Where to take your portfolio next

January 23, 2008

Continued from Page 1…

Malcolm Macdonald from Brandon writes: With the US in free fall what are the chances of our coming out of this collapse in relatively in good shape.

Rob Carrick: Malcolm, I don't see any way that Canada can emerge unscathed from a slowdown in the U.S. economy (freefall? don't think so). Overall economic activity in Canada is still pretty strong, and so are broad indicators like the unemployment rate. But take a look at specific sectors like manufacturing. It may already be in recession. And what about our housing market? By no stretch is it vulnerable to the same pounding going on in the U.S. market, but it's got to cool out sooner or later. When that happens, expect it to have a chilling effect on the consumer spending that is so important to economic growth. Canada is in a good position economically because our resource sector is being kept busy by demand from China, India and elsewhere. But we are going to feel some pain as the U.S. economy slows down. Layoffs, plant closings, higher unemployment rates, more bankruptcies. Things like that.

Pat Milne from Scarborough writes: Hi, I have two young sons that we are starting to teach about saving and investing. With the market down substantially, it seems like a good time to get them started in the market. Are there any large Canadain stocks that make single shares available for children to hold?

Rob Carrick: Pat, great idea. Unfortunately, the investing community does not make it easy to acquire a share or two for kids to introduce them to investing. You have to buy shares through a broker and ask to have the ownership changed to the child's name and then to have the paper certificate sent to you. There's a U.S. firm called OneShare.com that sells single shares of big U.S. companies as a gift (there's even a cute booklet that comes with the shares explaining how the markets work), but I know of no Canadian counterpart. Can I make a suggestion? Buy some good mutual funds for your sons in an in-trust account. Of course, we're assuming here that you already have registered education savings plans (RESPs) set up for them.

Janet Jones from Ottawa: Hello Rob; We are now retired and would like to add to our pensions through income from our portfolio. We are now receiving dividends from Canadian equities, and are considering adding to our income through REITs and preferred shares. Would this result in our assuming a lot of risk, especially in this volatile environment? Is the income from these two sources safe in this type of environment, and is it taxed favourably?

Rob Carrick: Janet, you've indicated that your primary goal in possibly buying REITs (those are real estate investment trusts for the non-initiated) and preferred shares is to augment your income, not make capital gains. In that context, I don't see a lot of danger in adding these two kinds of securities to a diversified portfolio. Both REITs and preferred shares have been hit very hard lately, so that their share prices have fallen considerably in some cases. This decline is mainly the result of investor jitteriness over the ripple effects of the U.S. subprime mortgage mess, and has little to do with possible interruptions ahead in the dividends paid by pref shares or the monthly cash distributions made by REITs. An economic slowdown could conceivably have some impact in this regard, but top-quality REITs — say RioCan, H&R for example — should be able to deliver the cash. Same with issuers of preferreds, including the big banks. Remember, a bank would have to suspend its common share dividend (a disaster) before doing likewise with the preferred dividend. A quick word on taxes: dividends benefit from the dividend tax credit, which means a much smaller tax bite than interest. And REIT distributions may offer certain tax advantages as well. Depends on the REIT.

Patrick Massicotte from Fort McMurray writes: Thoughts on rebound of Energy stocks...For Example, Suncor shares were trading at over $112 just a few short weeks ago, they are now down to just over $85. That's quite a dramatic drop!

I am sure they will rebound, but do you have an idea how long it would take to get back up to around $110?

Thanks

Rob Carrick: Patrick, I have no idea when oil stocks will get back to $110. Oil prices are murder to predict, and thus it's tough to extend that line of speculation and make a call on oil stocks. On one hand, you've got declining economic growth in the United States and other countries. On the other, there's the still strong economic growth in China, India and other emerging economies. Lots of people are convinced the emerging economy story will put a floor on any declines in demand for oil, and thus oil prices. But this remains unproven. Longer term, demand for oil, oil prices and oil stocks are all going higher because of scarcity issues and rising economic activity. I just don't know how much downside is ahead before we get there.

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