We don't have any plans for a mid-winter getaway. We'll be heading to Colorado in April for my high-altitude training, in preparation for Kilimanjaro - still a year away. Carmen heads to Italy in the summer. She has been invited to play with the Rome Festival Orchestra.

What's Available

GICs
The following table indicates our latest GIC rates. Minimum investment is $5,000.

Table 1 GIC Rates as of 22 January 2009
	MRS Trust	Laurentian Bank	Canadian Western Bank	Royal Bank
1 Year	2.25%	1.95%	2.27%	1.15%
2 Years	3.00%	2.75%	3.12%	1.60%
3 Years	3.35%	3.00%	3.37%	1.90%
4 Years	3.50%	3.20%	3.42%	2.00%
5 Years	3.55%	3.50%	3.77%	2.20%

GRI portfolios produce a guaranteed minimum 5% simple return during the accumulation phase and a guaranteed lifetime 5% minimum withdrawal benefit.

Apartment Building
We have a limited partnership on offer that will own an apartment building in downtown Cobourg, Ontario. The building has been completely modernized, with 6 retail units on the ground floor and 8 loft-style apartments above. It is fully leased, and tenants are responsible for utilities. The objective is to quietly collect the rent cheques until such time as the partnership can sell the building for a tidy profit. During the wait, income is expected to be in the 5-8% range. This is for non-registered accounts only, and the minimum is $25,000.

Seniors Housing
We are offering clients the opportunity to invest in a Calgary-based company that builds and operates seniors' residences in smaller centers in western Canada. The firm has lodges in operation in Red Deer, Airdrie, and Claresholm, and projects underway in Kelowna and Cochrane.

The investor will get a pro-rata part of a syndicated 1st mortgage on all the properties, plus common shares in the operating company. The first mortgage comes due on October 2012, and the overall cash yield is 7.6%.

This investment may be held in a self-directed RRSP, and the minimum is $12,500.

Corporate Bonds
The credit crisis has caused interest rates on government bonds to collapse, but interest rates on corporate bonds have shot up to double-digits. I showed in my November newsletter that corporate bonds have a very good risk/reward ratio. If we do end up in a depression, it is comforting to know that corporate bonds were the best-performing asset class during the Dirty Thirties. Last year was the worst year ever for the asset class.

Chart 1

There are several candidates within the mutual fund world, but let's look at one example of the income opportunity available in corporate bonds right now.

A very good corporate bond fund has paid a 5c/month distribution ever since it started. The income from the underlying bond portfolio more than covers the distribution. This fund closed today at $6.02, giving a 10.0% cash yield. Since this is a publicly-traded mutual fund that is marked to market every day, the posted market price will bounce up or down continuously. However, if you can get 10% in cash from an investment that you have no intention of selling, should you care what market price might appear in tomorrow's newspaper?

Furthermore, if you don't need the cash, but instead choose to reinvest the 5c distribution in more units of the fund, is it not in your interest to hope that the price remains low for a considerable period of time - in fact until the day before you want to sell?

History clearly shows us the exit strategy for corporate bonds. Right now the spread between government bonds and corporate bonds is enormous. (see Chart 1) When the credit crisis finally resolves itself, that spread will narrow. A corporate bond that currently sells at 50c to face value will sell at 90c. The result will be a massive capital gain - maybe as much as a double.

Income Trusts
By design, income trusts pay a large portion of their free cash flow to their shareholders. Those distributions have been untaxed at the trust level, but after 2011 they will be treated as a dividend.

The income trusts got hammered last year along with every other stock, despite the fact that the trusts pay very high cash yields to their investors. The thinking (to the extent that any thinking goes on in the stock market!) is that the trusts will have to reduce their distributions due to the recession and/or because of the taxation change in 2011.

Income trusts come in 4 flavours. These are the oil & gas royalty trusts, real estate income trusts, power & pipeline trusts, and business trusts. Most income trust-oriented mutual funds have roughly 1/3 of assets in energy trusts, 1/3 in REITs, and most of the rest in power & pipeline. The business trusts are most likely to be affected by the change in taxation in 2011.

The oldest trust-oriented mutual fund has paid a 6c/month distribution ever since it started. The revenue (i.e. the income from the underlying investments) coming into the fund more than covers the distribution. According to the manager, the 6c/mo is safe even if the energy trusts halve their distributions. As for the tax issue, most companies have depreciation, depletion or resource allowance pools that will reduce the impact of the new rules. He thinks that the market is overreacting.

The fund closed today at $6.11, giving a cash yield of 11.8%. As with the corporate bond fund, the market price will bounce up and down. However, if you can get 11.8% in cash from an investment that you have no intention of selling, should you care what market price might appear in tomorrow's newspaper?

Dividend Stocks
Most Canadian large-cap dividend mutual funds have a heavy weighting in the Big 5 banks. At today's close, the average dividend yield for the banks was 7.4%. The big banks have all been around for more than a century, and none of them have ever cut their dividend!

Every day the Financial Post lists the 100 largest companies on the TSX. Fully 1/3 of these companies - 33 out of 100 - are paying a dividend yield greater than 5%. Of the 2186 stocks trading on the New York Stock Exchange, 720 of them are paying a dividend yield greater than 5%.

Canadian and global dividend funds receive a dividend stream from the stocks in their portfolios. In some cases the internal yield within the fund is greater than 8%. Income investors can get access to that flow of dividends through T-SWP versions of the fund. These pay tax-efficient distribution of 8%, paid monthly.

Dividend mutual funds allow us to purchase a portfolio of the world's finest companies. We will be collecting 8% on our investment while waiting patiently for the world's economy to turn around to the point where we can sell at a profit. A capital gains double is not out of the question.

Borrowing for Income

The reason is simple. If you can borrow at 3% to get a portfolio of corporate bonds yielding 10%, a portfolio of income trusts yielding 11.8%, or a portfolio of dividend-paying stocks yielding 8%, why wouldn't you do this? Particularly when the loan interest is tax deductible, and central bankers around the world have made it clear that interest rates will remain low for the foreseeable future.

The credit crunch has driven up the cost of getting an investment loan, so that it is no longer possible (at least from my sources) to get a 100% investment loan at prime. However, it may still be possible for you to get a home equity line of credit that floats at the prime rate.

Our best RRSP loan rate is Prime + 1.5%
The RRSP contribution limit for 2008 is $20,000
The RRSP contribution limit for 2009 will be $21,000.

RRSP Loan

Suppose you take out a $6,000 RRSP loan in February, with the proceeds placed into a money market fund so that there is no market risk. If you're in the 33% tax bracket, this will give you a $2,000 tax refund, which you'll use to pay down the loan principal.

You have chosen a 1-year amortization of the loan, and have deferred payments for 90 days. By that time you'll have received your tax refund and paid down the loan, so the outstanding principal is only $4,000. You make 8 monthly payments of $512 and a small 9th payment, and you've retired the loan in time for the following February.

Your invested amount is $6,000; your out-of-pocket cost (including interest) is $4,135. The return on invested capital is a cool 45% - government-guaranteed!.

You can scale the numbers I've used in this example up or down to meet your personal circumstances, but you'll always get that 45% return. Keep this in mind this RRSP season!

Preparing for Hard Times

Therefore, you should visit your friendly banker while she is still friendly and get the largest credit line that you can get. This doesn't mean that you have to use these credit lines! Nevertheless, they will be awfully handy if you do lose your job and are without income for a few months. The EI cheque doesn't go very far these days.

Life, Disability & Critical Illness Insurance
If you lose your job you'll also lose the group coverage that you formerly had. You won't lose the need for coverage. It is much easier to get insurance when your personal life is stable. Insurance underwriters are in some ways like bankers. They get nervous when someone who has just become unemployed applies for a large life insurance policy!

Please call me at 403-616-3434. Insurance can be very affordable. The cost of not having insurance - unimaginable!

Table 2 Mortgage Rates as of 26 Jan 09
	Broker Rates	Bank Rates
Variable	3.60%
1 Year Closed	3.99%	5.00%
2 Year Closed	4.75%	5.75%
3 Year Closed	4.75%	5.75%
4 Year Closed	4.39%	5.69%
5 Year Closed	4.49%	5.79%
7 Year Closed	6.00%	7.00%
10 Year Closed	6.35%	7.35%

Mortgage Referral

Where We Are

On the stock market front, you'll be interested to know that you just experienced the 2nd worst performance by the US stock market in the past 200 years. The S&P 500 Index was down 41%. Only 1931 was worse, at -47%.

Compared to that record, Canada was a positive star (the results shown in Table 3 are in Canadian dollars; the fall of the looney cushioned the results from foreign markets). Every stock market around the world was similarly affected. There were no places to hide last year.

The carnage was across all sectors, too. Healthcare was a comparative star, down only -12.6%. Technology was down -35.6%; gold funds down -35.8%; real estate down -37.9%; natural resources down -44.7%. Emerging Markets took the honours for poor performance. This asset class was down a woeful -47.1%.

Table 3
2008 Returns to 31 December

MSCI: Morgan Stanley - Capital International
EAFE: Europe, Australia & Far East
Globe: Globe & Mail

Falling yields equals higher prices, so the return from foreign bonds, when translated into loonies, was truly spectacular.

Economy
From the way that our politicians and the news media are behaving, it would be reasonable to assume that we are in the middle of an economic collapse.

The data tell a far different story. Let's look at a few charts.

Chart 2

Chart 3

Chart 4

On Thursday, the Bank of Canada released its updated forecast (shown in purple on Chart 3) for 2008/09. The Bank is forecasting a mild recession lasting only 3 quarters, with a total fall in GDP of 2.1%. Compare this forecast with the nasty recessions of 1981-82 and 1990-91!

In addressing whether the federal government could or should spend its way out of recession, the Parliamentary Budget Office has written in its own forecast that any planned stimulus by the federal government (and the feds are planning $34B in stimulus over the next 2 years) will not have any effect whatsoever on Canadian economic growth.

"Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies."                                                                    Groucho Marx

Where We're Heading

Economy
If you are confused about what is happening in the US, with trillions of dollars being casually tossed around, you are not alone. Every government official in every country around the world is making up the playbook as they go along.

I'll just repeat what I wrote in my November newsletter:
"The US economy isn't going to grow strongly until the US consumer can get back to spending freely once again. That won't happen until house prices have returned to levels where the home can serve once again as an ATM. And that won't happen until the surplus of unoccupied new and foreclosed homes in the US has been absorbed through new family formation and immigration. And that won't be for another year at minimum!"

I don't think that even President Obama will be able to meaningfully change that grim assessment.

If the US housing market is at the center of the world financial squeeze - and it is - the US will remain in a slump until house prices stabilize and the inventory of unoccupied new homes and foreclosed homes gets absorbed. It will be 2010 before we see the end of the inventory problem. Major resets to adjustable-rate mortgages occur through 2011 and out to 2013. I think that it will be the policy of the US government to keep interest rates low through the next 4 years, so that those mortgages can be renegotiated at favourable rates.

Interest rates are on the way down in Canada too. The Bank of Canada dropped its key rate last week, and the retail banks followed suit. The prime rate is now 3%. Chart 5 shows other interest rates. Treasury bills (green line) are falling. The DEX Universal Bond Index (red line; the main index of bond prices in Canada) has firmly broken below the 4% level.

Chart 5

The consensus in Calgary is that oil prices won't stay down at the $40 level for long. "In 3 months, maybe 6, oil will be back to $70" is the story that I heard over and over during the Christmas holidays. Chart 6 shows the longer history of oil prices. The data is just too irregular to be able to make a convincing case about where the price of oil "should" be. The one bright spot is that the price seems to be holding above $30 despite the discouraging economic news.

Chart 6

I'm not so optimistic. If my prediction that the US will be in a long period of stagnation that lasts at least into 2010 and maybe longer is correct, there will be little demand for lumber for new houses, newsprint, copper pipes, stainless steel, etc, for a couple of years.

I've written many times that foreign markets (specifically the US stock market) outperform Canada when commodity prices are weak. This is primarily due to the fact that the looney is a resource-based currency.

Stock Market
Chart 7 shows the entire history of the Toronto Stock Exchange since its formation in 1919.

Chart 7

In fact, the lows reached in the middle of the Dirty Thirties just returned the index to the level it was at 10 years prior. I would argue that the stock market collapse from 1929 to 1932 was, at least in part, a consequence of the "irrational exuberance" of the previous 5 years. We have never had a bubble even remotely similar to 1924-29 since.

While Canada hasn't had another triple over 5 years, the US had another one from 1994-99. The 2000-2002 Bear removed half of that bubble; 2008 might have completed the process. Check out Chart 8. The red line shows the performance of the US stock market from 1923 to 1940. The blue line shows the performance since 1994.

Chart 8

History has shown that investors will receive higher-than-average investment returns when they invest during times when the market is down. It is even a direct relationship: the lower the market is below trend, the higher the future expected return! It is important to realize that this relationship exists only over holding periods of greater than 5 years. There is no relationship over shorter periods of time.

Toronto is presently trading at 30% below trend; the US market is trading at close to 40% below trend. Clearly, then, you should be considering not merely putting a toe in the waters of the stock market right now, but jumping right in!

To Sum Up
As the Chinese might say, we do live in interesting times. I have shown that this is an opportune time to make an investment in the stock market. Nevertheless, I also believe that we are in an extended period of slow or no economic growth. Therefore, I consider that we should be emphasizing income over capital growth from our investments.

I have already outlined my recommendations in a previous section: corporate bond funds; trust-based mutual funds; global and Canadian dividend funds.

Oil prices may rebound. I feel it more prudent to invest in a royalty trust-based fund than a growth-oriented resource fund. Gold could be an interesting speculation.

Government bond yields are anomalously low. They are guaranteed to lose money over the next 5-10 years.