1. MARKET COMMENTARY
An exclusive newsletter from
Mark J. Krygier, LL.B., CFP, Vice President & Portfolio Manager
COME ON EVERYBODY, LET’S ALL DO THE “TWIST”!
Once again the world watched as the U.S. Central Bank (the “Fed”) came up with yet another
attempt to try and stimulate the moribund U.S. economy. The latest idea is “Operation Twist”, in
Fall 2011 which the Fed will try to “twist” the normal yield curve, wherein shorter-term bonds have lower
Volume 12, Issue 7 yields than longer-term bonds. Rather than adding new money to the financial system, as in the first
two rounds of stimulus known as QE1 and QE2, the idea is to sell shorter-term bonds (prices go
down and yields rise) and use the proceeds to buy longer-term bonds (prices go up and yields drop), thereby “flattening” the
yield curve. The theory is to motivate business investment and perhaps housing purchases. Will it work? Dennis Gartman,
noted market strategist, does not believe so, and worse, believes it will hurt bank profitability, as banks profit from the
spread when they borrow money at lower-yielding short-term rates and they lend it out at higher-yielding longer-term rates.
We are doing a twist of our own as we have made numerous changes to our Balanced Growth portfolios in the past
quarter. These changes resulted from several factors. Firstly, we have seen a significant divergence in performance over
the past five years between our Monthly High Income portfolios and our Balanced Growth portfolios with comparable asset
mixes between stocks and bonds. While our Balanced Growth portfolios have provided good relative performance versus
the market indices, only the Monthly High Income portfolios have been significantly outperforming the indices and have
provided excellent absolute returns. It also recently came to our attention that this divergence fits within the context of
history. Over the last 25 years, Canadian dividend-paying stocks have rewarded investors with an average compounded
return of 10.5%, while nondividend-paying stocks averaged only 2.0%. Looking forward, I expect this trend to continue as
interest rates are likely to stay very low for a very long time. As well, both consumers and governments world-wide are
deleveraging, and less spending means slower economic growth. Finally, with baby boomers just starting to turn 65 last
year, there will be more investors buying these higher-income producing securities for an extended period of time.
The exciting result is our “Total Return” portfolio. While our Growth portfolios have traditionally favoured dividend-
paying stocks, now only exceptional circumstances will allow us to hold a nondividend-paying one. Our Total Return
approach has a strengthened emphasis on producing regular tax-efficient income in order to provide more stable, consistent
returns. Clients that need the income will continue to draw it out on a regular basis, whereas for those who do not require
income from their portfolios we will be reinvesting the income within the parameters established for each client household.
Bottom line – after much consideration, we are better aligning our portfolios with history as well as current economic
themes, in order to focus on providing total returns for our clients from wherever they may arise. As long as higher-yield is
providing better total returns over pure growth then that will remain our focus going forward.
GLOBAL BENCHMARKS – To September 30, 2011 (Canadian $ Returns) – sourced from TD
Asset Class 1 Month 1 Year 3 Years Asset Class 1 Month 1 Year 3 Years
S&P/TSX 60 (Canada) -8.1% -4.3% 0.9% US$/CDN$ (1.0499) 7.3% 2.1% -0.4%
S&P 500 (US) -0.2% 3.2% 0.8% 10-year GOC Bond 3.1% 9.4% 8.5%
MSCI Europe -4.6% -12.7% -6.2% 5-year GOC Bond 1.5% 6.3% 6.4%
MSCI Emerging Mkts -8.5% -16.4% 3.4% 3-Month CDN T-Bill 0.1% 1.0% 0.8%
MSCI World -2.2% -4.4% -2.7%
Mark J. Krygier: T : 416-512-6441 E : mark.krygier@td.com
Avital Pearlston: T : 416-512-6674 E: avital.pearlston@td.com
4950 Yonge St., 16th Floor, Toronto, ON M2N 6K1
The statements and statistics contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or complete. This newsletter was prepared
by Mark Krygier who is a TD Waterhouse Investment Advisor and is for informational purposes only. It is not an offer or solicitation with respect to the purchase and sale of any
investment fund, security or other product and does not provide individual, financial, legal, investment or tax advice. Please consult your own legal and tax advisor. Particular
investments or trading strategies should be evaluated relative to each individual's objectives in consultation with the Investment Advisor. TD Waterhouse Canada Inc. and its
affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. TD Waterhouse Private Investment Advice is a
division of TD Waterhouse Canada Inc, a subsidiary of The Toronto-Dominion Bank. TD Waterhouse Canada Inc. - Member of the Canadian Investor Protection Fund. ® / The
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