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The chief investment office at UBS published a research report Monday urging equity investors to ignore the inverted U.S. yield curve as a potential sign of recession and a bear market,

“In the past, U.S. [yield curve] inversions have typically occurred when rates are rising. This time it is happening as rates are falling. The only other time this happened was 1998. In that instance, the curve re-steepened, and there was no recession over the following two years.”

This doesn’t assuage my concerns at all. The U.S. yield curve inverted – the two-year U.S. Treasury yield fell below the 10-year Treasury yield - in late June 1998 when the S&P 500 was at 1134. It’s true that the U.S. benchmark leapt 35 per cent (not including dividends) from that point to March 24, 2000.

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The problem is that someone in 2000 would have had to time the market perfectly – which we have been taught is not something investors should consider attempting - to benefit from this rally. Immediately afterwards, the S&P 500 erased all of the gains and more, falling 49 per cent to 776.8 by early October 2002.

Yield curve inversions have a good track record in predicting recessions, but there are reasons why the most recent one could be a false alarm.

The Federal Reserve has been openly manipulating the yield curve to provide monetary stimulus during the past decade, and this could be distorting the bond market’s signals on future economic growth. In addition, an aging developed world population has created huge demand for risk-free savings vehicles, driving yields lower, perhaps artificially so.

That said, “don’t worry about the yield curve because the recession is still a ways off” is not a great reason to ignore the warning it provides. It requires investors to try and time the market by picking the peak or else risk the significant downside that will occur afterwards. Reducing portfolio risk sooner rather than later has a higher chance of success.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

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Shopify In becoming a rising force in global e-commerce, Shopify Inc.’s stock has caught fire, and on Tuesday the company passed venerable BCE Inc. in stock market value. The Canadian software company’s shares are up by 164 per cent so far this year, trouncing all the U.S. internet behemoths and capturing the attention of the market’s biggest growth and tech investors. Tim Shufelt reports

Keyera These are dark days for Canada’s energy sector. Low prices for oil and natural gas and lack of significant progress on new pipeline capacity have hit share prices hard. As of the close on Aug. 16, the S&P/TSX Capped Energy Index was showing a one-year loss of 37 per cent, and it continues to trend down. But amidst all the carnage, there are a few energy stocks that are still worth owning. One of them is Keyera Corp. (KEY-T), which is not a component of the Energy sub-index. Gordon Pape profiles the stock

The Rundown

Presenting the ‘perch portfolio’: Small cap dividend stocks with low volatility that are attractively priced

Smaller companies also pay dividends and often generate succulent returns. In an effort to catch some smaller stocks, Norman Rothery took the philosophy behind the Frugal Dividend portfolio and applied it to small and mid-sized firms. The idea is to look for dividend-paying stocks with low volatility in the past and low price-to-earnings ratios. Check out what this strategy revealed.

Apartment REITs are enjoying scorching gains. Here are four to consider

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With rents soaring and vacancy rates shrinking, finding an affordable apartment has become a challenge for a growing number of Canadians. In his capacity as an investing columnist – and a parent who wonders how his kids will ever be able to afford a place of their own – John Heinzl would like to offer a suggestion from the “if you can’t beat ‘em, join ‘em” school of investing: Consider owning apartment real estate investment trusts. He outlines four good ones.

What investors can learn about choosing ETFs from a soon-to-be terminated fund with the ticker symbol ZEUS

Two levels of flawed thinking are exposed when an exchange-traded fund is targeted for termination. One involves the ETF company’s business case for launching the ETF in the first place, while the second concerns the investors who bought in. ETF companies know that not all funds will work, so terminations are not that big a deal for them. But for individual investors, holding a fund that is wound up suggests they’ve wasted their time and money. An example of an ETF headed for termination is the BMO Shiller Select US Index ETF, which was launched in October 2017 with the ticker symbol ZEUS. That’s a lot to live up to. Rob Carrick tells us more.

Which Brookfield should you own? Here’s a simple solution

The Brookfield name has been attached to a head-spinning number of deals over the past year, either through Brookfield Asset Management Inc. or one of the alternative asset manager’s four publicly traded operations. How should investors approach this multi-headed behemoth? David Berman has some thoughts.

A relentless fighter for investor rights shares a moment of hopelessness about his battle against the investment industry

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Retired engineer Ken Kivenko has spent the past 15 years pushing securities regulators to do a better job of protecting investors from a profit-hungry financial industry. Mr. Kivenko might be Canada’s most resolute investor advocate. He has facts and figures on every regulatory topic and he’s a near automatic call for journalists covering regulatory matters affecting everyday investors. This summer has been a busy time in the regulatory world, with several files in play. Taking it all in during a recent interview with Rob Carrick, Mr. Kivenko sounded bleak about the progress he and colleagues have made.

Others (for subscribers)

Wednesday’s Insider Report: Director invests nearly $1-million in this stock yielding 8%

Wednesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: CEO pockets over $1.7-million with the sale of this large-cap dividend stock

Tuesday’s analyst upgrades and downgrades

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Browsing for U.S. retailers with sales and earnings momentum

Globe Advisor

Independent investment dealers are in the midst of a resurgence

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Ask Globe Investor

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Question: Can you please explain how some companies can sustain dividend payout ratios of close to 100 per cent, or more in some cases? One example is Six Flags Entertainment Corp.

Answer: Payout ratios can be measured in different ways. Usually, the payout ratio provided on financial websites is the percentage of earnings paid out as dividends. Paying out close to 100 per cent of earnings can be a red flag in many cases, but for certain companies it’s more useful to measure the payout ratio based on actual cash flow generated by the business. That’s because earnings are reduced by accounting charges such as depreciation and amortization that don’t affect the company’s cash flow or its ability to pay dividends.

In the case of Six Flags, the amusement park operator reported net income of US$276-million or US$3.23 a share in 2018 and paid dividends of US$3.16, for a payout ratio of 98 per cent based on earnings. But the company also uses a measure called adjusted free cash flow, which it says helps investors “evaluate the company’s underlying performance.” In 2018, Six Flags generated adjusted free cash flow of US$292.9-million or about US$3.43 a share. This was after paying all of its expenses and investing $133-million in its theme parks business. Based on adjusted free cash flow, the payout ratio was about 92 per cent – still on the high side, but consistent with the company’s policy to return all excess cash to shareholders in the form of dividends and share buybacks. It’s worth noting that Six Flags has raised its dividend for eight consecutive years. I’m not suggesting that Six Flags is a good (or bad) investment, just that its payout ratio may not be as egregious as it seems.

Because there is no standard definition of payout ratio, if you’re interested in a stock it’s imperative that you read the company’s investing materials carefully so that you understand how the ratio is calculated. And remember that the payout ratio is just one factor to consider when making an investment decision.

--John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Rob Carrick takes a close-up look at preferred share ETFs, which hold about $4.5-billion and have been nightmare for the conservative investors who bought them for zero-drama dividends.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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