Wednesday, October 27, 2010

A Financials Stock With Positive Traction.

Shares in the operator of the Toronto and Montreal exchanges have been undervalued for quite some time, but with today's earnings release it seems that the shares should finally get some positive traction and interest from investors. Earnings per share increased from 56 cents to 68 cents this quarter, a very healthy jump! Also, more importantly for anyone interested in some income, the dividend was increased to 1.60 per share annually, a yield of roughly 5 percent!

The shares recently jumped through 34 dollars per share, and it appears that they have reason to keep moving higher. By increasing the dividend the executives are showing that they have confidence in the business and its new ventures, which include an increased emphasis on derivatives trading and on energy futures. Clearly diversification efforts away from simply equity or stock business and more of a focus on energy and commodities appears to be boding well, especially considering the worldwide investment community is already beginning to see Canada as an energy and materials hub.

For some excellent exposure to the finance industry without more exposure to banks and insurance, definitely give TMX Group a look, it trades under the symbol X in Toronto.

(Legal Disclosure - I own shares in TMX Group).

Monday, October 18, 2010

Safe place to park some money.

Often people are looking for a nice spot to park their money for an indeterminate length of time. With uncertain futures and an incomplete knowledge of when we might use or need certain portions of our money, GIC's and fixed term investments are often risky and poor choices for most Canadians. Even though the bank would appreciate it if we kept buying GIC's, the truth of the matter is that they are good for the banks, but bad for the investing public.
In recent years there have arose a number of decent alternatives. The
IShares Universe Bond Index, which tracks the Scotia Universe Canadian Bond Index, trades on the Toronto Stock Exchange under the symbol XBB. Currently, it only has a yield to maturity of about 2.8%, but with low interest rates right now, that is not too bad. It must be bought through a brokerage account but can be bought and sold on any business day, which is great for people who have uncertain periods of time for their money.
Traditionally, to own bonds an individual would have to buy them in blocks starting at around $5,000 for a defined period of time, or buy them through a mutual fund. But bond mutual funds will rarely ever perform as well as the Bond Index simply because the management fees associated with the fund will be too high. The XBB has had a return after expenses per year of over 6% and it only costs 0.3% per year to own it. So, if you are looking for a safe place to park money but are generally unsure of the date when you might need it back, try and avoid GIC's in favour of the bond index.

Wednesday, October 13, 2010

The Great Savings Crisis.

Canada and broader western society is in the midst of a savings crisis that is going to lead to a drastic decline in the living standard to which we have grown accustomed. A low to negative savings rate (meaning people are sustaining their living standards on borrowed money) will inevitably result in either reduced prices for stocks and securities due to a smaller pool of money available to purchase them, or a general increase in the prices of the goods and services that we need to survive due to governmental initiatives to print and generate more money to help keep the house of cards from collapsing. At the first sign of a panic in the stock and bond markets, the government has shown that it would rather reduce people's wealth via inflation than have them experience a decline in their portfolios.

In 1987 Gordon Gekko in Wall Street said that "greed is good." His argument was that through greed people strive to innovate and generate greater degrees of wealth and prosperity for all. And of course, that has always been the basic argument for Smithian economists. But greed, in its many forms, will also lead to the decline of the very economic system that it helped to thrive. The current North American economy is very much dominated by the business of finance. As a people, we now produce very little of tangible value that can be sold to others or used for our own benefit. Intangibles, the creation of investment securities and insurance vehicles, and their subsequent transfer to others, has become the basis of our economy. The old economy, or the traditional manufacturing businesses that were a staple of American growth and prosperity, have largely vanished and been shipped overseas. With them, the jobs and steady stream of income payments for households have begun to vanish as well, leaving a plethora of retail jobs that provide very little in the means of long-term prospects for employees.

Why is this shift important? For the public to sustain its living standard and for the finance industry to continue making more money, the volume of traffic in debt instruments and consumer credit must increase because most people do not earn enough income to satisfy their current wants. People want larger houses, more cars, newer clothes, and innovative technologies, but they do not want to have to save up enough money to buy them. Cheap and easy credit have made it simple for people to escape the basic economic problem that finite resources means that we must limit our wants. This can only go on for so long, however, and low savings will inevitably result in reduced consumption when the governments are finally unable to prop up failing banking institutions that have irresponsibly been continuing to lend money to people with little prospects of ever paying it all back.

A recent poll shows that 38 percent of Canadians are unable to save either because they have nothing left over after paying bills or because they are impulsive spenders. Clearly, with Canadians only saving about 2 percent of their income, and owing about 1.50 for every dollar they earn in a year, the nation is not preparing itself to have a very bright future. The best strategy to deal with this crisis? Tangible investments in companies that produce commodities and products or services with an ability to increase prices at least in line with inflation. And also, a personal savings rate that is at least 7-10 percent, not 2 percent! If this type of savings rate is not being achieved, re-evaluate your spending habits... something is wrong, you are spending beyond your means. Avoid the debt trap, it is rampant in North American and will only get worse. Also, housing DOES NOT always go up in value and interest rates WILL NOT stay this low, so please, only buy a piece of property if you are sure that you could sustain payments on it if interest rates rise by at least 5 percent. It was not that long ago when mortgage rates were the same as a credit card and current government policies indicate that inflation, and a subsequent rise in interest rates, are a definite possibility.