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Andrew Bell

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Rates also rise

Andrew Bell

TORONTO (GlobeinvestorGOLD)—It is merely a question of when, not if, old Alan Greenspan finally and reluctantly steps on his giant rusty brake, and raises interest rates again. If you think anything else matters, get over it.

Climbing interest rates are like rat poison for equities because investors are increasingly tempted to dump shares to chase higher returns from fixed-income plays. As soon as rates go up, there'll be clever, ironic losses on offer from stocks—especially the high-multiple sorts in skimpy leather bathing suits, the sort with the little tassels. Oh, don't pretend you don't know the ones.

Now, big losses in the stock market are not a great way to get your $200,000 clock ticking, Jimmy. And don't believe bonds are necessarily the safest haven. Yes, rising interest rates also tend to demolish bond prices.

Better to keep a good chunk of your powder dry, leaving three-quarters of the 200,000 in a Canadian money market fund, something with an expense ratio below 1 per cent, will do nicely. The fund filter on GlobeinvestorGOLD can find you more than 25 to choose from. That way you'll have plenty of ammunition left when the target shooting begins as stock and bond markets tumble.

Sure, it's no certainty that U.S. rates will rise from their current 40-year-lows any time soon.

"In 2004, we expect just a token measure of tightening," Citigroup economist Steven Wieting warbled in a Dec. 3 report. But even smiley-faces like him admit that 2005 and 2006 are see the thumbscrews applied, so stocks and bonds are teetering on the edge of a sharp descent as investors get the heebie-jeebies about rising rates. That may have already started: the yield on Canadian 10-year bonds had topped 4.8 per cent by early December, up from 4 per cent in June.

Staggering dollar

Then there's the U.S. dollar, that stumbling, slurry-voiced character who's threatening to ruin the party, the one who broke your toilet. It took just $1.05 (U.S.) to buy a garlic-gnawing schnitzel-gulping euro at the start of 2003. By early December, you needed $1.22 of the increasingly wretched American currency. Morgan Stanley gloomster and chief economist Stephen Roach sees the risk of an "accelerating decline in the dollar."

With the world sliding into Christmas numbness, an overseas investor who bought 10-year U.S. government bonds was nailing his or her money to a yield of just 4.3 per cent. U.S. Treasuries will have to offer fatter returns to compensate for currency losses if the U.S. dollar goes on dropping. .

The gaping U.S. current account deficit means foreign investors will have to supply the U.S. economy with almost $3-billion every business day by 2005, warns Morgan Stanley's Mr. Roach. Meanwhile, invisibly low interest rates mean "central banks have made the riskiest bets in modern history," he says. "The bill for speculative excesses and global imbalances has yet to be paid."

Black gold

So three-quarters of your money should essentially be in a coma, languishing in a money market fund until rising interest rates have worked their mayhem and the U.S. dollar has found some kind of stability. So what about the other 25 per cent?

Here's a sure bet: Saudi Arabia is in for more unpleasant turmoil in 2004, potentially lighting a fire under oil prices, as U.S. efforts to turn Iraq into some sort of democracy cast a harsh light on the Middle East's repressive and socially backward governments.

"There is a high risk of further attacks by extremist Islamist cells on western targets" in Saudi Arabia, says the Economist Intelligence Unit, the data and analysis arm of the Economist magazine. It warns of "popular alienation from the regime over corruption and falling living standards." And unanswered questions fester over the Saudi role in fostering terrorism. The New York Times reported in September that most of the operating budget of the militant Palestinian group Hamas comes from Saudi individuals.

If Riyadh is roiled, investors are going to go looking for plays on non-Saudi oil. And for many, that will mean the Canadian oil sands. So put the risk-taking 25 per cent of your $200,000 into a mixed bag of Canadian integrated oil stocks:

Oh, and don't forget a stake in the Canadian Oil Sands Trust, with its 35 per cent chunk of Syncrude Canada and a nice yield of just over 5 per cent. Leverage to oil? CIBC reckons that the net asset value jumps 17 per cent or so for every $1 rise in crude.

Don't let your windfall turn into a freefall. Interest rates are going to rise, but that doesn't mean your newfound wealth can't rise with them.

Andrew Bell was an investment reporter and editor with The Globe and Mail for 12 years prior to joining Report on Business Television in 2001.

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