The Walker Report
A quarterly commentary by Brian Walker & Mike Vamvakaris
Volume 15 Issue 2 April 1, 2009
Market Numbers We have now had presentations from RBC, BMO,
Index Q1 2009 YTD 2009 Mackenzie, AGF and Templeton on the merits of
S&P/TSX - Toronto -2.97% -2.97% investors having 10%-15% of their portfolio in High
Dow Jones - New York (US$) -13.30% -13.30% Yielding Corporate Bonds. These bonds, just like
S&P 500 - New York (US$) -11.67% -11.67% stocks, have taken a beating and there is no doubt that
Morgan Stanley World (US$) -12.50% -12.50%
Morgan Stanley EAFE (US$) -14.64% -14.64% there will be some defaults on the corporate bonds,
(Europe, Australasia, Far East) making a bond fund the best vehicle to buy these
Source: TD Newcrest (as of March 31, 2009) investments. In fact there are bond funds that buy
corporate bonds hoping the company will default and
Bravo Ford Motor Company enter bankruptcy. When this happens companies,
I was interested to read in a recent Globe & Mail before re-emerging from protection, will either settle
article that the Ford Motor Company had reduced its on a price to redeem the bonds or exchange their
debt by 38% or $9.9-billion - remember a billion is a bonds for new stock, and the funds generally sell
thousand million or in layman’s terms “a lot of these at a significant profit based on the price at
money”. which they purchased them.
We think Ford has a lot to be proud of. They have The bond funds we have been buying are not these
not taken any Fed money, have introduced some “Vulture Funds”, but just regular funds buying
clever promotional initiatives, and judging by the corporate bonds that are priced similarly to those
automobile driver reports, introduced some well built Ford just repurchased. Currently the spread between
attractive cars and have been smart enough to reduce what Government T-Bills are paying and the yield on
their debt by buying it back at a substantial discount. corporate bonds is greater than 15% and the funds are
The article mentions that $2.2 billion of debt was paying out to our investors around 8%-9% annual
purchased at 47 cents on the dollar or better than half interest. As the spread contracts between Government
price, and we expect the balance was acquired at a T-bills and these bonds and as the economy recovers
discount as well. We are at a unique period in recent we should see, based on previous experience, double-
history where, in theory, if a company could borrow digit capital gains plus the interest payment. If you
the necessary money from its bankers they could buy are interested in hearing more about these funds, the
their debt back between 50%-70% of the cost at risks and how they work, please give Mike or myself
which they sold it. The problem is that the bank will a call.
not lend the money to do this under current
circumstances. However if they were prepared to do GICs with a difference
so, the debt could not be bought at this discount. Many of the fund companies recognizing that
That is a catch 22 if ever I saw one. This leads me to investors are weary of the market volatility, are being
the next article on Corporate High Yield Bonds. creative in some of their product offerings and have
re-invented the Guaranteed Investment Certificate or
Corporate High Yield Bonds GIC. These investments guarantee the investor’s
Timing is everything, and our recommendation principal with a minimum yield guarantee, coupled
regarding Corporate High Yield Bond funds a few with a maximum yield, based on the performance of a
weeks ago was a little premature. As we saw limited number of blue chip securities.
previously, Ford repurchased some of its debt at 47
cents on the dollar. In simple terms this means that a As an example, there is one from BMO that has a
bond Ford issued for $100,000 has been bought back term of 2 years, requires a minimum investment of
for just $47,000, saving the company $53,000 it $2,000 and guarantees a yield of 2% (1% per annum)
would not have realized if it had waited until the and a maximum of 5% per annum based on how well
bond matured. In this instance, assuming Ford was the basket of blue chip stocks perform. If the stocks
still paying the interest on the debt, the bond was do better than 5% per annum over the next 2 years
yielding twice what it was when issued. BMO will keep the surplus.
Key Benefits We have a number of clients working at Air Canada,
• The ten blue-chip securities in this GIC represent and naturally they are concerned for their jobs, their
Canadian industry leaders from a variety of pensions and the repercussions they expect from the
sectors new management (who appear as tough as nails).
• 100% principal protected Maybe this is what Air Canada needs to get the
• A minimum guaranteed return, regardless of the company sorted for the long-term and for their
employees to enjoy job security - let’s hope so.
• Potential additional returns
• Guaranteed by Bank of Montreal Bull or Bear Market Rally?
• Eligible for Canada Deposit Insurance Definition of a Bear Market Rally: An increase in prices
during a primary trend bear market is called a bear
This is just one of the guaranteed investments we are market rally. This market rally is sometimes defined as
receiving information on each month. We think these an increase of 10%-20%. Bear market rallies typically
types of investments might be interesting to clients begin suddenly and are often short-lived.
who just want a guarantee and are willing to accept Source: Wikipedia
less than the return offered on a typical GIC over the
same term with the opportunity of perhaps exceeding Since March 10th we’ve had four consecutive weeks
the base rate. of market gains that have moved the TSX up by 20%
What do we think? I doubt very much we would ever from its lows. As the definition above indicates we
contemplate buying this investment for ourselves, believe this to have been a bear market rally, and we
since it is highly probable that the basket of expect several more before the markets stabilize,
companies will do much better than 5% per annum maybe sometime later this year or early next. Best
on average over the next two years. Of course if you action to take is to buy on the dips.
do buy these investments, we earn a 1% commission Energy
paid by the manager. For more information on this I was reading a few weeks ago about a gentleman
and other similar ones please give us a call. who had made a huge amount of money by investing
Air Canada in energy stocks and selling just prior to oil reaching
As I sit here finishing our little newsletter on Monday $147 a barrel last year. Too bad I cannot remember
April 6th looking out and watching the snow fly, and this gentleman’s name, but what did interest me was
anticipating the threat of freezing rain, I can hardly the fact he intended getting back into energy stocks
believe that two weeks ago I told Damaris and Adrian sometime this year.
I’d had enough sun, sand and sea and was ready to get A recent conference call with an AGF resource
back to work. Air Canada, we read, is very close to manager and Sprott confirmed their belief that oil has
entering bankruptcy protection again, but they did a probably hit its bottom, and sometime in the next two
fine job of transporting the three of us on different or three years investors will be saying “I remember
days, with every flight on time. How we miss the when…” or “I should have…” Stay tuned we will
Wardair in-flight service though, which is now and report on this sector as the recession winds down in
forever consigned to history. the next few months.
Regards, Brian and Mike
Brian Walker & Mike Vamvakaris
Paragon Asset Management
4875 15th Sideroad – King City, Ontario – L7B 1K4
Telephone: (905) 859-5995 Fax: (905) 859-7281 Toll Free: 1-888-822-5514
Mutual Funds Provided Through FundEX Investments Inc.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation
or by any other government deposit insurer. Fund values change frequently and past performance may not be repeated. This information is
not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
However, please call Brian Walker or Mike Vamvakaris to discuss your particular circumstance.