Carmen and I have just returned from a week in the mountains of Colorado, where I enjoyed "Spring Training": hiking in the high country to see if we could handle the altitude. This was part of our Kilimanjaro preparations. The big expedition remains scheduled for next January.

Our son is currently in Saudi Arabia. His firm was awarded the daunting project of developing a long range land-use plan for the holy city of Mecca. David's role is housing - a major challenge for a city that has to accommodate millions of pilgrims annually. Liz will be here next month. She has been invited to speak at the Banff World Television Festival. Carmen is about to head off to Italy. She has been invited to play with the Rome Festival Orchestra. I'll stay home and take care of the dogs.

Rocky Mountain High - in Colorado! with cousin Charles and sister Penny

Where We Are

However, the Canadian dollar has also been strong, gaining 2.5% to the end of April. This has, to a great extent, overcome the positive results for US and foreign stocks and bonds. The Globe Canadian Balanced Index, which serves as a useful benchmark for most client portfolios, is up +2.0% on the year.

Table 1
2009 Returns to 30 April

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

I've written several times that the economic problems we are experiencing now had their roots in the irrational exuberance of 1994-99. This is, in many ways, similar to how the Roaring Twenties presaged the Dirty Thirties. Chart 1 shows the US stock market comparison between the two eras.

Chart 1

What's Available

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

• guarantees you a minimum 5% annual return on your equity investments every year;
• offers a reset every 3rd year if stock markets happen to do better than 5%;
• gives you a guaranteed lifetime minimum withdrawal benefit at 5% of the account value at the time of the first withdrawal;
• offers resets on your withdrawals every 3rd year if the markets value of your portfolio is higher than the initial amount; and
• offers the ability to pass this pension-like benefit to your spouse upon death. A GRIP may be appropriate for you. Call me at 403-616-3434 for a more detailed explanation.

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.

Mortgage Investment Corporation
We have on offer two Mortgage Investment Corporations that provide short term construction financing to developers across Canada. Projects are mainly in Ontario, Alberta and BC.

One MIC invests only in 1st mortgages; the other has a combination of 1st and 2nd mortgages. Both pay monthly distributions and are RRSP-eligible.

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.

Arizona Real Estate
We now have an opportunity that allows you to participate in the depressed Arizona real estate market. This Calgary-based corporation is investing in foreclosed single-family houses in the southeastern quadrant of Phoenix (the Mesa/Chandler area).

This is a popular area (it is the tech quadrant of Phoenix), and despite high foreclosures the vacancy rate is low. The objective will be to acquire a portfolio of properties, rent them to give investors a 4% cash yield, and ultimately sell the properties whenever real estate values recover.

As part of my due diligence, I flew to Arizona to check out their operation and meet their key people. They have a crew that checks out houses that are up for auction ahead of time, someone who literally bids for the properties on the courthouse steps, several crews who rehabilitate the houses to as-new condition, and a property manager who handles the rentals and/or sales.

This investment has a low minimum threshold, and can be held in a self-directed RRSP.

Foreclosed House in SE Phoenix Area

Second Mortgages in the Calgary Area
We are offering shares in a Mortgage Investment Corporation that is in the business of providing 2nd mortgages to homeowners in southern Alberta.

The MIC has more than 300 properties in the portfolio, and individual loans tend to be fairly small. Second mortgages are obviously higher risk, so yields to investors are in the low teens.

The data is always uncertain, but in the next few sections we'll go over some of the information, and my interpretation.

Economy
The Bank of Canada recently released their latest quarterly economic forecast. While the Bank is a little more conservative than it was 3 months ago, it is still forecasting a relatively mild recession and a recovery by yearend. See Chart 2. I hope it is right.

Chart 2

Management in both countries are slashing dividends, even at firms where the need to conserve cash is not apparent. Apparently the need of shareholders for income is not important to the titans of business. Would that any CEO who cut dividends by 50% would have to take a 50% cut in his pay package!

Chart 3

There was great rejoicing in the press this week because the US employment numbers showed job losses of "only" 611,000 vs 693,000 jobs lost the previous month. Both numbers look pretty terrible to me.

Two leading indicators within the US labour survey are Overtime Hours and Temporary Help. If there is a nascent recovery, both numbers will improve, as employers will ask their current staff to work overtime before hiring temporary workers, and will hire temporary workers before hiring permanent staff.

Chart 4

Chart 5

I've superimposed the S&P 500 Index onto both employment charts. Although the data is both tenuous and noisy, these charts may be useful predictors of when the stock market will enter a prolonged bullish phase. It appears as if major changes in the trend of both data sets occur before changes in the trend of the stock market.

Another "green shoot" appeared in the US housing data. The National Association of Home Builders (NAHB) announced that their Housing Market Index (HMI) had the biggest jump in 5 years! This was greeted with great enthusiasm by the market. The HMI is a confidence index, where 1=terrible conditions and 100=euphoria for NAHB members. I've shown the HMI as the red line in Chart 6. As you can see, the big jump was merely a change in confidence from severe agony to despair - hardly cause for celebration!

Chart 6

Perhaps, just perhaps, the NAHB Index is telling us that the US housing market is reaching a stable low point.

Interest Rates / Currency
The Chairman of the US Federal Reserve has made it quite clear. US short term rates will be staying at or near zero for a long time, and if that doesn't start the US credit markets moving, the Fed will start buying longer-term Treasuries, and drive those rates towards zero.

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 (see Chart 7).

Chart 7

I may be in the minority on this issue. Many observers feel that interest rates will have to rise because the trillions of dollars being poured into the economy right now are certain to create inflation. This is a valid concern.

My view is that the US remains the world's powerhouse economy and the greenback is the world's reserve currency. If the US government wants low interest rates, it will have them, even if the Federal Reserve Bank (the agency that prints money) has to buy every bond issued by the US Treasury Department (the agency that finances government operations). The resulting pressures will get dumped onto everyone else. Europe won't let the Euro appreciate; Japan has enough problems of its own.

Certainly Canada won't let the looney get much above parity. The result will be something called "competitive devaluation", as every country tries to avoid appreciation of their home currency by lowering interest rates.

Last fall, when the whole world financial system was on the brink of collapse, there was a massive rush to the US dollar, even though everyone knew that that was where the problems were centered! Looking forward, I think the same reasoning will apply: the US currency will look terrible, except for all the rest.

Commodities
The US, Europe & Japan are all in recession. Even the emerging markets are showing signs of weakness. Demand for all commodities, including energy, is dropping. I can't see much hope of a rebirth of the commodity boom for quite a while.

Despite that, there is the macro-economic situation that I discussed in the previous section. If the US government artificially holds down interest rates below where they should be, pressures will build within the world economic system. I think it probable that these pressures will get relieved through rising commodity prices, and particularly oil, the one key product that the US can't do without and has to import.

In a world of competitive devaluation of currencies, gold would be a natural safe haven. Right now, however, 1 oz of gold can purchase over 15 bbls of WTI oil, while the historical average has been 10 bbls/oz. Therefore, either gold is 50% over-valued, or oil is 33% undervalued relative to gold. I think that oil represents the better value.

As a side note, the 2008 mining flow-through issue that I recommended to investors last November has closed out after only 5 months, locking in a nice 20% profit on top of all the tax benefits.

Stock Market
I've written many times that the Canadian stock market outperforms foreign markets (specifically the US stock market) when commodity prices are strong. This is primarily due to the fact that Canada is a resource-based country (it is the only developed country that exports both food and energy), and is a combination of the strong currency as well as a strong stock market.

Chart 8

The TSX Index is up 35% since the low of 6 March. However, it remains 16% below the trendline that has been in place since 1932.

Opportunities

The stock market might be up from its Bear Market low, but it remains undervalued. The bargains might not be as great as they were 2 months ago, but the "on sale" sign is still in the window.

I've laid the case in the previous sections that we remain mired in a recession, and there are no signs of an imminent recovery. Therefore, I doubt that the stock market will be offering huge gains over the next while.

This doesn't mean that you should avoid stocks! In a world in which 5-year GICs from the Royal Bank yield only 1.9% and money market funds yield nothing, equity mutual funds can be considered as income plays. Consider:

• a GRIP that's invested fully in equities will give you a guaranteed minimum 5% return;
• my favourite income trust-based mutual fund still sports a cash yield of 11.6%;
• a mutual fund that specializes in energy royalty trusts is paying a cash yield of 8.6%;
• T-series mutual funds will pay a very tax-efficient monthly income that can range from 5% (T5) all the way up to 10% (T10).

I've written in previous letters that the corporate bond market offers exceptional opportunity right now. We have on offer high yield corporate bond funds that pay fixed monthly cash yields of 9.4%, or 9.6%, or 9.2%, or 11.3%. The latter is a global high yield bond fund that is fully hedged back to the Canadian dollar.

Finally, don't forget the non-stock market offerings that I mentioned in the first part of this letter. These have the psychological advantage that since they are not listed on an exchange, their value doesn't fluctuate day-by-day.

• apartment building in Cobourg, ON;
• mortgage investment corporation;
• seniors housing;
• Arizona real estate;
• Calgary-area second mortgages;
• Saskatchewan farmland; and
• (soon) entertainment industry.

TFSA Strategy

At the end of the year, the money market fund will have at least $500 in it. This is the cash that the 2 other funds have distributed during the year.

We can't control what the value of the income trust fund or the bond fund will be; that's up to the vagaries of the market. However, the cash in the money market fund will show us that the two income funds are doing their job of spinning off income.

Borrowing for Income

The strategy that I prefer is called borrowing for income. It is equivalent to someone buying a rental property in the hopes that the rent from the tenant will cover the cost of the mortgage. The difference is that mutual funds don't have property taxes, insurance or maintenance costs, and we don't have to worry about the tenant trashing the place, or skipping town without paying the rent.

One of our suppliers is offering a 3:1 investment loan for up to $250,000 at 3% (Prime + ¾%). With a 3:1 loan, the bank will loan you 3x your collateral. For example, if you had $50,000 in cash or mutual funds, the bank will loan $150,000.

Suppose we took that $200,000 and placed it into a portfolio of income trust-based funds, T8-series equity or balanced funds, and high yield corporate bond funds, for an overall portfolio yield of 8.25%. The monthly income will be $1,375 and the monthly interest payments will be $375. This leaves a surplus of $1,000/mo that can be used to amortize the loan.

The payback will be less than 10 years, and at the end you'll have a portfolio of mutual funds that provides you with a continuing income of $1375/mo.

Please give me a call at 403-616-3434 if this is something that you'd like to pursue.

What's Important to You?