January Investment Newsletter Written by Alain Roy CEO LTI Long Term Investing Jan 5, 2012

January Investment Newsletter

All It Took Was Five Trading Days
All it took was just a mere five trading days starting on August

In this issue:
All It Took Was Five Trading Days Walmart One Of The Most Prolific Dividend Increasers five business days the S&P 500 dropped from 1286 to 1119. resulted in a whopping 12.99% decrease in five trading days. This The

1st to wipe out all the stock market gains most folks had in 2011. In

My Portfolio Going into 2012 Market Index Summary

Future Outlook What Stocks to Buy LTI Investing Rules

markets never fully recovered from this drop and the volatility, as measured by the VIX, remained very high thereafter.

LTI Book of the Month

1.2 trillion dollar cuts over 10 years is so small that its like using a Dixie cup to bail water from a sinking ocean liner
Peter Schiff on the US budget plan and deficit CEO Euro Pacific Capital

As detailed in my August Newsletter I took advantage of the massive drop and bought several companies namely, Walmart, Proctor and Gamble, Astra Zeneca and very small amounts of Santander bank (one hundred shares just to open another trading account and make it active). I was not convinced that this was the bottom so I placed stop limits $1 above my purchase price on all of my positions. I figured that if they ever go that low again this will be a chance to buy even lower. Proctor and Gamble and Astra Zeneca stop limits were triggered; they did their job of

protecting my principle while providing an opportunity to buy even lower. I am still holding onto all the Walmart shares I purchased and owned prior to this. Walmart holdings here. Lets see how Walmart performed. I made some heavy additions to my

Walmart One of the Most Prolific Dividend Increasers

Walmart stock price has been on a major tear since the August lows. I bought aggressively on August 7th at $49.50 and it now stands at $59.76. Thats an impressive 20.72% return in just under five months. The icing on the cake was a nice dividend payment just before Christmas.

Walmart is the highest weighted holding in my portfolio thus tremendously lifting my 2012 returns. I knew Walmart was fundamentally one of the absolute best companies to invest in versus all others. I was pleasantly surprised to find out, during an exhaustive dividend growth analysis, that Walmart also happens to have one of the highest dividend growth rates in the industry with one of the lower standard deviations (volatility) in their dividend growth rate.

I spent roughly 15 hours downloading and analyzing 20 years worth of dividend prices from all the companies on my A and B Watch lists that pay dividends. Here is a graph of most of the companies on my A list of companies which includes Walmart. On average, over the past 20 years, Walmart has increased their dividend by 20.1% per year. Read that line over again: On average, over the past 20 years, Walmart has increased their dividend by 20.1% per year. There were only three companies that beat Walmart, when factoring in dividend payment variability, and they have only paid dividends for under 10 years so we cannot say for sure they can maintain the + 20% levels. Therefore, if you remove Stella Jones, Fact

Search and Calian Technologies, Walmart is the #1 company with the highest dividend increases every year and the most stable dividend increases versus the growth rate. This blew my mind. The rule of 72 is a quick way to see how long it takes for something to double. So at 20% growth it would take 3.6 years (72/20) for the dividend to DOUBLE. This is 100% amazing.

YOY Average Dividend Growth Rate vs. Dividend Growth Rate Standard Deviation 35%
Stella Jones

30% YOY Average Dividend Growth Rate

Fact Search

25%
Calian Technologies

20%

Walmart Novartis CNI

CNOOC Raven McDonalds Water Furnace

15%

10%
JNJ

CL CU United Technologies Idex Enbridge

DCI RBC GWW

Nike

General Dynamics Santander Bank Astra Zeneca Rollins

CVX Roper

PH

5%

Bristol Meyers Squibb

0% 0 5 10 15 Standard Deviation 20 25 30

The average price of my Walmart holdings is $49.50. yield is 2.95%. This doubles every 3.6 years.

At this price the current dividend

In 3.6 years the dividend yield on my Walmart stock would be 5.9% In 7.2 years it would be 8.85% In 10.8 years it would be 11.8% In 14.4 years it would be 14.75%

That means if I simply just do nothing for the next 15 years, by the time I am 45 I will have an investment paying me 14.75%, just by holding onto this investment at the $49.50 price. In the meantime Walmart will continue to buy back shares which will help lift the stock price. My capital gain might be $20 per share instead of $10 by thenwho knows.

Assuming I had $100,000 in Walmart this means that I would be getting paid $14,750 per year in dividends, at age 45, which continue to grow at 20%. Some will argue that this is not

sustainable. Well 21 years worth of dividend payments says it is possible. Remember some years its 12%, some its 35%...the growth rate varies. However in the 20 year time frame Walmart has seen a fierce gulf war, a tech bust, terrorists crashing planes into towers, a housing collapse, a financial crisis, etc, yet their dividends keep on rising throughout all this turmoil and uncertainty.

Walmart has a Return on Equity greater than 20% on average, stable net profit margins, excellent growth in retained earnings, share buybacks and very good adjusted debt to shareholders equity, etc. Their fundamentals are one of the best around. In addition, in difficult economic times like we are experiencing, and will continue to experience for years, Walmarts ultra cheap goods will continue to be in demand. Going forward, if you see Walmart in the $40s this is a gift. If it ever goes back into the 40s this will be a great buying opportunity.

My Portfolio Going into 2012

Long time readers of my newsletters know that I am very cautious about the current state of the economy and the general overvaluation of the stock market based on the P/E of the S&P 500. I want to share with you my results to show you what can be achieved with my style of investing. The risk of another large crash is high and I am taking a defensive approach. In 2011, I used Stop Limits to protect some of the medium term major gains I made and the following were sold: 1. Chevron: 58.5% gain 2. Exxon Mobile: 56% gain Once sold I bought xcb.to where I gained around 6% (dividends + capital gains) for several months then put this money into Walmart which is up 20% since the purchase. Stop Limits were triggered on the following stocks I bought in August as mentioned above: 1. Proctor and Gamble: 2% gain 2. Astra Zeneca: 2.3% gain My current equity holdings are 38% of my portfolio as of Dec. 30, 2011 and look like this:

Portfolio Equity Sector Summary

Financials 3% ETF India 3% Utilities 20% Health Care 6%

Consumer Durables 68%

My current holdings (as of Dec 30, 2011) are: 1. Walmart up 20%, portfolio weight of 69% 2. Canadian Utilities up 68%, portfolio weight of 20% 3. Bristol Meyers Squibb up 53%, portfolio weight of 6% 4. ETF India down 22%, portfolio weight of 3% 5. Santander Bank down 25%, portfolio weight of 3% 6. Physical Silver down 6%, portfolio weight of 7% Of my current holdings I have a weighted average return of 28.7% and an average dividend yield of 3.8%. I wanted to share my results to show you that not everything I buy is positive. I bought Santander bank in 2009 at a price I should never have bought it at. That was a learning lesson for me: LTI Investing Rule: NEVER BUY A STOCK AT OR NEAR A 52 WEEK HIGH I am going into 2012 with a heavy cash position and ready to take full advantage of the buying opportunities that present themselves. I assure you in the next two years there will be some great buying opportunities. I have been telling you to sell your mutual funds at the highs and put stop limits to protect your gains on your equities. I am ready for 2012 and am happy to be in a position of power going into 2012.

Portfolio Asset Class Summary

Physical Bullion 3%

Equities 38%

Cash 59%

Market Index Summary

I am particularly happy with my results given that the markets were negative in 2011. S&P 500 (the most widely used benchmark) down 1.1% Han Seng (China Index) down 22.3% FTSE 100 (London Index) down 7.5% TSX (Canadian Index) down 10.8% Nikkei (Japan Index) down 18.7% CAC 40 (France Index) down 19% DAX (Germany Index) down 15.6%

My 28% and 55% gains are very handsome when compared to the indexes. All this in safe, boring type companies like Chevron, Exxon Mobile, Walmart, Bristol Meyers Squibb and Canadian Utilities. This is proof that a long term value yield approach grounded in investing in companies that are fundamentally strong is an excellent approach that can provide superior returns in a safe fashion. How did your portfolio and mutual funds perform this year?

TSX Canadian Index

S&P 500 USA Index

Future Outlook
My long term economic and market outlook has not changed in 2011 and it remains the same going into 2012: Proceed with caution! From the economic data I analyze and the ever

increasing debt loads of various countries around the world, especially the US, I do not see much upside going forward. The P/E of the S&P 500 still remains historically high versus the average as shown below:

The US yield curve has inverted (nose diving) which is cause for concern; however, it has not dropped to the levels seen in the last two US recessionsyet.
US Yield Curve
(10 yr Treasury - 3 Month T-Bill)
4.5 4.0 3.5 3.0 2.5 Yield (%) 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Nov-88 Nov-91 Nov-94 Nov-97 Nov-00 Nov-03 Nov-06 Nov-09 Yield Curve
Source: FRED

The yield curve is supposed to be a very good leading economic indicator. telling us that the US will be contracting in the years ahead.

The above graph is

In September of 2011 ECRI publicly stated that their proprietary leading economic indicators show that the US is slipping into a recession and that a recession is inevitable. The Weekly Leading Indicator,
WLI Growth (%)

ECRI WLI Growth

30

20

which is public, has been hovering around -8% for the past few months. The last

10

time this leading indicator was at these levels the US went into a recession. By

-10

-20

the end of 2012 we will know for sure whether the US is officially in a recession and if ECRI was correct.

-30 May-99 Oct-00 Mar-02 Aug-03 Jan-05 Jun-06 Nov-07 Apr-09 Sep-10

Source: ECRI

WLI Growth

Major Five Asia Composite Leading Indicator

110 108

The leading composite indicator (from OECD)

Leading Indicator

106 104

of the Major Five Asian countries has dropped significantly in the last few months.

102 100 98 96 94 92 90 Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

S ource: OECD

It should come as no surprise that the leading

110

All Euro Composite Leading Indicator

economic indicator for European countries is

105

dropping hard as well.

Leading Indicator 100

95

90

85 Jan-78

Jan-81 Jan-84

Jan-87 Jan-90 Jan-93

Jan-96 Jan-99 Jan-02 Jan-05

Jan-08 Jan-11

Source: OECD

G7 Euro Composite Leading Indicator

110

The economic indicator of the G7 is

105

also starting to drop.

Leading Indicator 100

95

90

85 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Source: OEC D

Indias leading indicator has dropped by the largest amount out of all the countries tracked by the OECD.
Leading Indicator 110 108 106 104 102 100 98 96 94 92 90 Apr-94

India Composite Leading Indicator

Apr-96

Apr-98

Apr-00

Apr-02

Apr-04

Apr-06

Apr-08

Apr-10

Source: OEC D

Brazil Com posite Leading Indicator

12 0 11 5

Even

Brazil

is

coming

under
L eading I ndica tor

11 0

challenging economic times.

BRIC

10 5 10 0

countries will not be able to carry the world through the that global is

95 90

recession/contraction occurring.

85

80 Ja n-8 9

Ja n-9 1

Jan-93

Jan-95

Jan-97

Jan-99

Jan -01

Jan -03

Jan -05

Ja n-0 7

Jan-0 9

Jan-11

Source: OECD

Leading Indicator

FAO Food Price Index

World food prices have spiked to all time highs and are now dropping.

23 5 21 5 19 5

These prices are following the recent drop in commodity prices. My

Food Price Index

17 5 15 5 13 5 11 5

concern here is that the last time food prices spiked and then collapsed

95

we experienced a global recession.

75 Jan-90 Jan-92 Jan -9 4 Jan-96 Jan-98 Jan-00 Jan -02 Jan-0 4 Jan-06 Jan-08 Jan-10
Source: Food and Agriculture Organization o f the United Nations

Copper

is

often

called

Dr.

Copper by many economists for its uncanny ability as a leading economic indicator. Copper has

fallen by 24% this year.

There are many indicators pointing towards some major headwinds in the future.

The

potential for upside is minimal while the potential for a sideways to lower market is more likely. To summarize, I am highly cautious and defensive for the following reasons: Food prices just spiked and are declining: There is much more room for food prices to decrease to the historical average. If this occurs commodities will also decline. US Yield curve has inverted; this is a huge negative indicator Dr. Copper has dropped 24% and telling us the future is turbulent Leading Composite Indicators of almost every country tracked by OECD have sharply declined in the last several months. ECRI Weekly Growth Indicator has dropped sharply near the -8% range. The last time this occurred a recession ensued in the US The S&P 500 is still overvalued: at a P/E of 21.04 the S&P 500 is overvalued relative to the historical average of 15.82

What Stocks to Buy

In 2011 I performed a very exhaustive analysis of every single company listed on the TSX, NYSE and NASDAQ. I performed a Macro Screening of over 7,000 companies. The companies that passed my Macro Screen were then put through a Fundamental Analysis using Financial Statement information. This process took over 250 hours. In the end I created a watch list of the best

companies to invest in, companies with a durable competitive advantage that give my money the best chance for the biggest reward in the safest way possible. I will explain in detail how I

performed this analysis in a future newsletter. For now I want to share with you some companies to put on your watch list for 2012. Here are the companies, by sector, that I will be investing in, if they go down to the right price/ P/E ratio: Oil and Gas Oil is a commodity that will see increased demand and constrained supply in the years ahead. The increase in demand will come from the growth of emerging countries, increases in populations and increased demand from China and India as they continue to grow at fast paces. Any crashes or large drops in the stock prices of Chevron and Exxon Mobile is the best way to invest in oil. 1. Chevron: If Chevron drops into the mid to high $60s again, this would be an extraordinary gift. I would want the price to drop into the low $70s or $60s for me to get back in. 2. Exxon Mobile If Exxon Mobile drops into the $50s this is a huge gift. I would invest in the $60s or $50s easily. Health Care As each year passes more and more baby boomers reach the age of retirement. As baby boomers age the demand on the health care industry will increase. Investing in the health care industry is a great way to invest in this growing demand. In addition, many fatal and non-fatal illnesses are at an all-time high in North America (obesity) and I believe this will keep upward pressure on the demand for health care. Take advantage of any large dips or stock market crashes by investing in: 1. Johnson and Johnson I have been waiting patiently to buy some JNJ shares for a long time. JNJ is one of the most stable (safe) companies in my entire list of watch list companies and is in my top ten list of companies to invest in. 52 week lows are great prices to pick away at. Any price of mid $50s or below is a great price to enter into JNJ.

2. Bristol Meyers Squibb I bought BMY in March 2009 at $18.64. I am not sure if the price will drop that low again but if it gets into the low $20s I will be buying more. 3. Stryker Corp Low $40s or mid to high $30s is a very good entry point

4. Novartis Novartis is one of the largest pharmaceutical companies in the world. prolific dividend increasers. Novartis is a great company to invest in. If the price ever drops to mid-low $50s or lower I am buying some Novartis They are also

Consumer Durables 1. Walmart Walmart is in my top five companies to invest in right now. again this is an excellent entry point. great entry point 2. Proctor and Gamble PG is in my top five companies to invest in. The hard part for me is buying PG at a low price as it always seems to be hovering near a 52 week high, for good reason. $50s or lower is a good entry point 3. McDonalds MCD is also a prolific dividend increaser. They are not a consumer durables company by definition but I add them here because people consume their products no matter what economic conditions are present just like Walmart and Proctor and Gamble. In March 2009 MCD went down to $50. If MCD crashed down below $65 this would be a huge buying opportunity. MCD is always near a 52 week high. It just climbs like a champion in addition to increasing their dividends year over year. Mid If they get in the $40s

High $40s is a good entry point; low $40s a

Utilities and Transportation 1. Canadian Utilities I own cu.to and they have been great to me. I bought them in the $30s and they are now at $62. I am not sure if I will ever get that opportunity again. If I see $40s I am adding to my position. They love increasing their dividends as well. 2. Canadian National Railway CNI also has a strong dividend growth rate. If the economy contracts or goes into a

recession you will see their stock price decline. Take advantage and add some CNI to your portfolio. $40s or high $30s during a crash are excellent prices to buy. Not sure if they will go that low.

Financials 1. Royal Bank RBC is in my top ten list. Fundamentally they are the strongest bank in Canada and one of the strongest banks in the world. They are the #1 bank on my list out of all the banks listed on the TSX, NASDAQ and NYSE. I once owned RBC at $28. Financials are down this year. There is still more downside for this sector due to the European crisis and

future debt crisis of some major countries such as the US. Once it drops under $40 I will start to get interested. $30s would be an excellent long term entry point. 2. Bank of Nova Scotia BNS is the #2 bank worldwide on my watch list. At $42 or under I will start to get

interested. If it crashes into the low $30s or high $20s I will back up my little Toyota Yaris into BNS however I would place more money into RBC over BNS. Precious Metals 1. Physical Silver There are only a few gurus whose opinions I truly respect. Jim Rogers is one of those

gurus. Jim retired at age 37 from smart investing. He is still active in the markets and there are a few blogs that I read daily which track his TV interviews and quotes. Jim is long commodities in general, especially agriculture, oil and precious metals. Here are

Jims thoughts, I am long commodities because if the global economy gets worse governments will print more money and this will cause commodities to go up and if the global economy gets better the demand for commodities will go up causing commodity prices to go up. Either way they are going up and that is why I am long commodities. I

could not summarize it better myself. For this reason and many other reasons I will be buying physical silver and gold coins and bars on any major dips. If silver goes down to $21 this is a huge gift. Buy some physical silver at these price levels. 2. Physical Gold Gold has been in a correction for the past few months along with all other commodities. I hope it continues to correct in 2012. If gold drops below $1500 I will start to get interested. I would like to buy gold anywhere below $1400.

All of the above companies offer great dividends and dividend growth rates.

In a general

sideways market or declining market dividend paying companies become more attractive.

Here is where you can buy physical gold in Canada.

I have been buying coins.

For silver, I

purchased the silver maple coins and silver cougar limited edition coins. When I buy gold I will buy the Gold Maple Coins. 1. Silver Gold Bull: http://silvergoldbull.com/ 2. Sprott Money: https://www.sprottmoney.com/ 3. Scotia Mocatta:
https://www.scotiamocatta-estore.scotiabank.com/stores/scotiamocatta/catalog/featuredproducts.aspx

You can keep your physical bullion in a safety deposit box at a bank, in a safe at home bolted to the floor or wherever you feel it would be kept safe. I placed another order for Silver Limited Edition Cougar coins in late December when the price of Silver went down into the high $26s. I hope it goes lower in 2012. I want to buy more. Remember to follow the LTI Investing Rules outlined below before buying any of the above stocks.

LTI INVESTING RULES Over the years I have learned that you have to control your emotions when investing. Investing without emotions is one of the toughest challenges of any individual investor. I have made some bad moves due to emotions and have put in place some core investing rules to follow when investing. This helps to control emotions. If a stock price does not meet the rules I will not invest. Before buying any stocks I always follow these rules. If you follow these simple rules you will greatly stack the odds in your favor and give yourself a bigger chance for bigger gains and more success. LTI INVESTING RULES 1. Never ever buy at or near a 52 week high. Always buy at or near a 52 week low. 2. Always buy under the 200 day moving average (this occurs automatically when you follow Rule # 1) 3. Only buy companies with solid fundamentals (Top Five criteria I use) a. Retained Earnings Growth you want increasing retained earnings over time b. Return on Equity > 12%: consistent ROE above 12% over time c. Consistent EPS growth over time d. Consistent Net Profit Margin: greater than 20% is ideal e. Adjusted Debt to Shareholders Equity lower than 0.8 Technical Analysis I use to optimize my buys: 4. Buy only when RSI is lower than 30 5. Buy only when Stochastics are under 30 and pointing upwards 6. Buy only when MACD is below 0 and bars are getting shorter and shorter

If a great company meets all of the above criteria you are getting a really good company at a very good price. The above mentioned results were achieved using these rules. If you follow these

rules you are ensuring maximum success.

LTI Book of the Month

This month I am recommending a book that is in my Top Ten books to read. The 7 Habits of Highly Effective People by Stephen Covey is a book to help you become aware of how to be more effective and efficient not just in the workplace but in every facet of your life. This may help to clarify life goals or increase your performance at work which may help your finances. This is one of the best books I have ever read and I have read hundreds of books.

The 7 Habits of Highly Effective People by Stephen Covey $8.22 on Amazon.com

http://www.amazon.com/Habits-Highly-EffectivePeople/dp/0743269519/ref=sr_1_1?s=books&ie=UTF8&qid=1325705853&sr=1-1

Good luck in 2012. Happy New Year! Contact me anytime if you have questions. Be cautious and be smart!

Alain Roy, P.Eng, MBA Candidate 2014 CEO of LTI Long Term Investing almroy@gmail.com

Disclaimer: The content of this newsletter is to increase your financial intelligence and is intended as general information only. Any action that you take as a result of this

information and analysis is ultimately your responsibility. I will not be held responsible for any negative outcomes of any kind as a result of this information. information responsibly. decisions. Please use this

Consult your financial advisor before making any investment