An update by Leon Tuey... (A MUST read)

Conditions are ripe for a Tsunami rally. On Thursday, November 20, the popular market averages plunged to new lows, which caused another wave of panic. Clearly, investors remain mesmerized by the short-term movements of the market averages, and not on things that really matter. At the risk of sounding like a broken record, the things that really matter are the monetary, economic, valuation, and sentiment factors. These are the factors that really drive the market, and they continue to indicate that a low-risk, extremely high-reward juncture has been reached. At this juncture, we can’t stress strongly enough that investors should focus on these important market factors and to ignore the noise.

Monetary
As mentioned, the unprecedented monetary growth and co-operation of the world’s central banks will help to turn the economy
around. Clearly, that’s their goal.

Economic
Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to
recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic
downturn.

Valuation
By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it’s 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.

Sentiment
Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.

Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.

Finally, our work shows clearly that investors should abandon bonds and buy stocks, as stocks will outperform bonds in the months ahead.

In conclusion, conditions are in place for a monster rally. There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity.

"Don't Judge Your Financial Future On The Last 40 Trading Days..."

There are incredible movements in the Canadian banking sector to stimulate lending again. A luncheon recently took place in which the Presidents/CEO's of many institutional banks and private firms met to discuss strategies going forward. The great thing that's taking place is that even the OSFI (Office of the Superintendent of Financial Institutions), which is the regulating arm here in Canada, is closely monitoring the rate-cuts and other actions of the banks. This ensures that all are on even ground, with no one straying from the plan to "undercut" the next guy and gleam some sort of profit during the next few quarters. (There's one in every group...)

So to sum up what we are already hearing, Canada is in a pretty liquid position. Our nations banking structure is Oligopolic in nature, which allows the need for very little foot-work to encourage unanimous change. (Just need to apply a little "moral suasion" to the top 4-5 banks to make the necessary changes... The rest will fall into play). The problem is, even when credit gets moving again, it is but a pin-drop to truly effect the real problems going forward... The US is of course the key.

Unfortunately, the US banking system is much more layered than ours here in Canada, and leads to the number of banks recently failing in America. (There are more to follow...) On the other hand, Obama seems to be doing everything right. Selecting his people, allowing for certain information to "leak out" to the markets. (We all saw the effect on Friday in the final hour of trading) Also, Government guarantee's in the mortgage market seems to be giving financial institutions some breathing room. Who knows, they may get credit moving after all. (I'm still holding to my guess by the New Year... Fingers crossed Santa)

The code of the Samurai: "Expect nothing. Prepare for Everything."

Thoughtful Quips for the day...

"Undervaluation is not a timing signal. But, for the longer run it is better to accumulate undervalued stocks than waiting to buy strength."

"When the tide went out not only did we see who was swimming naked, but all of a sudden there was a law against public nudity..."

(-"How can someone have "naked-shorts" on anyway?...")

Signals and Solutions

This morning I sat through an interesting presentation by Gerry Brockelsby from Marquest Asset Management. At first I was fearing another "history lesson" in which he re-iterates the steps that led us to this awful predicament in the market. But I was pleased to find out that it was more of a "scenario builder", one where we are presented clear indications of massive upside potential (Ie. An action plan), pending one little hitch (Ie. A trigger to light the powder-keg)... Credit.

Lets look at precedence... (In this case - 1980 - Jimmy Carter - as it is the closest comparison to our problem at present.):

Similar to the illiquid situation we are in now, the Carter team effectively introduced massive credit controls which stalled lending and turned the market sharply downward. (Similar to September this year after the collapse of Lehman and the "mark-to-market" idea...). Banks stopped lending all at once! (Eventually, on a Global basis.) Looking at the "whip-saw" effect on the markets during the Carter fiasco, the credit collapse lasted roughly 1 quarter. Now, here's the scary part... We currently have 6 weeks or so to reach that full quarter duration. It is assumed, by many many smart people, that a credit collapse lasting more than 1 quarter may lead to a full economic depression. (Considering the speed of markets due to increased technology, maintaining this 3 month "buffer" is quite liberal to say the least).

So all other indicators are lined up for a great correction (or Bull run) with the only caveat to get credit moving. How then should we position ourselves? If credit is not loosened by year end, we could see extreme government measures introduced in January... (Possibly Nationalizing the entire Banking system, and government forcing credit back into the markets. Hopefully the financial system finds that "magical suppository" before anything like that happens...)

2 possibilities:

1. Credit gets moving again. Greed and all those other good measurable things return to the markets. The trillions of dollars sitting on the side-lines flood back in. We witness one of the greatest, most profitable movements in market history. (Hopefully Europe and Asia follow suit... Back on track).
or...
2. Credit stays stuck. Extreme Government intervention in the Financial system. Credit is forced back into the markets. Long term recovery, and uncertainty continues to exist in the markets due to the nationalization process... The pin-drop leading to the death of Capitalism as we know it?

Either way, it's very important to stop looking at the stories leading to this mess. To quit following and reading about who's to blame; slave to the government and media's diversions. All that is done is done.

It's also important to stop trying to call a market bottom. It's a suckers game. The funny thing is analysts will always try to "chart" and fix a thesis to call a bottom. One of them will hit the nail on the head out of luck, and taa-daa! Here's your next guru who we will all watch and listen to, and purchase their book on e-bay... Yadaa, yadaa, yadaa.....

Concentrate on position. Watch like a hawk for indications that credit is starting to move again. If it looks promising, take your positions quickly, as the speed at which the sling-shot moves will be extremely fast. I know it sounds like I'm advocating "timing the market", (which I think is next to impossible), but I'm merely trying to emphasize the importance of having your ducks in a row "before" this occurs. (Take your positions now, or yesterday, or tomorrow. As long as you can stomach the risk. I think the upside is well worth it, but that's my own opinion.)

It appears that down-side risk is being contained... Selling pressure is diminishing as stock prices are discounting all the bad news. Buying is still very timid and therefore cash continues to build on the sidelines. Again, negative market sentiment is a key ingredient to the bottoming process. Soon buying demand will surpass the selling pressure and a sustainable rally will take shape.

Hopefully the great minds and powers-that-be are ready for the challenge. We have seen some great moves by the Government and banks to restore liquidity to the system, and it's my bet that credit will get moving again before the New Year. At least that should help to shake off some of the deflationary pressure, and we can start to focus on other problems like "de-leveraging" and good-old-fashioned inflation... War... Etc...

Ahhh... This may be like waking up from a long drawn-out, bad dream; Only to find a pile of cash under your pillow where you recently placed all your teeth after the knock out punch the markets delivered in Fall of 2008... (Put a steak on it.)

Charting Ideas...

When in doubt, I like to pull out the ol' ANDEX charts. The detail is exceptional when comparing past recessions and bear markets to inflation, GDP growth, price of oil, Presidential cycles, currency, and various unsystemic "shocks" that have occured throughout history (war, etc...).

It truly helps when trying to visualize and maintain mental positivity during times when Global Markets as a whole are cascading downwards... Seemingly endless...

SIDE NOTE:

Strategy - Don Cox
INVESTMENT RECOMMENDATIONS

1. It is definitely too late to sell stocks, and it is still too early to do more than nibble at bargains. Investors should be opportunistic buyers, because today’s prices for quality stocks will look ridiculously cheap within two years—or less.

2. When the time comes to begin re-accumulating equities, buy banks and diversified financials. If there is going to be a global economicrecovery, these former pariahs should perform well—under mostly newmanagement.

3. At the same time, buy commodity-oriented stocks. They are oversold to depths we could not have imagined. When, not if, there is a global economic recovery, these stocks will once again be the winning asset class.

4. While you are waiting, you should be beginning to accumulate the bonds—convertible and otherwise—of quality corporations. What could be the trigger for a major equity rally would be a sharp contraction in the near-record yield spread between investment-quality corporates and Treasurys.

5. Buy Emerging Market bonds from the fundamentally sound economies,such as China, India, and Brazil. Avoid Eastern European debt.

6. Another group to be included when you are once again accumulating stocks is the leading business-oriented tech stocks. These companies will participate in a global recovery, whereas the consumer-oriented techs may have to wait quite a while.

7. This is also a good time to be looking at the railroad stocks. They benefit from lower energy costs, which may offset a significant percentage of the cutback in top-line revenues during the recession. Coming out the other side, they should be core investments.

8. Gold has been a disappointment. It has outperformed stocks since the S&P’s peaks, but not enough to be profitable. As deflation fears ebb, it will once again be lustrous.

G'Luck!

November musings...

Well... There are many things that come to mind when sifting through the daily onslaught of information sent my way. At a pace of about a mile-a-minute, I scrounge through endless positives and negatives on the markets going forward. Establishing a solid stance is not easily attainable... There are "bulls" and "bears" out there... People whom are able to take a stubborn stance either on the daily trend, or counter intuitively to that trend, defiant in the face of individual and media driven adversity. How can one truly address the markets as "black or white"? As an Investment Professional, I must follow an unwritten doctrine to "buy low/sell high", and leave all personal feelings and emotions at the door. To follow a strict discipline and not get enticed into the "hype" of the masses. After all, that is how the few make money and the rest "donate" to the cause. But where to begin?

1. The Markets are Cheap: Buffett's buying... This sale is not going to come again for a life time. But, as a fellow colleague put it; "Sure the P/E of the markets are being touted as "cheap", but those ratios are not truly reflecting their actual values. Currently based on company earnings priced in "before" the full effects of credit-tightening, we must then discount the shorter-term, future earning of many of these companies, thus "increasing" the true P/E ratios of the Markets that we must consider at this point in time." So "cheap" is arguably a possible overstatement.

2. However, from an advisory standpoint, we must be the champions of positivity, and any immediate source of strength to our argument will act as catalyst to encourage sentiment going forward. After all, is it not the "ripple in the pond" effect we are looking to advocate in times of uncertainty and media sponsored negativity?

3. History. History. History. Like Law, the best of what we have is based on "precedence". And amazingly how often history does tend to repeat itself. The movie playing on the TV may be set in a different place or time (in this case maybe Mars), but the underlying story is the same. Most cannot see past that, and in turn buy into the school of catastrophe and unwarranted discern. We must be a student of the markets. We must also have the capacity to check emotions at the door to be able to see clearly the lines in history that prepare us for what's to come. (It's the best "crystal ball" we've got. And a conscious part of my developmental path as an advisor)

There was a great line from an interview with Nick Murray on defining a "Bear Market" that I would like to share: "A Bear Market is an extended period of time during which people who think this time is different, hastily sell their equity to people who know there is no difference.”

It seems like the "baby has been thrown out with the bath water" as masses of people flee the markets to the false safety of "cash". And in this I do agree that this "sale" will be one of the greatest opportunities of a life time.

Now... To only check those emotions at the door...