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  Reinvigorated loonie makes us whistle a happy tune

BENJ GALLANDER and BEN STADELMANN

Friday, December 1, 2006

This is the time of year when the Contra Guys are most actively buying, as tax-loss selling sets our little hearts all aflutter. Our arms are outstretched as we coo, " Give us your tired, your poor, your huddled masses yearning to breathe free. " Well, beleaguered stocks might not exactly be all those things, but you get our drift.

During the past number of years, one of our primary concerns has been the undervalued nature of the Canadian dollar relative to that of our American neighbours. Our apprehension was that the Canadian dollar would appreciate in value, thereby offsetting potential gains on U.S. stocks. In this case, we were indeed correct.

However, our forward view on exchange rates is unclear. It does seem to us that the Canadian dollar is yet undervalued somewhat, but certainly not to the degree that it was in the past. So there is no concern in terms of buying on either side of the border at this point.

Re-examining past currency predictions does give us a chance to guffaw. In an article around December 2001, when our dollar was worth 64 U.S. cents, Sherry Cooper, executive vice-president and global economic strategist for the BMO Financial Group, stated, "Canada' s currency will continue to decline until we dollarize. " She added, " At the rate we are going, the loonie will be at 50 cents within the next eight years, and we might not even notice it. "

What we noticed was our dollar rising by about 35 percent. Of course, to be fair, it may be premature to gloat, as eight years have not yet passed.

Speaking of lame prognostications, how about our own forecast in July 2005, when we wrote about "The Darkness of 2006" ? Our hypothesis saw the possibility of a major blow-off this year. Hmm, it hasn' t happened. Are we early, or simply very wrong? Time will tell, but at this late stage, the odds of this prediction coming true before we replace the calendar are very long. Fortunately, while the dollar value of our investments in stocks was decreased, we did not vacate the markets, precisely because of our acute awareness of our fallibility.

Currently in the Contra the Heard portfolio there are 17 positions, eight in Canada and nine in the United States. This is within our normal range of 15 to 25 holdings. The portfolio breaks down to 48 percent Canadian content and 52 percent American. A year from now, that ratio will be somewhat different, depending largely on how many downtrodden corporations are added and how many of the current crop returns to previous form and exit the portfolio. Regrettably, there will also be the mistakes jettisoned for a tax loss.

Fortunately, whichever way the cookie crumbles, some of our purchases will be made using reinvigorated loonies. Nevertheless, the buys will be lighter than normal, as wariness of 2007 stirs in our bones.


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