The Dow Jones industrial average stormed to its highest level in more than a year during today’s trading session…

 

 

 

I recently began rereading one of my all time favorite investment books – Full of Bull by Stephen T. McClellan. McClellan’s a national best-selling author, writer and former Wall Street investment analyst with over 32 years of experience covering high-tech stocks. Full of Bull was his most recent book, where he outlines the ins and outs of Wall Street and provides strategies and tactics for investors. The main premise of the book, as stipulated by the subtitle, is “Do what Wall Street does, not what it says, to make money in the market.” And he certainly shows you how.

 

In Chapter 3, “Strategies in Quest of the Ideal Investment,” he offers several investment axioms adapted from his 1984 best seller Shakeout that protects investors from the snares and pitfalls lurking behind every corner.  As far as I’m concerned, they are time-tested and true and definitely worth reviewing…

 

1. It never rains bad news, it pours
2.  The first drop in profits is never the last
3.  When insiders sell, you should too
4.  Beware of stock price fixation
5.  The bigger their egos, the harder they fall
6. Turnarounds are usually too little, too late
7. If you read it in the morning paper, it’s too late
8. When management says things are bad, assume they are terrible
9. If you don’t understand a company’s business, management may not either, and the more likely a screw up will happen down the road
10. New digs are a bad sign

 

 

Interesting piece from the CBC…

 

Canadians who watched smugly as American regulators cracked down on big executive bonuses, thinking that we do better here, may have to think again.

 

A recent study suggests 12 of the companies in Canada’s TSX 60 index have corporate governance issues that make them a serious risk to investors. Another 10 companies are called a moderate risk.

 

The study was done by The Corporate Library, a Portland, Maine,-based firm that rates the risks of investing in 3,300 North American companies and for a fee provides its findings to big investors such as pension and mutual funds.

 

The 60 companies in the index are big, blue-chip firms, banks and resource companies predominate, that represent 73 per cent of the value of all shares traded in Canada. That means the chances are good that many Canadians hold some of them directly or through their pension or mutual funds.

 

Corporate governance refers to the policies and procedures followed by those who sit on corporate boards of directors and who are supposed to hold executives’ feet to the fire in order to protect the interests of shareholders.

 

The study looked at everything from compensation to how independent directors were from executives. It found several cases where compensation policies did not align the interests of executives with those of the shareholders. One example: discretionary bonuses, those paid even when the company didn’t reach performance targets.

 

“That is something that we picked up in a number of the TSX 60 companies,” Kimberly Gladman, director of research and ratings, told CBC News. She wouldn’t disclose which 22 companies raised warning flags. Someone would have to pay her firm $850 US to find that out.

 

Companies paid more discretionary bonuses than usual last year as the downturn cut into company performance, Gladman said.

 

She found directors gave reasons that amounted to “‘because you’re such a great person, you did such a good job, or you really made a good effort,’” even though the company didn’t make its profit targets.

 

The Corporate Library would prefer to see bonuses tied to several measures of performance such as minimum profit or revenue and that are only paid if the goals are met.

 

“We don’t think that good governance necessarily makes you money, but bad governance costs you money,” said Gladman, who comes from a background in the socially-responsible-investment industry. That means funds that try to achieve both high financial returns and social good.

 

The Corporate Library has even hired an outside firm to measure that. That firm found that investing in the companies in an American index the Russell 1000 minus those the Corporate Library identified as having poor governance, would have earned a 2.5 per cent higher return in each of the five years from 2003 to 2007.

 

American regulators have been focused on executive compensation as never before, scrutinizing thousands of financial institutions on how much they pay their managers. Federal Reserve chairman Ben Bernanke has blamed excessive bonuses for encouraging risk-taking behavior that led to the financial crisis.

 

Here the concern is not with bonuses encouraging risky behavior, but rather those unrelated to performance of any kind, or “pay for pulse.” Those are bonuses that kick in on a certain date, regardless of performance, and which executives collect if they just hang long enough.

 

Beth Hamilton-Keen, senior portfolio manager at Calgary-based Mawer Investment Management Ltd., disagreed that corporate governance policies alone say much about investment risk.

 

“My reaction is that that’s an overreaction,” she said, adding that it would be “very risky.

 

“It’s too narrow, there are too many things you could miss. A company can have great corporate governance in place but just not be profitable.”

 

Mawer has $6.5 billion assets under management which makes it a medium-sized player among Canadian money managers and, with a third of its clients being charitable foundations and not-for profits, takes a conservative approach to investing.

 

When it assesses companies as investments, it looks primarily at profitability and management experience.

 

“Corporate governance isn’t a short cut to identifying good, profitable, companies,” Hamilton-Keen said.

 

Continuing poor corporate governance could be a symptom rather than the cause, she said, an indicator of a broader problem with managerial acumen. And in that case, “we generally vote with our selling feet. If we don’t like the environment that the company’s heading into or the direction that the management’s taking the company, we’ll sell the company.”

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There’s a good chance the big banks are part of the 12 posing as a serious risk to investors. Although more conservative than their U.S. counterparts, Canada’s banks nonetheless engage in similar sketchy activities – I wouldn’t be surprised if all of them are in there.

 

For a complete list of TSX 60 constituent companies click here.

 

 

The Labor Department reported today that the U.S. unemployment rate climbed to 10.2% in October, topping the 10% mark for the first time in 26 years.

 

Nonfarm payrolls dropped by 190,000 in October, bringing to total number of jobs lost in the recession to 7.3 million. It was the 22nd straight decline in payrolls. Large losses were seen in manufacturing, construction and retail. Health care and temporary-help agencies added jobs.

 

The report was worse than expected. Economists surveyed by MarketWatch were forecasting a rise in the unemployment rate to 10%, with 150,000 lost payroll jobs.

 

The unemployment rate of 10.2% was the highest since April 1983.

 

Unemployment rose by 558,000 to 15.7 million, the government said. Of those, 5.6 million had been out of work longer than six months, representing a record 35.6% of the unemployed.

 

Earlier today, General Motors announced its decision to scrap the sale of Opel to Magna International, leaving many politicians, analysts and managers dumbfounded and prompting workers to plan walkouts in protest…

 

 

If you always wanted to invest alongside Warren Buffett, but found it too expensive, you now have your chance.

 

Buffett’s decision to conduct a 50-for-1 split of Class B shares of his Berkshire Hathaway Inc. lowers the price of entry for ordinary investors who long found it prohibitively costly to buy the stock.

 

The split is one piece of Berkshire’s $26 billion takeover of Burlington Northern Santa Fe Corp, and is intended to make it easier for shareholders of the railroad who want to swap their shares for Berkshire stock to do so.

 

Berkshire Class B shares closed Monday at $3,265. After a 50-for-1 split, they would cost just $65.30. Class A shares of Berkshire trade around 30 times the price of the Class B shares, or around $100,000, and are not being split. The split requires approval of Berkshire shareholders.

 

Berkshire Class B, 1-year stock and volume

 

 

Ford, the only Detroit automaker to dodge direct government aid and bankruptcy court, surprised the market today by reporting net income of nearly $1 billion in the third quarter.

 

Hats off to CEO Alan Mulally for his turnaround strategy…I know I’ve bashed the management of Ford – along with GM and Chrysler – in the past for their lackluster performance and stupid decisions, but this is truly remarkable and worth praise.

 

 

Reasons for the Loonie’s recent surge …

 

To understand the loonie’s inevitable move to parity, investors need to look beyond commodity prices, says George Vasic, UBS strategist.

 

“For the longest time, commodity prices were all you needed to know in relation to the Canadian dollar,” said Mr. Vasic.

 

“At this point, however, commodities would only suggest a Canadian dollar in the mid-80’s, and so other factors have also become influential.”

 

Specifically, Mr. Vasic said Canada’s public sector debt ratio, thanks to its better fiscal position, will support the loonie for several years to come, as well prospects for a weaker euro in relation to the U.S dollar.

 

He said more cyclical influences positively influencing the dollar include a higher risk appetite and short-term rate spreads, “the Canadian component of which the Bank has conditionally committed to leave unchanged through mid-2010.”

 

Kate Warne, Canadian market strategist at Edward Jones, said some of these factors affecting the dollar will likely continue to strengthen, but she is quick to point out that when the value of the currency strengthens, the impact on the economy tends to reverse the rise.

 

“For example, Canada’s rising currency is expected to hurt exports, keep inflation low, dampen overall economic growth and possibly lead to a longer period of low interest rates – which all will help weaken the loonie,” she told clients in a note.

 

“The cycles can last years, or decades, but it’s a mistake to assume that any currency will continue to move in one direction long-term.”

 

Source: Financial Post

 

For the first time since 1992, more than 100 banks have been closed by U.S. regulators in a single year. Yesterday, seven banks (three in Florida and one each in Georgia, Wisconsin, Minnesota, and Illinois) were closed pushing the 2009 total bank failures to 106.

 

Check out the diagram below for a look at where the other bank failures have originated from…

 

 

According to a Statistics Canada report, non-residents added $5.1 billion to their Canadian securities portfolios in August. Statistics Canada says the foreign investment was spread among all asset classes, except government short-term debt securities (…go figure, considering government bonds pay next to nothing nowadays). Meanwhile, Canadian investors adjusted their portfolios of foreign securities, moving from foreign debt to foreign stocks for a net reduction of $112 million.

 

Source: Statistics Canada