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Fitting the pieces for a recession-proof portfolio

While there are no easy answers in this market, says a leading Canadian analyst, here are a few careful steps to firm up your portfolio.

“There is no guarantee of anything these days.”

That statement might be made into a bumper sticker, or a sign to be hung above the desk of every investor.

And it should remain there after this mind-numbing crisis is over to remind us that there is really no guarantee of anything, ever.

As it happens, the quote comes from a leading market expert in Vancouver. Mr. Louis Paquette is fashioning a strategy for 2009.

As he develops his strategy in Emerging Growth Stocks, he gives us his thinking each step of the way. Shoring up your portfolio is not quite a guessing game, but it is a lot like putting together the pieces of a puzzle.

It’s easy to see what doesn’t fit and a lot harder to see what does. So let’s start assembling the pieces.

The wedding season

“What investment strategies are going to work this year?” asks this analyst. A couple that worked last year might just continue to get the job done this year, he believes.

Gold is one. This precious metal is entering its seasonally weak period from April to August.

But Mr. Paquette believes the pattern may not repeat itself this year. He believes it has “great potential to appreciate as the U.S. dollar is devalued due to massive printing of the currency and ongoing massive fiscal deficit spending.”

Last year seasonal buying failed. Prices didn’t bottom in August, but in November. Why? “Because seasonality has been driven in part by Indian jewelry demand and the wedding season. Being price sensitive though, Indians are playing a smaller role now.”

Jewelry demand fell 11 per cent last year, but the demand for gold bars and gold exchange-traded funds (ETFs) soared. Overall demand rose 4 per cent while mining production fell 4 per cent.

Add to this the looming fate of the U.S. dollar — “a disaster waiting to happen” — and you have a strong case for gold even out of season.

A new bubble

OK, that’s one. “But what other investing themes should we buy into going forward?” asks the analyst. There are two.

One comes from the debt markets, the other from the liquor store (no, no we don’t mean drowning your sorrows).

“Many analysts I follow are warning that U.S. government treasuries are forming a bubble that will burst if and when the economy bottoms out,” says Mr. Paquette.

His strategy involves shorting U.S. treasuries “without the dangers of going short.” That is, you don’t have to suffer the tightrope tensions of real short selling. Instead, you purchase the Horizon BetaPro U.S. 30-Yr. Bond Bear ETF (TSX-HTD), a fund that goes up when treasuries go down. The chief reason for doing this is that corporate bonds are paying the largest spreads in years. They have left the government’s treasuries far behind.

This has two results, the analyst points out.

The risk-reward balance

“First, it means corporate earnings will suffer since the cost of borrowing is relatively high, making equities less attractive. But the bondholder is getting paid more.”

This tilts the risk-reward balance in favour of the bonds, the analyst explains. “Corporations won’t hesitate to cut their dividends to get through the tough times — or cut salaries to reduce operating expenses, hurting employees and shareholders. But the last thing the company will do is to default on their bonds as it would lead to foreclosure and bankruptcy. So the risk-reward is relatively attractive.”

If you would like to go with corporate bonds instead of against government treasuries, you may wish to try a new product, Mr. Paquette suggests. It’s from noted venture capitalist Kevin O’Leary and it’s called the O’Leary Global Income Opportunities Fund (TSX-OGO). Because it is new, it’s thinly traded.

If you want to look for specific corporate bonds, he adds, speak to a licensed securities broker.

If you want a stock for these troubled times, he says, try this.

Necessity not luxury

While there are no guarantees these days, as we have had occasion to mention, “there are at least some businesses that depend less on discretionary spending and are more or less recession proof,” says Mr. Paquette.

Inevitably, one of those is alcohol, which always seems to prove to be more of a necessity than a luxury in times like these. One candidate this analyst likes is a trust, Liquor Stores Income Fund (TSX-LIQ.UN). (Ontarians take note — this is not your Liquor Control Board, but the private liquor stores of Alberta, British Columbia and Alaska.)

This fund’s chart looks promising, Mr. Paquette notes, and it yields more than 12 per cent.

Of course, there are other spots to troll for stocks that supply the necessities of life, such as food and medical services. And all that infrastructure spending must find a home. “So demand may remain strong for some building materials such as aggregates and the like.”

But that is where Mr. Paquette rests his case in this issue of Emerging Growth Stocks. The puzzle may not be complete — how could it be in today’s conditions? — but three pieces are firmly in place.

And in a world where certainties are few and far between, three investment ideas is a whole lot better than none.