Upcoming Seminars:

WHY?

Reduce your financial burden.
Maintain your independence.
Access cutting-edge medical services.
Assist in your recovery any way you choose.

Strategy Time... (a revisit to high yield corp bonds)

High yield bonds offer investors attractive income in the current environment, with an average yield of more than 600 basis points greater than the yield on government bonds.

So, why is it important for investors to include an allocation to high yield bonds in their portfolio?

1. Enhanced Diversification - High yield bonds are often considered a distinct asset class, as they involve different return characteristics and have a lower correlation to traditional asset classes such as Government bonds and equity. For this reason, adding high yield bonds can increase portfolio diversification, and potentially reduce risk and enhance returns.

2. Attractive Income Potential - With interest rates at low levels, most investors cannot generate the income they require by investing in government bonds alone. Generally speaking, high yield bonds pay higher interest rates than investment-grade and government bonds to help compensate investors for the additional risks of investing in lower quality bonds. Over the life of a bond, those higher coupons provide a higher rate of return than higher quality (investment grade) bonds.

High yield bonds offer investors attractive income in the current environment, with an average yield of more than 600 basis points greater than the yield on government bonds.

3. Capital Growth Potential - In a recovering economy, companies who issue high yield bonds can see their debt rating upgraded due to improved cash flow, offering investors the potential for capital appreciation from the associated increase in the bond’s price. Historically, high yield bonds have tended to provide equity-like returns, but with much lower volatility – a characteristic that many investors are currently looking for.

4. Less Sensitivity to Interest Rates - High yield bonds tend to be less sensitive to interest rate fluctuations than most fixed income securities, primarily because they carry a higher coupon and have terms of 10 years or less. In addition, high yield bond prices react more to credit spreads and changes in credit quality than interest rates.

What’s the outlook for high yield bonds?

We believe conditions remain extremely favorable for high yield bonds. Weak demand, particularly from consumers is providing an environment of slow but positive economic growth, low interest rates and low inflation. Corporations, having cut costs and delevered balance sheets during the credit crisis, are showing strong profit growth but only marginal revenue growth. As a result, leverage across the corporate sector remains low, and cash has been building to record levels. Credit quality, as measured by balance sheet strength is at record levels and corporate default rates are headed towards new lows.

With yields on traditional income producing investments at record lows, investors are increasingly looking to high yield bonds to provide steady, sustainable cash flows. In addition, many investors have been unnerved by the extreme volatility of equities in recent years, with high yield bonds offering an attractive, less volatile alternative. As a result, flows into the sector from both institutional and retail investors continue to grow, putting downward pressure on spreads.

How are we incorporating them in our client’s portfolios? (A study)

All portfolios reflect the clients individual risk tolerances, goals and requirements, so we sit with each and build out a strategy on a case-by-case basis. However, from a macro view, parts of client’s portfolios that are focused around a 100% equity mandate have benefitted greatly from scaling back (say 25%) and reallocating to High Yield.

The chart below shows the 15 year return of the S&P 500 along with the 15 year return on the US High Yield Index. Interestingly, High Yield outperformed by over 8%, but with substantially less volatility during that period.

For clients scaling back to a 25% High Yield / 75% Equity portfolio - the average annual return bettered the 100% Equity portfolio by around 2.2%. ***And it did so at 25% less volatility.

How does one best invest in this asset class?

It is important to view High Yield Corporate Bonds in a similar risk category as equities. (I commonly refer to them as a “stock in bonds clothing”.) So, I do not look to include them in the Fixed Income portion of client’s portfolio profiles, but rather towards the overall equity portion.

There are a number of ways to participate in High Yield: directly buying the bonds from the issuer, buying the index through various ETFs, or buying units of a High Yield fund. All 3 are great ways, but are unique and dependant on the requirements of the client. **Questions such as Cost, Liquidity, Diversity (market and sector), and Manager Risk are all part of the decision process.

Here are some examples:

iShares IBOXX Hi Yield Index ETF (HYG)

Costs 0.5% MER
The 3 year return 9.36%
The 3 year index return was 10.41%
Small tracking error for this ETF
Current Yield: 8.17%

Marret High Yield Fund (MHY.UN)

Barry Allen – Fund Manager
Costs 1% MER
Average duration – 3 yrs.
Since inception (June 2009) return 10.51%
Current Yield: 7.34%


The High Yield market in Canada is quite small, with most new issue allocations going towards the institutional investor, so looking towards a managed or indexing approach would provide access to much broader markets for the individual investor.

As always, contact your investment advisor to see if this asset class is an appropriate fit in your current portfolio.

Best Regards and Safe Investing.

Eric.

Market Update.... Emphasis on the Pro's not the Con's

So here we are...

It's been entirely too long to go without an entry to my blog. Albeit, my weekly Market Watch newsletter has refocused my attention, it is now time to place some very serious thoughts into perspective.

I've lost all craving for houmous, grape leaves and spanikopita. Probably for ever...

Here's a summary of the expected Euro plan for Greece:

1. Greek bondholders will “voluntarily” write down the value of Greek debt by 50% which will help reduce Greece’s debt load from 150% of GDP down to 120% by 2020.

2. The European Financial Stability Fund (EFSF) will be expanded to 1 trillion euros from the current 440 billion euros through a combination of additional funding from the IMF and possibly a capital injection by China and/or other nations.

3. European banks will be recapitalized to offset the impact of the haircut on Greek bonds.
As encouraging as this European agreement is in principle, it is clearly just the first step in a multi-step program to resolve the European debt crisis.

Despite the significant stock market rally, equities remain the favoured asset class versus bonds. That said, we expect equity market volatility to continue and recommend profit taking to lock in recent short term gains. For buyers building longer term portfolio positions, we expect the market will provide yet another lower entry point so there is no rush to buy at current levels.
One of a few exceptions would be gold which has pulled back almost US$200/oz. since the highs reached in August. Both gold bullion and gold equities should perform well in the current environment.

Commodity cyclicals and industrial stocks offer the most upside potential in the event equities rally again, but they also will likely continue to exhibit the greatest volatility.

Many high quality dividend paying stocks at current levels do not offer much capital appreciation potential but will provide investors with the most downside protection if the market retreats, and the steady dividend income generated remains an important component in portfolio total returns.

Given our outlook for an extended period of slow economic growth, whether falling into outright recession in North America or not, equities are expected to trade in a range for the next several years. We are inclined to trim some profits on holdings that have performed well. In turn, emphasizing the need to be more tactical in the current environment, this capital could be selectively rotated into stable names that are more reasonably valued.

We place particular emphasis on the word "selectively" given the fragile situation in Europe and we continue to encourage a focus on larger-cap companies with sound balance sheets.

Stick to your knitting....

There are indications of a Bullish time for equities ahead.... Why?

1. Systematic/mechanical devaluation of the US$

*Global Commodites/Resources priced in USD.

*Forecasting of some substantial falls in commodity prices over the next few years.

*Which will lower Inflation pressures in global Markets.
(I.e. A $10 fall in the price of a barrel of oil would transfer an amount of income equivalent to around 0.5% of world GDP from producers to consumers.)

*Eventually drive resurgence of demand.

*Good for Canadian resource heavy economy which some argue could overheat and (as we've seen in the past) fail to diversify.

2. The death of Defined Benefit Pension Plans.

*Larger institutional money must be reallocated away from risk-free assets towards stronger blue-chip portfolios.

*Equities will benefit from this "refocus" by pension plans and other large institutional players.

3. 100 Years of Expansion and Consolidation Trends.

*As per the chart at the top of this entry, there are very interesting themes that have taken place throughout history of the stockmarkets (in this case, the Dow Jones Industrial Average).

*After expansionary periods in the markets (which last on average 20 years), there are contractions/consolidations that last around 15 years.

*Roughly putting the next 20 year "up" period at a start date of around 2015... (Almost there)

The key of course will be to find ways to continue to navigate the turbulent waters ahead. It is paramount that we tailor our investment policies to reduce volatility and ensure a certain margin of safety is built in, should the macro-economic environment take a turn for the worse.

Best Regards and Safe Investing.

How interesting... All out sector correlation (again)

The S&P 500 sector correlation is at its highest level since '89.

With Global macro-economic factors continuing to drive equity markets, generating alpha (I.e. beating the market) is getting much harder. With the intensification of the Euro debt crisis and the U.S. credit rating downgrade, the correlation amongst S&P 500 sectors has increased rapidly. With sectors (and stocks) moving in lock-step, the average correlation among S&P 500 sectors has exploded, giong from 68% in eraly June to 90% currently, the highest level since at least 1989.

In comparison, the 22-year average sector correlation stands at 57%. The current sector correlation is surpassing the levels hit last summer (87%) and during the 2008/2009 crisis (89%), as illustrated in the chart above.

From a contrarian perspective, however, the last two peaks in sector correlations provided good entry points in the equity market.

Could ETF's be adding to this all out "unification"?

ETFs account for more than 30% of volume in U.S. stock markets, compared with just 2% in 2000. It may be reasonable to expect ETF trading to drive correlation higher because many of the vehicles are tied to stock indexes.

For example, the 10 different industry sectors of the S&P 500 show well over a 95% correlation over the last month, and a low of 72% in February 2011. High yield bond prices are at a 93% correlation to stocks, which is another multiyear record.

This is unusual for U.S. equity markets, which have tended towards lower correlations in rising markets and clustered returns when things get ugly.

It may not mean that we are necessarily in for tougher markets from these points, but it does make the decision about asset allocation more important than sector or stock selection. (At least for the time being)

Best Regards and Safe Investing.

E

Summer comes to a close...

Here we are... The days are getting shorter and the nights longer. There are whispers of the 4 letter "S" word on the trains and buses. AND, contrary to popular belief, the world has not come to an end. The markets keep turning, people keep consuming, and politicians keep on posturing. Let's review:

August was a rough month, so I took some time to meet with a friend and long-time mentor to discuss some of the recent turbulence, and more importantly, to find out where and how we should be focusing our investments in this harsh and unpredictable environment we find ourselves in...

The recent weakened in stock markets started on July 29. That was the day that the US government announced a revision to the first quarter GDP from 1.9% growth to 0.4% and said the first pass at the second quarter was 1.2%. These were shockingly weak numbers given the US deficit spending was running at a $1.5 trillion annual rate and Fed QE 2 plus their interest reinvesting was running in the $ Trillions as well.

Richard Koo said the QE programs wont work because business and consumers are not borrowing and spending, and therefore the money sits in the bank. This means the monetary toolbox of the Fed is limited in impact. (This also spilled into stronger emerging economies igniting inflation)

The two government sectors that control the economy are the elected politicians that can raise and lower taxes and spending, and the non-elected academic independent Central Bankers. Richard Koo is seeing the political winds move against government deficit spending just like what happened in Japan 15 years ago. He must be horrified. He came and warned Congress and proved his analogies between the Japanese balance sheet recession and the current US situation, but the elected people listened instead to their electorate (no surprise). The gridlock around the debt ceiling showed the distaste for government spending and borrowing.

Anyone familiar with Koo's theories realizes that reducing government spending during a balance sheet recession will tank the economy and the stock market. The fact that the Fed's massive QE program just kept the economy flat was ominous. Also the Fed's board had 3 dissenters for the first time in their last meeting, which includes future stimulus actions.

So that being said, where does one focus?

Gold could go into a bubble because any Central Bank action will have to include even more massive money printing given the weak response of QE2, and the elected officials move to restraint either by choice or by bond vigilante pressure.

The unelected academics in the Central Banks will try to offset the deflationary tides of their elected counter parties.

Emerging markets should outperform massively. The current drop in commodity prices takes the pressure off inflation that has kept their stock markets flat or down for the last 2 years.

***Emerging Markets produce over 50% of global GNP with only 14% of global debt... Compared with developed economies, where does the engine of growth look to favor the future?

Very interesting times we are in...

As always, drop me a line if you want to chat.

Best Regards and Safe Investing.

E.

(Above comments courtesy of Ken Macneal, Director/Investment Advisor, Richardson GMP)

First Half of 2011 Over.... Where to next?

The second quarter for the year has come to an end and I wanted to send a note summarizing events of the past three months. Here's a quick recap on the first quarter.

Developed markets registered solid gains in the first quarter, despite the setback from March's earthquake and tsunami in Japan. The second quarter was a different story, with concerns arising from growing inflation threats in emerging markets, sovereign debt worries in Europe and a downgrading of growth forecasts for the global economy.

Given the recent concerns about European debt and uncertainty about economic growth, I am sharing recent perspectives from three of today's most respected stock market observers: Warren Buffett; Morningstar fixed income manager of the decade Bill Gross; and Wharton researcher Jeremy Siegel, considered today's leading stock market historian.

Warren Buffett - "Betting on America"
"Money will always flow toward opportunity and there is an abundance of that in America .... Human potential is far from exhausted and the American system for unleashing that potential ... remains alive and effective.” - Warren Buffett, Berkshire Hathaway Letter to Shareholders - February 2011

Buffett has been consistent in his positive outlook for the U.S. economy, looking past short term events to focus on American ingenuity and resolve and its ability to attract the best and the brightest from around the world. He is consistently voted the greatest investor of all time. In the 46 years he's run Berkshire Hathaway, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock market index. Even more remarkable, Buffett's numbers are after tax, while the index's gains are pretax. And while he lagged in individual years, in his last letter to shareholders Buffett pointed out that there has never been a five year period where Berkshire Hathaway underperformed the S & P.

To put his record into dollar terms, $1000 invested in the Standard & Poors index of US stocks at the start of 1965 would have risen by the end of 2010 to $62,620. By contrast, that same $1000 under Buffett's stewardship would have grown to over $4 million.


Bill Gross - "The case for stocks that pay dividends"
"In terms of the stock market, there are amazing opportunities ... (compared to US government bonds) there's a huge gap and a huge differential." - Bill Gross, CNBC - June 7, 2011

My second expert is a household name among professional investors. As manager of PIMCO Total Return Fund, the world's largest bond fund, Bill Gross turned in a track record matched by few others and was named Morningstar Fixed Income Manager of the Decade. In part, this stems from his willingness to take contrarian views; in 2010, he went on record talking about the "new normal" of lower growth, higher inflation and increased risk in holding debt of governments around the world.

In a June 7 interview on CNBC, he discussed the appeal of brand name stocks that pay dividends:

"A Procter, a Johnson & Johnson, a utility company, Southern, Duke, as a whole they yield 3.5 -4% in terms of their dividend yield compared to a -0.5% in treasury space on that five-year. Corporations are in the catbird seat. They've got cheap financing, cheap leverage. They've got cheap labor and the ability to move from one country to another at their will. I think corporations basically are at the top in terms of profit margins. Doesn't mean that stocks are going to go down. It means that the catbird seat basically has been taken advantage of and that the heyday is probably in the past as opposed to the future."


Jeremy Siegel - "Why valuations are attractive"
"We've almost never seen valuations (on the US stock market) this low when interest rates are as low as they are today....relative to bonds today, I've almost never seen such compelling values.” -
Professor Jeremy Siegel, Business News Network - June 28, 2011

My third expert is Wharton's Jeremy Siegel, considered today's leading stock market historian. His book ‘Stocks for the Long Run’ examined 200 years of financial market performance and has been ranked as one of the most influential investment texts of all time. Among Siegel's claims to fame is an article in the Wall Street Journal in March of 2000, at the peak of the Internet bubble, warning about the excesses in tech stock valuations.

Here's why he, like Bill Gross, likes dividend paying stocks:

"History shows that dividend paying stocks beat inflation and are good investments for income, especially in the early stages of a financial recovery such as we see today ... The top one hundred dividend yielding stocks of the S & P 500 over the last half century beat the index by two and a half percent and did so with lower risk."


What this means to you
In today's low interest rate environment, it's hard to make a compelling case for cash except as a portfolio diversifier and a source of liquidity. As for bonds, Bill Gross represents the growing sentiment that the risk in bonds is greater than the reward, as economies recover and interest rates start to rise.

Whether you adopt Bill Gross' "least of evils" view of stocks compared to bonds or join Warren Buffett and Jeremy Siegel in embracing stocks more enthusiastically, there are clear values in high quality stocks that pay dependable dividends. Today, you can find quality companies with strong cash flows that provide a comfortable backing for their dividends and also have the potential for dividend growth.

As always, I am here to talk about any questions you have about the markets and to discuss your portfolio.

Hope your summer is enjoyable. All the best,

Eric

UK Pension Trouble... (No worries, I can help!)

I was reading yesterdays National Express (UK paper) and the headlines were: "Pensions War Will Cripple Britain!"

This may be the tip of the ice-berg in the face of large-scale nationalization of Britain's financial institutions, along with a weakened Pound Sterling and strong negative pressures on the Euro...

So why care?

There are a vast number of British-Canadians who will be affected by large scale reforms to UK Pension plans. We are seeing it now.

What most dont know is that there are presently a couple of financial institutions in Canada that can facilitate the transfer of UK pension plans into qualified RRSP plans.

So... here I am in Calgary, working with the UK Trade and Investment Organization (British Trade Organization - BTO), and Sheila Telford, who's a Director for the British-Canadian Pensioners Association, to help bring education and awareness to those holding UK pension plans.

Ultimately, we still need to find out the exact numbers (or database) of Canadians who have moved from the UK over the last 30-40 years (especially those who moved during our recent "boom" from 2001 onward).

Mrs. Telford tells me that currently over 50% of Canadian-Brits are unaware they even have a British State Pension available to them.... Many folks are quite elderly and living on government assistance payments... This would greatly help take the burden off the Government and increase the quality of living of many Canadians.

I've have had articles published in a few newspapers and magazines here in Alberta over the last couple of months, so I have some interesting topics all focused on the UK Pension issue.

Currently I am the "go to" guy at my firm (Scotia McLeod) when it comes to the mechanics and rules of the transfers. Mrs. Telford is the "go to" gal when it comes to specific rules and issues with the State pension back in the UK.

Always here to help.

Eric.

Banks and Cable/Telcos in the Dividend Sweet Spot

With the S&P/TSX Composite Index up 3.5% on a year-to-date basis, Scotia’s equity strategy team remains in the procyclical camp. Central bank tightening is typically seen as an inflection point between a cyclical and defensive bias. While remaining bullish on equities in the near-term, we highlight that the Canadian equity market is trading within 5% of our strategy team’s target of 14,750 for the S&P/TSX. With this in mind, we think the spotlight will soon refocus on dividend income as an increasing contributor to total returns.

In the Canadian context, we think the sweet spot for dividend income occurs at the confluence of a positive yield spread over government bonds and a dividend growth rate of at least 10%. As presented in exhibit 1 below, there is generally a trade-off between dividend yield and the growth rate of dividends. Defensive sectors tend to have higher yields but lower dividend growth, whereas cyclical sectors typically have lower dividend yields and potentially higher dividend growth rates.

At present, we think financials, particularly Canadian banks, and cable/telco stocks are in or about to enter the dividend sweet spot. After a two year hiatus caused by the financial crisis of 2008-2009, we think dividend growth for the bank group is set to resume. While the five-year compound average dividend growth rate of 7.4% for the bank group is healthy, dividend growth is likely to rebound to the low double-digit range in the coming years.

Above comments courtesy of my Portfolio Advisory Group group - Himalaya Jain

ATTENTION! - (Now that I have it... here is something worth taking a look at.)

Through the combined skills of my Scotia Capital team and the great people at Bloomberg, we have created a very interesting indicator: The Panic-Euphoria Indicator.

*ThePanic-Euphoria indicator is based on four factors including: the VIX index, S&P500 RSI, put-call ratio, and corporate credit spreads.

Here is the recent update (FYI):

The equity pullback continued yesterday with the S&P 500 retreating 0.6%.

Despite the recent decline, the S&P 500 is off 2.5% since its April 29 peak (1,363), our Panic-Euphoria indicator has yet to reach "panicky" levels. As illustrated in our Chart of the Day, the Panic-Euphoria is currently hovering in neutral territory.

The S&P 500 remains 7.8% above its 200-d moving average of 1,234, but the TSX and Shanghai A-share are hovering much closer. In fact, the TSX is standing 2% above its 200-d MA (13,094) and the Shanghai A-share is trading 0.8% above it. With China driving commodity sentiment, a break below its 200-d MA could spell further trouble for the commodity complex and commodity-related equities/indices.

*Entering this stage of the presidential election cycle, it is important to find indicators that one can track, and pair with other leading indicators, to help position ourselves for any upcoming corrections or, dare I say, Bear market directions... This particular study is interesting because we all try to remove emotion from our investment activity, and a great place to start is by looking at the emotional quotient of the overall markets... I hope to expand this indicator to other markets in the near future.

Best regards and safe investing.

E.

Sell in May and Go Away...?

"Sell in May and go away"?There’s an old adage on Wall Street called the Halloween indicator that says, “Sell in May and go away.” It refers to the belief that the period between end of October/beginning of November and April has significantly stronger growth than the other months. Will this saying prove true for 2011?

A bearish viewpoint – Those in favor of “Sell in May and go away” for 2011 * Since Halloween 2010, the S&P 500 is up more than 14%. In addition, in the past 25 months the S&P 500 is up more than 100%. Bears argue that we have come too far, too fast and a pull back in the stock market is warranted and should be expected. * The end of QE2. Bears point out to the strong correlation between stimulus and the rise in equities. When the Fed ceases the $600 million second round of quantitative easing next month, the stock market will recede. * High commodity prices. As prices for energy and food continue to rise, so too will corporate profits fall. Bears point to the fact that high commodity prices will be a huge hindrance to consumers as well. * Historically, the Halloween indicator has proven true – A $10,000 investment compounded to $527,388 for November to April in 60 years, compared to a $474 loss for May to October.

A bullish viewpoint – Those that disagree with “Sell in May and go away” for 2011 * The trend is your friend. Bulls point out that bears have been calling for a top for over a year now in the markets. Thus far it hasn’t happened and they don’t see the end in sight. * Throughout 2011 there have been many reasons for the market to justifiably pull back, here are just a few:

The violence in the Middle East and North Africa
The earthquake, tsunami, and subsequent nuclear emergency in Japan
Standard and Poor’s dropping it’s outlook to negative for US debt
Skyrocketing commodity prices
Rising inflation

In spite of all this, the S&P 500 is up 6.5% for 2011. Therefore, bulls point to the fact that if none of these major issues moved the market lower, why would anyone think the market is anything but strong?

* The Federal Reserve is committed to keeping rates extraordinarily low for an extended period of time. Most people think they won’t raise rates until 2012. Low rates are bullish for the stock markets.

* Historically, bulls point to historical data that stock prices rise 70% of the time during May through October when it’s the third year of a president’s term, as it is now for President Obama.

Thoughts?

*Courtesy of Matt Grossman - The Stockenthusiast

Live From Toronto...

Well... after 2 solid weeks of pressing the flesh with my back office and intrepid support team, I am on my way back to oil country. Yes, spring is in the air. The sun is out and flowers are starting to bloom (here in Toronto). Charlie Sheen just played his first show here, and people seem to be in general good spirits... Yet, in the back of my mind I know that I am flying into a foot of snow back in my dear city. (But I do so armed with a vast wealth of knowledge, preened by the good folks of Scotia McLeod, that I did not previously have before.) So, saying that... Time to move on to the markets.

The Presidential Election cycle continues onward... On Friday (today) Peter Gorenstein had a good comment on the Yahoo Finance page titled: Don't Call It a Stimulus: 2012 Election Spending Likely To Top $8Billion. (http://www.finance.yahoo.com/)

And with that, the cycle continues as predicted... We need to turn our attention to the indicators that will help us to spot and navigate the coming top of the cycle... Upward pricing continues... Caution as we go... 3 charts of interest. (Courtesy of Credit Suisse):

Global PMI's are rolling over, but still consistent with healthy global growth.

QE2 has had an incredibly high correlation with higher equity prices.

Jobless claims remain one of the very best bullish indicators for the equity markets.

I felt it appropriate to comment on Mr. Bill Gross' recent letter to investors. At $1.2 Trillion AUM, his words carry some important weight. In his closing statement: "I am confident that this country (U.S.) will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies - Inflation, currency devaluation and low to negative real interest rates." Mr. Gross and his team have put their money where their mouth is. Pimco owns virtually no US Treasury bonds on behalf of its clients, which is remarkable given the size of the Treasury market and the size of a company like Pimco.

Moving from a pointed individual security selection method on to a broader sector and country call will help us watch (and act) on the much larger trends as they present themselves... Small profits to cash is a kingly idea.

Best Regards and Safe Investing.

Nuclear Reactors in Japan - An interesting review...

Good Morning, below is a very good read on the Fukushima nuclear reactors in Japan. This comes from a professor of Nuclear Science and Engineering at MIT - Dennis Whyte.

"Given the extraordinary events in Japan over the last week, and the associated issues with the Fukushima nuclear reactors, I wanted to provide a set of data and perspective on this event. The mainstreammedia has been ridiculously irresponsible in its coverage of the events in Japan. If you were to take your cues from them, you would think we approaching nuclear armageddon.
The reality is that while this was a serious nuclear accident, it is insignificant to the magnitude
of destruction caused by the quake and tsunami.

I will note that fission reactors and accident scenarios are not in my area of research
expertise; but I do teach, and deal with, nuclear/radiation safety.

First I will provide two streams of "de-sensationalized" information.

A. A web-site blog which was set up by MIT nuclear engineering students: This provides very good background materials, explanation of terms, etc. http://mitnse.com/

B. A technical review of the incident is inserted below from Lake Barrett, who is an expert in fission accident scenarios.

My own comments:

1. The nuclear accident must be kept in perspective of the astonishing natural catastrophe that has occurred in Japan. A 9.0 earthquake is almost unimaginable. Remember this is on the Richter scale so each increment of 1 is a factor of ten increase. Most of us recall the devastation from the Northridge earthquake in Southern California in the mid 90's (I was living in San Diego then) which was a 6.7 earthquake. The Japanese earthquake was about 200 times more powerful! Then you throw on top of that a 30 foot high tsunami wave! You saw the pictures: this wipes out a civilization. Over 10,000 dead.

While the nuclear accident is of course a concern, the media completely lost perspective on this, which to date has killed one person (not killed by radiation, but by a chemical/H explosion in the plant).

2. While technical assessment will need to continue, if anything this accident will prove how incredibly good the engineering of a nuclear reactor really is. The size of the quake + tsunami were outside the limits of any scenario envisioned. Yet the reactors safely shut down as designed. The accident in the end, which came about because they just could not pump water around, was the result of the utter devastation to the entire infrastructure of northeastern Japan. Certainly all present and future reactors will use the lessons learned to make them even safer.

I am not trying to downplay the seriousness of the accident: this was a serious situation, particularly for the plant workers. But let's gain some proper perspective.

Nuclear fission is by far the safest form of generating large amounts of centralized electrical power. There has been exactly zero deaths due to radiation exposure from fission power plants producing 20% of US electricity for over 40 years. ZERO. About 30 people die every year in US coal mines. In China coal mining: 5000 deaths per year. Yet somehow the (probably horrible) deaths of these coal miners has never triggered a headline like "Deadly coal: Crisis for the world's coal reactors...all coal mining plants shut down"Perspective.

3. The biggest misperception comes from the dangers of the radiation release. This is so exaggerated by mainstream reporting that it borders on criminal intent to instill unnecessary fear into people. The perceived risk from radiation implied by the media is completely at odds with the physical reality. Here's the reality: a) What is radiation? Radiation arises from nuclear processes (like fission) because you are re-arranging the nuclear components. The characteristic energy of the "radiation", which is actually just light, is about a million times larger than radiation/light you get from chemical processes (like burning gas). This is why nuclear energy gives you millions times more energy per amount of fuel. We cannot directly see this light, and it penetrates deeply into solid materials including human bodies which is why you use it look inside the human body, i.e. an X-ray. The health hazard arises from this penetration: basically the energy of the light can get absorbed in human tissue and possibly cause local damage.....But at the same time, it is extremely easy to measure. in comparison with other toxins for human health (chemical, biological).

b) But isn't any exposure to radiation dangerous? NO, NO, NO - This is where the media is particularly egregious. You must be quantitative about radiation exposure. Again it is very easy to measure radiation. We use a specific unit called a "micro-sievert" to measure radiation exposure in humans; this is called a radiation "dose", i.e. the cumulative amount of radiation energy the human body has absorbed.

We also use a 'dose rate' which is just the dose divided by the time in which the dose was received. The easiest unit here is "micro-sieverts per hour" . Why? Because right now as you read this email you are receiving a radiation dose rate which is about one micro-sievert per hour. Wow, because of Japan? NO, because there is a continuous source of "background" radiation for any human living on the surface of the earth. In fact, this is why radiation is so benign to people: all organisms evolved in a radiation filled environment.

Our bodies have repair mechanisms for radiation damage through natural evolution. This "background" varies from location to location. For example Saskatchewan has a higher rate than Boston because of its higher elevation. It is this natural variation in natural radiation rates that obviously tell us that radiation exposure at levels like micro-sieverts per hour have no measurable impact on human health. In fact there are locations which have background radiation at approximately 100 micro-Sieverts per hour. The local populations there have on average better overall health and less cancer! And we willingly expose ourselves to radiation for health reasons: if you have ever received a CT scan, you got about 10,000 micro-sieverts, or about how much you receive naturally in one year. This has no measurable effect on human health.

So when is it dangerous? Radiation at very high dose rates will be dangerous to human health, basically because the body cannot heal the damage fast enough. This is called "acute" dose, which means when you get the dose in about a day. The first measurable signs of effect on human health are at about 500,000 micro-sieverts per day. In order for the dose to be lethal you need about 3,000,000 micro-sieverts. You can see these numbers are enormous compared to background radiation. So yes you can die from radiation exposure, but it must be at a radiation dose rate which is staggeringly large.

It is trivial to avoid harmful amounts of radiation. First, you can measure the radiation very easily so you readily know when the levels are too high. Second, just walk away from the radiation source: the dose rate decreases like the square of distance between you and the radiation source. So if you move 10 times further away from source, the dose rates goes down by 10x10=100 times. Third, put some combo of water, concrete and lead between yourself and the source and your dose rate goes down very rapidly to zero. This is the basis of how radiation is "contained" in a nuclear power plant...there are many meters of these materials between the radioactive source and people outside....this is why you can stand beside a nuclear reactor when it is operating. I do it everyday at work.

You can also get exposure by ingesting radioactive materials...again easily avoided... don't eat it.
Ah, ha you say, but isn't the real problem long term health effects. Aren't these people going to get cancer and die later on. Simple answer: NO Survivors from the atomic weapon attacks on Hiroshima and Nagasaki give us the best clue of this. It is a misconception that people died from
radiation in those cases: it was primarily the explosion itself and subsequent fires that killed people. The health of survivors was very carefully monitored because they received very large acute doses. In reality, their radiation exposure barely passed the threshold for causing increase in long-term chances of getting cancer compared with the general population. Unless you get nearly fatal radiation exposure, it is not possible to measure the effects of low-level radiation on long term human health. Again, this is almost certainly because we evolved in this radiation environment.

4) Let's quantify the problems at the nuclear plants. Because of the lack of cooling water, fuel rods have been exposed both in the cores and (probably) in the outside cooling pools. The radiation levels right up beside these radioactive fuel rods would pass the threshold for danger, which makes repair difficult. The biggest danger for workers has not been nuclear radiation: the fuel rods get hot and start to "burn" chemically with air. This releases explosive hydrogen. The explosion shown on TV at the plants were NOT nuclear explosions, but more like the Hindenburg. One of the explosions killed a worker. Workers are simply kept away from being in close vicinity to the exposed rods to limit their radiation exposure. Finite amounts of radioactive materials have been "mobilized" by all of this.. this means that it gets into the air and is carried by wind to other locations. Luckily the wind has mostly pushed this out to sea. This is the source of radiation exposure to the general public. What are the levels? We'll go through a few example headlines (paraphrased) and look at the reality:

"Plant workers sacrificing their lives in nuclear catastrophe"

The largest radiation dose for any worker inside the power plant was under 200,000 micro-sieverts. This means that all workers remain below the health and regulatory threshold for adverse health risks.

"Nuclear disaster increases radiation by 100!! We're all going to die!!!"

The present data shows some increase in close vicinity to the plant. Most of the readings are actually near 1 micro-sievert per hour...that is at the background level! The largest jump has been to about 100 micro-sieverts per hour right at the boundary to the site. So while it seems alarming (a factor of 100!), in fact it is well known that this has no measurable negative effect on human health at all.

"Radiation found in food!"

This invokes long-term poisoning of all the area, with sick kids, etc....WRONG The excess in radiation was easily detected in some spinach from nearby fields. You would have to eat kg's of this spinach every day for an entire year to get the same dose as from one CT scan...which itself has no measurable effect on human health.

"Radiation cloud reaches US West Coast"

This apparently cause a panic buying of iodine pills....ABSOLUTELY RIDICULOUS Because radiation is so easy to detect, you can find very minute changes in radiation type. What was measured is about 1/billionth the level of even the most conservative protection against radiation. You will get more radiation by taking an elevator to the top of a tall building.

Again, I in no way trivializing the accident. The situation is looking better there and will continue to evolve. There will be much work in safely containing the exposed fuel.

I hope this helps put these recent events in the proper perspective.

cheers

Dennis

Glossary:
TMI: Three Mile Island
PWR: Pressurized Water Reactor (the type of fission reactors at Fukushima)
fuel rods: the assembly of fissile materials and cladding which is inserted into a fission reactor
spent fuel: the same assembly which is removed after about 1-2 years in the reactor and
left to cool. This is often called "nuclear waste" but in fact is mostly unspent Uranium fuel.
spent fuel pools: basically a swimming pool of water in which the spent fuel is kept
decay heat: fission produces a complex chain of nuclear isotopes, some of these decay
by radioactivity into more stable isotopes, which releases heat.

Review... Review...

Well, much has happened since my last post... (And it appears that my picture choice had some preordained message attached to it...)

So where are we?

Japan pledges financial stability after earthquake

Last Friday’s devastating earthquake and the deepening nuclear crisis has rocked the world’s third-largest economy and will have an impact around the globe. But the Bank of Japan has pledged to ensure financial stability by injecting record amounts of cash into the banking system while the G7 agreed to intervene in currency markets to weaken the soaring yen.

Factories producing everything from semi-conductor chips to car parts have shut down or are prepared for rolling blackouts, threatening supplies to manufacturers across the globe. With damages estimated at up to US$200-billion, economists anticipate a contraction in Japan’s second-quarter GDP, and then a sharp rebound in the latter half of 2011 due to reconstruction investment. (Emotions overplay the facts after such chaotic events.)

In Canada, wholesale sales rose 1.5% in January over December, gaining for a sixth month. Manufacturing sales jumped 4.5%, reaching their highest since October 2008, driven by the auto and aerospace sectors. Labour productivity rose last year at the fastest pace since 2005, but still lagged behind the U.S. as a strong loonie pushed up costs. Household debt nudged lower as Canadians cooled their borrowing in the fourth quarter of 2010 and average net worth rose 4.1% to beat the pre-recession peak set in 2008. U.S. jobless claims fell, marking the third decline in four weeks. Employers added 192,000 jobs in February, causing unemployment to drop to 8.9%, the lowest since April 2009.

*Leading indicators suggest growth in developed nations – particularly Germany, the U.S., France and Canada – and a slowdown for China, India and Italy, according to the OECD.

**The migration from pessimistic pricing to optimistic pricing continues on....

***Macro view of this cycle: Started March 2009 - Peaking somewhere in 2012. (Seasonality is in play... Watch to move from Energy weighting to other sectors as the old "sell in May, go away" mantra takes hold.


Comments and Recommendations:

Equities: “not to minimize the human tragedy in Japan, this sell-off is healthy for equity markets and investors should be looking to add to positions on this bout of current market weakness.”

Fixed income: “Term Call – we recommend investors move further out the yield curve to a market neutral duration position. Sector Call – underweight Canada, overweight Municipals, Provincials, and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – overweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

Portfolio Strategy: “we don't expect the pullback to exceed the 10% mark as we doubt the Japanese situation triggers a global recession.”

Best Regards and Safe Investing.

E.

Big Picture - Where are we?

Equities:

The market has proven to be remarkably resilient and remains overbought; I still believe a modest pullback is likely and would ultimately be healthy for the longer term sustainability of positively trending equity markets.

Fixed income:

Term Call – recommend investors move further out the yield curve to a market neutral duration position. Sector Call – underweight Canada, overweight Municipals, Provincials, and Corporates. Currency Call – recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – overweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.

Portfolio Macro:

It is too soon to chase defensives and prefer raising cash instead. Focus is now in Financials, Tech, and Industrials. Look beyond the borders in emerging market opportunities.

***Indicators and Bubble Watch

Food prices soar; poverty rises
Corn prices surged to their highest since July 2008 after the USDA slashed its domestic and international forecast. Agrium’s quarterly profit rose as high grain prices fueled demand for fertilizer. The World Bank reported that higher food prices have pushed 44 million more people into extreme poverty since June 2010.

IMF warns U.S. to cut deficit and debt

The U.S. is putting the global recovery at risk for failing to take its debt seriously, according to the International Monetary Fund. In its report, the IMF says that “a continued absence of credible medium-term fiscal strategy threatens to eventually drive up U.S. interest rates, disrupt financial markets and adversely affect global prospects.” The U.S. deficit is nearly 11% of GDP, the widest in the G20.

Middle East unrest adds tension to global markets
Global economies continued to recover in February, but events in the Middle East added considerable tension to markets. Anti-government uprisings toppled regimes in Egypt and Tunisia, and protests broke out in Libya, Yemen, Bahrain and even Iran. As Libya shut down its oil production and unrest threatened to spread to other oil-producing nations, investors worried that rising oil prices could derail the global recovery.

Global trade returns to pre-recession levels
Global trade has recovered from the recession, driven by emerging-market exports and imports, according to the Bureau for Economic Policy Analysis. The volume of world goods traded surged 15.1% in 2010 after contracting by 13% in 2009. Goods traded in December exceeded the previous peak in spring 2008.

Summary:

Everything seems to be following along nicely to historical performance expectations during this Presidential Election Cycle. We are watching closely, and expect to be participating fully in the equity markets over the next 3 quarters. As we enter the 2012 election year, risk management will be our paramount concern. (Employing a 50/100/200 day M.A. strategy or setting stop-losses will be key)

*Remember - Looking back over history, stimulus is usually always reduced after the election. Other things such as tax and business reform also come in to play. Both have always led to a somewhat immediate correction in the equity markets.

Back to Life....

After 3 long months hiatus from the investment community, I have finally selected my next home... Scotia McLeod. They are, what I believe, the most entrepreneurial of the bank owned investment firms, and I am incredibly excited to start building my empire along side some key individuals who are among the "best of the best" when it comes to areas of insurance, estate, and progressive portfolio council. (As always, the team is key)

I will quickly be following up with details on my investment philosophy and all the work that my mentor and I have been pushing forward over the last few months. We are in a very important part of the presidential election cycle and caution must be taken. The animal spirits are alive and kicking up a storm. Perceptions in the stock market are taking more bullish forms each day. It's amazing what can flourish in an environment where fundamental strength is non-existent, and yet the crowd wants to believe in what it sees... So up we go.

Risk management is the song we must sing.