Winnipeg Free Press

Winnipeg Free Press (Newspaper) - February 05, 2014, Winnipeg, Manitoba C M Y K PAGE B6 B 6 WINNIPEG FREE PRESS, WEDNESDAY, FEBRUARY 5, 2014 winnipegfreepress. com FINANCIAL POST M A RT I N P E L L E T I E R On the Contrary B en Bernanke is leaving the U. S. Federal Reserve after overseeing the largest financial experiment ever - quantitative easing, which flooded the market with cheap liquidity, expanded its balance sheet to nearly US$ 4- trillion and had a profound impact, both good and bad. There is little doubt the recovery in the U. S. economy and its underlying stock market is a direct result of the Fed's actions. The U. S. is now leading the developed world in economic growth thanks to a strengthening housing market and a healthy consumer who is leveraging up once again by buying more goods. A stock market reaching new all- time highs also certainly helps provide a lot of confidence that things are going in the right direction. However, we believe it's not all rainbows and unicorns. The U. S. never really dealt with its most serious problem and the actions of the U. S. Fed unintentionally compounded it. That is, an unchecked Wall Street employing financial engineering to take advantage of naive investors chasing yield in an environment of perpetually low interest rates. There is nothing wrong with financial engineering, as long as there are rules that are enforced by a regulatory body. The problem is that Wall Street nearly brought down the entire financial system in 2008 and, like an undisciplined child, it is up to it yet again in both the housing and auto markets. On the surface, the U. S. housing recovery has been quite impressive. Existing- home sales have reached pre- financial crisis levels, house foreclosures have fallen to near decade lows, and housing prices are up nearly 14% from last year's levels, posting their strongest gains since February 2006. This is very important to the U. S. economy as the housing market contributes between 17% and 18% of its gross domestic product. Interestingly, all- cash purchases of single- family housing accounted for 42% of all total sales in November 2013, according to data from RealtyTrac. But nearly 90% of these cash purchases are from investors, not Main Street. We've read that investors have purchased more than one million homes in the past three years, focusing in on the foreclosed home market. Firms such as Blackstone Group LP have been buying up these homes in bulk, renting them out, securitizing them, getting a AAA rating and then selling them to yield- hungry investors. Sounds awfully familiar doesn't it? Demand is so strong for these single- family rental securitizations that it has the potential to grow into a US$ 1.5- trillion market, according to a recent Bloomberg report. To expedite this growth, Wall Street is in the early stages of providing financing to small and mid- sized investors involved in the rental housing market with the intent to bundle up these small loans, securitize them and then flog them to other investors. We're also seeing the return of the subprime market, but this time it's moved from housing into auto loans. Auto sales have rebounded, helping send automaker and related company share prices upward. However, in order to sustain this growth, the auto market has turned to those who normally cannot afford a car or truck by offering subprime loans with lengthy amortizations. Subprime auto loans have grown to account for more than half of the used auto market and a quarter of new- vehicle financings as of Q3 2013. Wa l l S t r e et ha s q u i c k l y caught on, packaging them up, getting a strong rating, and selling them to investors. For example, Exeter Finance Corp., owned by Blackstone Group, issued US$ 900- million of subprime auto- loan bonds last year. Overall, the return of financial engineering by Wall Street has been quite remarkable and something that most rational market strategists fail to realize. And if they are not fully aware of it, we worry about the unsuspecting investor. Financial Post Martin Pelletier, CFA, is a portfolio manager at Calgary- based TriVest Wealth Counsel Ltd. C O M M E N T Wall Street baits naive retail investors - yet again Favours U. S. banks because of their cash pile B Y J O N AT H A N R AT N E R Strong gains for U. S. equity markets last year and the historical precedent for corrections has Anil Tahiliani preparing for a pullback. After being fully invested at the end of 2013, the portfolio manager at Calgary- based Mc- Lean & Partners Wealth Management started raising cash and hedging the firm's Global Dividend Growth Pool early in 2014. " We've been looking at exiting or trimming positions, where appropriate, that are trading near our target prices," Tahiliani said. " We have a shopping list of highquality, dividend- growth companies that when they pull back, we'll be buying." The manager is also using options strategies, such as buying puts and selling calls on the SPDR S& P 500 ETF, to hedge a significant amount of the portfolio. Tahiliani noted the average peak- to- trough correction during a calendar year since 1980 has been about 15%. But the market only corrects on average 10% if the recessionary periods and the 1987 market crash are excluded. " Given how strong developed markets were, and the fact that investors overcame tapering fears, we want to be ready for a pullback at some point," he said. McLean & Partners manages money for high- net- worth clients and small endowments with a focus on high- quality dividend- paying companies. Manager sets for pullback QUALCOMM INC. ( QCOM/ NASDAQ) The position Top 10 core long- term holding Why do you like it? Tahiliani considers Qualcomm a good way to play the long- term secular trend in smartphone growth and other connected devices as the market expands for wearable devices and connected autos and appliances over the next five to 10 years. " Qualcomm licenses its mobile chip technology to every handset manufacturer and therefore benefits from growth in mobile phones and tablets," he said. The manager highlighted Qualcomm's strong balance sheet - US$ 31- billion in cash - and the US$ 27.5- billion it has returned to shareholders through dividends and buybacks over the past decade. Biggest risk A decline in mobile device sales. CAMECO CORP. ( CCO/ TSX) The position Top 10 holding Why do you like it? The uranium sector remains out of favour with investors because spot prices sharply dipped following the Fukushima disaster in March 2011 . However, Tahiliani noted the Japanese government and business leaders remain pro- nuclear given that the high cost of importing LNG has a huge negative impact on that country's deficit. The manager pointed out that all 50 Japanese reactors are currently shut down, but 14 have applied to restart operations during the next year. " Cameco is the largest publicly traded uranium company and the third- largest uranium producer, with low cash costs, and high grade deposits in stable regions," Tahiliani said. Biggest risk Another nuclear accident . PRAXAIR INC. ( PX/ NYSE) The position Core holding Why do you like it? Praxair is one of the world's largest suppliers of industrial gases and it recently increased its dividend by 8%, marking the 21st annual payout hike. " It benefits from growth in global industrial production," Tahiliani said. " It also has a strong balance sheet and a high return on equity." Biggest risk A decline in global gross domestic product. LOCKHEED MARTIN CORP. ( LMT/ NYSE) The position Sold recently Why don't you like it? Tahiliani took some healthy profits in this global security and aerospace company after holding it for more than a year. He continues to like Lockheed's long- term prospects, but is concerned about valuation. " We are starting to see some defence budget cuts come through, so there will be a reduction in some of Lockheed's smaller programs," the manager said. " It's also pretty much close to full value as the stock has kind of run ahead of itself." Potential positives More military conflict. M A N A G E R P R O F I L E Manager Anil Tahiliani, McLean & Partners Wealth Management Ltd. Fund McLean & Partners Global Dividend Growth Pool Description Bottom- up core, large- cap dividend- growth fund, primarily focused on North American equities AUM $ 600- million Performance 1- year: 24.2%; 3- year: 9.3%; 5- year: 9.9%; 10- year: 6.4% ( as of Dec. 31, 2013, gross of fees) MER 1% to 1.5% ( subject to investment size) B U Y & S E L L BIG- PICTURE VIEWS, CURRENT ISSUES, OUTLOOK AND PICKS B U Y S E L L The firm's assets of approximately $ 950- million are split between segregated accounts and six pooled strategies, including the Global Dividend Growth Pool. The portfolio's largest overweights are in industrials, financials and technology. " We like industrials because they typically have 12 to 18 months of visibility in their order books," Tahiliani said, noting the sector's companies benefit from strong U. S. growth, the recovery in Europe and improvements in China. For financials, he pointed to the positive impact on net interest margins U. S. banks should see from rising bond yields for the past six months. " A lot of the U. S. banks are sitting on significant excess capital, so we're going to see increased dividend payouts over the next year and more share buybacks," the manager said. Financial Post jratner@ nationalpost. com A shopping list of high- quality, dividend- growth companies KEITH MORISON FOR NATIONAL POST Portfolio manager Anil Tahiliani likes industrials because they benefit from strong U. S. growth. Follow us APPLY BEFORE APRIL 3 BDC. CA/ YEA GRAND PRIZE $ 100 , 000 TO GROW YOUR BUSINESS Are you an entrepreneur between 18 and 35, and have a project that will take your business to the next level? B_ 06_ Feb- 05- 14_ FP_ 01. indd B6 2/ 4/ 14 7: 42: 28 PM ;