How To Guarantee Income In Retirement...

The importance of Yield.

The Equity markets have moved in sync with the high-yield bond markets.

But as you can see in chart number 2, that doesn't mean an investment in each had the same result.

Chart 2 shows the same ETF's but adding dividends and coupon payments for the high-yield.

We are hosting 2 seminars this Fall that warrants attention:

1. Dividends (below)

2. How to Guarantee Income in Retirement. (Above)

Let me know if you would like to discuss these further... Regards.

An important event...

*With our recent acquisition of a company called Genuity, we picked up the number 1 Bank analyst and the number 1 Telecom analyst in Canada.

Call or email me to RSVP: (403) 781-1606

Best Regards.

Eric

Marketable Ideas.....

Well here we are.....

It is volatile months like July that makes one realize the benefits of leaving the "long only" business, and focusing on a more active (directional) mandate.

It seems like we've been at this inflection point forever, with the end of the world one possibility and a new bull market the other. But what is the bull case really built on? Terrible economic numbers and European bank stress tests that failed to consider sovereign bond holdings, this is only the biggest risk to the banks.

Economists, for what it's worth, seem to have all gone negative, but for opposite reasons. The fact that the long bond can be at all-time highs - a deflation worry - while gold is also at all-time highs - an inflation worry - illustrates the unparalleled disparity of views.

FinReg (aka the Volcker Rule) is starting to have an impact on the hedge fund industry. Morgan Stanley is selling down its stake in its successful Front Point Partners and Goldman Sachs has decided to spin out its prop trading business. Major industry changes lie ahead...

While most thinking is still bearish, the resilience of this market to all the negativity makes me unwilling to take on much directional exposure wither way. In other words, I'm looking to protect investors no matter what the market brings.

Best Regards and Safe Investing.

The Shape of Market Bubbles.

In my recent reviews of major worlds markets, I included a chart of the amazing bubble in the Shanghai Composite Index. In this post we’ll build an overlay of four major bubbles across market history to see the variety of shapes a bubble can take. But first let’s take a long view of the index. Incidentally, the index’s latest close was 2586.21. So a fall to the area Guppy mentioned is about a 10% correction from this point.In my recent reviews of major worlds markets, I included a chart of the amazing bubble in the Shanghai Composite Index. In this post we’ll build an overlay of four major bubbles across market history to see the variety of shapes a bubble can take. But first let’s take a long view of the index. Incidentally, the index’s latest close was 2586.21. So a fall to the area Guppy mentioned is about a 10% correction from this point.

The next chart centers the Shanghai Composite. The peak is the center of a 3000-market day timeline. Markets are open approximately 250 days per year, so this is a snapshot of a little over eight-and-a-half years with plenty of room left to track the future behavior. The dramatic rise took place over about one year with a dramatic collapse of about the same duration. The symmetry of this these two years is astonishing and, as we’ll see, not necessarily characteristic of bubbles.

Now we’ll add the Nasdaq Tech Bubble. The Nasdaq was a bit less aggressive in the early stages of bubble formation, but the collapses are remarkably similar.

Worst Oil Spills In History

An interesting pictograph of large oil spills throughout history and the one we are experiencing in the Gulf.

I find it fascinating that, through the wonders of media, this spill is being depicted as the worst disaster in history... (A political reaction due to the location being in the good old U.S. of A.)

"Time is better spent building a shelter, than trying to guess which way the storm is coming from."

"Everybody is right sometimes but nobody is right all of the time."

This lesson is most definitely not confined to the investment industry but it clearly portrays itself here. We are bombarded with information every day from newspapers, TV programs, market strategists and analysts. One would think that because this information is provided by people with extensive education and market experience, it would generally illustrate a similar theme or market direction. This is very often not the case and therein lies the beauty of the market. Even if opinions do converge, it does not mean that the masses are right.

For example, a well known "bear' is saying that the last few months of growth is a bull market in a secular downtrend. Investors should take cover because hard time are ahead. Contrary to that opinions is another well known "bull" who urges full investment because the stimulus has worked and we're off to the races. I cannot claim to compete with either of these people on academic achievement, market experience or intellectual capacity, but I do know one thing... One of them is wrong.

Academic theory itself provides guidance and strategy. There is a place for theories such as CAPM and the Efficient Frontier, but in my mind there are too many moving parts in the market to predict results with a degree of certainty. I perceive this information as valuable in the same way that mechanical studies explain why a car behaves the way it does when you drive it. The significant difference is that when you strap yourself into the market, put it in drive and hit the gas, don't always expect it to move forward.

Thus, the outcome is that time is better spent building a shelter than trying to guess which direction the next story is coming from. All of this sounds quite pessimistic. Growth is very important, but capital preservation should be the primary focus. We invest in strong companies capable of enduring harsh economic climates with attractive yields. Capital appreciation of these businesses is expected during better days. Sometimes these stocks fall our of favor with the market, yet nothing is fundamentally wrong with their franchises. We see opportunity here and we "back the truck up". This extensive shift is often an earth-shattering two percent increase in a holding.

It is obviously important to understand the dynamics of an industry, but from an investors point of view, the price you pay for an asset and your ability to protect the downside is paramount. As I've said, nobody is right all of the time, that is why buying companies based on a projection of the future of the economy and industry is fraught with risk. -Courtesy QV's June Comment.

A Look Ahead..... (With Roubini)

A Year of Two Halves and a Multi-Speed Recovery.

Nouriel Roubini is one of the most respected and widely known economists in the World. I am fortunate enough to receive select insight and ideas from his team of strategists, especially during the present stresses in the world economy that seem to reverberate back into our beloved stock market and thereafter, our clients portfolios. So without further adieu, here is Roubini's Global Macro strategy for the remainder of 2010:

"First we anticipate that the United States and the other major economies in the developed world will post anemic growth over the course of 2010, emerging from the "Great Recession" in a protracted, U-shaped recovery. Some major economies may fare worse. Japan and some parts of Europe, for instance, are at greater risk of flat-lining into an L-shaped recovery, or even double-dipping back into recession. Emerging markets, by contrast - and particularly those in East Asia - will bounce more quickly than the advanced economies, posting growth more in line with a V-shaped recovery."

Roubini continues to expect a "year of two halves", with fading government support translating into markedly weaker growth in H2 in the major high-income countries. In the United States, persistent high unemployment seems likely to limit personal consumption growth, and thus economic recovery, after base effects fade and fiscal incentives that front-loaded demand expire. The U.S. will lead Japan and Europe, however, due to a more flexible economy and greater fiscal capacity, given the dollar's standing as the global reserve currency.

Continuing fiscal retrenchment in the Eurozone, and particularly across southern Europe, given lingering sovereign debt crisis, is likely to lead to sluggish European growth as well. Greece represents the most urgent of these crises - should the situation there unravel in a disorderly manner, Europe's economic woes could be sharply exacerbated in the near-term. We do, however, see a North-South divide within Europe, however, due to a more flexible economy and a greater fiscal capacity, given the dollar's standing as the global reserve currency.

Emerging Market (EM) economies in Asia and Latin America will fare far better, largely because they do not face the balance sheet constraints that pose such strong headwinds to a robust recovery in the major high-income countries. If anything, stimulus programs in some countries have been too strong and successful, with Brazil and India growing above potential and so requiring monetary tightening; and credit booming in China, raising the specter of inflation despite the addition to overcapacity resulting from a 25% of GDP stimulus, the world's largest, in 2009. EEMEA is the exception to this bullish EM story, largely because much of this emerging region participated in the global credit boom and now requires a significant balance sheet adjustment to cope with the reduced availability and increased cost of credit. Russia will post a significantly lower rate of growth than it did during the boom years because the ongoing credit crunch will partly offset the benefits of the renewed commodity export price boom.

Global Markets: Divergence trades galore defined by balance sheet conditions

The USD should remain strong against other advanced economy currencies - the EUR and the GBP in particular. As the U.S. yield curve continues to steepen through H1, portfolio shifts out of bonds and into riskier assets will continue in the United States.

The market seems to expect that the government support propping up recovery in the U.S. and elsewhere in H1 will pass the baton to the private sector, which will play a stronger role supporting economic growth and markets in H2. We disagree with this premise. In the U.S. and Western Europe, fiscal restraints and balance sheet consolidation are likely to ramp up in H2. As this happens, equities - which have already seen their rapid run-up taper off to a degree - will start to underperform.

Corporate bonds are likely to outperform equities for the year as a whole - and particularly high-grade corporates, which by and large have the benefit of lots of cash and strong balance sheets. As growth slows over the course of H2, it should weigh on earnings, which are unlikely to continue beating expectations throughout the end of the year.

The strength of EM economies in LatAm and Asia, in turn, is likely to mandate tighter monetary policies in EM economies. Currencies in many EM nations, particularly in East Asia, are likely to strengthen against the USD, and the potential for strong carry trade activity should continue throughout 2010. EM equities will underperform, however, as the withdrawal of policy responses starts to take effect.

-Macro Views from Roubini Global Economics (04/28/2010)

Yank's and Samurai's... Oh My.

The simple decision process for the Yen/Dollar.

The easy thing with exchange rate markets is that, at any one time, they tend to have one key driver. The challenging bit is that this key driver, be it valuations, interest rate differentials, differences in the returns on invested capital, geopolitics... Can change brutally from one day to the next. Having said that, when it comes to the JPY-US$ exchange rate, historically, the combination of three factors have given decent signals:

1. Differences in short rates: If short rates decline faster in the US than in Japan, the Yen rises, and vice versa.



2. Valuations: Then the Yen is one standard deviation undervalued on a purchasing parity basis, it will have a hard time going down, even if the movements of short rates play against it.



3. The cycle: When Japan moves into a recession, imports will fall. Since 65% of Japanese imports are paid for in US dollars, the demand for dollars will thus go down, dollar inventories held by importers for their working capital needs will be reduced and the Yen will tend to rise.
   
   

The challenge is to then combine these three sometimes conflicting forces. For example, in 2007 interest rate movements should have led to a fall in the Yen, but by then, it was already undervalued. It was not until 2008 that all the stars were aligned for the Yen to go up: narrowing short term interest differentials, no more overvaluations and a negative economic cycle. The Yen duly shot up.

So what happens next? Looking forward we feel confident that:

• Short rates will rise in the US long before they rise in Japan.



• The Japanese economy is moving out of its recession, partly thanks to the rebound in Asian and US growth. This means that Japanese companies are back to needing more US$ for their working capital.



• The Yen is today very close to overvalued territory.
  
  

Looking to Japan as a bellwether for recovery and growth, in relation to the US and it's larger trading partners, is an interesting and lucrative macro strategy that should be paid attention to going forward. Especially looking into other Asian Tigers for signals of future currency relationships between the East and the West.

(Comments from GaveKal's - Five Corners - Asia. Apr 12, 2010)

Greece? Indeed...

I was speaking with a well-heeled colleague of mine regarding all the concern and media attention that Greece has been attracting. He pointed out that, until three months ago, for 99% of investors, "Greece was a bad movie with John Travolta... but now, the struggles of the Hellenes are all anyone will talk about." He went on to add: "Frankly, who cares if Greece goes bust? It's less than 2% of the European economy and 0% of everybody I know's portfolio; the market will be rocky for two weeks and then adjust to the reality that you should be more careful as to who you lend money to!"

His comments are very true of course, and my team and I have argued that, with a complete lack of leverage in the financial markets, the contagion effects of a Club Med crisis might not be the multiple of Lehman that so many expect. Nevertheless, the Greek crisis is important because of what it highlights. Specifically:

*The Greek crisis is not at its core a problem of excessive debt. Instead, debt is only a symptom of a wider problem which is that the labor force in Southern Europe is now massively uncompetitive with the labor force in Northern Europe, most specifically in Germany and Holland. And to paper over this widening productivity chasm, government have been accumulating budget deficits for far too long. Unfortunately, to make countries like Greece competitive in a system where Greece cannot devalue against Germany, one needs to see either massive salary cuts similar to what Hong Kong experienced between 1997 and 2003, or a plunge in the Euro which will make Greece competitive if not against Germany, at least against the rest of the the world. (I.e. the Euro gets to be so cheap that the Germans spend their holidays in Corfu instead of Phuket).

*The fiscal tightening the EMU governments will have to endure ensures that the ECB will have to remain very accomodative for as far as the eye can see. In turn, this means that the Euro and long-dated bond yield in countries like Germany, Holland and Scandinavia will continue to fall.

*This last point is the most important. One of the reasons we have been so bullish on China over the years is the pain the country took in the 1995-2002 restructuring of its economy. Over that period, Chinese state-owned industries shed 50 million jobs, and productivity in China went through the roof. This allowed the RMB to move from being overvalued in 2000 to undervalued by 2003. And thus, when the Fed decided to follow an inordinately easy monetary policy which hit the USD (and thus the RMB), Chinese equities and property prices soared. With that in mind, the question today has to be whether Northern Europe is set to go through a similar experience? Indeed, following the past decade's productivity efforts, countries like Germany are already tremendously competitive. So very low interest rates and a lower Euro may not be exactly what Germany, Holland or Scandinavia need. But that is what they are going to get anyway. Leaving us with the question of whether the next property bubble might not take place in Berlin, Hamburg, Warsaw and Bratislava?

Comments courtesy of our team and GaveKal's "Checking the Boxes' - 03/19/10

Quote of the Day....

Managing risk doesn't happen in the vacuum that the manic media creates. Managing risk doesn't happen when living in fear. Managing risk doesn't only happen on the way down.

Managing risk happens when the proactively prepared have the "confidence in what they can do", but at the same time maintain an attitude to "try and learn as much as they can out there."

-HedgeEye "The Joy of Winning".

1,2,3 Going Through Changes... Trust Changes.

Change is not always a bad thing. In fact, it can be a fantastic catalyst in ones life. Vaulting us from a simple mediocrity and static security towards the new and unknown. That's how I am viewing the approach of 2011 and the inherent effects of the new SIFT tax on trusts in this fine country. But although the shortsightedness of our fine government to cripple a great tax-efficient investment vehicle still leaves me standing stunned, I cant help but focus on some solutions... and distribution sustainability is looking fine.

For most energy trusts, 2011 will be the last year they operate within the trust structure, as many plan to convert into corporations prior to D-Day (Jan 1, 2011). Most of the converted or soon-to-be converted have expressed their intentions to continue as dividend paying corporations but with a more balanced mix between growth and income. However, there remain many questions and concerns about how this transition will unfold, the timing of conversion, distribution sustainability, tax shelter, and future growth potential just to name a few. Now, to hold them through the conversion or to get out is the question...

Distribution sustainability will depend largely on commodity prices, although most trusts have sufficient tax pools to offset cash taxes for several years beyond conversion. Most likely trusts will attempt to hold their distributions/dividends flat and allocate any excess cash flow to capital development projects instead of increasing the dividend. Growth will be an option for those trusts that have the right assets, but the one main advantage the trusts will have over existing intermediate E&P's is capital discipline, which will provide investors with superior returns over the long term.

Balance sheet strength will be paramount when looking at sustainability of the dividend and overall growth capacity, as this will gauge the ability to take on more debt to cover distributions during periods of weaker commodity prices.

Another focus to sustainability is found within the company's tax-pools. Under the trust structure, taxable income was essentially passed on to investors in the form of distributions, so energy trusts had minimal need for tax pools. As a result, many trusts built up sizable tax pools over the years which they can now use to reduce taxable income once they convert and become taxable. As tax pools are drawn down, companies will become more taxable and hence will have less cash to pay out to investors or reinvest in the business. However, it is important to keep in mind that ongoing capital expenditures are added to the tax pool base so these pools would never get drawn down completely, assuming the company remains a going concern.

Overall, the energy trusts will continue to offer attractive investment opportunities for the following reasons:

• They have sizable positions in legacy, low-productive assets where new horizontal drilling and multi-frac completion technology works best, providing significant long term development potential.


• They have the scale and access to capital necessary to successfully execute a resource play strategy.


• Continued improvements in drilling and completion technologies should lead to higher recovery rates over time and hence, contribute to reserve growth.


• They have strong capital discipline which should contribute to superior returns through a combination of underlying growth and income.

Happy investing. I will leave you with a quote I recently came across in a morning update from the fine gentlemen at "Hedgeye":

"Hope is not an investment process. The best process is in fact to get your brooms on the ice early and prepare for the market "bonspiel" while your competitors are still celebrating yesterday's successful "hit and rolls"." - Feb 18 Hedgeye comment (Men With Brooms)

2 Schools of Thought on the Markets Going Forward...

2 highly recommended articles:

Jeremy Siegel:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2411

Gary Shilling:

http://seekingalpha.com/article/183419-parsing-gary-shilling-s-take-on-2010

China - December Commodities Trade Data... Let's play.

I was originally going to comment on the velocity of money, as I think it is a prudent subject in relation to the US dollar, and an area that demands some attention when looking forward from our January perch. But stepping off our fair shores for a moment and focusing attention on the largest driver of economic growth has now invaded my thoughts for this blog entry.

So here's my update on China and the preliminary December commodities trade data which was released this morning.(Convenient, no?):

The stand-out commodities for the month on the positive side were crude oil, thermal coal and platinum where imports were significant. On the negative side, we saw large steel net exports, the first net exports since 2008 in aluminium and continuing weak refined nickel net imports.

We continue to see results fall into 3 key investment themes with respect to China:

- Favour upstream commodities, avoid downstream (I.e. prefer met coal & iron ore to steel; prefer bauxite to aluminium)

- Watch for arbitrage reversals: copper imports strong at the moment, aluminium exports strong

- Wary of commodities where China has significant capacity, prefer those where it doesn’t (China is net short of crude oil, nat gas, platinum, iron ore, mined copper, mined nickel. It is long of smelting capacity in copper, nickel and zinc; steel capacity; zinc; alumina/aluminium capacity).

I would expect to see continued strength in energy-related commodity imports in January as cold weather impacts. We may also see continued stockbuilding ahead of Chinese New Year, which is late this year on 14 February. Note that y/y comparisons for the Jan-Feb period are fraught because of the variable dates of the Lunar New Year holiday. We won’t therefore have reliable comparable data until the combined Jan-Feb data is released in March.

So why did this information pique my interest while focusing on domestic and international flows of the US$?

A colleague of mine brought up an interesting idea the other day. There is a unique trade pattern that forms around Presidential Election cycles, in which you will see economic output increase starting about 12 to 18 months before the year of an election. This is a great time for investing in Equities, and focusing on certain sectors during this phase will usually yield great results.

What's interesting is that we are fast approaching the next US election in 2012, and it just so happens that the Chinese Election falls in the same year... Very interesting to say the least, because the US cycle takes place every 4 years, but the Chinese cycle takes place every 5. So the odds of them falling in the same year happens once every 20 years. What an interesting idea as we come off of extreme market lows and we start to see a resurgence of flight to quality, and possibly "riskier" assets?

Lets dial that back a minute and think of the implications of increased economic production in both the US and China running up to the same finish line in 2012. Tie that in to an expected Bull cycle in equities and we have the makings for a "gang-busters" near term investment horizon. Bear's need not apply.

Stay tuned.....

Happy New Year... Any Resolutions?

Here are a few words of wisdom for your financial health throughout 2010 and beyond.

*Pause, take a breath, discuss, and look hard at the numbers before making any financial decision.
*Spend less than you earn now, not as much as you might earn in the future.
*Spend mindfully, not mindlessly, and periodically leave the credit cards at home and pay cash instead.
*Save something--regularly. Give something--regularly.
*Diversify your investments into many different asset classes.
*Buy low and sell high. Get aggressive when an asset class is down and act warily when an asset class is up.
*Realize that your actual net worth far exceeds your bank balance. It includes your talents, your lifetime of future earnings, your family and friends, and your health.

I invite you to take advantage of the new year, to transform your relationship to money, and to make a fresh start. We all need help to realize our goals.

Thank you for following my blog thus far. I look forward to what this year shall bring us, and I look forward to continuing on with sharing my thoughts and inspirations as I advance my career in the noble industry of wealth management.

-Regards.