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Harry Koza

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Garden variety

Harry Koza


TORONTO (GlobeinvestorGOLD) — Ah, the annual ritual of Spring Cleaning. I googled "Spring Cleaning" in a search for a suitable epigram to start this column, and Google returned a host of hits on how to spring clean your house — indoors and outdoors — as well as your wardrobe, your friends, your relationships, and even, rather alarmingly, your gastro-intestinal tract.

These days the market feels like it has a touch of the willies too, like something big and nasty is in the wings, for instance, an episode of gastro-intestinal spring cleaning with some violent Victorian-era purgative compounded from oil of ipecac and mustard powder.

There are rumblings of stagflation, that horror from the 1970s, caused by rising inflation in an economy that is still a ways from full employment. Admittedly, it's fairly benign stagflation, as inflation is a long way from the double-digit rates of that decade, but it doesn't take much to make markets skittish. Which they certainly are these days: the Dow Jones industrial average is down around 5 per cent year to date, Nasdaq composite down 11 per cent, the S&P/TSX composite, buoyed by high oil prices, is up a whopping 1 per cent year to date. Are we having fun yet?

I'm of mixed mind about my portfolio, I must admit. Net of contributions, my RRSP is up about 4.17 per cent year to date, which annualizes to about 12.5 per cent, so I'm quite pleased with my performance so far. But I was kind of hoping for bond yields to back up somewhat higher by now. I had an Ontario coupon (8 per cent yield) mature last month, a Ford 18-month T-bird (at 5.85 per cent) mature this month (whew! I'm glad I don't own 30-year car paper), and I have about 5.75 per cent of my portfolio in Ontario Savings Bonds at 4.625 per cent maturing in June.

I was hoping to roll most of that cash into some bonds at a higher yield. Everybody and his dog — and believe me, the dogs are about as accurate as most forecasters have been — have been calling for higher bond yields since last fall. Ten-year Canada bonds were yielding 4.6 per cent last November, and tumbled to as low as 4.09 per cent in February. Then there was a spike back up to 4.49 per cent in March, and since then, a resumption of the rally (bond prices go up, of course, when yields go down) with 10-year yields dropping back to today's close at 4.138 per cent.

While buying new bonds at today's levels doesn't seem that attractive at the moment, the low yields have had a salubrious effect on the 24-per-cent of my portfolio that is already in bonds. My Scotia BaTS 6.282 per cent, maturing 6/30/13, which I bought to yield around 6 per cent, are up 7 per cent since I bought them. I also bought West Coast Energy 8.3 per cent 12/30/13 at a 6.17 per cent yield, and they are up just under 7 per cent in price. All the stripped coupons and residuals I hold I bought years ago at yields around 8.5 per cent to 9.5 per cent. So all in all, I'm quite happy with my fixed income holdings, but I am a little disappointed at not being able to buy a bunch more at decent yields.

Oh well, my income trust holdings have been pumping out the cash flow as regularly as a herd of contented dairy cows generates milk, with the added benefit of me not having to get up at the crack of dawn to head out to the barn to milk them, not to mention not having to buy a milk quota. My income trust holdings comprise roughly 45 per cent of my portfolio. I've already started my spring cleaning — in January and February I took profits on some of my trust holdings: Enerplus, Bonavista, PrimeWest, Pengrowth (still own some), Innergex, APF Energy, and Boralex. I've since bought back some of the Boralex at about a buck lower. I also bought some more energy trusts: Daylight, Ketch, Tusk, and added to my position in Inter Pipeline. I even bought some Rogers Sugar, yielding almost 9.5 per cent, on the theory that the company is part of a duopoly in Canada, and so almost guaranteed to make money, although, naturally, the danged thing has dropped 4.4 per cent in price since I bought it.

I also took profits on my United Corporations and UTS Energy shares, and bought some Chamaelo, Cinch Energy, Burmis Energy and Breaker Energy. Chamaelo is converting itself to a trust, which should work out to a nice gain on my original purchase. I bought some Alcan at $45.90, which I was feeling quite good about back in early March when it advanced back up to over $50. Now that it is back down to $40.50, I'm not so crazy about it. I'm trying to decide whether to cut and run, or to buy some more if (when) it gets down to $40.00.

I must admit, I'm not at all crazy about the stock market in general these days. If you've been reading my previous columns, mind you, you'll know I haven't been overly bullish on the stock market since the turn of the millennium. Oh, I think the energy trusts are in good shape, and I think the fundamentals for electricity trusts are great (rising prices and a growing gap between demand and generating capacity — what's not to like?), so no worries on that front. As for oil and gas prices, I refer you to that great Canadian geophysicist, the late J. Tuzo Wilson.

The Tuz' once said, echoing the economic sage David Ricardo, that it was physically impossible to run out of oil. Oh sure, we could run out of $2 (U.S.) oil, and $10 oil, but there would always be oil, at a price. In the 1990s, the average price for WTI (West Texas Intermediate) crude was $19.70 a barrel, and Henry Hub natural gas averaged $2.05 per MCF. Since 2000, the average price of WTI crude has been $32.05, and HH natural gas is $4.71/MCF. I submit that those calling for oil to return to 1990 price levels are missing the Ultra-Large Crude Carrier: we've already run out of $20 oil, and maybe even $30 oil, no matter how much of the stuff the Saudis pump, and no matter how much President Bush and Crown Prince Abdullah hold hands and wish it weren't so.

The caveat to the oil story is that every day some investment dealer comes out with a new, higher forecast for oil prices. Recently, C-World (or CIBC World Markets, as they're known on the trading desk) forecast an average oil price for 2005 of $55, and for 2006, an average of $61. Of course, C-World's Jeff Rubin has already predicted $100 oil, and Goldman Sachs has bandied about three digit oil prices as well. It's beginning to feel a lot like Bre-X, when the big dealers' mining analysts vied daily with ever-and-ever higher estimates of how much gold was (not!) contained in Busang. So, ignore the hype: the oil story is about fundamentals — find good long term holds and don't trade the noise.

As for stocks in general, U.S. money supply has been shrinking of late, and without the constant injection of new liquidity to support stock prices, they've been going down. I keep hearing the doleful phrase "secular bear market" used to describe stocks these days.

The pervasive prevalence of that sentiment is keeping me ruefully aware of the old axiom, "sell in May and go away." But, come the summer solstice, when my OSB's mature, I'll have about 12 to 15 per cent cash in my RRSP, and I'm looking for something with some yield. I've stayed out of the financial sector for the most part, but I do own some ING Canada shares that I bought on the IPO at $26 (Canadian). I already have a sufficiency of income trusts — maybe too many — and bond yields, frankly, suck. I've toyed with buying some bank stocks for the dividend yield (better outside an RRSP than inside, though), and I kind of like HSBC Holdings PLC — the world's biggest bank.

HSBC American Depository Receipts (ADR's) trade around $79 (U.S.) and change, and one ADR is five shares. It offers a decent dividend — Bloomberg pegs it at 4.15 per cent and my Telerate terminal says 6.75 per cent, which seems a little rich. If Telerate turns out to be right, I'll be all over these ADR's like government on a bad idea.

The more I think of it though, the better I like the idea of parking my cash in T-Bills or other short-dated paper until markets get back some sense of direction. I noted the headline in a recent edition of The Globe and Mail, "Martin Buys NDP Support." Ten years ago, a headline like that would have knocked about four points off of long bond prices in a few nanoseconds, and, while the parlous state of our Parliamentary Kleptocracy hasn't yet sparked a wave off-shore investors screaming, "sell Canada," it may well be in the cards for the near future. Maybe I'd better raise some more cash.

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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