Disaster In Waiting In This Issue Portfolio Channel-Free PDF

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Internet Wealth Builder June 11 2012 2,Disaster continued from page 1. YOUR QUESTIONS, Prime Minister Stephen Harper s comment that Europe is running out of. runway is right on the mark Western leaders are increasingly frustrated with. the inability of the Europeans read Germany to take decisive action So is Exempt securities. European Central Bank president Mario Draghi who has practically been on Q A friend of mine is dissatisfied. his knees pleading with the politicians to get off the pot No wonder he s with the performance of his current. alarmed Spain s banks are going down the tube Italy s borrowing costs are investments and is looking at. approaching unsustainable levels and even France is starting to crack but no something called an Exempt. one is doing anything It is uncomfortably reminiscent of the 1930s when Market Product I ve never heard of. politicians turned a recession into a depression by pursuing narrow self interest this before and I wondered if you. policies such as the erection of trade barriers We re well down that same road could tell me a little about them and. if they would be suitable for a more, The investment implications are clear Stocks need to be selected with great care conservative investor someone. with an emphasis on dividend paying companies with good cash flow and strong with a growing family. balance sheets With a few exceptions such as Switzerland European securities. should be avoided Emerging markets must be treated with caution until such time Thank you very much and please. as the extent of the slowdowns in China and India become clearer Bonds should keep on writing your excellent IWB. continue to have a key position in your portfolio see accompanying story In short newsletter Greg E. play turtle and focus on preserving assets while generating some cash flow. A No these would not be suitable, This could be a long haul The U S Federal Reserve Board has already pledging for a conservative investor In fact. to keep interest rates at record low levels through 2014 That suggests we are they are highly risky The word. unlikely to see a return to strong growth until at least the middle of this decade exempt tells all these securities. are not subject to the usual scrutiny, There are ways to make money even in this kind of environment as our IWB that is required of any investment.
model portfolios have demonstrated We will continue to identify appropriate that is publicly traded They do not. securities for you But financial success in this situation also requires discipline trade on any exchange and the. constant monitoring and careful risk management on your part There will companies are not required to. come a time to take some flyers and go bargain hunting but this is not it provide investors with regular. financial disclosures Investors must, BONDS WON T GO AWAY be accredited or family friends or. associates of the company,The lack of regulatory approval means. that anyone considering investing in, How quickly things change Last January it appeared as through the long term bond. such a security must perform a lot of, bull market was finally over The U S economy seemed to be slowly getting back on. due diligence something most, track the European sovereign debt crisis looked to be contained and stock markets.
people are ill equipped to do The,were gearing up for a comeback. bottom line is that this is a market that,is suited only to very sophisticated. At the start of the year I commented that it was hard to see where bond profits. investors who are willing to risk money, might come from this year with interest rates already at record lows and. on companies that cannot meet the, apparently poised to rise My prediction was a return of about 4 from the DEX. qualifications for an approved initial, Universe Bond Index in 2012 By comparison the 2011 gain was about 10.
public offering G P, We re on track to coming close to that 4 mark As of Thursday s close the Index. was ahead by 1 52 year to date That s not a lot but in the light of what has Passing on money. happened to the stock markets in recent weeks a 4 return in 2012 now looks Q My wife s parents in their 80s. very attractive As of the June 7 close the S P TSX Composite Index was down sold their house earlier this year. 3 for the year and 12 1 over the past 12 months Despite the mid week rally I and are living off the proceeds from. don t expect that situation to change materially over the next few months In fact I these funds They are likely to head. think the gap between stock and bond performance will widen unless European to a care facility shortly due to. politicians pull off the equivalent of a Hail Mary pass in football health issues They want to put the. Continued on page 3 Continued on page 5, Building Wealth s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd All Rights Reserved. Internet Wealth Builder June 11 2012 3,Bonds continued from page 2. Therefore it s useful to take a closer look at the bond market to see where the profits are to be found So far. government bonds have underperformed in 2012 despite the recent inflow of cash into U S Treasuries and to a lesser. extent Government of Canada issues The DEX Universe Federal Bond Index is only up 1 10 so far this year. Provincial bonds have not fared much better at 1 12. The real action has been in corporate bonds especially those with lower ratings The DEX Universe All Corporate. Bond Index shows a year to date gain of 2 84 The leading performers have been the BBB rated bonds which are. ahead 3 51 so far, But for big profits you have to look at a segment of the bond market that most people know little about maple bonds. These are bonds denominated in Canadian dollars that are issued by foreign financial institutions and companies and. sold in this country The idea is to give Canadians an option to invest in offshore interest bearing securities without. exposure to currency risk, The DEX Maple Bond Index is up an astonishing 9 5 year to date with most of that advance occurring within the.
past month One mutual fund that has benefitted is the Pembroke Corporate Bond Fund which has about 40 of its. holdings in maple bonds It is ahead by 7 65 so far this year However there are two problems with it First many of. its maple bonds are issued by European financial institutions which raises the risk factor of the fund Second the. minimum initial investment is 150 000 which puts the fund out of the price range of most investors. A less expensive alternative is the new iShares DEX Short Term Corporate Universe Maple Bond Index Fund TSX. XSH Launched last September it invests in a portfolio of 174 short term Canadian issues and foreign maple bonds. 84 of which are rated BBB or higher about 16 of the issues are unrated About 86 of the holdings mature within. five years Another 9 have 5 10 year maturities while just under 3 are long term 25 years positions. This is an unusual combination of fixed income assets but the short term nature and high quality of the portfolio limits. risk while the maple bonds portion boosts return potential It s worth a look if that combination appeals to you but don t. expect big gains The fund is ahead only 0 35 year to date because of its short term nature. Note that I am not formally recommending this fund and will not be tracking it My preferred short term bond fund. continues to be XSB which is updated elsewhere in this issue But XSH can be used as an alternative if you prefer. some foreign exposure G P,THE CASE FOR ANALYSTS, Contributing editor Tom Slee is with us this week increasing number of pundits think that research. with some thoughts on the Facebook fiasco and the departments have become redundant and their opinions. role played by analysts in the whole mess He also are irrelevant On the other hand a lot of commentators. has a new pick for us Tom managed millions of believe that analysts are important but downright. dollars in pension money during his career and is a incompetent There is certainly not very much respect for. fundamentalist when it comes to stock picking Here the work being done. is his report, Take the recent Facebook initial public offering IPO for. Tom Slee writes example According to the Boston Globe the company. specified that 25 of the shares had to be allocated to. Who would want to be a securities analyst these days. They haven t a friend in the place On one hand an Continued on page 4. Building Wealth s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd All Rights Reserved. Internet Wealth Builder June 11 2012 4, Analysts continued from page 3 changing markets Brokers research is aimed at accurately. forecasting profits and identifying industries that are likely to. retail clients to broaden public participation As a result prosper Recently however this approach has not been. when the stock opened at US 38 and promptly plummeted rewarding These days there seems to be little connection. 18 these people were left with losses totaling US 630 between earnings growth and stock performance. million What was their reaction They promptly sued the. underwriters analysts for a misleading forecast Surveys show that in 2011 daily activity in stocks was. dictated more by breaking news than fundamentals, In fairness these investors are also suing the bankers and I. Earnings beat expectations in many cases but the shares. can understand why they are upset in many cases hopping. failed to respond It s also apparent that with increased. mad A major IPO should be reasonably priced perhaps. computer trading and hedge fund operations similar stocks. slightly below market in order to distribute the new supply To. are no longer moving in unison Sophisticated traders. have the shares immediately plunge reeks of stupidity That. monitor correlations how individual stocks move vis vis. being said I should point out that several independent. the market and each other According to Marko Kolanovic. analysts had already reduced their forecasts after seeing the. head of derivative equities at JPMorgan Chase We are. initial prospectus There were plenty of warnings that. currently witnessing the largest drop in realized correlation. Facebook was a high risk investment There is no, in recent years Not only are the markets erratic but there.
suggestion that the prospectus was fraudulent only that the. is also turmoil within the various sectors It s a tough time. underwriters analyst subsequently reduced his projections. for fundamentalists trying to provide recommendations. and the banks disclosed this to preferred clients,based on value. An investigation has been launched but at first glance it s. difficult to see what the analyst did wrong He or she was There is another important factor at work As the respected. hired to forecast earnings using various sources including magazine The Economist has pointed out we no longer. the company s guidance and provide this information to enjoy a constant flood of new public companies American. the employer s clients The general public was given listed companies reached an all time high of 7 888 in 1997. adequate information about Facebook s IPO in the Since then the number has actually fallen by about 38. prospectus After all the so called revisions that have The number of major IPOs dropped from an average of. caused all the fuss were minor and amounted to a 311 per annum during the period from 1980 to 2000 to just. reduction of about 7 3 in the company s estimated 2013 81 in 2011 Entrepreneurs are now more inclined to expand. revenues not profit The trouble is that all of the through private financing because of the complex. forecasted numbers were highly leveraged At US 38 regulations governing public companies There is continual. Facebook was priced at 100 times its last 12 months pressure on their executives as Mark Zuckerberg is. earnings compared to a 14 multiple for the S P 500 index discovering at Facebook As a result partnerships are. Consequently tampering with any of the assumptions increasingly popular This makes it difficult for analysts to. produced a magnified effect on the issue price identify and cover new stocks. Let s face it Facebook at US 38 was extremely My feeling though is that good analysts are more important. expensive It was floated on hype As one wag put it than ever Of course we are inundated with information and. From now on IPO means It s probably overpriced opinion through the Internet and the media so it s unlikely. that an analyst is going to provide much fresh insight into a. What intrigues me about the entire affair is that the analyst company The days of a research department cozying up to. or analysts are suddenly regarded as crucial players and to executives and getting some unpublished numbers are long. blame for the fiasco This comes at a time when they are gone However following an industry properly still involves a. being dismissed as irrelevant There has been a wave of huge amount of grunt work in studying financial statements. criticism and suggestions that analysts are no longer and trying to spot trends Most important analysts provide a. needed Dr Eric Jackson founder of hedge fund Ironfire sounding board for your leads and ideas as well as on going. Capital maintains that stock analysts are clueless They coverage Always keep in mind that buying a stock is. love analysis paralysis heck that s part of the job primarily an inves. Internet Wealth Builder to ward off destabilizing bank runs in troubled politicians pull off the equivalent of a Hail Mary pass in football Continued on

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