Abandon Hope All Ye Who Enter Here

Through me you pass into the city of woe:
Through me you pass into eternal pain:
Through me among the people lost for aye.


Justice the founder of my fabric mov'd:
To rear me was the task of power divine,
Supremest wisdom, and primeval love.


Before me things create were none, save things
Eternal, and eternal I endure.
All hope abandon ye who enter here.


Such characters in colour dim I mark'd
Over a portal's lofty arch inscrib'd:
Whereat I thus: Master, these words import.

Dante Alighieri




That pretty much somes up the second half of 2008, and unfortunately, the outlook for 2009. The sky has fallen. The fat lady is out of breath. The sh-t has offically hit the fan. Enron aint got nothing on this.

Hopefully, the small investors can make it through this economic hell, through purgatory and then into financial heaven. The time has come to say "bye-bye" to the NYSE, Nasdaq, TSX and say hello to FIXED INCOME. Corporate bonds are your friend. Stocks are now satan's domain.

Think of the Inspector as Virgil, your guide through the Inferno, through Purgatory, and finally into Paradise.

Step one is to adandon all hope in the stock market. Its done ... its over. 2009 is going to be an absolute blood bath. As comforting as it may be to think that Bernie Madoff has a special place in hell waiting for him, that is not gonna make you any richer. That's where fixed income comes in.



Like most investors, the Inspector's equity portfolio has taken a beating. The value has shrunk. But, the Inspector is a long-term investor and can afford to hold on to his stocks. As a way to regain some value in his portfolio, the Inspector is looking at corporate bonds.

Specifically, in today's post, the Inspector will look at a Canadian Bank, BMO, and a 10 year bond that generates between 8% - 10% annually. The bond is "BMO TIER 1 NTES - SER.A" which has a call date of December 31 2018. It is listed at 10.221% Pretty good. This bond is rated AH/Aa3 by Moodys and DBRS respectively. Investor grade.

The spread between government bonds and corporate bonds in general are at very high levels (so far this year, well above six points). This is a good time for corporate bonds. As far as risk is concerned, the most obvious one is the health of the company and their ability to pay at maturity. Well, if its any consolation, all of Canada's big banks are healthy, especially compared to banks world-wide. In fact, today, March 3, BMO beat analyst expectations . This is no struggling giant. If BMO can make a profit in the current environment, arguably the worst ever (as in the history of the universe), then it shows they are in it for the long haul. As a rule, as long as a bond issuer stays in business, you're likely to get generous payouts regardless of economic conditions.

The ultimate enemy of bonds is inflation, and we are likely due for some of that eventually. None the less, what is the likelihood that the average rate of inflation will be 10% for the next ten years? Also, consider that inflation has never been lower than it is right now. Bottom line: Inflation might end up eating into the 8 - 10% annual return, but it won't erase it.

DISCLOSURE: The author owns units of BMO TIER 1 NTES - SER.A


Do your homework. Eat your veggies. Trust no-one ...especially not the devil.