Old Guys Getting $crewed - and it's not about Viagra!

Large US banks nearly destroyed the World economy when sub-prime mortgages, asset backed commercial paper, credit default swaps and other imaginary investment vehicles proved unsustainable. Sub-prime mortgages were a bad idea in and of themselves, then the BIG guys added insult to injury by bundling them into $100 Million packages and selling them to each other and off shore banks. Have they no conscience? On a positive note, the market collapse exposed flakes like Bernie Madoff and lesser Ponzi practitioners.

The US government stepped in to bail out the banks to the tune of hundreds of billions of dollars. Then, to stimulate a struggling economy the US Central Bank reduced interest rates to very near zero. The banks took their bailout money and took advantage of low interest rates. In the process, they managed to squeeze another point or two into the deposit/lending spread, enabling a miraculous recovery.

America’s second largest bank, J P Morgan (JPM:NY), managed to repay their full $25 Billion TARP loan in June of 2009, a scant eight months after receiving the funds. Heck, at that rate it was more like a revolving line. $25 Billion here, $25 Billion there, who cares? For the quarter ended September 30, 2009 J P Morgan reported profits of $3.59 Billion. Quite a turnaround in one year!

Naturally, the Canadian economy suffered along with the US. The overall slowdown along with the near collapse of the automotive sector forced the Canadian government to step in with stimulus money. The Bank of Canada went along for the ride and reduced interest rates to near zero.

Like the US banks, Canadian banks did very well during the recovery period. Similarly, Canadian companies benefited from historical low interest rates and continued to turn in decent numbers throughout the downturn. Young Canadians snapped up real estate and no longer asked, "how much house can I afford?"   Rather, the new question is "how much mortgage can I afford?"   At these rates, they can afford BIG mortgages. This undoubtedly contributed to the escalation of real estate values...during a so-called recession!

Good for the banks, good for business, good for young people buying homes. So who’s getting shafted by near zero interest rates? The Boomers! (that’s me) and elderly Canadians (that’s not me…yet).  Canadians who worked hard and saved all their lives are now offered  .5% in a Bonus Savings Account or 3% for a 5 year GIC.

The Bank of Canada provided the ultimate insult with the annual issue of Canada Savings Bonds. Remember the ads? The falling leaves…the flying geese. Yup, The Bank of Canada spent mucho dinero advertising CSBs, and they were paying…are you ready for it? .40%! Yup, four tenths of one percent for our hard earned money. I’m all over that. NOT!

My own retirement a number of years ago was based on deposit rates in the 8-10% range.

Hi Ho, Hi Ho, it’s off to work I go!

Plans For 2010

My last post was prepared in a bit of a fog on the Monday morning following the festive season. Since then, I've looked into things more closely and discovered some interesting numbers.

My portfolio has three main components. The largest is an account with a fund company which includes just two funds, both of which I've previously mentioned, the Canadian Resource and Endeavour Funds. The next account is a basket of five seg funds with a life company. It's one of those guaranteed income accounts...if I live long enough. Finally there's my trading account which a self directed RSP with a discount broker. As mentioned before, this is my smallest account and I have the most fun with it.

The value of my trading account increased by 56% in 2009! Whoopee! I started the year with six stocks in this account...four of which were still there at year end along with five new ones. Additionally, there were a couple that I bought and sold during the year. I completed eighteen trades in 2009. Not nearly enough to qualify for discounted active trader fees but at least I feel that I'm moving away from that passive mode. Taking charge...sort of.

One of the stocks I bought and sold within the year was Canadian Hydro Developers (KHD) which was taken over by Transalta (TA). I wanted to buy it when Transalta made the initial offer but had no cash in my account. Their offer was 4.55 but the shares quickly went higher as the market anticipated an increased offer to come. By the time I sold something the Canadian Hydro shares had risen to 5.00 which I paid. I was rewarded a couple of weeks later when Transalta revised their offer to 5.25. I was pleased with a 5% gain in a very short time. Had I been in a position to buy sooner I could have done much better. The lesson...keep some liquidity in the trading account for great opportunities when they arise.

My large fund account was up 34% thanks to rising commodity prices and strong performances by Canadian large cap companies. This account makes up more than 50% of my portfolio and the Resource Fund was a full 75% of this. I was in love with this fund when oil reached $147.00 per barrel. Not so much when oil fell to $33.00. Now that oil has recovered to the $80.00 range and the unit price has responded accordingly I felt it was time to make an adjustment. I rebalanced this account to divide the holdings 50/50 between the Resource and Endeavour Funds. My next step will be to source out a third fund for this account. I’ve done well with all the eggs in two baskets but wonder if a little diversification is in order.

My seg fund account increased by 18% in 2009…but not before going down 40% in the final six months of 2008. We’ve got a long way to go baby! Canada’s two largest players in the seg fund business suffered in 2009 as their balance sheets went out of whack because of the difference between the seg fund guarantees and the actual value of the funds. Not my problem, they’re the ones who provided the guarantees. My plan for this account id to get out of it sometime in the future when the Deferred Sales Charges are fully paid and value of the holdings equals or exceeds the guaranteed value. Guarantees are nice but 5% annual is pretty easy to beat in a normal market…and we all hope for a return to a normal market….right?

Looking Back At 2009

My portfolio is still under water from the beginning of 2007.  Three full years and it's not back yet!  Close, but still down 8%.

On a positive note, my portfolio value clawed it's way back a full 49% from the low point of last March.  I am thankful that I did not succumb to the urge to bail.  It did cross my mind.

We ended the year on a high note.  The TSX reached a new high for the year, 11,779, on December 2.  My portfolio reached a new high on December 30.  It didn't hold for year end on the 31st but very close.

The TSX began the year at 8,987 and ended at 11,746 for a gain of 31%.  The market went up on 146 days and down on 105 days.  The value of my portfolio rose by 33%.  AT LAST!  I beat the TSX!

South of the border, the DOW began 2009 at 8,776 and finished at 10,428 for a gain of 19%.  Once again, I'm happy with my decision of a couple of years ago to stay with Canadian investments.

All-in-all, I think most of us who held on are pleased with the past year.  Others, who took money off the table a year or so ago missed a nice upside but likely slept a whole lot better.  You've gotta do what you've gotta do.  What works for one doesn't work for all.

Here we are at the beginning of a New Year.  Oil, Gold, the Canadian Dollar and the TSX are all going up on this, the first trading day.  Let's keep our fingers crossed.