Canada’s Report On Business Television recently held a series of live broadcasts from BCE place in downtown Toronto. On Monday, September 18th, 2006, they invited two venerable deep-value fund managers in a question and answer forum. You might think I’m hypocritical for advising people not to obssess over ROB-TV while highlighting this event. However, my interest was peaked because of Irwin Michael’s appearance. I hope you will see why I listen when Irwin speaks. It’s truly a no-spin zone (unlike Fox News, or Jim Cramer) and investors get to benefit from his wisdom!

Irwin Michael is my favourite fund manager because of his no compromise, no spin, non-apologetic approach to openly discuss investing. He talks and writes candidly about his investment decisions; allowing me to soak up his perspective and learn from it. You won’t catch him doing any sweet-talking to appease investors and audiences. As of the end of August 2006, Irwin’s ABC Fundamental Value has averaged an annual 17.82% return for the last 15 years while it’s benchmark indes S&P/TSX Total Return has only managed a 10.79% in the same timeframe.

Ross Healy is the chariman and CEO of Strategic Analysis Corporation, an investment advisory firm. Though I feel at times, that Ross’s comments are too politically correct, too on the fence, I still recognize that Ross is very much respected in the Canadian investment scene. Ross is best known for his bearish call on Nortel when it was trading over $100 in 2000. As of June 2006, Strategic Analysis Corporation’s model portfolio has outperformed the S&P/TSX Total Return index to a tune of 20.9% to 11.7% since its 1993 inception.

Note: While Irwin Michael has been a frequent guest of Report On Business Television, this was his first appearance on the show “Market Call”. In contrast, Ross Healy sat in the very first Market Call and has been a popular frequent guest of the show. The following transcript has been edited for readibility and relevance purposes. (i.e. consolidating various responses on the same topic that were made throughout the show)

On Current Market Conditions
Michael: Fear [comes to mind]. I think a lot of people are fearful. If it’s not gold crashing or oil and gas falling out of bed. It’s something else, wars, US federal reserve etc. I think there’s a real dose of negativity out there. [It's a cycle of fear and greed]

Healy: I think the market is kind of sleep-walking through what I view as a market-top heading into a recession, probably in 2007, which I suspect will be fairly severe. I know that there’s a lot of fear out there. On the other hand, I see equal amounts of confidence and hope. Between the two of them, there’s a kind of stasis in the market

Michael: I just see a slow down. Instead of growing at 3.5% rate of growth, we’ll maybe be at 1.75% to 2%. We’re stock pickers. In this environment of fear, we’re finding opportunities to purchase certain stocks.

Healy: I’m selling. We’re selling pretty much across the board. We have been reducing our energy, mining exposure, and broadly across the board. I’m just happy to be pulling back and getting more and more cash. I think cash will be king in another year and I want to have lots of it!

On Value In The Energy Sector?
Healy: Yes there is, there’s a lot of value in the energy sector but the market doesn’t care right now and I think it’s going to continue not to care. And there’s some sectors of the market, which include the oil sands, where there are some concerns developing about costs. And as the price of oil sinks, it’s taking the stocks down with it. I think there’s gonna be a magnificent buying opportunity coming, but it’s not today.

Michael: [The opportunity is here in some cases] It’s cheaper to buy them at the stock market, than to drill for [oil]. In consequence, I think you’re going to see many more mergers, acquisitions, takeovers; particularly on the trusts side.

On Income Trusts
Michael: [I'm buying some broken, beaten down income trusts]

Healy: I wouldn’t touch trusts. I think it’s too early, there will be a terrific opportunity. The problem with “those wretched things” is that too many of the trusts are basically junior stocks. In recessions, junior stocks get ravaged. I don’t see any difference between junior income trusts and junior stock. I am keeping my money well away from that group

Michael: I like to see 35%, 45% upside (before I lay my money down) not including the income. I’m not saying you buy all the trusts. There are a select few.

On Blue Chips As Safety
Healy: I think it’s a frightening idea actually. When I look at the U.S. companies, a lot of them have a tremendous amount of downside. Starting off with the financial sector which I’m afraid of.

On Celestica, And The Tech Sector
Michael: We don’t own ANY high-tech company. Zero. They’re not fundamentally cheap! Our style is we want to buy you two dollars for one dollar. And if I can’t buy it, forget it right there!

Healy: No tech. I’m a 100% with Irwin on that one. Celestica happens to be one of the few tech stocks where a little value seems to be coming back in again. But that doesn’t make any difference when the whole group is overvalued or expensive. I think we can be very patient. We’ll buy tech stocks when it’s a lot cheaper.

On Canadian Oil Sands Reserves
Michael: I have nothing in the oil sands, nothing. That’s probably a statement unto itself. We tend to be buying companies that actually, I won’t say they’re real, but they have cash flow, they’re earning. We own Nexxen and Talisman, which I can relate to. In terms of the feeding frenzy in the oil sands, I’m not there

Healy: I don’t think it’s a feeding frenzy yet. I’ve been a little surprised that one hasn’t developed. It’s one of the last open-ended sources of oil reserves on that planet. But nothing has happened and that’s quite surprising. I think one of the reasons is that the costs have escalated tremendously.

On A Possible U.S. Recession
Healy: I also have concerns about the U.S. consumer. David Dodge, the head of the Bank of Canada, also has quite serious concerns about the U.S. consumer in 2007 and a strong possibility of a recession.

Michael: I see a slow-down. The very fact that U.S. gasoline is no longer $3 a gallon helps the consumer. A lot of people weren’t going to Walmart because gasoline was too much, now they can drive there. I think the psychology is so bad, it’s like the chicken-little scenario right now: “We’re going into recession, we’re going into recession”. We are getting ourselves into a funk and not doing anything.

On What’s The Next Hot Sector?
Michael: We don’t go for hot sectors. We look at hot stocks - stocks that everyone hates. When I wake up in the morning, I tend to look at the new low-list, as opposed to the new high-list. Not to say that everyone is to be bought. But quite often, you’ll find one or two little gems, that have come apart because of tax-loss selling, which we’re starting to see right now. Or just the sheer paranoia of investors wanting out because they read something on the front page of the paper, or the front page of Business Week.

Healy: There are sectors that I avoid. I’m out of the Financials both sides of the border because they’re very very expensive and offer no value at all. And if the financials don’t come through and if the energies can’t come through. That’s 60% of the Canadian market. You have to say to yourself, ok, if 60% of the Canadian markets wants to go down. Where are you going to make money?

Michael: We have no banks and no real Canadian insurance companies in our portfolio. However, on the contrary, I look at the American life companies and they’re dirt cheap. We’re able to buy them well below book and break-up value because the American companies have not gone through the consolidation that Canadian companies have.

Healy: Healthcare looks like they’re bouncing quite nicely. There looks like some good value in that sector.

That’s it for an exciting part 1. If you’re on the edge of your seat from the wisdom that these two fund managers have displayed, make sure you stay tuned for Part 2 and Part 3!!