A BAD START TO 2007

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  Well, here we are in a New Year – and it has not started off well for investors, to say the least. As of the close of trading on Jan. 13, the S&P/TSX Composite Index was off 1.8% for 2007. To put that in perspective, only the Brazilian market fared worse in the early going.

As you might expect, the resource sector was the main culprit in dragging down the TSX. So far this year, oil stocks have fallen 6.3%, gold has given back 5.1%, and the metals and minerals sector is off 5.5%. Canadian investors feasted on resource stocks in recent years – the Composite Index was up 14.5% in 2006 and resources played a big part in that. So now are we facing famine?

Hopefully not, but the weak start certainly is not encouraging. January is regarded by many investors as being a predictor for the entire year. If markets are down during the month, the belief is that they’ll be down at year-end as well. Of course, it doesn’t always happen that way but the pattern has held true often enough to give the idea some credibility.

My advice is to use more prudence than usual when making your 2007 investment decisions, keeping in mind that bull markets don’t last forever. The current bull began in the late fall of 2002, after a selling climax in October finally brought an end to the long bear market that started with the tech crash in the spring of 2000. That means this bull market was more than four years old entering this year. A sharp correction was overdue and I said as much in the issue of Mutual Funds Update that was published on New Year’s Day.

I also said that the Canadian stock market is more vulnerable than the U.S. market, and so far that has proven to be the case. To Jan. 13, the Dow, S&P 500, and Nasdaq were all in positive territory for the first two weeks of 2007, with Nasdaq leading the way with a gain of 3.6%. The Dow, meanwhile, closed on Jan. 13 at a new all-time high.

In the circumstances, lightening up on Canadian stocks or mutual funds and adding more U.S. exposure in 2007 looks like a good strategy. Bonds also look like a better bet this year than they have in some time. Bank of Canada Governor David Dodge has been making unusually gloomy noises about the prospects for our economy in 2007, which could presage a lowering in interest rates sooner rather than later. That would be good news for the bond sector and I recommend increasing bond weightings in your portfolio.

The bottom line is that this looks like a year to hope for the best while preparing for the worst. Review your portfolio carefully with this idea in mind.

WHAT HAPPENED TO $100 OIL?

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  Sagging oil prices have played a key role in the weak performance of the TSX to open 2007. How long will it go on – and how low will the price go? You can read my views on the future of the oil sector at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2715

TWO MUTUAL FUNDS THAT LOOK GOOD

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  In the January issue of Mutual Funds Update (MFU), we listed some fund picks for 2007 in the light of current conditions and the outlook for the year ahead. A total of 22 funds were recommended. Here are two of the choices:

RBC O’Shaughnessy U.S. Value Fund. This fund has been on the MFU Recommended List since August 2003 and after mid-January it will be the only one of the original three O’Shaughnessy that is still open to new investors. We’re please it is still available because we regard this fund as a perfect fit for the current conditions. The manager uses the O’Shaughnessy U.S. Value Strategy Index, which identifies firms with high dividend yields and higher-than-average sales and capitalizations. The fund went through a mini-slump in early 2006 but has since rallied well and shows a one-year gain of 17% (to Dec. 31). Longer-term returns are miles ahead of the category average. The five-year average annual compound rate of return is 10.2% compared to an average annual loss of 0.25% for the competition. One reason for this good showing is that both this and the companion Growth Fund use currency hedges. As a result, these funds were not exposed to the sharp decline in the value of the U.S. dollar against the loonie that cut into the returns of most U.S. stock funds. However, this is a two-edged sword; when the loonie drops in value investors in this fund will experience currency losses. The portfolio emphasis is on blue-chip value stocks like JC Penney, Heinz and Allstate. The better-than-average risk rating and low MER of 1.57% add to its appeal.

CIBC Monthly Income Fund. Since I believe 2007 will be a year when some caution is warranted, I recommend adding a well-managed balanced fund with steady cash flow to your portfolio. This fund has been a first or second-quartile performer every year since 2000 and it has been on the MFU Recommended List since November 2002. It provides a monthly stream of income (72c per unit over the past twelve months) while preserving capital and generating above-average gains. The latest 12-month return was a very healthy 11.7% and the three-year average annual compound rate of return stood at 14.1%, more than four points better than the average for the Canadian Income Balanced category. The ratio of equities to bonds/cash is about 66/34, but equities in this case include a few income trusts and preferred shares so that proportion is somewhat misleading. Volatility has been about average on both on an absolute and relative basis, given the high returns recorded thus far. It’s a good choice if you need steady cash flow or a balanced fund in an RRSP or RRIF.

For information on subscribing to Mutual Funds Update go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=80

MORE TOP FUNDS

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  We have just published a new Special Report, titled Top 50 Funds 2007. This report has been sent free to all subscribers to our On-line Buyer’s Guide to Mutual Funds and is available at a discount price to members of our paid circulation newsletters.

Investing Today readers who do not use any of our paid services can obtain a copy of this valuable report for $25 plus applicable taxes by calling our Customer Service desk at 1-888-287-8229 or ordering on-line at: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=595

The 44-page report contains entries in all the major mutual fund categories including Broad-based Canadian Equity, Small-Cap Canadian Equity, U.S. Equity, International and Global Equity, Income funds, Balanced funds, and Canadian Bond funds. Each entry includes such important information as risk rating, RRSP/RRIF suitability, managerial tenure, management style, and MER, as well as a detailed analysis. All performance numbers are as of Dec. 31, so this report is right up to date.

If you invest in mutual funds, I’m sure you will find this Special Report to be a valuable reference tool when it comes to making your decisions.

A FUND TRAP

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  Sometimes things are not always as they seem in the mutual funds world. I’ve said this before but another example of how numbers can badly mislead investors popped up when a broker friend and I tried to a U.S. equity fund that provided decent cash flow. You can read the whole story of an RBC fund that shows terrific, but irrelevant, performance results at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2700

VALUEFORUM NOW IN CANADA

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  I am delighted to announce the launch of a new service for Investing Today readers who want to add an extra dimension to their investment knowledge and experience.

In an arrangement that has been two years in the making, our organization has teamed up with BNK Invest, Inc. of New York to launch BuildingWealth.ValueForum.com, which can be accessed at http://buildingwealth.valueforum.com/

This site is a special Canadian portal to ValueForum.com, which has become one of the most popular and influential investment discussion forums in the United States. A recent article in Forbes Magazine called ValueForum “a valuable tool for trading investment information”, describing it and others like it as “electronic versions of investment clubs”.

There are plenty of free discussion sites available for investors. This is not one of them. As Thomas M. Anderson wrote in December in Kiplinger’s, ValueForum’s US$220 annual fee “helps keep out the riff-raff”. (There is a 10% discount for our readers.)

“Some investors, frustrated by the noise, have gravitated to more exclusive forums that don't suffer fools gladly,” he commented. “One such round table is ValueForum.com.”

Those who join BuildingWealth.ValueForum.com will have access to the full range of ValueForum features and services. They include active discussion strings on a wide range of topics including income trusts (lots of talk about those), stock market tips, risk analysis, currencies, international investing, and much more. ValueForum participants are extremely knowledgeable and, without disclosing any secrets because all postings on the site are confidential, some are active or retired investment professionals and a few are advisors to governments and/or international organizations. I will be an active participant on the site in the Canada and Commentators section and will try to respond to questions/comments that are directed to me.

The Canada portal has several features of special interest, over and above the standard ValueForum offerings. The Canada Discussion Forum allows Canadians to talk about topics of special interest to us. A Canada Stock Ratings section has been created, which allows members to rate every TSX listing. There is also a Canada Resources section, which is being added to on a regular basis.

This description only scratches the surface. There’s a lot more going on within the site including contests, group polls, shared portfolios, and current stock market quotes from Toronto and New York. Fortunately, there is a very well-designed site tutorial (the “VF Walkthrough”) that will help you understand exactly how everything works and get maximum benefit from the experience.

We’ve made arrangements with ValueForum to enable our readers to try out this new service for 30 days at a special price of US$24.99. This is a great deal because it is a risk-free offer. If you decide not to subscribe to BuildingWealth.ValueForum.com after the trial period is over, you won’t have to pay one cent. You’ll find complete details of this guarantee at http://buildingwealth.valueforum.com/ BuildingWealth.ValueForum.com will be especially useful to serious investors who want more depth and faster reaction time than even a weekly newsletter like this can provide. But even casual members may find much of interest. It’s certainly worth a look. You can sign up for the trial offer on-line at the above url or by calling the BNK Invest toll-free number at 1-866-315-6971. Please do not contact the BuildingWealth Customer Service department as they are not equipped to take orders for this product.

AN ALTERNATIVE TO INCOME TRUSTS?

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  A reader recently wrote to ask whether income participating securities (IPS) are exempt from the new tax on income trusts proposed by Finance Minister Jim Flaherty. The answer appears to be yes, although given the Conservative party’s willingness to change course at a moment’s notice on the trust issue, nothing can be taken for granted. To find out more about IPS, some of which offer very high yields, and to read my analysis of two of them, go to: http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2709

That wraps up the January issue. See you again next month.