THE INTEREST RATE DILEMMA

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  We’re in a difficult period when it comes to making decisions on interest rates. Both the Bank of Canada and the U.S. Federal Reserve Board have served notice that they are becoming increasingly concerned about inflation and may have to move soon to start raising rates again.

However, there are some signs of softness in both economies that could delay the decision. Here at home, the May employment report was far from robust and if that pattern continues through June the Bank of Canada governors may decide to hold the line when they convene again in July. Across the boarder, weakness in the U.S. housing market continues to be worrisome and raising rates at this critical point could exacerbate an already bad situation.

The general expectation at the financial institutions seems to be that rates will rise and we have already seen some small upward moves in the yields on high-interest savings accounts and in the bond markets. But no one is placing any big bets just yet.

Nor should you! My advice if you invest in interest-bearing securities such as bonds and guaranteed investment certificates (GICs) is to stay short term. Don’t lock into a five-year GIC now – you could be kicking yourself in the fall if rates do move higher. As for bonds, a short-term bond fund such as the iShares CDN Short Bond ETF, which trades on the TSX under the symbol XSB, is a safe choice.

Borrowers may want to consider locking in rates for a longer term, to be on the safe side. For example, if you have a mortgage coming up for renewal you should consider taking a two or three year term (I would not go out as far as five) to protect yourself in the event rates move higher.

It’s very much a guessing game at this point and a lot will depend on which way the economy goes. But it’s better to be safe than sorry.

MARKET FORECAST: MORE VOLATILITY

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  Last week, investors got the shivers when the TSX fell more than 400 points on Wednesday and Thursday, mainly on fears of higher interest rates. Stocks rallied back on Friday but there is still a lot of uncertainty on what the markets will do over the summer. To read my take on the situation, check out the article at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2832

INCOME INVESTOR RECOMMENDS NORTH WEST COMPANY

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  Our Income Investor newsletter recently recommended the purchase of shares in the North West Company Income Fund (TSX: NWF.UN), the modern-day successor to the original North West Company that you read about in history class.

The fund, an income trust, operates general stores across northern Canada and Alaska as well as Giant Tiger stores in major cities. Here’s an excerpt from an update we published over the weekend:

“The fund released first-quarter results on June 5 and they were very impressive. Earnings for the three months to April 30 came in at $10.8 million (23c a unit, fully diluted), an increase of 10.7% over last year's first quarter earnings of $9.8 million (20c a unit). Management noted that the quarter had 89 days of operations compared to 91 last year as a result of changing the fiscal year-end to Jan. 31 and adopting a fixed-calendar quarter end.

“Sales increased to $234.4 million, up 9.7% compared to the first quarter last year. On an equivalent 13-week basis, sales increased 11.7% and were up 6% on a same-store basis.

“The big news was a decision by the trustees to approve a 22.7% increase in the quarterly distribution, raising it to 27c ($1.08 a year). At Friday’s closing price of $19, the shares have a projected one-year yield of 5.68%.”

I regard North West Company as a blue-chip trust and recommend it as a buy for income-oriented investors.

For information on a three-month trial subscription to The Income Investor for only $19.95 plus tax (6 issues), go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=396

To read a free sample issue, go to http://www.buildingwealth.ca/pub/TII2007/tiiMay07.htm

PH&N FUNDS TO BE MORE ACCESSIBLE

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  Vancouver-based Phillips, Hager & North has two big advantages going for it. First, its mutual funds are among the top performers in several categories. Second, they are among the least expensive in the industry.

The problem for many people has been buying them. The company requires a minimum of $25,000 to open an account with them. Brokers don’t like to sell them because they don’t get compensated.

So now PH&N has come up with a new class of units which should make these great funds more accessible to everyone. To read the full story, go to http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2828

NEW MACKENZIE FUND REVIEWED

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  We have just added the Mackenzie Cundill American Class to our On-Line Buyer’s Guide to Mutual Funds with a $$$ rating (out of four). Here is our commentary:

“This fund had the good fortune to be launched in May 2003, just as a prolonged bull market was starting to take hold. As a result, it had never experienced any bad stock market periods up to the time of this review. The mandate is to invest in mid- and large-cap U.S. stocks however the managers are not restricted to the American market. In fact, almost 11% of the portfolio was held in shares of Canadian companies as of the end of April/07. Peter Cundill, whose deep value investment philosophy guides all the funds that bear his name, has never been reluctant to hold cash when he has trouble finding bargains. That is the case right now, with almost half the assets (48.3%) in cash and short-term securities. This limits the downside risk to investors but it also means that the fund has not benefited fully from the recent record highs on Wall Street. In commenting in this situation in their first-quarter report, the managers said: "Low volatility and high tolerance of risk makes it more difficult to find undervalued securities, especially in mid to large cap U.S. equities. As a result, the fund continues to hold significant amounts of cash while searching for undervalued securities with high amounts of margin of safety." Despite this caution, the return for the year to April 30/07 was about five percentage points above the category average, at 14.1%. Three-year results are also above par. Over time, we expect this fund will follow a similar pattern to the other Cundill funds, which have tended to underperform in strong markets while outperforming in weak ones. That said, there is no denying that it has done well out of the gate despite the high cash handicap. We are giving it an initial rating of $$$.”

The On-line Buyer’s Guide contains reviews and ratings of 1,253 mutual funds, which are updated on an on-going basis. Access to the database is available to subscribers on a 24/7 basis. For more information go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=72

WALL STREET ON SALE

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  The rise of the Canadian dollar has made U.S. stocks cheaper than they have been in years. The loonie may go higher still, but you may want to begin taking advantage of this opportunity to add some great American companies to your stock portfolio. Read the full story at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2824

SIGNATURE'S WINNERS

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  The Signature family of funds is part of the huge CI organization so investors sometimes lose sight of it. Don’t make that mistake. Almost every fund in this line-up is a winner. We recently reviewed the group in our Mutual Funds Update newsletter and you can read some of our findings at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2822

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

To read a free copy of the June issue, go to http://www.buildingwealth.ca/pub/MFU2007/mfuJune07.htm

IWB STOCK UP 32% IN TWO MONTHS

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  Shares in Bombardier (TSX: BBD.B) have risen 32% since being recommended in April by Tom Slee, a contributing editor to the Internet Wealth Builder newsletter. In the latest issue, which went out over the weekend, he says he still considers them to be a buy.

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

To read a free sample copy of a recent issue go to http://www.buildingwealth.ca/pub/iwb2007/iwb2721.htm

That’s all for this month. We’ll be back in late July with our Summer edition.