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Harry Koza

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Harry Koza

The sweet pretty things are well bid now of course,
The market mavens, they're trying to endorse,
The reincarnation of bullish discourse,
But the street has no need to be nervous.

apologies to Bob Dylan, "Tombstone Blues"

TORONTO (GlobeinvestorGOLD) Actually, the street has plenty of reasons to be nervous these days: oil prices; terrorism; dodgy accounting; downright fraud; rising interest rates; elections and potential changes of government in the U.S. and (hopefully) Canada; inflation; deflation; Iraq; Iran the list goes on.

What to do, what to do? Where does the prudent investor put her money in a time when interest rates are rising? Stocks? Bonds? Income trusts? Gold bullion? Lottery tickets? Paying down the mortgage?

Stocks don't thrill me particularly at the moment. Every time I think that maybe the worst is over for equity markets, I look at my screen and see Air Canada's worthless stock still trading at over a dollar a share.

One last time, people: there are two possibilities.

  1. Either Air Canada successfully restructures, in which case the debt holders and Deutsche Bank will own all the new equity and the current shares are worthless;
  2. or it doesn't restructure and gets liquidated and all the current shares are say it together, now worthless.

Punters taking a flyer on Air Canada shares demonstrate yet again that what Federal Reserve Chairman Alan Greenspan once referred to as "irrational exuberance" has not yet been completely wrung out of the stock market.

People keep asking me what I think of Nortel.

Not much.

The company is still trying to figure out how much money it made or lost over the past several years. This boggles my mind. I just don't get this high-tech stuff, I guess. I figure, you make some kind of electronic widgets for $x, sell 'em for $x plus a profit margin, you shouldn't need a column of accountants and a six-pack of Nobel Prize-winning economists to figure out whether you made any money or not. Well, at least not unless you're Long-Term Capital Management.

There're always bank stocks. Every time I pick up the newspaper lately, there's another bank making another largish provision against its past dealings with Enron and its larcenous ilk, or against new class action lawsuits launched against the bank regarding its past dealings with Enron and its larcenous ilk, and on the next page another analyst at a bank-owned dealer is extolling the virtues of bank stocks for the retail investor. But the street, as Dylan might have said, has no need to be nervous.

Then there's Bombardier. Descartes Systems. Atlas Cold Storage. There's a trail of battered and broken former market darlings strewn about the investing landscape like empty beer cans on the shoulders of Highway 11. Bre-X, Livent, YBM Magnex well, you get the idea. The S&P/TSX composite is still down around 3,000 points from its Y2K highs, and frankly, until investors start to recognize that there is a difference between speculation and investment again, I don't think we'll have seen the bottom for stocks.

Perhaps I'm too harsh. I do own a handful of stocks. I kind of like BCE a lot better now that they're back to being just a phone company again. I bought a little for my RRSP several months back, and it has done essentially zilch price-wise for me since, but with a 4.45 per cent dividend yield which is more than five-year Government of Canada bonds yield (and outside an RSP is more like 5 per cent and change) I can live with it. (BCE also owns Bell Globemedia, owner of The Globe and Mail, CTV television and Trade by Numbers.) I like TransCanada Pipelines, too, for similar reasons, though I haven't bought it yet it yields 4.35 per cent. Plus which, one of these days they're going to build that Arctic pipeline. And I've been bullish the oil patch and long some oil stocks (EEE, ECA, and POU at the moment) for years, not to mention a whole herd of mostly energy and resource income trusts (28 now, with yields from 9 per cent to 15 per cent, plus most are still way up from where I bought them) that I plan to milk like a barn full of Holsteins for years to come. (By the way, last month I wrote about Innergex and Boralex Power Income Trusts for the "Road Trip II" issue, and I actually managed to convince myself to buy some of both).

So while I still can't find many stocks I like enough to buy at current prices, I do still really like oil and gas, electricity, and other resource and utility income trusts. If you're looking for yield, this is a good place to start.

Of course, the higher the yield, the higher the risk. But seriously, can we talk? Which would you rather own, a chunk of a stable oil and gas income trust that only pays out 60 per cent of its income but still yields 15 per cent, such as Baytex Energy Trust, or a sweaty high-yield bond rated single-B minus and yielding 8.75 per cent? Risk is relative.

At the other end of the risk continuum, the Ontario Financing Authority (OFINA) has launched this year's Ontario Savings Bond Campaign. This is always an exciting market event that for sheer exhilaration rivals the annual arrival of the latest edition of the phone book.

Seriously, if you're looking for a safe place to park some cash to earn a decent low-risk return, and you aren't going to need your money next week, then OSB's are worth a look. (For any Thomas Pynchon fans out there, OSB is pronounced 'Osbie'. I know it's irrational, but I have a tendency to invest in things that strike some kind of semiotic chord. I doubled my money and am still earning 15 per cent on an income trust with a stock symbol that is the same as the initials of one of my favourite rock bands CCR).

Anyway, as usual this year, OFINA is offering three kinds of Osbies. There's a three-year fixed-rate bond paying 3.30 per cent. This one you have to hold to maturity. There's a variable rate bond, with the coupon for the first six months set at 1.80 per cent. That will be reset higher if (when) interest rates rise. And finally, there is a five-year step up bond which pays 1.7 per cent this year, 3 per cent in year two, 3.50 per cent in year three, 4.5 per cent in year four, and 6.0 per cent in year five. The variable rate and step-up bonds are redeemable at par on June 21 and Dec 21, so if interest rates rise, you can roll out into something else with a higher yield with no loss of principal. Normally, bonds, as every article ever written on the subject must repeat, drop in price as interest rates rise. Osbies don't. This phenomenon is known as a free option, and is something never to be turned down, sort of like the investment equivalent of a date with a pair of twin Swedish fashion models. Osbies are available anywhere you bank or invest, until June 21.

I bought a pile of Osbies in 2002, back when I hated the stock market (Mind you, I'm still not crazy about it). This year I'm going to redeem my variable-rate OSB's and put the cash into adding to my existing stable of income trust holdings, much like a dairy farmer buying a few more cows. My Series 2002 fixed-rate Osbies have another year to maturity and still pay 4.625 per cent. I can live with that.

For the really risk averse, there are still few investments as risk-free (and rewarding, though dull) as paying down your mortgage principal. As for gold, hedge funds, futures, structured notes and all the other myriad investment vehicles out there, I'll leave it to the other columnists in this issue of Trade by Numbers to offer suggestions. Be careful out there.

Harry Koza is Senior Analyst in Canadian markets for Thomson Financial/IFR. At various times in his career, Mr. Koza has been a prospector, metallurgist, project manager, engineer, as well as an institutional bond salesman for 15 years. His current area of expertise is in high-yield distressed securities and corporate bonds in general.

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