Managed Money Reporter Newsletter — Issue 247, October/November 2008


Editors: Carl Spiess & Allan McGlade


Featured Articles



Market Update: Yet more volatility

Carl Spiess

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management

This month in the markets, the roller coaster ride continues with extreme market volatility around the world. Markets have been rising and falling by hundreds of points on a daily basis. At time of writing, the TSX is moving between 9,000 and 10,000. This volatility reflects our collective concern as a society for the short-term performance of the global and Canadian economies. The three major factors affecting these concerns, and thereby the markets, are:

  • The global credit crisis
  • The recession in the US
  • Falling commodities prices

"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
- Mark Twain, "Pudd'nhead Wilson"

The global credit crisis

Remember when this used to be called the US credit crisis? Since financial markets have become so globally intertwined, this crisis could not have resided indefinitely in the US. It is showing that it is equally at home in many places around the world. Yes, even in Canada, though to a lesser extent.

The pressure on US and European financial markets caused by the credit crisis should ease off slightly as measures are taken to provide liquidity to the lending institutions. Whether the financial assistance around the world will prove to be beneficial in the long run (it has not done much for Japan's economy over the last decade) remains to be seen but it should reduce uncertainty in the near-term. The US debt, as a percentage of the overall economy, will be increasing significantly as a result of all the bailouts. However, as can be seen in the charts below, the US debt is still lower than Japan's or Italy's.

How Much is the US in Debt?

And vs. the Rest of the World

The prudent management of the Canadian financial system has really shone through during this crisis. In fact, Canada's banks were recently rated the soundest in the world in a survey conducted by the World Economic Forum.

Canadian banks and insurers are much less affected by the crisis due to their solid holdings and lending portfolios and healthy reserves. Manulife, one of Canada's largest insurance companies, issued a press release earlier this month detailing its exposure. While, some of its investments have gone down in value, the overall impact on Manulife's portfolio is manageable. Due to their strong reserves, there is no impact on its ability to meet it's obligations. The impact has been solely on its own profits. Canada's well-regulated financial system has prevented collapses such as we have seen in the US.

However, no matter how good your credit rating is, if no-one is lending out money, it is hard (or expensive) to borrow. Canadian banks have had difficulties accessing longer term money in the global market place due to the credit crisis. In response to this lack of liquidity, the Canadian government announced earlier this month that it would take over $25-billion in mortgages from the banks to free up money for lending. On October 23rd, the government announced it will also temporarily make extra insurance available to federally-regulated banks. This will be offered at market cost for those banks that need it to support their wholesale long term borrowing.

This climate of uncertainty has created a riskier envoronment in which to do business. The chart, below, shows how the spread between corporate bond yields and government bond yields has widened to reflect this higher perceived risk. The last time yields were this high, it presented a good buying opportunity for corporate bond funds. We may find the same this time around.

We've been here before

More on the Canadian financial system

The recession in the US

The US is now widely believed to be in a recession. As our largest trading partner, the United States' financial troubles eventually become ours. Their slow down means a lessening of demand for our goods and services. The upside here is that with the low value of the CDN$ relative to the US$, our "stuff" is looking like a pretty good bargain south of the border. Our lower currency value should reduce the impact on our economy. So while the global economy appears to be headed for a mild recession, the impact on Canada will not be as severe due to the lower value of the CDN$.

Falling commodity prices

Falling commodities prices across the board are of particular concern for Canadians since they form a large portion of our economy. Looking at one major Canadian export, the price of oil has dropped from its peak in June of $147 (US) per barrel to under $70. And it is not predicted to change much in the short term.

What does this mean for the Canadian economy? Well, oilsands projects that looked pretty profitable at prices over $100 per barrel are now looking less attractive and some are even being delayed or scaled back. In one such example, Suncor announced October 23rd that, due to tightening credit conditions and falling oil prices, it is reducing next year's capital budget by one-third to $6 billion and delaying the completion of its Voyageur heavy oil upgrader by one year to 2012. It previously cited $75 to $80 a barrel as the break-even price for oilsands projects.

The silver lining here is, again, the Canadian dollar. There are bargains to be had in Canada for foreign purchasers, relative to the already low prices for commodities around the world because they can pay in cheap CDN$.

What does this mean for the Canadian economy?

On October 23rd, the Bank of Canada, in its "Monetary Policy Report" predicted sluggish economic performance in Canada through the first quarter of next year. However, it does predict some improvement in the situation for the remainder of 2009 and strong performance in 2010 as interest rate cuts (the Bank of Canada is hinting there will be more) and resolutions to the credit crisis take effect.

More on the Canadian economy

What to do about your investments

I came across a wonderful article by Warren Buffet, founder of Berkshire Hathaway and long time proponent of prudent value investing. While I've posted a link to the article, below, the long and short of it is, he is moving his cash into equities. Not just any equities — good, solid companies that he expects to weather the current financial troubles. His point that the markets have historically bottomed out long before the economy picks up again is a good one. If you're wondering if this is a good time to increase your investments in the market, do give us a call. While we can't predict where the markets will go in the short-term, it strikes me that there are some great deals out there at the moment.

Holdings in short term cash equivalents continue to pose potential problems since the current bailouts around the globe will likely trigger inflation, eroding the value of those cash investments. As always, your appropriate asset allocation should be your starting point. If falling values in the markets have left your portfolio a little bond heavy, it may be time to shift more money into equities. For those that are retired or retiring, we recommend liquidating as little as possible of your equity investments. Instead, drawing funds from your fixed income holdings has the added bonus of pushing your asset allocation towards its target mix.

Please don't be a contrary indicator. Many Canadian equity funds are seeing redemptions. While only 1% of long term assets were redeemed in September, (and preliminary reports suggest even more in October) recent research from Morningstar shows that the last time Canadians pulled significant amounts out of equity funds was in 2002. In retrospect, this time period proved to be the bottom of the last bear market.

We are here to help you sort this out, so do not hesitate to contact me or any member of The Spiess McGlade Team with your questions or concerns. Periods of volatility are stressful for investors and we understand that. If it's been a while since your last portfolio review or you are wondering whether you should be making any changes, just give us a call. We'd be happy to go through your investments with you and make sure you are on track to achieving your long term financial goals.

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Scotia First to Offer Tax Free Savings Accounts

January 2, 2009 is the first day that Canadians can contribute to the new Tax Free Savings Accounts (TFSA). ScotiaMcLeod is pleased to be the first Brokerage firm that is ready to set up your TFSA now. Scotiabank is also the first major bank to announce the ability to set up TFSAs. ScotiaMcLeod's TFSAs are full "self-directed" accounts (like your RRSP and non-registered investment accounts) that can hold any number of securities, from GICs and bonds, to stocks and mutual funds. Scotiabank's TFSAs can hold GICs, Scotiafunds and the popular Money Master daily interest savings account.

We recommend opening a TFSA for anyone who has non-registered investments which are currently being taxed. The account is especially good as an account for your "rainy day savings" (generally 3 months of income) that many people have on hand for emergencies. Rainy day savings are usually held in highly taxed interest bearing investments for liquidity so there is the real potential for some tax-savings by sheltering this money inside the TFSA. However, for long term retirement savings, the RRSP is generally still preferential since pre-retirement tax rates are virtually always higher for Canadians than their post-retirement tax rates. In your investment strategy, your TFSA should have a slightly higher priority that other taxable investments but a slightly lower priority than other registered account where the government assists with your savings (e.g. RRSP and RESP) and paying down your mortgage.

We will automatically be contacting and sending forms to clients who have non-registered accounts, and whose household account balance qualifies for a ScotiaMcLeod TFSA with no annual fee, a $50 a year saving. Clients who prefer not to sign paperwork or who don't need the full flexibility of a ScotiaMcLeod TFSA, are encouraged to open their TFSA online at www.scotiabank.com.

More on Tax Free Savings Accounts

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Scotiabank buys stake in CI

On October 6, 2008, Scotiabank Group announced that we have signed a definitive agreement to make a strategic investment in CI Financial through the purchase of Sun Life Financial's ownership stake. Under the agreement, Scotiabank will acquire Sun Life's 37 per cent ownership in CI through a cash purchase of $2.3 billion. This definitive agreement is subject to regulatory approval.

CI Financial is Canada's third largest independently-owned wealth management company with approximately $62.9 billion in assets under management. It has an outstanding management team with extensive wealth management experience and a long track record of superior performance. CI's excellence in fund management has been recognized with 19 Canadian Investment Awards over the past seven years including Advisor's Choice Favourite Investment Fund Company in 2005, and Analysts' Choice Investment Fund Company of the Year in 2006 and 2007. Two of CI's mutual funds are included on our recommended list and many of our clients have included them in their portfolios.

More on the CI Scotiabank deal

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CDIC and Assuris Insurance

One of the most common questions we have been receiving is, "What part of my investment account is guaranteed?" Fortunately, this is also one of the easiest to answer. Here are some general commments:

  • GICs, which ScotiaMcLeod offers from 12 different issuers, are all guaranteed up to $100,000 by the Canadian Deposit Insurance Corporation (CDIC). We can have up to $1.2 million of CDIC insurance in each ScotiaMcLeod account.
  • Regarding annuities and seg funds, Assuris (the insurance companies' insurance) covers up to $60,000 of principal or $2,000 of monthly income from insurance contracts. It covers 85% on amounts above that.
  • In addition, the Canadian Investor Protection fund (CIPF) covers cash and investments at brokerage firms like ScotiaMcLeod.

For exact details, see the web sites, below:

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CSBs and Better Rates on GICs

Canada Savings Bonds (CSBs) are on sale now. The rates, however, are pretty dismal.

Canada Savings Bonds Rates
Canada Premium Bonds
Year 1 2.35%
Year 2 2.50%
Year 3 2.65%
Canada Savings Bonds
Year 1 1.85%

Since the annual inflation as of September 2008 is 3.4%, these rates, in real terms, are negative.

If you are looking for options for the guaranteed portion of your portfolio, GICs usually provide better rates and they are guaranteed by CDIC (see article above) up to $100,000 per issuer.

If needed, we can select from several issuers to ensure you have full CDIC insurance on amounts greater than $100,000.

It is interesting to note that retail investors can get 4.7% on 5 year CDIC guaranteed investments but institutional investors (pension funds and large balanced and bond funds) could only find 5 year Government of Canada bonds for 2.38% on Oct. 22, 2008.

More on CSBs and GICs

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Scam Emails and Letters

Please be warned, there are a number of scam "phishing" emails going around. These emails try and trick you into logging into a fake website, in an effort to capture your Scotiabank card number and password. Many of the emails have official sounding titles, but the poor grammar can often be a clue.

Sample phishing email

Another "old-school" version of this has been circulating by mail. The Canada Revenue Agency (CRA) is warning taxpayers to beware of a recent scam where some Canadians are receiving a letter fraudulently identified as coming from the CRA and asking for personal information. The letter is not from the CRA. A PDF version of the letter is available on the CRA website:

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Go Paperless!

We just wanted to remind you again about the new feature offered to ScotiaMcLeod clients. It's a great way to save a tree. Your private, searchable online records are available 24/7 through ScotiaOnline. They are available to you days earlier than those mailed out. All your documents are kept online for 7 years. You can download them to your own computer, if you wish, for permanent storage. For more information, see:

  • Scotia eRecords Information

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Managed Money Reporter in the News

Our special client update from last month was featured in Linda Leatherdale's financial column. The last time I was quoted by Linda was in 2001. Here are links to both articles.

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Recommended Link of the Month

We found this site that has a very extensive and up-to-date list of phishing emails that are circulating. If you want to look into a suspicious email you've received, you can search for it in their database. You can also report such emails to them for investigation.

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Contact Us

T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

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