Robin Hood and the fight against inflation
There are five reasons inflation may be kept at bay for some time, says this Canadian advisory, which also has fresh advice on a major stock.
Was Robin Hood a thief? A revolutionary? An early socialist?
Or just a guy who was handy with a bow and arrow?
Whatever conclusions we may draw about the legendary medieval outlaw, the Robin Hood equation still applies. Taking from those who have more to give to those who have less.
Only today it doesn’t come from lightning raids in the forest, but from a stealthier source, says one of Canada’s oldest investment advisories.
Inflation is the modern Robin Hood, says The Investment Reporter. “This scourge robs from the old and gives to the young.”
Inflation eats into everyone’s standard of living, of course. But those who are younger have more time to work against inflation. Those who are close to retirement, or already there, face a grimmer battle.
There are five roadblocks to inflation right now, says this advisory. We’ll see in a moment just what they are and how long they can be expected to hold off the inflationary monster.
But first, the advisory has changed its advice on a stock that has also been robbed of something — but may be better off for it.
Restored to a buy
In the strictest sense of the word Magna International (TSX-MG.A) wasn’t robbed. But just about a month ago, GM yanked Opel out of Magna’s hands and left Mr. Frank Stronach without the European automaker of his dreams.
But this may actually help the company turn the corner. The Investment Reporter certainly thinks so. It has had Magna on a hold since early 2007 and has now restored it to a buy.
With Opel out of the picture, it says, “Magna will not compete against its customers — major car manufacturers.” Now the firm can roll up its sleeves and get back to its basic business of making auto parts.
The auto industry isn’t exactly motoring along smoothly these days, and the U.S. “cash for clunkers” program won’t be around to pull it out of the doldrums next year.
Still, this advisory sees a silver lining for Magna. It’s flush with cash, which it could use “to acquire the assets of failed competitors on the cheap.” With or without new blood, it should continue to increase its dollar content per car in North America and Europe. “That is, each car produced will contain more and more parts made by Magna, which raises its sales.”
The stock trades well below its book value and should return to profitability in 2010. It’s a buy for long-term gains, says the advisory. The shares have generally been trending upward and, at $52.31, they aren’t far from their 52-week high. The dividend, alas, has not yet been restored.
Thank the technology boom
Now consider convertible debentures, Mr. Baskin says. They are simply bonds issued by companies. They pay interest regularly, usually twice a year.
The interest payments on debentures take priority over dividends. No dividends can be paid until the interest on debentures has gone out. By the same token, if the company fails or has to reorganize, debenture holders must receive their principal before shareholders get anything.
Debentures are usually rated by one of Canada’s big bond rating agencies. They will be rated lower than government bonds, of course.
Institutional investors rarely buy anything with less than a BBB rating, so you’re taking a greater risk with debentures under this level. Naturally smaller companies will get lower ratings than blue chips.
Convertible debentures are often traded on the exchange under the company’s symbol with “db” or “d” affixed to it.
That’s what they are. Here’s how they work.
In and out of the money
Now back to some real theft. Inflation. As we know, that ravaging predator is dormant right now. And five things are keeping it that way.
The first is higher productivity. We can thank the technology boom for this, says this advisory. The coming of sophisticated computer networks has made businesses much more efficient.
This means they can crank up their output and absorb higher costs without passing them on to their customers.
The second inflation-fighter comes from a less cheerful source — higher unemployment. The very gains in productivity mentioned above may well mean that companies spend more on equipment and less on workers even as the recovery picks up.
That means unemployment is liable to remain fairly high and wage demands correspondingly low. That’s good for inflation, not so good for the pocketbooks of many families.
Less spending, more saving
International trade is the third reason inflation is being kept in check. As this advisory puts it: “If North American manufacturers try to gouge consumers or fail to meet their needs, they’ll lose market share to, say, low-cost imports from China and elsewhere.”
Fourth on the list is the rising loonie. This has actually led to deflation, as low-cost imports get even cheaper. While it’s hard to predict currency movements down the road, the Canadian dollar now appears to be fairly valued, rather than undervalued as it was earlier in the decade, the advisory informs us.
The final brake on inflation is the simple fact that the population is getting older. As people age, they spend less. Homes are paid off, kids are gone, there’s less need for new home furnishings and so on.
Less spending and more saving add up to less fuel for inflation.
The Investment Reporter is reasonably optimistic. It does not see another period of rapid inflation until 2012, when “large numbers of baby boomers leave the work force.” Even that could change if new legislation were to raise the retirement ceiling from 65 to 70 years.
When inflation does begin to bubble up, the advisory adds, you can still combat it with a portfolio that contains a healthy proportion of stocks whose dividends rise faster than inflation (and yes, the advisory believes Magna will bring back its dividend as its earnings recover).
In the meantime, the longer Robin Hood is idle, the richer we’ll all be.
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