Summer comes to a close...

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

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

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

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

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

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

So that being said, where does one focus?

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

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

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

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

Very interesting times we are in...

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

Best Regards and Safe Investing.

E.

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

Hope your summer is enjoyable. All the best,

Eric

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

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

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

So why care?

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

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

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

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

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

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

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

Always here to help.

Eric.

Banks and Cable/Telcos in the Dividend Sweet Spot

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

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

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

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

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

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

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

Here is the recent update (FYI):

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

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

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

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

Best regards and safe investing.

E.

Sell in May and Go Away...?

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

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

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

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

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

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

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

Thoughts?

*Courtesy of Matt Grossman - The Stockenthusiast

Live From Toronto...

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

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

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

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

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

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

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

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

Best Regards and Safe Investing.