Managed Money Reporter Newsletter — Issue 244, May/June 2008

Editors: Carl Spiess & Allan McGlade

Featured Articles

Market Update

Carl Spiess

Oil prices, US housing crisis and the future of civilization

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management

As oil continues to set record prices, and home foreclosures continue to wreak havoc on the US economy, we find ourselves in interesting times. In several meetings with clients, I have been asked whether I worry that we are nearing the "end of times". With rising energy and food prices, could it be that civilization's era of prosperity is doomed to end? Here are a few of my thoughts and some of the more interesting reading I've been doing to try and determine if we should all run for the hills, or continue to believe in the progress that has historically improved our lives.

Energy prices

First, let's put the energy price spike into perspective...

While prices are starting to impact consumers, we don't think that this will be enough to completely stall the economy. Energy: Consumers starting to feel the pinch Consumer spending on energy, as a percentage of income, is rising but at 6.6% (see chart, right), it is still well below the all time high of 9.2% we saw in the early 1980s. So while energy costs are high, they could be higher.

Consumer preferences are also shifting. As we saw during the oil crisis in the 1970s, expensive gasoline shifts consumer preference towards cars that burn less gasoline. This combined with an interest in alternate fuels, is changing the automobile market and encouraging manufacturers to come up with more fuel efficient products.

The environmental movement is creating more interest in alternate modes of transportation. In response to this shift in public opinion, policy makers are getting in on the action. Locally, more public transit and bicycle routes are being created and pollution taxes are being talked about.

Provincial governments are getting together to set up traded emissions markets. (This is an area of particular interest to me. I did a paper on a proposal for tradable emissions during my MBA back in 1990 and found them to be a very exciting idea for managing pollution in southern Ontario.) This will ultimately limit the energy consumed by industry.

Federally, we are seeing an interest in biofuels. By the way, I have provided a link to a terrific article from Road and Track about some of the facts and fallacies about biofuels, which is long, but as an engineer, packed with facts I found interesting, e.g. E85 (15% ethanol) flexfuel has only 70% the energy content of regular gasoline. Hmmm.

As sceptical as I am about the current state of biofuels, there is some reason to be excited. In 2001, Craig Venter sequenced the human genome. Now he has started a company that is both exciting and scary at the same time. Their goal is to create the first synthetic life forms – micro organisms that can produce alternative fuels. And while he appears to be an egomaniac, this is the next invention that could change the world. If you have time (Al Gore and Google founder, Sergey Brin, took the time to be in the audience), watch this link:

or just know that there could be an amazing new technology, just around the corner, ready to keep the Malthusians at bay.

Here are a few more examples, not directly related to the price of oil but they show that what was previously impossible is becoming reality:

While I believe energy prices will remain high (and in fact, I believe they should be higher to encourage people to think about how they are using fossil fuel and reflect the full cost of their consumption), I don't think that high prices will sound the death knell for our society. I do, however, believe high energy prices will ultimately prompt some very exciting new technology and social changes and some wonderful opportunities for investors. In the short term though, there will certainly be some reallocation of resources which will disrupt the markets – all the more reason to be well diversified!

US housing crisis

Certainly the US housing issues, credit crisis and overall economy continue to be of concern. To put the US foreclosure numbers into perspective, one in a hundred homes in the US is now in foreclosure, in Riverside and San Bernardino, California's Inland Empire, the foreclosure rate was one in every 38 homes! One in 20 US households are behind on mortgage payments. And in many cases banks are not even beginning foreclosure proceedings, as they simply don't want the homes to be left vacant. Didn't we say last year that this was coming? See:

What does the International Monetary Fund have to say about house prices? Canada is in great shape, and other developed House price gaps - IMF countries look over-priced, even relative to the US (see chart, right).

So what to make of the US? The following paragraph, from a much read financial column is full of surprises as it describes why some very smart people feel that despite all that is going on the US will be the dominant developed country for our lives, and for the lives of our children's children. Click the link to be surprised by the logic:

Andrew and I were fortunate to see Bill Clinton speak in Toronto in May. (He, of course, opined that things would go much better with a woman in the white house.) Bill Clinton was very concerned about the fiscal and emotional costs of the War in Iraq, AIDS/HIV, the debt crisis, global warming and the rising price of energy and food. At times during his speech, it seemed the list of challenges facing the world are endless. He did mention that there are many novel approaches being taken to deal with these very serious problems. In spite of his deep concerns about the state of the world, his final quote was "it has always turned out wrong to bet against humanity".

Another optimist we met in the last month was Jeremy Siegel. Author of "Stocks for the long run", his basic premise has not changed since we saw him last in 2003. He is very bullish on the future, See our report on Jeremy Siegel from December 2003:

An interesting point from his lecture - while gold is up sharply in the last few years, in real dollars, $1 invested in gold in 1801 would be worth $1.75 today (adjusted for inflation). Granted, that's up from $1.17 in 2003 (see Prof. Siegel's chart, left) but certainly not the highest it has ever been.

Total real return indices

I am currently reading a book he recommended, "The Triumph of the Optimists", which chronicles 100 years of investment returns from around the world. Stay tuned for a report on that.

However, mine, Jeremy Siegel's and Bill Clinton's are not the only opinions I'd like you to listen to. So to add to our battle of optimists and pessimists, here are two Canadian perspectives, both with seemingly good facts and arguments:

There is a lot to think about in this article, not the least of which is how these themes might affect the markets and your investments. Given these economic outlooks, what's a prudent investor to do? First and foremost, diversify your investments to protect yourself in the short term. Second, be forward thinking in your investment selections. What do you think the world is going to look like in 20, 30, 40 years? There are bound to be some really great opportunities for investors along the way. I welcome your thoughts and comments or any links or articles that you are finding of interest as we work together to develop your personal investment strategy. As always, please contact us if you have any questions on your investments or think it's time for a review of your portfolio.

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Recommended Reading

In case you didn't get enough reading in the previous article, here is some more. Both are information on the markets from ScotiaMcLeod's research department:


Scotia Money Market Fund & the Liquidity Crisis

While the liquidity crisis is off the radar for most investors now, we thought you might be interested to know that the Scotia Money Market fund was not exposed to any of the Asset Backed Commercial Paper (ABCP) that was featured in the news.

Find out more


The BCE Deal & Professional Portfolio Management

As many investors are aware, the BCE buyout by the Teacher's pension plan is not a done deal. As we wait for regulator and court approval of the deal, the share price has fluctuated widely, and many pundits have weighed in on their thoughts about whether the deal will ever go through.

Early in 2008, as part of our due diligence in watching the funds that we recommend to our clients, we met with Shane Jones, the manager of the Scotia Canadian Dividend fund. He was very confident that the deal would go through, and was a big shareholder of BCE in the fund.

In May, when the Quebec court ruled for bondholders and against the deal, punishing the stock the next day, I immediately checked the price of the Dividend fund, and it had not gone down much at all. That evening, at a ScotiaMcLeod function, I cornered Shane and asked if he was such a bull on BCE, why wasn't the fund affected, or had he changed his mind. The simple answer was that he had recently added some undervalued BCE bonds to the portfolio, which went up when the ruling was announced. Leave it to the professionals....

This is a great fund, with a very low management fee, that makes a solid core holding for either taxable or RRSP accounts. You can check out the performance, below.

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Ontario Saving Bonds

Available until June 21st 2008, the next set of Ontario Savings Bonds are now available:

  • 2008 Series Variable-Rate Bonds pay 3.00% per annum for the six-month period commencing June 21,2008.
  • 2008 Series Fixed-Rate Bonds pay 3.50% per annum for the 3 year term commencing June 21,2008.
  • 2008 Series 5 year Step-up Bonds pay 2.60% for the first year, and climb to 4.00% for year 5.
  • Previous year Variable rate bonds now pay 3.00%.

For more rate information visit:

or call us for rates on other available guaranteed investments.


Community Involvement

Carl & Darryl Fox with the Tour of Hope van

Tour of Hope

In May, Carl and Andrew were present for the unveiling of Terry Fox's Marathon of Hope Van in St. John's (see photo, right). ScotiaMcLeod is helping to sponsor the Fox family as they drive across Canada and complete the journey that Terry started. The van left Newfoundland on May 25th and is heading across the country, with a stop in Ottawa on July 1st for Canada Day celebrations, with plans to be in Toronto in mid July - details TBA. For more information on summer events near you or to make a donation, please visit:




Spiess McGlade Team at the Rat Race

Spiess McGlade Team at the United Way's Rat Race

In June, Scotiabank's Rat Race for United Way featured several runners from your ScotiaMcLeod investment team (see photo, right), raising funds for the United Way.






Recommended Link of the Month

Who would believe that a music video about Fed Chairman, Ben Bernanke, performed by Columbia Business School Dean, Glenn Hubbard, can be funny. Especially if you are a fan of the Police, economics and parodies...



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