted about this and recommended UPS, JNJ, and MO when the Canadian dollar traded at about $1.06 USD. I was right on this one, as the Loonie now trades at $0.93 USD. If you had bought the stocks here is how you would have fared after currency conversion. These are the currency adjusted returns before any dividends.
UPS +9.4%
JNJ +22.3%
MO +5.8%

Prediction #3 Bank of America Will Not Cut Its Dividend
On November 3, 2007 I used some of my valuable Canadian dollars to buy some Bank of America, claiming that this purchase made a lot of sense as long as the big bank didn't cut its dividend. Well I was right on this one, so far. Bank of America is still paying out the same $0.64/ share that they were at that time, and while they failed to raise the dividend at their usual time of year, they have not cut it, yet....

2007 final portfolio summary

Well, 2007 has come to a close in the financial markets and here are how some of the major indices fared:

S&P 500 = +3.5%
DJIA = +6.4%
TSX = +7.1%

Let's take a look at 2007, the year in review for our non-registered portfolio.

Volatility = Good Buying Opportunities
By all accounts 2007 will probably be heralded as a volatile year in the markets. I am thankful for the volatility that we experienced because it gave me some good opportunities to buy a few great dividend growing companies on sale. For example, in August I picked up quite a bit of Yellow Pages Income Fund (YLO.UN) at around $12.60, and since then it has recovered back to a trading range of $13.50 - $14.50. Another blessing that came in mid August was Bank of Nova Scotia (BNS) trading in around $47.50, where I scooped some up for my dividend growth portfolio as well.

Currency Squeeze
The strength of the Canadian dollar this year really took a bite out of my portfolio. The loonie appreciated about 18% over the course of the year against the greenback. U.S. stocks that I bought in 2006 or early 2007 look really red on paper currently. For example I bought Procter & Gamble in two lots during March of 2007 and since then the stock is up about 17% in real terms, but because of the rapid appreciation of the loonie on paper I am actually down 1% on the stock.

Worst Performers
Walgreen Co. (WAG) down 17% on the year
Telus Corp. (T.A) down 8%

Best Performers
Procter & Gamble (PG) up 14% on the year
Sun Life Financial (SLF) up 13%

Portfolio Returns and Statistics
This was a year of furiuos buying for my non-registered portfolio, so this combined with the currency squeeze mentioned above have been a real drag to my portfolio.

• 2007 Return = +0.2% (incl. dividends) (fully time/value weighted)
• 2007 Dividend Growth Rate = 529% (incl. new funds)
• 2007 Final Div./Dist. Income Per Year = $1,430
• 2007 Final Portfolio Value = $35,574
• Largest Asset = Financial Services (30%)
• Smallest Asset = Technology (0%)
• Geographic = 65% Canadian & 33% U.S.
• 2007 New Funds (Savings) = $23,513 or $1,959/month

In Summary
Overall I am pleased with our progress in 2007. When I look back on 2007 I'll probably mostly see the strong appreciation of the loonie as the story of the year for my portfolio. Also, 2007 will probably bee seen as an accumulation year as we deposited about $24,000 and bought 10 new stocks in the calendar year. I don't expect to deposit anywhere near $24K into the portfolio in 2008. Also, I expect my emphasis in 2008 will be adding to existing positions, although I may still purchase a couple new dividend growing stocks or Exchange Traded Funds (ETFs). 2007 was a really bad year to use any type of benchmark to judge my portfolio performance as the currency move and scale of new funds that my portfolio experienced were unprecedented. Next year I am going to try to develop a good benchmark to evaluate my performance.


Happy New Year!

x border shopping

The Canadian dollar recently appreciated up to above $1.10 vs. the greenback, and then quickly moved back down to around $1.06 U.S.. Most analysts within Canada and the U.S. are predicting that the loonie will cool off to average levels anywhere in between $0.95 and $1.07 over the next year. I don't pretend to be an economist or a currency guru, however I am of the same mind as most of these analysts. I'm not sure where the loonie will land over the next year or two, but I am fairly certain that it can not maintain levels above $1.05 U.S. for very long.

Factors that are pushing the Canadian dollar higher include: very high oil prices of above $90/barrel, high commodity prices because of strong global growth, a solid Canadian economy, a weaker U.S. economy, a U.S. credit crises, recent U.S. interest rate cuts, and good Canadian employment growth. I count 7 key factors here that are keeping the loonie buoyant against the greenback. It is my belief that these 7 factors will not all stay in place for the duration over the next few months, and years. This is why I believe the loonie will eventually cool off to levels well below $1.00 US as we move into 2008 and 2009.

So where does that leave investors who share my thoughts and would like to put these inferences to action? Well, if you are a stock investor and are looking for places to stash your currently strong Canadian dollars that might earn you some dividends and buy you some time while you wait for the loonie to weaken, here are a few options:

The key things you want to look for in a U.S. denominated stock to hold for this purpose are these:

• large stable companies in stable industries, that have histories of dividend growth
• modest earnings growth expectations, and fairly valued stocks (you don't want a company to miss high earnings expectations and suffer a major share price hit).
• a decent sized dividend to pay you quarterly while you hold
• go after some exposure that you might not be able to get in Canada
• even if you are wrong about the currency, you're still holding quality blue-chip U.S. stocks

Recommendations:

• Johnson & Johnson (JNJ) - Health care & Consumer Products, consistency, safety, global, low debt, dividend growth, low earnings expectations, 2.5% yield.
• UPS (UPS) - Transportation of goods and supply chain mgmt., consistency, global, low debt, barriers to entry, dividend growth, low earnings expectations, 2.3% yield.
• Altria (MO) - Tobacco products, consistency, not economically sensitive, global, low debt, dividend growth, low earnings growth expectations, 4.1% yield

Of course any one of these three companies could suffer share price depreciation due to some unforeseen event or economic turmoil, however I believe these three are as good a place as any to hide while the U.S. dollar strengthens over time against the loonie. Obviously I would recommend holding these investments for at least a few years.

Alternatively you could look into several other investment vehicles in the U.S. which are not limited to bonds, exchange traded funds (ETFs), money market funds, and simple U.S. cash.

currency risk vs. 'canada risk'

With the great appreciation of the Canadian dollar recently, I'm sure many of us that hold U.S. stocks in a Canadian account have been experiencing some devaluation of our securities. What appears to be a rising stock on paper may look like a red ink blotch on your record keeping. This phenomenon has been occurring within my portfolio in a big way lately. I'm not going to get too concerned with this though.

The reason I'm not concerned is that if I'm going to hold U.S. stocks in a Canadian account, I have no choice in the matter. Avoiding these problems with currency changes is akin to avoiding rainy days, in lieu of sunny ones; it just can't be done. If one is going to live (invest) in this market, one has to know that this part of the game. Just like the weather, it can't be controlled or predicted accurately.

With a long term horizon I believe one can look at this with a 'glass half' full view. Currencies will fluctuate both ways, many times, the longer the investment time horizon. What seems like running on a treadmill now, might feel like jumping onto the moving conveyor with all your bags in toe at the airport, a year from now, when the currency is moving the other way.

When making investment decisions I have often heard people express concern about 'currency risk'. These people then go on to say that they stay away from U.S. equities because of this risk.

For me 'Canada risk' is a far greater risk than currency risk will ever be.

'Canada risk' is concentrating your portfolio too much in this great country of ours. While we live in an amazing country, the sum of the corporations which play here do to even come close to running the gamut of diversification. Trying to find companies in Canada that can expose you in the same way that companies like Johnson and Johnson, UPS, Colgate Palmolive, ADP, and Microsoft can, is a daunting task. What ends up happening is that you run out of investment options, or settle for mediocre value, or worse yet, mediocre performers in specific markets. Canada is such a small economy and so concentrated in financials and resource plays, that being 100% Canadian equities is not something I believe is wise, for proper diversification.

There are great things about Canadian investments, which include the dividend tax credit and not having to pay withholding tax on dividends. There is also a certain familiarity, knowledge, and even 'feeling' that you can garner about companies that operate within this country, that seems to help. Staying properly diversified, while taking advantage of these benefits while you can is key, in my opinion.