Vancouver Moneyshow / Financial Forum

I try to make the effort to go out to the annual Vancouver Financial Forum, usually held at the Vancouver Convention Centre (where the Pan Pacific Hotel is on Waterfront). This year, apparently the conference was acquired by another company and is now re-branded as the Vancouver Moneyshow and was held at the Hyatt on Burrard Street.

The reason why I try to show up to this is because I have found it to be a rather uncanny barometer of investment sentiment, and what the “strategies of the day” tend to be. As a result, I know what to stay away from for at least the next year. I consider it to be more entertainment than anything else, although occasionally you will get some corporate swag that is actually useful.

The themes to avoid this time around seem to be heavily concentrated on gold and silver (both bullion and mining ventures), and also real estate limited partnerships.

So this year, I would like to thank the two ladies at the booth of Vale Corporation, who gave me a steel thermos. Considering I never heard of the corporation before, I much later realized that the reason why the two ladies had Latin American-sounding accents is because the company is headquartered in Brazil, and does about $30 billion in revenues a year in the mining industry.

There were a few other large-cap companies that showed up, including Proctor and Gamble, Cemex, National Bank and a couple others. I truly believe the only reason why they show up to these things is to get some vacation time out in Vancouver, although the weather this time of year was pretty rainy and windy and not hospitable.

I enjoy listening to bad investment pitches, and about half of them I classify as bad, so it takes a bit of cherry picking and research to determine which is the worst of the worst. To protect the guilty I will leave out the specific names of the companies involved.

There were three “trading schools” that had tables. One of them in particular, had a 5-day training course which you could pay $4000 for, and they give you a live account to trade 100 share lots of Apple or some stock of the day with using technical indicators they train you with. They then explained you could take the course as many times as you want with no charge, and that they train their people to do around 60 to 80 trades a week. They also said their classes have 21 people and despite them trading furiously in training, they collectively don’t lose more than around $200. I found that tough to swallow. I liked their marketing front, however – one guy and three attractive women – it implied “Want to meet women? Sign up to trading school!”. Fortunately as I left the table, I still had my wallet with me.

There were plenty of real estate “opportunities”, ranging from commercial real estate to residential apartment investing. They typically pitched a limited partnership format. One of them, which I thought was particularly atrocious, was pitching a limited partnership that proposed redeveloping a strip mall in northeastern Edmonton. The partnership would then acquire the property from a related party through a leveraged buyout (this is where the promoters truly make their ‘money’ even if the underlying project fails), the limited partners get a substantial tax-loss writeoff in the first year, and then they very patiently have to wait many, many years for payback (i.e. 2022). A great deal for them – get your money today, and maybe give it back to your investors 12 years later.

When asking the guy “So, let’s pretend I have $25,000 in my wallet, why should I invest in you guys than Rio-Can?” and the salesguy basically gave three minutes of speech about how great their property is, and how they are not exposed to “market risk” like Rio-Can is… I did say this was entertaining, right?

The companies providing charting services were also equally amusing, although they have been a mainstay at the financial forum – charts that can produce the fanciest lines and do a wonderful job of extracting value out of historical data, but with no predictive value whatsoever.

For the first time, I’ve noticed a few firms trying to get into the fundamental data analysis sales business, but the companies were relatively uninspiring. The worst of them pretty much copied all the information out of a company’s annual information form and just put it in a research report with some very bland extrapolations of their financial status in a typical research report.

I truly wonder how many people that go to these things actually think the information they receive at these forums can be acted upon with real money.

Athabasca Oil Sands IPO – First day of trading

The first day of trading of Athabasca Oil Sands resulted in a 6% drop in valuation from $18 to $16.90. I had written about my quick researched valuation of the IPO in a prior post, and also said that I wouldn’t be surprised if there was a post-IPO “bump”:

Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.

If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.

This kind of surprised me in light of the fact that this was much touted by the media before it started trading and it was appearing as if there would be droves of retail investors that would pile into the stock (before it went down). Instead, it just went down from the start of trading:

Probably what will be even more affected by this drop in valuation is the valuation of other related oil firms, which might get sold off now that the hype has been extinguished.

Inevitably, Athabasca Oil Sands will be running net operating losses for the next four years, so investors will have to be very patient before they will see any dividends coming from their common equity.

Investment returns must be calculated after-tax

One critical consideration of computing returns is that pre-tax is an easy calculation, but after-tax involves a bit more effort.

In Canada, interest income (and distributions of income from trusts) is taxed at your marginal rate. Foreign dividends are also taxed at your marginal rate. Dividend income from publicly traded Canadian companies are taxed at a very favorable rate. Capital gains are taxed at half your marginal rate.

As a result, portfolios should be structured such that income is maximized in sheltered vehicles (RRSPs, TFSAs) while Canadian dividends and capital gains are preferentially outside the RRSP and TFSA.

Your marginal rate depends on what province you live in and also what income bracket you are in.

So if you live in British Columbia, and make a taxable income of $50,000, your marginal rate rate on an extra dollar of interest income would be 29.7%. So to realize a 10% after-tax return on investment, you need to earn 14.2% on a pre-tax basis. Alternatively, you could also earn a 11.7% return via capital gains, or a 10.1% return via eligible dividends. It all amounts to the same: a 10% after-tax return.

The following tables are a simple illustration of the required pre-tax returns required to achieve a 10% after-tax return:

BC 2010 Tax Rates 10% after-tax equivalent
Marginal Cap. Eligible SB
Low Range High Range Rate Gains Dividends Dividends
$ – $ 35,859 12.5% 11.1% 8.9% 10.4%
$ 35,859 $ 40,970 12.9% 11.3% 9.2% 10.8%
$ 40,970 $ 71,719 14.2% 11.7% 10.1% 11.9%
$ 71,719 $ 81,941 14.8% 11.9% 10.6% 12.5%
$ 81,941 $ 82,342 15.7% 12.2% 11.2% 13.3%
$ 82,342 $ 99,987 16.2% 12.4% 11.6% 13.7%
$ 99,987 $ 127,021 16.9% 12.6% 12.1% 14.3%
$ 127,021 and above 17.8% 12.8% 12.7% 15.1%
BC 2010 Tax Rates 10% after-tax equivalent
Marginal Cap. Eligible SB
Low Range High Range Rate Gains Dividends Dividends
$ – $ 35,859 12.5% 11.1% 8.9% 10.4%
$ 35,859 $ 40,970 12.9% 11.3% 9.2% 10.8%
$ 40,970 $ 71,719 14.2% 11.7% 10.1% 11.9%
$ 71,719 $ 81,941 14.8% 11.9% 10.6% 12.5%
$ 81,941 $ 82,342 15.7% 12.2% 11.2% 13.3%
$ 82,342 $ 99,987 16.2% 12.4% 11.6% 13.7%
$ 99,987 $ 127,021 16.9% 12.6% 12.1% 14.3%
$ 127,021 and above 17.8% 12.8% 12.7% 15.1%

The following is for an 8% after-tax return:

BC 2010 Tax Rates 8% after-tax equivalent
Marginal Cap. Eligible SB
Low Range High Range Rate Gains Dividends Dividends
$ – $ 35,859 10.0% 8.9% 7.1% 8.3%
$ 35,859 $ 40,970 10.3% 9.0% 7.4% 8.6%
$ 40,970 $ 71,719 11.4% 9.4% 8.1% 9.5%
$ 71,719 $ 81,941 11.9% 9.6% 8.4% 10.0%
$ 81,941 $ 82,342 12.6% 9.8% 9.0% 10.6%
$ 82,342 $ 99,987 13.0% 9.9% 9.3% 11.0%
$ 99,987 $ 127,021 13.5% 10.0% 9.7% 11.4%
$ 127,021 and above 14.2% 10.2% 10.2% 12.1%

The kiss of death – a mention in Forbes Magazine

I notice with amusement an article in Forbes – “Five Canadian Trust Survivors“, where the author basically states the following will still give out “solid” distributions after distributions are taxed in 2011:

Baytex Energy Trust (BTE.UN)
Cineplex Galaxy Income Fund (CGX.UN)
Vermilion Energy Trust (VET.UN)
Brookfield Renewable Power Fund (BRC.UN)
Keyera Facilities Income Fund (KEY.UN)

There is only one good that can come out of this article: it saves you the time from having to bother even looking at these companies. Just scratch them off your candidate list – if Forbes magazine is extolling the virtues of these companies, then it is a virtual guarantee that you are likely to be paying fair (if not greater than fair) value.

I wonder how many people actually base their purchase decisions on magazine articles such as these.

I have spent the greater part of the day trying to screen income trusts, and I don’t see any exceptional value out there. The only one (and literally one out of the forty or so that I took a detailed look at) stinks so badly that even I have no idea how their business can be made viable, but at least their market valuation is trading such that they think this company is going out of business really soon.

Canadian dollar at parity to US Dollar

For the first time in about two years, and a rare event in a generation, the Canadian dollar is worth the same as a US dollar. The following is a three-year chart of the Canadian Dollar vs. the US Dollar:

This can probably be explained by a few factors:

1. Rate differentials: The Bank of Canada is expected to have a higher interest rate than the US Federal Reserve, thus moving carry trade dollars into the Canadian currency;
2. Commodities: Canada is seen internationally as being concentrated with commodity markets. Thus, more demand for Canadian dollars due to high exports of more expensive commodities;
3. Fiscal factors: The Canadian government is less of a fiscal basket case than the US government, thus inspiring confidence in Canadian bonds, thus giving the currency higher value.

The question is whether this trend will continue or whether there will be some sort of regression of the mean (the Canadian dollar traditionally has been around 80 cents US throughout its lifetime). I truly don’t know.

With a strengthened dollar, consumers win because their dollars have higher purchasing power. Prices in Canada are always higher than in the United States, so a cross-border shopping trip will probably have more value realized.

Also, investors should probably take a look at currency concentration and perhaps consider diversifying into US equities if they are primarily concentrated in Canadian currency.