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Media Co-op Investor: April

We Ride the Rails with Montreal's Canadian National Railway

by Geordie Gwalgen Dent

PHOTO the Dominion
PHOTO the Dominion

Welcome to Media Co-op Investor!

The Media Co-op Investor Series aims to help the general public understand the stock market, how it works, and the major companies which benefit from it.

Every two weeks we examine an element or term in the stock market, how the Toronto Media Co-op has done fake-investing in companies on the Toronto Stock Exchange as well as highlighting specific large Canadian Companies, why their price has gone up and down and what they are all about.

To learn more go here.

This Week's Term:  Interest Rates    

Intensely powerful, mentioned daily and at all-time lows, central bank interest rates are a cornerstone of the world economy.   

If you follow the business pages, you'll see daily mention of 'central bank' interest rates being 'held', 'raised' or 'lowered'.  The key rate for the Bank of Canada is currently 1% and was held at that rate in April.  Even NDP leader Jack Layton's recent succes forced him to take a stance on the BoC interest rate.  

Central banks are technically the institutions which create money for a country (or for a variety of countries in the European Union for example). I say technically, because the reality is that the vast majority (95% in some estimates) of money created is done by individual private banks through the issuing of loans.

While individual private banks can create money out of thin air through loans, central banks create money by literally printing it.  Why would a bank do such a thing and how?

Generally, a central bank creates money when another bank or major institution needs cash. We go to the bank to get cash.  The banks on the other hand must go to a central bank.

However, the most important thing which most central banks do is set interest rates.  To understand this you have to understand how much investors love buying government bonds.

Central bank interest rates heavily influence the government bond markets as well as mortgage rates.  While the two don't always match-up, generally a low/high Central Bank interest rate will lead to a low/high bond or mortgage rate.

In the late 90's and early 2000's, the US Federal Reserve Chairman, Alan Greenspan, pushed rates down to consistently historical lows.  What this meant was that investors looking for a high rate of return on a bond would have to look elsewhere than the US treasury bonds.    

High interest rates by central banks generally are thought to lead to more savings.  Often, if a central bank is mainly concerned about inflation (prices going higher and higher) then they with raise interest rates so that people spend less and money gets locked up.  Another side effect is that the country with a high interest rate and more people buying its bonds will usually see it's currency rise.

When central banks push interest rates low, they are usually trying to kick-start the economy, as Greenspan was during the early 2000's.  The hope is that money used to invest in bonds will instead be spent on creating new infrastructure or businesses.

Sadly, as Greenspan and the rest of us found out, money can also be simply thrown into speculative, casino-style investments which lead to the economic crisis in 2008.   

In addition, right-wing economists have been arguing for decades that the lowering of interest rates by a central bank helps solve major financial crisis.  The fact that rates were lowered to lose to 0% during the 2008-09 crisis and the crisis still raged on has sent that theory packing to Palookaville.

What we invested in this week

This week we tracked our four Canadian manufacturing stocks.  We theoretically-bought about $1000 worth of each company on September 15th.

How we did this week

Still good.

After a dismal 2010 where the return hovered around 5%, our stocks have risen by over 10%.
The economy seems to be stable, but again, as long as central bank interest rates are being kept at 1% or lower across the board, then the economy is in rough shape in terms of its foundation.

Dodgy actions by companies seem to be the flavour of the week.  The EU is investigating 8 banks/financial services groups over concerns they are manipulating the derivatives markets.  Belgium is investigating oil market manipulation.  Warren Buffet admits that his second in command may have purchased shares inappropriately.   

Former Ontario Premier and current Magna Chairman Mike Harris got an earful from Magna shareholders about dodgy pay packages being approved for executives.

Meanwhile, Portugal and Greece continue to suffer from their bailouts.  Spain (often seen as the final country pegged for a bailout) has a jobless rate of $5 Million ready for economic shock doctrine.

While the Canadian economy has been hyped as being solid as a rock, our GDP shrank in February (inexplicably) while our dollar has risen which usually can hurt the manufacturing session.

And just to scare the living daylights out everyone, gold, the mineral which rises the fastest and most during financial meltdowns hit $1570 on Friday, a new record high.

Today's Company: CN

The Canadian National Railway Company is Canada's railway giant.  While the company we featured last week, Brookfield Asset Management, was also started by rail entrepreneurs, CN was actually put together by the Canadian government in 1918 by nationalizing and then fusing several small operators together.

Like many of the world's top companies, it owes a lot to government for it's creation.  It was granted massive right-of-way land grants (on first-nations treaty land), publicly-funded lines and the government covered any losses up until the 1970's.  

In it's heyday CN was a massive Canadian conglomerate.   In addition to massive rail lines as well as freight and passenger services, CN owned a radio network, a hotel chain, ferry operations, trucking, real estate, and telecommunications companies.

In the 1970's, CN was deregulated turning it into a money-making crown corporation and allowing it to make business decisions without government intervention.  It sold off a bunch of it's non-freight services and shut down thousands of kilometers of 'money-losing' tracks in almost every Province.  It then proceeded to expand into the US before being privatized after making a profit for the public after 11 of 15 years.  One condition of the privatization was that the company had to be headquartered in Montreal.

Since then, CN has shed a bunch of small lines that serviced smaller communities and bought major rail lines in the US.  

Of course, while the focus on freight rail has been good for shippers and the goods-transportation industry, passenger rail in Canada has been reduced to the slow, expensive shell that it once was.
Besides the controversy surrounding it's privatization and existence on stolen land (which has lead to several first-nations blockades), a number of other controversies have dogged CN especially in the last decade.

CN has been promoted as an industry leader in laying off workers an replacing them with radio controlled switching of locomotives.

And, as one would expect, the reliance on machines has seen derailments, explosions, chemical spills, environmental damage and deaths in the last decade in Quebec, Illinois, Alberta, and several in BC.

Labour relations, once considered leading edge, were exposed as caustic during a strike in 2004.  A report in 2008 looking into the several derailments concluded that management had created a culture of fear and discipline and that the railway was operating in an unsafe manner.  

Their Chair, David McLean, is among typical political and industry company on the board of directors.  Charles Baille is the former CEO of TD bank and Chancellor of Queen's University.   Gordon Giffin was previously appointed by US President Clinton as the US ambassador to Canada.  Denis Losier is a former Liberal MLA from New Brunswick.  Ed Lumley, is a former Liberal MP and Chancellor of Windsor University.

We bought roughly $1000 of CN stock for $65.72 a share on Sept 15th.  It's up to $73.46 for a gain of 11.8% or $116.10.


September: Potash Corp

September #2: Suncor and ARC Energy Trust

October: Shoppers Drugmart and Barrick Gold

October #2: Scotiabank and Power Corporation of Canada

November: Cameco Corp and TransCanada Corp

December: Saputo and Bombardier

December #2: First Quantum and Manulife Financial

January: Quarterly report

February: Magna

March: Brookfield Asset Management

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