For a melting summer market, cool Canadian stocks

Here’s a history lesson you didn’t really need. It was a little less than a year ago that the sub-prime mortgage crisis burst onto the scene and grabbed the markets by the throat.

A year later, after periodic shocks and rebounds, North American stock markets are once again melting in the sun.

One of Canada’s most respected investment advisers, Dr. Michael Graham, assesses this unhappy state of affairs in The MoneyLetter.

“Last summer,” he reminds us, “the question was whether high-flying stock markets would falter.” And indeed they did, although not many had predicted that it was a real estate bubble that would bring them down.

“This summer, soaring fuel and food prices are adding to the continuing fallout from these same deeply rooted problems,” adds Dr. Graham. “Weakening growth and rising inflation are always a toxic enough mix to contend with, but I still feel it’s the lost trust that is casting the longest shadow.”

The analyst takes a hard look at what we’ve lost. But he also recommends an elite group of Canadian stocks that may help us weather this violent summer storm.

Shame on them all!

When the chairman of Bear Stearns apologized to employees, directors, and investors, he was met with stony silence.

After rogue trader Jerome Kerviel defrauded Societe Generale (OTO: SCGLY, Stock Forum) of some five billion euros, jeering shareholders accused the chairman of turning the bank into a “casino.”

Lehman Brothers (NYSE: LEH, Stock Forum) keeps saying it’s out of the woods, then wanders back into the forest to try and scare up more money. Stumbling around in there with them are Citigroup (NYSE: C, Stock Forum), Merrill Lynch (NYSE: MER, Stock Forum), and Morgan Stanley (NYSE: MS, Stock Forum).

“What a sorry litany from America’s vaunted investment leaders,” says Mr. Graham. “Shame on them all!”

How different was the reaction at the Berkshire Hathaway Inc. (NYSE: BRK.A, Stock Forum)/(NYSE: BRK.B, Stock Forum) annual meeting in Omaha, Nebraska, where Mr. Warren Buffet and Mr. Charlie Munger received a prolonged standing ovation from their shareholders. Their shares have pulled back as well, but the trust is still there.

“I repeat, it’s an ingredient that couldn’t be more vitally important at a stage when the letdown could seldom have been greater!”

Inflationary shocks

As a result of all this recklessness and greed, we are now faced with a serious case of inflation. Ultimately, it could be the worst case since the great oil shock of the 1970s.

Dr. Graham enumerates the elements of inflation. Although they aren’t included in official inflation statistics, rising fuel and food prices are out in front of the pack. And central banks are pumping money into their respective economies to keep them from grinding to a halt.

The Bank of Canada’s refusal to cut rates caught the markets off guard. The governor, Mr. Mark Carney had to remind the investment community that inflation is public enemy number one. “I’m with Mr. Carney,” says the analyst. “Much better to keep the inflation genie in the bottle, even at a price of more short-term economic pain.”

Nothing is pushing inflation as hard as oil prices. Some observers, like hedge fund guru Mr. George Soros, believe that speculators are the real reason prices are sky high. Others, like Mr. Buffett, believe that supply and demand is still the main engine that’s driving the price up. And indeed, without a real demand for the stuff, speculators could only do so much to push the price higher.

But if, as Goldman Sachs (NYSE: GS, Stock Forum) predicts, oil soars to $200 a barrel, the inflationary shocks will be seismic.

Here comes Mr. Market

In the midst of all this trouble, Dr. Graham believes, it’s time to meet Mr. Market. That’s the character introduced by the father of value investing, Mr. Benjamin Graham, in his classic, The Intelligent Investor.

Mr. Market is a “mercurial but obsessive and often manic-depressive character who shows up every day to either buy or sell to you, whatever you wish,” explains Dr. Graham. If you’re not interested today, he’ll be back tomorrow.

“Often, the more volatile and manic his mood, the better the prices at which he will deal,” adds the analyst. “That’s why Graham’s great disciple Warren Buffet likes to remind how Mr. Market’s offerings can often bring irrationally low prices for solid investments, thereby providing an extra cushion between the price paid and the value purchased.

“Mr. Market could be an increasingly welcome [call] this summer.” In short, get good stocks while they’re down. Good Canadian stocks.

Canada’s elite stocks

Dr. Graham thinks it may be time for an elite list of Canadian stocks, just like the blue chips that make up the Dow Jones Industrial Average.

He leads off with a few timely suggestions. One is EnCana Corp. (TSX: T.ECA, Stock Forum), which is “all the more attractive given its planned separation into two distinct entities – a natural gas company of immense potential and an integrated oil company with unique operating and environmental growth attributes.”

The next logical step in the sequence involves gas pipelines. His two picks are TransCanada Corp. (TSX: T.TRP, Stock Forum) and Enbridge Inc. (TSX: T.ENB, Stock Forum). He recommends these two for “their industry leadership, diversification, and farsighted planning beyond traditional utility regulation.” Staying in the field, he has Husky Energy (TSX: T.HSE, Stock Forum) as a long-standing favourite.

Here are the rest of the analyst’s MoneyLetter recommendations for the “Dow Jones” list, in alphabetical order:

Bank of Nova Scotia (TSX: T.BNS, Stock Forum)
Brookfield Asset Management (TSX: T.BAM.A, Stock Forum)
Canadian National Railway (TSX: T.CNR, Stock Forum)
Canadian Pacific Railway (TSX: T.CP, Stock Forum)
Manulife Financial Corp. (TSX: T.MFC, Stock Forum)
Power Corp. of Canada (TSX: T.POW, Stock Forum)
Sherritt International Corp. (TSX: T.S, Stock Forum)
Teck Cominco Ltd. (TSX: T.TCK.B, Stock Forum)
Thomson-Reuters Corp. (TSX: T.TRI, Stock Forum)
Toronto-Dominion Bank (TSX: T.TD, Stock Forum)
TransAlta Corp. (TSX: T.TA, Stock Forum)
Viterra Inc. (TSX: T.VT, Stock Forum)

Concludes Dr. Graham: “I’ve been an investor long enough to know that the advantage is always greatest when one goes against the crowd.”

That’s a history lesson that investors do need. When the markets are melting, buying quality stocks at low prices always pays off in the long run. Mr. Market says so.

The MoneyLetter

The MoneyLetter is widely recognized as one of Canada’s premier financial advisories. Twice a month, investors across the country, whatever their level of experience, profit from its far-reaching coverage. The MoneyLetter features the expertise of a high-powered team of contributors from many areas of investing. They share with their readers an “insider’s” knowledge of the market – the knowledge that has made them wealthy. The MoneyLetter’s expert columnists cover the full spectrum of investments available to Canadians – Canadian and foreign equities, exchange-traded funds, income trusts, and much more.

http://themoneyletter.ca/

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