The crabapples in our backyard are turning bright red. Some of the neighbourhood poplars are starting to turn yellow. It looks as if the balmy days of summer have come to an end. Carmen had a terrifically rewarding time in Italy this summer with the Rome Festival Orchestra. Although she had to work hard, she feels she improved her musicianship immensely. And what's not to like about a month in the Eternal City?

Carmen and Mike with Eve Josephy

Sunflower

I stayed home to dog-sit, and was able to get out in the mountains for some really great hikes. David and Kelly-Anne announced that K-A is expecting. Due date is February. We're going to be grandparents for the first time! Liz reported that she passed her exams at the London School of Economics, and will be entering her final year of studies. We admire her dedication to keep it up midst the pressures of her job and her massive home reno project (which, by the way, was featured in the New York Times!)

Strategic Planning

Chart 1

Asset Allocation
Asset allocation is the process of selecting the appropriate investments for each piece of the retirement income pie.

I think it is fair to say that most of us would be satisfied with a steady return in the 8-10% range. The 2000-2002 and 2008 bear markets have shown that stocks have such huge downside volatility that we probably shouldn't be over-exposed to equities.

At the same time, the yields from government bonds and GICs are so low that we're unable to get the return that we need by sticking to guaranteed investments.

What should we do?

We need equity exposure. Lifecycle funds and Guaranteed Retirement Income Portfolios (GRIPs) will participate on the upside yet have guarantees that help investors to remain calm in the face of market downturns.

On the fixed income side, high yield corporate bonds still sport very attractive yields, and prospects are favourable as we emerge from recession.

One family of lifecycle funds that I particularly like provides a guaranteed value at maturity, thereby protecting your capital. At maturity, you will receive the highest month-end value the fund ever achieves, even if that high water mark was achieved prior to you purchasing the fund. This is possible because the manager has to hold a strip bond within the fund such that the value of the bond at maturity matches the high water value.

The Target Click 2025 Fund is currently trading at a 19.4% discount to its high water value. Even if there is absolutely no market recovery, the client will make this gain if held to maturity.

Get a GRIP!
A Guaranteed Retirement Income Portfolio can give the equity portion of your portfolio these features:

• 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.

Chart 2 indicates the historical payments made by Canadian Horizons First Mortgage MIC and CareVest Capital 1st Mortgage MIC since inception. Canadian Horizons is the "wholesale" arm of CareVest, designed to serve clients with financial advisors.

Chart 2

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.

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. Investicare Seniors Housing Corporation 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 redeemable preferred shares in the operating company. The first mortgage comes due on 30 September 2014, and the overall cash yield is 7.0%.

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

                          SPECIAL LIMITED TIME OFFER!
For 1 month only, Investicare is offering the first mortgage to investors without the preferred shares.
The mortgage will come due on 30 Sept 2014, and pays 9.5% interest, paid quarterly.
Minimum investment is $10,000.

Land Development: Calgary & Colorado
We have a mutual fund trust on offer that provides debt financing to a land developer who purchases raw farmland, takes the land through the subdivision and permitting process, installs the services, then sells individual lots to developers or individuals.

Current projects are in Pueblo, Colorado, and Bearspaw, near Calgary. The Pueblo project is a massive staged subdivision in one of the few US cities that is still growing. The early stages are now in the selling phase. The lot sales provide the income that flows back to the investors.

The firm is developing 4 quarter sections in Bearspaw. The municipal government is supporting the idea of a "Bearspaw town centre" on one of the parcels.

According to the principals, the development company is aiming to double their investment over 3 years (ie a 30% annualized return on invested capital). The plan is to give the investors an 11.7% annual return if paid annually, or 11.2% if the investor prefers quarterly payments. The payment can be reinvested if desired. Investors have unlimited redemption rights, with a 5% discount if funds are redeemed in the first 2 years.

This investment is RRSP-eligible, and minimum is $10,000.

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, 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.

Saskatchewan Farmland
We're now able to offer you the opportunity to invest in Saskatchewan farmland.

Saskatchewan land is substantially cheaper than equivalent land in Alberta because provincial laws restrict ownership to Canadians. While Saskatchewan farmland has steadily appreciated in value over the years even with this restriction, were it to be lifted at some point during the hold period the value of Saskatchewan land could triple virtually overnight.

The limited partnership will purchase productive land, primarily in Saskatchewan, and lease it to farmers. During the hold period, the investor will receive a 2.7% cash yield. The land will be sold at the end of the partnership's term, with initial capital and any capital gain from the sale returned to the investors.

This investment may be held in an RRSP. The minimum commitment is $10,000.

Entertainment Industry
NB: this offering is not yet available to the public!

We expect to soon have a limited partnership available that will give you a foothold in the entertainment industry. The LP will provide front-money to bring around 15 world-class acts on cross-Canada tours over a span of 5 years.

The partnership will provide the initial capital, but a Calgary-based events management group will be responsible for all details of putting on the shows. Profits from the events will be split 60/40 between the partners and the impresario, and distributed annually. Projections are that the LP investors could make up to 20% per annum on their invested capital, with the original seed money returned after 5 years.

The first event funded by the partnership will be a noonhour talk about future energy policy to be given in Calgary and Edmonton by Dr. Alan Greenspan, former chairman of the US Federal Reserve. This will be in Q&A format, with Jeff Rubin, former chief economist at CIBC as moderator. The events manager has lined up major sponsors, and the majority of the premier tickets are already sold.

The second event will be a cross-Canada tour by another US personality. The tour will start in Halifax. Details are confidential as the necessary contracts have not yet been signed.

This limited partnership has (I think) good separation between the limited partners and the events manager, and the manager has personal reasons (beyond the potential profits) for working hard to make the partnership a success. Minimum subscription will be a very low $5000.

Where We Are

In the meantime, stock markets around the world are up substantially year to date (see Table 1 below). Corporate bond yields have fallen to more normal levels, reflecting reduced risk of mass defaults. At the same time, government bond yields remain low. Mortgage and other secured credit rates are also low. More importantly, credit is available once again.

Table 1 2009 Returns to 31 August
Equities
TSX Total Return Index	23.7%
S&P 500 Total Return Index (C$)	3.0%
MSCI EAFE Index (C$)	11.2%
Fixed Income
Globe Cdn Money Market Average	0.5%
Globe Canadian Bond Average	5.3%
Globe Foreign Bond Average (C$)	-0.6%
MSCI: Morgan Stanley - Capital International EAFE: Europe, Australia & Far East Globe: Globe & Mail

Among the sectors, the emerging markets have been the stars, up a very nice 35.6% year to date. They have been followed by natural resources at +30.6%, precious metals at +29.7%, financial services at +27.9%, and technology at +25.1%. The laggards are real estate at +13.9% and healthcare at +5.9%.

Despite these good returns, only precious metals have fully recovered from the devastation late last year. On a 1-year basis, gold is up +6.5%

Where We're Heading

The TSX is now trading at 11% below the trend that has been in place since 1932. I think that it will be necessary to have a real recovery and resumption in world economic prosperity for that gap to completely close.

Chart 3

Economy
The Bank of Canada released their latest quarterly economic forecast in July. The Bank is now forecasting that we have come out of recession and have resumed positive GDP growth (see Chart 4 below). If so, the 2008-2009 recession ranks as one of the mildest events that Canada has experienced in the last half-century.

Chart 4

Dividends in both countries (yellow & blue lines) are also stabilizing, a sign that managements are comfortable with their cash reserves.

Chart 5

The G20 Finance Ministers and Central Bank Governors met on 5 September in London. Their communiqué read in part:

"Financial markets are stabilising and the global economy is improving, but we remain cautious about the outlook for growth and jobs, and are particularly concerned about the impact on many low income countries. We will continue to implement decisively our necessary financial support measures and expansionary monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability, until recovery is secured".

These officials are clearly concerned that any incipient recovery underway is heavily dependent upon a continuation of the massive deficit financing by world governments. They have reason to be concerned. Chart 6 shows data from the World Trade Organization. It shows that global trade reversed its terrible plunge in the 2nd quarter. This is definitely a hopeful sign. Nevertheless, world trade remains down 33% from a year ago - a significant drop by any measure!

Chart 6

This is particularly so when so many of the emerging countries depend upon exports to the US and Europe for their own prosperity. The BRIC countires - Brazil, Russia, India and China - may become economic titans in the future, but we're not at that point in history yet.

Chart 7

Housing, and particularly house construction, is really important to the US economy. The construction process itself is very labour and materials intensive. Afterwards, the new homeowners have to fill their home with new appliances, draperies, floor coverings and furniture. The yard needs to be landscaped.

The most recent US data shows that there has been a significant uptick in sales of existing homes. Unfortunately, almost 2/3 of home sales were either foreclosures or bank-owned properties.

House construction can't start without a building permit. Permits are therefore an excellent leading indicator for this sector of the economy. Chart 8 shows the monthly issue of building permits (blue line). This data has been both seasonally adjusted and smoothed. It is uncertain whether the recent uptick is meaningful, or just a small blip similar to the blips in the data that show up in the previous 2 summers.

Chart 8

The official unemployment rate in the US is now 9.7%. Another 7% or so of the employed are part-time workers hoping to get a fulltime job. It has been estimated that around 1/5 to 1/6 of the US labour force is either unemployed or underemployed.

Rather than look at unemployment numbers, I track employment. The news here is still dismal. The recent US Employment Report issued by the Department of Labor Statistics indicated that over 7 million private sector jobs have been lost since December 2007. The bleeding continues. The DLS says that 198,000 private sector jobs were eliminated last month alone.

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. Charts 9 and 10 show this data. There is a small uptick in overtime hours in manufacturing, but the temporary jobs data doesn't show any good news at all.

Chart 9

Chart 10

The Governor of the Bank of Canada has gone on record to say that interest rates in Canada are unlikely to rise until the middle of next year at the earliest. More recently, he has publicly spoken of his concern regarding the USD/CAD exchange rate. Raising Canadian interest rates would make that problem even more of a concern.

The looney is a petro-currency. Chart 11 should make that clear. In fact, barring speculative events like a run-up in the oil price to $140/bbl, the operative equation of exchange is:

USD/CAD = 0.005*(oil price) + 0.56

Chart 11

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 12). President Obama needs to keep the owners in all those houses! I think that it will be the policy of the US government to keep interest rates low through the next 2 years, so that those mortgages can be renegotiated at favourable rates.

Chart 12

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 recovery in the developed world promises to be slow and uneven. 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 has to import and can't do without.

In a world of competitive devaluation of currencies, gold would be a natural safe haven. Right now, however, 1 oz of gold can purchase almost 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.

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 13 shows the history of the Commodities Research Bureau Index of commodity prices. The Index (blue line) has begun to rebound after its gut-wrenching fall last autumn. According to my theory, then, the rising CRB Index indicates that the Canadian stock market will outperform the US stock market (which it has been doing until very recently - note that the red line is trending upwards).

Chart 13

Flow-Through Shares

Junior resource (mining or energy) companies engage in exploration and development of their mineral properties, but don't have the revenues to be able to write off their expenditures against income. The federal government allows them to issue special flow-through shares that permit the exploration companies to pass their expenditures to their shareholders.

Mining flow-throughs have 2 advantages over energy issues: they qualify for a 15% "super" tax credit, and many juniors are so desperate for capital in these markets that they are issuing flow-through shares at little or no mark-up to the market price of ordinary shares. That makes it much easier for the investor to turn a profit.

In return for a minimum $10,000 investment, you get a 100% write-off of the investment against current income (the same as an RRSP contribution), 92% of it being in the 1st year; the remainder over the next 4 years.

If you're in the 39% tax bracket, that will reduce your 2009 taxes by $3,588. In addition, the mining super tax credit reduces your tax bill by a further $1,380. After the tax breaks, your at-risk money is only $5,032.

Does an investment in junior mining stocks make financial sense without the tax breaks? I can't guarantee future profit, but here is how we've done over the past few years:

• In 2005, the partnership dissolved after only 6 months with a $10,000 investment worth $13,932.
• In 2006, the partnership dissolved after only 6 months with a $10,000 investment worth $11,320.
• In 2007, the partnership dissolved after 20 months with a $10,000 investment worth $3,769.
• In 2008, the partnership dissolved after only 7 months with a $10,000 investment worth $12,092.

What's Important to You?