(B)(N) Canada Days – The Cashback Plan

Loonies Now!

Drama. Although there are some reasons to invest in foreign markets (please see below for the good ones), we’re only a charity case abroad if we can’t prove our investments in Canadian equities to be good for an income now and not just maybe good for capital gains and an income later in the distant future in dollars or euros or loonies or something of an uncertain worth when we need them twenty or thirty years from now.

Moreover, if we’re buying investments in foreign equities or properties in currencies which are currently strong against the Canadian dollar, such as the US dollar or euro or the Chinese yuan, we’re betting against a Canadian recovery against those currencies which ought to be a bad bet for the long term and a shady one too if we can’t prove an income from them either now or then.

And if we buy more cheaply priced investments in Russia, India, Turkey, Mexico, and Brazil, for example, should we hope that they will pay our Canadian dollar pensions when the time is ripe?

Loonies Now!

The “Cashback Plan” is a loyalty plan but we’re hampered in that ambition because the Canadian stock market is worth only about $2.1 trillion in the “investibles” (about 190 companies which are currently trading in excess of $1 billion) and that total is only 2.5% of the global equities market in trade and to attract foreign dollars that we might harvest now (and we do harvest them, please see below), we need to convince them to buy our stocks and not theirs without losing the ownership or control of all of our companies to them.

Moreover, the Canadian investibles are not an easy market from which to derive a cash flow because the investibles have a normalized annual volatility (a semi-variance; please see the Exhibit 1 below) of only 6.8% so that even in the (B)-Class Portfolio we should expect only an annual return of 13.6% (twice the normalized annual volatility) plus the dividend yield which is currently 2.7% and pays out $58 billion which is already 60% of the earnings ($94 billion) and, hence, less than $2 billion a year if we own, as investors, less than 3% of it for $60 billion or so.

The Pump

However, the market works like a pump and if we can distance ourselves far enough from the market and what it does with our money, that’s all it is – a pump: the investors keep pumping money into stocks until they need an income (liquidity) or some other factor causes them to sell their stocks in large quantities and, so, we need to be in the market early to catch the upside draw and then to catch the downside flow when it happens (and it always does) with an effective stop/loss program so that we’re not surprised and are both among the pumpers and then among the “pumpees”, so to speak.

The companies themselves are merely the underlying and don’t have much to do with what the investors are willing to pay for them which is currently [P/E] 23× their earnings and twice their net worth ($1.1 trillion) and the “ownership” of said companies but only 1/4th of their total assets ($8.9 trillion) for an aggregate dividend yield of 2.7% and a return of 60% of the earnings ($94 billion) to them.

Those are the facts and the worth or purchasing power of their money in this market is measured by a market yield of 4.4% (the inverse of the [P/E]-multiple) which is an ownership interest because it buys the common stocks plus a dividend yield of 2.7% which is an earnings interest for a total of 7.1% which both decline as the stock prices increase but increase as the stock prices decrease.

In the example below, we’ve taken a “position” of $40 billion in the 2012 market which was worth only $1.3 trillion and $40 billion is only 3% of it which is easily achieved by a handful of Canadian pension funds who might then need to fight it out for the income if all that they’re thinking about is dividends and maybe capital gains which would cause them to sell the stocks which they own and look for others.

However, the (B)-Class Portfolio in the Perpetual Bond is always in the market and it returned all of our capital in the last five years (by 2015, in fact) with no capital risk at all and our portfolio is currently still worth $90 billion – more than twice as much guaranteed and 4% of the current market for the next five years.

Thinking ahead, we can now watch for $90 billion in income in the next five years despite the prognosis above that suggests only $2 billion or $3 billion a year, and count it on a monthly basis to make sure that we’re on plan and we’ll also have a capital of $180 billion at the end of five years to greet the new years thereafter as long as there are investors somewhere who need to earn an income, as above, for which they are willing to pay $23 for $1 of it to net 60 cents in dividends.

The Investibles

In Exhibit 1 and 2 below. we’ve summarized the economics of these companies in the fundamentals and the Cash Flow Summary of the (B)-Class Portfolio for the past five years since 2012 and, effectively, for the next five years but for a scale factor of four (as above) because the investors will always be just the investors no matter what country they come from; please click on them and again to make them larger as required.

Exhibit 1: Canada Days – The Investibles – Fundamentals

Exhibit 2: Canada Days – The Investibles – (B)-Class Portfolio

The Volatility Defense

The Volatility Defense

Pension management has been a disaster for decades for the simple reason that the “volatility defense” which they almost all claim to “maximize returns without undue risk of loss” works (if it’s working) to give the “volatility average” which might produce 8% per year in the long term – the very long term which doesn’t exist – and even that would be a surprise because the market worth in terms of a real income can’t grow faster in the long term than the growth of the economies which support it.

The Bottom Line

Where’s my money?

If your pension plan can’t prove a non-decreasing income benefit now, year after year, whether you take it or not (and we recommend that you do and really invest or spend your money), it isn’t working and that’s the only test that matters.

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

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®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ 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*.