Last week I reported on the negative quarter of GDP growth for Canada. I also suggested that the Bank of Canada would hold rates. That was an easy call you might say, and as expected the overnight rate was held at 5%. That’s a slight sigh of relief perhaps for mortgage holders. But the bond markets offers that rates are not coming down any time soon. In fact, bond yields increased. The gov 5-year went from 3.83% up to 3.96%. Bank of Canada Governor Tiff Macklem said that they are ready to raise rates again, if needed. The bond market was listening. It’s good news for savers as savings account and GIC rates and bond yields move higher. Rates are on hold on the Sunday Reads.
Here’s the post from last week, noting the recession watch in Canada. Keep in mind that the GDP decline was very slight, and employment and income are more than holding up in Canada. While the economy is softening, the call between a soft economic landing and a real recession of some sort is an impossible guess in September of 2023.
Here’s the overnight rate vs the inflation rate by way of MoneySense.
Simple and cheap investing works
The world changed in 2020 with the first modern day pandemic. The invasion of Ukraine that helped to break the supply chains and short circuit economic events (and economic thinking and modelling) even more. The first modern day pandemic unleashed unexpected and high inflation.
In that invasion of Ukraine post I offered …
Are you ready for war, nuclear war, or a pandemic that might be worse than the last two years? How about a prolonged depression? Stagflation? The last two years have taught us that the unthinkable can happen. The key is to be prepared and aware. But we should not let fear cause investor paralysis. We can manage the risks for most any environment.
We need to stay invested.
And sure enough, through all of the above, simple and cheap ETF portfolios have delivered some very solid returns. I’ve updated the …
Returns for the core ETF portfolios.
Readers will know that I also like some inflation-fighting assets in the mix. Energy stocks and the Purpose Real Asset ETF (PRA/TSX) delivered wonderful gains from the time of the pandemic and would have boosted the returns over the last 3 to 5 years.
From the time I put Canadian oil and gas stocks on the table in 2020, outrageous returns were available. I continue to hold and add.
As always, embrace an investment plan, and stick to it like glue.
If you want sensible low-fee ETF portfolios with advice and planning, check out …
Justwealth – Canada’s top robo advisor.
Making sense of the week
At MoneySense Kyle made sense of the markets for the week. He touched on the rate hold in Canada and offered some good insights into the deep troubles in China.
Kyle also looked at earnings from Couche-Tard (ATD/TSX). The gas bar retailer is a pick in the Canadian Wide Moat Portfolio. The stock is up 18.8% over the last year and 118% over the last 5 years, not including dividends. The second pick, Brookfield (BM/TSX) is up 58% over the last 5 years. The TSX Composite is up 25.4% over the last 5 years, not including dividends.
At Tawcan, Bob asks if the Smith Manoeuver is a good idea. In that post Bob interviews Robinson Smith, son of Fraser Smith, who has been advising thousands of Canadian families on the implementation of The Smith Manoeuvre.
With the Smith Manoeuvre, you essentially used borrowed money from your home in the form of a HELOC (home equity line of credit), to invest. You can then use the interest from your loans as a tax write off, to reduce your taxable income. The strategy suggests you then use any tax refund to “pay off” the mortgage.
There are a few moving parts, but essentially the after-tax rate of return must be higher than the borrowing costs. That seems a stretch when a HELOC might run you 8% or more these days. Expected returns (before tax) for a global balanced portfolio are more modest these days thanks to the higher than normal valuations of U.S. stocks that dominate the global portfolios.
That said, what do you think? You might understand the math better than me. Please offer your thoughts in the comment section.
I am more comfortable with no mortgage and not borrowing to invest.
Here’s the week in review from Dividend Hawk. I joined the Hawk in welcoming dividends from Enbridge and Johnson & Johnson.
Another week, more GIC rate hikes at EQ Bank. The 1-year moves to 5.75%.
Make your cash work harder at EQ Bank.
And of course one of the big stories of the week was the natural gas asset acquisitions by Enbridge. The company is to become 50 / 50 Canada and U.S. earnings split, and also a near even mix on pipelines vs utility. The company states that the moves will be accretive to free cash flow in year one, and suggest that the acquisitions strengthen their ability to pay and increase the dividend. I am working on a post to look at the numbers.
The consensus is that Enbridge bought some very profitable regulated assets at a good to fair price. There is also growth potential for those assets. The question or risk is the rising debt level, and share dilution (they borrowed funds and issued new shares to fund the purchase).
In the mix from Hawk is ‘the things I wish I knew when I started investing’ podcast from Mike the Dividend Guy.
At a Wealth of Common Sense – the 60 / 40 balanced portfolio is alive and well.
The Irrelevant Investor podcast with Nick Colas from DataTrek suggests that in the EV wars only Tesla and Toyota will survive. I would suggest that we are only in the first inning. The Tesla monopoly is over, but we don’t know who will win. Given that, I invest in the EV and battery ecosystem by way of the Amplify BATT/NYSE ETF. I also invest in the “green” metals by way of GMET/NYSE. They are both very modest positions in my TFSA.
While I’m on board, I think that the EV adoption targets are pure fantasy.
At Findependence Hub, Pat McKeough suggests that we focus on the blue chips and hold the good ones forever. I think Warren Buffett would agree.
At stocktrades.ca Dan gives us 11 Canadian stocks to buy in 2023. That’s a good list for consideration. Dan often offers growth ideas beyond the traditional Canadian large cap approach.
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