An important event...

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

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

Best Regards.

Eric

Marketable Ideas.....

Well here we are.....

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

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

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

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

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

Best Regards and Safe Investing.

The Shape of Market Bubbles.

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

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

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

Worst Oil Spills In History

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Global Markets: Divergence trades galore defined by balance sheet conditions

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

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

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

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

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

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

The simple decision process for the Yen/Dollar.

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

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



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



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

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

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

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



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



• The Yen is today very close to overvalued territory.
  
  

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

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