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Quebec Limited

September 4, 2012

Quebec is the largest province in Canada (by area). It has a population of about 8 million people, over 230,000 public and private companies and an annual GDP in excess of $320 billion, ranking it, however, only 10th per capita among all of the ten Provinces and three Territories of Canada. Frugality, of course, is a virtue and in a recent survey by Canadian Business ( “Canada’s 30 favourite Canadian companies”, August 28, 2012), the Jean Coutu Group ranked #1 – “the pharmacy chain’s Quebec customers tend to be incredibly loyal to home grown businesses and, it is said, Quebecers feel especially proprietary about this one, thanks in part to their fondness for the avuncular Jean, who stars in the ads”.

It’s hard to top that – happy as a family (avuncular) and frugal although perhaps somewhat “straightened” on average when compared to the other Provinces and Territories. This suggests that we ought to be able to create a Perpetual Bond™ that is regional in nature and encourages global investments in the local economy and community – The “Quebec Limited” Perpetual Bond™ – which contains only the largest capitalization stocks of public companies that are registered in Quebec and also listed in the S&P TSX Composite Index.

Exhibit 1: (B)(N) The “Quebec Limited” Perpetual Bond – Summary

(Please Click on the Chart to make it larger if required.)

The Table in Exhibit 1 is the Cash Flow Report for the Perpetual Bond “Quebec Limited” since early January of this year. The domain for the “Bond” consists of thirty-four companies (please see Exhibit 2 below for the complete list) of which we were able to buy seventeen (Count) in early 2012 because – and only because – they were (B) according to our rules, that is, the stock price (SP) tended to exceed the risk price (SF) as far as we could tell (please see The Price of Risk, August 2012). Since then we have bought six (Buy line) and sold six (Sell line) and still hold seventeen.

The cost of this portfolio in blocks of 100 shares was $61,300 (Portfolio line) in early January in contrast to the cost of buying them all on the same basis, $103,400 (Companies line). The current portfolio is worth $65,500 (Portfolio line) and we also have a Cash Account of $1,600 for a return on capital gains of 9% for the year-to-date plus dividends which will add another 2 1/2% to the total. In contrast, the S&P TSX Composite Index has returned nothing (Index 0%) and buying all of the companies has returned 4% (plus more dividends). And, of course, buying blocks of only 100 shares is merely notional – we can readily buy blocks of one thousand or one million shares without changing the results. It’s just a matter of money.

But what is 9% plus dividends? Is it significant or not? What can we expect for the future?

Montréal, August 17, 2012 –The Caisse de dépôt et placement du Québec provided an update today on its performance for the first half of 2012. For this period, it earned a 3.5% weighted average return on depositors’ funds. The Caisse’s net assets reached $165.7 billion as at June 30, 2012, up $6.8 billion from $159 billion as at December 31, 2011. Net investment results totalled $5.4 billion for the first half of the year and depositors made a net contribution of $1.4 billion.

The Caisse, as a matter of policy, invests heavily and broadly in Quebec-based companies as well as all over the world and the asset base of $166 billion is more than two-thirds of the total market capitalization of all the companies in “Quebec Limited” (please see Exhibit 2 below). However, there is no distinction in which companies and how much and when it may choose to invest. Its methods (CAPM, MPT and VaR) make no such qualitative distinction and the only distinction is protection against the demonstrated statistical variance and covariance of past “volatility” which is determined only by the demonstrated buying and selling activity of other investors. However, it’s well-known that “volatility is not risk” (attributed to the mathematician John von Neumann in 1943) and it seems, one would think, to be a mean basis for determining company and investment success now and in the future. For more information, please see these Letters, Run, Rabbit! Run and Volatility for the Delta Challenged, June 2012.

To answer the question, we know that 9% is more than 3.5% (200% more) and that the Caisse is hoping for a 10% return by the end of the year but has no idea of how or why that might happen, absent “volatility” in its favour. But that’s mere happenstance and one is minded of instant 40% losses in 2008 and slow recoveries in 2009 and 2010 using the same “protective” methods. The “market” has returned 0% so far this year and one might be cautioned by the 9% drop in March through May of this year (Exhibit 1 Index and Index Scale lines).

In contrast, we know exactly how that 9% return was obtained on a company-by-company basis and we can reasonably expect to continue to do that indefinitely into the future regardless of the markets in toto. And, of course, we have the option (please see The Wall Street Put, August 2012) of simply locking in our gains and doing nothing until the end of the year if 9% plus dividends is enough for us this year.

The “Quebec Limited” Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Loads and No Fees on Capital

Exhibit 2: (B)(N) The “Quebec Limited” Perpetual Bond – Portfolio


(Please Click on the Chart to make it larger if required. These data are also available for free from RiskWerk in a machine readable format.)

The table in Exhibit 2 is sorted by those companies that had the most price gains since the beginning of the year (CHG – Change) and shows exactly whether a company was in our portfolio (B) or not (N) and “buying” and “selling” occurs only on a transition from (N) to (B) (“buy”) or (B) to (N) ( “sell”) and our usual discipline of “buying” and “selling” is enforced. Please see, for example, No Stock Is Forever, August 2012.

It is noteworthy that the top two companies, Alimentation Couche-Tard Inc and Heroux-Devtek Inc, each with extraordinary gains of +60% during the past eight months, have been in our portfolio since January and are still in the portfolio, but that the next one, Gildan Activewear Inc with a gain of +50% was not nor is it now and it might be helpful to explore the details of that result. Of the thirteen “losers”, only the Laurentian Bank (-3%) and Power Financial Corporation (-4%) are in our portfolio at the present time.

Exhibit 3: (B)(N) GIL Gildan Activewear Inc

The Dark Line and Grey Zone below it, show the daily stock prices and price volatility of  GIL Gildan Activewear Inc since early 2008. The Risk Price (SF) is shown as the Black Line step-function and is calculated only as new balance sheets become generally available (and may be, and generally are, several months out of date) and the Dark Red Line (also a step-function) shows the Stock Prices (SP) at which we actually bought or sold the stock. We only buy or hold the stock if the Stock Price (SP) plausibly exceeds the Risk Price (SF) and the “selling” discipline and closing price is usually enforced by a “protective put” (which is purchased and often times three to six months out).

The Chart shows that we bought Gildan at $10-$15 in early 2009 and held it through $34 in early 2011 (two years later) and have not bought or held it since because the stock price is below the risk price (Black Line, step-function). The “selling” price of $34 was enforced by a “protective put” and the cost of that was partially offset by an opportunistic (sold) call at $38 which expired without value against our long position.

In contrast, PJC.A The Jean Coutu Group has been in our portfolio since $9 in late 2010 and is still in our portfolio at the current $14 to $15. The stock is trading at $3 above the current risk price (and is therefore in (B)) and has a volatility calculated downside of $1. We have the choice of setting a stop-loss at $14 and possibly being sold out at that price, or buying a “protective put” with strike price $14 in January 2013 ($65 per hundred shares) and at the same time, selling an opportunistic call at $15 ($55 per hundred shares) against our long position. In effect, we can guarantee $14 or more per share for next four months for the net cost of $0.10 per share now. And neither “volatility” nor the “markets” nor “earnings surprise” or anything else can change that.

Exhibit 4: (B)(N) PJC.A The Jean Coutu Group Inc

For more information, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used.

These data may be obtained from us for free by simply sending us an email request at and consist of the three data files S&P TSX (B)(N), S&P TSX (B)(N) Risk Price and S&P TSX (B)(N) Stock Price, or for any of the major North American markets,  in a machine readable format.


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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