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July
Commentary
(7/6/08)
Review of June 2008 Results &
This Month's Changes
Except Energy – Dividend Stocks Smacked
Soaring crude oil prices knocked the market down hard in June, and
dividend stocks got hit big-time.
Except for Canadian Royalty Trusts, which
gained 8%, on average, and our Oil portfolio, which broke even, all of our
portfolios suffered losses, many of them substantial.
Utilities and Closed-End Funds, down 2%, and
4%, respectively, got away relatively unscathed. But from there, it gets
worse fast.
For instance, Master Limited Partnerships
dropped 6%, Canadian Income (Business) Trusts fell 8%, Manufacturing &
Services lost 9%, and our Insurance and Speculator portfolios both dropped
11%. Then came Large Banks, down 12%.
There’s even more. Real Estate Investment
Trusts averaged a 15% drop, Business Development Corporations lost 22%,
and finally, Regional Banks fell 23%.
Our Sample Portfolios all recorded losses,
although not as bad as you might expect from the numbers that I’ve just
recounted.
What Happened?
The startling rise in energy prices became impossible to ignore. A
recession appears inevitable. The market reacted by knocking down all
stocks, those likely to be hurt and everything else as well. The only
stocks that didn’t get hit were those owning oil and natural gas still in
the ground. That’s why our Canadian Royalty Trusts did so well.
What to Do?
This relatively sudden turn of events requires immediate action. While it
would be great if crude oil prices drop, we can’t plan on that happening.
For starters, we're following the advice of
that famous bank robber, Willie Sutton, and go where the money is. In this
case, that means loading up on stocks that do have energy reserves in the
ground. Even if oil prices stabilize or drop, in most instances, share
prices don’t reflect their increased asset values, and moreover, don’t
reflect the rivers of cash flowing into their bank accounts.
Then, priority number two is figuring out
which are the “babies that got thrown out with the bathwater” and which
stocks will truly be hurt by the recession.
Given those realities, we’re making wholesale
changes to our portfolios.
We’re adding seven new stocks and we’re
selling 21 existing picks that we think would suffer in an economic
slowdown.
We’re changing our ratings on 18 stocks to
‘do not add,’ We don’t know how deep of a recession we’re facing and these
are stocks that should do okay if things don’t get too bad. Thus, we’re
awaiting more economic data points before deciding to add to positions or
to sell these stocks.
Finally, we’re making an adjustment to our
Canadian Royalty Trust portfolio which involves changing one pick to ‘buy’
from ‘do not add’ and another to ‘do not add’ from ‘buy’ to optimize the
portfolio’s near term performance.
CANROY Scoring System Progress
Last month, we listed the Canadian Royalty Trusts with the best near-term
(1-3 months) prospects based on a new scoring system that we've been
testing. In June, those six trusts returned 15.0%, on average, compared to
8.4% for the overall portfolio. In May, the four top-rated picks averaged
a 12.8% return vs. 8.2% for the overall portfolio.
Obviously, two month's history
isn't enough to proclaim that the scoring system works. However, we're
encouraged enough by the results to list the six highest rated stocks for
July. We'll report on that portfolio's return next month.
For the details, please go to
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