Free Trade in the S&P TSX

So, you want to buy them from us? It’s generally conceded that the Canadian Economy is 80% foreign-owned. For example, the Canadian Oil Sands projects and properties are said to be at least two-thirds foreign-owned already (ForestEthics, April 2012, or the numerous more detailed studies of the Conference Board of Canada). We don’t know whether that’s good or bad for us (and opinions differ) because the answer that economics provides (free trade and laissez-faire) is not one that we or anyone else can actually live with for very long. Please see our Postscript below.

However. we can provide Our Own Solution (OOS, so to speak, or, in German, as a demonstration of our global reach, the Unwahrscheinlichkeit Selbstbestimmte Aufrechnung (or USA, it seems)) to this problem as investors who are as “world class” as anyone else. After all, with the indebtedness that is required in order to develop our resources and technologies, and to market and sell them to friendly customers, and strangers, we could very well become 150% “owned” by “foreigners” if we fail to compete. The issue, then, is how do we get more of our money into the economy (our economy) that everyone wants to buy so that whoever wants to buy it will need to buy it from us rather than we from them.

It ought to be clear, however, that being like everyone else isn’t going to do the job. For example, as passive index investors in the S&P TSX Composite Index, we’d have a +3% return (and no dividends) so far this year. If the index is 80% foreign-owned, then we’ll eventually need to buy it from them at higher prices with less money, won’t we. (Please see our recent Post, Churn, Churn, Churn, September 2012.)

Exhibit 1: S&P TSX Composite Index

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

Buying only (N)’s or substantially only (N)’s is no good either. Of the two hundred and fifty (250) companies in the S&P TSX Composite Index with a market capitalization in excess of $50 million (which is “peanuts” but there are only eighty companies in the market with a market capitalization of over $5 billion (which is still “peanuts” because, what can we buy for $1 billion today – next to nothing), one hundred and seven (107) of them never obtained a (B) rating from us this year and usually longer, and that portfolio has returned a miserly minus (-6%) plus dividends so far this year,  and of these, only sixty- seven (67) actually paid any dividends.

Exhibit 2: The Contra (N) Portfolio – Summary 2012 Year-to-date

Of course, we don’t invest in (N) Portfolios or (N) Companies regardless of how compelling is the National Interest. At the present time, these companies have a combined market capitalization of $700 billion which is about 40% of the total market capitalization of $1,700 billion ($1.7 trillion which is still “peanuts” in world terms) and includes three of our major banks, all of the big insurance companies, some manufacturing, food and retail companies, and a raft of resources companies in mines, potash, forestry, and oil & gas exploration and development (including COS Canadian Oil Sands Limited (N)).

The Free Trade S&P TSX Perpetual Bond™ (please see Exhibit 3 and 4 below) is then a managed portfolio with a domain that consists of exactly all of those companies that are a (B) now and have been or become (B)’s at some time in the course of the year. The cost to buy it (in blocks of 1,000 shares over sixty-four companies in early January) was $1,792,000 and it currently has ninety-five companies with a current value of $3,078,000 some of which is bought on margin. Please see the Portfolio, Cash and Total Lines in Exhibit 3 below. We made seventy-three transactions in the course of year, fifty-two “buys” and twenty-one “sells” using our usual “buy” and “sell” disciplines. The return for this portfolio is +17% for the year-to-date plus earned dividends that will add another 2% to 3% to our return.

The “Market” has returned only +3% so far this year and undoubtedly we will soon be hearing a lot about how unforgiving the market has been this year and a great deal of  “concern” for the economy. We, on the other hand, don’t have to do anything for the rest of the year and if we just set the indicated Stop-Loss Prices (please see Exhibit 4 below) our “holiday” will cost no more than $241,000 even if the market evaporates. We could, of course, do a great deal better if the world keeps wanting to buy our stocks – the ones that we own – and we could, of course, just keep on working.

Exhibit 3: The Free Trade S&P TSX Perpetual Bond™ – Cash Flow Summary

The Free Trade S&P TSX Perpetual Bond – Cash Flow

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

Exhibit 4: The Free Trade S&P TSX Perpetual Bond™ – Portfolio

(Please Click on the Chart to make it larger and Click again to make it much larger if required. Elements of the Chart are also explained in more detail in other Posts such as The “Birds of Prey” Perpetual Bond, October 2012, and several other Posts also discuss other aspects of the Canadian market. Please see Quebec Limited, Alberta & Company, The Nexen Best Thing, The Canadian Bank Act, and (B)(N) Talisman Energy Inc, all from September 2012.)

We notice from the bottom lines of the Chart that ninety-five companies are eligible for inclusion in the portfolio at a current (early October) cost of $3,078,000 if we just buy blocks of 1,000 shares in each of the companies, paying essentially no attention to the relative prices or the market capitalization of the companies (although we certainly could and that can be advantageous if there are big price differences between the companies). The combined market capitalization of all the companies is currently $718 Billion which is still only 40% of the entire market. Three other numbers are significant. The Total Stock Price (SP) is $2,604,000 and the Total Risk Price (SF) is $2,572,000 and the Total Stop Loss Price is $2,836,000 against the portfolio value of $3,078,000 (so that in a hypothetical situation we could incur an 8% loss or $241,000 drop in the value of our portfolio if we are sold out of everything).

Postscript

In the absence of trade, that is, the active buying, selling and exchange of goods and services, there would not be an economy in which we could acquire for ourselves, income, savings and capital (Blue) or expenditures and consumption (Red). (For the meaning of the colours, Red and Blue, please see our recent Post, The Weal of Fortune, September 2012.) For example, if nobody (not even the government in providing a social dividend, so to speak) wanted to buy our talents, skills and services, or buy what we have (even if it’s just our cash) or product or persons, how are we to have an income and how are we to buy what they have or produce?

It does not take a lot of reflection to understand what happens when The Weal of Fortune slows down, stops, speeds up or spins out of control in various shades of Red and Blue, but that is the sub-text of anyone – government, politician, policy analyst, economist, NGO, or whatever – who might have their hands on it, complicated by personal aspirations and limitations, and who might not have to deal with the consequences of what they say or do.

As investors, however, we need to be perfectly clear that we are not investing our money in order to have a better chance to lose it or obtain an inadequate return because The Weal of Fortune has somehow been turned against us. We are investing our money in order to keep our money and obtain a hopeful return above the rate of inflation which benefits money alone cannot provide. And that’s our job as investors and we need to do it well or we will lose our money and not provide the societal goods that we anticipate.

The RiskWerk Company Training Programme

Some of you (Dear Readers!) have asked for training in these methods and the theory and practice that’s involved. We only train customers, and we are delighted to do it, but it’s only in the context of the Perpetual Bond™ that we design for them and which we manage until they are ready to take it over.

The Perpetual Bond™
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The minimum capital is $10 million and will be of interest to family trusts, endowment funds and some charities or private investors. Larger amounts in excess of $100 million and with no limit, will be of interest to private and public pension funds, banks, and insurance companies to manage their equity capital and portfolio. We don’t charge for training but we do charge our usual fee of 20% of the gross capital gains and earned dividends above the high-water mark which begins at zero with the investment capital and continues only while we are managing the portfolio. There are no fees and no loads on the capital so that we expect that you will be earning while you are learning.

Please send us an enquiry at RiskWerk@gmail.com. We’ll be pleased to make the deal that you want.

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Disclaimer

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*.