FEBRUARY 2010

REPORT ON BUSINESS

The

New

RULES

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’50s ’60s ’70s ’80s ’90s ’00s

S&P dividend yield vs. 10-year treasury yield

Rule

If you’re takinga risk, you deservea premium for it

mor ruls

aking money was still easy as recently as 2007. If you’d invested injust about anything over the previous two decades and held on, youwere ahead of the game. (Well, apart from tech stocks and Zimbabwe.)Sure, some scolds and worrywarts were muttering about warn-ing signs like sky-high Florida real estate prices and bewilderingnew credit derivatives, but why should anyone have cared? Stocks,bonds, real estate, oil, gold, China, India, Donald Trump—all were climbing up, up, up.So were the retirement prospects of baby boomers. Risk? The only risk was not getting inthe game.

And then it all came crashing down. Now, just about every investment vehicleand strategy is suspect, even though many markets rebounded and posted big gains in2009. Stocks? Still about 25% below pre-crash highs. Bonds? Real estate? Both are beingpropped up by low-interest-rate Viagra from central bankers. Gold? Could be a bubble that’sabout to burst, now that TV pitchmen are offering to buy your llings. Do we need newrules for grim new investment realities? Or do some traditional maxims still offer hope?The answer may be a bit of both.

By Scot Blythe and John Daly

Pre-1958

Memories o theGreat Crash o1929 are stillstrong. Stocksare perceivedas riskier thanbonds. Investorsdemand hetydividends asa risk premium.

1960s

Stocks surge inthe 1960s andearly 1970s, andinvestors aresatised with lowdividends—ornone at all—ithey earn atcapital gains.

1970s and 1980s

The Great Infationo the 1970s erodesthe value o bondinterest paymentsand the xed acevalue that investorsreceive when bondsmature. Bond yieldssoar as investorsdemand a premiumor infation risk.

1990s and 2000s

Dividend yieldsand bond yieldsboth declineas infation abatesand stock andbond prices climb.Investors aren’ttoo worried aboutrisks o any kind.

2008

Investors stampedeinto governmentbonds ater themarket meltdown,pushing down bondyields. Rattled babyboomers, hungryor income, seekout higher dividendson stocks.

For stock-marketstats junkies, it wasan epochal event:In 2008, the dividendyield on Standard& Poor’s 500 indexstocks climbed abovethe bond yieldon 10-year U.S.treasuries or thefrst time since 1958.That signalled aundamentalshit in investors’ perceptions o therelative riskso owning stocksand bonds.

10-year U.S. treasury yieldat constant maturityS&P 500 dividend yield

FEBRUARY 2010

REPORT ON BUSINESS

FEBRUARY 2010

REPORT ON BUSINESS

20151050

19992009

s o u r c e s : ( l e f t ) t m x g r o u p ; ( t o p r i g h t ) i n v e s t m e n t f u n d s i n s t i t u t e o f c a n a d a ; ( b o t t o m r i g h t ) t f c c o m m o d i t y c h a r t s

Rule

Grt sceertn ve

Peter Hodson,

Manager, SprottGrowth Fund

“vu r rdg rgw  28 r rg rr, d grw rrdg  15  16. t ru r grw  23 24. s  g ju w r, u’d g50% r u r grw.p  g w u r u u’r rd  ,  d rk. t  dd  r  ddd.t r ru.s  r gu r  d’r g ur d.hr,grw   r u .t k , u   grwg  100% r,  ud wr r   grwg 2% r 3%. sgrw wr wr r,u  w rd  g, g du u .”

DiviDenD-paying stocksy’ b r    rr, b s&p/tsX  dx  b r 2.8% ddd d .c: t ’ b   rd ddd,b b r r ’ rrd r 2008 d.

Real estate investmenttRusts (Reits)c r (b,  r  rr br    r r   rr)r b r 7%—r r   d qrr  2005.Reit r   drb  7%.

pReeRReD shaResn r  br r  r r  , cdrrrd r  d b 5.8%.g  rb x r ddd,  bprB  ’ q  8.2% r r.

coRpoRate BonDst’r    br r r bd r rz   Dbr, 2008. B rrbd r  d b 6%,  r 220 b  (b)r gr  cdbd  r r, rr   r  100 b  150 b.

tse 300  ds&p/tsx  d

NrteBCEBCESegrSctbnRyBnCdnNtrResrcesRyBnTDTD

Rule

Cn  edge fnd e y rde t ret snd dns? Yes—f t srvves

o 50 ud r r r  mk ng d pr bk rwd r 2003 k,

Hedge Funds for Canadians

, 30  drd. n  27 dg ud  rfd  g -u r d  r u.y  ud w u rg, r rg d rr rd rug  rk dw  2008 d d rg ru.“i’  g    rk. hdg ud r k k—   . t gd w   ur u   ur r    ruru.”—

Jim McGovern, CEO of Arrow Hedge Fund Partners

n e w r u l e s

Rule

Follow ThE muTual FuND hERD’S moNEY,ThEN Do ThE oppoSiTE

Want to know where stock markets are headed? TrimTabs, a California-basedresearch rm, analyzes market swings and signals like ows of cash in andout of mutual funds. Basically, if the herd is ocking to mutual funds, markets areprobably due for a fall, and if fund investors are eeing, a rally may be imminent. Alook at monthly net sales of long-term mutual funds in Canada versus the S&P/TSXcomposite index over the past decade bears out the theory. In April, 2000,a month after the U.S. tech bubble burst, monthly net sales hit $1.5 billion, doublethe level a year earlier. In the depths of a market slump in October, 2002, investorsremoved a net total of $688 million. In February, 2007, as the U.S. mortgage crisisdeepened, net sales surged to a massive $7.7 billion. Over the last three monthsof 2008, as markets plunged and savvy investors like Warren Buffett scooped upbargains, Canadians withdrew $11.4 billion from long-term funds. Get the big picture?

15,00012,0009,0006,000

n   g-ruu ud  cd($ )s&p/tsx d ()

Rice Soybeans Bee Milk Corn Wheat Orange juice Coee Sugar

108% 93% -7% 5% 98% 80% 46% 31% 196%

Rule

neeD investment aDvice? ask youR waiteR, not youR BRokeR

Your dinner plate is an excellent barometer o commodities prices. Many major oodstushave climbed strongly over the past ve years (see chart below), yet have dipped recently, presentinga buying opportunity. Adrian Ravinsky, manager o operations or Buca, a stylish restaurantin downtown Toronto, has one word o investment advice: “Rice.”

Rule

take a closeR look at the inDeX

Individual investors tend to use indexes such as the S&P 500as benchmarks and as a cheap, easy way to diversify by “buyingthe index.” But are indexes suitable for either task? At the endof 1999, more than a quarter of the market value of majorToronto Stock Exchange stocks was accounted for by BCE Inc.,a tired phone monopoly, and its offspring, the grossly overvaluedNortel Networks Corp. At the end of 2009, no individual stockwas as bloated as Nortel was in 1999, but the

S&P/TSX

compositeindex was top-heavy with banks and resource companies.Is it ever a good idea to have so many eggs in just a few baskets?

Rule

Stocks still beat bonds andinfation (atleast until thenext crash)

Rule

Yes, there arealternatives toincome trusts

t x d  r  d  2011. ciBc wrdmr   cd $100 b rd  -r d, b dd    brr.wr r   ?

Rule

waTCh FoR SCammERS’ NEw TRiCkS

y ’  r r b  r-drd   rr  700%.B    rr  d  r-b.t sr cdlrc 60 et  rbb  - r  rd.i ’d d $10,000 1999, ’d  $18,735 dd r. i  tD cd Bd idx dd    $17,612.i ’d d    j    f,’d  $12,308. t  2008-’09 r b b  r 1930, ’   d.

’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Attn: Sir/Madam,I am a Chinese Government registered angel investor based in BeijingChina. I have a huge amount running into Millions o United States Dollars,which I intend to invest into any lucrative project.I am willing to oer the unding in a orm o a direct loan at 7% interest per annum, the loan will span or a period o 5 years and there is anoption or re-investment once both o us are satised with the prot accruedrom the investment.I am also open to Joint Venture at 40% Return On Investment (R.O.I).However, the unds or my investment dealings are clean and does not havecriminal origin, also clean rom Terrorist and Drug activities.Let me know i you require unding or your Business/Project so thatwe can establish a long lasting, reliable and ruitul business relationship. I look orward to doing business with you. Sincerely,Joseph Day LeeTel: +005202474790Email : joedaylee363@yahoo.com.cn

srk fjrg dra r rggrk, d fr wr r gra u-udg g-rrrg,  $268,000 k dr W ar    d dg   $206addrrda u rgu, ugg k l K-gr  Kwkrr wud r