THE OUTLAY

It’s finally time to start investing.

The Current Market Environment

Overall company valuations appear to be relatively cheap, but I still believe market levels will contract before a sustainable rise. According to Goldman Sachs, we are still 15% above historical trough recessionary P/E levels. Furthermore, variable rate mortgage resets in the US only peaked in March so I think we are in for at least one more quarter of bank earnings surprises, write-downs and increased volatility.

In terms of timing, the S&P 500 is up over 7% for the past month and I think it will have to give some of those gains back in the near term. We should begin by investing between 60-70% of capital at these levels so we can take advantage of any market regressions.

Some of the stocks I had outlined in the target portfolio in early March should be removed from our initial outlay. These include:

• 7% in HR Block (stock up 22% since March 11)
• 5% in Sigma-Aldrich (stock up 17% since March 11)
• 5% in Sanofis-Aventis (pharmaceutical company finding too complicated, although recently bought by Buffett and Burgundy )
• 3% in Healthscreen Solutions (too illiquid)

On the other hand, I’ve added some plays that I think are timely:

10% in BCE (BCE). The only risk left in the deal is financing and TD and Teachers are both expressing confidence that it will go through. We are looking at ~15% arbitrage upside at these levels. Even if the deal doesn’t go through, we are protected by a P/E of 7x and cash yield of 4%

7% in Dollar Financial (DLLR). This company owns Money Mart in Canada and has growing operations in the US and UK . It is trading at 9.7X 2008 earnings, its the low-cost industry provider, has high-margin fee-based business, competition is waning due to increased gov’t regulation, and they only have 5% of UK market but investing to grow there. Conservative estimates indicate 32% operating growth overall.

1% in Ultrashort 200% Oil & Gas ETF (DUG). We can buy this ETF to short oil without taking on leverage. I think we can make the bet based on $112/barrel being unsustainable — it is up 80% over the past year with consensus estimates pricing it somewhere between $75-$85.

5% in Nokia (NOK). Stock is down on a profit-warning by #4 player Ericsson. However, Nokia is #1 player in global handset market with a strong focus on emerging market growth — i.e. Eastern Europe, Africa, Developing Asia — and a renewed focus on the U.S. Risks to the business include Blackberry competition, but Nokia is a proven technology leader and trades at 11.4x earnings compared to 53x earnings for RIM.