The US Federal Reserve (The Fed)’s decision on Tuesday to leave short term interest rates unchanged at 0-0.25% for “an extended period” as well as consider further measures such as reinvesting the proceeds from maturing bonds not merely in mortgages but in government bonds as well, known as quantitative easing (QE), has seen the US dollar sell off, bond yields fall back towards their lows of mid year and gold rise to a record. The rise in the prices of both government bonds and gold is a good example of the market’s ability to believe at least two impossible things before breakfast, to paraphrase Alice in Wonderland. If growth in the US is so slow as lead to worries about deflation, as observers have concluded is the logical deduction from the Fed’s commentary, then either the US is sinking into Japanese style deflation and bond yields will fall due to no inflation, or the Fed will print lots of money to prevent this happening, and gold benefit as an inflation hedge. It is difficult to see how both of these outcomes will occur.
Archive for September, 2010
The 35th Toronto International Film Festival (TIFF) closes this weekend. As the publicity for the festival stated “300 films and 300,000 tickets in 11 days. What will you see?”
What we saw were a couple of movies at midday and early afternoon, the British comedy, The Trip, from Michael Winterbottom, director of what has been described as “the famously unfilmable book” Tristam Shandy-a Cock and Bull Story and a period western, Meek’s Cut-off, set on the Oregon Trail in1845 from female American independent director Kelly Reichardt. One of the fun aspects of TIFF is seeing the cast and director of the film appear and say something about the movie, and The Trip had Winterbottom and the two stars, Steve Coogan and Rod Brydon, turn up on stage to explain amongst other things, why Coogan had fallen in a river during the making of the film. Of course, sometimes they don’t, as Kelly Reichardt had flown back to LA after doing the Venice festival and the premiere at TIFF.
As always with events of this type, success lies in picking your spots; when attempting to obtain tickets, don’t try for red carpet evening premieres in the first week, don’t try to see films from big name directors unless they’re coming off a couple of failures, and you’ll probably get what you want if you concentrate on the last 3 or 4 days as exhaustion takes its toll on the dedicated film goers. A gentleman in the line behind me at the TIFF box office had tickets to 48 movies, and was exchanging some which were showing at the same time. He recognized me from my TV appearances and we discussed gold stocks as well as TIFF techniques. The cost as well as the time involved in being such a true afficionado makes one admire but not wish to emulate such folk. Tickets to ordinary screening were C$21 each, with premieres going for $43, plus a booking fee. Doing 4 films most days and occasionally 5 was costing my acquaintance $1,000.
Still, the pleasure of hearing Sir Michael Caine explain why he had accepted the script for Harry Brown last year, or seeing the Indo-Canadian cast of Cooking With Stella beaming with pride as they were a Red Carpet premiere at the Roy Thomson Hall adds enormously to the pleasure of watching the film, and sometimes, as with The Trip or Almost Famous 10 years ago, you have a throughly enjoyable two hours in the cinema.
This week, the Governor of the the Bank of Canada (BoC), ex-Goldman Sachs alumnus Mark Carney, raised Canadian interest rates by 0.25% for the third meeting in a row, to a still low 1%. Commentators were fairly evenly divided about whether or not Mr Carney would go ahead with the latest increase, given the uncertain progress of the US economy, to which approximately 70% of Canadian exports go and the slowdown in some parts of the Canadian economy, such as housing and manufacturing. Some economists felt that this reflected the effect of the two 0.25% increases in June and July, but in fact, long term mortgage rates have fallen since the spring even as short term rates have increased.
However, there should not have been too much surprise that Mr Carney chose to raise rates again. 1% is still the lowest interest rate ever for Canada in the last 50 years, and the BoC may well now choose to pause for a while to assess how deep the weakness in the US runs. More importantly, once a central bank begins moving interest rates, in either direction, it will be likely to keep moving them in the same direction for the next 18 months to 2 years at a minimum. In the last decade, the US Federal Reserve (the Fed), the European Central Bank and the Bank of England have all moved rates down (2000-3), up (2004-06) and down again (2007-09) in a continuous process. In fact, former Fed Chairman Alan Greenspan essentially announced in 2004 that he would raise interest rates 0.25% at every meeting, which he proceeded to do until he retired in 2006. Talk about a one way bet for banks and investors in the fixed interest markets!
The onlycentral bank which has deviated from this pattern is, ironically, the BoC, which, under former Governor David Dodge, twice raised interest rates while the the Fed was lowering them (2002 and 2007) and had to hastily reverse itself within 6 months as the Canadian dollar appreciated rapidly. With Mark Carney at the helm, it seems highly unlikely this behaviour will be repeated. The Fed is not raising rates, but with the Federal Funds rate at a microscopic 0-0.25%, it has no room to lower them. Mr Carney can continue to raise interest rates over the next year if he chooses, and given that other resource-based economies like Australia have short term rates at 4.5%, up from 3% a year ago, he has plenty of room to catch up. Another 0.5-1% on Canadian rates over the next 12 months, leaving them at 1.5-2%, seems a reasonable forecast.
The answer to the the question of “What does it take to make someone happy?” is apparently a household income of U$75,000 p.a. This is according to research by Nobel Prize-winning behavioural psychologist Daniel Kahneman (the only non-economist to win the Nobel Prize for Economics) and economist Angus Deaton, published in the Proceedings of the National Academy of Sciences. Based on their analysis of 450,ooo responses from the Gallup-Healthways Well-Being Index phone survey conducted in 2008-09, as household income approached the U$75,000 p.a. level, reports of being sad, worries or angry decreased and reports of being happy and joyful increased. After that amount was reached, however, emotional improvement stalled.
Interestingly, when the same survey asked a “life evaluation” question, which asked people if they were living the best possible life for them, on a scale of 1 to 10, happiness does continue to increase as household income gets larger.
This is another example of the value of behavioural psychology in analyzing economic matters. Firstly, the myth of the perfectly rational person, which bestrides conventional economic analysis, continues to be disproved by research focused on examining the way that individuals actually do behave in real life “empirical” situations. Human beings are irrational, driven by basic emotional instincts such as fight or flight, which equipped them to survive the dangers of life in prehistoric times, but which leaves them ill prepared to handle the vagaries of investing wisely. The aspirational happiness that comes from being richer than the U$75,000 p.a. level is, according to the study, completely independent of the emotional happiness attained once one has reached an income level that enables you to live comfortably.
The conclusions from Kahneman & Deaton’s study of happiness illustrates that as Kahneman says “By U$75,000, the essentials are covered for most people.” which may be useful to know from a public policy perspective. He went on to observe that the study found that illness, smoking loneliness and time spent as a caregiver were relatively strong predictors of negative emotions; “the surprise is really how dreadful it is emotionally to be poor” he said. Government policies might usefully be concentrated on taking more people out of the tax net and increasing incomes at the lower level, which would, incidentally, also help with health issues as well, if the survey is any guide.
Another baseball season coming to a close with fewer than 30 games left before the end of the regular season and another year (the sixteenth) that the Toronto Blue Jays will not feature in the playoffs. In fact, the Jays` string of years when they have failed to reach the post-season is now only exceeded by 3 of the 30 major league teams. Being in the same club as such basket cases as Montreal/Washington (last-and only-playoff appearance 1981), Kansas City (1985), and Pittsburgh (1992) is not a distinction that the Jays should wish to possess.
Even such perennial losers as Milwaukee and Detroit, which hadn’t been in the post-season since 1982 and 1987 (the latter time at the expense of the Jays) managed to get in via the wild card spot in 2008 and 2006, the latter riding a hot streak all the way to the World Series. In the AL East, dominated as it has been by the New York Yankees and the Boston Red Sox for the last 15 years, Baltimore used Peter Angelos` dollars to reach the post season in 1996 and 1997 and the revamped Tampa Bay Rays showed how a young team built by good drafts with a few veterans could reach a World Series a couple of years ago in 2008.
In fact, in the 15 seasons since the last baseball strike in 1994 and the introduction of the wild card, 2008 was the only year the Yankees failed to make the playoffs (14 out of 15 years), and 1996-97, 2000-02 and 2006 the only years the Red Sox didn`t appear (9 out of 15). While the AL West has managed 3 wild cards in 2000-02 for Seattle, Anaheim and Oakland and the AL Central 1 (Detroit in 2006), the AL East has produced 11 of the 15 wild cards, but only, it seems, if your name is New York or Boston.
Entering `AL East` into a search engine will produce 6 out of 10 headlines along the lines of `AL East unfair`, `Al East stacked` or `AL East most difficult division`. Baltimore`s success in the mid 1990s showed that spending enough money could achieve success, but Rogers Communications (RCI.B-T), the media and telecom conglomerate that owns the Jays, tried that route in the middle of the decade and achieved one second place finish well out of the playoffs. The Tampa Bay Rays have shown that intelligent drafting and signing a few under priced veterans can also get a team to the playoffs in the AL East, as they look likely to reach their second post-season this year. Unfortunately, the Jays regime of previous General Manager JP Ricciardi was not highly regarded for its drafting of position players, although the overall verdict on its success may be revised favourably as more of its young pitchers arrive in the major leagues.
With no willingness to spend the U$150 million p.a. that it would take to compete with the Yankees and Red Sox and no obvious boost on the field from young talent, the Blue Jays seem destined to continue their streak of fifteen years and counting without seeing playoff baseball, except watching the Yankees, Red Sox or Rays on TV.
The answer is obvious; move to the AL Central, as former AL East teams Milwaukee, Cleveland (both in 1994 with the introduction of three divisions and the wild card) and Detroit (in 1998 with the introduction of expansion team Tampa Bay) did.
No AL East champion has won fewer than 92 games in a full season since 1996, with the exception of the 2000 Yankees (87-75). In fact all of the AL East wild cards have won at least 92 games since Baltimore got in with an 88-74 record in 1996. In the AL Central, on the other hand, 6 of the 15 champoins have won 91 games or fewer, and the last two divisional championships went to one game playoffs between teams which had won 88 and 86 games respectively, in 2008 and 2009. Cleveland is only slightly further west than Toronto, and as baseball was quite happy to have Atlanta and Cincinnati in the NL West while St Louis and Chicago were in the NL East for a quarter of a century, it shouldn`t find the Cleveland-Toronto switch too hard to swallow!
In today’s Number Cruncher column in the Globe and Mail, Scott Adams features the most recent report on mid-cap dividend growth stocks by George Vasic, the strategist at UBS Securities Canada. Mr Vasic has been producing excellent work for many years, and perhaps the most valuable reports he produces are those showing that mid-cap Canadian stocks (those outside the S&P/TSX 60 Index) with growth in their dividends have, in his words “have uniformly outperformed their peers within the 60, and with better risk/reward”.
The column features financial mid caps today (the non-financials appear tomorrow) and it is unsurprising to see three companies in the Desmarais family group, namely Great West Life (GWO-T), IGM Financial (formely Investors Group) (IGM-T) and Power Financial (PWF-T) as well as Canadian Western Bank (CWB-T) amongst those stocks that have a 15 year dividend growth history. The Desmarais family, as major shareholders in their companies, either directly or indirectly, have always been believers in raising dividends as a tax effective method of paying themselves and preserving the real value of their income stream. I recommended PWF in the Income Investor in 2005 precisely for this reason, and it has raised its dividend since then at a 10% annualized rate, comparable to the 8.7% and 8.9% annualized rates for its principal subsidiaries, GWO and IGM.
Now, however, the estimated 2010 payout ratio, according to UBS, is 57% for PWF and 59% and 72% for GWO and IGM. Research by CIBC on PWF indicates that GWO accounts for about 74% of PWF’s Net Asset Value (NAV) and 77% of operating earnings, and CIBC does not expect any dividend growth through 2011 for PWF due to the elevated payout ratios at both GWO and IGM.
While this would be disappointing, given the strong track record of the Power group of companies, PWF is yielding 5.1%, equivalent with the dividend tax credit to almost double the net yield on the 10 year Govt. of Canada bond. Thus, despite 2010 likely being the first year this decade that PWF will not have increased its dividend, shareholders will still receive an attractive yield. CIBC also notes that PWF’s discount to its NAV is 7.4% at the end of July, against 8.6% over the last 5 years and 9.4% over the last decade, and therefore it is not particularly cheap compared to its recent history. Given that PWF has underperformed the S&P/TSX Financials Sub-Index for 4 of the last 5 years, and is lower in absolute terms than when I made my recommendation in 2005, it seems probable, not to put it too strongly, that shareholders may experience a period of relative outperformance against the financial index over the next few years.