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2011-12-15T09:50:00.000-08:00

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

2011-11-23T12:07:00.000-08:00

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

2011-11-07T12:11:00.000-08:00

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)

2011-09-15T07:34:00.000-07:00

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.

Summer comes to a close...

2011-08-30T13:49:00.000-07:00

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.

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

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

2011-07-04T11:40:00.001-07:00

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!)

2011-06-30T07:27:00.000-07:00

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

2011-05-19T10:42:00.000-07:00

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.)

2011-05-17T10:26:00.000-07:00

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.

Sell in May and Go Away...?

2011-05-05T11:25:00.000-07:00

"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...

2011-04-15T13:35:00.000-07:00

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...

2011-03-21T10:42:00.000-07:00

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...

2011-03-18T09:03:00.000-07:00

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?

2011-03-04T08:44:00.000-08:00

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....

2011-01-24T13:42:00.000-08:00

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.

How To Guarantee Income In Retirement...

2010-10-05T07:22:00.001-07:00

The importance of Yield.

2010-10-05T07:03:00.000-07:00

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...

2010-09-29T06:48:00.000-07:00

*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.....

2010-08-09T12:52:00.000-07:00

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.

2010-06-25T10:02:00.000-07:00

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

2010-06-18T07:40:00.001-07:00

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."

2010-05-31T10:32:00.000-07:00

"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)

2010-04-30T06:12:00.000-07:00

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.

2010-04-12T07:50:00.000-07:00

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:

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

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.

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...

2010-03-19T07:24:00.000-07:00

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....

2010-03-01T12:49:00.000-08:00

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.

2010-02-18T06:29:00.000-08:00

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...

2010-01-28T09:00:00.000-08:00

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.

2010-01-25T10:11:00.001-08:00

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?

2010-01-04T07:23:00.000-08:00

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.

Investing Focal Points... and a loving reminder.

2009-12-16T10:43:00.000-08:00

In an inflationary world, stocks outperform bonds, and long-term bonds fare particularly badly.
Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies.
Chinese equities will continue to offer their outsized gains over the next several years, even after the amazing run thus far in 2009.

Most experienced, successful investors try to maintain a levelheaded approach to their portfolios. They try to observe the same principles through good times and bad. They try to rely more on historical perspective than on an analysis of day-to-day news developments. They stick to high-quality investments and they resign themselves to the fact that some market downturns will take them by surprise. They willingly take on some risk, however, because they know that this brings the opportunity for growth, in dividends and in capital.

Less experienced (and, generally, less successful) investors set out with the same goals, but often fail to attain them. Lacking historical perspective, they see great importance in every news release and prime rate change. This, though, can sabotage their efforts, by making them lose sight of the overall picture.

In times like these, for instance, with media reports of poor credit ratings and companies going bankrupt, some inexperienced investors quit thinking like investors. Instead, they start to think like bankers. Instead of looking for opportunity, they devote themselves to avoiding risk. This ensures they'll miss out on opportunity. When investors think like bankers, after all, they forget that they're trying to limit losses, not avoid them altogether. If you let yourself be cowed by the possibility of loss, you just might sell out when risk appears to be greatest — when prices are at the bottom. That's when you ought to be holding on, if not buying.

Mr. Bernard Baruch, who made a stock-market fortune in the first half of the twentieth century, used to advise investors, "Don't try to buy at the bottom and sell at the top. This can't be done, except by liars." However, many successful, experienced investors do manage to avoid selling at the bottom and do avoid buying at the top, most of the time. They do this by following a level-headed approach through boom and bust and by sticking to what we refer to only half-jokingly around the office as 'that old-time religion' — gradually buying a balanced, diversified portfolio of high-quality stocks and sticking with it for long periods.

The funny thing is that bankers make the opposite mistake. They too can profit from a levelheaded approach and historical perspective. For traditional bankers, this comes down to trying to avoid as much risk as possible, at all times. After all, the best that a traditional banker can hope for is to get the bank's money back, plus interest. At market tops, however, some bankers start to think like investors.

Instead of avoiding risk, these bankers start to fret about missing out on opportunity — and missing out on huge bonuses. They make high-risk bets in hopes of striking it rich rather than sticking to tried and true lines of business. Indeed, the management of investment-banking firm Lehman Brothers and Merrill Lynch bet their companies' futures — and lost.

If you do try to time the market — to buy at the bottom and sell at the top — then you need to think like a banker or an investor, depending upon financial conditions. When profits and stock prices have risen for some years and everything looks rosy, think like a banker — focus on risk and dwell on what it will cost you if something goes wrong.

In times like today, however, when profits and stock prices are down from their peaks, you should think like an investor. Get used to the idea of taking on risk. But deal with it by gradually buying a diversified portfolio of dividend-paying, high-quality stocks. Recognize, too, that stock prices already reflect most of the risks you hear about in the media.

As an investor, you should observe the standard rules. But you also have to keep opportunity and the prospects for growth in mind. After all, that's what makes it worthwhile to be in the stock market. It also protects you from another less-obvious risk: running out of money before you run out of time.

The Immutable Principles of Energy

2009-12-01T08:01:00.000-08:00

Jim Halloran, a financial analyst of the oil/gas industry now with Russell Energy Advisors at Financial America Securities, recently sent along to his various contacts something he came up with called "The Immutable Principles of Energy". I liked it, and thought it was worth passing on verbatim to readers of my blog:

1. Never confuse reserves with production.
2. The biggest, best fields are discovered first.
3. Commodities are priced at the margin – the last 1% dictates the price.
4. E&P companies are serial destroyers of capital. Any appearance to the contrary is a temporary aberration, usually due to hoped-for, unsustainable pricing gains.
5. More than any other sector, time is money with respect to Energy.
6. The more efficient we become in our use of energy, the more we will use (Jevons’ Paradox).
7. The more society expands and demands greater access to energy, the more it will create roadblocks to its delivery.
8. We desire six qualities in our energy sources: 1) Affordability (cheap); 2) Abundance; 3) Reliability; 4) Purity; 5) Universal access; 6) Environmentally friendly. There is no set of circumstances under which all of these can exist simultaneously.
9. There exists at least a “$2 differential” between crude oil and competing sources of energy, regardless of the price of crude oil.
10. In dealing with OPEC, pay attention to what its members do, and give little heed to what they say.
11. Governments look at energy fields as sources of revenue, not as sources of energy:· Governments have a disincentive to promote efficiency/conservation· Income streams will be protected as to magnitude· Long-term energy planning is incompatible with political realities.
12. Once a field goes into decline, it will not increase production beyond this peak in the future without capex infusions that will prove to be uneconomic.
13. Crude oil is universal. The price you pay for gasoline is determined more by the small producer in Colombia than by the Wal*Mart on the corner.
14. Natural gas is local. The price will continue to be set by continental production even after the lawyers have given up fighting the LNG terminals.
15. The media know nothing about the oil business. The more strident the published predictions of a price extension above (below) extreme levels, the closer the oil market is to a temporary top (bottom).
16. “It’s always something” - Roseanne Roseannadanna

Investment Idea: Nuclear Energy... No-Clear Waste?

2009-11-23T08:45:00.000-08:00

Nuclear energy.......

True foresight may lead you to buy into Uranium now.

The Democrats have always traditionally been the ones to stand in the way of any forward momentum for pursuit of this energy, but with this financial crisis (very large to see an absolute fix by Obama’s 4th year in office), general discontent in the public may see another Republican in office next election. This will once again put Nuclear back on the front page.

There was an interesting article in Esquire regarding Eric Loewen and his Sodium FAST Reactor which is gaining traction. Interesting because this reactor produces energy from the waste produced from nuclear reactors (which is the number one hurdle for the pursuit of nuclear energy to begin with). So what is nuclear waste? It's still 99% uranium and It's still usable. But 1% is transuranics. (Which are very fast neutrons that make fission very difficult and dangerous, but with these fast reactors, can be slowed down for viability... Since no CO2 is released with nuclear, what other energy source in the world is there for a true game changing event?)

So, near-term easy fossil fuels aside, investing in a uranium miner or 2 might be an ideal path to follow.

Also Lithium, due to its small global supply along with the recent and exceptional increase in electrical motivation by Global auto producers, but that’s another story.

Cheers.

PS. Here’s the link to the FAST reactor article. A very interesting read. (Found in Esquire of all places...)

http://www.esquire.com/features/best-and-brightest-2009/nuclear-waste-disposal-1209

A good lesson...... An interesting reminder.....

2009-11-20T10:23:00.000-08:00

One of the fantastic things I enjoy most about travelling is viewing the magnificent architecture. Witnessing the great dramatic feats of human ingenuity is something that resounds within me, and my passions involving the great themes of historical endeavor tend to coincide with many stories in the industry of wealth management.

A fine example was seeing the Sydney Harbour Bridge in all its glory. I marvel at the fact that it was built at a time when there was about 4 cars in Sydney (or was it 5?), and officially opened in 1932. These days about 160,000 vehicles use the bridge each day. What amazing foresight they had way back in the 1920's when they began such a project! There's a lesson in that for us all: Live in today, and for today! But make sure to plan and allow for the future!

Why Should I Have An Investment Advisor?

2009-11-16T12:01:00.000-08:00

Twenty years ago, before the creation of CNBC and before the media spent as much time as it does now on market watching, investors had more difficulty getting economic information and market impact assessment. This lack of information gave investment dealers, fund managers, and other larger-scale investors a relative advantage. Today, investors have access to much of the information available to institutions, although that has not altered the importance of in-house economic research. In fact, today’s market participants are so inundated with information that the quality of the analysis is even more important; investors must sort out useful information from misleading or worthless information.

Unfortunately, the media does not always explain what is behind reported numbers either. Media sound bites tend to be superficial and often miss the most interesting or meaningful aspects of the particular event or data release. For example, the media may report that retail sales are strong, without explaining whether this strength is the result of outstanding performance in just a few categories or good performance in a broad range of categories. An advisor's role is to take a closer look at the numbers and brief their clients on the broader implications for specific sectors of the economy and forecasts.

Market participants sometimes use the word noise when discussing certain economic releases, which means ambiguous messages from a single report or mixed readings from a series of releases. Noisy data can hide the real direction of an underlying variable or of the economy in general. Advisor's use many tools to filter out the noise, including seasonal adjustments, moving averages, and trend analysis. Short-term fluctuations in the data may provide investors with tactical trading opportunities as market participants react to monthly changes in the data. It is important, however, to be aware of long-term trends to properly position the strategic asset allocation mix.

This is the underlying goal of any sound portfolio strategy, and one that needs continual guidance. Which is also where the professional advisor truly earns his keep.

Regards.

Don't sell!! - Seven reasons to remain positive on Equities.

2009-11-03T10:35:00.000-08:00

1) Macro outlook
We still believe that 2010 GDP growth will come in close to 4% globally and 3% in the US. The latest ISM report supports this view, with the headline index, at 55.7, being in expansion territory (i.e., above 50) for the third consecutive month. The figure is consistent with GDP growth of about 3.1%. We also note that the ISM employment component had the biggest monthly gain since 1983.

Admittedly, the new orders component has fallen for the second month in a row. However, a slowdown in ISM new orders 9 months into a recovery is perfectly normal (and typically lasts 3 months) and in 11 out of the last 15 ISM cycles, ISM new orders has then carried on to make new highs. And on these occasions equities also did well (apart from the 1 month after its initial peak).

2) Earnings
The Q3 results season in the US is close to being the best ever, in spite of revenue expectations for 2009 still being below levels of 3 or 6 months ago.

3) Many credit & macro indicators are at levels they held when equities were 25% higher
Equities have continued to lag credit. When high yield spreads and credit spreads were last at current levels, the S&P 500 was 25% and 30% higher, respectively.

4) Valuation
All our long-term valuation measures show equities to be broadly in line with their longterm averages. -One favoured measure is the equity risk premium. This is currently 4.4% on trend earnings, compared to a long-run average of 3.6%. If we were to input consensus earnings, it is a
much higher 5.5%.

5) Positioning
Retail investors are still cautiously positioned on our data. Money market funds are at 27%
of market cap, compared to a long term average of 19%. Since the start of Q3, retail investors have been net sellers of equities ($4bn), but net buyers of bonds ($166bn) – with $270bn of outflows from money market funds Our model of retail buying of equities (based on the gap between the bond and the earnings yield as well as price momentum) suggests retail should indeed be buying equity.

6) Excess liquidity is close to an all-time high
Excess liquidity – global narrow money minus IP growth - is close to an all time high… it will slow, but excess liquidity tends to be good for financial assets. -According to the IMF, only 26% of announced quantitative easing has yet to be implemented. In the US, there is another $326bn of QE to be implemented, although the Fed have just finished their programme of buying US Treasuries.

7) Tactical indicators
The equity sentiment indicator (based on VIX, put/call, skew, inflows into aggressive growth funds) is high, but not as high as in 2003/4. Historically, the S&P 500 has performed well after the equity sentiment indicator hit current levels.

A Side Note: Focus on high dividend yield with positive earnings momentum.
High dividend yield was the best performing style in the first 18 months of the last bull market. The earnings momentum style has recently started to outperform, after underperforming between the March market low and September (just as it did in the first 5 months of the last bull market) and the style looks abnormally cheap.

(Above mentioned courtesy of C Suisse Global Equity research report - Nov 3, 09)

Approaching The End Of October.

2009-10-28T11:19:00.000-07:00

3 days of falling markets and all of a sudden Halloween may look to be a little scarier this year. I'll admit that being contrarian to the contrarians has paid off this year, and that our fully invested strategy of picking up growth at cheaply valued prices has allowed us to bulk up during these tumultuous times. Is this the second wave that everyone was waiting for? The second opportunity for those who sat the sidelines in shell-shocked disbelief as markets ran for the better part of this year?

Seems agreeable to think so... Or maybe it seems easier to think so... For nothing effects us as investors worse than that of hindsight. Of seeing lost opportunity, and inadvertently dwelling in dismay of the riches we should have made. But remember, hindsight may embolden you to sway from your plan and fall victim to the emotional roller coaster.

To be led, or to lead...

That is a million dollar question that defines overall success in ones investment strategy, and is the question I ask myself every day before picking up that newspaper, or turning on the "talking heads" of business television. It's worth it's weight in gold to ask this question when fighting the urge to act emotionally. This is something I value in the actions of other professionals in my field who manage to tame this beast and stick by their convictions.

The following is an excerpt from an email a colleague sent to me regarding the fall in the market of late. I hope it helps you to see past the influence of negative bearish sentiment that has been unleashed by many in the media lime-light:

"I just wanted to share something I saw on the CNBC website. They were four headlines:

- Fast money traders say tech decline may mean bull dead.
- Art Cashin says dollar decline carry trade could cause BIG pullback.
- Stocks are at least 20% overvalued....Rosenberg.
- Doug Kass says markets have made highs for year.

Almost makes you want to sell everything. I would resist that temptation as all of these headlines are very bullish. You may find 2 out of 10 people that are bullish. That is a perfect scenario.

It amazes me that tech can act so well since March and they start to correct which is very healthy and the fast traders are calling for their demise. Art Cashin has been bearish for the last 150 S&P points- eventually he will be right. Our good friend at Gluskin has been bearish since 666- not good. And Doug Kass who made a fantastic call in March sadly decided to get off the train at 950 S&P and so he is reiterating his bearish call made 6 weeks ago.

We are currently down 3.4 % on the S&P from recent high and as we all know, the avg. % drop since Mar 9 has been just over 5%. Even if we get a sharp short pullback to 1000 which would be just over 9% just like the June- July selling period, don't be deterred. Stay the course, stay invested as the S&P will likely continue to foil the bears and close 2009 upwards of 80 % from the March lows.

Have a great day. Happy investing." - Cheers.

My Burgeoning Philosophy.

2009-09-22T07:18:00.000-07:00

People always ask me what my minimum net-worth standards are for clients, and I always respond with; "that depends... The nature and culture of my firm dictates that the ideal client has a minimum of $1M in investible assets (could be household), or has other dynamics like the young professional family with rather large income streams (IE. Great growth potential), or a focus on an entrepreneurial business owner who may not have the largest asset base to begin with, but the bulk of his money is in his business that he will one day sell, triggering a special event in which my services are definitely of added value."

Quite the mouth-full... I hear other advisors speak about their ideal client and they can usually spit it out in 1 quick sentence. The more I look at it, the more I don't want to define my clients by minimum net-worth standards, but by someone with integrity, honesty and respect. Someone who is interested in receiving and willing to act on good advice, and who is willing to sit and share thoughts and insights on family, friends, and anything else of true value to them.

The following is a quote I recently read from a top Canadian advisor publication that I find truly sums up my own thoughts regarding my place in the industry, and how I define myself as a wealth manager:

"When an investment advisor looks at the glass of water, he will tell you that it is half full, and is filling up quickly so you should buy a bigger glass. An insurance agent will warn you that a half-empty glass leaves the future uncertain so you should insure against possible consequences. An accountant will tell you that you paid too much for the glass because it is too big. My goal is to ensure my clients have considered all these issues, focusing on the importance of the water, not the glass." (Courtesy of Mr. Blair Corkum, Corkum & Associates)

No one's cornered the market on the best strategy.

2009-09-18T08:03:00.000-07:00

It's interesting that as of late I have been receiving phone calls and emails from clients who are questioning the recent run in the markets. It is the old "sky is falling" reverberation that one sees when markets trend a specific way. We keep hearing that we're in for a lot of short-term volatility so just picking good stocks is no longer enough, and that utilizing a bottom-up method of selecting quality companies will no longer work in this economic environment... I found this article from Tom Bradley at the Globe and Mail really hits the nail on the head when addressing this very question. Enjoy...

Tom Bradley -The Globe and Mail 09/09/2009

I feel like I'm really up to speed right now. With the lousy weather in Ontario and Manitoba cottage country, there's been more time for reading. And while I still can't tell you what “quantitative easing” is, I've firmed up my view on all kinds of other topics.

I'm convinced that to get out of this debt crisis, we have to come up with a strategy that doesn't involve people borrowing more money. China is not the star that everyone says it is – it's easy to look good when the government is spending like a drunken sailor and the credit tap is wide open. And perhaps our first step toward a greener economy should be the better use of all the natural gas we have.

I love thinking about the big-picture stuff as much as the next investment geek, but the problem is, I don't know how I'm going to make money from it. At the end of the day, I'm still a believer that the most reliable way to add value to an indexed portfolio is to work from the bottom up. In other words, build a concentrated portfolio that doesn't look like the index, one security at a time. Each time, attempt to buy something that is worth considerably more than it trades at in the market.

But I read something this week that threw me for a loop. In his latest musing, Ira Gluskin, the soon-to-retire but never retiring president of Gluskin Sheff, was outlining why his firm is putting an increased emphasis on asset mix and had added economist, strategist and industry rock star David Rosenberg to their team. Mr. Gluskin said: “There are the holdouts who claim that they just select the best stocks around the world, regardless of industry [or country]. They are true antiques.”

“ My first reaction to his statement was one of indignation. Hmmph.”

My first reaction to his statement was one of indignation. Hmmph. Mr. Gluskin goes over to the dark side and suddenly all his old philosophical buddies are misguided and out-of-date. Relics we are!

But after I got my fragile ego back in check, I thought I'd better give Mr. Gluskin's view careful consideration, because he is one of the leading thinkers and thought provokers on Bay Street, and was writing great stuff when Mr. Rosenberg was still in school. He is of the view that short-term volatility will be with us for a while and just picking good stocks is not enough. “We wanted better strategic advice on where events are heading.”

Let's take a step back. In reality, investing involves a combination of the “bottom up” and “top down” approaches. Even pure stock pickers have a general awareness of the overall business environment when they're doing their company research and valuation work. And after the macro investors choose their direction, they still have to select securities to execute their strategies (unless they're indexing).

Nevertheless, the approaches are profoundly different. The “high elevation” investors focus on economics and broad market factors, including valuation. Their big-picture conclusions determine which sectors and/or countries they will invest in. The security selection falls out of the macro work.

That's opposed to the managers skulking along the bottom (dare I say dinosaurs), who let their fundamental analysis and valuation work determine when to buy, hold or sell a stock. The country and industry weightings in their portfolios are the result of where they find the most undervalued stocks.

Too often other issues get mixed in with the top-versus-bottom discussion, specifically the merits of “buy and hold” strategies and the importance of asset mix. That's unfortunate. Equating bottom-up to “buy and hold” is just not appropriate. Certainly some stock pickers have low turnover, but others actively trade their portfolios. Top-downers vary greatly on this measure as well.

As for asset mix (stocks versus bonds versus cash), neither side will dispute that getting the strategic or long-term mix right is the most important thing an investor does. Where the big gulf between the enlightened and the prehistoric lies is in how actively that mix is managed, and how far they are willing to stray from the long-term targets to pursue shorter-term tactics. It's in most top-downers' DNA to be more active and make bigger bets, which prompts a number of questions. Is it possible, with the likes of Mr. Rosenberg, Jeff Rubin or Patti Croft at my side, to get it right consistently enough to add value? Does all that work lead to too much tinkering? Will it distract me from finding undervalued securities and prevent me from buying them? And can I use my budget for risk more effectively elsewhere in the portfolio?

I'll keep noodling on the issue since, in my experience, ignoring what Mr. Gluskin says is usually at one's peril. In the meantime, my fellow antiques and I will continue to make sure our clients' strategic asset mix fits with their objectives. We'll devote most of our resources to finding undervalued bonds and stocks. And we'll try to get the big picture by watching long-term term trends and ignoring anything to do with the next three months.

Cheers.

7 Top Ways Millionaires Become Wealthy - Courtesy of Steven Mattos

2009-08-24T09:52:00.000-07:00

There are 7 common factors to those who build net fortunes of one million dollars or more. In America, there has never been more personal wealth than there is today; yet most Americans are not wealthy. Amazingly, a mere 3.5% of households own almost one-half of the wealth in the United States! Although we may be hard working, educated, moderate to high-income earners, why are so few of us affluent?

In studying the affluent, I found a pattern that the wealthy follow. It is more often the result of planning, hard work, perseverance, and self-discipline that determines who become wealthy. The factors compiled here are summarized from the research done by Thomas Stanley Ph.D. on over 1100 actual millionaires (many are multi-millionaires) in the U.S. today.

1) Live Well Below Your Means
Don't be fooled. The ‘average' millionaire doesn't look like a millionaire! The key word here is frugal, frugal, and frugal. The typical person is America is a consumptionist. It's in our blood. We work hard, make money, and spend it well. Not the typical millionaire! They play great defense (saving and investing) as well as offense (making money). Just like in football -- great offense is exciting…but great defense wins games. An interesting note: Millionaires on average claimed their spouses were as frugal or more than they were. It's a family affair: Sacrifice high consumption today, for financial freedom tomorrow.

2) Spend Your Time, Energy, and Money in Ways that Build Wealth
Although the road to Millionaire's Ville takes a frugal path, they pay well for training and advice. Do investment planning. Go to seminars. Hire good attorneys, tax accountants, mentors and coaches. Learn to identify and invest in assets that produce income. The wealthy spend money when the investment will protect and grow their assets. Millionaires also know the details: How much is spent each month and on food, clothing, and shelter. The non-wealthy say they don't have time to plan, while the wealthy make time to plan. But here's the shocker: The average millionaire spends 8.5 hours per month planning, while the non-affluent spend 4.5 hours or less planning. How can 4 more hours per week impact your future? Make it happen and the odds are in your favor of joining the truly wealthy!

3) Choose Financial Independence over Displaying High Social Status
The wealthy run highly efficient operations both in business and at home. Most live in average neighborhoods, and drive average cars. They're not interested in keeping up with the Jones' -- because the Jones' aren't financially free. It takes lots of energy to consume big mortgages, change homes every few years, buy the most recent model cars, and wear the latest fashions. The wealthy drive typically American made cars! Japanese cars come in 2nd place; half of these are Toyota Camry's. Yes, significant value per dollar is the key here. The Millionaire's Motto: You aren't what you drive. The status cars -- Lexus, BMW's, Mercedes? At 6.4% or less per each brand.

4) Don't Accept Economic Support from Your Parents once Outside the Home
Sounds painful doesn't it? It's a fact that has taught the wealthy how to earn, keep, and invest money. Parents of the wealthy do not, or cannot, provide "economic outpatient care". The results are clear: The more dollars the adult children receive, the fewer they accumulate. Those who are given less are motivated to accumulate more on their own merits. An amazing fact: 80% of millionaires are first generation millionaires; they have made their money on their own, in their lifetime. Many of these folks have been immigrants to the U.S., starting out with minimal cash on hand. Work hard to learn and generate wealth--it CAN be done, and happens in America every day.

5) Teach your children to be economically self-sufficient to foster a "Wealth Mind-Set"
Provide your children fish and they will eat for a day. Teach them to fish and they will eat for a lifetime. As you might guess, children who grew up to be affluent, who had affluent parents, were taught to be disciplined and intentional with their money. Robert Kyosaki, author of Rich Dad Poor Dad, didn't cave in when his son asked for a car at 16 years old, even when the neighbor kids were being given cars by their parents. He gave his son $3000, and a subscription to the Wall Street Journal, and a few books on investing in the stock market. Now Rich Dad's son watches more CNN than MTV. He has the motivation, and is getting an education that will provide him for a lifetime, well beyond his first car purchase.

6) Become Proficient in Targeting Market Opportunities
Find your niche, like the wealthy do. Follow where the money flows, and look for specialized opportunities. Why not target the wealthy themselves? Yes, they are frugal, especially first generation self-made wealthy. BUT…they spend openly on investing in themselves and their families. Investment advice and services, business training, software, tax advice, legal, medical, dental, health, real estate, and education are top priorities. They pay well for products and services that protect and grow their assets. Remember the majority of the wealthy are self-employed entrepreneurs. Followed by medical professionals and business executives.

7) Choose the Right Occupation
You now have a good idea of what the affluent do. 20% are retirees. Of the remaining 80%, most of these are self-made businessmen and women. Keep in mind that entrepreneurs are 4 times more likely to become millionaires than those who work for others. There is no one business, or group of business more likely to breed millionaire-hood. Some are lecturers, others medical professionals, farmers, small manufacturers, and corner mom and pop stores. The most important predictor is the characteristics of the owner, than the type of business. It's the winning combination of skills and attitude that hits the wealth target.

NOTE: The affluent attribute being honest with all people as the most important characteristic in their businesses, tied with being well disciplined. The vast majority of the wealthy were not stellar students, or born into money. They have made it through following a few simple principles and being consistent.

TEACH YOUR CHILDREN WELL OR ATLAS WILL SHRUG. (Courtesy of The Gartman Letter)

2009-08-05T13:41:00.000-07:00

Crosby, Stills and Nash told us that we’ve no choice but to teach our children well, and it is very, very hard to argue with that statement for who wants to teach their children poorly.

But sometimes they learn lessons for themselves, and a friend of ours sent us the following short story about a lesson concerning the US drift into socialism learned on their own by his two sons. Our friend wrote:

On the way home from summer vacation, my two sons (four and eight years old) were talking about staging a lemonade stand when they got home. The four year old who spends every penny he gets suggested that he should keep all the profits because his brother (who saves every penny) has a lot more money. As a lesson in behavioral finance I suggested that it sounded like a good idea. The eight year old then said the four year old can do it himself and he would not participate.

It does not get much simpler than this to see why socialism does not work.

ScottEbeling
CommodityTrader
Chicago, IL

Scott wrote later, after we’d asked if we could reproduce this wonderfully simple yet forceful story for our clients, that “You should have seen my [eight year old son… he was kickin’ and screaming, but eventually our taxes will get to a point where it is not worth the risk to put capital and effort into starting businesses and creating jobs, we will choose just to not participate.”

We are collectively near to the point of this eight year old boy’s anger and dismay over his four year old brother’s illogical demands, for we are being asked to pay huge and rising taxes to support those who chose not to work and we wish not to do so.

We’ve a responsibility to those who cannot work and for those to whom life has dealt a very bad hand. We have obligations to the infirm and the ill-treated, and we take those obligations very, very seriously, for we give graciously and willingly to charities of all kinds and at most times.

However we are not prepared, nor do we intend, to sponsor the “four year olds” who envy what we or others have made and think it is theirs to be taken from us. Obama and the Left are teaching our young an ill advised lesson that those who are wealthy owe money… large sums of money… to those who are not, but even eight year olds know a scam when they see one.

(Dennis Gartman - The Gartman Letter - Aug 05, 09)

El Nino... (Investment Opp?)

2009-07-29T06:53:00.000-07:00

Not that I really want to become a weather forecaster, but one of the things that commodity funds keep a close eye on, and I do too, is El Nino/La Nina events and their impact on commodity supply, prices and related equity performance.

Over the past few months there have been signs of a developing El Nino event in the Pacific and this could have important implications for supply and prices for several commodities over the next 12-18 months. The US National Oceanic and Atmospheric Administration expects the current event to last throughout the Northern Hemisphere winter and into 2010.

What is El Nino? It is an abnormal warming of surface ocean waters in the eastern Pacific which causes an oscillation of pressure patterns impacting weather conditions.

What are El Nino impacts?

• Reduction in rainfall in eastern and northern Australia, as well as parts of South East Asia causing drought conditions. A strong El Nino could result in drought in India, Indonesia and Malaysia. Very hot summer weather in northern China, flooding in southern China.

• Warmer winters in the northern part of North America and cooler in the southern parts. Wetter summers in the intermountain regions of the US. Depressed hurricane activity in the Gulf of Mexico.

• Warm and wet summers in western parts of Latin America (Peru and Ecuador) likely causing flooding. Higher winter rainfall in Chile. Dryer and hotter weather in the Amazon, Colombia and Central America with wetter spring and summer conditions in southern Brazil and northern Argentina.

Why is this relevant to commodities?

El Nino/La Nina trends generally impact supply of commodities, be that oil and gas, coal, wheat, soybeans, rice, etc

What are potential commodity impacts?

Oil & gas: El Nino generally results in depressed GoM hurricane activity which could mean limited supply curtailments this hurricane season, keeping gas prices depressed if demand doesn’t pick up.

Wheat: The last two major El-Nino events have resulted in significant increases in wheat prices during and after the event. This has come in no small measure due to impact of drought conditions in Australia on wheat production and yields.

Soybean: The last two major El-Nino events have resulted in significant increases in wheat prices during and after the event. Brazilian and Argentinean production of soybean has been impacted by drought and flooding in previous events.

Rice: The last three major El-Nino events have resulted in increases in rice prices during and after the event. Chinese and Indian rice production may be impacted by an El Nino event.

A Great Answer To A Great Question.

2009-07-13T09:44:00.000-07:00

There seems to be something wrong with the way oil is trading these days -- at least wrong if you believe it should trade based on supply and demand. Obviously, the fundamentals aren't changing as fast as the wild price swings. Much of this seems to be because the trading pits are dominated by trades of paper (financial) barrels of oil and not real barrels of oil.

Yet, you seem to be generally opposed to limitations on oil speculation. Why? And is the current method of pricing oil the best one we can come up with? Can't we come up with a better system? When I go to the store to buy other goods, the price doesn't fluctuate so wildly. Why do we have to price oil this way?

Stephen Schork (The Globe & Mail 13/07/09): I certainly agree that oil speculators impact the pricing of oil (and other commodities) in the short-run. Therefore, at times the price path does indeed decouple from the underlying fundamentals. However, in the long-run, markets will regress to the fundamentals. hence the Wall Street adage. markets fall faster than they rise.

I do favor certain new regs on speculative trading in commodities. For instance, there is a tremendous amount of derivative contracts linked to U.S. markets that are traded on the ICE exchange in London that do not come under the purview of U.S. regulators. For price transparency reasons I think that ought to change.

On the other hand, I do not like the idea of limiting oil speculation. Why?

The most important reason is that speculators provide an outlet for producers to sell risk. If you hamper the speculators ability to buy that risk then all you are really doing is forcing this systemic risk back onto the books of the producers.

Therefore, they will in turn become apprehensive when it comes to increasing their risk exposure to the market, i.e. it will retard their ability to increase their plant and equipment or said another way. it will hamper their ability to increase supply when demand warrants.

Thus, in the long-run, limiting speculation might decreased short-run volatility in the market. But it will only serve to increase it for all of us in the long run.

So... Where are we again?

2009-06-29T13:22:00.000-07:00

June has come to pass with the swift speed that only Father Time could attain, and here we are still watching as the tumultuous markets work through their innate differences in a most vexing fashion. The famous "sell in May and go away" adage did not apply, and as we look back from our semi-annual perch piecing together the sparse similarities of historical precedence to some how map our way in an effort to gain some long-desired foresight, we need not be afraid. For the markets ALWAYS have this stubbornly magical, yet preordained habit of moving from the lower-left to the upper-right. From morning to noon and into the night... (*This rhyme is best served with a recent Andex chart. Feel free to scroll down to a recent post of mine in which you will find a wonderful reminder of what markets tend to do)

Asset selection is very very important from this point going forward. Easy to say, difficult to apply. There are many different theories on what a portfolio should look like... How to "learn from this one and finally build something that will guarantee principle value retention." It seems to me that all of these sudden preservation and V&L shaped recovery strategies are an explosive way to market a short-term reaction to the problem. Whereas, I am really interested as to what those select few who have stayed to their original investment policy in the face of adversity are up to. As they tend to be the ones skating to where the puck will be, where the rest of those "reactionaries" are busy adjusting course to where the puck is going.

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years. The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow. Think about your future…

Moving on to a side-note.

In 2008, for the first time in human history, the majority of the world’s people lived in cities. And cities for the foreseeable future will continue to grow faster than the countrysides surrounding them. Globally, the number of people living in cities of 1 million or more will grow from about half a billion in 1975 to almost 2 billion in 2025. As a result, cities have assumed a central role in the urbanized world of the 21st century. They are wielding more economic power, developing greater political influence and increasingly employing more advanced technological capabilities to enhance their operations... This is an absolute and finite and indisputable reason why Globally competitive markets will continue their march from these lows. The continued urbanization of exisiting economic powerhouses, along with the creation of a middle-class in developing countries, will put a strain on supply and add to the demand for natural resources, services, and pretty much all industries across the board.

So, if the words of financial Armageddon have not pierced your heart and left you frozen in a state of asset-shock, then where do we begin? What story do you believe in? Look into your own portfolio and ask yourself these 2 questions:

- What investments do you want to own in the next 1,3, and 5 years?

- What are you concerned about for the next 1,3, and 5 years?

Alternative Energy? ♦ Municipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up? ♦ Monthly income? ♦ The dollar?

As the old guy next to me used to say: "A car could look sporty, but if it don't got it under the hood, then all that exterior jazz will just get blown off when the race starts..." So to should a portfolio need to have the best underlying story driving all the other parts, to not only finish the race, but to win the darn thing. It's the least you could do for yourself. Honest.

You're not as smart as you think you are... Investing Wisdoms.

2009-06-11T13:56:00.000-07:00

The following is from an email a colleague sent to me. It has great rhyme and reason, and I feel it is a great reminder for anyone who invests in the stock market.

Our emotions are our biggest enemy, at least when it comes to investing. We should all know this. If you don’t, stop making your own investment decisions right now.

Our emotions lead us to do the opposite of what we should be doing. They lead us to buy high and sell low. They make us excited when we should be scared, and scared when we should be excited. They make us slaves to the stock market; they let the market become our master.

The market is there to serve us, and not the other way around. It is okay to have emotions; we’re human, after all. But what we really need is an investment process. This is system of rules that we follow that keeps emotion in check.

Now, I hate republishing old articles. But a few, the ones that focus on the process, I’ll recycle (and improve upon) for a long, long time. I wrote the following article, in 2007. I included it in my book. I’ve shared it with readers in the past. And I even wrote the flip side of it in October 2008, addressing the impact of a cyclical bear market on out psyche by cyclical bear market.

I’m not offering it now to provide a hidden message that I think the current (cyclical) bull market is over. I don’t know that. I just want to remind you (and me) that a rising market has an impact on our psyche, our analysis and our decisions, and we need to be aware of it.

You are not as smart as you think you are; psychotherapy for (cyclical) bull markets
Lately I’ve been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret way to follow Will Rogers’ advice: Buy stocks that go up, and if they don’t go up, don’t buy them.

No, I didn’t get much smarter, and my stock-picking skills haven’t improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are the same way a bear market makes you feel dumber than you are.

Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make us careless. We forget about risk since we haven’t seen it in a while and focus only on the rewards. You have to actively make yourself aware of the four-letter word R-I-S-K!
How do you do that? My favorite way is to remind myself how dumb I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my errors.

We all have these stocks, the ones we lost a lot of money in because we were overconfident. We tend to forget about them during a bull market. But I suggest you remember them now, so you’ll have fewer of those names to remember in the future. Risk is still there; it is just hiding under the joyful sentiment of the bull market.
Believe me, it will show its ugly face. It is just a matter of time.

Discipline counts

In a bull market, it is easy to forget about selling discipline and then turn into a “buy and forget to sell” investor. Every time you sell a stock, you look dumb because it usually goes up afterward.

I recently sold several stocks. Shamelessly, paying absolutely no attention to the fact that I sold them, they went higher. I don’t feel smart about those sell decisions. However, when I bought those stocks, I set valuation targets. When they approached the targets, I quickly reviewed their fundamentals. They had not changed much. The decision was obvious — sell.

Cyclical bull markets teach us not to sell, while cyclical bear markets teach us not to buy. If you let the market tell you what to do, you have no process.
But the bell doesn’t ring when bull or bear markets are over.

You cannot worry about marking the “top” in every sell. My objective is not to buy at the “bottom” and sell at the “top.” My objective is to buy a great company when it is cheap and to sell it when it is fairly valued! I suggest you do the same.

-Courtessy of Vitaliy Katsenelson.

To Benefit From The Knowledge Of Historical Trends.

2009-05-29T11:58:00.000-07:00

There is a firm belief that the following is happening (or will happen) in connection with the current economic stimuli being applied to the global economy. I feel it is necessary to look into what the real effects of this stimulus are, without speculation or political suggestion driving ones conclusions:

1. Central banks worldwide are flooding the global economy with liquidity to stave off deflation and stimulate economic activity. This is particularly true of the United States, which is central to the global economy.

2. This monetary policy will result in a significant increase of M2 (typically viewed as the total currency in circulation, deposits and money market instruments or other cash equivalents), which will debase currencies, but in particular the U.S. dollar.

3. The price of gold will increase, anticipating the effect of the M2 increase and inflation.

4. The price of energy will increase, being an essential input of an inflating economy.

5. A more broad-based economic recovery will then begin resulting in a rise in share prices world-wide.

6. Insurance companies, which are more levered to the stock market (compared with banks)as a result of, among other things providing guaranteed returns on variable annuity products, will benefit next as their capital position backing those policies grows in connection with rising share prices.

7. Credit conditions will improve, lifting the prospects of banks globally.

*Current actions taken by governments around the world are designed to create an inflationary effect in the global economy, stimulating economic output and consumer spending.

*Historically, industrial output contraction has been followed by significant output increases which have driven economic growth and market returns.

Asset Allocation Designed To Benefit From An Economic Recovery:
Certain sectors and companies will benefit earlier and more substantially than others in the event of a market recovery. And it's within these names that you will find the greatest value and successes in rebuilding your portfolio holdings over the next 5 years and beyond. Once again, tactical, active management is needed now more than ever before.

(Due to licensing constraints, I will not be listing the individual names of companies I am following, but send me an email if you would like to hear more.)

Regards.

Bubbles To Recovery...

2009-05-12T08:03:00.000-07:00

I sat with a senior advisor and partner at my firm last week. The topic of the conversation was "bubbles", and the usual action/reaction process that takes place when they "pop". He was an advisor back in the 1970's, and he's quite astute when it comes to this particular subject. (This is also proven through his uncanny ability to miss each bubble-bursting that his taken place since... I.E. Dot Com, 9-11, LTCM, etc...)

Firstly there is a predictable behavior when bubbles reach their peak... That is, no matter who you are, whether you are a novice or an investment professional, the story ALWAYS sounds good and convincing. For example: In the dot-com bubble, anything "tech" related was a great story. "This company specializes in this", and so on... Eventually, everyone starts to see it as a very compelling idea. It is a trick on our emotional nature that, even though our rational minds are telling us: "OK, this company is run by two college kids, went public last week, no proven revenue, but is located in California and specializes in something computer related... This is crazy to even consider, BUT, Greg my neighbor has made 200% so far... And the technology they are developing is cutting-edge as they say... I'll do it! Sell the tractor, back up the truck!!!"

Bubbles:
They start as a reasonable, but unproven idea at a reasonable price.
They end as a sound proven idea, but at an unreasonable price.

Sound familiar? Look at the "potash" story. Great story. Feeding off of the "world food glut" problem. It also fits in nicely to the China and India story, whereby, China has the largest population in the World, and has a quickly developing middle-class who will demand higher grades of protein (beef, chicken, etc...) Imagine the economics that goes in to matching this increase in demand. It blows your mind. So, the developed world gets wind of this and follows the supply chain right back down to agriculture and of course the fertilizer companies. POW. You have a small fert company in rural Saskatchewan that suddenly becomes a heavy-hitter on the world stage, and a very large weighting on the Canadian Stock Exchange. (Eerily familiar to what Nortel did during the dot-com era... Look at Nortel now. Once worth a few hundred dollars per share, now in the pennies.)

Of course times are different now, and China hasn't even begun to wake from it's long slumber, so the story remains strong. (But, that doesn't mean we wont see future bubbles forming in this sector. We just have to be much more active in how we manage our investments. Passivity will surly lead to personal destruction in this new and interesting economic environment.)

After the recent "correction" we've experienced in the markets around the globe, the number one focus should be on recovery. The 5 year plan... Probably the most important 5 years your assets will experience for a life time. Let's look at 2 possible recoveries and the conditions that need to be met to succeed:

V-shaped Recovery:

“When a downturn in growth is followed by steep upturn”

Historical Precedence:
Zarnowitz Rule: Deep recessions are almost always followed by steep recoveries.
This was exhibited over the last four recessions. The shallower than average recessions of the early 2000’s and 1990’s were followed by shallower than average recoveries. The deep recessions of the early 1980’s and 1970’s were followed by steep recoveries.

Conditions needed for a V-Shaped Recovery:
Sustained recovery in U.S. consumer spending, including housing, autos and other durable goods with no significant increase in household savings. Significant Government spending and investment stretched out over several years. Significant increases in private investment. Strong export growth resumes, trade deficit shrinks further.

L-shaped (sideways) Recovery:

“When a steep downturn in growth is followed by several years of sluggish recovery”

Historical Precedence:
Financial & Global Recessions: An IMF study found that recessions caused by financial crises tend to be followed by slow recoveries. Similarly, recoveries from globally synchronized recessions are generally weak. After Japan’s real estate and stock market bubble burst in the 1990, its financial system was crippled. Economic growth averaged 0.5% over the next 10 years. This was dubbed the “lost decade".

Conditions needed for an L-Shaped Recovery:
Very sluggish recovery in U.S. consumer spending with a significant increase in household savings. Significant Government spending and investment stretched out over several years. Modest increases in private investment. Export growth resumes and trade deficit stabilizes.

Be Proactive Regardless of What You Expect from the Market:
What performed best going into the bottom will not likely perform the best coming out of it. Make sure you are comfortable with your asset allocation and security/fund selection. AND, if the story of something becomes too convincing, take a step back, maybe some profits as well, and watch for the inevitable bubble to grow and burst. With "preservation" being a key element to ones retirement future, having a bullish yet contrarian mind to these things may prove vital to your recovery. 'Luck.

Lets Talk Economy............. (Shall we?)

2009-04-29T10:37:00.000-07:00

The Sky Is Falling....

It must be true. It’s in the newspapers, on TV and the radio. The economy is in trouble. Stocks, mortgages, banks, insurance companies. All falling and/or failing.

But, falling from where? The biggest economic boom of all time? The biggest housing boom of all time? The easiest loan requirements of all time?

Business is not down, it’s just different. The media, with their mysterious ways of relaying half-truths and impartial information, have impressed upon us to graciously "miss the point", thanks in part to the number 1 controller of our actions: Fear.

For example, when you hear the negative statistic on the news that home sales are down 33%, it actually means that FIVE MILLION homes will be sold this year. The only unanswered question is: Who will get that business? The media portrays gloom when actually there’s still PLENTY of opportunity – just not as much as before.

The low hanging fruit of two years ago is now much higher in the trees.

There’s plenty of business in the marketplace – just not as much as there was during what was the biggest housing and economic boom of all time. As a result, businesses are adjusting to current market conditions. (And this is especially reflected in the stock market, which has been and will always be the leading indicator of commerce... Investors should take heed.)

Since no one can predict the future, and the economic growth or slowdown answers are not yet apparent, senior management must react to present-day situations. Finding those who are doing so should be a primary focus of investment strategy going forward... Survival of the Fittest! and all that jazz...

An Interesting Reflection...

2009-04-28T09:00:00.000-07:00

CAPITALISM STILL LIGHTS THE WORLD:

Sometimes images we see pass across our desk make cases for arguments far more perfectly and far more swiftly than any sum of words may or shall. One such is the “map” of the world compiled by amateur astronomers from pictures take from high
above the earth of the earth “at night”. We’ve included that “map” here this morning for the case is made that only the capitalist nations of the world are alight! One can see the US, Europe, Canada, Japan, the large cities of the coastlines of Australia, the lights of New Zealand, the major cities of S. America et al. One is even shocked by the “light” from India, and perhaps most fascinating, Israel stands out rather archly from the rest of the Middle East.

And then one sees the darkness that is most of Africa other than S.Africa and parts of Nigeria in the west. One sees the darkness of the Middle East. One sees the darkness of the “stans” in Central Asia…and one sees the utter and complete darkness that is the People’s Paradise of N. Korea. It is there, made evident by its complete and utter darkness.

(Co Of: Dennis Gartman - 04/28/09)

A Most Insightful Idea... (Courtesy of Brian Tracy)

2009-04-13T13:25:00.000-07:00

I felt the following is a great topic regarding the current state of the markets and economy in the US... Great because it is generally looking at a "solution", and not just the "problem". A refreshing read to say the least. (Posted by Brian Tracy on Mar 25, 2009)

There is good news and bad news in our economy today. First, the bad news: We are immersed in the worst economic situation of our lifetimes. As a nation, we have been on a spending binge for decades, spending money that we have not earned on things that we could not afford, and on terms that we could not pay for, to impress people that we don’t care about that much in any case.

Now, it’s all over. As Stein’s Law says, “What can not go on indefinitely, won’t go on indefinitely.”

After several decades of affluence, Americans fell in love with the idea that they were entitled to have the highest standard of living in the world while working at half-speed, wheeling and dealing, flipping properties and generally trying to “get-rich-quick.” Now, it’s all over, and it’s not coming back. We are living in a new reality.

The good news is that the US economy is still the most entrepreneurial in the world. Americans start more businesses per capita, register more patents and copyrights, create more breakthroughs in every field, graduate more students, and are simultaneously more positive and optimistic about the future than people in any other country.

The key to reversing our negative economic situation is for the federal government to allow the business community to “take off the gloves” and begin investing, producing and creating new wealth and new jobs.

The current federal bail-outs and massive spending plans are imposing a huge financial burden on our children and grandchildren. The latest estimate is that each person in America has been saddled with an additional $48,000 in debt that they will have to pay off out of their paychecks and through their taxes in the years ahead. The tragedy is that virtually none of this big spending will do anything to stimulate job and wealth creation.

Almost every dollar has been allocated to pet programs, give-aways, earmarks, pork belly projects, and social welfare. None of the money invested in these areas will create any real jobs. And most of the spending doesn’t start until 2010 and beyond.

Government has no money. The only money government has is the money that it takes away from the private sector, and from individual taxpayers. Government creates no wealth. It merely redistributes wealth away from the people who earn it toward the government sector.

For every job that government creates, it must destroy approximately 1.4 jobs in the private sector.

Government jobs are those jobs that, by definition, nobody is willing to pay for because nobody values the results or outcome of those jobs.

Jobs in the private sector only arise when people produce products and services that people want and are willing to pay for.

The current administration seems to be obsessed with taxing the successful and productive people in America. These people are also the only real “job creators” in America. If you want to create more jobs, reward the people who create more jobs.

There is a simple solution to the current economic situation: abolish corporate income taxes. Abolish capital gains taxes. Abolish taxes on dividends.

Instead of taxing productive people so heavily that they have no money or incentives to invest and create jobs, remove these tax burdens completely.

The result would be a complete turnaround of the US stock market. Companies and their stocks would increase in value overnight. The monies lost in 401(K) plans would be largely recovered and recouped, thereby saving the retirements and dreams of millions of Americans.

Companies do not pay taxes anyway. Companies only collect taxes from their customers, or reduce the wages that they pay to their employees, and pass them on to the government.

Today, very few companies are earning any profits so eliminating taxes on those profits would cost the government almost nothing. On the other hand, it would signal to America, Americans, and the rest of the world that the US is now the most attractive country in the world to start businesses, and to invest and create wealth. The natural energy, ambition and determination of the American people can and will bring us rapidly out of this recession if entrepreneurs, businesses people, investors and wealth-creators are simply encouraged to “take off the gloves.”

Brian Tracy

(I recommend his website to any who are looking for inspirational ideas and insightful opinions: www.briantracy.com)

April... Bear or Bull Rally? Promising Thoughts.

2009-04-06T07:31:00.000-07:00

(Please click on the above picture to get a clearer view... It details what, as investors, we should all be focused on... The main reason why staying invested in a portfolio of good quality companies is paramount to capturing this once in a life time opportunity.)

A quick blurb on Professional Active Management:

We're entering a great time for those of us who believe in active management. We will have the opportunity to acquire great businesses at historically low valuations. Mr. Buffett made his career from 1973 to 1975 because at that time picking grossly undervalued businesses was like shooting fish in a barrel. (OF course, this time the barrel is much larger, and finding the highest quality fish that much trickier.)
Successful investing through this near-term market volatility calls for tactical asset management. As the pace of creative destruction accelerates, it's important to own industry leaders with very strong balance sheets: The strong will get stronger, the weak will get weaker.

Pertinent Closing Thoughts (Bill Gross)

In a sense, we are all children of the bull market, although some of us are more mature than others – a bull market of free-enterprise productivity and innovation, yes, but one fostered by a bull market in leverage, deregulation and globalization that proved unsustainable in its excesses. We now must view ourselves as chastened adults, forced into acknowledging a new reality that is dependent upon bear-market delevering and debt liquidation to deliver us to our new and ultimate restructured destination – wherever it lies. Thus, while historians might describe these years as an evolution, for those of us living it day-by-day it most assuredly has the feel of a revolution. Much like Irving Fisher’s “permanently higher plateau” of prosperity that was quickly turned on its head in 1929, those who would forecast a “permanently lower valley” of despair might similarly be off the mark. Yet there should be no doubt that the bull markets as we’ve known them are over and that the revolution is on. Investing is no longer child’s play.

Behavioural finance offers path to market recovery.

2009-03-20T08:33:00.000-07:00

Investors could be willing to take on more risk to recoup their losses.

Behavioural finance theories are gaining prominence and could plausibly explain the wild market volatility of recent months, according to Jan Mahrt-Smith, an associate professor of finance at the University of Toronto’s Rotman School of Management.

Speaking at the University of Toronto on Tuesday, Mahrt-Smith pointed out that behavioural finance has recently gained much more attention as financial experts and commentators seek to explain the dramatic market activity of recent months.

“Behavioural finance is everywhere these days,” said Mahrt-Smith, who is also co-director of the Rotman Master of Finance Program.

One of the roles of behavioural finance, which is the study of non-rational decision-making and the ways such decisions impact financial markets, is to fill in the gaps of rational finance theories, Mahrt-Smith explained. For instance, behavioural finance acknowledges that investors have different expectations about investments, and that changes in investor confidence levels can impact the markets. In addition, the theory shows that emotions can play a role in investing.

Certain irrational investment behaviours could have played a role in adding to the market volatility of recent months. For instance, Mahrt-Smith pointed to studies showing that investors tend to focus more on gains and losses than their overall level of wealth.

“It should be only wealth matters,” he said. “But it turns out we care about gaining money or losing money much more.”

Whether a loss is big or small, it can have a significant impact on a person’s happiness, he added.

“One dollar gain is a gain, it’s fantastic. One dollar loss is a loss and it’s horrible,” Mahrt-Smith said.

The losses incurred by investors early in the downturn, therefore, could have helped trigger an irrational panicked reaction that led to a more severe selloff and added momentum to the downturn.

Some of the investment losses of recent months could also have been worsened by the tendency for investors to hold on to losing stocks longer than winning stocks -- a reality of investment behaviour, according to Mahrt-Smith.

“We’re willing to gamble that it will come back up, but we don’t want to take the loss,” he said.

He added that the recent crash could change investors’ behaviour going forward.

“We’re all poorer now, so we have to recalibrate how we think going forward,” he said. “Maybe using historical statistics isn’t going to be the same when you’re going through a period of a crash or a bubble.”

In particular, Mahrt-Smith said that even though nearly all investors have lost money in recent months, behavioural finance theory shows that they could be willing to take on more risk to recoup their losses.

“We’re going to behave quite differently from these risk-averse, rational investors,” he said. “People are going to gamble for a resurrection.”

Mahrt-Smith noted that there are some considerable arguments against using behavioural finance theories to explain the current market events. For instance, some argue that since all investors tend to behave differently, it is difficult to draw generalized conclusions about this behaviour.

Still, Mahrt-Smith said the theories represent a promising starting point for justifying some of the ways investor behaviour has played into the widespread market volatility of recent months.

(-Courtesy of: "Investment Executive - 03/18/09 Article by Megan Harman.)

What amazing times these are...

2009-03-12T11:10:00.000-07:00

“Be careful what you water your dreams with. Water them with worry and fear and you produce weeds that choke the life from your dreams… Always be on the lookout for ways to turn a problem in to an opportunity for success.” -Lao Tzu

"Bear-Market... Shmear-Market..."

The near term will likely remain volatile, but I continue to believe periods like these create long-term opportunity... We must however navigate wisely.

We will look back on this period as one that provided fantastic entry points for long-term oriented investors.

If you are a value investor- you are a long-term investor. If you are a long-term investor- you accept in advance that you are making no effort whatsoever to keep up with your benchmark or peers on a short-term basis.

Reasons to consider investing today:

-Contrarian Sentiment: Buy when there is blood in the streets. While the current crisis has created mass fear and panic, it has also created opportune entry points for long-term investors.

-Cheap Stocks: Current S&P 500 valuations imply an extended period of extraordinarily- and unlikely- weak long-term earnings growth.

-Government Action: The U.S. Government- and others- is making an extraordinarily proactive effort to address current problems.

-Growth on Tap: While the economic global engines of growth (e.g. China, Brazil, India) have slowed, they are not broken.

-Parked Wealth: Nearly $4 trillion are currently sitting in money market funds.

-Historical Precedent: Equities have delivered 9% to 11% annualized returns in the more than eight decades through 2007... decades that include the Great Depression, World War 2, the Long-Term Capital Debacle, the Asian Contagion, Iraq Wars 1 and 2 and September 11Th.

Addition To The Corporate Bond Post... (From Warren Buffett's Recent Release)

2009-03-01T15:20:00.000-08:00

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.

Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

Bonds... Corporate Bonds. (Sexy no?)

2009-03-01T14:14:00.000-08:00

Safety and security is a pressing issue now-a-days; when we see even the most rational investors of our life time acting in irrational ways. But where does one focus his investments and still guarantee a great degree of protection while beating the eroding effects of inflation? If your stomach (IE. risk tolerance) is not up to the swings of high-yielding equities (IE. companies that pay handsome dividends, etc...), then bonds are the most logical place to look... or one could simply hide under a rock until the sky is done falling... Unfortunately, most of us don't have that kind of luxury, as time is something we don't have alot of. So now more than ever, investment returns are vastly important to achieve some semblance of our former retirement dreams and aspirations.

Quick Background:
Bond prices and bond yields move in opposite directions. Prices are quoted relative to a par value of 100 - a bonds value at issue. If the bond has a 5% interest coupon, the annual yield is 5%. But if investors bid down the price of the bond in the market, and you buy at say 90, the effective yield is greater than 5%. And if you hold the bond to maturity, you'll get the 100 in principal, on top of the coupon income you've received.

If you read that bond yields have increased, it means that bond prices have declined(and vice-versa). Prices for long-term corporate bonds tend to move alot, since these prices are based on Government bonds plus a spread for greater risk. A company's sales, earnings and other financials also have a big impact. Rating agencies grade bond issuers on their ability to repay (AAA, AA, B, Etc..).

In the current market one sees great opportunities, especially in midterm corporate bonds. In 2006 and 2007 spreads were very tight. Even riskier corporate bonds weren't yielding much more than Government issues. But last fall, corporate bond prices plummeted as the credit crisis worsened. Today, spreads are more rational - they're wider.

Overall it is important to hold on to the bond until maturity to be certain to make money. Even without the glamour of stocks, there's still risk - and excitement in bonds these days.

(PLEASE CLICK ON THE LINK TO MY TEAM'S WEBSITE ON THE RIGHT SIDE OF THIS BLOG-PAGE TO FIND OUT MORE ON SOME OF THE GREAT DEALS ON CORPORATE BONDS. UNDER THE HEADING "PUBLICATIONS: CABA NEWSLETTERS"... CHEERS)

(Some information sourced from The Globe and Mail - R.O.B. 03/2009)

Thoughts Going Into The Weekend...

2009-02-20T07:48:00.000-08:00

The Chinese word for crisis, Wei Ji, is a compound of the characters for Danger (Wei), and Opportunity (Ji). There is probably no better word for describing the mindset of successful investors.

Where we're at... (Brief comment from Don Coxe)

2009-02-17T07:05:00.000-08:00

What we know from the 70s is that if you have a recession at a time of fast money supply growth that what happens is that the stock groups that tend to do best during the recession and to lead you out of the recession tend to be commodities. So the commodities stocks of course, were just hammered after the ‘midnight massacre’ of July 13, 2008 which is what really launched deflation in the world. But what’s interesting is what’s happened to them since then in relative strength. We come back to my old faithful of the IBD’s 197 industry subgroup rankings and what changes there are in that from week to week. This week, if we take the top 21 stock groups, we see that 7 of them, that is one-third of them are commodity groups led, of course, once again, by metals, ores, gold and silver; they’ve been at the top for some time. But we’ve got food flour and grain; we’ve got oil and gas transport pipeline, we’ve got oil and gas refining and marketing, I feel very good about the fact that pure refiners have done so well, I can tell you. Food, miscellaneous preparation, retail, wholesale food; and Oil and Gas, International Exploration and Production interestingly enough.

So, what that tells me is that this is the kind of swing at a time when everything looked bad, back in 1974, and by the way, things looked much worse then than they do now, in 1974. We were down to a 6 mulitple on the Dow. And the belief in equities as an asset class was being abandoned on all sides and unemployment was double digit levels and governments were falling; things were much much worse then. But, what you could see was the relative strength of the commodity groups, including, by the way, the supermarkets back then, which is interesting, because the supermarkets are doing well now. So, I would therefore like to take the view that what signals we’re getting for the market are that the market like all the pundits, isn’t sure that this $2-trillion that’s being thrown at the system is going to work. But the belief is if it does work, we’re going to have a greater demand for scarce assets, and that everybody recognizes that the huge selloff that we’ve had in commodities and commodities stocks means that scarcities could come back pretty quickly. And that’s exactly what happened in the 70s.

Now, I’m quite sure there’s a lot of you out there saying ‘you keep talking about the 70s, and its a different world.’ It is in many respects, but only in one, I think, that’s really crucial, and that is on the real estate side. Because back then what we had was the baby boomers were university graduates having to live with their parents or grandparents because there were no houses available for them. There was a housing shortage because of course, there was no way they could expand the housing market fast enough to take cognizance of the huge number of baby boomers coming out of high schools, community colleges, and universities; well we havn;t anything like that this time, because of the birth dearth that began back then. What we have is a situation where the housing supply was built on the assumption that things would be the same as they had been every other cycle and of course they aren’t the same, and they will never be the same the next 50 years. So that’s the big difference. We have demographic deflation across the industrial world and in that sense, what it means is that there is one asset class which cannot behave as it did back then. And back then, house prices, although it took them a while to start moving up, even though we had inflation, they did. In any case, you didn’t lose money on housing back then.

I think that the fact that the oil stocks, despite the fact that spot WTI has gone to a new low, the oil stocks are actually starting to perform better, is people’s recognition that with the cutbacks that OPEC has already delivered and then the evidence that US consumption hasn’t fallen by 5%, 6%, or 7% as people thought; those statistics were clouded by what the retail gasoline sales were; and of course, what they did, because retail gasoline was down by 50%, was in trying to adjust for this after you took out state taxes and all these things, people got wrong what the actual volumes there were. So what we see is that the actual demand for oil in the world has not fallen off a cliff. Yes, the demand for industrial goods and consumer goods and ? and things like that has fallen of a cliff. But certainly not for most commodities, and particularly, not for oil. And with the move that we’re getting in the fertilizers, and I’d just like to mention once again, the value of the IBD survey, because way down, you get way down the list, number 56 on the list, and you see chemicals and fertilzers [12:23] but that this week and three weeks ago they were down in the depths at 154 and the charts show you that there has been a huge change in attitude towards the fertilizers and indeed towards the agricultural stocks generally.

Now, that’s not because I think the world has embraced our view of the strong possibility that the two centuries of global warming have come to an end, and that we might be entering a period of global cooling which would dramatically affect the outlook for crops in the northern hemisphere. No, I think its simply once again the recognition that although demand is reduced somewhat for key grains and feedgrains as a result of the economic slowdown, that it has not collapsed and the carry overs even though they’re bigger than they were a year ago, are not so great as to suggest that the prices farmers are going to get for their grain are going to be profitable. Yes, spot corn is $3.66, but the new corn that hasn’t been planted yet, which will be delivered in December is $4.07, and corn for the next year after that is $4.25. These are prices, that if you’re a farmer who does a good job producing it, could make a lot of money on it, despite the collapse in demand for ethanol. So, what I’m basically saying is that we already have two commodity groups which in the last few weeks have been moving up strongly, and they’re basically saying that you don’t have to take a bet on how the Obama program works out, as to whether or not this recession is going to drag out a couple more years. You can make money here.

Nick Murray... Words of Wisdom

2009-02-03T07:30:00.000-08:00

Stocks Vs. Bonds:

The most important thing is: did you invest relentlessly in any stock funds as opposed to any bond funds, individual bonds or CD’s. The Megatruth is: real wealth come to, and abides with, the owners of great companies, not to the lenders to great companies. I’m not suggesting that an owner can’t lose; I’m declaring as an article of faith that a loaner can’t win.

If you steadily accumulate even mundane stocks month after month and year after year, if you patiently remain true to your tortoise disciplines even when hares go whizzing past you left and right, and above all if you regard “bear markets” as opportunities to buy more of your stocks at sale prices rather than as the onset of Armageddon – you’ll not only achieve wealth, you’ll probably “outperform” 90% of your fellow investors without even trying.

Thus, a huge percentage of your total lifetime return is attributable to the simple decision to be an owner and not a loaner. And most of the rest of your return depends not on how your stocks perform vs. their peers, but on how you behave. Wealth isn’t primarily determined by investment performance, but by investor behaviour.

Equities neither make you wealthy nor keep you wealthy. You have to do those things yourself. You can’t, as we’ve seen, build and hold wealth without equities. But the converse is even more importantly true: equities can’t do it without you. Your appropriate behaviour with respect to equity investments – and not the relative “performance” of those investments – is the variable that will govern your financial success. (And in the end, your behaviour is the only thing you can ever really control.)
The single most important variable in the quest for equity investment success is also the only variable you ultimately control: you own behaviour.

Four Behavioural Tactics to Success:
1. Setting goals in dollar-specific, date- specific terms.
2. Establishing a plan for achieving those goals, assuming a specific rate (or rates) of return.
3. Investing the same dollar amounts at regular intervals, so as to harness the power of dollar-cost averaging.
4. Meeting your retirement income needs via systematic withdrawal from your equity portfolio.

Short-term Numbers. (Think Beyond)

2009-01-29T07:27:00.000-08:00

Just as in every boom the bulls proclaim that “this time is different” — that the markets are fundamentally more stable than ever before — so in every slump, the pessimists insist that the world faces unprecedented disaster and that, just this time, the recession will not be followed by recovery as it always has before.

The cause of the current economic misery is an unprecedented credit crunch. But against these deflationary pressures there are equally unprecedented expansionary forces: the lowest interest rates in history; the fastest-ever fall in oil and commodity prices; the biggest-ever peace-time public works programmes; and, most importantly, a willingness and ability by governments and central banks to support their financial systems.

This crisis has therefore become a tug-of-war between two extraordinary forces. So what can we say about the outcome of this elemental battle?

We can only say one thing for certain: that no economist will accurately forecast the numerical result. However a reading of the major economic thinkers — Schumpeter, Hayek, Keynes, etc. — can remind us that in one way or another, the profit motive will ultimately triumph.

Bottom Line.....

2009-01-26T10:38:00.001-08:00

(1987 VS. Present)

You will regret not owning equities over your investment lifetime. You will regret even more if you miss this wonderful opportunity to acquire companies at fire-sale prices.

In the coming weeks I will be referring to old adages from Mr. Nick Murray. I find that his words of wisdom on markets and investing are the most clear and concise argument in the face of media driven adversity. There are no shades of grey, just precedence and fact... Markets always go up.

Stocks are inexpensive VS. Bonds!

Growth Stocks now are priced equally to Value Stocks!

I can't think of a more prudent arguement for investing in equities at present. Please feel free to counter this statement. Cheers.

Signs for Optimism. (Happy Birthday Bro.)

2009-01-12T07:14:00.000-08:00

Following a strong start to 2009, equities had a disappointing showing last week, and given everyone’s painful 2008 memories, most investors were probably quick to conclude: “Oh no! here we go again”… But does this reaction make sense? As mentioned in the past, investment returns typically depend on four very important variables:

* Where do we stand on the valuation front? Buying overvalued assets can work in the short term during rising markets, but is hardly a long-term recipe for getting rich. The good news is that today, almost all assets (bar OECD government bonds) are at the very least fairly valued—and many remain very undervalued.

* Where do we stand on the sentiment front? When sentiment is buoyant, company managers are prone to over-reach, take on too much leverage, and jeopardize the long term health of their businesses. At the same time, as the past year has shown, buying assets alongside people who are over-extended can prove highly detrimental… in that forced selling hardly begets rising prices. The good news today is that a lot of the excess leverage has been wrung out of the system—there can hardly be any “weak hands” left. The bad news is that “strong hands” remain hard to identify.

* Where do we stand in the inflation cycle? Changes in prices are a key determinant to asset valuations. In a positive environment, prices remain stable, allowing companies to focus on their core businesses. When prices rise too fast, or decline precipitously, companies worry about their level of inventories, about the ability of their suppliers to continuing delivering, etc… Thus rapidly accelerating inflation, or collapsing prices, typically lead to serious contractions in P/Es (with inflation actually being worse for P/Es than deflation). The bad news today is that we are entering into an overtly deflationary phase, with consumer and producer prices collapsing in almost all major economies. The good news is that this trend may come to a halt sooner than most investors realize as a) central banks are pushing an unprecedented amount of money into the system, and b) the velocity of money, after an 18 month long pull-back, may finally be creeping back into positive territory.

* Where do we stand in the economic cycle? The three measures above combine to form the “P” in the P/E equation. But of course, valuations also depend on the “E”, and earnings are driven first and foremost by the economic cycle. And on this front, the news continues to remain bleak. Whether it be record job losses in the US, contracting retail sales in Germany, or shocking industrial production numbers out of France, there is little on which to hang one’s hat. In fact, the only piece of positive economic news we could rake up is the turnaround in the diffusion index of Asian leading indicators.

So where does all this leave us? On the positive side, most equity markets today are extremely undervalued and “weak hands” and other over-levered investors must have been shaken out by now. This good news is mitigated however by the fact that equity investors, having taken such a beating over the past year, now have little tolerance for pain of any kind. And with the visibility on both prices and economic growth still very limited, and unlikely to get better in the very near term, it is hard to think that equity markets will not remain choppy over the coming quarters. However, if investors do buy into the belief that the combination of an unprecedented monetary loosening, fiscal easing and low oil prices will help the US and Asian economies recover by the second half of 2009, then any significant dip in equity markets over the coming months should be seen as a buying opportunity.

(Courtessy of GaveKal Research)

Back To The Grind...

2009-01-05T08:20:00.000-08:00

Ahhh the holidays. Nothing is better than to recharge the battery's and look into the New Year thoughtfully, aggressively, meaningfully, and maybe a bit timidly...

Most of the time, being a financial advisor ranks among the very best careers around. Once you’re over the hump of building an initial client base, few jobs offer the unique combination of being able to make a positive impact on so many lives, the freedom to take lots of time off and an above average income. (in some cases way above average)

And then there are periods like 2008. Your response to those market events was the ultimate measure of discipline and fortitude - as the old cliché goes, it’s periods like 2008 that separate winners from losers.

So now what? The value side of the market, like much of the bond market, is priced for a depression. The growth side of the market is priced for recession. With dividend and other income vehicles yielding in some cases 15% to 20%, and a possible ballooning of the Government fixed-income market(bonds, T-bills, etc.), it seems that applying appropriate risk and re-establishing a long equity position seems justified. (If you have not already done so.)

From their lows, most stocks recovered nicely in December. Yet again proving that accumulating during weakness beats buying into strength, and that market timing is not an intelligent practice. I won't go into company specifics, as you can just as easily open any finance paper and see the performance up till now. It is not industry/sector specific either, however...

Almost everybody, retail investors and institutional investors alike, invests with their eyes in the rear view mirror, favoring what has worked best in the past. But there is a very powerful pattern of mean-reversion in the markets. What has done spectacularly well often takes a rest or it takes a bear market to get back to normal. So the notion of looking at markets and asking what has been hit really hard and, as a consequence, may be priced at really attractive levels is alien to most investors. That goes for highly sophisticated institutional investors as well. This temptation to buy what has done well is the single greatest pitfall in investing, and it is the single reason that a disciplined approach to asset allocation can actually work very, very well.

Something to consider.

My Value As An Advisor...

2008-12-22T08:29:00.000-08:00

To know what clients want, you need to first know what they really value in life. You need to know about their life objectives and their tolerance for various types of investment risk. Then you build a financial plan to give them the highest probability of reaching those objectives while remaining true to their values. I call this enhancing their wealth.

Here's one definition of wealth from Webster's Dictionary: "the things that are most important to you." So when I find out what wealth means for a client, I want to help them create an abundance of whatever that is. Will it be a specific amount of money? No, in fact, I have never had a client who ranked money as number one. What's most important to people are things like their families, friends, health, career, or even spirituality.

When a client engages me as their primary financial advisor, my mandate is clear: Design a plan to take the client from where they are today to where they would like to be. The plan needs to give them the highest probability of reaching their objectives. The plan must also give them more time to focus on what matters most to them.

In addition, as an advisory team, each year we will:

1. Recommend saving strategies. We go over how much they should save (or when retired how much they can spend). If things are tight, we will help find money in their budget to save what they need to. They know that we prefer never to suggest to someone that they need to reduce their lifestyle, unless they really must.

2. Control money management expenses. Performance we can't control, but expenses we can control. We'll never rebalance needlessly to trigger taxes, and that we may rebalance to soak up losses.

3. Reduce taxes. First we will look for deductions or credits. Next we'll look to incur minimal tax on the portfolio by adjusting type of income, as appropriate. Then we will look for any deferral opportunities, and lastly, look for any ways to have income taxed in the hands of the family member with the lowest possible income. It's amazing the many situations in which we can reduce taxes by thousands.

4. Anticipate cash flow requirements. We will make certain they have adequate liquidity to avoid liquidation at the wrong time.

5. Protect net worth. We will be certain that they are protected from an interruption of income as a result of disability or critical illness. It's important to make sure there are adequate funds to protect erosion of what they have accumulated.

6. Keep estate affairs organized. We will suggest any changes that need to be made as the life evolves.

It's quite easy to fall into the performance game... To be measured by ones ability to beat the uncertainties of the market at all times. Investment performance is obviously part of the financial planning equation, but it's the part that we least control. That isn't to say that this mitigates the need for us to use well-defined investment principles and processes, but lack of control of the markets is a constant... I ask myself: What is my value as an advisor worth? (Because I know clients will be asking the same question)

Thoughts on Future Inflation... (M.C.)

2008-12-18T08:31:00.000-08:00

We are in the camp that, although what the Fed is doing is inflationary, it will not cause higher inflation for a while (perhaps at least a year or more). That is because commodity prices, earnings, jobs, consumer confidence and economic activity are all in the dumps with not much expectation of a dramatic improvement in the foreseeable future.

However, Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve put it cogently:

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating. Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

It's nothing to bet on yet but, if history is any proxy, the unprecedented stimulus efforts will at some point cause same unintended effects. A world inflation bubble might just be that unwanted love child.

Refreshing Idea's...

2008-12-16T13:58:00.000-08:00

The market's going to be tough over the next number of quarters. But there are some incredible deals out there in both the Materials and Energy sectors. You're getting companies at single P/E multiples. I believe in Peak Oil, and when you can buy companies trading at half price sales, you want to buy them!

The small-cap cycles are typically 5 years in duration, and this is the 5Th year that small-caps have underperformed, which isn't surprising given the current credit crisis. In this environment, to succeed, you have to not follow the Index, cut your losers, and keep your winners.

Over all, what's happening now is both Deflation in paper assets and Inflation in real assets. To use Eric Sprott's example: "The price of a house is going down, because you can't borrow the money to buy the damn house! Because nobody wants to issue that piece of paper, because paper's not worth what it used to be..." (Our lovely "dual _flationary" environment)

Remember to stick to your convictions. There are periods where the market doesn't embrace your ideas... Unfortunately you have to wait for the market. You can't change the market. Nor shall we chase the market...

Ballooning Bond Yields... (Velocity of the USD)

2008-12-11T11:12:00.000-08:00

Below is a recent ex script from Hong Kong's "GaveKal Daily" regarding the most repeated questions being asked by their global clients today. (An interesting piece I found most appropriate as we approach the end of 2008):

“I just don’t get it! The Fed is out there printing US$ as if paper and ink were about to run out, and yet the US$ surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels that I had never thought I would see in my lifetime! How does this all add up? It makes no sense!” As we see it, there are three potential explanations to the above dilemma:

Option #1: As much as the Fed is printing, the velocity of money is collapsing even faster than the money supply is increasing. As such, the total amount of liquidity in the system is still shrinking, thereby bringing down prices (explaining the low bond yields and the low gold) and activity (low oil). Of course, this situation will not last forever and, once the banks get back on their feet (which admittedly may take some time), velocity will bounce back. At that point, the risk is that the excess liquidity provided by the Fed and other central banks will be multiplied aggressively and that we will move from a deflationary bust to an inflationary boom scenario very rapidly; it will then be very important for the world’s central banks to aggressively withdraw the liquidity that they provided or inflation will become a real economic problem.

Option #2: Looking to markets for any kind of confirmation of deep macro-economic trends today makes little sense as markets are still under heavy duress from forced selling in the riskier assets (i.e., oil, gold…) and forced buying of others (US$, US government bonds…). Indeed, how else could we explain that 3-month bond yields were actually negative earlier this week? If this is not a sign of a bond bubble, then what is? And as we all know, the late stage of a bubble is always characterized by “forced buying”; investors know that valuations make no sense but they are forced, either because of regulations, or simply to keep their jobs, to pile into an asset class. In early 2000, all the indexers and closet indexers had little choice but to buy Nokia, Cisco and JDSU. In the first half of this year, oil and commodities were driven higher by Chinese forced buying ahead of the Olympics (see our book A Roadmap for Troubling Times). And now, government bonds are being bought by banks, insurance companies and pension funds in an obvious attempt to “window dress” the books before the year-end. Thus, in the new year, once the need to “window dress” is behind us, we should expect capital to flow out of bonds and into riskier assets.

Option #3: Contrary to popular belief, the Fed actually has not been printing nearly as aggressively as everyone believes. Indeed, as we tried to show in our latest Quarterly Strategy Chart Book, borrowings from the Fed now exceed the total amount of bank reserves, and thus the reserve component of the monetary base is now entirely borrowed money. The monetary base itself is now a levered figure. Thus, non-borrowed reserves growth has been negative; Bernanke, the pre-eminent scholar of the Great Depression, who knew that the contraction of the monetary base was possibly the most significant policy blunder of the 1930s, sat back and let the unlevered monetary collapse by a third. Fortunately, however, that trend has recently been reversed with the Treasury injecting more than $150bn into commercial banks and taking equity stakes.

As we see it, these are the three possible explanations to the dilemma above. Now the interesting thing is that, whichever option you decide to go with, it will tell you that getting out of government bonds today is not only necessary, but could be urgent.

Something to ponder as you follow your path of due diligence...

Using Discipline in an Undisciplined Environment.

2008-12-02T11:44:00.000-08:00

Courage is at the core of every great investor and genuine courage is rare.

Every market climate tests our investment conviction, today's environment is especially intimidating.

For an investor, challenging popular thought is never easy, but the fact is a number of solid companies with good fundamentals lie in the market wreckage.

Greed blinds us to danger while fear blinds us to new opportunities.

This occurs when logic loses out to emotion.

It is one of the principle reasons why it is so hard for investors to buy low and sell high.

Often, even when individuals plan strategically, they deviate from their plan when the market is too challenging or too tempting.

The elements of Investment Discipline:

- Don't chase performance - it can be hazardous to your wealth!

- Act Strategically, not emotionally. Build an investment plan

- Rebalance your portfolio regularly

- Stick to your plan even when your emotions tell you to do the opposite

- Seek experts when you do not have the tools, the time, or the experience to do it yourself.

Additional Comment.....

2008-12-01T09:48:00.000-08:00

December 1st, 2008... Here we go.

2008-12-01T08:47:00.000-08:00

The levels of market volatility continue to be an incredible force to contend with. It’s almost like viewing a Richter Scale during a large seismic event… Imagine you’ve lived through an earthquake… You rebuild and life goes on. But from that day forward, anytime you hear or feel the slightest tremor, you expect the utmost worst to happen. This “fear” becomes a permanent “Pavlovian” response in your mind. But does that stop you from living your life? Does it drive you to escape? If that were the truth, then places like California and Japan would be uninhabited ghost-towns. People pick up the pieces and rebuild.

Some rebuild better than others, improving on their foundations to protect against future rumbling’s.

Some rebuild quicker than others, utilizing the skill and expertise of industry tradesmen to recover what they once lost.

Right now it’s time to focus on Things That Are Really Important:

Last week was the first week up on many indices like the TSX. What makes this very interesting to me is that the TSX has not enjoyed 2 consecutive weeks up since the index was 13771 back in late August. So if the market is going to come off a bit, it should probably do it very early in the week and then by this Friday, I would think that it stands a very good chance to close higher than the 9270 close on Nov.28th. I would think that if we get 2 consecutive up weeks on all the major indices, that would be very positive given we are going into a very bullish seasonal time and the prospect of automakers getting their bridge loans when they reconvene in Washington this week and with the inauguration set for Jan 20th, the table does seem to be set for an opportunity finally for all of us to make quite a bit of money from the long side for a change. The rally is only 6 days old and that is why I think if they come off for 2 or 3, you have to be all over that.

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

2008-11-28T11:51:00.000-08:00

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..."

2008-11-25T09:32:00.000-08:00

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...

2008-11-20T07:43:00.000-08:00

"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

2008-11-18T07:36:00.000-08:00

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...

2008-11-13T09:20:00.000-08:00

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...

2008-11-10T09:16:00.000-08:00

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...