Financial Edge – Pro’s 3 Stars

‘Don’t speculate – that’s the other guy’s problem’

Read Article: Business Edge March 12, 2010

Featured Pro: Jonathon A. L. Gold, B.Comm., FCSI, DMS, CFA and President of Edmonton-based Gold Investment Management Ltd. (GIM), a registered portfolio manager and investment counsel.  Investment Strategy: “GIM’s investment strategy is described as semi-passive. We aim to capture the best of active management and indexation. Model portfolios offer distinct risk levels centered around core themes: semi-passive core strategy; study of macro environment, funda­mentals and technicals; active overlay including tactical and strategic trading; select currency hedging; no large directional bets; and agnostic on markets – not overly concerned with market direction.

GIM’s five investment com­mandments are:

(1)   buy great stocks;

(2)   buy dividend paying stocks;

(3)   don’t speculate – that’s the other guy’s problem;

(4)   keep a cash reserve and buy when others panic; and,

(5)   don’t buy fear – sell it.”

Dear Clients and Friends,

Merry Christmas!  Best wishes for a healthy and prosperous 2010.

Yours truly,

GOLD INVESTMENT MANAGEMENT LTD. 

In Jasper Park, A.Y. Jackson, 1924, oil on canvas        

Every year, since 1995, we’ve run on our front page — and now on our home page, too — a piece of art from the Thomson family’s collection.

It started as a holiday greeting to our readers and has become a bit of a Canadian tradition. This year, we offer you holiday cheer and inspiration with In Jasper Park, an extraordinary work by A.Y. Jackson. This tradition was started by The Globe and Mail’s late controlling shareholder, Kenneth Thomson, who had a passion for many things, among them Canadian art and newspapers. Not only was he a great collector; Mr. Thomson believed that these works should be shared by everyone. Thus, he donated more than 3,000 pieces to the Art Gallery of Ontario, and funded a redesign of the gallery by Toronto native Frank Gehry to — among other things — house the Kenneth and Marilyn Thomson collection.

The Globe’s visual arts critic Sarah Milroy explains the artwork’s significance

By 1924, A.Y. Jackson had already climbed a few peaks in his life. He had fought in the First World War and after being wounded, worked as a war artist. Prior to that he studied painting at the Académie Julian in Paris, where he had imbibed the nectar of impressionism, and had returned home to forge what would become the Group of Seven with his artist friends in Toronto, making numerous sketching expeditions throughout Ontario and Quebec. Here, though, Jackson has left the cozy Laurentian villages and their rolling, muddied cart paths for something untamed - the peaks of the Rocky Mountains, which held him in awe. “The obedient in art are always the forgotten,” Jackson once wrote to a friend. “Chop your own path. Get off the car track.”

THE BOW, FUTURE CORPORATE HEADQUARTERS FOR ENCANA CORPORATION, IS THE FIRST OFFICE TOWER OF ITS KIND IN NORTH AMERICA.

Its signature design, as provided by Lord Norman Foster’s internationally renowned architectural practice, Foster + Partners, firmly situates EnCana and Calgary, Alberta at the forefront of the global business arena that defines 21st century commerce.

Matthews Development (Alberta) is developing this landmark 58-story tower, which is the first significant mixed-use development east of Centre Street in downtown Calgary, a vibrant city of more than one million people.

Upon completion in 2011, THE BOW will be a one-of-a-kind workplace experience for EnCana employees. And, its distinctive arrival on the Calgary skyline will also provide a new urban destination for Calgarians and visitors.

The Bow (PDF Presentation)

Live Cam of the Bow

By Tom Sullivan

INVESTORS SHOULD PUT AT&T BACK ON THEIR SPEED-DIAL LISTS.

This phone giant doesn’t deserve to be on Wall Street’s “Do Not Call” list.   The country’s No. 2 cellular phone-service provider’s shares (ticker: T) are down 8% this year, while the Dow Jones Industrial Average — made up of AT&T and 29 other blue-chip stocks — is up 17% over the same period. The broader Standard & Poor’s 500 index, to use another comparison, has gained a whopping 21%.

Apple’s iPhone helped AT&T add a record two-million subscribers during the third quarter.

“Since March, the market has been enamored with leverage and low quality,” says Charlie Smith, chief investment officer of the value-oriented large-cap mutual fund Fort Pitt Capital Total Return (FPCGX), with $31.2 million in assets, including top holding AT&T, at 4.66%. “Stable companies haven’t performed well,” says Smith.

In AT&T’s case, the woeful share performance is also attributable to the approaching end of its exclusive contract to sell Apple’s (AAPL) wildly popular iPhone, says Mike McCormack, telecom analyst at JPMorgan. Although the terms of their deal are confidential, it’s widely assumed that it will wind up toward the end of 2010. The loss of that exclusivity could have a “meaningful” impact on AT&T’s subscriber base, he says.

Yes, it could. But AT&T’s weak share price overlooks a number of positives — including robust cash flow, a 6.3% dividend yield, a broad line of other smartphones and a management team, headed by CEO Randall Stephenson, that has proved it can cut costs, reduce debt and integrate acquisitions. For many of the same reasons, some analysts also recommend buying AT&T debt.

“The loss of exclusivity in 2010 is already priced into the stock,” says Sergey Dluzhevskiy, telecom analyst at Gabelli & Co. However, there’ll be some headline risk when the actual event occurs. AT&T enjoyed a 2.2% gain in average revenue per wireless user in the third quarter, and had a record low churn, or customer-loss rate, of 1.43% in the same period, he notes. Dluzhevskiy believes the stock, at 26.11 last Thursday, is worth 34, based on 2009 results. At recent levels, the stock has a price/earnings ratio of just 12 times estimated 2010 earnings. Gabelli & Co. has a Buy on the shares.

THE KEY BENEFIT OF THE iPhone contract has been in “getting people into the store and [helping] sell other smartphones” for AT&T Wireless, says Todd Rosenbluth, an analyst at Standard & Poor’s Equity Research, which has a Strong Buy rating on AT&T and a 12-month price target of 31. “It helped to boost and invigorate its customer base,” as 60% of iPhone sales and subscriptions went to existing AT&T customers, he says.

These advantages are unlikely to disappear completely, even if the contract expires next year.

“We’ve got a good relationship with Apple,” declares Rick Lindner, chief financial officer at AT&T. “At some point in the future, if Apple wants other U.S. carriers to sell the iPhone, we expect we’d continue to sell a full line of Apple products,” he says. And “we have a very robust line of devices, including higher-end, integrated devices,” Lindner adds.

Aside from the iPhone, AT&T is the leading service provider for BlackBerry, and offers a variety of smartphones including hotties like HTC Pure, Samsung Impression and LG Vu, among others.

AT&T added a record 2 million wireless subscribers in the third quarter, the third time in the last five quarters it’s approached that number, embarrassing bearish Wall Streeters who warned of flattening demand. In all, AT&T has 82 million wireless customers, behind No. 1 Verizon Communications’ (VZ) 89 million.

THE CENTURY-OLD FORMER phone monopoly is expected to earn $2.12 a share this year on revenues of $123 billion, and $2.25 a share on revenues of $124 billion in 2010. In addition to its increasingly important wireless business, which kicks in 46% of cash flow and 39% of revenue, the global company offers communications services in the personal-computer and video markets for both consumers and businesses.

By comparison, rival Verizon owns only 55% of its cellular joint venture with Vodafone Group (VOD). That means it gets a commensurate amount of profit from the venture. Overall, Verizon is expected to generate a profit of $2.46 per share this year, on revenues of $108 billion, and $2.50 a share next year, on revenues of $109 billion.

AT&T continues to bleed traditional wireline phone revenue. Its revenue from the traditional service was down 7.1% in the third quarter, and it has undergone extensive cost cutting in that area. But the business portion should pick up as the economy recovers, says Lindner. AT&T also faces brutal competition from cable companies, including Comcast (CMCSA) and Time Warner Cable (TWC), which offer attractively priced bundles of video, voice and broadband to consumers. AT&T’s consumer land-line business, considered by many a dinosaur, dropped 11% in the third quarter.

In an attempt to fend off the cable companies, AT&T delivers its own television service through its “U-Verse” Internet-powered TV offering, as well as partners with DirecTV Group (DTV) to offer satellite TV service. AT&T also has something the cable companies don’t- mobile telephone service.

AT&T’s free cash flow for the first nine months of this year totaled $13.9 billion, more than for all of 2008, despite the tough economy, and that free cash flow has many anticipating a mid-single-digit hike in the $1.64 dividend to be announced in December, when the board is scheduled to meet.

“Historically, we’ve increased the dividend for the last 25 years, in good economic times and challenging ones,” says CFO Lindner.

At 6.3%, AT&T’s dividend yield is fatter than that of its bonds, which some analysts also find attractive. One issue, due in 2019 and rated single-A by Moody’s and S&P but with negative outlooks, recently traded at a yield premium of 1.4 percentage points over 10-year Treasuries, or 4.8%. That’s about in line with similarly-rated Verizon’s 10-year bonds.

By comparison, the 10-year bonds of consumer-products giant General Mills (GIS), whose creditworthiness is rated a couple of notches lower, recently traded at 1.3 percentage points over Treasuries.

David Novosel, senior analyst at corporate-credit research firm Gimme Credit, says AT&T is a “slightly improving credit,” and he has an Outperform rating on the bond issue. Novosel notes that management has reduced debt by $1.9 billion in the first three quarters of this year. Debt now stands at a reasonable 1.7 times Ebitda, or earnings before interest, taxes, depreciation and amortization. Total net debt minus cash at the end of the third quarter was $66.5 billion, down 9% from $73 billion at the end of 2008.

Management has promised to get debt down to 1.5 times Ebitda before contemplating a resumption of stock buybacks, which have been virtually nil since the second quarter of 2008. The 1.7 level is already lower than rivals’ — like France Telecom (FTE), at 2.4 times, and Deutsche Telekom (DT), at 2.9 times — although it lags Verizon’s 1.3 times.

Novosel believes AT&T will achieve its debt-reduction goal in the second or third quarter next year. “They’re doing what they say they’re going to do, and that’s generated some trust” among bondholders, he says.

Lindner says the company is serious about keeping its single-A credit ratings. As part of its belt-tightening, AT&T cut its capital expenditures this year by 15%, to roughly $17 billion from about $20 billion in 2008 — and plans to keep them in a stable range over the next 12 to 18 months.

AS THE HOLIDAYS APPROACH, the fierce competition for consumer attention will intensify. There’s been buzz about iPhone rivals like Droid at Verizon, the Palm Pixi at Sprint Nextel (S) and Project Black at T-Mobile, which is owned by Deutsche Telekom.

AT&T is planning “a big splash on Black Friday,” the big retailing extravaganza the day after Thanksgiving, “to promote relatively new offerings,” says S&P’s Rosenbluth. AT&T has “an interesting and compelling broadband story” to tell, he says.

The Bottom Line

Although they’ve lagged the market, AT&T shares — with a 6.3% dividend — look attractive, regardless of the fate of its Apple deal. What’s more, AT&T debt merits consideration.

That may help ease some of the embarrassment over last week’s setback in a lawsuit against Verizon over ads that portray AT&T’s third-generation, or 3G, coverage as meager compared to Verizon’s — a criticism even AT&T’s admirers concede has merit. A judge ruled that Verizon did not have to take the ads off the air during the lawsuit.

“You’ll find the bottlenecks in the networks in [Los Angeles], San Francisco and New York City,” says Smith of Fort Pitt Capital. “They need more towers, and they’re getting them,” he says.

AT&T’s goal is to have a much stronger network in place before the iPhone exclusivity contract expires.

For investors, a marketing blitz and additional cell towers are nice, but still not as nice a gift as a solid hike in AT&T’s dividend.

Nov. 9 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said a rebound in stocks is “re-liquifying” the U.S. economy and housing prices are showing early indications of ending their decline.

“We have been very fortunate that the stock markets moved back” and are “re-liquifying the whole process,” Greenspan said at an event in Edmonton, Alberta, presented by Abu Dhabi National Energy Co., the state-controlled energy producer known as Taqa.

The Standard & Poor’s 500 Index advanced 2.2 percent to 1,093.08, a sixth straight day of gains, and is up 62 percent from its low for the year on March 9. The Dow Jones Industrial Average added 203.52 points, or 2 percent, to 10,226.94, the highest close in 13 months.

The world’s largest economy is feeling the “maximum impact” now from the federal government’s $787 billion in fiscal stimulus, Greenspan said. He said a rebound in house prices might help avert another wave of foreclosures.

“It may be too soon, but all the relevant price indexes are turning,” Greenspan, 83, said. “Now whether or not that is temporary is very difficult to tell, because we have never been through anything like this.”

A gauge of home prices in 20 U.S. cities rose in August for a third consecutive month. The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said Oct. 27.

Greenspan was appointed Fed chairman in 1987 by then- President Ronald Reagan and served until January 2006. He was succeeded by Ben S. Bernanke.

U.S. Growth

In the third quarter, gross domestic product expanded at a 3.5 percent annual rate after a yearlong contraction, Commerce Department figures showed Oct. 29. Household purchases increased 3.4 percent, the most in two years.

Greenspan said inventories are being drawn down as the economy recovers. Manufacturers will need to rev up production lines to prevent stockpiles from being depleted, he said.

“An ever-increasing part of your consumption must be met by industrial production,” rather than from inventories, he said, adding that this phase may extend into the second quarter of 2010. After that, the economic outlook “is going to depend to a very significant extent on what stock prices do.”

Through stocks comes a “wealth effect” from realized capital gains, he said.

Job Losses

U.S. payrolls fell last month more than the median forecast of economists surveyed by Bloomberg News, and the unemployment rate jumped to a 26-year high of 10.2 percent, according to a government report last week. The figures bolstered expectations the Fed is more likely to maintain its pledge to keep interest rates near zero.

The economy has lost 7.3 million jobs since the recession began in December 2007, the biggest drop since the Great Depression.

U.K. Chancellor of the Exchequer Alistair Darling, hosting a meeting of finance ministers from Group of 20 nations, said on Nov. 7 his colleagues decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold.

Greenspan said the U.S. needs to address the country’s budget deficit.

“Our capacity to sell U.S. Treasury issues was never in doubt because we had a very significant cushion between federal debt on the one hand and the capacity to borrow on the other.”

With budget shortfalls projected, “that cushion is narrowing,” he said. “We are in a position where we have got to reign in” the national debt.

The Times’s Andrew Ross Sorkin, Gretchen Morgenson and Joe Nocera recount the events of the weekend that Lehman Brothers failed and discuss the lessons learned from the financial crisis.

Click to Watch Video

KAREN BLEIER/AFP/Getty Image

The loonie neared 97 U.S. cents on Monday as oil prices surged and in the wake of strong Canadian jobs data late last week.

LONDON — The Canadian dollar extended gains to hit a new one-year high against the U.S. dollar on Monday as oil prices surged and in the wake of strong Canadian jobs data late last week.

The loonie was trading at 96.75 U.S. cents at 10 a.m on Monday. The exchange rate hit a high of 96.92 U.S. cents earlier on Monday.

Higher-than-expected domestic jobs figures on Friday raised speculation the Bank of Canada may be forced to raise rates sooner than expected.

U.S. crude oil futures rose above US$72 a barrel on Monday.

© Thomson Reuters 2009

This indictment of our need for oil and the destruction it has wrought predicts the Age of Petroleum will soon be history.

            Illustration by Shout

Investment Executive

October 2009 Edition