The West Letter

Dear Friends,

They make a nice couple, don't they, Canada's PM Mark Carney and Mexico's President Claudia Sheinbaum. They are smiling bravely, given that our two countries -- as Pierre Trudeau so delicately put it -- are "sleeping with the elephant". When that elephant is agitated , as it has been since the second coming of the Orange Bloviator, either of us can be crushed.

Both Canada and Mexico are fortunate to have such steady hands guiding the ship of state during these perilous times. It remains to be seen, however, whether their administrations will be able to successfully renegotiate the three-way free trade agreement (CUSMA) we have with the US that is up for renewal this year. Both leaders are projecting optimism, but at the same time working feverishly on Plan B's.

As PM Carney has wisely and repeatedly said: the old order of global trade anchored by the U.S. "is dead". Canada must seek out new alliances and partners. The elephant will never go away, but we must learn to stand more on our own two feet, to be less dependent on the behemoth. Canadians understand this.

In this context it is encouraging that Canada and Mexico last September signed a Comprehensive Strategic Partnership framework agreement and a Canada Mexico Action Plan. Each has much to gain from strengthening bilateral relations. Afterall, we are natural western hemisphere neighbours, albeit separated by an inconvenient elephant.

As most of you know, by a strange twist of fate, I personally in the last couple of years have found myself in the position of making connections in, and getting to know, Mexico. In my own small way, I hope I am contributing to building new bridges between our nations and cultures. With that in mind, I thought it might be of interest to share a few observations with you from the experience of a Canuck who has "gone native" (part of each year) in Mexico. I don't hang out with ex-pats and with the exception of business calls, speak only Spanish all day long. My base is in Mexico City.

Off the bat, you might ask: "Chris, where did the Spanish come from?" The answer is a surprise to me. It turns out that old dogs can indeed learn new tricks. All you need is a passion to learn, an excellent teacher and a romantic partner who only speaks Spanish with you. Next question. (Ps. Please message me if you'd like to be connected with my profesora. She gives classes in her home in Kingston and remotely. You're on your own for the romantic partner.)

While Mexico and Canada are both democracies, how that form of government is expressed in Mexico can be quite different, compared to what we are used to here. Mexico has a long history of the pendulum swinging between revolutionary liberators of the people, and autocratic rulers who restore the privileges of the land and capital owning classes. In terms of distribution of the wealth, Canada is a much more democratic society.

Claudia Sheinbaum, as leader of the Morena (literally, "dark-skinned") Party, represents (along with her immediate predecessor Andrés Manuel López Obrador) a swing of the pendulum back to the left. By increasing the minimum wage dramatically, accompanied by numerous social benefits programs, Morena has lifted tens of millions of Mexicans out of abject poverty. The party is wildly popular in consequence. Sheinbaum has something like a 90% approval rating.

Mexico is not shy about interfering with free markets. State-owned Pemex, the major player in the petroleum sector, is a prime example, with predictably unhappy results. Both the left and the right are known for running deficits, but Morena is perhaps trying even harder. In consequence, even though GDP is still growing and unemployment is remarkably low (around 2.7%), inflation is dangerously high. The knock-on effect is high interest rates on mortgages, car loans, credit cards and most crucially, government debt. If I were to consider taking out a mortgage on a property in Mexico City, I'd be looking at an interest rate of say 12%.

Despite being a social justice movement "of the people", the Morena regime can appear much more autocratic than we are used to in Canada. Five days a week, starting at 7:00 AM, Sheinbaum holds a "mañanera" (early bird) press conference. It lasts two hours and media access is strictly controlled. Sheinbaum decides who to take questions from. With the mañanera ritual, Morena to a surprising degree determines the news cycle for the next 24 hours. Virtually all the media, print and broadcast, parrot the talking points of the mañanera. It is an extremely effective propaganda machine.

Canal Once, the public broadcaster equivalent of the CBC, has seen its senior management gutted under Morena and replaced with political hires. To my delight, though, Mexico still has a seemingly thriving print newspaper industry. When I take my daily stroll to the news vendor on Avenida Insurgentes, I have my choice of ten or so publications. For a total of 25 pesos (roughly two dollars), I pick up copies of the left of centre La Jornada and the right of center Millenio. They both make for lively reading (up to a point, considering the influence of the mañanera ). Millenio's pundits, as one would expect, are more consistently questioning and/or scathing of Morena in their opining.

Business coverage is particularly good in Millenio, including content from WSJ and the Financial Times, and refreshingly, both papers devote more pages to arts and culture than we see in Canada. There is a singularity in the Mexican papers, however, that is quite shocking to the Canadian eye: acres of government ads plugging the marvels and benefits of Morena programs! A dozen or more full-page and half-page ads/propaganda in a single issue. Not just for a day. Day after day. Another tool in the government toolbox to control the news agenda.

The scale and the splendour of public art in Mexico are stunning. Here is some of the central detail from a spectacular Diego Rivera

mural in Mexico City's Palacio de Bellas Artes. It's title is Man the Controller of the Universe. It was originally commissioned by John D. Rockefeller Jr., of Standard Oil fame and fortune, to adorn the lobby of his newly built Rockefeller Center in New York City. However, when John D. saw the still unfinished work and realized he would be giving wall space to Lenin (depicted on the right), he and Rivera had a falling out and the commission was never completed. Rivera was a committed communist (of the anti-Stalin, Trotskyite school) and Rockefeller would have known this. Perhaps he could have overlooked Lenin, but not Trotsky, Marx and Engels, ten feet or so to the right of Lenin. Then there was his own likeness swilling a glass of champagne between the two propeller blades to the left. Rockefeller was a notorious teetotaler.

It would be fair to say that in this work, and in countless other examples throughout Mexico City and beyond, Rivera laid on his pro-worker, anti-capitalist feelings with a trowel, as did his great compatriots, Orozco and Siqueiros. To a Canadian sensibility it is rather remarkable that the Mexicans are so sanguine about mocking the capitalist hand that feeds them. President Claudia Sheinbaum's official residence in Mexico City's Palacio Nacional is no exception. Karl Marx has pride of place overlooking centuries of Mexican history as gloriously brought forth by Rivera. It is hard to imagine something equivalent in Ottawa. The closest we might come to it would be if the Canadian government were to commission Kent Monkman to paint his vast Miss Chief Testicle revisionist historical tableaux on all the corridor walls of Parliament's Centre Block building. That seems a stretch. And it's only a starting thought.

To conclude: we need to remind ourselves that these murals were commissioned in the the 20s through the 40s, following the Mexican Revolution. The vast majority of the population had not been well served by crony capitalism, far from it. Sadly, that is still true for tens of millions of Mexicans. Rivera and his artist compadres, through the medium of great art, taught essential lessons about Mexico's proud but difficult past, the ongoing struggles of the present, and the promised land of the future. Those lessons still resonate today.

Here is one more Rivera masterpiece from the 20s, poking fun at two generations of the Rockefeller clan this time, along with Henry Ford and J.P. Morgan. It is titled The Capitalist Dinner and is in stark contrast to a nearby panel that portrays a simple, Mexican communal supper titled Our Daily Bread. Both are part of a massive mural installation conceived and executed by Rivera for the stately colonial buildings of the Ministry of Public Education in the historic sector of Mexico City, an absolute must-see, if you have the chance.

Attitudes towards the stock market today in Mexico, if not as cynical as Rivera's, are nonetheless markedly different from those in Canada. Being in the business, I am curious about those differences. Here is some of what I have learned.

All Mexicans in the formal, tax-paying economy, are entitled to government pensions. As here, both the employer and the employee are obliged to pay into these programs. Also as here, these pensions, equivalent in some ways to CPP and OAS, are not nearly enough to retire on.

As here, Mexicans can supplement their minimum government pensions with various programs roughly analogous to our RRSPs and TFSAs. But that's where the similarity ends. The middle class and well-to-do Mexicans that I meet do not use these programs. More to the point: they generally do not save!

How then, do they expect to be able to retire? Good question. As far as I can surmise, there is a profound belief in two things: real estate and "familia". Everyone strives to own their own apartment or "casa". That makes sense. Secondly, there is an expectation that in old age one's children will pick up the slack as needed. That may make less sense in a country with rapidly falling birthrates.

As a result, the people I tend to meet, with rare exceptions, haven't a clue about the stock market. It might as well not exist. They wouldn't know where to begin to buy a stock. It's an alien concept. This is a problem that the government has identified. The roots to it are multifold.

Financial literacy, often considered to be unacceptably low in Canada, is woefully lacking in Mexico. The idea that it is possible to compound savings in the stock market at far better rates than parking cash in a bank, is virtually unknown.

So basic financial education would be part of the solution. But the government is not doing it. Logically the private sector should leap into the breach, but that could be easier said than done. As in Rivera's murals, there is deep-seated distrust of financial "advisors" in Mexico.

My read is that these barriers could be overcome with a long-term, strategic commitment from a well-capitalized investment dealer. Every time I float this idea in conversations, there is immediate interest from potential savers and investors. They tell me they simply are not being offered this kind of option in the Mexican market. Backing up that perception, it is noteworthy that in a country of 130 million people, Mexico has only some 10,000 registered financial advisors. Canada, with a population of 41 million, has about 28,000 advisors. Nature abhors a vacuum. In the spirit of deepening bilateral relations between our two countries, let's hope that a Canadian wealth manager steps up to help fill this one.

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CLASS OF 2026 FIRST SEMESTER REPORT CARD Staying the course pays off swimmingly!

The Class of '26 rose 10.1% for the July 1st to December 31st period, staying neck and neck with the S&P 500's gain of 10.5%. It bested the Dow by 2% over the same stretch. The outlier was the TSX which advanced an eye-popping 18%, mostly attributable to stratospheric gains in the precious metals sector. As the Headmaster has said before: "That's a sandbox we don't choose to play in. Those sugar highs never last, and when they wear off, many long years can go by before they return."

Adds the Headmaster: "I would like to commend our Healthcare benchmates Johnson & Johnson and Amgen, the so-called defensives of the Class, for leading their peers with a sparkling average gain of 26.4% over the first six months. Info Tech were a close second at 22.9%.

In terms of individual performance, I feel bound to congratulate Alphabet (parent of Google et al.) on a stunning 77.6% advance. And our patrician financial Class member Royal Bank deserves special mention for a none-too-shabby pickup of 30.4%."

No Class losers suffered a 10% or more dip. The worst hit were Intact Financial Corp, -9.8%, John Deere, -8.4% and Disney, -8.3%. As always, it pays to be diversified.

Here, briefly, are the sector by sector Class results.

Financials - B Central bankers, with the exception of Teflon Carney, rarely are showered with praise during their tenures. With only two exceedingly blunt instruments, setting interest rates and operating the spiggots that control the creation of money, we expect them to steer us skillfully away from the miseries of recession and inflation.

In the words of the Headmaster: "Let's give a tip of the hat to oft-maligned Bank of Canada Governor Tiff Macklem and his US Fed Governor counterpart Jerome Powell. Coming out of the pandemic collapse, they have artfully threaded the needle. To the surprise of many, our economies are still growing and inflation has largely been tamed.

Our Financial Classmates in particular are direct beneficiaries. When the economy is growing, credit and investment flows more freely and defaults on loans are not a drag on earnings. That was clearly the pattern for BlackRock, the world's largest asset manager, RBC, Intact Financial (property and casualty insurance) and Brookfield Asset Management over the past six months. Don't be fooled by their modest average market rise of 4.4%. All are thriving."

Resources - B Nutrien, with the world's largest reserves of the essential crop nutrient potash, advanced handily over the semester, up 6.7%. Adds the Headmaster: "Potash is so essential that it has largely dodged the Bloviator's tariff bullets. The U.S. simply can't produce enough on their own. They don't have the precious reserves that we do."

Retail - B Class veterans Alimentation Couche-Tard and Metro, despite predictably steady sales and earnings growth, saw their stock prices stuck on pause over the past couple of quarters. They advanced an average 1.6%. Comments the Headmaster: "I am not concerned. In both cases, the valuations were getting a bit rich. This is just a normal phase, building a new base before the next leg up."

Industry - B minus Class stalwarts John Deere, CCL and CNR appreciated an average -1.2%. Looked at individually, Deere was the laggard of the trio with a drop of 8.4%. This has to be looked at in the context of the highly cyclical agricultural world where farm equipment dealers are still working down excess tractor and related equipment inventories. The rebound is expected later this year and continuing into 2027.

CCL, the Canadian label and packaging company that operates around the world, conversely picked up a gain of 9.2% on the back of more than healthy increases in revenues and earnings. "And there is more to come," adds the Headmaster.

CNR was essentially flat over the semester. Comments the Headmaster: "CNR's been in a funk, underperforming its North American Class I railroad rivals for the past couple of years. CEO Tracy Robinson has made a lot of good moves to cut costs and improve efficiencies, but it's show me time. No more excuses!"

Healthcare - A plus From the Headmaster again: "Sometimes the hardest thing in investing is perversely the easiest. Do nothing and wait. If you have chosen well, good things will happen. Johnson & Johnson joined the Class in 2010 and from then until now we have seen its stock advance at a compound annual growth rate of 8.7%. If you include reinvested dividends, the return was 12.1%. Annually. Although Amgen joined the Class in 2016, its return rates are almost identical. Patient stocks like these are the essential yin component of a well-balanced portfolio."

Info Tech - A plus More from the Headmaster on his Confucian thought: "And then there's the yang, the dazzling pyrotechnical performers on the high wire who grab all our attention. Classmates Apple, Microsoft, Alphabet and Taiwan SemiConductor were all in the Artificial Intelligence (AI) spotlight this semester and didn't slip. Nor did their more utility-like benchmates Visa and Salesforce. Collectively they posted an average gain of 22.9%. Yin and yang. We need them both."

Entertainment - C plus Headmaster: "If Donald Duck were around, he'd be blowing a gasket over Disney's ongoing stock market woes ... five years and counting of Zippity Doo Dah nuttin, and -8.3% in the latest semester!!! I sympathize hugely.

Why do I hang on? Because sometimes the market gets it wrong. To wit: in the past five years Disney revenues are up 40.2%; earnings per share are up 628%; long term debt is down 26.7%; and return on equity has risen from a moribund 2.4% to a live and kicking 11.8%.

A rational observer could easily conclude that a great company with one-of-a-kind assets selling at a discount is an obvious buying opportunity. But the market is not always rational. Patience, dear Donald. Patience."

Donald Duck: "And if that doesn't work, Headmaster, we give Disney the Bee Oh Oh Tee! Good riddance!!!"

Infrastructure - C plus Brookfield Infrastructure saw its stock price sag 4.6% over the semester. But this was belied by this Class member's fundamentals. In the words of the Headmaster: "Brookfield's Data division is on fire, up 62% in the latest quarter. That drove overall funds from operations performance up 9%. And the icing on the cake? The company just signed a $5 billion framework agreement with Bloom Energy to develop power for AI data centres.

While we wait for the market to catch up to Brookfield's burgeoning order book, we can take solace in its unit distributions, currently yielding a snappy 5%"

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If you would like further information on any of the investing ideas raised in this issue, or a complimentary consultation, please call or email.

Dear Friends, Tim Price, the former Chairman and CEO of 3Macs, died of a stubborn cancer on December 21st at the age of 66. I attended his funeral at St. Andrew's and St. Paul's in Montreal on January 9th. I wasn't alone. The church was overflowing with family and friends, and the bag-pipe-accompanied service was streamed around the world. Tim was a prince of a man. He came from a storied Quebec family and made friends and won respect throughout his life. He was equally at home on the playing field, in boardrooms, serving the community in a multitude of ways, and most of all, in the bosom of his family. Tim and I met in the 80s in Montreal when we were both on the board of the local Queen's Alumni chapter. Along with our fellow alums, we helped raise the profile of Queen's in Montreal with some memorable annual dinners held at the Ritz Carlton. After our stint on behalf of Queen's, the years passed and Tim and I lost touch. By 2005, after co-founding and running a handful of successful businesses, I was at a crossroads in my life. My marriage had blown up; my New York partner and I were disenchanted with the U.S.-based medical education business we had started up; and my dear mama was dying in Kingston, my hometown. Mom died and as I emerged from the aftermath, there were decisions to make. By 2006, I decided to explore the possibility of starting a new life in Kingston. But what would I do? During my working life in Montreal I had built businesses that catered to blue chip companies like the Royal Bank, Bell Canada, and major U.S. and European pharmaceutical companies. They all had offices and operations in Montreal. Obviously, nothing like that would be possible from Kingston. All my adult life I had been a keen student of, and investor in, the stock market. I did my first trade, behind my parents' backs, when I was 18. I placed all my summer's earnings (earmarked for tuition at Queen's) on a single stock: Doman Industries. Call it fate. Call it beginner's luck. But that initial investment tripled by February and gave me the lifelong bug. In Montreal, I was a member of Canada's oldest, and arguably most prestigious investment club, Optimus Ltd.. And I had many friends and acquaintances in the investment world. The penny dropped in my fevered brain. I would canvas people I knew in the brokerages and investment houses in Montreal and see what they thought about my getting into the business in Montreal, or better yet, in Kingston. I was received warmly on the first two calls, and received great, but not actionable, advice. The third call I made was at MacDougall, MacDougall & MacTier, affectionately known as 3Macs. I knew a broker there from way back, Richard Hart. We met in a conference room at the offices on de la Gauchetière in downtown Montreal, overlooking Dominion Square. I quickly made my elevator pitch to Rick, updating him on my "crossroads" in life, and my tentative thinking on getting into the investment "biz" in Kingston. Little did I know that Rick's first wife (who tragically died in a car crash) was from Kingston, and he knew the community well. He immediately grasped the potential, and exclaimed: "We don't have any representation in Kingston. But it's a great market. We need to get Tim in here!" "Tim?" I asked. "Tim Price," Rick answered, "our CEO. He's right around the corner."

"Tim Price who went to Queen's and played rugby?" I blurted out. "He's the CEO at 3Macs?"

"Uh huh," replied Rick. "Wait a sec and I'll get him. He has to hear this."

In less than a minute Tim bounded in with a huge welcoming grin and a handshake to match. We hadn't seen each other in perhaps 15 years, but picked right back up where we had left off. Within 20 minutes we had sketched out the terms and conditions of my joining 3Macs and setting up the Kingston office. And so it came to pass.

Dear Friends, This temptress of the deep wields her charms in a marvellously baroque former monastery that now houses the Museo de Arte in Queretaro, Mexico. You will find delightful variations of her likeness throughout Mexico in art both high and low, from centuries ago, and continuing right up to today.

As many of you know, like Homer's Ulysses, I have long been drawn to mermaids. In fact, I swim with them in the inland sea we know as Lake Ontario, every summer morning. They have sustained me through the tempests and the doldrums and everything in between for the past 20 years. Mermaids, or "Sirens" are universal to all coastal cultures and they share key characteristics. They live in treacherous places by the sea and are half fish or bird, half woman. They tempt men with their beauty and their music (Siren songs). And their sailor victims lose their senses and perish on the rocks! But we know from Homer that not all men succumb. We have Ulysses' legendary example. On his 10-year voyage across the Mediterranean back to his beloved Ithaca, he desperately wanted to see and hear the Sirens. But Ulysses had restraint. He did not want to die on the rocks. He ordered his crew to plug their ears with wax so they would be immune to the Sirens' calls. Then he bade them lash him to the mast of the ship, ears unplugged. Sure enough, as they came upon the Sirens, Ulysses was driven to distraction by the haunting cries and melodies of these wondrous creatures. He had to join them. He ordered his men to free him, but deaf to his bidding, they refused. Ulysses thrashed and wailed with all his might. The crew only responded by redoubling the knots of his lashings. In his perverse way, though, Ulysses had his cake and ate it too. He sipped of the Sirens' cup, yet survived to live another day and eventually reclaim his birthright and his ever-patient wife Penelope. The Headmaster has written previously of Siren songs in the investing world. He will not repeat himself here, other than to say that the lures of false promise are eternally with us. If we don't want to be dashed upon the rocks, we must control our passions as Ulysses did.

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CLASS OF 2025 YEAR-END REPORT CARD Strength in diversity, and some membership changes The Headmaster takes some comfort in the Class average of 11.3% over the school year (July 1, 2024 - June 30, 2025), given the second coming of the Orange Bloviator in Washington DC. "For the most part, the Class held its course admirably. My students were not easily distracted. They kept their eyes on the distant horizon, and the results bear that out. We had strong contributions from most sectors, including an outstanding turnaround at Disney of 24.9 percent." "Following on Disney's heels, we had excellent returns from Financials, Infrastructure, Resources, Retail, Industry and Info Tech. Telecom was so-so, but the only losers were Energy and Healthcare. Overall, I say well done." The comparable returns for the S&P 500, the Dow and the TSX over the Class year period were 13.6%, 12.7% and 22.7% respectively. The latter, in large part was attributable to the rise in gold stocks, a fear-factor sector the Headmaster is not drawn to. Here are the sector-by-sector results. Financials - B+ BlackRock, Royal Bank, TD and newcomers Intact Financial and Brookfield Asset Management posted an average gain of 16.9%. Intact is Canada's largest property and casualty insurance company, and has significant operations in the U.S. and Europe. It has a reputation for consistent growth, both organic and by way of acquisitions, and industry-leading returns on equity invested. "Brookfield Asset Management (BAM)", explains the Headmaster, has about $1 trillion under management. Led by the reclusive and brilliant Bruce Flatt, it raises funds from, and invests on behalf of, some 2000 institutional clients in countries around the world. The beauty of the business model is that in return for its services, BAM collects a handsome stream of management fees and incentive bonuses (known as carried interest), that has grown in the double digits since the company was formed. I expect it will continue to do so." "Regretfully," adds the Headmaster, "TD is not rejoining us in the Class of 2026. I expelled this long-time Class favorite last December. Turning a blind eye to rampant money laundering (in the $100s of millions over a six-year period) is not something we can take lightly. The company pleaded guilty and has paid over $3 billion in fines. But it's still is in the doghouse with U.S. regulators and the Department of Justice, and deserves to be." RBC, BlackRock, Intact and BAM, promoted. Resources - B+ Headmaster: "Our old friend Nutrien, the Canadian fertlizer powerhouse, came through for us once again with a 13.9% return. Over the school year the potash spot price rose 17%. Bear in mind, potash is Nutrien's flagship product. As long as the world population is growing and there are more hungry mouths to feed, that spot price will continue to creep upward." Promoted. Energy - C minus It is with sadness that the Headmaster has thrown in the towel on his energy representative, Brookfield Renewables, a subsidiary of Brookfield Asset Management. It had a return of -4.8%. "The stock price has been on a downward slope for the past five years. Yes, the generous unit distribution has mitigated that somewhat, but not nearly enough. In many ways the fundamentals have been encouraging -- growing revenues and wonderful deals struck, such as the ones with Microsoft and Google -- but the payoff is always being pushed off into the future. With the Orange Bloviator pulling out the rug from under renewables in the U.S., I'm no longer prepared to wait. We can do better elsewhere."

Infrastructure - A Class member Brookfield Infrastructure, another subsidiary of Brookfield Asset Management, in the words of the Headmaster, "is chugging along nicely. The stock is up a rather surprising 21.4%, but we won't let that bother us. More importantly, this craftily operated entity, under the leadership of Sam Pollock Jr., continues to buy low and and sell high rail lines, port terminals, pipelines, toll roads, data centres, cellphone towers and much more, and grow its funds from operations at about a 10% clip." Promoted. Retail - B+ Class veterans Alimentation Couche Tard and Metro Inc. had a combined average return of 14.6%. "But that is deceptive," says the Headmaster. "Investors have been twitchy (not in a good way) about Couche Tard's hugely ambitious efforts to take over its larger rival Seven Eleven, and the stock fell 11.8%. Conversely, steady-Eddy Metro, soared over the school year with a 41.1% gain. While they can never say it out loud, inflation is always a winner for the grocers, and Metro is the best of the bunch." Both promoted. NB. Subsequent to the school year Couche Tard withdrew its offer for Seven Eleven and the stock price has begun to recover. Industry - B Class veterans John Deere, CCL and CNR produced an average return of 11.4%. Headmaster: "The leader of the pack was Deere, with a gain of 36%. Perhaps it's got a little ahead of itself -- the valuation by any measure is rich -- but the market is the market, and it sees rising weather events and related crop failure leading to higher commodity prices, which is good news for farmers' bank balances and correspondingly for Deere." "CCL continues to grow its global label, packaging and security products business at a 12 to 15% clip. This is one of our most consistent Class members, and it's not expensive. CNR is going through a bit of a dry patch (down 12.2%), and its stock price is currently undervalued. With rising revenues and earnings, I don't see that lasting for long." All promoted. Healthcare - D Classmates Amgen, Johnson & Johnson and Merck averaged a disappointing minus 14.5% over the Class year. Adds the Headmaster: "All continued to grow sales and earnings at their customary stately pace -- something highly valued in this traditionally defensive sector -- but Merck's individual return of minus 37.4% was particularly troubling, and damaging to the Class. Mr. Market, has lost confidence in this company's ability to replace the 40% of its revenues and profits that derive from its Keytruda family of oncology drugs when they expire over the next couple of years. So have I. Regrettably, I asked Merck to leave the Class in May." Amgen and Johnson & Johnson, promoted. Telecom - C+ Classmate Telus had a decent if unspectacular market return over the school year of 7%. However, the Headmaster has soured on this member of the Class.

Dear Friends, The Spanish were nothing if not methodical in their colonisation of Mexico and beyond in the New World. If you wanted to subjugate a people and project dominance of your culture over theirs from the start, the recipe was straightforward.

Crush them militarily, raze their sacred sites and civic spaces to the ground, burn everything else, then condemn the surviving enslaved inhabitants to eternal damnation unless they abandon their heathen gods and accept Jesus as their lord and saviour.

Cuernavaca, with a marvelous year-round temperate climate, is about an hour's drive south of Mexico City. It was an important Aztec city for hundreds of years before the Spanish arrived, anchored by a sacred pyramid temple in the city centre. The Spanish, unable or unwilling to pronounce the Nahuatl-language name Cuauhnahuac, changed it to Cuernavaca.

Pictured above is a classic example of Spanish colonial architecture, the Cuernavaca Cathedral, an aesthetically inspiring structure, both inside and out. Depending on one's faith, it may even project strong spiritual appeal. As a reminder, though, it was built by enslaved Aztecs from the rubble of their destroyed city, temple, religion and culture.

This disjunction is at the heart of the Mexican psyche, an unresolved tension that has reverberated through the centuries ever since the Conquest, and that finds expression throughout Mexican life and politics today. Equally, and quintessentially, it is a large part of what attracts many of us to Mexico ... an enduring contradiction!

Cortes was so taken with Cuernavaca that he had his personal palace built there, directly upon the foundations of the destroyed pyramid temple. It still stands today with its Roman arches and crenelated embattlements (in case the natives were restless, which from time to time they were).

The Palacio Cortes today is a museum. It features views of the excavated pyramid foundations, but more spectacularly, stunning Diego Rivera murals that line the walls of a north-facing arcade. With unsparing eye, and a brush more than equal to the Conquistadors' arquebuses, he depicts the history of the Conquest in all its cruelty and gore, followed by redemption in the form of the Mexican Revolution.

  § The great Albert Barnes, art collector, philanthropist and founder of the Barnes Foundation in Philadelphia, mentored a promising young artist at the Foundation in the 1950s named Robert Brady. Brady's father wanted him to go into the family trucking business, but the son, with encouragement from his art teacher mother, resisted. If you are ever fortunate enough to visit Cuernavaca and tour the Museo Robert Brady, you will be thankful he did. After six years of living and painting in Venice, next door to Peggy Guggenheim -- they became lifelong friends -- Brady returned to the western hemisphere and fell upon the charms of Cuernavaca. In 1961 he purchased the dilapidated Casa de la Torre (house of the tower), a former Franciscan monastery property on the grounds surrounding the Cuernavaca Cathedral. Over the next 20 years he restored and artfully amended the Casa, using it as his residence, studio and showcase for a gloriously eclectic art collection -- everything from pre-Columbian artefacts, to Balinese masks, and Indian representations of Shiva, to paintings by renowned contemporary Mexican artists of the time, including Frida Kahlo, Rufino Tamayo and Diego Rivera, not to mention his own enduring portraits of friends such as Peggy Guggenheim and Josephine Baker. What makes the collection and the museum truly extraordinary, though, is the gift Brady had for creating unique experiences of bold colour, texture and sensation in all the rooms of the Casa. Each has its own theme, with meticulously displayed, seemingly disparate, objects, artefacts and paintings, that taken in as a whole leave one in a trance of wonderment. Pictured below are the yellow living room, riffing off the mustard yellow in his portrait of Peggy Guggenheim, and the hot-pink-inspired guest room Brady designed and decorated for his beloved Josephine Baker, the African-American entertainer famous for her scandalous routines at the Folies Bergères in Paris, clad only in a belt of bananas suspended from her waist.

In addition to his gifts for art and collecting and decor, Brady was equally brilliant in collecting friends and entertaining them lavishly at Casa de la Torre. The guest list over the years included, and this is a small sampling, Rita Hayworth, Octavio Paz, Sophia Loren, Diego Rivera and Frida, John Cage, Gabriel Garcia Marquez, not to mention Peggy and Josephine. One can just imagine the sparkling conversations! Brady was a big handsome man with a personality to match. He was also gay at a time when it generally was not socially acceptable to be out of the closet, so we know little of his intimate life. He died at age 58 in 1986 and is buried in the gardens of Casa de la Torre along with his dogs. He left his beautiful home and collections to the State, with the stipulation that they be maintained in perpetuity as a Museum open to the public, exactly as he left them. § CLASS OF 2024 YEAR-END REPORT CARD Solid gains led by Info Tech Like Robert Brady, the Headmaster is in the business not just of randomly collecting, but of curating well-balanced groupings, the components of which complement and enhance one another. Whether it's art and artefacts, or stocks, the same fundamental principles apply. The overall results for the Class of 2024 (for the period July 1, 2023 to June 30, 2024) were "neat but not gaudy", as the Headmaster's mother used to say. The Class average of 8% trailed the TSX by .5% and the Dow by 5.5%. The discrepancy with the S&P 500 was greater, a spread of 14.5%, powered by the dominance of the so-called Magnificent Seven; aka Microsoft, Alphabet, Meta, Tesla, Nvidia, Amazon and Apple. Explains the Headmaster: "I am not prepared to skew the Class to that extent. Yes, it's nice when there's a tailwind, but the opposite can be true too. It was only two years ago when the S&P plummeted 12%, while the Class limited its loss to 2.5%." Not surprisingly, the Class leaders this year were in info tech. The average return of Apple, Microsoft, Alphabet, Visa and newcomer Taiwan Semiconductor was a spectacular 30.5%. The worst under-performers were Brookfield Infrastructure at -22.4% and telecom classmate Telus at -19.6%. Here are the detailed results. Financials - B BlackRock, RBC, Scotiabank and TD averaged a gain of 5.3%. In the case of the latter three, these banking classmates arguably were held back by the unfavourable yield curve. When banks have to pay more interest on short-term deposits than they can make back on longer- term loans and mortgages, it's a losing game. "The obverse is equally true," says the Headmaster, "and things should improve as the Bank of Canada brings down rates and the yield curve reverts to form." That said, however, the Headmaster lost patience with Scotiabank's underwhelming turnaround plans and last January asked this long-term Class member to take its leave. BlackRock, RBC and TD were promoted to the Class of 2025. Resources - D The Canadian fertilizer and agricultural retailing giant Nutrien continued to disappoint with a loss of 10.5%. It was dragged down by weak potash markets, in which it is a dominant global player, and some management troubles in its Brazilian subsidiary. "Big swings in the prices of commodities like potash are the nature of the beast," says the Headmaster. "I am confident we are nearing the end of the current cyclical low, however. And I look forward to the rebound. In the meantime Nutrien continues to throw off gobs of free cash flow. Promoted."

Energy - B minus Brookfield Renewables (stock ticker, BEP) returned minus 13.3%. Why, you might ask, has the Headmaster given it such a decent mark? Let's hear from him: "BEP remains my favourite pick among global decarbonization players. No one else has the 200 gigawatt pipeline, the access to capital and the partnerships with green-energy-seeking behemoths like Microsoft. The stock price has been held back by high interest rates that diminished the value of its handsome dividend yield (currently about 4.6%). That trend should reverse course as interest rates decline. Meanwhile BEP is on track to continue growing its funds from operations at an annualized rate of 10%. Promoted." Infrastructure - B minus Like its renewables sister, Brookfield Infrastructure, another stock with a generous dividend yield (currently 5.1%), has not been helped by high interest rates. "As they abate," says the Headmaster, "the value of the dividend will rise and the stock should too." "This company has an outstanding portfolio of consistent revenue-generating assets around the world, and I especially like its focus on data centres. The artificial intelligence boom would be a bust without massive incremental investment in data centres. Brookfield is already a leader, and is continuing to invest in, this burgeoning market. Promoted." Retail - B+ Between the pair of them, Quebec-based benchmates Alimentation Couche-Tard and Metro returned an average 7.1%. "What's not to like about these two?" says the Headmaster. "Couche-Tard continues to grow earnings per share and free cash flow at 15% or better, year after year. And Metro, while not quite in that league, is also remarkably consistent and has the stock performance to show for it. Both promoted." Industry - B+ John Deere, CNR and label-maker CCL returned an average 6.5%. "Don't be fooled by that modest number," adds the Headmaster. "Over the long haul these continue to be market leaders in their sectors and have delivered, and will continue to deliver, superior returns. There's a shadow over CNR right now, due to an impending strike, but that cloud will lift and soon be forgotten."

"John Deere had sterling third-quarter earnings, and the same goes for CCL's Q2." "All three promoted." Healthcare - A Blue chip Class stalwarts Amgen, Johnson & Johnson and Merck returned an average 12.1%. "The healthcare sector, as I have noted previously, has been clearly undervalued for some time," says the Headmaster. "It is gratifying to see something approaching a reversion to mean valuations. Amgen, in particular, stands out with a 41% gain." "Johnson and Johnson has labored, understandably, in light of ongoing litigation targeting its talcum powder products. I see that problem resolving itself and a Class member that should be able to grow free cash flow at a 20% plus rate for years to come." All promoted. Telecom - D "Woe is me!" laments the Headmaster. His telecom favourite, and Class constituent, Telus, returned a miserable -19.6%. But this is not a Telus-specific story. Telecom across the board, whether in the U.S. or Canada has been struggling to make back returns that justify investing the enormous sums of capital that the industry requires. "They can't all be managing their businesses badly," says the Headmaster. "There are obviously systemic challenges, not the least of which is the long painful death of the legacy, wireline telephone business. Yes, there are opportunities galore in wireless, but they come with gargantuan price tags. Simply buying more broadband spectrum from the government costs $billions. And then you are in a dog-eat-dog competitive environment where nobody is winning." "I hate to say it, but I am putting telecom, in general, and Telus, specifically, on notice. It has always made sense to me to have telecom exposure in a well-balanced Class, but that may not be the case anymore." Promoted with an asterisk. Info Tech - A+ Apple, Microsoft, Alphabet (parent of Google), Visa and newcomer Taiwan Semiconductor produced an average return of 30.5%. The latter joined the Class in January and galloped to a 48.6% gain by the end of the school year. Explains the Headmaster: "Taiwan Semi is by far the dominant fabricator of high-end chips, the kind needed for the artificial intelligence revolution, for companies like Apple and Nvidia. I liken them to the pick and shovel makers who profited from the Gold Rush. They don't design the chips, they just make them, to exceedingly exacting standards that competitors find hard to match. Hence their inexorable revenue growth rate, currently around 40%." "Apple, Microsoft and Alphabet are charter members of the Magnificent Seven and deservedly so. Each gave a big lift to the Class overall results." "Visa is often misperceived as belonging to the financial sector. It doesn't. Visa, rightfully, is a technology company, that together with its only major competitor, MasterCard, controls about 80% of the invisible international payments highway that connects buyers, sellers and financial institutions. Every time you use your credit card or debit card, a little toll on that transaction flows back to Visa or MasterCard. Do that nearly a billion times a day, and it adds up rather nicely. Visa has been compounding earnings and free cash flow at a 15% plus rate since it went public in 2008." All promoted. Entertainment - B+ The lone Class member in this category, the oft-time troubled Disney, produced a respectable return of 11.2%. Says the Headmaster: "I am delighted that in the quarter ending on June 30th, Disney finally announced they have turned the corner to profitability in their streaming business! This has been an albatross around the House of Mouse's neck for too long. There is still a long way to go to proper returns, but I'm banking on this Class member for the long haul." "Yes, the parks are lagging, but they'll come back. In the meantime it is heartening to see that Disney has got its mojo back in the movie theatres. The two big blockbusters of the summer are Disney's Inside Out 2 and Deadpool & Wolverine." Promoted. §

Dear Friends, Mexican culture, going back millennia, is steeped in volcano lore. This marvelous painting by the 19th century master José María Velasco, can be found at the Museo Nacional de Arte in Mexico City.  It depicts Popocatepetl, on the right, and Iztaccíhuatl on the left, the volcanos that at 17 thousand feet plus, soar over the plain of Mexico City.

They don’t just soar, they dominate the imagination. In the neighbourhood where I have spent some very agreeable time this year, the leafy Avenida Amsterdam that rings Parque Mexico is anchored at one end by Plaza Popocatepetl and at the other by Plaza Iztaccihuatl. Popocatepetl and Iztaccihuatl were and are like the gods of Greek and Roman mythology.  The legends vary, according to the periods they arose from, but there is a common thread.  The beautiful princess Iztaccihuatl and the brave warrior Popocatepetl fell in love and pledged to wed when Popocatepetl returned from war.  A jealous lover, however, entered the scene and fed poor Iztaccihuatl the false news that Popocatepetl had died in battle.  Iztaccihuatl  was devastated and died of a broken heart.  When the triumphant Popocatepetl returned, he received the tragic tidings and was inconsolable.  He laid her to rest where she lies today, in perpetual sleep, while he, ever restless beside her, reminds the world that the flame of his eternal passion is still burning.  When the Spanish invaded the Aztec empire in the 16th century, their leader Hernando Cortes quickly realised the significance of Iztaccihuatl and Popocatepetl. When he proposed an ascent of Popo (as it was and is affectionately known), the indigenous members of his party recoiled in fear and said it couldn’t be done.  Cortes saw an opportunity to reinforce Aztec perceptions that the Spaniards were of a superior, god-like race.  He ordered a party, not just to scale Popo, but also to descend into its bowels! Here is a vivid description of that expedition, excerpted from William Prescott’s magisterial History of the Conquest of Mexico, originally published in 1843:  “The Spaniards, five in number, climbed to the very edge of the crater ....  Its depth might be from 800 to 1,000 feet.  A lurid flame burned gloomily at the bottom, sending up a sulphurous steam, which, cooling as it rose, was precipitated on the sides of the cavity.   The party cast lots, and it fell on Montano [the commander] himself to descend in a basket into this hideous abyss, into which he was lowered several times, till the adventurous cavalier had collected a sufficient quantity of sulphur for the wants of the army [to make gunpowder].  This doughty enterprise excited general admiration at the time. Cortes concludes his report of it to the emperor with the judicious reflection that it would be less inconvenient, on the whole, to import their powder from Spain.” 

At the dawn of the 20th century, the government of long-standing Mexican dictator Porfirio Diaz ordered the construction of an opulent opera house and cultural centre in Mexico City.  After a pause for the Mexican Revolution and its aftermath (including the deposition of Diaz), the grand opening finally took place in 1934. The resulting structure, a beautiful mashup of neo-classical and belle epoque outside, and art deco and Mexican muralism inside, is known today as the Palacio de Bellas Artes. A charismatic artist, writer, political activist and volcano obsessive, Gerardo Murillo, aka Dr. Atl (his adopted Nahuatl name meaning water) was commissioned to provide the design for a glass stage curtain. It took Tiffany’s of New York a million pieces of stained glass to execute the design. The result, as you can see, is stunning and still in use today. Critically – and this was no small contribution on Dr. Atl’s part – it draws on native Mexican topography, iconography and mythology, in the form of Popocatepetl and Iztaccihuatl.

Dr. Atl, pictured here, more than repays the trouble of getting to know him a bit better. When he was a young buck in the late 1800s, the time of Diaz, the Mexican art world was stiflingly derivative of the classical and religious works of the Old World. It was colonialism at its worst, and it was dead. Atl responded with a manifesto in 1906 calling for a new public art movement featuring native Mexican themes and monumental scale. Like a volcanic eruption, it shook the intelligentsia and the art world. Atl championed and mentored a new generation of Mexican-centric artists to his cause, among them, Diego Rivera, David Alfaro Siqueiros and Jose Clemente Orozco.  This in turn led to the birth of the Mexican muralist movement in 1922.

In 1921 Atl, the volcano obsessive, met a beautiful, green-eyed volcano named Carmen Mondragon at a social gathering in Mexico City’s San Angel district. She is pictured here in an Atl portrait. Afterwards he confided to his diary: “I came home from the party … with my head burning and my soul trepid. Between the multitude of people that crowded the salons a green abyss opened before me, it was a green so profound as the sea: they were the eyes of a woman. I fell into that abyss instantly, like a man jumping from a high above rock ….” A week later they met again. Mondragon’s husband didn’t have a chance. Atl, the volcano obsessive, and the green-eyed volcano spent the day together. Two days later, she wrote back to Atl: “For me, for you, there will be no yesterday or tomorrow, for us both there is only one day, eternity of love and only one change: love that transforms into more love where there is no yesterday or tomorrow only an infinite space, a day where night does not exist but to love each other one night that will be more luminous than day itself when our flesh comes together, it is our destiny.”   The two volcanos moved into an abandoned convent in Mexico City and established their love nest and studio there. Atl bestowed upon Mondragon the Nahuatl name Nahui Olin, for cosmic movement “both orderly and disorderly". They wrote and painted prolifically. In concert, Mondragon rapidly established a reputation as a model and muse for a parade of artists and photographers of the day, among them Diego Rivera and Edward Weston. She was not shy about disrobing (and putatively more). Yet it was the green-eyed volcano, not Atl, who was given to jealous fits of rage and tempestuous behaviour befitting her Nahuatl name. Sadly, this brilliant pair was not destined to find the eternal equilibrium of Popocateptl and Iztaccihuatl. They became known as the “escandalo” (scandal) of Mexico and eventually separated after seven years. Atl’s passion, however, for volcanoes of the terrestrial kind remained undimmed. For the rest of his life he trekked and spent vast amounts of time in volcano country, camping, sketching, painting and journaling. He even wrote an influential book that is still considered a valuable reference among volcanologists to this day. In 1943 there were reports of a fresh lava outcropping in a corn field in Michoacan State, to the west of Mexico City. Atl had to be there! And he was for the next year, obsessively documenting the birth and rise of the volcano known as Paricutin.  He was so completely immersed in his work, and oblivious to the danger, that he lost a leg to Paricutin.  Undaunted, he continued his trekking by mule. There is a spectacular exhibit on Mexican art and lore inspired by volcanoes, much of it Atl’s, on now at the Museo de Arte Moderno in Mexico City.  If you happen to be heading to CDMX, try to see it.  You won’t be disappointed.  Here, from that exhibit, is a stunning depiction of what grew from that lump of lava in a farmer’s cornfield, by Atl.

                                         § CLASS OF 2023 YEAR-END REPORT CARD Results capture only some of volcanic returns in info tech The Class of 2023 produced an average return of 5.6% over the Class year (July 1st, 2022 to June 30th, 2023). That compares to 6.8% for the TSX, 11.8% for the Dow and 17.5% for the S&P 500. While a decent recovery from the disappointments of the past two years, the Class clearly underperformed its benchmarks.  The Headmaster notes:  “There is no shame in failing to match the gains of the S&P when 75% of that performance derives from only 7 volatile stocks.  The collective gains of Meta (parent of Facebook), Nvidia, Microsoft, Alphabet (parent of Google), Apple, Amazon and Tesla were volcanic.  We had our share of that excitement by way of Apple, Microsoft and Alphabet.  Along with Visa, our info tech foursome topped the Class with an average return of 25.9%. We have to remember that with volatile market leaders, what explodes upward, can also implode in similar fashion, as was the case last year when the S&P fell 19.4% vs a drop of 8.9% for the Class.  I am happy with our degree of new economy exposure and would not want to increase it materially.” Other Class standout performers were teacher’s pets Alimentation Couche-Tard and Metro, with an average gain of 21.8%.  Industrials benchmates CNR, John Deere and CCL did well too, with an average return of 17.6%.   Class laggards were fertilizer giant, Nutrien, down 23.5%, and the energy twosome, Brookfield Renewable Partners and sad sack Algonquin Power (asked to leave the Class last November), down 12.6% and 42.1% (ouch!!!) respectively.  

Dear Friends,  Jean-Michel Basquiat was born into humble circumstances to a Haitian father and  a Puerto Rican mother in Brooklyn in 1960.  His mama was mentally unstable and Basquiat was largely raised by his dad.  He rebelled early and often and by his late teens was out of school and on the streets.  But he wasn’t idle, far from it.   Basquiat in partnership with his friend Al Diaz formed a graffiti duo.  They tagged their anti-establishment works with the pseudonym SAMO (standing for Same Old ----) and worked like demons.  The public and the art world began to take notice. Independently Basquiat hustled otherwise to survive.  One of his schemes was hawking hand-produced postcards on the street in Manhattan’s SoHo.  He espied Andy Warhol one evening and convinced him to buy a postcard.  Thus began a relationship that eventually resulted in a series of  collaborations, including the one above, Arm and Hammer II, produced in 1985. It happens to be on display in a magnificent retrospective at the Montreal Museum of Fine Arts entitled Seeing Loud: Basquiat and Music.  The show runs until February 19 and is a stunningly immersive, almost overwhelming experience.  Many of the works, such as this one (9′ by 6′), are massive in scale.  The head on the Liberty penny is that of Charlie Parker, the bebop legend who died of an overdose in 1955.  Basquiat was drawn equally to the black lions of jazz who preceded him, and to the nascent rap and hip hop movement of the 80s.  He had a “noise” band, first called “Test Pattern” and then changed to “Gray”.  If you have a chance, try to make it to Montreal and this show before it’s gone.  You will be swimming in the music, the images, the pain and the glory of an extremely short but blindingly prolific life.  Basquiat, like so many of his musical heroes, died of an overdose too.  He was 27 and already exhibited and sought the world over. Debbie Harry (aka Blondie) was the first to purchase a Basquiat painting, Cadillac Moon, in 1981.  She paid $200.  In 2017, Untitled, a 1982 work, sold for $110 million.    

                                            §  

And now for something completely different.  This is New Year’s Day in Kingston and these are but a few of the 100 or so devotees who showed up to practice a new form of masochism called Wim Hof.  I went down to Portsmouth Olympic Harbour to witness and applaud them, but not to join in.   The Wim Hof’ers are a species separate and distinct from the Mermaids.  They prepare themselves with yogic-style breathing exercises and some back-slapping rah-rah-rah behaviour.  Then they slowly walk in, up to their waists or chests, and just stand there.  The goal is to stay in, semi-immersed or so, for five minutes.  On this particular day, the group’s leader Albert Nerenberg challenged them to set a Guinness World Record for laughing while standing in freezing water.  The details are vague, but you get the point, anything to distract from the excruciating cold.    We Mer-people, when the spirit moves us, will stick to the tried and true polar dip: no preparatory hocus pocus, just a brave dash and a dive straight in, a few strokes and a dash out.  To be clear, it’s a full immersion experience, no mittens or tuques permitted.  A wee dram of whiskey afterwards, purely for medicinal purposes, is of course de rigueur.                                              § As Canadians, we all must find our ways to celebrate and enjoy winter.  I hope you have found yours.  If still in doubt, and in the Kingston area, you could do worse than make your way to mighty Mount Batawa where granddaughter Pippa is learning to carve her first turns.  It’s an old-style family place that makes up for its vertical shortcomings with superhero heart and spirit.    Youp, youp! CW                                                §          CLASS OF 2023 MID-YEAR REPORT CARD Results mixed, not all gloom and doom There has been much commentary on the perfect storm that was the calendar year 2022:  limp demand from China owing to COVID, war in Ukraine discombobulating markets, and central banks raising interest rates to throttle inflation levels not seen in a generation. The benchmarks that the Headmaster cares about reflected that storm.  The S&P 500, the Dow and the TSX were down 19.4%, 8.7% and 8.6% respectively. The Class index over the same period was off by 8.9%.  “We held our own, and in fact bested the S&P nicely,” says the Headmaster, “but there is nothing to crow about.”   Over the first six months of the Class of 2023 year (from July 1st, 2022 to December 31st, 2022), the Class performance of -.4% lagged returns respectively of the S&P 500, the Dow and the TSX of 1.4%, 7.7% and 2.7%.  Comments the Headmaster: “We were blown out of the water in energy.  And missed the bull market in oil and gas entirely.  Algonquin Energy and Brookfield Renewable averaged a loss of 32.7%!  Ouch!”   “Apart from the energy debacle, though, there were significant bright spots.  The heroes of the year to date are Retail, Industry and Healthcare with respective returns to December 31st of 13.5%, 16.7% and 9.7%.  For outstanding individual performance, we need look no further than perennial Class leader, John Deere, whose stock rose 43.1%.” Here are the complete Class results.    Financials - B  Scotiabank, TD, RBC and BlackRock averaged a return of 2.3%, once again proving the value of Canada’s protected banking sector, and the advantages of scale and market dominance that BlackRock enjoys.  Headmaster: “BlackRock was the group leader with a 16.3% gain.  I told you last summer it was oversold.”   “Scotiabank was the only disappointment with a 12.9% decline.  I am worried about BNS.  The changing of the guard in the CEO position troubles me -- the new fellow has no banking experience, and the company has lost a raft of other senior management talent in recent quarters.  BNS’s days as a Class member may be numbered.  We’ll see.” Resources - B Canada has very few true global champions.  Class member Nutrien, the fertilizer and farm supplies retail giant is one of them.  When war broke out in Ukraine, one of the knock-on consequences was sanctioning of Belarusian and Russian potash.  Nutrien, as the main alternative supplier, was a huge beneficiary, and sales and the stock price reflected that reality earlier last year.   The stock is down 3.5% since the beginning of the Class year.  Says the Headmaster: “The war effect is attenuating somewhat now, but Nutrien remains one of the most dependable free cash  flow machines I know.” Energy - F Algonquin Power’s stock fell off a cliff after announcing its Q3 earnings.  Headmaster:  “Sadly, they deserved it.  Everything was askew.  Taxes and interest on debt were much higher than management had projected, and closing of the Kentucky Power deal delayed yet again.  The company will not be viable without  cutting the dividend and aggressively selling assets, and no doubt issuing more equity.  Not a formula for success in the Class of 2023!” The Headmaster bade farewell to Algonquin in November, incurring a 42.1% loss.  Subsequent to the December 31st year-end, the company announced a 40% dividend cut and major asset sales to shore up the bleeding balance sheet.   Brookfield Renewable Energy incurred a 32.7% loss, but retained the Headmaster’s confidence.  “Brookfield’s balance sheet, sales growth and free cash flow generating capacity remain intact.  The stock is simply taking a breather, along with others in the green energy sector.”   Infrastructure - C minus Brookfield Renewable’s sister, Brookfield Infrastructure, invests in long-lasting assets like toll roads, pipelines, rail lines, port terminals and cell phone towers, around the world.  Many are under long-term contracts, in many cases regulated, that assure growing and sustainable revenue streams for years to come.   Headmaster: “While the company’s stock is down 14.7% since the start of the school year, this in no way reflects its prospects for benchmark bettering performance.  Organic growth alone in the third quarter was 10%.  But remember, this Classmate also excels at mergers and acquisitions.  With economic weakness forecast in the year to come, there should be ample opportunity for Brookfield to pounce on opportunistic targets.”  

Dear Friends,  The essence of gardening is time.  As Pierre Berton memorably put it (I am paraphrasing): “Gardening is a four-dimensional art form.”  Height, width, depth?  Those are the easy parameters.  As in investing, it’s time, the fourth and vital dimension, that makes you or breaks you.  About 25 years ago, after Dad died, my mother laid out the modern bones of the garden pictured above.  The tree in the middle, providing lovely dappled light and shade, is a honey locust.  When she planted it as a sapling, the beautiful effect of the mature locust was only a vision in Mom’s imagination.  Time brought that vision to reality, years after her own passing.  The shade in the foreground is denser and shifts with the day.  It comes from a towering silver maple that I wager the original owners of the property planted around 1872.  Did they know what delight (and natural air conditioning) they were bequeathing to future generations?  I suspect they did. Time, a lot of it, made their gift to us today a reality.  As all gardeners know, time is not just a bearer of gifts.  It is also the deliverer of constant plagues, infestations, death and destruction.  Allow me to list a few: the yellow iris in the pond was so prolific, it entirely choked out the water lilies (so much for Monet); the clump of birch that provided shade over the Yoga Palace succumbed to whatever birches succumb to; equally that glorious magnolia I planted for Mom as a Mother’s Day gift many moons ago, gone with the wind; the oriental poppies and delphiniums that added a pop of colour to the front bed, pop no more, starved of light by a now well-established Norway maple; the serviceberry that gave up the ghost; the gooseneck loosestrife that strangled nearly everything in the north bed; the caterpillar invasion of the hydrangeas; the bug and fungal wars of the roses .... The list is endless and has driven many a gardener to heretical thoughts, like ripping out the perennials and surrendering to instant gardening with annuals.  But that’s the equivalent of day trading in the stock market.  There is no lasting value being created.  Never surrender, no matter how discouraging it gets!  Virtue and the fourth dimension will triumph, if you have a sound vision and stick with it.  I should add that there is an essential fifth dimension to rewarding gardening (and investing): humility.  Nature is always going to throw us a curveball, especially in a time of accelerating climate change.  What worked in years gone by, may not work so well now or in the years ahead.  Be prepared to admit mistakes, edit, prune, replace and even radically rethink.  For example, can we really continue to design and tend to gardens that are so water dependent?  In places like California, the answer to that question has already arrived.  For better and worse, gardening is an endless dance with both nature and time.  When we get it right, or at least partially right, it is hugely gratifying.  Why?  Because not only have we added immeasurable beauty and comfort to our lives today, we have also done so for the generations that will follow us.   Stay well, enjoy the fruits of your gardening labours, and make the most of these high summer days! CW

                                       §     CLASS OF 2022 REPORT CARD Benchmark-beating results in a down market No one can deny it’s been a tough and worrisome year (from last July 1st, 2021 to June 30th, 2022).  The market numbers for the Class year period are stark.  The TSX, S&P 500 and the Dow were down 6.5%, 11.5% and 10.8% respectively.  But the Headmaster is pleased.  Why? “The Class of ‘22 showed its grit and character in spades.  The class average, a stingy -2.6%, mitigated almost all the damage the markets threw at us, and did so in extremely convincing fashion.  We blew our three benchmarks out of the water.  Bravo!” More from the Headmaster:  “I am particularly impressed by the results of the defensive squad, Class members like Metro and Alimentation Couche-Tard who had returns of 16.2% and 10.2%; and healthcare stalwarts like Johnson and Johnson and Merck, who clocked 7.7% and 17.2%.  They did exactly what we expect of them when the going gets rough.”   Interestingly, the top Class performer was far from a member of the defensive squad.  Fertilizer giant and agricultural supplies retailer Nutrien advanced 36.4% and is the epitome of a cyclical stock, forever exposed to the fickle winds of the resource sector.  Adds the Headmaster:  “Sometimes the contrarian, cyclical bet pays off.  Who knew Putin would wage war on Ukraine and precipitate a global food shortage?  Not I.  But Nutrien, with its global dominance in potash and its shock-absorbing retail operations, is actually structured to do well through all phases of the cycle.  We just happened to get a lucky boost from Putin’s madness.” Class underachievers were Disney (-46.2%); BlackRock (-30.4%); and Alphabet (-20.4%).  All were promoted, however, for reasons you can read below.   Below are the complete Class results at the June 30th year-end.  By way of context, the Class average annual investment return over the past 10 years stands at 10.1%.

Financials - B minus ScotiaBank, TD, RBC and BlackRock had an average return of -9.85%, more or less in line with market performance.  But their group average is deceiving.  As noted above, BlackRock struggled and dragged down our trio of Canadian banks.  Leaning as always on their protected, oligopoly advantages, they handily sailed past their pre-COVID earnings per share numbers and bested the benchmarks. NB, rising interest rates are a good thing for the banks as the “spread” between what they pay depositors and charge borrowers tends to fatten and drop to the bottom line.   As for BlackRock, the Headmaster comments: “With all due respect for Mr. Market, sometimes he gets it wrong.  Mr. Market is assuming BlackRock, the world’s leading asset manager, is on the brink of a major blow to its revenues and earnings and has punished the stock severely, in advance of any such developments.  So all that bad news is already reflected in the drubbing Mr. Market has meted out on this Class Member’s stock price.  “It doesn’t make sense.  Yes, BlackRock’s assets under management were down 7.2% at the end of June, but fee revenue was only down 1.8%.  And critically, net fund flows are now turning positive.” “I look at BlackRock and see a company with sustainable double-digit growth rates for sales, earnings per share, dividends and free cash flow, for years to come.  If you don’t own a piece of this blue chip Class member already, now is the time to buy.  The stock is on sale.” All promoted     Resources - A Class leader Nutrien is on track to double sales in fiscal 2022 versus its pre-COVID results in 2019.  Net income is projected at $11.7 billion compared to $1.3 billion in 2019.  Adds the Headmaster:  “As the world’s dominant and lowest cost potash producer, this Class member is a free cash flow machine. Much of that cash is returned to shareholders via a handsome dividend and an aggressive share-buyback program.  The share float (total shares outstanding) is down 11% from only four years ago.  Ka-ching!”   When we last reported, there was some troubling management uncertainty at Nutrien.  Two CEOs had come and gone in less than a year.  Happily, things appear to have stabilized nicely under interim CEO Ken Seitz.  The Board and management give every indication of being in synch again.   Promoted

Energy - C+ Desk mates Algonquin Power and Brookfield Renewables both surrendered about 6.5% to the markets over the Class of 2022 year, somewhat better than their benchmarks.  From the Headmaster:  “I continue to like this pair.  They are still regrouping after peaking in 2021, but the fundamentals remain sound.  Algonquin is an appealing hybrid: half conventional utility, with the regulated and predictable cash flows that attend in that sector, and half a leading-edge green energy developer.  To wit, its recently announced partnership with Meta (formerly known as Facebook) to invest in wind energy in Michigan, subsequent to a similar deal in Virginia.  That’s just the tip of a bulging pipeline of renewable projects on the near horizon.” “Brookfield Renewables is a similar story. The company enjoys utility-like inflation escalator clauses on 77% of its revenues, but on the other side is riding the decarbonization wave with new developments that augur 10% plus growth in funds from operations per unit for years to come.  The company has newly inked partnership agreements with Amazon, Johnson and Johnson, BASF and Salesforce.” Each of these Classmates pays a handsome dividend while we wait for their stock prices to rebound.   Promoted

Infrastructure - B+ Brookfield Infrastructure advanced 7.2% over the Class year.  Like its Renewables sibling, it benefits from much of its revenue being boosted by regular inflation adjustments, while its debt funding is generally at lower rates and fixed for longer periods.  Adds the Headmaster:  “That’s a recipe I like ... increasing margins that tumble to the bottom line." The company’s forte remains purchasing long term infrastructure assets when they are out of favour, improving their efficiencies, and eventually selling them back into the market for outsized capital gains.  The proceeds are reinvested in new opportunities that meet Brookfield’s strict criteria for return on capital.   Headmaster:  “It’s a formula they’ve been following with incontrovertible success since the company’s inception in 2008.” Promoted

Retail - A+ Classmates Alimentation Couche-Tard and Metro had stellar average 12-month returns of 13.2%.  They are past and present masters of the art of controlling costs in an inflationary environment, while passing them on sufficiently to guard precious profit margins.   Headmaster:  “Each of these recession-resilient players has breezed past their pre-COVID sales and earnings per share numbers.  I commend them in good times and bad.” Promoted

Industry - B minus Label maker CCL, CNR and John Deere returned an average -5.1% over the school year.  Constrained by stiff headwinds, they still managed to better the benchmarks.  Better yet, all blew past their previous pre-COVID highs for revenue and earnings per share.  Headmaster:  “Each of these Classmates is now a certifiable value play.  CCL is cranking out the cash and can easily manage its ongoing share buyback program and future acquisitions.  CNR, after losing the battle for Kansas City Southern has hunkered down, as we expected, and improved its operating efficiency and profitability markedly.  And as a member of that wonderful species known as duopolism, it continues to forever enjoy pricing advantages.” John Deere is a player for all seasons, with major strengths in agriculture, construction and forestry.  We expect it to more than double earnings per share in fiscal ‘22, compared to pre-COVID 2019.” Promoted

Healthcare - A

Last January in his Mid-Year Report Card, the Headmaster said of Amgen, Johnson & Johnson and Merck: “The only thing not growing for this trio are their stock prices.  With return on equity averaging 34% and an average forward PE multiple of 15, they are a very safe place to be in an overvalued market.  Their time to walk in the sun will come.” That time has come.  Over the past 12 months, this trio made an average stock market advance of 8%, leaving their benchmarks in the dust.  Merck was a standout, with a gain of 17.2%.   Promoted Telecom - B Telus, a perennial favourite of the Headmaster, was another safe haven in the storms of 2022.  The stock was up 3.1% over the Class year.  Adds the Headmaster: “Combined with its 5% dividend yield, that’s a total return of about 8%.  Commendable.” In its end of June quarterly results, Telus reported a revenue gain of 7.1% and earnings per share growth of 23% vs. a year ago.  The company added 93,000 net new mobile phone users, 34,000 internet subscribers and 15,000 TV customers.   Headmaster: “Telus continues to benefit from wise investment in its fibre cable network (the backbone of its internet and TV services).  It also is beginning to reap significant revenue and profit growth from its digital investments in Telus Health, Telus International and Telus Agriculture.” Promoted Information Technology - C+ Apple and Microsoft registered stock declines of .1% and 5.2% respectively, besting the market and most of their market peers.  Visa and Alphabet (parent of Google) were not so adroit.  While still doing better than the decline in the tech sector as whole, they took meaningful stock hits of 15.8% and 20.4%.  Headmaster: “That’s the bad news. The good news is that each of these Classmates has blasted past their previous revenue and earnings per share highs, pre-COVID.  Without exception, they continue to forge ahead with revenue and earnings growth in the high double digits.  Isn’t quasi-monopolistic capitalism a wonderful thing!  I have every confidence their stock prices will return to form.” Factoid:  Microsoft’s cloud business, branded as Azure, is a behemoth.  It is  exceeded only by Amazon’s AWS counterpart.  Azure’s revenues, as reported at the end of June, grew 46% year over year.   Promoted* *Open Text was demoted last January and asked to leave the Class.  It was replaced by Alphabet. Entertainment - C minus 

By some measures, Class member Disney continues to struggle.  Revenues look on track to surpass pre-COVID levels by the end of fiscal ‘22, but earnings per share are going to take longer.  Headmaster:  “I’m a big fan of Disney’s garden of wonders ... the enduring success of its classic and current films (from Mickey Mouse to Star Wars and The Avengers); the ABC and ESPN networks, the theme parks around the world that build on the characters and intellectual property of the films; and the merchandising of all the foregoing ...” “But most of all I am impressed with how this Class member, like a master gardener, is navigating transition.  The world of entertainment, like the physical world, is undergoing massive climate change.  In the world of media, that transformation is from conventional TV broadcasting and distribution of movies to the era of digital streaming.” “While Netflix owns first mover status, Disney with its streaming assets such as Disney+, Hulu, ESPN+ and Star+ is poised to overtake Netflix in the next fiscal or two.  To build that kind of momentum has taken a major investment (e.g., a projected $32 billion in fiscal ‘22) that has suppressed profits in the short term.” “I am confident in the vision.  Disney is laying the groundwork for a new generation of global entertainment dominance.  The commensurate profitability will come.” Promoted

Dear Friends,

This remarkable woman is Dylan Friedmann of Toronto.  While not officially a Mermaid, she is definitely a kindred spirit.  This past December 31st she celebrated 365 consecutive days of swimming in Lake Ontario off the shores of the Beach neighbourhood.  She doesn’t just take a quick dip; she stays in for a full ten minutes, in every kind of weather.   

Some people seek out adversity, and others have it thrust upon them.  Friedmann is obviously in the former category.  Why on earth, though, would she subject herself to the torture of that frigid lake at this time of the year?  Here is how she explains it in the Toronto Star: “I do it first thing in the morning, it invigorates me, raises my energy levels and makes me ready to take on any challenges.”  She also does it to raise money and awareness for a children’s mental health charity.   Having a positive, optimistic outlook to hardship and challenge seems to be in short supply these days.  As we enter the third year of a pandemic, that can be understandable, but it also can be debilitating.  How do we keep ourselves up, when all around us seems so down?

I am reminded of that wonderful Jimmy McHugh/Dorothy Fields tune that came out in the depths of the Depression, The Sunny Side of the Street.  There were a number of versions, but Louis Armstrong’s is the one from that time that is remembered.  You may recall how the lyrics go:  I used to walk in the shade With those blues on parade But I'm not afraid This Rover crossed over. Grab your coat and get your hat Leave your worry on the doorstep Just direct your feet To the sunny side of the street. What apt words to live by, especially when times are tough.  The song established itself as a standard and was an enormous hit again for Tommy Dorsey and the Sentimentalists (aka the Clark Sisters) in early 1945 as WW II was building to a climax.   [For jazz nerds only: here’s a scintillating 1958 bebop version laid down by trumpeter supremo Dizzy Gillespie, Sonny Stitt in fabulous form on tenor sax, Lou Levy, piano, Ray Brown, double bass and Gus Johnson on drums. Don’t miss the spirited, hip rendition of the lyrics by Dizz and Sonny at the end.]      It’s hard to find equivalent uplift in the offerings of today’s popular music  performers.  The likes of big stars Justin Bieber, Ariana Grande, Taylor Swift, Drake and Dua Lipa, don’t quite cut it.  For my money, New York’s Jon Batiste, albeit in a lesser orbit, comes closest to the sunny spirit the times call for. Here are lyrics from his infectious hit, I Need You:   In this world with a lot of problems All we need is a little loving. All right, not exactly Dorothy Fields wit, but Batiste makes up for the lack with his get-up-and-dance, leave-your-worry-on-the-doorstep performance.  If you stay up late enough, you may recall Batiste and his band, Stay Human, from the Steven Colbert Late Show, where they are the house band.  Batiste formed Stay Human with fellow graduates from Juilliard.  Their name, according to Wikipedia, derives from Batiste’s belief that “human interaction during a live musical performance can uplift humanity in the midst of the plug-in, tune-out nature of modern society.”  The band is known for impromptu street performances.  Batiste calls them “love riots”.   This world with a lot of problems ... let’s list some with the highest profiles:  The population is exhausted, and continues to suffer from the pandemic; front line workers are stretched beyond limit; we have yet to find an off switch for global warming, and extreme weather events are becoming the norm; real wages have barely budged in a generation and the cost of living is increasingly unaffordable; at the root of it is wealth distribution inequity, the nut that never gets cracked; we have a more divided body politic than in living memory, us and them; the sense of “the common good” that one is willing to sacrifice for (as did our forebears), no longer seems so common; we are still at square one in addressing the ravages that colonialism and paternalism visited upon our indigenous peoples; our neighbours to the south appear to be in danger of slipping into autocracy; the debt, the debt, let us not forget the debt!  Better stop there.  No doubt about it, that list is the shady side of the street, “with those blues on parade”.  But before we succumb completely to despair, why not channel some Dylan Friedmann and try to find “the sunny side of the street”?  Thinkers and observers like Bill Gates and Harvard’s Steven Pinker have been doing that in recent years, and have attracted much opprobrium for their efforts.  Nonetheless, here is the kind of information they have tried to draw our attention to. One hundred years ago, life expectancy in Canada was 58 years.  Fifty years ago it was 73.  Today it is 82.8.  The equivalent life expectancy numbers for China are 32, 61 and 77.3.  For India, 24.5, 49.1 and 70.2.   Fifty years ago Canada’s infant mortality rate was 40.1 per 1,000 live births.  Today it is 4.05. The equivalent statistic for China fifty years ago was 127.5.  Today it is 8.7.  India fifty years ago lost 189.6 infants per 1,000 births.  Today the number is 27.7.   As the saying goes: in the order of turpitude there are lies, damned lies, and statistics.  Surely though, we can all agree that for billions of people on this planet to be living markedly longer lives, and surviving childbirth in far greater numbers, standards of living across a broad spectrum of humanity have de facto risen exponentially.  There is no other explanation that stands to reason.     According to the World Bank, 100 years ago roughly 80% of the global population lived in “extreme poverty” (below subsistence level).  Fifty years ago that number dropped to about 55%.  Today it is around 10%.  Even allowing for subjectivity in measuring something like poverty, when we correlate with increasing lifespans and declining infant mortality, it is impossible not to deny the material progress that mankind has achieved in the last 100 years.  Other key global markers -- if you look over the sweep of time -- are trending in the right direction too: literacy, democracy, even vaccinations.   If we understand that despite all our foibles and failings, we have achieved great things in the past, then we can be optimistic about doing the same in the future.  Despair and cynicism are never an answer.  Just direct your feet to the sunny side of the street and start a love riot! CW                                              § CLASS OF 2022 MID-YEAR REPORT CARD On the sunny side of the street, but not a love riot While no cause for dancing in the street, the Class chalked up acceptable returns over the first half of the school year (since July 1st) of 6.5%, and 16.4% over the calendar year.  That stood in contrast to comparable returns of 15.6% and 21.7% for the TSX, 12.7% and 18.7% for the Dow, and 14.3% and 26.9% for the S&P 500.  Top performers were Nutrien, Microsoft and Apple, with 6 month and 12 month returns respectively of 26.5% and 55.3%, 24.1% and 51.2%, and 29.6% and 33.8%.  The laggards were Disney at -11.9% and -14.5%, Brookfield Renewables at -5.4% and -17.5%, and Algonquin at -1.1% and -12.8%.  “We trailed our benchmarks,” says the Headmaster, “and I’ll take the responsibility for that.  My decision to exit fossil fuel derived energy over the past four years (bye bye Crescent Point, Vermilion and Enbridge) came back to bite us. Conventional energy was the most influential sector behind the rise of both the TSX and the S&P 500 last year, with gains of 79.9% and 47.74% respectively.  Our shift to green energy meant  we missed that boat, but call off the blues parade.  Last year was an anomaly.  Oil and gas remains a low to no growth dead end.  The sector with years of healthy growth ahead of it remains solidly green!” Here are the complete Class results at the half-year mark: Financials - B+ Class members ScotiaBank, TD, RBC and BlackRock were exemplary in their continued recovery from the 2020 pandemic lows.  They had handsome earnings increases across the board, matched by an average stock gain of 8.5%. Says the Headmaster: “Thanks to central bank pump priming, and government pandemic relief, the banks were able to write down their provisions for loan losses significantly.  That went right to the bottom line.  And like BlackRock, they were also able to grow their investment assets under management.  I expect more of the same.”   Resources - A All the stars aligned for Nutrien.  Crop prices and farmers’ incomes are at a high, meaning demand for Nutrien’s farm supplies and fertilizers has sky-rocketed. So has the stock price, up 26.5% over the past six months.  There is a cloud on the horizon.  CEO Mayo Schmidt up and left after New Year’s, with no explanation from him, nor the board.  Worse, Schmidt’s predecessor Chuck Magro did the same thing less than a year ago.  From the Headmaster: “The company is staying mum.  I don’t like that.  When boards and the managements they oversee are not in synch, watch out.  And that is what we shall do for the next while.  Otherwise, Nutrien’s prospects are second to none.  I hope we are not in a ‘catching defeat from the jaws of victory’ situation.”  Energy - C+ While their stock prices struggled with an average loss of 3.2%, Algonquin Power and Brookfield Renewables both continue to grow their businesses at double digit rates, and have years of bankable, green energy projects in the offing. From the Headmaster: “While the current stock performance of this pair is underwhelming, we have to put it in context.  They both had runaway gains coming off the pandemic lows in March of 2020.  This is an understandable market pause for breath.  Nothing more.”   Infrastructure - B+ Revenues and free cash flow at Brookfield Infrastructure (a teacher’s pet) continued unabated in the past six months.  The stock was up 11.8%.  As a reminder the company invests in long-term assets such as port terminals, toll roads, cell phone towers and much more, with long-term, predictable cash flows.   “The trick,” says the Headmaster, “is the discipline they have in recycling those assets, selling when markets peak, and reinvesting in lower-priced, out of favour sectors.  Brookfield, under the leadership of Sam Pollock, are masters at that game.”

Dear Friends, This is Theodore Too, being escorted to his berth at the Marine Museum in Kingston in July.  You may recall, the popular children’s TV series in the 90s called Theodore Tugboat.  Based on the exploits of a friendly little tug in a port loosely resembling Halifax, it aired in 80 countries around the world for seven seasons.   Curious fact: Denny Doherty, formerly of the Mamas and the Papas, played the role of narrator and Theodore’s kindly Harbour Master. He also voiced all the animated characters, including Theodore. Denny was originally from Halifax.     Theodore Tugboat was so popular that the TV producers commissioned a life-sized replica. Theodore Too was christened in Nova Scotia in 2000 and became an instant ambassador and fixture on the Halifax waterfront.   Sadly, in 2020 Theodore’s owner was looking to sell.  Happily, though, up stepped Blair McKeil of McKeil Marine in Burlington, Ontario.  He and clean water advocacy group Swim, Drink, Fish came up with a new plan for Theodore.  He would make the long voyage from Halifax to his new home in Hamilton Harbour.  And from there he would take on the role of roving ambassador for clean water, green marine sustainability, and indigenous reconciliation, throughout the Great Lakes.  Theodore’s arrival in Kingston for a two-day stay at the Marine Museum Pier was a hit with the pandemic-starved public.  Over 2,000 visitors, mostly parents with young children, came to have their selfie moments with Theodore. There was more going on, though, than cartoon character entertainment.  We held a formal welcoming ceremony on the Museum Pier to mark the occasion.  In his role as emcee, the Museum Chair offered the following words.  “The Marine Museum of the Great Lakes at Kingston acknowledges the site it sits on and the water it interacts with to be the traditional territory of First Nations peoples. We thank these Nations for their care and stewardship over this land and water. We are committed to sharing this stewardship moving forward. Today is an historic occasion in so many ways.  I like to see it as a rebirth.  It’s a rebirth for the Marine Museum. We haven’t had a public event of any kind down at this historic site for five years. This is a rebirth. We’re back!  [loud applause] “This is of course a rebirth for Theodore Too, as he enters his new domain and new role as an ambassador for the environment of the Great Lakes. And as an ambassador for the often below-the-radar marine industry. Critically, it’s a rebirth for our relations with indigenous peoples and culture. We’re standing on what was traditionally known as Mississauga Point. From time immemorial this has been indigenous territory, land and water. We’re delighted to be reaching out – after far too long, I should say – to our indigenous partners. Among Theodore’s many new jobs, Swim, Drink, Fish has tasked him with collecting 100,000 ‘watermarks’.  A ‘watermark’, I believe, is a personal reflection on one’s connection to these precious waters. For me, I connect with a daily swim in Lake Ontario.  Not alone, but with a beautiful group of women called the Kingston Mermaids.  Every morning from May 24 to Thanksgiving we gather for a 1 to 2 km swim, whatever the conditions.  And every day we emerge from that swim communally reborn. That’s what these waters do for us. They give us life.” Happy summer to all, and wherever you are, may you enjoy the gift of life-giving waters! CW

                                       § CLASS OF 2021 REPORT CARD Heroic returns driven by cash flows and profits To make a crude analogy, a stock company’s rising cash flows and profits are the life-giving waters that renew its fortunes, and enable it to be reborn for a new day, a new quarter, a new year, a new decade or longer.  Conversely, absent these necessities, the opposite applies.  Falling cash flows and profits, unless remedied, are the antithesis of continual rebirth.  Rather, they signal inexorable decline, and takeover or extinction are looming threats.    The Headmaster is delighted to observe that his students in the Class of 2021, almost without exception, delivered Olympian cash flow and profit growth over the past school year (July 1, 2020 to June 30, 2021).  The Class average stock return reflected this heroic performance with an average gain of 31.9% for the 12-month period, vs. 29.9% for the TSX, 29.9% for the S&P 500 and 33.9% for the Dow.  “Bravo!” exclaimed the Headmaster.  “That’s two golds and a silver.  I can hardly expect more.”   Here are the sector by sector results. Financials - A+ After taking their knocks in 2020, Class members TD Bank, ScotiaBank, RBC and BlackRock came roaring out of the blocks in the past 12 months and posted an average gain of 45.9 %.  Once again, BlackRock excelled, growing its assets under management to nearly $10 trillion and leading the Class with a return of 60.8%.  The Headmaster, however, is not discounting the prospects for his Canadian trio:  “With declining loan losses and surging earnings, the banks are swimming in excess cash.  The bank regulator prudently halted dividend increases back in March 2020 to shore up bank capital reserves as we headed into the pandemic.  But that policy will come to an end as we emerge from COVID.  Expect mostly double digit dividend increases when it does.  That will bode well for stock prices.  All promoted.”  Resources - A+ Global fertilizer and farm supplies retailer Nutrien caught the commodities wave and chalked up a 72.1% gain.  Nutrien has the world’s largest reserves of low-cost potash, an essential farm crop nutrient, and is a major player in the other two essential fertilizers, nitrogen and phosphorus.  Says the Headmaster:  “It’s the nature of the beast that the fertilizer biz is highly cyclical and unpredictable.  I can’t tell you what the price of soy beans will be next year, or whether weather will wipe out western wheat, or what card the inscrutable Chinese will play in the global potash market.  However, I can tell you this: Nutrien, unlike its competitors, has a brilliant counterweight to that uncertainty ... its steady-Eddie farm supplies retailing unit.  In consequence, Nutrien has become a dependable cash dispensing machine.  Note the recent hike in the dividend and the announcement of yet another share buyback program.  Promoted!” Energy - C+ As faithful readers will know, the Headmaster over the past three to four years has largely pulled the plug on fossil-fuel-related Class members. Goodbye Crescent Point.  Goodbye Vermilion.  Goodbye Enbridge.  The two current claimants to the Energy bench are Algonquin Power and Brookfield Renewable Energy.  Both are predominantly oriented to green energy and both are superbly well run businesses with exemplary long-term growth prospects, unlike their predecessors.  Each has sailed through the pandemic with rising cash flows.  

“That said,” adds the Headmaster, “Algonquin and Brookfield Renewables got a titch ahead of themselves in stock price and are currently taking a well-deserved rest.  Their average stock gain over the school year was 3.4%.  I am not deterred in the slightest.  I expect renewed out-performance from this pair in the future.  Promoted.”

Infrastructure - A Class stalwart Brookfield Infrastructure returned 23.1%. Headmaster: “Brookfield are masters at buying long-term assets with dependable, growing cash flows when they are out of favour and prices are low.  Equally, they are adept at cashing out when greed enters the market and prices are high.  Rinse and repeat.” Promoted.  

Retail - B   Classmate veterans Alimentation Couche-Tard and Metro, both hailing from Montreal, returned an average 6.5%.  Couche-Tard, the global convenience store conglomerate (second in the world to Seven Eleven), and Metro, Canada’s best-run grocer are examples of companies that have benefited richly from pandemic stocking up and home meal preparation.  Will their lustre fade as COVID recedes? Says the Headmaster: “That was not the case in the years before the pandemic and I see no reason why it will be so in the future.  Both these companies excel in judicious investment of capital to grow profits and cash flow to the benefit of shareholders.  I see no change in that trend. Promoted.”

Industry - A+ Says the Headmaster: “Label and packaging maker CCL, CNR and John Deere knocked it out of the park with an average gain of 62.9%.  Bravo!  And let’s give an extra pat on the back to John Deere, who cranked out an individual performance of 124.4%.”   “Each of the members of this trio was well poised to benefit from COVID recovery, but there’s more to the story than that.  Each is a superbly well-run business, primed to take advantage when opportunity knocks.” “For those who need reminding, John Deere is not just in the business of vending agricultural equipment and lawn mowers.  It is also a major player in construction machinery and stands to benefit handsomely from the impending global infrastructure boom.”   “There are those who doubt the wisdom of CNR’s bid to takeover Kansas City Southern Railway and integrate it into North America’s first and only railway system linking Mexico, the US and Canada.  They have put the brakes on CNR’s stock of late.  I happen to think they are wrong and should the deal go through, shareholders will be the beneficiaries for decades to come.  Let us be patient.” All promoted.

Healthcare - B Healthcare, before the pandemic, during and no doubt after, tends to be seen as a ‘defensive’ sector.  I.e., don’t look for spectacular growth or gains.  Opines the Headmaster: “On the contrary, I see the singular cash generating qualities of these stocks through thick and thin -- our Merck, Amgen and Johnson and Johnson generate free cash flow of from 20 to 40% of sales -- as marvellously conducive to long-term wealth accumulation.” Early in June, Merck spun off its women’s health unit known as Organon.  There was a share distribution to Merck stockholders.  Given the slower growing nature of the spin-off, the Headmaster did not welcome Organon into the Class of 2022.  He sold the shares and purchased more Merck.   Merck, Amgen and J&J had an average return of 7.3% over the school year.  Promoted.

Telecom - A The lone Class standard bearer for telecom continues to be Vancouver-based Telus.  Telus, as a generator of healthy cash flows, has ploughed significant capital into its ‘fiber-to-home’ network in recent years, giving it a clear competitive advantage over chief western rival Shaw.  Equally, Telus has invested in subsidiaries such as Telus International and Telus Health that are now yielding meaningful returns to the balance sheet.  Headmaster: “Telus’s stock advanced a sprightly 22% over the school year.  It still enjoys ‘best wireless network’ on most customer surveys, and consistently has Canada’s best customer retention rates.  Promoted.”

Information Technology - A+ It is becoming a truth universally acknowledged that the info tech behemoths that rule so much of our lives are surprisingly impervious to the slings and arrows that beset the rest of the stock market.  That was certainly the case for global giants and classmates  Apple and Microsoft over the past year.  They positively galloped through the pandemic.  Visa is shrugging off a minor setback due to reduced international travel, and looks to have its groove back.  Even domestic software player Open Text, a minnow by comparison with the other three, managed to keep cash flows and profits rising throughout COVID.   

Headmaster: “This talented quartet had an average return of 28.3%.  All promoted.”

Entertainment - A+ Disney, not surprisingly, took a COVID hit to several key sectors in its vast empire: theme parks, cruise ships and movie theatrical releases.  However you wouldn’t know this from gazing upon its stock chart, up a remarkable 57.6% over the school year.   The Headmaster has his thoughts on how this could be so: “We have to remind ourselves how huge and dominant this world-beater is.  It doesn’t just own Pixar, Marvel, and Fox TV and movie studios.  It also has Lucasfilm.  So the Empire is always striking back.  Not to mention that Disney also owns America’s largest and most profitable cable network, ESPN.  And ABC.  And the Disney Channel.  The icing on the cake is that Disney appears to be well on the way to winning the streaming wars.  Disney+, ESPN+ and Hulu and the like are on track to have 300 million subscribers by 2025.  The only rival in its league looks to be Netflix.  The two of them are divvying up the streaming world.  Lastly, but not least, Disney has mastered the art of monetizing its franchises and their memorable characters across a myriad of platforms.  It all began with Mickey Mouse.  Now think of all those Elsas (from the movie Frozen) every Halloween.  That’s the cash generating magic of Disney.  Promoted!” If you would like further information on any of the investing ideas raised in this issue, or a complimentary consultation, please call or email.

Dear Friends,  One of Albrecht Durer’s most enduring images is this 1498 woodcut depicting The Four Horsemen of the Apocalyse. It is based on the Bible’s Book of Revelation and can be interpreted variously. But the essentials are fairly basic: as punishment for our sins, mankind will be visited by Pestilence, War and Famine, followed by the ragged cleanup hitter down in the left hand corner, Death. In short, the End of Days is coming!  With resurgent COVID, bloody insurrection in Washington, hunger, hardship and death ravaging the land -- and why not throw in climate change for good measure -- one could be forgiven for concluding that the Apocalypse has arrived. Take away the religious element, and I am nearly there.  Yes, ultimately and somehow we shall overcome these travails, but this is a bleeping depressing mess we are in.  Why do so many seemingly intelligent people selfishly equate wearing a life-saving mask to taking away their freedom?  Why do so many flout the travel and social gathering rules?   Why are there millions who distrust the vaccines and say they won’t take them?  Can this really be happening?  Sadly, yes, and those four horsemen show no signs of slowing down.  Now we have seared in our brains forever the image of Confederate flag-waving “patriots”, egged on by the putative “leader of the free world”,  storming the Capitol in Washington in a violent attempt to subvert the presidential election.   My Great Grandpa Allen Sherman West who fought under Lincoln at Gettysburg is roaring from his grave.  This is not what he fought for.  Nor my father Allen Sherman West III who served in WWII.   My generation, the Boomers, has enjoyed for the most part, life without war.  That has been a blessing in many ways, at least materially.  No generation in history has lived so high off the hog, enjoyed such an expansion of human rights (but not responsibilities) and seen the average lifespan increase so dramatically.    But as the body politic has fattened, has our spirit become flabby?  Where are the social sinews that hold us together and give us the strength to face adversity collectively?  We had them in previous wars.  Are they gone forever, or can we get them back?  I am not sure.   Sometimes it takes a truly epic catastrophe, an Apocalypse if you will, to bring people to their senses.  Let us hope that is not the direction we are headed in now.   Apologies for posing so many questions without answers.  I leave it to the next generation, including Allen Sherman West IV, to guide us to enlightenment.  Watch out for those horsemen and stay well, CW 

                                             §

You probably recognise this fine fellow.  He is Mark Carney, the brilliant former Governor of the Bank of Canada who was a key figure in reforming the global financial system after the collapse in 2008.  He then went on to the governorship of the Bank of England and deftly stickhandled his way through the thickets of Boris Johnson and Brexit. What you may not recognise is that Mr. Carney has long been a champion of “impact investing”; i.e., investing that takes into account social, environmental and governance factors, so-called ESG investing.  In particular, for years he has been advocating the need to take what he has termed “the climate emergency” into account on private enterprises’ balance sheets.  He has argued on the one hand that there are enormous shareholder liabilities for companies that do not include environmental costs in the liabilities column.  On the other hand, he has proclaimed from the rooftops that there is a massive opportunity for shareholder gains in companies that are prepared to put capital to work in addressing climate change and reducing carbon output. Last August the elite banker found a new home where he is putting his philosophy  to work.  Brookfield Asset Management has appointed Mark Carney Vice Chair and Head of ESG and Impact Fund Investing.     Canadian-based Brookfield has over $550 billion in long-life assets under management and its subsidiary, Brookfield Renewables is home to a growing portfolio of hydro, solar and wind investments around the globe.  Said the visionary CEO of Brookfield, Bruce Flatt: “Over time we see ESG and impact funds matching the size of our existing platforms.”  “We are not going to solve climate change without the private sector,” said Mr. Carney in the Globe and Mail.  “We are in the early innings of a very long game.”   He is not talking small potatoes.  According to the industry publication Pensions and Investments: “The value of global assets applying environmental, social and governance data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion in 2020.”                                            §    CLASS OF 2021 MID-YEAR REPORT CARD  Sparkling returns mock the Apocalypse Apocalypses come and go, as do wannabe fascist autocrats.  The markets don’t care.  As the Headmaster has often remarked, he has no insight into where the markets are going in the short term.  All he knows is that a basket of well-managed companies with competitive advantages in promising sectors will rise nicely over time.   To wit: since the beginning of the school year, July 1st, 2020, the Class of 2021 turned in an average investment performance of 20.3% vs. 21.1%, 17.4% and 12.3% for the S&P 500, the Dow and the TSX respectively.  “Bravo Class!” declared the Headmaster.  “You stared the four horsemen down and matched or bested your benchmarks.  Keep up the good work.” Class results for the calendar year (January 1, 2020 - December 31st, 2020), that included the stomach-turning contraction last March, were similarly impressive.  The Class returned 13.6% vs. 15.5%, 6.5% and 2.8% for the S&P, the Dow and the TSX.   Here are the sector by sector results. Financials - A  Each of these blue chips -- TD Bank, ScotiaBank, RBC and BlackRock -- bore out its pedigree, with an average return of 21.8%.  BlackRock was the leader of the pack with a sterling 32.6% gain.  Remember, as previously reported, BlackRock is the largest investment fund company ($7.8 trillion under management at the end of September) in the world and CEO Larry Fink, echoing Mark Carney, has been an industry leader in demanding that companies do a better job of incorporating ESG into their strategic planning and financial reporting.  All promoted.  Resources - A plus The lone Class member in this highly cyclical category is Nutrien, the Calgary-based fertilizers and agricultural supplies retailer.  As the owner of the world’s largest, and lowest cost, potash reserves, the company enjoys the advantages of scale.  Adds the Headmaster: “When commodity prices are on an upswing, as they are now, Nutrien can do very well.”  Hard-working Nutrien’s return was 40.4%.  Promoted.  Energy - B  Quoth the Headmaster: “Enbridge has been a loyal, blue chip pipeline performer almost since this Class was formed 13 years ago.  It is with regret that I had to let him go this past October.  There was no pivotal event. Rather, the advantages of being a dominant conveyor of fossil fuels, in my humble view, came to be out-weighed by the disadvantages of same.”  “My timing may not be perfect, but it is inarguable that the production of fossil fuel, and businesses tied to it like Enbridge, are approaching or in decline.  It may be a long decline, but in the meantime, we need to give our precious Class space to an energy candidate with the winds of change behind it.  Last October I replaced Enbridge with Brookfield Renewables.”  From July 1st to October 10th, Enbridge  returned minus 5.5%.  From October 10th to December 31st, Brookfield Renewables returned 16.5%.  Promoted. Classmate Algonquin Energy, with investments in solar, wind and hydro, didn’t miss a beat during these pandemical times, with rising revenues and profits.  Its stock appreciated 19.3%.  Promoted.  Infrastructure - B Once again, Brookfield Infrastructure proved the value of its business model, investing in long-term assets like rail, toll roads and cell phone towers, with regulated cash flows largely immune to the vicissitudes of the markets.  The company’s stock price advanced 12.7% over the past six months.   Adds the Headmaster: “I am delighted that CEO Sam Pollock has reiterated his commitment to recycling assets, selling mature businesses when prices are high, and buying new ones that are out of favour when prices are low.  No one plays the game better than Brookfield.”

Dear Friends, It’s ironic.  Since the onset of the twin pandemics that plague us, many of you, and the public generally, have sought reassurance that your life savings were not going to be wiped out in some end-of-the-world-as-we-know-it scenario.  I have responded in my philosophical way that pandemics -- both the viral and the political kinds -- come and go, and that in the end they will have no bearing on your net worth.  Perhaps I have made these remarks too blithely sometimes, but so far, with regard to both the Trumpian pandemic and COVID-19, I have been more right than wrong on the financial impact. However, and this is a big however, I take much less comfort from the ongoing social consequences of COVID-19.  I have to admit to underplaying them.  The cruelty of loved ones dying in complete isolation in nursing homes and intensive care has been beyond measure.  I didn’t see that coming.   The cabin fever effect -- the inability to physically see and touch and hug and kiss and play -- has taken an enormous toll on our collective psyches.  ZOOM and its analogues, have been marvellous stop-gaps, but in the end, they just don’t cut it.  Most of us crave human company, up close and personal.  All to say, my heart and sympathies go out, especially to those like my sister Susie, and so many others, who are immuno-compromised or have other conditions that preclude even masked visitations, even now as things are gradually opening up.  I miss Susie! So that’s my humble admission of hubris.  I downplayed the virus and I was wrong.  While always an optimist, I have no predictions on when it is going to be behind us.  What I can say with a fair degree of confidence, is that society is going to have to rearrange itself after this pandemic.   For starters, we can only hope that in future the workers we deem to be “essential” will be compensated accordingly.  To be worried about the dividends in our portfolios when the cleaners, and migrant farm workers, and  grocery store clerks and shelf-stockers, and meat packing plant workers, and PSWs and nurses  and emergency service workers have been risking their lives every day and dying for us in droves, is beyond any level of social acceptance.  

                                           § I came back to Kingston by accident early in the summer of 2005.  My mother was unexpectedly in hospital and I came to help care for her.  I spent many long days at her bedside.  Prior to heading to the hospital each morning, I would rise early and take my dog Max down to the lake for a walk along a beautiful stretch of shoreline starting at the former Rockwood Insane Asylum buildings.  On the second or third morning of this new routine we espied some bathing caps quite far out in the lake.  “Those look like serious swimmers,” I said to Max.  Max agreed.  As an ardent swimmer, I was intrigued. The next morning on our walk we happened to come across what looked to be the same swimmers as they were emerging from the lake at the beach behind Rockwood.  They were a group of four women and I couldn’t resist approaching them.   “Hello, I’m Chris West.  I think I’ve seen you swimming far out, and this is Max.  Max hates the water, but I’m a life-long swimmer.  How far do you go?” Susan, Francine, Peggy and Sue very graciously introduced themselves and explained that for several years they had been meeting at this point every morning at seven o’clock for a swim that lasted about 45 minutes or so.  They told me they loved this ritual and did it from as soon as the water was tolerable in June until Thanksgiving. “That’s amazing!” I said.  “I’m visiting from Montreal, but I grew up in Kingston and my parents started every summer’s day with a swim at Richardson Beach.  I salute you.  Bravo!” “Well why don’t you join us?” rejoindered Tall Susan (as opposed to Little Sue).  I couldn’t believe my good fortune.   “You mean it?” “Absolutely,” said Tall Susan.  We’re here every morning at seven.  See you tomorrow!” And that was the beginning of a beautiful friendship and my salvation in a summer that my Mom did not survive.  Fifteen years later, as pictured above, the Mermaids as they are now known are more numerous in number, but we still swim every morning.  More than ever, as we grind through the pandemic, this sisterhood is my salvation. I wish the same kind of human connection for all of you.  In whatever form it takes, it is the most precious and important thing, and will carry us through the uncertainty that lies ahead.  CW                                              § CLASS OF 2020 YEAR-END REPORT CARD Positive returns in tough year! Given the mayhem precipitated by the COVID-19 lockdowns around the world, and incompetent leadership south of the border, the Headmaster is very relieved that the Class of 2020 made it to the June 30th finish line in positive terrain.   The Class average for the July 1, 2019 to June 30, 2020 period came in at a 2.8% gain, versus -5.2% for the TSX; 5.3% for the S&P 500; and -2.9% for the Dow.  “Once again,” said the Headmaster, “we bested the average of our benchmarks.  I can’t ask more of the Class than that.”   He continued: “One must note, however, that the Class results were far from even.  Were it not for the outstanding contributions of Apple and Microsoft, with returns of 84.3% and 51.9% respectively, the Class would have been underwater.”

“At the other extreme, cyclical classmates like Nutrien (fertilizers and farm supplies) and CCL (consumer labels and packaging) were particularly vulnerable to the COVID slowdown and their performances of -37% and -31.6% respectively reflect how they were whipsawed.” “Overall, though, the diversity and the quality of the Class of 2020 shone through, as I would have hoped.”     Here are the sector by sector results.  Financials - C Canadian bank stalwarts TD, RBC and BNS were seriously whacked by both COVID and the collapse in the energy sector, with an average return of -17.6%.  “The market’s concerns about the banks’ rising impaired loans and falling profits are perfectly reasonable,” says the Headmaster.  “But I have confidence in this trio.  With their strong balance sheets and prudent management, they will prevail.  Promoted.”  “The bright spark in Financials was the US asset manager, BlackRock, who turned in a terrific 15.9% return and actually managed to grow their assets under management to well above $7 trillion.  None of their competition came close to this performance.  Hats off to CEO Larry Fink and co.  Promoted.”     Resources - D As noted above, it was tough sledding for the sole contributor in this category, Nutrien.  Adds the Headmaster: “With major potash buyers China and India holding back, and US farmers shrinking from the market in a COVID frame of mind, it was inevitable that Nutrien would take a hit.”  “However, management is extremely disciplined and when demand drops, cuts production rather than chasing volume at lower prices.  This tactic has paid off handsomely in the past and will do so in the future.  Promoted.”  Energy - B minus Quelle surprise, green energy firm Algonquin (wind and solar farms) bested the oil and gas pipeline giant, Enbridge, with returns respectively of 10.5% and minus 12.7%.  The Headmaster comments: “Each proved its worth in a time of crisis with positive cash flows supporting generous dividends.  I have no doubt this pair will continue to rebound nicely in the COVID recovery.  Promoted.”  Infrastructure - B Brookfield Infrastructure invests in long-duration assets around the world, including port terminals, cell phone towers, gas transmission systems, toll roads and data centres.  Together with parent Brookfield Asset Management, the company has advantageous access to capital and the smarts to deploy it wisely.  As the Headmaster sees it: “Economic downturns are when Brookfield excels.  Just wait until truly distressed companies start to cry ‘Uncle!’.  Brookfield will be there with cheque book and sharp pencil at the ready.  Promoted.” Retail - B plus Montrealers Alimentation Couche Tard (convenience store and fuel sales around the world) and Metro, the grocer, once again proved the worth of their pedigrees.  With respective returns of 3.3% and 13.9%, they easily beat the market.   Each of these classmates was in the “essential services” category and nimble in taking measures to protect their workers and serve their customers safely.   “Metro actually managed to increase both revenues and profits,” adds the Headmaster, “benefiting from the pandemic stocking-up phenomenon.  Couche Tard, of course, experienced a major drop in fuel sales as car travel came to a near halt, but still cranked out a gain in profits.  Bravo to both!  Promoted.” Industry - C minus The three class members in this category, CNR, John Deere and CCL, are in classically cyclical businesses.  And in classical fashion they were buffeted by the COVID winds. As mentioned above, CCL proved to be particularly vulnerable, but post the end of term has shown promising shoots of renewed growth.  John Deere hunkered down admirably and suffered only a 5.1% drop.  Blue chip performer CNR, sustaining hits to both revenues and profits, managed nonetheless to convince the market that the worst is behind it.  It’s share price neither fell nor rose.  Says the Headmaster:  “We knew this trio was in for a rough ride.  I am pleased with how well they have done collectively and see them as poised for nice gains in the Class of 2021.  Promoted.”   Healthcare - A Biotech giant Amgen and healthcare conglomerate Johnson and Johnson (pharmaceuticals, medical devices and personal care) chalked up a scintillating average gain of 14%.   Says the Headmaster, “I have been trying to tell anyone who would listen for the past couple of years that the healthcare sector was undervalued and unjustifiably unloved in the markets.” “Yes, of course, the hunt for a COVID vaccine has given a lift to many healthcare stocks, and JNJ has benefited somewhat in this regard, but the true story here is that every soundly constructed portfolio needs a healthy dose of stocks like these that are virtually recession-proof.  When they are trading at bargain valuations, back up the truck!  Promoted”   Footnote:  Just after the year-end, the Headmaster added another global pharma player to the Class of 2021, Merck & Co.  Telecom - C  Class veteran Telus slipped in sales and profits in the wake of the COVID lockdown, but not catastrophically.  The stock was down over the year a tolerable 5.9%.

Dear Friends, This mysterious poster has been appearing on lampposts in downtown Kingston since last fall.  It has prompted a rather personal examination of fake news.  Read the fine print under the photo and note that the scientist on the right is The West Letter editor’s father, Allen (Al) West.  He died at age 86 in 1996.   Bitten is the title of a book that appeared last year.  Written by a science writer in California, Kris Newby, it argues with great conviction that the scourge of tick-borne Lyme disease can be traced to US biological weapons research “gone wrong” post World War II.  The author, a recovered Lyme disease patient herself, builds a case that experimental work at Plum Island NY, led to the pathogen “escaping” into the deer population in Connecticut in the ‘70s, and from there to humans.   In plain English, Bitten is a conspiracy theory, that commits the classic error of equating correlation with causation.  Newby conveniently skirts the ample evidence that Lyme disease has been with us at least since the 1890s, and possibly for centuries, preferring to make a case out of two coincident but unrelated facts: one, US military tick-borne disease research in progress on Plum Island NY post WW II; and two, the first identification of Lyme disease in Old Lyme (from whence the name), Connecticut in 1977.  The “ah hah” factor, if you are inclined to the conspiracy, is that Plum Island is but a short hop, as the crow flies, from Connecticut.  

The amateur poster maker too has indulged -- egregiously so -- in the same lack of critical thinking.  Looking at the poster, you might assume that Al West and Queen’s University “in Ontario” were central to the conspiracy theory story.  You would be wrong.  The cover of the book does not feature this photograph.  Nor in the entire text of Bitten is there any reference to Al West or Queen’s University, other than in the photo and caption.  The main character from beginning to end of Bitten is the man on left, Willy Burgdorfer, the discoverer of the bacterium that causes Lyme Disease.  The purpose of the photo was to help bring him to life for the reader.  The guys in the lab coats to his left were completely unrelated to the conspiracy tale.   

I’m guessing that the poster maker is a Lyme disease sufferer in Kingston who buys the conspiracy angle of Bitten.  He or she has seized on the three amigos in lab coats photo, and its caption, as “evidence” (guilt by association) that Al West and Queen’s University must have had a hand, along with Burgdorfer, in releasing the plague of Lyme disease upon humans.  Sic transit the compounding of fake news.                                              §     

FAKE INVESTING NEWS Beware the market soothsayers Canadian economist David Rosenberg is a genuine heavy hitter.  After years opining and advising on Wall Street he returned to Canada to do the same for the Toronto-based money manager Gluskin Sheff.  Rosenberg’s “Breakfast with Dave” subscription service has a devoted following, as do his frequent interviews and articles in publications such as the Wall Street Journal, the Globe and Mail and the Financial Post.  

Last November Rosenberg left Gluskin Sheff to hang out his own shingle.  The name may be changing, but the schtick has not and will not.  Rosenberg is best known as a “perma-bear”, someone who almost always forecasts bad news ahead in the markets.  Famously, while Chief Economist at Merrill Lynch, he correctly called the impending real estate crash in the US before the Great Recession in 2008.  That made his reputation.  Unfortunately, with rare exceptions, he has been calling for more bad news ever since.   Rosenberg is one of those economists of whom it can fairly be said: “He called 39 of the last 9 recessions.”  Put another way, even a broken clock is right twice every 24 hours.   Beware the market soothsayers.  If you listened to the naysayers a year ago (including Rosenberg), you missed out on the best market performance in the past decade.  In investing it pays to stick to the knowable: is this stock over or under priced; are the board and management demonstrably competent and on the shareholders’ side; can the balance sheet withstand the inevitable storms?  The rest is guessing, which has no place in long term successful investing.                                            §     

THEME FOR A NEW DECADE Hop on board the shortage in rental housing! To quote from an editorial in the January 3rd edition of Globe and Mail:

“Canada has recently been the fastest growing country in the Group of Seven, with a population rising at double the pace of the United States and United Kingdom, and four times that of France and Germany. According to Statistics Canada projections, our country could have 48.8 million people by 2050.  And that’s the agency’s medium growth projection; under a high-growth scenario,there could soon be 56 million Canadians.   Nearly all of these future residents are going to live in this country’s handful of big cities.  That means millions of new urban dwellers ....”   At a recent baby boomers dinner party, the talk turned to empty nesters making steps to downsize.  The hosts, it turned out, were preparing to put their house on the market, and had been apartment hunting.  However, they were discouraged.  “How long do you think the waiting lists are to get into a good building in Kingston?” they asked.   

No one knew.  They answered their own question: “Two hundred.  Three hundred.  Even five freaking hundred!!!”  Of course that’s just anecdotal.  But the Stats Can projections bear out the argument.  In large part due to immigration policy, but also taking natural increase into account, there is a widely acknowledged shortage in rental housing stock in Canada’s cities.  This bodes well for the the cash flows and growth rates of well-run operators like Minto Apartment Real Estate Income Trust (REIT) of Ottawa.  The founding Greenberg family is still running the business and they are best of breed, as is their portfolio of properties. 

                                            §

There were a number of firsts achieved at the April Fools Day speaker luncheon: first speaker beamed in by video chat link from an off site location (Professor Susan Crawford spoke from her office on the Harvard campus); first live streaming of a Community Foundation event (reaching 146 off site attendees); first speaker luncheon proceedings to be recorded and soon to be “archived” and viewable on the CF web site; first speaker luncheon with a dedicated Tweeter (thank you Brenda Slomka!) throughout, resulting in 65,000 Twitter accounts reached and 672,000 Twitter “impressions” registered. 

There were some 75 flesh and blood attendees at the event.  As hoped for, the City was well represented, including Mayor Bryan Paterson, the CAO, the Police Chief, and a passel of City commissioners and officers. Committee organizer and moderator, Chrystal Wilson, introduced Susan Crawford – smiling down from a giant screen at the front of the room – as the co-author of The Responsive City, the book that inspired the event.

The genial Prof. Crawford, a former advisor to New York Mayor Bloomberg and President Obama, quickly and clearly outlined the chief elements of her thesis, among them: not having access to the internet today is the equivalent of not having clean drinking water; broadband should be considered an essential component of a city’s infrastructure; the only delivery format that makes sense is fibre optic cable, because of its vastly superior capacity; the new generation needs and wants to interact with its municipal government by smart phone; citizens will only have faith in their democratic institutions if they are engaged; cities can encourage engagement by broadening the number of  internet and smart phone “touch points”; when responsive cities have the trust of their citizens, they can do big things.

Campbell Paterson, of CP Communications and a consultant to Utilities Kingston, spoke next to the challenges of implementing a data-smart vision for Kingston. Referencing both Susan Crawford’s book and the Mayor’s vision laid out at his inauguration, he outlined a number of key points. He called for a new openness (“think Twitter and Facebook”) and a collaborative non-hierarchical approach. He said Kingston needs a “digital platform” to connect people, processes and things.  He gave many examples such as smart parking and smart transit (imagine locating that empty parking spot on Clarence with your smart phone or finding out how many blocks away the next bus is. He emphasized that connectedness and openness lead to cities doing more with less; i.e., becoming more efficient. Who will pay for the digital platform? He referenced federal and provincial funds available for broadband infrastructure investment.

Constable Steven Koopman rounded out the panel with an eye-opening overview of current City of Kingston Police Force data-smart and responsive city initiatives. Under his oversight, KPF’s Facebook page has over 13,000 followers, tops in the province on a per capita basis. The Force’s Twitter account, also managed by Constable Koopman, has over 20,000 followers versus 17,000 for a much larger city like Hamilton. The My PD app has been downloaded 4,085 times and has 1,417 active subscribers.  The app is the embodiment of Susan Crawford’s “touch point” concept for citizen engagement. With it, anyone can submit tips; ask questions and get feedback; receive Tweets and news alerts; file a report; connect with a specific officer; access local traffic information; and view a crime incident map. KPF also has a 911 texting service for the hearing and speech impaired.  In addition to these examples of social media outreach, Constable Koopman related examples of how the Force is employing “data analytics” to identify crime patterns, leading to successful arrests in sex assault and theft cases.

Dear Friends,  It saddens me deeply to report that The West Letter has lost its canine correspondent and assistant editor, Maximilian West, aka Max. The picture above was taken at the corner of Ave. Melville and Blvd. de Maisonneuve in Montreal, bordering Westmount Park, last June 2nd. He had been visiting friends and clients with his master.  A day later he was back in Kingston. It was a lazy Saturday. Max began this last day as he always had, going for the morning walk -- albeit at a very sedate pace, befitting his 15 years -- and accompanying his master on the usual errands about town in the back of the Maxmobile. It was warm and sunny and he spent most of the afternoon snoozing contently in the yard. That evening he struggled getting up the porch steps. But he still tucked into his supper gamely and lay at his master’s feet for the duration of a postprandial movie.  When It came time to call it a day, for the first and only time in his adult life, Maximilian West was unable to mount the stairs to the second floor.  His master picked him up and carried him like a baby, setting him down by the bed on his favourite sheepskin rug.  And that is where he was the next morning, in perfect repose.  Alas, too perfect.   

WHO?

Who came into this world in the winter of 2003 and was abandoned as a defenceless puppy along with his beautiful mama and brothers and sisters in Sainte-Agathe-des-Monts?

Who, as a teddy-bear-sized ball of fluff, caught his master-to-be’s eye at the shelter on the banks of Riviere du Nord, and soon won his heart? Who was dismissed by the Napoleonic obedience school director as “damaged goods; untrainable; you should ask for your money back”? Who graduated summa cum laude at that same school? Who, nonetheless, for the first years of his life had a chip on his shoulder, and needlessly terrorized more than one lovely hostess, up to and including physically blocking her from entering her own home? Who, with German Shepherd and Border Collie bloodlines, was fiercely loyal to, and protective of, his family, no stranger at the door avoiding the big bowwow treatment?  And herded the children and other dogs like sheep? Who teased the boys -- Allen, Harry and Pablo -- endlessly, loving nothing more than a game of piggy in the middle or hey-I-have-your-mitten-now-try-to-catch-me?   Who had an astonishingly extensive mastery of English and Spanish commands, and even a smattering of French? Who was equally adept at interpreting his master’s hand signals and body gestures … even the wink of an eye or a nod?   And who had his own repertoire of canine language commands and gestures – a flick of the leash, a rattling of a dish, a cold nose protruding into an early morning bed? Who could leap tall fences in a single bound? Who wandered off into a farmer’s field and upon encountering cows for the first time, calmly proceeded to herd them back to his startled master … And decided there was no better way to celebrate his new-found talent than to dive ecstatically into a fresh green cow pie? Who had a morbid fear of water and apart from the cow pie incident, never had a bath in his life?   Who famously said to his Piscean master: “If I had been meant to swim, I’d have been born with webbed toes, n’est-ce-pas?” Who, despite his fear of water, was quite at home on many a sailing or canoe voyage, always with the proviso that his master was at the helm? Who slept at the side or the foot of his master’s bed every night of his life, no different than the dogs of English knights memorialized in brass? Who, as a puppy, devoured half the furniture in the apartment, including Great Grandmother’s sumptuous Victorian settee (it being retrieved with an extravagant reupholstery job)? Who could sniff a treat-bearing lady at a hundred paces, and invariably seduce her of her bounty with a sly charm? And as a corollary, who was far too well-mannered to beg, unless you count infinitely patient, beseeching eyes? Who was the dog world’s pickiest eater, a true gourmet, not a gourmand, perfectly content to walk away from a partially eaten bowl of the tenderest vitals? Who was so well trained, he didn’t need a leash and would never waste his time or effort chasing a squirrel across the road or a seagull along the shore? Who greeted a parade of innocent mailmen over the years with a reception worthy of Attila the Hun? Who, ever the jealous lover, begrudgingly accompanied his master in and out of bachelorhood, often in the beginning barely tolerating female competition in his domain? And as an instance of same, who, with a chaperone’s reproach, would busily park himself between a romantic candidate and his master, and if that tactic failed, would go into a high dudgeon for days, sulking under the table? And yet, who came to adore his mistress of the past six years, and shower her with loyalty and devotion? Who accompanied his master in the Maxmobile on nearly all his road trips … to Montreal, Chicago, Brantford, Toronto, New York, Prince Edward County and Saint-Adolphe-d’Howard, not to mention daily errands, always supremely comfortable and happy at his command post in the back of the wagon? Who never got up on the plush living room furniture, except for those few thousand times that his master wasn’t looking? Who, for the past 13 summers was the adoptive mascot of a group of swimmers known as the Mermaids, and attended to their immersion into, and emergence from, Lake Ontario nearly every day of each of those summers? And who, in particular, was befriended by and doted on and spoiled by Mermaid Peggy, and even enticed by her siren wiles and treats to enter the water up to his withers?!! Who, from youngest days, had Latin rhythm and loved to dance (bailar!), up on his hind legs to cumbia, salsa, merengue, son cubano y mucho más, until in old age those legs began to give out? Who was a contributing editor to an investment newsletter (The West Letter) and cultivated a following that rivaled his master’s?   Who was also surprisingly well-read and the creator of Canada’s Canine Lit List, top picks including Jack London’s The Call of the Wild, Conan Doyle’s The Hound of the Baskervilles and Mark Haddon’s The Curious Incident of the Dog in the Night-time? Who was the face that launched a new pet food company in Montreal, and complained that celebrity wasn’t all it was cracked up to be? “My master negotiated what seemed like an OK contract at the time.  I was paid in the new product, of course, not royalties. So … sigh … retiring to the stud farm is still looking like a distant proposition.” Who, once he knocked that chip off his shoulder, was his master’s superb four-legged ambassador …  not only on walks, but when receiving visitors, hosting parties and as a grateful houseguest, making friends wherever he went? Who took demented cousin Bob at the Helen Henderson Care Centre under his wing on Saturday morning visits, quickly learning to heel to Bob’s erratic wheelchair progress up and down the hallways?   And along the way became the unofficial therapy dog of the residence, sitting patiently at their sides as affection-starved souls petted and stroked and asked if they could give the doggie a treat? Who wagged his spectacular blond tail from side to side like a regal fan? And left a hole in his master’s heart? Who is Maximilian West.  

                                           §

YEAR-END REPORT CARD Class of 2018: No Surprises, Steady Performance  “Neat but not gaudy” is the Headmaster’s summation of the Class of 2018′s  year over year (July 1 ‘17 to June 30 ‘18) average gain of 6.6%. Over the same period, the TSX and S&P 500 were up 7.2% and 12.1% respectively.  

The Headmaster says there is no reason for class members to take umbrage and commends them for their cautious, no-drama progress in choppy seas.  The worst performer in the class, Enbridge, was only down 9%.  To add perspective: over the past five years, the class annual return has averaged 10.3% versus 6.1% for the TSX and 11.1% for the S&P 500.  If some class members are temporarily out of favour with the market, it is not a concern of the Headmaster.  “Value will always out.”         As for the sizzle this year ... Information Technology stocks once again went to the head of the class, with outstanding performances from Apple, Open Text and Visa.  For all the sector by sector details, please read on.   Financials - B  TD Bank, Royal Bank and Bank of Nova Scotia produced an average return of 3.6%.  With double digit earnings growth and handsome dividend increases, averaging 9%, you’d think they might have received more market recognition.  Ah well, all the more reason to keep them in the class for the return of that swinging pendulum. Promoted. Resources - B plus  Class veterans Vermilion Energy and Nutrien (the former Agrium, merged with Potash Corp) more than made up for Enbridge’s travails. The threesome posted an average 9.8% gain, fueled by rising commodity markets in energy and agriculture, and excellent execution of their business plans. Nutrien, in particular, is to be commended for being well ahead of schedule in wringing massive savings out of its operations as a result of the merger. They go right to the bottom line.  Enbridge is at last emerging from the cloud it has been under since its purchase of the US pipeline company Spectra. Worries of unsustainable debt and potential dividend cuts have been put to rest with a string of non-core asset sales that have delivered balance sheet and investor relief. The stock has been on a tear since it bottomed in April. The Headmaster expects more of the same to come.  All promoted. 

   Infrastructure - C plus Brookfield Instructure Partners Limited took an expected pause this year, having disposed of some Brazilian assets, the temporary lack of which, have put the brakes on cash flow growth. Happily however, the excess capital is being redeployed and CEO Sam Pollock sees no reason to stray from Brookfield’s stated long term target of 12 to 15% returns on invested capital, not to mention a generous distribution increasing at about 8% per annum.  The company’s Class of 2018 performance was -4.9%. The Headmaster is far from perturbed and has full confidence in the medium and long term prospects for Brookfield. Promoted.  Retail - B minus Class bench-mates Alimentation Couche Tard and Metro are perfect examples of how sometimes the markets can be out of synch with reality on the ground.  To wit: this pair had earnings per share growth of 17.5% and 4.8% respectively and boosted their dividends by 10 and 11%. Their track records and prospects are exemplary.  Yet their average stock performance over the past year was -3.4%.  Once again the Headmaster notes: “The pendulum will swing back to value.”  All promoted.  Industrials - B plus  Class seniors CNR, John Deere and global packaging player CCL, each produced admirable, double-digit earnings and dividend growth over the school year, despite various headwinds in their respective businesses.  The trio’s average stock gain, 4.5%, would have been more in line with earnings growth, but for CCL taking one of its familiar breathing spells, pending the next transformative acquisition.  The Headmaster is sanguine and sees much promise ahead.  All promoted.  Healthcare - A The Headmaster’s continued faith in his unloved healthcare class members was borne out in spades. Amgen, Johnson and Johnson and Express Scripts racked up earnings gains in stellar fashion, and were rewarded commensurately by the market with an average stock advance of 19.8%.  Bravo and promoted!   Telecom - C minus There is no room for sentiment in managing a class of stocks.  The Headmaster can no longer justify the anemic returns of that friend of widows and orphans,  BCE. True, as long as its generous dividends are sustainable, there will be a place for BCE in many portfolios.  But the Headmaster wants more than dividends. The evidence for same just isn’t there.  BCE, by the kinds of industry measures that count -- e.g., customer “churn” (turnover rate), average annual revenue and lifetime revenue per customer, and resultant cash flow growth -- is falling consistently short of its rival, Telus. The market recognized this disparity last year, awarding Telus with a 4.3% gain, and punishing BCE with an 8.8% loss.  While acknowledging yeoman’s service in years gone by, the Headmaster has asked BCE to leave the class, based on current and projected performance.  Conversely, Telus is promoted.      Information Technology - A plus Apple, Visa and their Canadian desk mate Open Text knocked the ball out of the park last year with average earnings per share and stock price gains of 27%.  Add to that heroic stock buybacks at Apple and Visa, and significant dividend hikes for all three, and you have a recipe for rare Headmaster contentment. All three promoted. To replace BCE, the Headmaster has ushered Microsoft into the Class of 2019.  There are a number of reasons to like Microsoft: the dependable cash flows spun off by its legacy Office and related software products; the successful move it has made into cloud-computing (second only to Amazon); but what really catches the Headmaster’s eye is CEO Satya Nadella’s determination to make Microsoft a major player in artificial intelligence (AI).  Nadella calls AI “the defining technology of our times” and wants to make sure that Microsoft is in line for more than a fair share of what prognosticators estimate will be a $4 trillion market by 2022. Microsoft currently has 8,000  scientists and engineers working in this strategic sector, and has already begun to incorporate the fruits of their labours into each of the company’s lines of business. “Smart move,” says the Headmaster, who values intelligence, artificial or otherwise.   Entertainment - B minus Disney over the past year continued to do exactly what one would expect of a one-of-a-kind leader in media and entertainment. It delivered the goods; i.e., growth in all the right places. Well, okay ... just about in all the right places. To Disney and the Headmaster’s frustration, there is still a knock against this class member for failure to make the transition from cable delivery of content to “streaming” fast enough. The stock languished with a return of -1.3%.   “Pshaw!” says the Headmaster. “I have full confidence in Bob Iger and the Disney management team. The pending takeover of the television and movie assets of 20th Century Fox only reinforces my view!”  He may have a point. The stock is up 9% since the end of the school year.  If you would like further information on any of the investing ideas raised in this issue, or a complimentary consultation, please call or email. CW                                                                                                 § AQUATIC UPDATE 

Winter Morning, Charlevoix County -- A. Y. Jackson, 1933 Dear Friends,  The theme of this edition is vision.  Fatherless at age 12, the young A. Y. Jackson apprenticed to a lithographer in Montreal and quickly realized he did not want to spend the rest of his life designing soup can labels.  He had a vision, hopped a freighter and studied art in Paris.  On his return he knew he wanted to dedicate his life to art.   We now remember Jackson as one of the co-founders of the Group of Seven in Toronto, and the equally influential Beaver Hall Group in Montreal.  Jackson and his friends in both groups were determined to create a new artistic vocabulary that was distinctly Canadian, and not derivative of our European mother countries.  And they did!  I first encountered the magic of Quebec’s Charlevoix County when I was 12.  My Queen’s professor father took me out of school in late spring of my grade eight year and said he was going to take me along on an annual business trip that would take us to Quebec City, Baie St. Paul, Murray Bay (now La Malbaie), Tadoussac, Baie Comeau, Seven Islands (now Sept Isles) and all the way up to Wabush and Labrador City.     Baie St. Paul is in the heart of Charlevoix, where the Laurentian mountains tumble down spectacularly into the tidal waters of the St. Lawrence.  The air is salty and luminous, like the south of France.  The hills are so steep, the region used to be known as Little Switzerland (La Petite Suisse).  As many of you know, the biggest and best skiing in the east is at Le Massif, a 15 minute drive down Highway 138 from Baie St. Paul. I have been going there faithfully every winter for the past  25 years.   You may not know that part of the charm of Le Massif is that its visionary Cirque du Soleil co-founder and owner, Daniel Gauthier, saw to it to name a number of the resort’s runs after famous Charlevoix artists.  It is a very special thrill to make fresh powder tracks in the company of René Richard, Marc- Aurèle Fortin, Clarence Gagnon and Louis Tremblay.   This summer, I retraced some of the steps of that long ago voyage with my father.  I hadn’t been in Baie St-Paul other than in the depths of winter for close to 60 years, ahem.  It is still a teeming art colony hugging the St. Lawrence, with colourful galleries, bistros and auberges lining its one main street.  Lest you forget, the city fathers have wisely erected bronze busts of about a dozen of the artists who put Baie St. Paul on the map.  The four from Le Massif are joined by the likes of Jean Paul Lemieux; André Biéler  (who taught at Queen’s beginning in 1936 and became the first director of the Agnes Etherington Art Centre in 1957); my old Montreal ad agency boss and Charlevoix artist Claude Le Sauteur; the godfather of the Beaver Hall Group and mentor to A. Y. Jackson, William Brymner; the folk artists Blanche and Yvonne Bolduc; and the inimitable A. Y. himself. 

High tide in Baie St. Paul with Le Massif in the background Dad said he met A. Y. once on his North Shore travels.  I can’t remember what he related of that encounter, but I recall that he was impressed. Who wouldn’t be impressed with an artist who spent so much time tramping through the deep snow in the depths of winter in order to capture the perfect Charlevoix light that the locals dubbed him: Père Raquette (Father Snowshoes)?  One of Jackson’s greatest gifts was his ability to connect with fellow artists and lead, without basking in the limelight.  Being bilingual, and presumably to some extent bicultural, it was A. Y.  who bridged the divide between the anglos in Upper Canada and the French Canadians memorialized in the ski runs of Le Massif.  This is what he is recognized for in the plaque below his bust in Baie St. Paul.  It was Alexander Young Jackson who coaxed and seduced his brethren in Toronto -- e.g., Edwin Holgate and Arthur Lismer -- to pack their bags and easels and join in the creative ferment of Charlevoix.  Equally, he promoted Quebec artists in Toronto, particularly the Beaver Hall Group members, from his perch in the Group of Seven.                                             § I think my father had a vision for his 12-year-old son when he took me on that trip down the North Shore so many decades ago. Without ever saying it out loud, he must have wanted to impart to me the romance of French Canada.  The first night in Quebec City, gazing down at Lower Town and the river from Dufferin Terrace with the Chateau Frontenac behind us, Champlain’s statue beside us, and the Plains of Abraham to the west, was enough to do that.   As I see it now, Dad also wanted to draw my attention to the kind of people he admired, the doers, creators and builders.  He didn’t call them visionaries.  He liked to talk about examples as we came upon them.  Champlain fit that category.  And A. Y. too.  When we reached Baie Comeau, and passed a bronze statue in the centre of town of a man paddling a canoe , Dad was quick to tell me that it was Colonel Robert McCormick, the former publisher of the Chicago Tribune.

McCormick was an adventurer and a builder.  In 1915, the time depicted in the statue, he was exploring the woodlands of the North Shore of the St. Lawrence, with an eye to sourcing pulp and paper for the hungry Tribune printing presses in Chicago.  That is how, 22 years later, the company town of Baie Comeau came to be.  Initially pulp and paper was the sole industry, but along the way Reynolds Aluminum established North America’s largest aluminum smelter, the deep water port attracted shipping and the town grew.  It even produced Canada’s 18th prime minister.   

There are two important rivers that empty into the St. Lawrence at Baie Comeau, the Outardes and the Manicouagan.  Baie Comeau continued to prosper as Hydro Québec, over a 20-year period, beginning with the election of Jean Lesage in 1960, built the damns that harnessed the hydro-electric power potential of these magnificent rivers.  Dad didn’t say this was part of what we now know as the Quiet Revolution -- the Minister of Energy was Réne Lévesque -- but Hydro Québec were doers, creators and builders, and he knew the energy they were generating was not just hydro-electric.

                                            § 

The visionary Joseph R. Smallwood, Premier of Newfoundland, 1949 - 1972

Joey Smallwood styled himself as Canada’s “last father of Confederation”, having dragged Newfoundland, by dint of sheer will and oratory, kicking and screaming into Canada in 1949.  That was only the beginning of his vision.  He had much more in store. Joey was determined to bring modern education standards to Newfoundland.  A major objective was to elevate Memorial College to full university status.  He achieved that soon after being elected Premier in 1949.   Joey’s first choice for University Chancellor was Max Aitken, better known as Lord Beaverbrook, the wealthy Canadian industrialist and newspaperman who memorably served as minister of nearly everything in Winston Churchill’s WWII war cabinet.  Joey and Aitken had never met.  In typical Smallwood fashion, Joey cold-called the Baron and wangled an introductory meeting.  Beaverbrook graciously declined the Chancellorship, but the two hit it off personally and a relationship was formed.  In 1952, Joey was glad-handing and talking up a storm about his next great visionary project for his beloved Newfoundland and Labrador.  He was determined to tap the province’s vast, but largely undeveloped, natural resources.  The crowning glory would be harnessing the massive hydro-electricity generation potential of what was then known as Hamilton Falls on the Hamilton River in Labrador.   Much like King Charles granted Rupert’s Land to the Hudson’s Bay Company three centuries earlier, Joey was prepared to bestow a similar monopoly over an extraordinary swath of territory in Labrador to the right financial and operating partner.  The search was on.   Joey was more inclined to look to the mother country than the US.  He called up his pal Beaverbrook and said he was coming to London.  Could Max possibly set him up for a meeting at Downing Street with Prime Minister Churchill? Beaverbrook and Churchill were no longer close.  Max thought it highly unlikely that Winston would be inclined.  Joey, pacing the floor at his rooms in the Savoy, would not be deterred.  He pestered and pestered until miraculously an opening in the PM’s schedule was created.   The meeting took place late in the day over brandy and cigars, after Churchill returned from a wedding, at which presumably copious libations had already been consumed.  The prospects for Smallwood making a memorable impression appeared remote.  But Joey cranked it up and delivered a spell-binding sales pitch for his grand vision. Afterwards Churchill said to an aide: “Ring up Tony [Anthony Rothschild] and tell him from me I would like him to see Mr. Smallwood.”  Rothschild was the head of the British branch of the legendary family of bankers and financiers.  A meeting was set up and once again Joey was masterful in his presentation. “It is probably the greatest storehouse of undeveloped natural wealth left in the world, and it’s ours,” he said. He pitched the development of Labrador as being “the beginning of England staging a great [post WWII] industrial comeback.”   Rothschild liked the story so much, in short order he brought in major partners and British Newfoundland Corporation (Brinco) came into being.  It was granted exclusive mineral, timber and hydro-electric generation rights over territory larger than New Brunswick, Nova Scotia and PEI combined, for 99 years.  By 1972, Joey Smallwood’s impossible vision was realized.  The Churchill Falls Generation Station (the falls and the river were renamed after Churchill died in 1965) was operational and inaugurated by Prime Minister Pierre Trudeau. It had been the largest construction project ever undertaken by a private company anywhere.  Trudeau congratulated “the dreamers as well as the workmen, the financiers as well as the engineers, the scientists as well as the managers” who made it happen.  My father, was proud to have been one of them.  And so am I.  Dad first regaled me with  fantastical Joey Smallwood tales on that magical trip down the North Shore when I was 12.  He made light of the last father of Confederation’s infamous failings and foibles, always drawing attention to what was best in Joey: the visionary doer, creator and builder.                                              §   YEAR-END REPORT CARD Class of 2019: Another Index Beating Year  The Headmaster is well pleased with his visionary doers, creators and builders.  Collectively, their class average (for the July 1 ‘18 to June 30 ‘19 school year) came in at a more than acceptable 10.3%. The comparable returns for the S&P 500, the Dow and the TSX, were respectively 8.2%. 9.6% and .6%.    “Never underestimate the importance of visionary leadership,” says the Headmaster, when assessing a potential investment.  “Without the far-sightedness of founders and CEOs like Alain Bouchard at Alimentation Couche Tard, Bill Gates and now Satya Nadella at Microsoft, Steve Jobs and now Tim Cook at Apple, Darren Entwistle at Telus, Bruce Flatt and Sam Pollock at Brookfield, Bob Iger at Disney or Eric La Flèche  at Metro -- I could go on --  the Class of 2020 would have very underwhelming prospects."    There were many outstanding performances in the Class over the past year, and few disappointments.  Here are the sector by sector results. Financials - B TD Bank, Royal Bank, Bank of Nova Scotia and BlackRock continued their sojourn in the doldrums with an average return of -1.5%.  “Keep the faith and enjoy those fat dividends,” advises the Headmaster.  “This blue chip quartet continues to deliver consistent revenues, earnings and dividend growth, despite the naysayers.  Their stock prices will catch up.  It’s only a matter of time.” Promoted. Resources - D Sadly, the Headmaster concluded in May that he had no option other than to dispense with long-time class member Vermilion Energy.  Despite positive cash flow and demonstrable balance sheet strength backing up a dividend that has never been cut dating back to the Crash of ‘08, the writing is on the wall: Vermilion, like its many Canadian peers, cannot win the respect of the market, no matter what it does. It’s performance to May was down 38.9% and falling. The Headmaster is of the view that blame for the Canadian oil and gas sector’s woes cannot be laid entirely at the feet of government.  Yes, things would be better for companies like Vermilion if one or two pipelines had been built by now. But in the larger scheme we have to ask ourselves: how close are we to the tipping point, when fossil fuels will start their slow inexorable descent?  “That’s a wagon we do not want to be hitched to,” says the Headmaster, “especially against the backdrop of dramatically falling green energy prices.”   Nutrien, the fertilizer and agricultural retailing powerhouse, held up reasonably well, with a return of -2.1%.  That negative statistic belies the reality of this class member’s admirable performance: despite one of the worst US planting seasons in years, the company still spun off cash.  It is closing in on its target of $650 million in 2019 synergies from the merger of Agrium and Potash; it bought back $1 billion in shares in the second quarter; and still was able to hike its dividend. Promoted. Utilities - B minus Enbridge and newcomer Algonquin Power, who joined the class in May, produced a modest average return of .9%.  Faced with permitting delays on new pipeline capacity, Enbridge performed remarkably well, managing to grow revenues, earnings and its dividend (now yielding an eye-popping 6%).   If fossil fuels are eventually heading to a tipping point, though, should one be hanging on to an aging oil and gas pipeline player like Enbridge?  Says the Headmaster: “I ask myself the same question.  As long as pipeline capacity is less than demand, it should bode well for Enbridge.  It’s a seller’s market.  I also like the fact that much of this class member’s revenue is tied to regulated long term rates.  That’s a nice thing to have the next time we head into a downturn.”  Promoted. “Eventually, though, the green tide will turn, even against stalwarts like Enbridge. Which is why I asked Algonquin Power to join the class.  The company is well managed and has an impressive and growing suite of renewable assets, including solar, wind, hydro-electric and geo-thermal.  I think the tidal currents of change are at its back.  To boot, it pays a decent 4.2% dividend.”  Promoted. Infrastructure - B plus Brookfield Infrastructure, ably led by the visionary doer, creator and builder Sam Pollock, was up a tidy 11.3% at the end of the school year.  The Headmaster particularly likes this class member because it affords him exposure to the kinds of long-lasting assets -- like toll roads, port terminals, transmission systems and cell phone towers -- that are often only available through private equity.   “I also like the fact that much of its income derives from fixed long-term contracts,” he adds.  “This is the kind of company that can weather the storms.”   Brookfield has a growing dividend, currently yielding 4.2%.  Promoted. Retail - A After resting on their laurels for the past year or more, both Alimentation Couche Tard and Metro showed us their true mettle over the past year with a sparkling average gain of 27.1%.  Each uncorked double digit gains in revenues, earnings and dividend growth.   “Metro’s takeover of Jean Coutu is really starting to pay off,” says the Headmaster.  “And Couche Tard is firing on all cylinders.  The company is becoming a cash machine. It’s paying down debt ahead of schedule.  We can expect another transformative acquisition in the coming months.”  Promoted.  Industrials - B plus CNR, John Deere and the packaging conglomerate CCL chalked up an average return of 10.2%.  Despite international trade headwinds and market uncertainty, each managed to grow its revenues, profits and dividends in impressive style.   “I particularly commend Deere,” says the Headmaster.  The American farmer has been hit by a double whammy of bad weather and ill-conceived trade policy.  You’d think that the company might have suffered a retreat.  But no, they reined in costs, while ramping up handsome gains from the recent acquistion of the Wirtgen heavy equipment group in Germany.”  All promoted. Healthcare - A During the year Express Scripts was taken over by the managed care operator, Cigna.  This resulted in a large gain.  Averaged with class members Amgen and Johnson & Johnson, the collective performance was 19.4%.  “Of note,” says the Headmaster, “I decided in May to let Cigna go. We have done well with the takeover, but now Cigna is in a show-me mode as we wait to see it produce numbers to justify its expensive buyout of Express Scripts.  I’m not comfortable with that.”  Both Amgen and JNJ cranked out workmanlike growth over the school year.  Of late the market has tossed a wet blanket over JNJ, responding to its purported involvement in the opioid crisis.  The company was fined a half a billion dollars by a judge in Oklahoma.  Says the Headmaster: “Pharmaceutical companies are being sued all the time, and it is not unusual for unreasonably large amounts to be awarded in the lower courts.  The appeals process takes years and almost inevitably results in dramatically reduced fines. If you don’t own JNJ, now is a good time to buy.” Conversely, the market is delighted with Amgen’s recent announcement that it is going to purchase the blockbuster psoriasis drug Otezla from Celgene Corporation (which in turn is merging with Bristol-Myers Squibb).  Both Amgen and Johnson & Johnson are promoted to the Class of 2020.   Telecom - B minus  “I continue to like Telus,” says the Headmaster.  “And I like its visionary CEO Darren Entwistle.”  When he joined Telus in 2000, the company was merely a regional landline operator.  Entwistle engineered the takeover of the wireless player, Clearnet, that year for  $6.6 billion.  The stock tanked on the day the deal was announced.  The market couldn’t see what Entwistle could see.  Today Telus owns 30% of the Canadian national wireless market, and it contributes 50% of company profits. The stock price has marched upwards commensurately.

Dear Friends, The theme of this issue is “smart”.  Smart as in smart entertainment, smart cars, and smart investing.   The chief scribbler of this modest publication will never be accused of being an early adopter of new technology.  However, out of native curiosity and a fear of being left behind, supplemented by a horror of becoming a nostalgist for “the good old days”, he does endeavour to keep up in a halting fashion.   The photo above is a publicity shot for the best new movie I have seen in ages: Roma, written and directed by the Mexican movie maker Alfonso Cuarón. Some of you may be familiar with his earlier work: like his breakout film Y Tu Mamá También, Harry Potter and the Prisoner of Azkaban, or the Sandra Bullock hit, Gravity.    Roma is a teeming neighbourhood in Mexico City that I know from my travels there.  I used to take a daily walk through the cool, leafy Parque México, across the intimidating traffic of Avenida de los Insurgentes and down Av. Coahuila for my daily swim at the Roma Club sports and aquatic centre.  A few blocks south is number 21, Av. Tepeji, where Cuarón grew up.  Roma is an exquisite recreation of that chaotic upbringing in a privileged household with professional parents, the abuella (grandmother), squabbling kids, a prodigiously defecating dog, birds, the constant calls of itinerant street vendors, and crucially, domestic help.  Cuarón’s parents’ marriage is collapsing, as is civil order in the streets of Mexico City.  But the focal point of the movie, and its huge dramatic strength, is Cleo, the humble maid.  She’s indigenous from a poor pueblo in Oaxaca State south of Mexico City.  She works from pre-dawn to long past dusk, cleaning, washing and serving, along the way providing more direct, loving care of the four children than either parent.  Roma is part autobiography and an even larger part tribute to Cuarón’s second mamá, Cleo.      I read glowing reviews like this one in the New York Times and knew I would have to see this movie.  Problem.  Apart from very limited release, it was only available on Netflix.  Fast forward: your very-slow-to-adapt-to-change correspondent marched immediately into Best Buy and is now the owner of a smart TV, and a subscriber to the smart entertainment provider, Netflix.   Initial impressions of Netflix: apart from Roma, there are few movies of interest.  The catalog is extraordinarily thin, by comparison with something like Hollywood Suites available on cable.  The latter provides four channels of well-reviewed movies, ad-free, covering many of the classics and favourites from the 50s right up to now.  Netflix, to be fair, is just getting to know my likes and dislikes.  So perhaps it can’t be faulted entirely for lacking smarts in directing me to endless narco tales, Pablo Escobar bios, and similar crime and violence fare.  While, I have heard that offerings get smarter over time, I remain skeptical.  Of equal concern is Netflix’s tenuousness as a business.  Yes, the stock has gone up like a rocket over the last five years, but by any standard measure it is over-valued and the risk to reward ratio for investing in it is very unappealing.  The cost of building up that meagre proprietary catalogue has been, and continues to be, massive.  The cash burn (negative cash flow) last year was $1.8 billion and that trend will continue.  The company is carrying billions in debt, and the price to earnings ratio is 99 times.  Not so smart.                                               §  

Dear Friends,

Odysseus was warned about the Sirens. Their musical and other charms had lured countless sailors to their demise in the briny depths. Homer’s hero devised a plot. He ordered his crew to plug their ears with beeswax, rendering them impervious to the Sirens’ seductive songs.  Odysseus, however, wanted to hear what all the fuss was about and so had his men lash him tightly to the boat’s mast, with his ears unplugged. Sure enough, when they encountered the legendary maidens, the effect of their haunting melodies was overwhelming.  Odysseus, thrashing to get loose and join the Sirens, ordered his men to untie him. He was heading for certain death. But it was not to be. Odysseus’ foresight saved him. His men, deaf to the Sirens’ irresistable call, as well as their master’s futile commands, redoubled the knots. Curiosity was satisfied and tragedy averted.    There’s an easy parallel to this Homeric tale. As heroic investors we must plug our ears to the Siren call of too-good-to-be-true investment ideas.  Think sexy “structured notes”, so often perversely structured to benefit everyone except the lowly purchaser of same (aka the house always wins); or the seduction of the ultra-high-yielding dividend stock or bond, about to be betrayed by a balance sheet that can no longer afford such generosity; or the inflated promises of umpteen cannabis stocks that have never made a penny of profit; or the legions of lavishly marketed mutual funds that perennially fail to meet or beat their benchmarks, yet consistently do well (via unconscionable fees) for the advisors who recommend them.  We could go on, but our purpose is not just the easy parallel. My Montreal reading group of long standing has a scoring system we use to rate our book choices. At the conclusion of every meeting each member advances his case for whether the chosen work deserves to be labelled ‘A’ for a classic; ‘B’ for a worthy literary effort; or ‘C’ for trash. The critical distinction between a classic and a worthy endeavour is that a classic, like The Odyssey, and Odysseus himself, endures. Countless entirely readable works of fiction and non-fiction are published every year. But will they be read by our grandchildren and their children and so on down the generations? That’s the judgement call that my reading group buddies -- not without some chutzpah -- take upon themselves every time we meet.    You may not have read a classic like The Odyssey, but its themes and characters are so deeply rooted in our culture that you are familiar with them nonetheless. The idea of a hero wandering, by times aimlessly, for years and years, from one adventure or female distraction to the next, all the while pining for home, is the story of every man’s life to some degree. It is also the stuff of countless derivative works, everything from Frank Baum’s The Wizard of Oz to the Coen brothers’ O Brother Where Art Thou?   The greatest work of English literature that I have ever read, James Joyce’s Ulysses (a Latin variant of Odysseus) , is of course patterned on the The Odyssey. The brilliance of Joyce is that instead of his hero being a warrior and a leader of men on the high seas, he is the unprepossessing advertising salesman, Leopold Bloom. And instead of the action being spun out over ten years, it all takes place in a single 24-hour day in Dublin, Ireland.  Bloom is the quintessential everyman, yet his adventures are as gripping and deeply felt as those of the archetypal warrior hero. Instead of having to contend with Homer’s gigantic villain, the one-eyed Cyclops, Bloom verbally outwits the equally horrifying ‘Citizen’, a nightmare of pub-dwelling bombast and bigotry.  Instead of seven years in the arms (and bed) of the beautiful nymph, Calypso, Bloom has a wistfully chaste, but every bit as illicit, erotic pen pal correspondence with Martha Clifford. Instead of longing for loyal Penelope, beseiged by unwanted suitors back home in Ithaca, Bloom spends an exhaustive 24-hour day drifting around Dublin, doing anything rather than interfere with his beloved Molly’s assignation with her impresario lover, Blazes Boylan. Instead of reconnecting and bonding with Telemachus, Oydsseus’ son from whom he has been separated for 20 years, Bloom, forever mourning the loss of his infant son Rudy, tenderly “adopts” and looks out for the precocious young Stephen Dedalus. Both tales culminate in an orgy of passion. Odysseus and Telemachus slay the suitors and their consorts without mercy, restoring sovereignty over Ithaca. In the aftermath, Penelope, after some understandable testing, takes her wandering Odysseus back. Joyce, in one of the most brilliant twists in all of literature, turns the plot around. It is the incomparable Molly, who metaphorically slays her suitors with words, by memorialising them in a mesmerising torrent of both romantic and graphically carnal reminiscences. In the end, though, she famously says “Yes” to her beloved warrior. Peace is restored in the Bloom kingdom.                                                   § 

Literary classics have their equivalent in the world of investing. As readers of this irregular publication know, its Editor and Headmaster, just like the reading group in Montreal, rates his annual ‘Class’ of stocks on the A, B, C system.  What are the qualities that the Headmaster considers most indicative of an enduring classic stock? Here are some of his essentials. The return on capital raised (shares issued, debt raised) must be greater than the cost of that capital.  Otherwise, a company may have all the appearances of growth -- investing in new plants, research or acquisitions -- yet be providing no return to the shareholder. Worse, shareholder value is slowly but surely being eroded.  Enduring companies are mindful of the cash. Mr. Micawber’s famous advice in the Dickens classic, David Copperfield, is always pertinent: Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness.  Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. Classic companies are just as vigilant over their balance sheets. They never forget that the next economic dip could be just around the corner, and shore up their balance sheets accordingly. Result, they enjoy higher credit ratings and lower costs of borrowing. Better yet, they are the least likely to eliminate or cut their dividends when the going gets rough. Consistent and dependable dividends support higher stock prices that reduce the cost of capital. It’s all a virtuous circle.  

To endure, a company must have one or more clearly definable competitive advantages. They could be the advantages of scale, such as those enjoyed by Amazon or Visa; the advantages of near monopoly or oligopoly, with high barriers to new entrants, such as enjoyed by the Canadian banks; or the power of a dominant global brand like Coca Cola. A company without competitive advantage, faces maximum competition that threatens not only its profit margins, but in many cases its existence. To achieve top marks for the above criteria, a company above all must have strong governance. Leadership in our share capital system comes from boards of directors who represent the shareholders’ interests. Enduring companies have strong boards and rank highly in annual governance surveys. Strong boards keep their eye on the long game, and keep over eager and short-term-thinking managements in check.     Happy New Year to All!  May you enjoy enduring peace and prosperity in 2018.

CW                                         § 

    CLASS OF 2018 FIRST TERM REPORT CARD   Results reward classic approach to investing   Investing is far from a perfected science, and the Headmaster would be the first to admit of his many disappointments over the years. However, having a coherent investment philosophy, such as the one articulated above, and sticking with it through thick and thin, generally produces superior returns.  The results of the Class of 2018 school year to date (July 1st - December 22nd) and over the past 12 months, 7.3% and 12.8% respectively, beat their TSX index comparables (6.4% and 5.4%) handily.  The S&P 500 jumped 10.7% and 19.9% over the same periods.  Given that the Class of 2018 is primarily Canadian and given the extreme valuations in the US markets, the Headmaster is reasonably pleased with the progress of the Class. Here are the sector by sector results (with 6 month results always preceding 12 months).   Information technology was the runaway leader of the pack at 13.2% and 31.7%. Both Apple and Visa exemplify the classic attributes of dominant brands and scale. Rounding out this group we have the Canadian enterprise software firm, Open Text. While modest in scale, Open Text, who joined the Class last March, has been wise in raising and allocating capital to grow through acquisitions. It would be a stretch to give Open Text an A for classic performance at this stage. The Headmaster, however, is happy to give it a solid B. Industrials, represented by John Deere, CNR and CCL Industries, were also impressive with gains of 5.1% and 24.7%. Each member of this talented trio can boast classic attributes. John Deere is a globally renowned and respected brand that enjoys pricing power because of loyalty to its brand. CNR has the priceless advantage of being in a quasi-oligopolistic industry. It is virtually impossible for new railroads to be built. Ergo, the incumbents, especially those that are the best run (a nod to CNR) have a very long road of rising revenues and price increases ahead of them. CCL, while smaller than its deskmates, gets top marks for capital allocation, as it quietly, but remorselessly, has become a dominant global player in labels and packaging.  Brookfield Infrastructure Partners carries the flag for Infrastructure in the Class of 2018, and it has done very well, with gains of 5.5% and 22.7%. The company is a global player and uses its advantage of scale to bargain shop for assets in countries where others are less knowledgeable, and less able to access funding on favourable terms. Most recently it acquired valuable gas transmission assets in Brazil and it is currently kicking the tires of cell tower companies in India. These kinds of long term investments support a healthy and growing dividend.

Healthcare, represented by Amgen, Johnson & Johnson and Express Scripts, at last has begun turning in the kind of results expected by the Headmaster: 8.9% and 17.2%. Each of these class members is dominant in one or more fields -- biotechnology, pharmaceuticals, medical devices, consumer health & beauty, pharmacy benefit management -- and is well positioned demographically for future gains. The only question mark is pharmacy benefits manager Express Scripts. The company currently reaps $billions in free cash flow that must be wisely redeployed if it is to continue to prosper after the departure of a key client, the healthcare insurer Anthem Inc. in 2020. The Headmaster believes Express Scripts, up 16.7% since last June, has the acumen to allocate its capital to ensure enduring growth, but he is watching closely.  

Financial deskmates Royal Bank, TD Bank and Bank of Nova Scotia, with a collective performance of 8.6% and 9.4%, continue to do what beneficiaries of oligopoly should be able to do: namely, steadily build on their advantage with growing revenues, profits and dividends. The Headmaster draws attention to their healthy balance sheets and strong governance (unlike their US counterparts), marks of classic long term performers. Newcomer BlackRock Inc., the world’s largest investment asset manager, joined the class this past December. The Headmaster is drawn to BlackRock’s big footprint (~ $6trillion in assets) in both institutional and retail markets. A major factor driving the company’s impressive growth is ownership of the iShares brand, the number one provider of index funds globally. The Headmaster sees passive investing (which index funds make possible) as the wave of the future. That bodes well for BlackRock, but, ironically, not necessarily for people like the Headmaster.

Telecom in Canada is another virtual oligopoly. Once again, classmates BCE and Telus have done well in exploiting that competitive advantage. They produced collective results of 5.0% and 7.5%, all the while sustaining handsome dividends.

One-of-a-kind Entertainment classmate, Walt Disney Company, produced modest returns of 2.2% and 3.9%. The Headmaster is sanguine, however, and maintains full confidence in the “house of mouse”. By any definition, Disney is overflowing with classic qualities, from its inimitable theme parks, to multi-billion dollar movie franchises such as Star Wars, and beloved characters such as Mickey Mouse. 

While Disney has been hitting box office numbers out of the park, most recently with The Last Jedi, the stock price has been held back by the perception that the company is not moving quickly enough in migrating the distribution of its content from old platforms such as cable TV and movie theatres, to direct “streaming” via the internet. The Headmaster says this concern has been overblown. He draws attention to the recent announcement that Disney has an agreement in principle to purchase the movie and television assets of Twentieth Century Fox. That’s great for bulking up scale. But a less heralded part of the deal is that it will give Disney majority control over the popular streaming channel Hulu. Disney CEO Bob Iger has other streaming solutions in the works as well. May the force be with you, Disney!  

The Class of 2018′s Retail students are longstanding class members Alimentation Couche Tard and Metro, both of Montreal. They produced returns of -.1% and 3.6%. The Headmaster has lauded their classic features many times in the past. Both of them are masters of the balance sheet, cash flow management and capital deployment. Couche Tard has the added quality of global scale. With nearly 15,000 outlets, it is the second largest convenience store chain in the world after 7-Eleven. Metro, late in the year, entered into an agreement to purchase the Quebec-based pharmacy chain Jean Coutu. As with Loblaw’s purchase of Shoppers Drug Mart, this should be a profitable deal for Metro, building the scale of its existing pharmacy business, and exploiting merchandising synergies with Jean Coutu. Both companies have generated sterling results in revenue and profit growth over the past six and twelve months.

Resources, represented by Agrium, Enbridge and Vermilion Energy were buffeted by headwinds, particularly earlier in the year, posting returns of 9.1% and -9.8%. The Headmaster is quick to point out that these numbers mask the true situation. In fact, Agrium -- now post its merger with Potash Corp. -- did very well with a six-month return of 22.7% and 5.3% over the past twelve months. 

It was the energy sector, headed by Enbridge and Vermilion, dragged down by low oil and gas prices for much of the past year, that really suffered. Enbridge also had to contend with market concerns that it overloaded its balance sheet in acquiring Spectra Energy. Further to a company announcement in December that it is divesting itself of some non-core assets in order to pay down debt, the Headmaster is reassured and inclined to cut this hitherto classic performer some slack. He also notes that the dearth of new pipeline approvals bodes well for companies like Enbridge with dominant positions in already built infrastructure.   Vermilion’s classic virtues are multiple, including one of the best managed balance sheets in the business; global diversification; outstanding cash management and in consequence an ability to maintain its generous dividend through the vicissitudes of a cyclical business.   The newly formed Nutrien combines Agrium’s world-beating farm supply chain assets, plus a more modest fertilizer production operation, with the world-class fertilizer assets of Potash. On paper, it’s a wonderful deal, with a balance sheet strong enough to grow the steadier farm retail side of the business, while enhancing an already impressive portfolio of more cyclical fertilizer assets. The Headmaster is hopeful for the merger evolving into a classic combination, but will be casting a wary eye in succeeding quarters to see if theory turns into practice.

If you would like further information on any of the investing ideas raised in this issue, or a complimentary consultation, please call or email. CW