Divestor

Rogers has just fired their own broadside with the introduction of another virtual mobile service, Chatr, which feeds off of their own phone network (very similar to Fido, another Rogers-owned company).

It is very obvious with their pricing structure, and the cities that they are in that they are strictly trying to wipe out Wind Mobile and/or Mobilicity off the face of the planet. What’s hilarious is that Wind Mobile has no spectrum license in Quebec (other than the Ottawa-Gatineau area), and Rogers/Chatr’s service offerings are identical to the locations offered by Wind Mobile – Vancouver, Edmonton, Calgary, Toronto and Ottawa. On Montreal, they stated:

“We’re working out some translation issues in Montreal, but it will very soon be our sixth market,” Chatr’s senior vice-president Garrick Tiplady said in an interview.

Translation issues indeed! More like “There’s no rush since our competition isn’t there!”

You can be sure as Wind Mobile expands to other cities and/or expands their coverage in their existing cities, that Chatr will come up with “service enhancements” to incorporate those areas into their own “home network” as well.

Their pricing plan is, for the most part, identical to Wind Mobile’s structure, with the most notable exception that on Rogers/Chatr’s $35 plan, they charge 25 cents to recover your voicemail, and they charge for incoming text messages.

Since the coverage areas between Chatr and Wind is nearly identical, I have no idea who would sign up to them.

As I stated in a previous post, the new entrants to the Canadian wireless market are not going to be making any money. The only reason why Rogers is doing any of this is to bankrupt Wind Mobile and Mobilicity – Rogers/Chatr’s offering adds absolutely no value whatsoever to the Canadian mobile marketplace other than wasting consumer’s time as they have yet another offering to review.

I extensively analyzed RESP’s in an earlier post, coming to the conclusion that a person is likely better to wait until the last moment that they are convinced their children will be heading to upper-level education before opening one.

The Globe and Mail is reporting how RESPs are having a rather lacking participation rate and goes into detail why this may be the case. I believe the explanation is simpler than this, and it boils down to two reasons:

1. People do not have disposable income to invest in an RESP, and are choosing to allocate it elsewhere for more immediate priorities;
2. Opening up an RESP leads to potential losses, and people would not want to lose money on their children’s education fund compared to their own investments – ergo, they will be sticking to extremely safe fixed-income products, and given the interest rates available, it is not really worth it at the moment.

There are plenty of scholarship funds out there that try to prey on people that fall under category #2; unfortunately for those that read the fine print, they will likely be throwing away their money on these conceived structured products that are designed to enrich the scholarship fund managers.

The government is trying to promote RESPs to lower income individuals by offering significant incentives to putting money in them. For example, if you earn less than $40,970 in a year, you will qualify for the Canada Learning Bond, which is a “free” $500 plus $100/year that your income is below that level into the RESP. If your income is less than $38,832/year, your contributions will be eligible for a 40% match by the government for the Canada Education Savings Grant, as opposed to the 30% or 20% brackets if you make more income.

Many lower income individuals are usually too busy working to pay attention to any of this and thus will not be taking advantage of money of these benefits. This is even assuming they are not falling under category #1, mainly that they do not have enough disposable income to be thinking about RESPs for their children.

The Bank of Canada, to nobody’s surprise, raised interest rates by 0.25% today. Key parts of their statement:

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

…

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

The take-home message is that growth projections have moderated to a “business as usual” type of economy after the 2008 calamity and the Bank of Canada is reserving all rights to not committing themselves to future rate increases. It is likely the global situation, rather than the domestic situation, will have significant influence over the decision to continue to raising rates.

As of today, the target rate is 0.75%, and I expect a rate of 1.00% by years’ end.

The only implication of this decision is that short-term corporate paper and inter-bank lending rates will correspondingly increase. People with variable rate mortgages will see interest increases, but this will not be affecting the longer-term fixed rate mortgage rates. The other subtle implication for most people is that financial institutions such as ING Direct might be willing to offer better rates on short-term savings and/or short-term GICs.

On July 20, the Bank of Canada is very likely to increase the overnight target interest rate from 0.50% to 0.75%; this has already been baked into the marketplace. The Prime Rate is likely to correspondingly increase from 2.5% to 2.75%.

In terms of what lies ahead in the future, we look at the only financial product in Canada that one can use to predict such rate changes, the 3-month Bankers’ Acceptance Futures:

What we see is a 3-month future rate of 1.12% in September; and by years’ end we have a 1.29% rate.

There are four more meetings left in 2010; July 20, September 8, October 19 and December 7.  Right now, the market is speculating that there will be 0.25% increases in two of these meetings, leading to a year-end target rate of 1.00%.  It is possible that after September 8, that the Bank of Canada will leave short term rates unchanged for the duration of the year.

In 2011, the market believes that the short term rate will increase by about 0.75% above this; to 1.75%, still a very low rate by historical standards.

Presumably after its July20 statement it will change the language which will sufficiently guide the marketplace to adjust its prices.

Of note is the impact on mortgage rates; only variable-rate mortgages will be going up as a result of these short-term rate increases.  The reason is because longer-term rates are set by the marketplace, and these have gone down over the past quarter.  A 5-year government bond yields 2.49% currently; this was as high as 3.2% back in April.

Portfolio Performance

My very unaudited portfolio performance in the second quarter of 2010 is approximately +0.3%, so rounding this off it is 0%. For the 6 months to June 30, 2010, my performance is approximately +9%. Most of the positive portfolio performance could be attributed to the CAD-USD exchange rate – indeed, if exchange rates were unchanged, my performance for the quarter would have been around negative 2%.

You can read the Q1-2010 report here. I also keep the links in the upper-right hand sidebar.

Portfolio Commentary

This has been a relatively boring quarter in terms of performance, but boring is better than the alternative, which is dealing with capital losses. An index investor in the S&P 500 would be down 8% for the year. As the general intention of the portfolio is geared toward risk aversion, while taking some snipes at various issues, I believe my financial intentions are being realized. Nobody said portfolio management has to be exciting.

I did make use of the “flash crash” to add to my existing positions in two names, but the dollar volume amounted to approximately a percentage of my portfolio. I also unloaded a slight amount of one of my debenture positions because there was some guy/computer putting up a rather high price on the bid that I couldn’t resist nibbling at.

Because of the end-of-quarter volatility, there was some trades that I engaged in less than liquid issues, amounting to a few percent of the portfolio. Looking at the ticker tape, it looks like that computer traders were randomly liquidating some of their shares. Although I am not too confident in the state of the economy in general, there are nuggets of value to be picked up here and there (on the equity side) which my research flagged and recent valuations have triggered some price alerts. I will continue examining these short-listed prospects and likely allocate some cash to them if they continue their downward trajectory.

Economic Ramblings

My issue with the economy is that stimulus spending has not translated into private sector investment, especially in the USA. Not helping the US picture is their pending tax increase in 2011 (specifically an expiration of the Bush-era tax cuts). There was a significant drop in inventories in 2009, but now that inventories have been built up in 2010, it is unlikely that we will see any sort of extra investment from the private or government sector that should lead the broad markets into a premium valuation multiple. It is seemingly likely that the rest of this year and a good part of this decade will represent a Japan-type scenario where you have a deflationary environment and a liquidity-trap situation. The only way to cure this is to liquidate bad debts, get the losses on the income statement, take the hit, and move on with life. This is not going to happen.

I have been closely examining the BP incident (as well as a lot of other financial, political and media analysts on this planet) and have some mental orders put in for the various drillers, but nothing has hit yet. Given the market action of the past month, I doubt those transactions will come to fruition unless if the US government decides to launch a frontal legal assault against them in addition to throwing BP under the bus and shaking them down for more money.

I will make a bold call and state that I believe Q3, at least the months of July and August, will be relatively boring, and fraught with conflicting stories on whether the economy is really recovering or whether the “double dip recession” scenario occurs. All one really has to do is look at the commodity and import/export markets to see the best leading indicators of economic activity. I continue to be long-term positive on crude oil, although there might be demand shocks (in the form of economic retardation, especially as the financial markets reverberate) and supply shocks (in the form of conflict arising in the Iran-Israel theater) that will result in price volatility.

It is a simple thesis that watching the world around me that I see planes, trains and automobiles continuing to function. They all require gasoline to run and as long as this is the case, the only thing that will prevent usage of gasoline are higher prices. We will get them eventually, along with $200 oil. It is just a matter of time. The only story that ends the inevitable climb up for crude is demand destruction due to high prices.

Minority governments and the Bloc Quebecois aside, Canada remains one of the most politically stable jurisdictions on the planet to do petroleum business with; as such, we should remain very attractive to international investors, especially considering that Canadian corporations have a huge incentive to doing business here compared to the USA in terms of the corporate income tax regime the Harper government smartly enacted in their late 2007 fiscal update. This is going to pay off massive dividends for Canada and it will pay off massive dividends for Canadians that choose to invest in their own corporations. Still, Canada is very dependent on trade, and our biggest partner (the USA) continues to be the overwhelming majority of our export market. When America gets sick, we will sneeze.

Portfolio percentages

I am going to introduce a new term, mainly the concept of “income equity”. Now that income trusts are converting into corporations, there will be quite a few Canadian corporations that will have relatively high dividend payout ratios. For those companies that have payout ratios that consist a “substantial majority” of their earnings, I will be classifying them as income equity. All other common shares will be considered plain “equity”.

Currently, equity consists of about 1% of my portfolio, income equity 40%, short term debt (maturing between December 2011 to June 30, 2012) is 23%, long term corporate debt (maturing between 2028 and 2033) is 28%, and cash is 8%. Blended together, the current yield on the portfolio is 8.2%. Excluding cash, it is 8.8%.

Assuming I twiddle my thumbs and security prices in my portfolio do not change for the rest of the year, my portfolio will have a 12% cash balance. The short term debt also includes debt that I consider to be a 99% guarantee for maturity at par, so those could be readily liquidated in the event I need to raise some cash. However, for tax reasons and also for the reasons that those securities still give off a fairly high single digit yield, I am not touching them unless if I find significantly better opportunities elsewhere.

Outlook

The investment outlook has changed little – while I am looking for places to deploy cash, I am finding little opportunity out there although May and June’s dip gives a little inspiration. As such, I am keeping a dry powder keg (of cash) ready in the event that investment opportunities arise. My research time (and effectiveness) has been somewhat compromised lately with the arrival of a newborn child, but one of the reasons why I have a low maintenance portfolio was just for this reason. Given what I do see out there, I would lean much more toward the equity side than the fixed income side, but I will not chase yield (or total return). Except for special situations (e.g. picking winners out of the BP fallout) I would also avoid large cap issues.

As such, I continue to wait and be patient. Rule one of investing is: don’t lose money. You lose money by forcing trades in sub-optimal situations. Right now is “sub-optimal”. If we saw more panic like we did in the month of May, I would start to get a little more optimistic. There’s a lot of doom and gloom out there – this generally bodes well for the markets.

However, in the meantime, caution is the name of the game. There is very little chance of any good performance (e.g. double digit returns) in the next quarter without taking more risk (which means selling debt and going for equities). I do not think this risk is warranted at this time.

Readers here might have noticed a lull in posting over the past week – it’s because I’ve been on a break and will continue to be so until mid-July.

A good deal of people on Wall Street take some part of the summer off – especially the month of August. Trading, as a result, becomes dominated by computer trading and volatility is typically higher due to decreased market volumes.

This last quarter has been quite dull on the trading front, but as the markets continue to dive, I am watching for opportunities.