BCE being taken private?

The rumor mill is going wild on the news that BCE may be taken private by Kohlberg, Kravis Roberts (KKR). The US private equity firm has been involved in many of the most spectacular deals over the past decade or so. The firm has access to the capital required to complete this $24 billion deal.

The main hurdle will be the foreign ownership limits in place on Canadian telecom and media companies. KKR would need to find a wiling Canadian partner or partners to complete the deal. The Ontario Teacher Pension Plan already has an ownership position in BCE and would be a likely partner along with other pension plans.

If this deal goes through it seems that this will potentially be one of the unintended consequences of the Governments decision to stop the creation of income trusts. If BCE had been allowed to convert to a trust structure I doubt that any of the unit holders would be willing to tender to an offer taking the company private and give up the high income distributions. The common shareholders will be much more receptive to an offer for this lackluster performer. BCE shares have basically gone sideways for nearly 5 years as management tries to refocus the company back to its core businesses.

If you currently own BCE shares be prepared to accept an offer from a group led by KKR and say good bye to another Canadian icon stock as global investors continue to see value in the Canadian market.

For more information go to www.campbellreport.com

Canadian Budget 2007:

The Conservative Government has just tabled their newest budget; the budget has a lot of new spending initiatives mainly aimed at the provincial governments for infrastructure, education and health care.

The Federal Government has tried to meet the requests of many special interest groups which appears to be a strategy by the Conservatives to divide and conquer the opposition in the next election. If the opposition parties defeat the Government on this budget they will be penalized by Canadians who do not want to go to the polls again so soon.

The Conservatives have made some headway on the so called fiscal imbalance by offering a substantial increase in the transfer payment system which will potentially become more flexible and can be tailored to the individual provinces requirements.

The budget does have one interesting change that is the ability of a family to file jointly which will eliminate the marriage penalty. Now Canadian families will be treated equally regardless of whether they are a one income or two income families, reducing the penalty forced on a family where one spouse stays home to care for the children.

I am a bit surprised that the budget did not deal with any changes to the capital gains taxes as many had expected and the government had hinted at, also that the Government decided to reduce the investment incentive for the development of the oil sands projects.

The Government is going to apply $9.2 billion to debt reduction but has increased spending by a considerable amount. The Government did not change the current structure of the tax brackets which will hurt the average taxpayer over time.

Generally the budget meets a lot of the concerns expressed by Canadians recently, it does not dramatically change the average Canadians tax bill and it will not add any impetus for increased investment but that being said it does not hinder the economy either so that economic growth should continue to be robust going forward.

For more information go to www.campbellreport.com

Sub prime will be the dot com of 2007:

The sub prime mortgage market is sending shock waves through out the equity and bond markets. Many investors will ask what is all the fuss about. The answer is that the sub prime segment of the mortgage market has ballooned over the past four years as lenders scrambled to expand market share.

Sub prime mortgages are those that are issued to borrowers with less than attractive credit histories or mortgages that have extremely lax terms such as zero down payments. The explosion in sub prime mortgages generally happened in areas with substantial increases in home prices. The assumption being that the lender could justify the mortgage due to an anticipated increase in real estate prices which would protect their position.

Over half of all the mortgages currently out standing were issued in the last three years, and a large percentage of those would be considered sub prime. As real estate prices continue to soften over the next few months the number of defaults in sub prime mortgages will increase dramatically.

Investors have to be very careful going forward as it is not going to be easy to see which lenders will be most affected by the increase in default rates. Many of the major financial institutions have been funding the expansion in mortgages and will have substantial indirect exposure to this segment of the market.

The fall out from this huge increase in lending risk will hit a number of sectors of the stock market. Avoid any and all sub prime mortgage lenders, small regional banks and trusts and be very vigilant in looking at the details of loan loss provisions for any of the major lenders as well. The home builders and building supply companies are going to be hit hard as the number of homes for sale jumps due to foreclosure action. The retail sector will be hit as many borrowers cut down on consumption in an effort to hold on to their homes.

This is only the beginning of the slide in the financial services sector and the process will take months to complete and there will be a lot of tears shed before this is finished.

For more information go to www.campbellreport.com

Look to the land of the rising sun:

The economy in Japan over the past year or so has been showing consistent signs of improving. The previous cycle of deflation appears to have ended and prices of most goods and services have stopped going down. Consumer confidence is starting to improve and corporate profitability has turned the corner as well. The Japanese economy has benefited from increased trade with China as well.

The Japanese economy has been hampered by a decade long fight with deflation which started in real estate and quickly spread to the rest of the economy. The extreme valuations that occurred in real estate took years to correct and over that time frame the Japanese consumer drastically reduced consumption.

Real estate prices appear to have stabilized and that has helped to embolden the consumer, this increase in consumer activity has helped to push up corporate profitability which has helped to reduce the jobless rate in the country.

All of these factors are starting to have a positive impact on the over all Japanese economy and once the psychology of deflation has turned around to one of optimism and growth the trend will last a considerable length of time.

An efficient way to get access to Japan is by utilizing Exchange Traded Funds (ETF’s) the ishares MSCI Japan Index Fund (EWJ-N) tracks a broadly based index of Japanese stocks. The top five holdings in the fund are Toyota, Mitsubishi Financial, Mizuho Financial, Sumitomo Financial and Canon Inc. The fund is quite large approximately $14 billion and very liquid with 1 billion units out standing. This is an inexpensive fund with a management expense ratio of only 0.59%.

For investors looking to diversify into a strengthening international market Japan appears to have the potential to out perform many other regions over the next 18 to 24 months.

For more information go to www.campbellreport.com