Cross-border shopping

A decade ago, we fulfilled a lifelong dream by purchasing a winter home in Florida. Now I know that many people love the bracing Canadian winter, and so did we when we were younger. But after spending years chilling out (literally) in such frigid places as Trois-Rivieres, Montreal, Quebec City, and Ottawa, my wife and I figured we’d done our part. It was time to follow the sun.

When we bought the house on Gulf Coast, the Canadian dollar was worth about US$0.72. In the years that followed, we watched with mounting anxiety as the loonie fell lower and lower while our Florida expenses climbed. By early 2002, the loonie was below US$0.62 and at least one economist was predicting it could fall all the way to US$0.25 (I’m not kidding about that). At that point, we began to think maybe this wasn’t such a wonderful idea.

This year we’re feeling a lot better about things. The cost of carrying the Florida house has dropped by more than 15 per cent since the start of 2007, thanks to the surprising surge of the loonie to parity and then, briefly, above par. We’re not alone in breathing a little easier. Thousands of other snowbirds are in the same situation. And it’s not only the sun-seekers who are rejoicing. Cross-border shoppers are giving northern US retailers a pre-Christmas bonanza for forcing Canadian stores to cut their prices, albeit reluctantly.

Of course, we’ve all seen and read the stories about the other side of this coin. One-third of New Brunswick’s sawmills are closed because the high dollar makes their products uncompetitive in the American market. The B.C. forest industry is in despair. Canadian companies continue to take earnings hits as a result of the high dollar. CN Rail, for example, listed the strong dollar as one of the reasons for cutting in half its projected 2007 earnings per share growth, from 10 per cent to 5 per cent. And that was based on the assumption that the exchange rate would hold at around US$0.95, a level we haven’t seen since early September according to the Bank of Canada.

So while the high loonie has been a windfall for some people, it has pretty much been bad news across the board for Canadian business, unless you happen to be operating a pro sports franchise. Despite this, the TSX has held up reasonably well, with a year-to-date gain of over 8 per cent to Dec. 10.

From an investment perspective, the relatively few Americans who own Canadian stocks that are interlisted in New York must be delighted with this turn of events. They’ve made big profits even on stocks that have been laggards in this country. Take a look at Enbridge, the big pipeline company and natural gas distributor. Its stock ended 2006 on the TSX at $40.27. Recently, it was trading at $39, so Canadian investors have experienced a year-to-date loss of 3.2 per cent. Americans, by contrast, are enjoying a small profit. Enbridge shares opened 2007 on the NYSE at US$34.40 and were recently trading at US$38.64, up 12.3 per cent. Such are the ironies of currency movements!

The biggest losers have been Canadians who hold US stocks or equity funds in their portfolios. After almost five years of seeing the loonie climb, eroding their US stock gains in the process, they must be seriously questioning the wisdom of the time-honoured principle that global diversification is a good idea.

Who can blame them? The sad reality is that any US stock or unhedged mutual fund that has not gained at least 15 per cent in 2007 has lost money in Canadian dollar terms.

As I write, the Dow is up 10.1 per cent on the year, the S&P 500 is ahead 6.9 per cent, and Nasdaq is up 12.6 per cent. But when we scan down the year-to-date returns for US equity funds, what do we find? Very few funds come anywhere close to those numbers, in Canadian dollar terms. In fact, a large percentage of them have struggled to break even.

I ran a search on Globefund for US stock funds that had outperformed the S&P 500 Index this year in Canadian dollars. Out of hundreds of entries, only eight made the cut – and seven of those were currency-hedged funds! The top performer overall was the Dynamic Power American Currency Neutral Fund, which was up a spectacular 48.2 per cent for the year (to Dec. 6). The only unhedged fund to make the list was its twin, Dynamic Power American Growth, which gained 33.3 per cent.

Now the big question is what happens next. We’ve seen a 60 per cent appreciation in the value of the loonie since early 2002. But many economists now believe it peaked out on Nov. 7 when it closed at US$1.09, and it has drifted down since then. Recently, The Globe and Mail reported that our dollar is no longer a hot ticket item with currency traders, who have turned their attention elsewhere. That’s good news; we don’t need speculators driving our dollar to unrealistically high levels.

But will it settle around parity? Some analysts maintain that its true value compared to the US dollar in purchasing power parity terms is about US$0.85. But if oil should rise to beyond US$100 a barrel as some experts are forecasting, who knows?

For the moment, the loonie seems to have stabilized around parity. While no one can accurately predict where it will be in a year, at this moment in time Wall Street offers the best bargains Canadian investors have seen in more than 30 years, except for the brief three-week period last month when the loonie was at parity-plus. We actually pay about the same price for US-listed stocks as Americans do! Cross-border shopping? Hey, this is where the real values are, if you choose wisely. Take advantage of it while you can.