Internet Wealth Builder #2736

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Teck Cominco, sold for a 553% gain.
Brookfield Asset Management. Capital gain to date of 472%. Still a buy.
Manulife Financial. Capital gain to date of 203%. Still a buy.
Equitable Resources. Capital gain to date of 183%. Took half-profits.
Canadian Utilities. Capital gain to date of 184%. Still a buy.
Enbridge. Capital gain to date of 153%. Still a buy.
Research in Motion, sold for 151% gain.
Canadian Tire. Capital gain to date of 150%. Still a buy.
iShares Hong Kong. Capital gain to date of 129%. Took half-profits.
E-L Financial. Capital gain to date of 127%. Still holding.
Alcan. Capital gain of 117%. Still holding.
Canam Group. Sold for a 117% gain.
RioCan REIT. Capital gain to date of 105%. Still a buy.
CN Rail. Capital gain to date of 104%. Still a buy

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THE PPN CRAZE

I don’t like principal protected notes (PPNs). I have said this before but my concerns about this hybrid product have had approximately the same effect as King Canute trying to hold back the tide. Investors seem to love these things and Bay Street responds by cranking out more of them almost on a daily basis. On Thursday, for example, RBC announced a new issue based on commodities while BMO and Mackenzie Financial teamed up for two new products based on Mackenzie mutual funds.

There are a lot more in the pipe, and why not? If people want to line the pockets of underwriters and financial advisors by paying hefty commissions for the peace of mind of capital protection, the financial community is only too happy to oblige.

There are literally hundreds of these notes out there. If you click on the Miscellaneous category on Globefund, you’ll find 651 entries, most of which are PPNs. I don’t claim to have analyzed them all, but the spot checks I did this week confirmed my scepticism about these structured products.

Before I give examples, here’s a quick primer on how they work for those who may not be familiar with them. A classic PPN tracks a benchmark index or indexes. But more often these days they track one or more mutual funds, a basket of stocks, one or more commodities, a hedge fund, a collection of indexes, a hot stock category, or just about anything else you might imagine. Each note has a maturity date, which is usually from three to 10 years from the date of issue, and is on sale only for a limited time. The investor’s principal is guaranteed – if there is no profit at the maturity date, the capital is refunded. (There are some non-principal protected notes as well, but they’re another story). Investors pay a sales commission at the time of purchase and there is usually a hefty annual fee as well.

The banks are among the largest promoters of PPNs, so let’s look at a couple of past issues from them, selected at random.

First up is the BMO CI Linked Notes S1 from Bank of Montreal. These were issued in March 2005 and they track the performance of a portfolio of units of CI Canadian Investment Fund and CI Signature High Income Fund. The units carry an annual management fee of 2.95%. According to the performance numbers on Globefund, these notes had a two-year average annual compound rate of return of 3.34% to Aug. 31. By comparison, the CI Canadian Investment Fund gained an annual average of 10.18% during that period while Signature High Income averaged 5.47%. Assuming a 50-50 portfolio split, that works out to an average annual return of 7.83% for investors who simply invested directly in the two funds – more than double the return on the PPN. To add insult to injury, both funds reported MERs that were much lower than those of the PPN.

Let’s look at another mutual fund-linked note, this one from CIBC. It’s called the CIBC FULPaY Franklin Templeton S1 note and it has a neat little kicker. This PPN, issued in January 2004, offers a return based on the best performer among seven Franklin Templeton funds in any given year. They are Templeton Global Smaller Companies Fund, Mutual Beacon Fund, Bissett Canadian Equity Fund, Templeton International Stock Fund, Bissett Income Fund, Bissett Bond Fund, and Bissett Dividend Income Fund. This PPN showed an average annual compound rate of return of 4.66% for the three years to Aug. 31. And how did the individual funds do from 2004 to 2006? (Obviously the 2007 winner has not been factored in yet.) In 2004, the best performer was Bissett Income, with a gain of 22.73%. In 2005, the list was topped by Bissett Canadian Equity, which was ahead 19.1%. The 2006 top gainer was Templeton International Stock, at 28.15%. You’d think that all those numbers would work out to a lot more than a 4.66% annual return, wouldn’t you? Nope! In fact, every individual fund on the list had a much better three-year return than the PPN holders received, except Bissett Bond.

Why such poor results? Two reasons. First, the annual fees are high. But more important, a large chunk of your invested money goes to purchase a stripped bond or derivative that provides the return of capital guarantee at maturity. So only a fraction of the invested amount actually works for you.

I have used mutual fund-linked PPNs for these examples because their performance numbers are easy to track and compare. However, most PPNs are structured in such a way so as to make accurate comparisons difficult. They may be based on mixed baskets of Canadian and foreign stocks, a mixture of indexes, a collection of specialized stocks (CIBC has one based on climate change and another based on biofuel issues), etc.

Last week I received a question from a reader asking about a new PPN currently being marketed by TD. He wrote: “Would you recommend purchase of the just announced TD Dividend Income Fund - Linked principal protected notes Series 1 (Return of Capital)?”

These PPNs track the performance of the TD Dividend Income Fund. They have a term of 6.5 years, maturing on May 9, 2014. The return is based on the results of the benchmark fund over the life of the notes and the principal is guaranteed in the event of any loss. They carry a sales commission of 5% and an annual “portfolio fee” of 2.2%.

This offering is yet another example of why I don’t recommend PPNs. In this case, investors are being charged hefty fees to invest in a product that tracks a mutual fund that rarely loses money. During the bear market of 2000-2002, this fund made gains in every single calendar year. In fact, the worst 12-month loss it ever sustained was a drop of 5.4% during the year ending March 1999. Why would you simply not invest in the fund, which is no-load and has a management expense ratio of only 1.94%? This PPN will make the underwriter and the sales agent richer but it won’t do anything for the investor.

It is issues like this that make TD Bank so profitable! You don’t need to contribute a few dollars more to their bottom line by buying them. – G.P.

IRWIN MICHAEL FINDS BARGAINS IN SMALL CAPS

Contributing editor Irwin Michael is on board this week with a look at how the markets are doing and a brand-new stock pick for us. Irwin is the founder and president of the ABC funds, which are among the best long-term performers in their categories.

Although world-wide equity markets appear to be recovering from the August stock market lows, there remain many lingering concerns. They include: the U.S. subprime mortgage issue, the Canadian asset-backed commercial paper problem, the Northern Rock Financial mess in the U.K., etc. While many investors, as well as former U.S. Federal Reserve chairman, Alan Greenspan, remain quite concerned about the risks of a U.S. economic recession, we believe that the decisive 0.5% cut of the U.S. discount and federal funds rates by the U.S. Federal Reserve indicate that the Fed is concerned, proactive, and fully-supportive of reinvigorating the U.S. economy. The negative, unfortunately, is that this objective will probably be at the expense of future inflation.

With respect to monetary policy, we expect the U.S. Fed along with the Bank of England and the European Central Bank to continue to pump significant liquidity into the worldwide financial system. Accordingly, we believe that the old adage, “don’t fight the Fed,” is worth remembering at this time. Over the balance of 2007, leading into the first quarter of 2008, we expect continued low interest rates and further rate cuts in the U.S. We believe that low interest rates, while not a panacea to all the ills plaguing the U.S. economy, will, nonetheless, encourage more company share buybacks, corporate insider buyers, privatizations, and increased mergers and acquisitions.

At the present time there is considerable economic and investment uncertainty confronting investors. Many are quite fidgety and risk-averse. As a result, most of the price recovery from the August lows has largely centred on liquid, large-capitalization corporate shares. Smaller companies have lagged the market recovery because of their relative illiquidity and the desire of anxious investors to liquefy. These companies are significantly undervalued and it is our view that when they do recover they will experience meaningful capital appreciation.

To exemplify this point, we offer the case of two ABC Funds holding Polaris Minerals (an IWB recommendation) and Seaspan Corp. Polaris Minerals in mid-August plunged to $9.95 from a high of $15. Over the past week, Polaris has recovered to over $14 with its freshly-signed marketing agreement with Cemex, a major Mexican-based cement company. Seaspan Corp., which touched $37 earlier in the summer, fell to $27 on Aug. 16; it is presently trading at $33.

In summary, as fussy stock pickers we remain relatively optimistic with regard to the present investment environment. In the context of a 12-18 month time horizon, we believe that patient investors will be amply rewarded with excellent, long-term investment results.

FORTRESS PAPER (TSX: FTP)

Fortress Paper is an international producer of security and specialty papers and wallpaper base. The company’s Landqart Mill in Switzerland produces security papers, which includes paper currency, passports, visas, cheques, share certificates, and lottery tickets. The Lanqart Mill has been the sole provider of banknote paper for the Swiss currency since 1979 and is one of only nine authorized suppliers of various denominations of the euro currency.

The company’s Dresden Mill in Germany produces primarily non-woven wallpaper base that is sold to Eastern Europe and the former Soviet Union. Although global demand for wallpaper is declining, these markets are experiencing growth, especially in the non-woven segment.

Fortress Paper became a TSX-listed company on June 28 of this year after purchasing the Lanqart Mill and the Dresden Mill from Mercer International Incorporated. Mercer, a European softwood and kraft pulp producer that trades on Nasdaq (MERC) and the TSX (MRI.U), divested the mills to focus on its pulp business. A Canadian entrepreneur, Chad Wasilenkoff, reviewed the assets, conducted due diligence, and negotiated the transaction. Mr. Wasilenkoff then installed experienced European management, led by Dr. Alfonso Ciotola as chief operating officer and Erich Sulser as chief financial officer.

We believe that Fortress Paper is a net asset value story, where the replacement value of the two mills and the related equipment is well above the company’s current market capitalization. The Lanqart Mill is situated in the town of Lanquart, 100 kilometres east of Zurich in the scenic Swiss Alps. After poring through the initial public offering prospectus, we discovered that the fire insurance value of the property was CHF (Swiss Francs) 66.5 million for the building and CHF 163 million for the inventory and equipment. At the current exchange rate this totals approximately C$200 million.

The Dresden Mill is located in the town of Heidenau, 12 kilometres south of Dresden on the Elbe River. The mill has total capacity of 36,000 tonnes and a 12,000 tonne machine costs approximately €30 million. Therefore, the total replacement value of three 12,000 tonne machines is €90 million or C$125 million. Additionally, the Dresden complex includes land, a hydroelectric plant, and a water treatment facility, which were appraised at C$50 to C$100 million combined.

Putting all of the pieces together, we believe that the company’s assets are worth between C$375 and C$425 million, compared to the current market capitalization of only C$86 million. We are not suggesting that the stock should trade at replacement value but we believe that a 75% discount to net asset value is excessive for assets that are both cash flow positive and profitable.

On Aug. 14, Fortress released second-quarter results that supported our net asset value analysis. Reported sales of $35.4 million were down from $38.3 million in the prior quarter due to foreign exchange and the timing of shipments (financial results in Canadian dollars). However, EBITDA improved to $4.3 million from $2.4 million in the first quarter of 2007. Similarly, net income grew to $1.7 million from $1.1 million in the first quarter. To be fair, we need to adjust the first quarter net income to reflect a one-time sale by prior management, which had a negative impact of approximately $0.4 million. Excluding this item, net income still grew almost 14% quarter over quarter.

Based on the number of shares outstanding post-IPO, Fortress earned 17c per basic share and 16c per fully diluted share in its first quarter as a public entity. Annualized and ignoring any additional sequential growth through the balance of the year, the stock is trading at approximately twelve times earnings. Looking at the company’s historic results, net income grew to $1.8 million in 2006 from $1.5 million in 2005. Based on a 20% growth rate, consistent with management’s outlook, we believe that Fortress could trade at 20 times earnings. This implies a potential valuation range of $12.80 to $15 a share over the course of the next 12 to 18 months.

We believe that Fortress Paper is a deep value story that is under-followed and accordingly, under-valued. The shares have been thinly traded post-IPO and have been quite volatile, which is perhaps unsurprising given the general market conditions. However, Fortress is an intriguing small-capitalization story, with solid net asset value support and potentially decent earnings growth going forward. Interestingly, with the TSX listing Fortress is positioned to bid on contracts to print Canadian currency in the near future. We plan to patiently hold the stock over the course of the next few years and hope to be well rewarded.

Action now: Buy at current price levels but enter a limit order (maximum $8.25) as the stock is thinly traded. The shares closed on Friday at $7.82.

GLENN ROGERS PICKS
A HIGH-TECH WINNER

Contributing editor Glenn Rogers is here today with a new stock pick, a high-tech company that survived the meltdown and has emerged as one of the giants of the industry. He also offers some profit-taking suggestions for people who are nervous about the stock markets. Glenn is a businessman and entrepreneur who is based in Victoria. Here is his report.

These are exciting times for the stock markets and I expect there’s a lot more to come. It’s great for active traders, who can make big profits (or losses!) in this kind of volatility. But for the rest of us, it’s downright unsettling.

After the initial euphoria surrounding the Fed’s half-point rate cut, reality is likely to set in. The Fed did not cut rates just to save the bacon of some wealthy hedge fund managers. It's more likely that there is weakness in the underlying economy that has not yet completely emerged so if you have some nice profits in some of your equity positions it might be a good idea to lock in some of those gains, as Gordon has already suggested.

However, buying stocks is a lot more fun than selling them so I wanted to suggest one that has great global growth prospects along with a very strong balance sheet, lots of cash, and top-notch management. I considered several possibilities that might fit that description but the stock I kept coming back to was Cisco Systems Inc. (NDQ: CSCO).

Cisco Systems emerged as a major player in the high-tech boom of the 1990s. Although its stock got pummeled in the subsequent meltdown, it has reemerged stronger than ever and it should be one of the core holdings of any growth-oriented portfolio.

Cisco's main business is in providing the networking software and hardware that powers the Internet and corporate communications. The company designs and manufactures networking products related to telecommunications and the information technology industry. In fact, there are very few large corporations that do not have Cisco products as part of their network backbone and this large installed base of commercial customers gives them a tremendous advantage against competitors like Nortel, Juniper, or Alcatel/Lucent. Cisco is the number one player in virtually every network segment. They have greater than 50% share in the routing and switching markets and an 80% share in the Enterprise routing market.

During the past couple of years the company has made investments in a number of adjacent high-growth markets that are natural extensions of their existing product line. For example, Cisco is now one of the dominant players in security, storage, wireless networking, video services, and Internet-based telephony. The company also made a major investment in Scientific Atlanta and WebEx.

Scientific Atlanta takes the company into the consumer market as the leading cable box manufacturer in the world. If you have a high-definition TV set, chances are that it is powered by a Scientific Atlanta receiver. WebEx is a large Internet conferencing business, which is growing rapidly. The company's reach is global with strong positions in China, Russia, and the Middle East. It is growing by 25% year, with the international component really starting to take off.

Cisco Systems is headed by John Chambers who has provided visionary leadership for the company for number of years. He spent the high-tech downturn streamlining operations, reducing staff, and improving customer service. As a result, the company generates tremendous margins and great cash flow. Additionally, Chambers made a number of acquisitions that have broadened the company's offerings.

Last month, the company released fourth-quarter and year-end results for fiscal 2007 (to July 28). They were very impressive: net sales for the year were up 23% year-over-year to $34.9 billion (figures in U.S. dollars) while net income (using GAAP methodology) was $7.3 billion ($1.17 a share), up 31%.

Typically, Chambers, while pleased with the results, spent more time focusing on the future than on the past in his statement accompanying the announcement.

"As we turn our attention to the next fiscal year, we believe that we are headed into a new era in networking that we define as the second phase of the Internet,” he said. “We expect that this phase will be driven by collaboration and Web 2.0 technologies and will become an increasingly influential market trend for businesses. Collaboration has already transformed almost every area of our business internally, resulting in the potential for dramatic gains in productivity and efficiency. We believe this new model will help enable Cisco to identify, target and capture market opportunities more effectively than at any other time in our history."

Cisco has spent $30 billion since 2001 on repurchasing its shares and although I would prefer to see a dividend program instead, overall the management team has kept its shareholders front and center.

As for risk, the company could face increasing competition from some of its early stage competitors in China but that is a few years down the road. In the meantime, Cisco should not only provide some safety for nervous investors over the next few months but offers significant potential for growth as well.

The shares trade on Nasdaq under the symbol CSCO and closed on Friday at $33.13.

GLENN ROGERS�S UPDATES

I just reviewed the recommendations I made this past year and have come to the conclusion that we are in good shape with virtually all of them. Frankly, that makes it difficult to recommend selling any of them here despite the fact that we may well be facing a 10% correction in the next 30 days. So, if the thought of a correction doesn't bother you, just sit tight. However, if you'd prefer raise some cash, here are some candidates that will let you lock in profits and perhaps give you an opportunity to buy them back at a lower price a month or two from now.

Originally recommended on April 30/07 (IWB #2717) at $112.23. Closed Friday at $148.42 (all figures in U.S. dollars).

I originally recommended this stock at $112.23. It traded as high as $149.18 earlier this month and closed on Friday at $148.42, so at this point we’re up 32.2% in five months. I still like this stock but selling half your position now to lock in profits might be a prudent move. It may continue to go higher but at least you are protected on the downside and you can consider buying back in if the stock pulls back to a price that is closer to where it was originally recommended.

Originally recommended on April 2/07 (IWB #2713) at $57.19. Closed Friday at $76.18 (all figures in U.S. dollars).

Flowserve was originally recommended at $57.19. The stock closed the week at $76.18 so we have a nice gain of 33.2% in about six months. Again, I continue like this stock but if you wish you could sell half your position to raise some cash. Otherwise hold or put a stop-loss in at $74.

Originally recommended on Aug. 22/05 (IWB #2532) at $79.40. Closed Friday at $102.14 (all figures in U.S. dollars).

L-3 Communications was originally recommended at $79.40 in August 2005. The stock closed on Friday at $102.14 so we have a profit to date of 28.6%. As with the other stocks I am updating today, there is nothing wrong with this one and long-term investors should continue to hold. But there's a chance there could be pullback here. If so, there'll be another opportunity to top up your position.

Readers will detect some reluctance of my part to suggest closing out positions in good companies based on the fear of a correction. However, the old axiom of pigs get fat but hogs get slaughtered probably rings true right now. Happily, profits have been made in all these choices and all three continue to be good long-term holds.

Finally, a member wrote wondering why I chose to recommend Dentsply International (NDQ: XRAY), which is up US$2.26 since I recommended it at US$39.38 on Sept. 4, instead of Paterson Companies (NDQ: PDCO) or Henry Schein Inc. (NDQ: HSIC), which are in the same business more or less.

Our reader has a fine eye since any of these companies would be good to own. In the end, Dentsply has significantly higher profit margins than the other two: 12.63% compared to 7.53% for Paterson and 3.87% for Henry Schein. I like them all, but profit margins pushed me towards XRAY. Thanks for the question.

UP, UP, AND AWAY!
WHERE NOW FOR THE LOONIE?

Is there any end in sight for the flight of the loonie? It appears not. On Friday, our dollar spent most of the day trading above parity, finally ending at US$1.0052 – the first time since 1976 we’ve been looking down at the greenback at the close of a trading day. Could it go higher? You bet!

“The stars are aligned for the Canadian dollar right now,” said Patricia Croft, chief economist for the money management firm of Phillips, Hager & North, in a telephone conversation I had with her on Friday. “Gold and oil prices are strong, wheat prices are at a record high, and we’re the only country in the G8 with a budget surplus.”

Adding to the loonie’s strength is the global negative perception of the U.S. greenback. No one likes Uncle Sam’s buck right now for a variety of reasons including the plunging housing market, subprime mortgage crisis, and the old favourites, the huge trade and fiscal deficits.

“Currencies are driven by momentum and sentiment, so they can easily overshoot,” says Ms. Croft. Her analysis puts a fair market value of US85c on the loonie but in the current circumstances she says it will likely trade at a much higher level than that for some time. “I won’t say it could go to $1.25, but parity is just a number,” she observed.

Big financial institutions are hedging their currency bets. Many use what Ms. Croft called “the path of least regret”, which means they hedge 50% of their U.S. currency exposure. However, hedging is more difficult for ordinary investors. In fact, there is no easy and inexpensive way to do it except by investing in currency-hedged funds.

The disenchantment with the greenback has caused international investors to steer clear of U.S. stocks, and even some American money managers are advising their clients to look at foreign securities in countries with sound currencies. This has resulted in good values appearing in New York. “There’s a compelling case for a lot of U.S. blue-chip stocks right now,” Ms. Croft commented.

One way to take advantage of the situation while eliminating currency risk is to buy units of the iShares CDN S&P 500 Index Fund (TSX: XSP), which is fully hedged back into Canadian dollars. I originally recommended this ETF on July 9/07 (IWB #2725) at $19.22. It took a hit during the summer correction, with the shares dropping below $18 at one point. However, it has now regained most of that loss and the units closed on Friday at $19.12. This fund is suitable for long-term investors who want to take a currency-hedged position in America’s largest companies. Don’t buy it if you have a short time horizon as I continue to be concerned about another significant stock market correction in the next few months. – G.P.

GORDON PAPE�S UPDATES

Originally recommended on Sept. 2/03 (IWB #2332) at $19.74. Closed Friday at $51.87 (all figures in U.S. dollars).

Despite weak natural gas prices, shares of Equitable Resources have shown strength this year. At the time of my last update on Jan. 29, they were trading at $43.29 and I rated them as a Buy. Since then, they have moved up by $8.58.

Equitable is in the natural gas production and distribution business in the eastern U.S. The company released second-quarter results in late July. They showed operating revenue of $293.2 million during the quarter, up from $251.2 the year before. However, higher expenses reduced operating income to $61.5 million compared to $74.1 million in the year-ago period. The company reported net income of $107.3 million (87c a share, fully diluted), up from $43.9 million (36c a share) but that was the result of a one-time pre-tax gain of about $120 million related to the agreements with Range Resources Corporation to jointly develop the Nora Field in southwestern Virginia.

The stock pays a quarterly dividend of 22c a share (88c annually) to yield 1.7% at the current price.

Equitable looks a little expensive at this level. If you have not previously taken some profits on this one, I suggest you do so now as we have a capital gain to date of more than 160%.

Originally recommended on Nov. 13/06 (IWB #2640) at C$54.85, US$48.52. Closed Friday at C$56, US$56.15.

Nothing very exciting has happened with Telus lately unless you’re living in the U.S. and have been able to ride the soaring loonie with this one. In August, the company released second-quarter results that showed a modest 4% increase in revenue over the same period last year, to $2.23 billion. Excluding tax-related adjustments, net income was up $4.5 million and earnings per share (EPS) increased by 4c per share. Taking the tax adjustments out of the picture, net income was down by $103.5 million in the quarter, while EPS declined 27c. The company attributed the decline to increased expenses in the wireless sector and higher costs for the acquisition and retention of wireless customers.

Telus seems to be marking time at the moment, perhaps waiting to see how BCE will fare under its new owners. However, I continue to regard this as a core holding for Canadian investors.

YOUR QUESTIONS

Q – I just want to confirm what happens to U.S. equity dividends in an RRSP. Is tax withheld (15%) despite the fact it is held in the RRSP? Also, can you now keep limited partnerships in an RRSP, like Buckeye Partners for example)? – A.G.M.

A – Under the Canada/U.S. Tax Treaty, there should be no withholding tax on dividends from American companies that are paid into a registered plan.

As for your second question, a little-noted change in the 2007 federal budget opened the door to holding U.S. limited partnerships in registered plans. I queried the Canada Revenue Agency on this point and received this response:

“With the recent Bill C-52 changes resulting from Budget 2007, paragraph (d) of that definition now reads as follows: d) securities (other than futures contracts or other derivative instruments in respect of which the holder's risk of loss may exceed the holder's cost) that are listed on a prescribed stock exchange.

“Prior to the recent amendment, (d) used to read "shares listed on a prescribed stock exchange in Canada". With the new definition, (d) now refers to any stock exchange which would include a prescribed stock exchange in Canada or outside Canada.

“The change therefore expands the types of qualifying listed securities to include, for example, listed units of foreign real estate investment trusts, foreign partnerships and foreign gold and silver exchange traded funds.” – G.P.

Q – Is there any difference from a tax or investing point of view between buying an ETF vs. buying a small basket of individual stocks? For example, buying the energy ETF vs. buying the four or five stocks that make up the majority of the index (ECA, PCA, CNQ, etc). – Mike D., Miramichi NB

A – There is certainly a cost difference. Buying the ETF means you pay brokerage commission on just one security. Buying the individual stocks multiplies the commission cost four or five times.

From a tax perspective, any capital gains on the ETF or the individual shares would be treated in exactly the same way. However, you may be farther ahead in terms of after-tax return on the distributions by owning the stocks instead of the ETF. To use the iShares CDN Energy Index Fund (TSX: XEG) as an example, in 2006 about 60% of the total distribution of $2.17 a unit was classed as “other income”, meaning it was taxed at the top marginal rate. Only 17.5% was treated as dividend income. Of course, all the payments from owning the stocks would be dividends and therefore taxed at a much lower rate thanks to the dividend tax credit. – G.P.

Q – What is behind the latest large increase in the value of TD bank shares? There has been no such increase to other banks’ value. – Nachum L.

A – TD Bank reported very strong quarterly results, handily beating analysts’ expectations, and increased its dividend by 8%. Investors saw these developments as extremely positive and reacted accordingly. Contributing editor Tom Slee, who recommended the stock in February at $69.85 (it closed Friday at C$76.30, US$76.68) will have a complete update in next week’s issue. – G.P.

Q – Would you be comfortable and would you sleep well if you invested a large amount of money (more than $100,000) in the new Dundee Premium GIC for 1 year at 5% in the light of the recent liquidity problems of Dundee Bank? – Gino B.

A – It appears that Scotiabank’s bid to acquire Dundee Bank along with an 18% stake in DundeeWealth will go ahead, despite a rival offer from CI Financial. If it happens, all Dundee Bank obligations, including GICs, will be assumed by the Bank of Nova Scotia. I wouldn’t hesitate for a moment to put more than $100,000 into BNS, even though that amount exceeds the coverage available under the Canada Deposit Insurance Corporation (CDIC).

However, it’s not a done deal yet and a prudent investor takes nothing for granted. Since we know that Dundee Bank is in financial trouble (if it weren’t, the Scotia deal would never have happened), I would be reluctant to invest more than $100,000 there at present. – G.P.

That’s all for today. Look for your next issue on Tuesday, Oct. 9. Happy Thanksgiving!

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