Risk & Seeking Stable Growth

Posted by Ryan Irvine - Keystone Financial

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Market BuzzMarkets Range-Bound in Minimal Growth Environment – Seek Stable Growth

On Friday for first time in more than a month, Toronto’s main index saw action above the 12,000, peaking at 12,017.92 late in the morning. Late in the session and on the heels of six-straight days of gains, the TSX turned mildly negative and closed down 18.38 points, or 0.15 per cent, to 11,927.59. A positive Friday session would have made it the second-longest run of the year.

Gold was the story of the week, as the little yellow metal hit a new record on Friday as investors sought a safe haven outside of heavily indebted governments. Spot gold hit a high of $1,260.20 an ounce U.S. compared with $1,243.40 U.S. late on Thursday. The rise in the gold price helped buoy gold mining stocks on the Toronto Stock Exchange.

In the U.S., the Dow Jones industrial average ended the day slightly up, but posted its best two weeks since November.

The Dow’s modest Friday gains capped a surge of 5.2 per cent over the past two weeks, putting the average nearly halfway back to the high for the year that it reached on April 26.

U.S. equities had a longer winning streak earlier this year, an eight-week stretch that ended in late April, but those gains were more gradual. A sharp drop in May and early June brought the Dow down as much as 12.4 per cent below its 2010 high, a decline that most analysts call a “correction” (market decline of between 10-20 per cent).

The debate becomes whether that correction phase is over. The Dow has gained back 6.5 per cent from its lowest close of the year on June 7, but it’s still down 6.7 per cent from its 2010 high.

From our perspective, the gains (and declines) we have seen of late are typically of the type of uncertain and highly jittery market conditions we find ourselves in at present and is the type of action that will not likely abate in the near term. Both the bulls and bears have decent arguments for the markets next move, but until one out muscles the other, we will continue with a rather directionless market. In the end, valuations may just be fair on a broad basis at present and the current consolidation is a product of that conclusion. This type of consolidation, in a minimal growth environment, is something we have foreseen seen this past fall.

In times of uncertainty, it is great to get paid while you wait. Along those lines, this past week, one of our long-term favourites for stable growth in our Small-Cap Coverage Universe (www.keystocks.com), K-Bro Linen Income Fund (KBL.UN:TSX) declared its regular monthly cash distribution of 9.167 cents per unit for the period from June 1, 2010, to June 30, 2010, to be paid on July 15, 2010, to holders of record of units on June 30, 2010.

K-Bro Linen also recently announced that the fund’s operating subsidiary has signed 10-year contracts with Vancouver Coastal Health Authority, Fraser Health Authority, Provincial Health Services Authority, and Providence Health Care Society as a result of K-Bro being a successful proponent under a competitive request for proposal processes that begun last December. Service for the majority of the new volume is expected to commence in November 2010. The contracts are renewable for a further five years at the customer’s option. Certain existing contracts with VCH and FH were extended to November 2015, as part of this process.

Looniversity –  Understand Your Tolerance for Risk

In the wonderful world of investing, there is a direct relationship between expected returns and risk – the higher the expected payback from your investment, the higher the risk. Before you can decide on a personal investment strategy, you must consider how much or how little risk you are prepared to take with your hard earned dollars.

Your risk tolerance can be affected by:

Time horizons
The amount of time you have to meet your financial goals and to make up for any losses you might experience. People with long-term horizons may be more willing to endure periodic fluctuations in the value of their investments.

Cash requirements
The extent you depend on your investments to meet daily expenses. Investors who rely on their investments to meet daily living expenses will be much less comfortable with the risk of losses.

Emotional factors
Your emotional response to risk and to changes in the value of your investments. Some people are quite comfortable with the ups and downs of the market, while others find it difficult to sleep at night when their investments fluctuate in value.

There is no ‘right’ answer to the question “How much risk should I take?” Risk tolerance is a personal issue. You should never feel obliged or pressured to take more investment risk than you are comfortable with. Remember, though, that there is no such thing as a high-return, risk-free investment. You cannot expect to be rewarded with high returns on your investments if you are not prepared to accept the risks that go with them.

Put it to Us?

Q. What is a company’s “current ratio”?

– Harry Miller, Toronto, Ontario

A. The current ratio compares all of a company’s current assets to its current liabilities. In the financial world, the term “current” means less than one year. So, current assets include cash, accounts receivable, inventory, prepaid expenses, and other assets that can be converted to cash within one year. Current liabilities include short-term debt, interest, accounts payable, and any other outstanding liabilities that are due within a year’s time.

When calculating this ratio, you are essentially trying to determine whether a company can meet its short-term obligations. It will likely be able to do so if the ratio is above 1; if the ratio is less than 1, the company may fall short, so some alarm bells are raised. For industries that generally have a large portion of current assets tied up in inventory, a ratio of 1.5 (or even 2) might be a better standard. When analyzing the current ratio, as when looking at any ratio, an investor should make comparisons between companies that operate in the same industry. Different industries have different dynamics and cross comparisons can be somewhat meaningless.

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