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WHAT TO DO NOW?

As the stock markets were going through their second meltdown of the week on Wednesday, I received a phone call from a Canadian Press reporter. What, he asked, would I suggest that investors do now?

I know that Wednesday seems like a century ago in the light of what has happened since, but flash back for a moment to that day. The TSX had just plunged another 349 points to bring its loss for September to almost 1,900 points (13.75%). The Dow had fared even worse, dropping 450 points on the day. Stocks were sinking faster than a ship with a holed hull and people were selling everything in a rush to the lifeboats.

My response to the CP writer was to tell his readers to stop panicking and take a deep breath. The stock markets weren't going to zero. Quality companies like Enbridge, TransCanada, Rogers, Shaw, and Fortis, just to name a few, were not going to implode. Enbridge will still be delivering natural gas to your home 20 years from now. Rogers will still be supplying cable TV services to folks in eastern Canada and being paid very handsomely for it and Shaw will be doing the same in Alberta. Fortis will still be generating electricity and TransCanada will be carrying oil and gas through its pipelines.

Yes, Canadian banks and insurers have been sideswiped by events in the U.S. but there is no comparison between their situation and that of Lehman Brothers, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, and all the other fallen American icons. Royal, TD, Scotiabank and the others will still be around decades from now, unless the federal government some day decides to let them merge.

However, I did tell the CP reporter that people shouldn't put their heads in the sand and do nothing. Painful as it may be, investors need to take a long, hard look at their portfolios. We can't change the past but we can try to minimize the damage going forward.

I pointed out to him that history tells us that big stock market losses are always followed by a rebound, often a dramatic one. I said I expected it would happen again this time, and reasonably soon. His story hadn't even made it onto the wire before my prediction became obsolete!

First, the U.S. government did an about-face and announced that it would save AIG from bankruptcy at a cost of up to $85 billion. That was followed by news of a number of extraordinary measures to end the liquidity crisis and restore stability to the stock markets. Central banks around the world poured $180 billion into the financial system. The SEC banned short-selling of financial stocks. Administration officials sat down with Congressional leaders to hammer out a comprehensive plan that would effectively see the government buy up all the messy bad debts, thus enabling the banking system to get back to business as usual.

Back in the old days, investors would have thrown their hats in the air in celebration. Since hardly anyone wears hats these days except in the dead of winter, they contented themselves with going out and buying stocks.

And did they buy! The TSX shot up 187 points on Thursday and then added a mind-boggling 848 points on Friday, the biggest one-day gain in its history. In just two days, we recovered more than half of the month's losses.

Can it go on? I doubt it, certainly not at anything like this pace. In fact, this could turn out to be what's known as a sucker's rally. Yes, it appears that the dramatic action of the U.S. government may have finally eased the credit crunch that has plagued the markets for more than a year. But there are still many underlying problems, not just in the States but around the globe. Russia is spending billions to try to revive its sagging fortunes. The boom in China is finally slowing down. Oil moved back over US$100 a barrel on Friday but commodity prices are still well off their highs of earlier in the year. The Washington bail-out, which will cost hundreds of billions when all is said and done, is likely to put downward pressure on the U.S. dollar. That could revive inflation fears and eventually lead to higher interest rates. We're not out of the woods yet.

So I suggest using this huge rally as an opportunity to revamp your portfolio, if you decide some action is needed. Sell some stocks or funds you were wishing you had disposed of when the markets were crumbling and build cash reserves.

Of course, if upon review you decide that your portfolio is well diversified with a good mix of bonds, cash, and high-quality stocks or equity funds, then you should take no action. You've done your homework and put a plan into place so stick with it. Over time, you'll do fine.

However, if you determine that in fact your portfolio is flawed and is exposing you to more risk than you are comfortable with, you need to create an action plan. Decide which securities you want to get rid of and take advantage of this market bounce.

As for commodities, I don't advise aggressively adding to positions at this stage. I want to see where oil will settle and whether last week's unprecedented spike in bullion was a flash-in-the-pan, as the Friday pull-back suggests. One exception among the commodity stocks is Viterra (TSX: VT) which I recommended last week as a buy under $11. It closed at $10.50 on Friday so I suggest you start to build a position. – G.P.

THE ULTRA-SOFT BED

For those who can't deal with the angst of this wild stock market, I recommend looking at the Ultra-Soft Bed Portfolio in my book Sleep-Easy Investing. It's a blend of money market funds, GICs, short-term bond funds, and universe bond funds. If you'd followed the formula in the book and used iShares ETFs for the short-term and universe bond funds, the portfolio would have produced a profit of slightly over 5% for the year ending Aug. 31.

Here's what the portfolio looks like. Remember, it has zero stock market exposure so there is no growth potential. This portfolio is only for people who have virtually no risk tolerance and for whom capital preservation is everything. Of course, you could simply put all the money into a savings account or under the mattress but you'll get better returns with this plan.

Type of Security	Weighting	Estimated Annual Return
Money market fund or high-interest account	20%	3%
Laddered GICs	30%	4%
Short-term bond funds	30%	4%
Universe bond funds	20%	5%
Total/Average	100%	4%

The projected one-year return of 4% is less than you would have received over the last 12 months because I am taking a conservative view on interest rates. If they hold steady or rise, the return would be closer to 5%.

Obviously, you need to shop around for the best possible rates if you go this route. Check the marketplace for the top GIC rates (the Report on Business website is a big help). Choose funds with very low MERs. Money market funds from Beutel Goodman or Phillips, Hager & North would be good selections.

GLENN ROGERS DOESN'T LIKE HIS IPHONE

Contributing editor Glenn Rogers is here this week with a tale of woe about his glamorous new iPhone. It turns out that Apple's pride and joy looks great but when it comes to speed and efficiency, Glenn wants his BlackBerry back. He's not keen on Apple's stock either. Glenn recently accepted a CEO position with a California company and his returned to his home in Laguna Beach. Here is his report.

It doesn’t get much worse than this. Stocks in a freefall, a hockey mom is running for Veep, and I don’t like my new iPhone. Now my gadget troubles may not seem particularly germane in the context of this wild and wooly stock market but it does speak to RIM’s (and Apple's) fortunes going forward so here is the story.

I have always been a Mac person so it was natural for me to buy an iPhone at the first opportunity. It's sleek, it's slick, it's colourful, and it comes with all kinds of great features. Unfortunately, it also comes with a number of very serious problems. They include:

Battery life. Frankly, it's brutal. On my BlackBerry, I could go three days without recharging the battery. I can’t make it through one day with the iPhone. Plus, the battery is sealed in the unit so you can’t carry a spare. You can with a BlackBerry.

For a casual user who stays close to home, battery time may not be a huge concern but for business travelers it is a major issue. Last week, I had eight flights in ten days. I had to spend time between flights trying to find a plug to charge up the iPhone for a few minutes. It conjured up images of hundreds of iPhone users battling over the few available outlets in airports around the country.

Data costs. Since signing up for the iPhone, I have had three voice mails and two text messages from AT&T urgently asking me to call because I was running up a huge data bill. It turned out I had incurred data charges of over $350 in one week and that did not include phone charges. AT&T agreed to backdate me on an all-in data plan for $60 but since then I have had two more text messages with dire warnings.

Last week, The Wall Street Journal gave the explanation for why the BlackBerry Bold has not been launched in the U.S. yet. Apparently, the iPhone is hogging so much data space on the AT&T network that they will have to spend over $1 billion to add capacity. In the meantime, they have delayed the launch of the new Bold. RIM hosts e-mail for the BlackBerry on its own servers but the iPhone has to ping ATT constantly for mail and Internet activity.

E-mail searches. With the BlackBerry I can search for old e-mails on the fly. I can’t do that on the iPhone and contact search requires a third party application.

Cut and Paste. With the BlackBerry, a user can perform many of the functions that you can do on your laptop but the iPhone still doesn’t work well with those basic workplace functions. It takes a number of steps to perform such simple tasks as looking up and calling a contact. If you have over 1,000 contacts, as I do, it's very slow and tedious.

Typing. Just try typing on the fancy iPhone screen with even medium-sized fingers. Go ahead, I dare you. Every e-mail ends up with multiple mistakes and there is no built-in spell check. Believe it or not, many users have decided to embed an apology in their e-mail signature as a way of placating frustrated recipients.
Yes, there are some very cool features on the iPhone, including its groundbreaking interface and big screen. The Apps store is a great idea and of course it integrates well with all your Macintosh applications if you are on that platform. However, if you are a heavy e-mail user or business traveler then stick with the BlackBerry.

So what does all this mean to an investor? Both Apple and Research in Motion are exciting companies with good growth potential. But Apple worries me for a couple of reasons. The recent announcement of some new colors for the iPod line and an upgrade to iTunes didn’t excite anyone and the stock dropped even before last week's market dive.

Second, Steve Jobs looked very thin at the announcement. For those of you who don’t follow Apple, Jobs has been battling cancer this year. If he has to step down, the stock will tank. The company still has great products and will likely rally when this chaos is over, but the uncertainty about Jobs' health and the problems that we are now seeing with the iPhone concern me.

On the other hand, Research in Motion (TSX: RIM, NDQ: RIMM) has a number of new products in the pipeline and continues to roll out globally. There is no founder risk on this stock and the product works flawlessly. They have plenty of cash and a clean balance sheet so even though they have exposure to the financial industry they should continue to thrive going forward.

RIM shares fell below $100 on the TSX last week for the first time since spring before rallying $13 on Friday to finish at $109.50. However, even with that bounce RIM is trading below its 50-day and 200-day moving averages. Normally, I'd be tempted to buy now but given the volatility of the markets and the fact that RIM is due to release its quarterly results on Sept. 25, I suggest we hold off for a while. However, if the shares fall below $90 on the TSX or US$85 on Nasdaq, aggressive investors may want to start taking positions.

Action now: Watch and wait. We don’t know if we've now seen the bottom and a new bull is in place so things are still in a state of flux. So put RIM on your watch list for now and I'll continue to monitor it. Aggressive investors may buy below C$90 or US$85.

GLENN ROGERS' UPDATES

Dentsply International (NDQ: XRAY)
Originally recommended on Sept. 4/07 (IWB #2731) at $39.38. Closed Friday at $39.65. (All prices in U.S. dollars.)

In a world of pain worse than any dentist might inflict, this stock has held up well. Yes, it’s down more than $8 from its 12-month high of $47.84 but it is still slightly above where we recommended it at $39.38. When you consider the shock waves that have hit the stock markets in recent weeks, that tells you a lot about the fundamental strengths of this dental supply company.

Their most recent results were stellar. Second-quarter sales rose 17.2% to $595 million. On the cost side, the company will benefit from the downturn in metals prices. Earnings grew by 18.2% in the second quarter to $79.4 million (52c a share) and the company raised profit guidance for the full fiscal year to between $1.86 and $1.91 a share.

Monsanto (NYSE: MON)
Originally recommended on April 30/07 (IWB #2717) at $60.30. Closed Friday at $118.41. (All prices in U.S. dollars.)

All the agriculture-related stocks have been hammered and that includes Monsanto. Fortunately, we took half profits a while back and now I’m a buyer again. The company just released solid earnings and raised guidance for the year. They are now looking for earnings of $3.58 to $3.60 a share, up from $3.37 previously. In a press release, the company said the change reflected higher-than-expected sales and gross profit in its seeds and traits business and its Roundup and other glyphosate-based herbicide business.

The stock briefly traded below $100 earlier this month and is down almost 20% from its all-time high of $145.80 reached in mid-June. But despite the pull-back, it is up 96% since I recommended it at $60.30 in April 2007 and has lately been showing signs of renewed strength. Farmers may defer the purchase of a tractor but seed is likely to be the last place they will scrimp.

There aren't many stocks that I am actively buying in the current market conditions but Monsanto is an exception.

The Deere Company (NYSE: DE)
Originally recommended on April 30/07 (IWB #2717) at $56.12. Closed Friday at $63.38. (All prices in U.S. dollars.)

Amazingly, we can still get out of Deere with a small profit and I think we should sell. There is nothing really wrong with the company but they have reduced their earnings guidance for the year and have announced they will close their Welland, Ontario plant by the end of 2009, taking a $90 million charge as a result.

The company did report a 7% increase in third-quarter profits to $575 million (12% on an EPS basis). For the first nine months of the 2008 fiscal year, Deere earned $1.7 billion ($3.89 a share) so no one is going to have to bail out this company. But looking ahead, the short-term prospects are not great. At best, this stock is likely to be dead money for a time. At worst, the shares will drop if the market slide returns. This is a good time to raise some cash and take a small profit of 13% here.

Fluor Corp. (NYSE: FLR)
Originally recommended on March 17/08 (IWB #2811) at $68.27 (split-adjusted). Closed Friday at $64.11. (All prices in U.S. dollars.)

Fluor shares split two-for-one on July 17 but it didn't do anything to boost the stock. The share price of this Texas-based company, which supplies a range of services to the oil industry, has dropped in tandem with crude prices. At one point in late June, the shares briefly topped $200 (pre-split). Since then they have tumbled 36%.

It all sounds pretty grim but my advice is to keep the faith on this one. When I last updated the stock in May, the shares were trading at over $180 (pre-split) and I suggested locking in some profits at that time. Anyone who did has a nice cushion to work with.

Recent results have been good and the shares are worth another look. Second-quarter profits more than doubled, coming in at $209.3 million ($1.13 share), up from $95.6 million (53c a share) the previous year. Revenue rose 37% to $5.87 billion, driven primarily by growth in the oil and gas business. The results beat analysts' expectations by a wide margin.

Management raised guidance for the second time this year to between $3.65 and $3.80 a share. That was up 35c a share from the previous forecast.

Normally, upside surprises are followed by strong stock returns and Fluor is due. Certainly the global slowdown doesn’t help but their order backlog is large and these are multi-year projects so if there is a recession it should be over before they run out of work.

YOLA EDWARDS REVIEWS HER FINANCIAL STOCKS

We're pleased to welcome back contributing editor Yola Edwards, who is writing for us quarterly this year. Like the rest of us, Yola has been watching the wild stock market gyrations with a mixture of trepidation and astonishment. "Unbelievable" is how she describes last week's developments. In this month's column, she focuses on updating past recommendations as well as looking at the implications of the Bank of America's takeover of Merrill Lynch. Yola is one of Canada's leading technical analysts and publishes her own newsletter, Edwards Charts. For information, send an e-mail to edwardscharts@rogers.com. Here is her report.

Financial stocks were the number one story last week and things certainly got off on the wrong foot with the news that Lehman Brothers had gone under and that Merrill Lynch had escaped the same fate only through a fire sale deal with Bank of America. Since Merrill Lynch is one of my IWB picks, it seems appropriate to begin there.

Merrill Lynch (NYSE: MER)
Originally recommended on Nov. 26/07 (IWB #2742) at $53.43. Closed Friday at $29.50. (All prices in U.S. dollars.)

As anyone who follows the news knows by now, Merrill Lynch has been purchased by Bank of America. It's an all-share deal at an exchange rate of 0.8595 Bank of America shares for every share of Merrill Lynch. However, the acquisition is not slated to close until the first quarter of 2009 and in the meantime Merrill shares continue to trade on the NYSE, finishing on Friday at $29.50 after surging $7.44 on the day. The eventual price that shareholders receive if they wait for the takeover will depend on the price of Bank of America shares at that time, so let's take a closer look at what's happening there. (Bank of America trades on the NYSE under the symbol BAC.)

The financial crisis has caused stock prices to gyrate wildly. On Friday, the stock ran into resistance at the open window gap up to $40.40 and finished the day at $37.48. It appears that the bank’s share price has risen too far too fast and will likely pull back to retest the open window gap area registering between $32.10 and $34.41. Additionally, the weekly candlestick appears that it will end as a high-wave one which would suggests a trend change as there is indecision by the bulls and the bears.

The share price traced out a pennant pattern from July to August when it broke out to the upside. The pattern’s technical measurement suggests a potential target of about $47.88 over the next three months. Therefore, based on the share exchange ratio, you may wish to purchase additional shares of Merrill Lynch on a pull-back to about $25.25

Berkshire Hathaway isn't strictly a financial stock but it does have significant exposure to the insurance industry through its holdings in Geico, General Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Life Insurance Company of Nebraska. As a result, the price of the B shares, which I recommended in mid-2005, fell all the way to $2,147.48 in July, but have since rallied strongly. Here's how we stand now.

Berkshire Hathaway Inc. (NYSE: BRK.B)
Originally recommended on June 20/05 (IWB #2524) at $2,687. Closed Friday at $4,595. (All prices in U.S. dollars.)

Berkshire's share price has clearly broken out to the upside from the negatively trending channel. The MACD is at an oversold level and has issued a preliminary buy signal.

Although there may be a pullback to about $4,165, it would offer another buying opportunity. Over the next year the stock is poised to retest its high of $5,059.

Of course, this whole mess was triggered by the collapse of the U.S. housing market, which is still struggling to recover from its worst setback since the Great Depression. Foreclosures are still occurring at a record rate in parts of the country and the situation will take many more months to stabilize. Stocks of American homebuilders and the companies that supply them were hammered as a result but now there finally seems to be some light at the end of the tunnel.

KB Homes (NYSE: KBH)
Originally recommended on Aug. 17/07 (IWB #2731) at $31.98. Closed Friday at $23.87. (All prices in U.S. dollars.)

The bottom appears to be in for the home building stocks. The MACD and RSI are both diverging positively and the MACD has issued a preliminary buy signal from an oversold position.

The share price appears to have formed a double bottom and a close above $28.50 would signify an upside breakout for the stock with a potential target of about $42.50 over the ensuing year.

Moving closer to home, the Canadian bank most affected by the subprime meltdown was CIBC, which has already booked huge writedowns as a result. At one point earlier this summer, the stock was down more than 50% from its 52-week high. But that's history. Let's look at its prospects from here.

Canadian Imperial Bank of Commerce (TSX, NYSE: CM)
Originally recommended on Nov. 26/07 (IWB #2742) at C$83.62, US$86.40. Closed Friday at C$62.59, US$59.60.

It appears that the relentless selling in shares of the bank may be nearing an end. At least we know that a bottom was found at the low of $48.70 in July. When the share price reached that level, both the MACD and RSI diverged positively, suggesting that a bottom was in place. Additionally, a hammer bottom candlestick, which is usually a sign of a bottom, appears as though it will complete this week.

The problem is that there is a falling window gap present at the start of the week’s candlestick meaning that there is a possible trend change at hand. Additionally, the hammer bottom candlestick has fallen below the uptrend suggesting that the July low may be retested before the stock is ready to mount a meaningful sustained rally.

There are two possible scenarios. The stock closed the week slightly above the gap down which registers at $62.57, so the low may be in. A close above $65.87 will confirm the uptrend is in place and the stock should rally to about $74 where it will find overhead resistance.

If the stock is able to hold at the hammer bottom’s low of $55.21 then given that the indicators are oversold we should have a successful retest. And that could include a pull-back to the lower Bollinger band at $51.40.

Action now: If the stock breaks out to the upside we should make additional purchases at $65.87. If the stock goes lower before breaking out we should purchase at $51.50.

Finally, let's look at a couple of stocks that are not related to the financial or housing sectors.

QLT Inc. (TSX: QLT, NDQ: QLTI)
Originally recommended on Jan. 19/04 (IWB #2403) at C$22.56. Closed Friday at C$3.75, US$3.85.

The MACD suggests that the consolidation may be coming to an end, but the stock has been a disaster and doesn’t seem to have much of a future. Rather than wait any longer it is time to let this one go. Sell and take the tax loss.

Student Transportation of America (TSX: STB.UN)
Originally recommended on April 18/05 (IWB #2515) at $12.55. Closed Friday at $9.24.

The share price has trended negatively over the past few years but it appears to be finding a bottom. The MACD and RSI are at oversold levels and diverging positively. The share price has put in a triple bottom and this week’s candle stick is a high-wave doji suggesting the stock is losing its direction. Therefore, we should expect a trend change.

A rally to about $10.50 from current levels should be possible over the next three months. A close above $11 would signal that the bottoming process is complete and a rally to about $13.85 should follow over the next year.

YOUR QUESTIONS

Q - We have a question that may also be of interest to other IWB readers. My wife will be turning 65 next month, when she should start to collect her pension from a previous long-time employment situation. The private pension was managed by Norwich Union, which some time ago was bought by AIG. AIG in the States seems to be saved, at least for the moment. But what if it had gone under or will do so in the future? What would be the status of my wife's pension that AIG in Canada is obliged to pay her? Is AIG in Canada different from AIG in the States? Is there any form of protection for pensions from gross incompetence by highly paid "experts"? Many thanks for either your assurance or else for yet something else to worry about. – Burt P., Vissec, France

A – AIG Life Insurance Company of Canada is based in Toronto and is indeed a member of the U.S. American International Group that was bailed out by the U.S. Government last week. However, there are some important differences in the Canadian operation, which the company highlighted in a letter to agents on Sept. 15. Among the key points:

AIG Canada is a separate legal entity. It operates only in Canada and, according to the letter, it "has not been affected by the U.S. credit crisis".
Policies with AIG Canada are "safe and secure".
The operation is regulated by the federal Office of the Superintendent of Financial Institutions (OFSI) and must meet Canadian standards for regulatory compliance and financial solvency. The company says its assets, capital, and surplus are "significantly greater" than OFSI's requirements.
Perhaps most important, AIG Canada says it has no investments in U.S. subprime mortgages, nor is it exposed to the Canadian Asset Backed Commercial Paper (ABCP) market.

The letter, which is signed by CEO Peter McCarthy, concludes: "...although present economic conditions in the U.S. are difficult, AIG Life of Canada has the strength, resources and commitment to meet the promises we have made to our customers."

So it would appear that AIG Canada is in good financial shape. But even more important in this case is the fact the company only manages the pension plan money. Those assets are held in a segregated account and would not be affected if AIG Canada were to go down.

The real question our member's wife should be asking is how solid is the pension plan itself? Is it fully funded and able to meet all commitments? Or is it in a deficit position, which could spell trouble down the road? And how did the plan's investment portfolio fare in the market meltdown? We've already seen examples of pension plans having to cut payments to retirees because they were underfunded so just because AIG Canada appears sound doesn't necessarily mean the pension plan itself is okay. They are two separate entities. – G.P.

And with that, we wrap up this amazing week. We may never see another one like it – and that would be a blessing! We'll be back on Sept. 29 with the next instalment in this saga.

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. None of the content in this newsletter is intended to be, nor should be interpreted as, an invitation to buy or sell securities. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers, contributors, and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. The staff of and contributors to the Internet Wealth Builder may hold positions in securities mentioned in this newsletter, either personally or through managed accounts. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted.

Published September 22, 2008: PDF

WHAT TO DO NOW?

THE ULTRA-SOFT BED

GLENN ROGERS DOESN'T LIKE HIS IPHONE

GLENN ROGERS' UPDATES

YOLA EDWARDS REVIEWS HER FINANCIAL STOCKS

YOUR QUESTIONS