THE TWILIGHT OF THE CYCLE

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  These are wild and uncertain times for stock market investors. Triple-digit gains and losses (mainly losses recently) have become the norm rather than the exception on the TSX, due mainly to big swings in the price of resource stocks.

A number of factors are contributing to this. One is a growing sense that the world economy is heading for a slowdown, which would reduce demand for oil and minerals, thereby bringing down prices. Another worry is inflation, which is starting to rear its head again. The chairman of the U.S. Federal Reserve Board, Ben Bernanke, last week called the most recent CPI numbers “unwelcome developments”. Inflationary concerns lead to higher interest rates and we have seen a new round of increases this month in several countries, including the European Union.

Recently, I appeared on ROB-TV as part of a panel discussing the latest business news. During the program, a caller asked a question relating to a book I wrote many years ago, Retiring Wealthy. In it, I compared the economic cycle to the times of a day and he wanted to know where we were now. I told him I believed we had come to the twilight phase.

In the book I described twilight as follows: “The day has been so glorious, we aren’t really conscious of nightfall fast approaching. But there are plenty of signs around. The government has declared inflation to be a major problem. Short-term interest rates are high. Commodity prices are soaring – oil, copper, wheat, aluminum, potash, timber. House prices in Toronto and Vancouver have begun to move back into the stratosphere, as have prices for cottages in Muskoka and condos in Whistler. The stock markets are setting all-time records.”

Those words were written almost 20 years ago but they describe our current situation almost exactly. A new darkness phase is coming – it’s just a matter of time.

So what should you do? My advice is to take a more conservative approach to your money. Don’t take on new debt – interest rates are likely to rise further before they start to ease back. Increase your personal savings – make sure you have a family emergency fund available.

Investment portfolios and RRSPs should put more emphasis on cash-type securities and bonds and less on stocks. Holdings in cyclical stocks (oil, metals, etc.) and mutual funds that specialize in them should be reduced. More stable securities like banks, insurance companies, and utilities will hold up better in declining markets.

Night may not fall for a while yet but you should start to prepare for it now. It’s like living in the hurricane zone – you don’t want the storm to come your way but you know you had better be ready for it if it does.

WRINGING OUT VOLATILITY

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  The best way to wring much of the volatility out of a mutual fund portfolio is to choose equity funds with a proven record of stability in difficult times. In the June issue of our Mutual Funds Update newsletter, we explained how to do this and recommended several funds that met the test. You can read about two of them at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2559

SPRING SPECIAL EXTENDED

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  We had such good response to our Fund Investors Spring Special that we have extended the offer until June 30. For only $29.95 plus tax, you receive a three-month subscription to the electronic edition of Mutual Funds Update, three months of unlimited access to our On-Line Buyer’s Guide to Mutual Funds, and, as a bonus, a copy of our special report titled The Top 50 Funds for 2006 – in itself, a $25 value! Order now by going to: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=560

GEMS OF WISDOM

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  Francis Chou is one of the most outspoken mutual fund managers in the business and is highly respected by his peers – he was named Manager of the Decade at an industry dinner a couple of years ago. His latest annual report is vintage Chou with warnings about the growing cost of corporate compliance and its impact on mutual fund MERs and a caution to avoid companies that suffer from a bladder problem. Check it out at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2557

IWB PICK DOUBLES IN VALUE

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  One of the stocks selected by contributing editor Irwin Michael for our Internet Wealth Builder newsletter has more than doubled in value. E-L Financial, which was originally selected by the founder of the ABC Funds in May 2002 when it was trading at $275, has now passed the $600 level and was trading this week at just under $620. The shares are listed on Toronto under the symbol ELF.

In a recent update, Irwin Michael wrote as follows: “Now that ELF trades at approximately 1.37 times its book value of $450 per share, it is important to revisit the valuation. We believe that a sum of the parts valuation is the most appropriate way to value the company. Property and casualty companies with a good return on equity currently trade at almost twice book value. Life insurance companies also tend to trade at a similar multiple.

“We are comfortable valuing ELF’s investment portfolio at fair market value as reported in the financial statements. Using this methodology, ELF still trades at a discount to its net asset value of $650 to $700 per share. Therefore, we are willing to continue to hold the stock unless we see signs of a dramatic softening in the property and casualty market.” In the same column, he recommended a new stock for our members, a California high-tech company that is an important supplier to companies like Amazon, Dell, Cisco, EBay and Microsoft and which he feels is greatly undervalued.

For information on a three-month trial membership in the weekly IWB, go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=562

WHICH FIDELITY U.S. FUND?

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  Fidelity Canada offers five equity funds that specialize in U.S. stocks. I think that’s too many and I recently took a close look at the line-up. One fund stands out from the rest and should be your first choice. Details at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2558

RETIREMENT TIME BOMB

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  The Conservative government in Ottawa has apparently decided that something needs to be done to fix Canada’s struggling private pensions system before they reach the tipping point and have put forward a series of proposed initiatives for comment. As things currently stand, the pension benefits of potentially hundreds of thousands of people could be at risk. I deal with the subject in depth in my new book, The Retirement Time Bomb. If you belong to an employer or union pension plan, I suggest you read it. You can buy a copy through Amazon.ca at 34% off the cover price by going to our home page at www.buildingwealth.ca and clicking on the book cover on the left.

INVESTING IN OIL

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  Energy stocks have taken a beating recently but world demand for oil and natural gas isn’t going to disappear any time soon. Longer-term investors may want to take advantage of any price weakness to start building positions. We have been running a multi-part series on the best ways to do this in the Internet Wealth Builder. You can read an excerpt at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2556

THE INCOME INVESTOR

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  A few years ago, we decided to launch a newsletter entirely devoted to income-producing securities. The move was made in response to a growing need among older Canadians for guidance on how to invest their life savings in such a way as to increase retirement income without taking on undue risk.

The Income Investor recently celebrated its third anniversary and I’m pleased to report that the great majority of our recommendations have performed very well for our readers. Some have also recorded big capital gains, although that has never been a priority for us. For example, Peyto Energy Trust was originally recommended at a split-adjusted $9.95 in September 2003 and now trades in the $24 range.

You can try the electronic edition of The Income Investor for three months for only $19.95 plus tax. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=572

WHAT’S WRONG WITH TRIMARK?

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  Many Canadians with money invested in Trimark funds have been concerned about low returns and I have received several inquires about them. As a result, I revisited the funds and have just completed an update of all of them in my On-Line Buyer’s Guide to Mutual Funds. My conclusion is that while the Trimark funds carry below-average risk, their returns on the whole have slipped dramatically in the past couple of years. Here is my latest review of the widely-held Trimark Income Growth Fund:

“Like many of the Trimark funds, this once-stellar performer is coming off a poor year. The fund gained less than 1% in the 12 months to May 31/06, way below the 8.5% average for the Canadian Income Balanced category. Although long-term numbers are much better, this weakness is certainly a cause for concern. The fund's U.S. exposure (16.4% of assets as of April 28/06) and holdings in stocks like Loblaw which have been sliding are contributing factors to the relatively poor results. “But before you dismiss this fund out of hand, you have to consider its benefits. For one thing, it's safe. The conservative management style enabled it to come through the 2000-2002 bear market unscathed, in fact it managed to record a profit in each of those years. Also, the fund provides decent cash flow with monthly distributions, although these can vary considerably. Over the 12 months to May 31/06, the fund paid out about 33c per unit for a cash yield of 3%.

“The portfolio is broadly diversified, with a 61%-34% stock-bond split as of the end of April 2006, with a small cash position. Stock selection tends more toward value than growth, with emphasis placed on issues that are attractively priced in relation to historical earnings and valuations. As a result, the equity side has a blue-chip feel with lots of banks, BCE and the like.

“This fund comes with two purchase options and we strongly recommend the SC units, which have a much lower MER. That makes a big difference to your net return; the three-year average annual gain for the Series A units to May 31/06 was almost a percentage point less than that of the SC units, at 8.4% vs. 9.2%.

“To sum up, this fund is best suited to investors who prize safety over high return potential.”

If you want to see all the new Trimark fund reviews, take advantage of our Fund Investors Spring Special or subscribe to the On-Line Buyer’s Guide for a full year for only $49.95 plus tax. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=72

WHAT TO DO WITH CANADA SAVINGS BONDS

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  I recently received a question from a lady who invested in Canada Savings Bonds many years ago and recently discovered that she received interest of only 1.5% last year. What, she asked, should she do with them now? Keep them or redeem them and invest the money somewhere else? You can read my reply in our website Q&A section by going to http://www.buildingwealth.ca/QA.cfm

Also this week I answer questions about whether to pay down debt or contribute to an RRSP, what to do about mutual funds in a falling stock market, the tax implications of leaving Canada, and more.

I invite you to send along your own general interest financial question (please don’t ask for personal investment advice, however) and I’ll do my best to answer it on the page. You’ll find a link to a special e-mail form on the page.

That’s all for this month. Look for our Summer edition in early August. Enjoy the warm weather!