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This Taming the Bear website is a good tool to understand a bear (losing) market which is a normal infrequent part of long term investing. Understanding a bear market will help you to switch from selling low and buying high which the masses are doing and buying low and selling high like a few smart investors are doing.
Sept 16, 2011
As you may recall, we have been concerned for quite awhile that the worldwide economic recovery since 2009's market lows was not entirely sustainable since it was mostly due to governments worldwide implementing tremendous amounts of government stimulus into their economies.
We are now at a point where analysts are saying that a double dip recession is at a 50% risk of happening. This time the problem is due to credit issues with government debt and not just credit problems detonating in the financial systems.
China is trying desperately to calm the world by supporting bond purchases all over the place but the reality is China can only do so much and as one article headlines "who will back China when it falls?"
China from our opinion has its own serious economic problems brewing which is evidenced by the many bank reserve changes meant to calm down the use of credit (a leading factor to the sub prime mortgage failures that triggered the US recession) and reports of "ghost cities" in China point to the concern that China itself has a tremendous credit, real estate and economic growth bubble that is about to pop.
Government bonds have shown a recent drop in yields indicating the "risk off" attitude of investors as they flee from stock market towards the safety of government bonds. The yields have since risen but there hasn't been the same level of renewed interest in stocks (though there are still investors buying on the dips) while gold and silver bullion have had a small pull back, they are still holding record high prices suggesting that the world is converting to cash and bullion until the market gets more sense of a direction.
That said, because markets move so fast, we have been holding an 80% income based portfolio favouring companies paying dividends and corporate bond issues over government bond and financial institution stocks. As a result, the recent TSX correction of over 15% loss resulted in a 5% drop in our defensive portfolios. That said the defensive portfolio continues to return income on a monthly basis and invests back into our portfolios (an automated buy on the dips function) and will further strengthen and protect investor assets when this correction eventually passes.
We continue to monitor the worldwide situation and will keep you posted.
Feb 6, 2011
During the latter part of 2010, DC Complete Financial went through an internal restructuring to help deliver even better services to our clients. As a result, the market commentary was put on the back burner until some of the key restructuring occurred.
We are now back online.
So what has happened recently?
The bottom part of 2010 saw equities finally come out of the dirt to end the year about 15% up compared to Jan 1. 2010. Good fixed income portfolios managed to do the same amount of return at a fraction of the risk.
This year we are seeing more credit problems arising and political unrest in regions like Egypt. I share the opinion that there are still lots of problems buried in the financial system (including NASDAQ computers that have been hacked) and what I feel is a misinterpretation of why the Chinese central bank is putting the brakes on the economy. I believe that the the Chinese fear the creation of a credit bubble like here in north America. The clue is the massive "flipping" taxes imposed on citizens of Hong Kong. There is no purpose to this tax other than to prevent investors from pushing real estate prices too high using cheap borrowed money (a critical reason why the US subprime mortgage problem occurred).
Similarly in Canada, our central government is diffusing a credit bubble in our real estate market. The first change being restriction from owning 40 yr mortgages with higher equity requirements for non-principle residences. Now the government has declared that even 35 year mortgages are gone and 15% minimum equity is required for CMHC coverage and no insurance for HELOC's.
So what does this mean. In the short run, I believe that the stock market will rise with some rapid dips as investors are still edgy and it is mostly speculative investors pushing this market on last quarter data. Fixed income investments will still do well this year compared to historical averages but will likely underperform last years returns. That said, if things suddenly change (a double dip that may be in the process of unfolding as shown by the US Case Schiller housing index where home prices have dipped again) then equities will get punished in the latter part of the year and fixed income will be on track to outperform.
in terms of the fixed income portfolios we have selected for our clients in are underweight government bonds but overweight in corporates and equities with solid companies paying regular dividends.
July 21, 2010
The recent bought of volatility has left many equity funds losing money year to date. While the slide has not been as fast as in March 2009, the lack of returns and the continued risk of loss has made equities in my opinion a less desirable place to be right now. The fixed income investments that dominate our client portfolios have remained in the positives year to date and our cash holdings give our investors the opportunity to buy into equities at more strategic points in time.
The market stumble is no surprise as Canada records an increase in unemployment benefit recipients (the first time in 8 months) and the US shows an increase in recipients as well (contrary to analyst expectations). In addition, housing sales have turned lower with areas like the Okanagan reported to have home sale prices dropping 20-30% and as much as 50% for developments on the verge of going into receivership.
It is no surprise that the bank of Canada and various bank analysts are now reducing the 2010 and 2011 growth outlook. According to economic theory, the best solution to economic downturns is for consumers to spend contrary to their instincts to save. Central governments therefore use stimulus money, fiscal policy, interest rates and statistics portrayed in a way to convince consumers to spend and thus heal the economic problems. In my opinion, the Bank of Canada's recent 2 rate hikes was due to being pushed into a corner. With analysts basically saying "if the economy is truly on the mend, prove it and raise interest rates!" While there were 2 rate hikes, compared to what could have happened, the rate hikes are relatively small. I suspect this was to show meet the analysts need for proof but preventing major shocks to the Canadian economy. However, the Bank of Canada warned that there is reduced growth outlooks for Canada and the world and that further hikes will be carefully considered depending on the prevailing economic conditions.
In the US, Bernake described a state of unusual economic conditions that may impact economic growth. These comments in combination with the Bank of Canada and evidence that China's economy is starting to cool off, suggests that as government stimulus programs come off the table that indeed much of the growth was government programs and the big question is whether the economies can continue to grow without them. Some leading economic indicators suggest that the answer is "no".
One thing is for certain now, this is not a sharp V shaped recovery but more likely a prolonged slow recovery with some concerns for a double dip recovery.
While we may be overly cautious, I don't think that it is unwarranted. Due to electronic trading and trading run by computer market analysis, the speed with which money can be made or lost has moved to levels never seen before. With insurance companies starting to de-risk their guaranteed market investment accounts, this is a sign that caution is still warranted.
June 21, 2010
While the market has lifted off of the low from this latest correction, even hope from China's declaration that it will allow the Yuan to appreciate quickly faded in the market today. There are more and more reports of deteriorating consumer confidence and financial conditions that as the Bank of Canada states is a rising threat to Canada's financial system.
During all of this bond yields continue to drop indicating more movement of cash into fixed income investments (a risk adverse behaviour).
Gold prices have fallen though which is a pattern that I have seen prior to a major market drops as some investors in my opinion convert some of their holdings to cash in preparation to buy on the market dips.
The Ted Spread and Libor continue to go up. While some say it is just a correction to what it should normally be after hitting an extreme low, in light credit distress worldwide, I believe that this is not a normal correction but the beginning to another credit crisis. If the mechanism remains the same, then this has the potential to cause major losses in equity markets worldwide.
We are still recommending a heavy cash holding in our client portfolios with the rest in high yield fixed income investments until further notice.
June 7, 2010
Libor and the Ted Spread continue to rise. This is something that Rick Berman BNN says hasn't occurred in the last few corrections. This makes him quite nervous about the market and he has a warning to not be in equities right now.
The evidence out there is that a double dip is even more likely with credit problems continuing to spread through Europe and with oil prices falling and bond prices rising, there is still an significant risk aversion in the market.
There are more and more analysts swinging to the camp that Europe is likely to double dip into a second recession. Should this occur, there are thoughts that China could be in trouble as Europe is one of their largest customers compared to the United States.
The key thing is that should Europe double dip and/or China's economy start to stall, it is unlikely that Canada can avoid going back into recession. Of course this will be good for interest rates as it will have the tendency to push them back down.
May 25, 2010
The markets continue to follow a pattern of deleveraging that we have seen before in 2008 and 2009. That fall was catalyzed by a credit crisis that seems to be looming its head again suggesting that Eric Sprott is correct that there is a lot of credit and fiscal policy problems still in the system.
The Ted Spread was talked about a lot before the so called "green shoots" recovery in 2009 as it spiked to all time highs in 2008. The Ted Spread is an indicator of the risk charge that is paid to lend to banks instead of the US Government.
This indicator is at 36 right now and rising fast if you look at the following illustration.
While the Ted Spread is still well below the 110 it reached at the Mar 2009 low, the speed with which is is rising is a warning sign of rising worldwide credit problems which could send the markets into a double dip scenario.
On Friday, bank market analysts believed that we had levelled out because of a rise in the TSX and a slow down in the number of trades. However, today, there is no sign of levelling out as the market plunges again today. My belief is that due to the Victoria Day holiday, investors cautiously placed some bets hoping that Monday's US market would give them profits. However as Monday proved to be another down day for the Dow, I believe investors quickly unwound their bets this morning.
Of course of continuing concern is the continued drop in bond yields and the price of oil, both indications that investors do not have much risk appetite right now and speculation on a booming economy in the near future is perhaps fanciful wishing.
May 18, 2010
The recent high volatility triggered by the Greek debt crisis (an echo of the Dubai Surprise) illustrates the ongoing concern I have for the world economy. More precisely, the monetary policies are simply covering up and pushing forward a deeply entrenched credit problem where running deficits and total government debt exceeds the annual GDP of many countries several times over. Ultimately with all this debt who is to pay it back and how???
The solution to date is to print money and rollover treasury debt. Much like a Ponsi scheme, the problem is there is no new real money fuelling the intake and collapse is ultimately the end result.
This link (no warranty is expressed and no credibility is inferred as the source of the info cannot be verified) shows a video that helps the average person understand some of my concerns. http://www.youtube.com/watch?v=eb1n1X0Oqdw
At the present I have recommended to all of my clients that they pull their equity investments especially resource focused funds. It is my belief that the huge amount of volatility in the last 2 weeks will not end any time soon suggesting that equity returns will be net zero as the up days are balanced by the down days in this range bound trading pattern or worse, there will be a downward correction that could test the March 2009 lows of this recession.
This article by Shirley Won describes some of the thoughts of some of Canada's leading financial analysts:
Apr. 12 2010
The market is holding to a sideways trading pattern fluctuating between 11900 and 12300 points on the TSX. Oil prices recently shot up and have now fallen back down on disappointing news earnings news from Alcoa and the concern that China has a trade deficit that long term may not be sustainable.
During the last bout of market volatility, cash flows were going from bonds and fixed income to gold and some market investments being bought on the dip. However, it appears as if money is flowing back to bonds and fixed income. Given the lower credit spreads for this year, corporate bonds and other debt instruments may not make as much as last year but I believe that it will still be a better investment than government short term bonds.
There are more analysts and consultants leaning towards a significant market correction at this time. Let's see where this market goes.
Mar. 17 2010
Sorry for the hiatus caused by the Olympic Games and RRSP season which played havoc with my schedule.
Markets have significantly cooled compared to 2009. Analysts are urging central banks to raise interest rates and withdraw stimulus. As I speak, today there is a call to have China appreciate its currency, withdraw stimulus and raise their rates to cool their economy.
Analysts speak of signs of recovery in the UK with unemployment decreasing and beating estimates.
Of course on the other side of the fence, German consumer confidence is at the lowest it has ever been, credit problems still exist for Greece, Spain and Portugal. Other countries like Dubai likely have problems that are not being talked about.
Central government deficits are at an all time high due to stimulus and monetary policy (printing money) and the key question is "can the world economy continue to recover without the stimulus programs"?
The thoughts are all divided but it is generally accepted that the easy money has been made and those who rode this market storm out and stayed in the game are still facing loses and with the prospects of muted growth (or stagnant growth) they'll need a new game plan to recover the rest of their losses.
Eric Sprott of Sprott Asset Management expects the S&P500 to fall 40% this year potentially pushing investor losses beyond the lows of March 2009.
The TSX is expected to flatten out at 12,500 points and at 12,100 right now, it doesn't have much further to go.
Gold is off of its highs for the year probably due to less fear of short term inflation or monetary debasement but there still seems to be activity as investors are using gold as a currency and trading on the dips and highs to try and make some money.
Bonds showed lower yields indicating that investor money has been moving away from the market to safer havens and oil has pushed up a little higher likely due to OPEC production controls. All this said, there is still no solid evidence of what direction this market will take. My money however is bet on Mr. Sprott's prediction that the market will correct. Until there is more solid sign of market direction, I still recommend a 30% cash content, 30% equity and 40% high yield fixed income component to moderate risk and to pick up some decent gains along the way.
US stimulus programs are supposed to begin to retract this month, so we'll see if there really is enough traction for the economy. My fear is the economy is still too fragile to be taken off of life support and the government is cautiously keeping interest rates low and trying to defuse what they feel is a housing bubble in Canada (great article in Canadian Business magazine, March issue) that should it burst, could force us back into deep recession.
Jan. 26, 2010
The market has definitely hit a rough patch with lots of uncertainty due primarily to the new lending regulations in China and Obama's war on the banks. Of course, I believe that some of the concerns are the US new housing market that showed a 7.6% slip in sales during Dec 2009. This key indicator of consumer confidence is particularly worrisome for investors considering that analysts were expecting over 3.5% positive growth in sales in December.
The investor crowd is still waiting for the US central bank interest rates that are expected to be released later today, before they decide which way they want to go for the short term. Given the state of the economy, it is unlikely that the interest rate will move yet and even if it does, it will be a very minor movement at best (not the doom and gloom interest rate hikes that the banks have been using to make people lock in their rates).
Right now the pattern of gold price drops and the market's steady slide down are in line with the previous patterns created when the market fell in Nov 2008 and Mar 2009. Could this be the beginning of the massive correction that portfolio managers like Eric Sprott have been warning us about?
Jim Flaherty this morning also stressed that while Canada seems to be well on its way to recovery, the numbers are weak and a slide back into recession is possible if we are not careful.
Jan. 17, 2010
While attending a talk by David Franklin from Sprott Asset Management, I got some comforting information that allows me to formulate some game plans.
I have held the position that the world has not really gotten out of recession yet and that most of the statistics are being skewed by what is not being talked about and speculative market bets are not supported by true organic growth. Mr. Franklin sided with my view discussing some evidence that is truly worrying.
The US government states that unemployment is 10.5% but if you look at the tax returns for 2008 and the preliminary data for 2009, tax returns for people are down 22% and for corporations 57%. This is an interesting indicator because it goes down when income and jobs decrease and unlike unemployment reports where those who have given up looking for jobs or those who are part-time employed are not counted, tax return data are not so easy to disguise.
The US apparently on Dec 24 2009, lifted the subsidy cap for Fanny and Freddie for 3 years (coinciding with the end of Obama's presidential term). The plan is to use Fanny and Freddie (now wholly government owned) to continue to purchase and back sub prime mortgages in the US economy. The problem is that if this data was included in the national debt data (which it currently is not) then the US debt would grow by over 50% overnight.
March is going to be an interesting data point as the US stimulus program goes offline. With the constant revisions down of the US third quarter GDP, this is likely to stall the US economy because in Mr. Franklin's estimates, if you take away the stimulus program, the US was still in a negative GDP situation.
Going forward, Mr. Franklin believes that the US dollar will continue to fall and the Canadian dollar will continue to track the price of oil. If this is the case, then a par dollar is the likely near term future which will likely put stalling pressure on the Canadian economy but of more importance is the implied need to pull out of US investments due to the currency effect.
Markets continue to be range bound but this range has moved up ever so slightly and given Mr. Franklin's comments, I believe that moving out of balanced equities prior to March would be a good thing. This is already happening for a lot of investors as the government bond yields have started to drop indicating a flight from the market towards bonds.
Dec. 31, 2009
December was relatively quiet for the markets with the holiday season fast approaching and investors attention focused on family. The TSX continued to climb slowly and relatively range bound. Hopefully 2010 will begin to show clearer signs as to what direction markets will take.
Famed portfolio manager, Eric Sprott warns that 2010 will see a 40% correction to the S&P. His thoughts are similar to mine that people have misread the economic indicators and as the stimulus package starts to roll off, the US economy is likely to stall.
Eric Bushell of CI Investments warns that economic distress is on its way as companies that had longer term credit luckily passed through 2008 and 2009 but with newer, higher equity lending terms required for new commercial debt paper, companies are scrambling to IPO and do whatever measures necessary to raise the capital needed to satisfy these new credit terms.
More and more analysts are now on side that caution is necessary as the markets have risen far too quickly and with corporate profits reported only due to cost cutting, there are concerns that profitability will stall if organic growth doesn't occur after the stimulus goes offline. There are more opinions that this will be an L shaped recover where the markets will have small movements up and down that will result in no net growth.
So as it stands, as we go into the new year, the caution flag still remains up.
Nov. 29, 2009
this weeks market saw trouble with what is now labelled the Dubai Surprise. Dubai World, a government holding co., defaulted on a $2.5 billion loan payment and what is at stake is estimated at between $59-75 billion US, loan.
While this loan default does not spell the end of the world for credit markets which when frozen have the potential to strangle the world equity markets (like it did in 2008-2009) but it demonstrates that the market's rebound since March is not supported by fundamental strength but rather by speculation. The hint of any trouble in the world economic structure still has the potential to put equity markets into a tailspin (hardly a sign of market in robust recovery).
Of course the Dubai Surprise is in line with the reports I have heard that overleveraged accounts, and sub prime mortgage from non-current accounts still exist and that there is a new wave of bad credit accounts starting to grow in Asia. This potential for a second credit freeze wave has the potential to create a double dip recession at the worst and at the very least will prolong the recovery phase of the current recession.
Nov. 20, 2009
The market is in somewhat of a sideways trading pattern right now. It is no surprise that the US housing starts and mortgage delinquencies data is coming back a little worse than expected and likely responsible for the small sell off on US stock exchanges.
A recent poll in Canada and the US showed continuing concern over the job market and instability in this so-called recovery. As such a significant number of people indicated that they would not be making any major purchases over the holidays and this is worrying investors.
Yesterday, Dell computer reported a third quarter loss in revenues which have sent its stock down 10% and this fair weather company data does not bode well for investors either.
Analysts are now convinced that this will be a slow recovery and government officials and central bank officials continue to warn about the possibility of a double dip if a whole host of issues pop up that can topple this shaky recovery.
Oct. 29, 2009
Yesterday saw a major sell off from the TSX and all North American markets in line with the patterns I was expecting. To date the correction is about 7% which is quite significant. The US 3rd quarter GDP number just came in at 3.5% above expectations and the feds have signalled that this is the end of the US recession. Bear in mind that this GDP number is significantly elevated due to government stimulus (cash for clunkers and new home tax credits) which does not necessarily show any organic growth.
Gold bulls have pushed the price of gold up $7-9 from yesterdays month long lows probably in anticipation that the US GDP numbers might be positive. That said but I think that today's opening results show some tepid interest in the market given that gold prices have not rocketed up any further on speculation that if the recession is genuinely over, then hyperinflation is a possible next event.
With jobs still being cut in Canadian industry like West Fraser cutting 535 jobs by closing their Kitimat mill, Canadian Oil Sands Trust down 59%, and Aug. Cdn payrolls dropping 110,200 and reversing gains made in July and Volkswagon declaring a third quarter profit drop 86%, we are still hardly seen the signs of the economy firing on all cylinders.
There are signs that the US and major countries worldwide like India, are prematurely pulling stimulus off of the table and with the economies fragile as they are, this could result in a massive shock to the system which apparently senior economist, Jan Friederich suggested in his talk in Vancouver, is a real possibility for 2010.
Oct. 27, 2009
Friday and Monday say significant drops in the TSX with both days in the 150 point drop range. Gold also took a hit today in line with the patterns that I noticed that in the Nov 08 crash and Mar 09 crash, gold plummeted as well. After 2 days of significant losses and tomorrows futures bids looking negative, we may be in a significant correction trend.
Mark Leibovit who has a top 10 yr record of calling the market correctly, believes that we will be seeing a market correction of up to 1000 points on the DOW. He also believes we will see a short term correction in gold prices but on a long call, he believes that between now and 2020, $3000 an ounce for gold is not impossible and $1300 an ounce in mid 2010 is also quite reasonable.
Many companies are still cutting costs to deliver results that are slightly ahead of analyst expectations. That said, we'll see if investors are willing to accept this as good economic data and continue the upward trend or they will continue to pull away from the markets. According to Mark Leibovit who said the DOW would hit 10300 tops and the TSX would hit 11000 tops, both marks have been basically hit and the market seems to be pulling back like Mark predicts.
Oct. 17, 2009
This week in the market saw very mixed results as earning season continued. The data is still being digested by investors but it is not all lollipops and candy apples as optimistic market investors were hoping. Harley Davidson with an 84% dip in earnings compared to last year is a sign that consumers still don't have extra spending money to purchase lifestyle goods on top of basic living needs.
IBM got hammered despite positive earnings due to their disclosure that service contracts are down. GE, while beating earnings estimates was still due to the now really annoying "excluding some items" accounting that is very popular in trying to cover up the actual level of organic growth or shrinkage. GE however got some thumbs down from investors due to the 20% decrease in revenues compared to last year.
Major financial firms like Bank of America and Citibank showed a $1 billion and $3.2 billion loss respectively. Note that Citibank had a $2.9 billion loss at this time last year. Both results indicate that while the government bailout money has prevented their fast demise, in the end it has not fixed the problems that exploded in the credit crisis and eventual failure is still possible.
The Michigan University consumer sentiment index reversed course unexpectedly in October and registered 69.4 instead of the same 73.5 September result analysts were expecting for October. The 12 month economic outlook has also plunged from 88 to 79 last month as well.
Nokia, reportedly the worlds largest cell phone maker posted a third quarter loss of $836 million and Blackberry maker RIM, posted lower sales of $3.6 - $3.85 billion US instead of the $3.9 billion analysts expected.
Gold experienced a pull back this week likely due to lower industrial demand and profit taking. When gold and silver was at $1040 and $16.50 US an ounce, I'd already signalled that it was time to sell off and take profits as it is always easier to sell of prior to the market peak and waiting beyond that is more likely to get investors caught in the sell-off cycle. My feeling is that if gold and silver follow the past patterns, if the market corrects as more and more analysts are starting to believe will happen, then gold and silver prices will plummet on cash raising activities and will present another good buying opportunity for currency investors.
If this quarters earning reports are split 50/50 for profits and losses, I believe a small correction 10-15% is quite possible. If it is 1:3 profitable co's compared to the number of companies posting third quarter losses, I believe that a 20%+ correction is very possible. Based on inside information that I got from some parts manufacturers, orders have increased for small maintenance parts but large parts for big capital development projects still remain quiet. This makes me lean toward this quarters earnings reports without excluded items will still show problems with organic growth.
Feel free to contact us for a no obligation check-up and use the results to clarify your own situation and see what choices you have to face your challenges.
Oct. 9, 2009
The first week of October saw us lose all of September's market gains. The market has since recovered some but on Friday this momentum sputtered even in light of better employment numbers.
The big question right now is whether these numbers are truly indicative of "organic growth" or stimulus spending and cost cutting?
Both the US and Canadian central governments warn that interest rates are unlikely to climb any time soon as the economies are too fragile to sustain that type of economic shock.
Royal LePage in Canada warns that the housing sales increases right now are not a housing boom cycle but merely a correction cycle. This sentiment is increasingly been shared by more analysts that a pull back is imminent and it will likely be 10-20%. Many portfolio managers seem to be raising their cash reserves indicating a move to take profits off of the table and wait for some discount buys. Some analysts agree and indicate that if the market drops 20% then this is the time to consider moving back in and if it drops 30% or more then it is aggressive movement back into the market is a good idea.
I did some research and in fact it looks like insider trading is up and leaning dramatically to the "sell" side with amount of sales at more than 4 to 1. This is definitely a huge warning sign to me in earnings season right now suggesting that company key people know that there is some bad news from their companies that are on the horizon.
Another interesting trend that I have noticed is that gold prices over the last two major market collapses started to rocket up prior to the market haircuts and fell as the market tumbled (likely a move to get money off the table, profit from US dollar weakness and then to liquidate to cash in order to buy back into the market after it fell). This cycle seems to be reoccurring since in the last two weeks gold has rocketed up to almost $1060 US an ounce just as the market has started to lose momentum and just now has started to fall back down.
I am still of the sentiment that the caution flag is up for equities and there are more surprises on the way.
Feel free to contact us for a no obligation check-up and use the results to clarify your own situation and see what choices you have to face your challenges.
Sept. 24, 2009
After a short break I am glad to be back in the saddle. Since the summer, I've been in a cautionary mode due to a lot of the true technical data hidden in the positive news reports and the political propaganda of central governments.
Yesterday, the US Federal Government declared that they would be keeping interest rates at extremely low levels for quite a while going forward. Definitely not a sign of economic prosperity yet.
The market reacted with an across the board loss to markets in North America. Today as I write this, markets continue to fall with a current 96.7 point loss to the TSX and rising (although the market started in the green). More telling though is that within the last 2 weeks, oil prices have fallen about 7% even in the wake of a falling US currency and a rising Canadian dollar compared to the Euro. Gold still remains strong at between 1010 and 1020 US an ounce.
Japan Air has now asked their federal government for a bailout the 4th time since 2001 while Japanese exports fall for the 11th month in a row. Rite Aid (a consumer defensive industry that should be unlikely to be affected by the economy) has lowered its outlook for 2010.
There are reports that insider sales of stocks has increased which is generally a sign that internal management of public companies can see economic woes ahead and are pulling their profits before the rest of the public can cause the stocks to plummet.
It's been a painful process to be in this holding pattern and perhaps the next market fall which more and more analysts like those at Sprott Asset Management may not occur quickly but it will still likely be significant. That said, it is acknowledged that there is still a lot of credit write offs looming in the banking system that have been temporarily stabilized by government bailout money. It remains to be seen how this spectre will play out and whether the credit taps will be opened up more or if credit will seize up again. As it stands, while credit is flowing like slow trickle, lending still remains restricted compared to 2007 and a leading reason why corporate bond funds have being doing extremely well at 400% better performance than is normal for them.
No matter what, in my opinion, there is still a bumpy ride ahead for us.
Feel free to contact us for a no obligation check-up and use the results to clarify your own situation and see what choices you have to face your challenges.
Aug. 17, 2009
Today we are seeing a major pullback worldwide on growing concerns that China has finished restocking their reserves and they will no longer be buying commodities. While Japan's GDP showed the first growth this year signalling an end to their recession, conservative opinions are that this might be premature good signs.
Lowe's in the US showed a 19% drop in revenues and was less than analysts estimates supporting the view that consumer confidence is still in doubt (July saw a month over month decline in consumer confidence compared to June in the US).
In Canada, GDP deficits climbed suggesting we are not out of the woods yet despite the Bank of Canada's brazen declaration not less than 1 month ago that our recession was over.
China's markets saw over 8% loss in one day topping all one day losses since November of 2008. The pullback across the board is significant and in line with my opinion that things went up way too fast and nothing is fundamentally supporting it.
July 28, 2009
Markets over the last week bounced off of the losing streak the previous week on speculation that the economy wasn't as bad as previously thought and the Bank of Canada declared the recession over in Canada (though it cautioned that it could be a slow recovery and that external factors or unexpected factors could push us back into a recession).
As always with speculative investors buying on headlines, the week of gains led many to believe that the worst is over.
This week however, as I've anticipated, the economic data that is coming out is gloomier than previously expected. Consumer confidence in the US has fallen to 46, durable goods orders have dropped 2.5% in June and large companies are showing massive decreases in revenue (eg. Oil Sands Trust down 91%, GE down 47%, Merck down 12%, Enbridge down 40%, Time Warner down 34%, Talisman Energy down 85%, Nextel-Sprint wider loss than expected, Microsoft and IBM also showing wider losses than expected).
In terms of June building permits, they were down 8.7% and housing starts were down 3.6%. The Case-Schiller housing index in the US might show a month to month gain but still a year over year loss. Optimistically this could indicate that the US housing slump has slowed down but in my opinion, the small increase in purchases and prices is only being fuelled by the threat of rising interest rates. With consumer confidence where it is, still rising unemployment, the highest EI claimants in Canada since the statistics were recorded, and rising bankruptcies, I doubt that this is the end of the housing slump.
With China reporting that durable goods orders were the worst since January (internal sources report that Chinese exports are flat and insignificant), investors have gotten afraid, yesterday pulling 187 points out of the TSX and as I write this 126 points today (peaked at about 155 earlier). I suspect that this will be the trend for the next bit knowing that US purchases of computers, airplanes and cars is likely to continue well into 2010 and with growing pressure of another credit system crack as prime mortgages are facing renewal with decrease equity and higher interest rates on 5 year mortgages, the risk of another massive stock market fall is growing.
China has declared that it is no longer interested in financing more of the US debt that is growing from the stimulus packages that they are deploying. The question is who is the US going to finance more debt from? The US consumer debt has fallen slightly but it has been replaced by the US public debt and until both of these numbers fall, the US economy in my opinion is still in serious trouble.
July 16, 2009
Realty Trac reports that US mortgage foreclosures hit new highs in line with expectations that things will still get worse economically before they will get better. Marriot hotels reports a 76% drop in revenue as world travel drops due to the recession.
Nokia 2nd quarter earnings are down 66% which in my opinion is a warning that consumer spending is down given that Nokia tends to be a significant player in the non-business user market.
US jobless claims dropped however experts point out that the true statistics may be masked by various factors. However, the jobless rate is still extremely high with the US government expecting it to hit a high of 10.1% before it will start to get better.
Volatility is extremely high right now and in my opinion caution is still warranted due to speculative investor activity.
In Canada the Canadian Real Estate Association reports that compared to June 2008:
the 10 best cities for increased real estate prices are:
the 10 worst cities for real estate losses are:
With Canadian debt a continuing concern and bankruptcies on the rise, I expect that overall real estate prices will continue to drop as mortgage foreclosures rise. This will be fuelled by negative equity and rising interest rate foreclosures similar to what we saw in the late 70's.
July 6, 2009
The job loss report that came out in the US on July 2 was dismal as I expected. Job losses were 467,000 instead of the 365,000 that were expected (27.95% worse). This triggered a wave of concern about the road to recovery with investors heavily pulling the plug today with the TSX down over 3% as I write this.
This is not overly surprising as Obama's tune switches from green shoots to it will take us more than a few months to fix this problem that took years to create.
The data that continues to stream in shows a pattern of decreased production, lower goods prices, lower energy demand, and job loss statistics that continue to be negative. There is a new growing concern that as consuming savings rates rise, it may counteract the economic stimulus packages that are being employed in North America.
For the meantime, I believe that a cash position is prudent until this wave of investor concern passes.
June 22, 2009
Today the TSX lost 453 points on a continuing meltdown trend much like the beginning of the market crash in November 2008 and March 2009. As I reported before, the underlying economic indicators beneath the optimistic propaganda of the world governments, did not support such a rapid rise in the market. The World Bank forecasted today that the world economy would contract by 2.9% in 2009 and expand again by 2% in 2010. Not only is this a significant change from their previous 1.7% contraction forecast but the forecast for 2010 also shows that full recovery will not occur in 2010.
While today's market result is awful, as I held out for a while now, it was expected. I strongly believe that this downward cycle could test the March 2009 lows as more of this quarters economic data starts to come out. In my discussions with various business people from different industrial sectors, I am constantly hearing that sales are down 30% or more. Lays continue and more and more companies are trim costs. While the initial layoffs and shut downs were "fat" now these companies are starting to look at cutting "meat from the bone" in an attempt to stay viable.
Nortel today reports that they will not be able to emerge out of bankruptcy following the sale of their wireless division to Nokia.
Canadian Employment Insurance claimants increase by 2.7% in April and in the first quarter, and Canadian net worth dropped by 1.3%.
This is far from being the end of the economic sorrows but I believe that this down cycle will likely be the last major one between now and the road to economic recovery.
June 15, 2009
Today more and more reports are coming out that the economic recovery will be slow. With mortgage foreclosures up 62% in the US, credit card delinquencies up 11% and car loan delinquencies up 28% in the US, the world is starting to turn away from the US as the source of economic growth coming out of this slump.
Today the TSX as I write this is down over 240 points as has been underwater most of the day due to a sell off. Insider Insights suggest that insiders are selling off stocks due to a growing cautionary sentiment.
Gold is selling off too, likely to raise capital to regain a stronger cash position in light of today's large market losses.
In Canada, while housing sales have increased, the average price is down 3.2% from this time last year. This data also presents problems or "headwinds" that analysts like to refer to now.
I still stand by my opinion that now is the time to remain cautious with equity markets.
June 11, 2009
As much as the spin doctors are trying to keep numbers positive, there is still a lot to be concerned about regarding the world economy. In the US sales data increased .5% but once the rising cost of fuel is adjusted for, the increase in sales is only .1%. This according to Ian Shephardson (chief economist at High Frequency Economics) is hardly a "green shoot" and with the increasing pressure from fuel prices, consumers will be unlikely to increase their core purchases any time soon.
US initial job claims are down to 601k but the number of total unemployed remains high at 6.8 million and holding indicating that not only those that have been recently laid off but all the unemployed are having difficulty finding jobs. According to the stats that makes about 1 in 9 North American resident is unemployed. This is a truly scary and staggering number. Canada, new home prices are down another 3% in April year over year.
Locally, a poll was done and found that 58% of British Columbians would be totally unprepared financially if they lost their job.
This week the market started to flatten out indicating a potential turning point. More and more analysts are joining the bandwagon that the market has recovered way to fast and could tumble. We are definitely seeing a pattern of investors taking profits with the recent sell off of equities and gold.
Since the beginning of the quarter I have been quite concerned that the market could go back down to the March 2009 lows. While I might have been ahead of the market in my views, I still believe that given how fast the November and March lows occurred it is perhaps better to be off the betting table prior to the fall rather than trying to exit as everyone is trying to get their money off the table.
May 26, 2009
The latest quarter's economic data is starting to trickle in and as expected, they are not so rosey.
US housing prices are down 18.7% compared to this time last year, Cdn EI claims are up 10.6%, German exports dropped 9.7%, Germany's GDP fell 3.8%, and BMO, the first bank this week to roll out it's quarterly data had profits down 44% (they are currently up 1% because they beat expectations which may not be accurate due to cost cutting measures and the general practice to use low ball estimates to regain credibility after being so far out of line in the 2008 market destruction).
It seems that investors are still buying through automated programs and on headlines. The proof of this is despite the poor economic data and the test nuclear detonations by North Korea, gold prices have fallen today only because the US dollar gained ground on the expectation that other currencies would lose ground. That said, the US dollar will be judged again depending on how it's economic data rolls out.
Another demonstration of investors buying on headlines is Timminco. I've been tracking this company due as part of my interest in alternative energy companies and watched it's price plummet last week on the headline of a class action law suit and this week rocket 49% on news that Q-cell replaced and signed their contract with Timminco for solar grade silicone for the next 5 years. Both of these massive swings are not due to fundamental mechanics.
There is growing sentiment with the analysts that the market has recovered way to fast and too soon. They feel that there is a serious possibility that the market could fall and test the March 2009 lows.
I still hold my opinion that gold is the place to be right now as the world digests all of this economic data, especially given that my gut feeling is that the data is going to be negative rather than positive. Only time will tell.
May 19, 2009
There is more evidence coming down the pipeline that in my opinion does not bode well. Even though the US federal government keeps declaring that the economy is on the mend and that there are "green shoots" emerging, the actual data coming out doesn't support that.
The market in the US shot up yesterday on reports that Home Depot had profits that exceeded expectations. However, today it was declared that this profit came as a result of massive cost cutting. This implies that the better than expected profitability may be artificially due to the cost cutting and worse, the next quarter may show losses as Home Depot and thousands of other companies that have cut costs and showed profitability now do not have any more fat to cut and the true performance numbers will shine through.
Nonetheless, housing starts in the US and Canada are down (US is down 13%). Amex just cut 4,000 jobs and ABN AMRO cut 5,000 jobs. These are signs that perhaps the obscure analyst is correct that the economic decline hasn't ended and that the "green shootists" are premature to call the levelling out as a bottom rather than just a return of the decline rate to its baseline without the unusual effect of the worldwide de-leveraging process.
At the end of the day, fundamentally support market values are related to profitability and not speculation. If things don't go down now, once the next quarters sales data comes out (without the influence of cost cutting measures) investors are likely to pull the plug if sales data is still down. I'm betting the next quarter will still show losses since the system is far from fixed.
Warning signs that this obscure analyst is correct is that gold still has not decreased in value significantly (a sign that many investors are using it as a safe haven) and the reports that Paulson & Co. and Lone Pine Capital have made large bets on gold via the SPDR Gold Trust (becoming the number 1 and 2 major shareholder). Something is brewing on the horizon. How big and how bad a storm is anyone's guess but I think that an economic recover right now is still premature. Locking down the hatches and preparing for a steep ride down is probably a prudent action.
May 10, 2009
While the markets still rise, there is growing sentiment that there isn't enough fundamental support for where the market is right now. Gold may have dipped slightly but it has not fallen precipitously as the market rises thus indicating that there are many investors who are still buying gold for safety. This would suggest that these gold bugs believe that the market will fall again.
Given the world's credit problems and jobs still being lost (despite what the statistics state), there is a high probability that the market will test the lows again.
The following article sums things up pretty well and is part of why I hold the position that for short term investors, pulling out of equities for the meantime might be prudent.
May 3, 2009
On the weekend investment guru Warren Buffet announced to Berkshire Hathaway AGM shareholders that the US dollar is headed down and inflation is coming back. Reportedly he has never been in favour of gold for 44 years until now.
This is also in line with China's reported stockpiling of gold which in my opinion spells trouble. Recently Russia and China strongly suggested that their currency be included in the world reserve currencies. This in combination with China's gold hoarding gives them the perfect opportunity to make another play on the US dollar. Because China still holds large reserves of US dollars, it is conceivable that they could dump them on the world market thus devaluing the greenback. The purpose of course being to allow the Chinese currency to go up relative to the US dollar. This in turn could allow the Chinese to afford more foreign products.
This devaluing of the US dollar could lead to massive inflation in the US (in line with Buffet's warnings). At the same time because gold is priced in US dollars, the value of gold will increase when the value of the US dollar falls. This will allow the Chinese to purchase back more US dollars and hedge against losses in a monetary manipulation. If the US dollar rises after this gold sell off, then the Chinese will again be in a good position economically as they hold more US dollars than they did to begin with.
Regardless, lots of analysts believe we are in the twilight zone as things are happening in the markets that have never happened before.
My opinion is that we are seeing the side effect of sidelined investor money popping back in the market due to buying on emotion and the reported large movements of investment money from mutual funds into ETF index funds (would have the artificial effect of buoying up the indexes as a whole).
One little mentioned theory that I think holds water is that the economy was contracting on a preset rate. This rate accelerated as hedge funds de-leveraged and shear panic arose in the minds of investors and company heads leading to an accelerated decline in the market and massive layoffs. This extra force has no subsided which may encourage some analysts and investors to believe that we have bottomed out and they have begun to move back into the market. However, this theory holds that we have not bottomed out but only decelerated the drop. Should this theory hold true, then the market could once again test the March 2009 lows.
I believe that this theory holds water given that there is no fundamental support for where the market is right now. Oil is still trapped in a price range that doesn't indicate that the economy is rebounding. Layoffs continue to grow, GDP numbers continue to decline, quarterly sales data show that losses continue to occur (although results have beat extremely negative doom & gloom expectations) production orders are down, car sales have slumped and there is still the risk that major financial institutions are still in jeopardy.
The next month will certainly be interesting.
Apr. 20, 2009
Today we are watching a huge pull back in the market. One week ago, I informed short term investment clients that a pullback in the market was in the works as the first of the quarterly sales data started to hit the market. At first I thought I might be wrong as the TSX continued to rise another 500 points from my call point.
However, as I write this, we are down about 3% in the TSX with oil falling 8% and gold rising 2%. This is the first major pullback since the latest rising market started. These are all indicators that show that there is still instability in the stock market. Investors are still using the "hit and run" tactics to take profits off of the table. Some analysts are predicting that we are in store for the largest market drop yet in part because of the rapid rise of the market from the 7500 point range.
I need to stress again that Gold's upward movement is tied to the lack of faith in the stock market and a lack of faith in currencies (hyperinflation threat that exists because the central governments are printing massive amounts of money to fix credit markets). This coupled with the fall of the price of oil indicates that investors are predictably reacting to the poor quarterly sales data that is coming out.
For long term fund investors, I need to point out that timing the market is a risky venture when it comes to long term gains and losses. Data suggests that trying to time the market for long term portfolios has a greater chance of decreasing long term results.
For short term accounts, timing the market, while undesirable, may be necessary because the market may be on a down swing when you need to use the money. Therefore for short term accounts stepping out right now to money market or cash may be a good idea.
Looking forward, it is comforting to see that in the last quarter, the market rebounded significantly and recovered 27% of the losses from the TSX highs of 2008. To do this in about 2 months shows that the fundamentals of the market are still working and that the market will likely come back stronger than before.
I've long held that for now, Gold holdings will be key to ride out the stock market storm and the huge inflation risk from currency printing. Oil long term will be a serious winner as the world economies emerge out of the recession so buying into oil companies anywhere below $50 US a barrel is an excellent discount price with huge profit potential. Oil's current short term volatility also shows that this resource is likely to pop up quicker than is traditional for resource stocks in economic recovery cycles.
Uranium is a serious sleeper deal right now too. With much of the world moving from third world lifestyles to second and first world living standards, the demand for electricity will seriously exceed the world capacity to generate it from coal and oil. With other energy alternatives (solar, hydro, wave and wind generation) still in it's infancy, nuclear power remains the only proven and viable method to meet the world electrical demand. There are reportedly some 88 nuclear reactors worldwide being constructed right now. Key countries that can supply uranium are Canada and Australia so Canadian uranium stocks will likely be very profitable in the near future.
Financial institutions in my opinion have had a premature pop as investors were wooed by the profit data showing earnings better than expected. However, investors have been reacting to headlines and not to data as their nearsightedness misses the fact that earnings from the financial sector are still way down compared to 2007 and 2008. RBC's recent $850 million write down from it's Centura bank operations in the US show that there is still trouble on the horizon. I still maintain that writedowns will continue at least until the summer (end of the second quarter) due to the transparency and restructuring that the governments are requiring as part of their bailout package. At that point the risk of loss in this sector will likely be mostly over and it may be a decent time to move back into financials.
The manufacturing sector will still have lots of surprises as major companies like GM are facing serious layoffs and pay and benefits cuts of file for bankruptcy. The manufacturing sector is still not out of the woods and the potential for more layoffs is still high as companies whittle away their financial reserves.
Apr. 7, 2009
Markets have started to invert. It is no surprise given that the 2009 first quarter sales results are starting to roll out. Some investors believe that the sales data won't be that bad and so they are holding tight. However, the price of oil has started to cut back, and gold prices have started to rise again, clearly indicating that enough investors and analysts believe that we are due for another drop in the market.
I believe that the later camp is correct. The data that is rolling out shows goods inventories declining threatening to drop the gross domestic product of the US and Canada. Worse, there are indications that we will be witnessing many once powerful companies liquidating their commercial properties as their ability to get refinancing is threatened by the continuing credit crisis. Look at Canwest Global and their inability to refinance their debt and pay their upcoming interest payment forcing creditors to call their credit.
This threat that corporations are starting to fail in waves raises the risk that corporate bond investments will default. With government bond interest rates at all time lows, corporate bonds at all time high risk levels and equities lacking support as investors sell on headlines, we continue to be stuck in this range bound market where cracking 9100 points on the TSX has been a serious challenge.
That however doesn't mean profits are impossible. To the contrary. Well run funds where portfolio managers have large cash holdings and turning over their portfolio a little faster than normal are showing a disconnect from the TSX (less losses and greater gains). Even with day trading cherry picked stocks, I've been able to personally earn 10-130% returns on short term stock holdings. Profiting at these levels however is still a challenge requiring hourly monitoring of stock portfolios and the interrelation of gold and oil prices and investor sentiment sprinkled with news headlines.
On a greater scale, the TSX has over moved from 7500 points to just under 9100 points in two waves. This supports the notion that the recovery is going to be tremendous especially based on IFIC's estimate that over $72 billion remains tucked away in cash, bonds and money market funds, all waiting to rush back into the market when confidence returns.
Mar. 6, 2009
The last week has been a tough one for the North American stock market. After the first slide back down to the bottom on Monday, created a lot of negative sentiment. Breaching the November 2008 low this week, both the TSX and the Dow fell to their lowest points in years. The charts look like a plane that has come in for a crash belly landing (bouncing a couple of times but basically sticking at the bottom).
Some analysts attribute this reaction to the news that the Citibank bailout won't succeed thus requiring the US government to increase the amount of bailout money that it has dedicated to Citibank. This in conjunction with high unemployment figures, continued threat of bankruptcies of once mighty household name companies, falling dividends, decreasing sales and banks still rolling out bad asset write-offs, has caused this breaching of the November low according to journalists.
Gold momentarily received support as investors fled from equities markets but even then it kind of flattened out too. Some analysts suggests that there is not enough fundamental support for gold over $1000 US an ounce but according to other camps it is expected that gold will crack $1200 and ounce and may even get as high as $1500 an ounce (especially with the fear of currency shrinkage caused by rampant printing of money as part of the worldwide economic stimulus tactics).
In my opinion, there is likely another element that is obscuring what is happening. As I have stated before, the smart investors are now playing a hit and run game. Using a short term investing strategy many investors are rebuilding their loses through quick buying and selling of their assets. This continued volatility continues to fuel panic but more importantly, as the end of the quarter nears, hedge funds that only allow redemptions at the end of a quarter are likely converting to cash in order to satisfy expected fund redemptions. This mission to raise cash just fuels the hit and run tactics that result in profits being taken off the table before the market can move up for any extended period of time.
The looming threat of hyperinflation is already occurring despite some camps that believe that monetary policy can be adjusted fast enough to prevent hyperinflation caused by printing money and the resulting devaluation of currencies. I have noticed that a lot of prices at the stores on manufactured goods and food supplies are rising in cost despite the central banks claims that deflation is occurring.
While it may be true that deflation is occurring on resource commodities, I believe that at the retail point, prices are rising due to the loss of volume pricing. Without the cost efficiencies of high volume manufacturing that feeds high consumption demands, companies will be forced to need to increase their prices to maintain functional profit margins to compensate for the higher production costs that result from less efficient low volume production. Simply put, if consumers are not buying finished goods, manufacturers cannot continue to produce in high quantities. As the volumes of production drop, the cost rises and end retail prices must rise for companies to maintain profitability and meet debt obligations or restore positive cash flows as their corporate investments have fallen in the 2008 recession. This vicious cycle in addition to the growing threat of monetary devaluation has already resulted in inflation and makes hyperinflation a likely near future outcome.
The sad thing about all of this is according to economic theory, the solution is that people need to spend money and reduce debt. Reduced spending to try to reduce debt simply causes the recession and the negative economic activity to be dragged out longer than is necessary during any downturn.
As with all things, this too will pass and the resulting playing field will look very different as only goliath companies that survive (and may have even grown by gobbling up the competition through takeovers) will now have the whole consumer pie to themselves.
Feb. 19, 2009
The week ended with losses in the TSX that are about to test the Nov 2008 lows and with new lows in the Dow. It is no surprise with much of North America's stimulus package money slated to arrive by April of 2009.
There has been a magnificent flight to safety with gold bullion being seen as the only real currency right now. However much of its rise past the $1000 per ounce mark is due to speculation and fear. There are still signs though that gold buyers are adopting a "hit and run" methodology in this hot market too. Silver however has been rising faster than gold with about a 27% increase in market value year to date compared to gold at about 23% increase.
While there is the possibility that we might test the lows in Canada or even slide down past it, initial signs are that it is unlikely to slide dramatically past the lows because there is a lot of resistance in the equities buyers market to let support the view that we are due for another huge drop. My gut feeling is this is still a result of more "hit and run" buying as more investors and institutions adopt this strategy as part of their plan to recover their 2008 losses.
Libor continues to remain fairly flat showing that the credit market is not necessarily improving and more businesses continue to roll out quarterly decreases in revenue and job layoffs.
The Bank of Canada expects the economy to stabilize and come out of the recession by the end of 2009 while doom and gloomers feel that the US might be experiencing a sniffle while Canada will catch the cold. Of course this could be the case but with blue chip Canadian resource producers, despite their massive hit in 2008, they tend to save the day on the TSX whenever the financial institutions drag them down (a pattern that we saw throughout 2008 that created TSX profits during much of 2008 when the US had already slid into recessionary territory).
I think Canada still has some wild cards left and that the recovery will not mimic what has happened in the past.
With the current TSX lows that we are seeing, this is another good opportunity to cost average into the market and deploy sidelined cash to buy discounted blue chip portfolios in an opportune moment that we will likely not see for another 50 years.
Feb. 6, 2009
While Obama fever seems to be lifting the sentiment of the American people, the sentiment of investors is still rather muted.
Prior to the Obama administration takeover and the successful passing of the Conservative government budget (that threatened to spin the Canadian government into chaos and delayed the injection of an economic stimulus package but instead effectively shattered the coalition government threat), the market has effectively remained temporarily flat as I expected.
Analysts called this a "sucker rally" or the testing of the waters prior to a rally but my opinion is that in fact there are 2 overriding factors creating this pattern. You can clearly see this in the TSX index chart. The red line shows the average zero returns of the market since December and the lack of serious volume of trading (other than in January which was due to investors rebalancing their portfolios after the December tax loss selling).
First the lack of any serious economic stimulus packages in North America as we waited for the Obama administration to take over and the Conservative government to try to bail themselves out of political jeopardy. Now we wait for the actual money to start going from government coffers to the people where it is needed. This, in my opinion back in December, would create a minimum of 1-2 months of average zero market growth due to this waiting to see what would happen politically.
The second factor in my opinion is that the market is taking a new hit and run approach. The world investment markets are basically a huge poker table with only so much money on it. When the credit crunch started to unravel, margins calls forced leveraged investors to convert to cash and this wave of losses panicked risk averse investors who also proceeded to pull bets off of the table. In this domino effect everyone in equities took a hit in this process as there were no places to hide (all equity sectors and even bonds and treasury bills took a hit. I believe that the data now shows a hit and run approach by the 1000 point swings up and down behaviour that is stuck in a range that has not pushed past 9500 points. The volume of trading also shows a lack of a break out into a rally and in my opinion also the lack of a "sucker rally". This low level of trading volume and this range bound market value is more indicative of investors placing small bets and taking them off of the table whenever they see some small profits. The hopes is this hit and run tactic will slowly but surely re-equalize the poker table's betting piles.
As of today, it looks like there may be a small rally beginning in the market but I believe this is still part of the hit and run tactics. Gold is falling as investors take those profits off of the table and the equity markets are rising as they try to take advantage of that market. However, oil futures are dropping which is a sign that investor sentiment is that the economic future is still not on the upswing. My view is that oil consumption and the ability to afford high gas prices will only go up if the economic future is bright. As long as oil is range bound in the $35-45 per barrel range, there is no reason to believe that investor sentiment has improved.
I do believe however that the market has huge potential to start moving up after the summer of 2009. The huge wave of layoffs is starting to happen as expected and I think the banks will still be rolling out credit writeoffs until the end of the 2nd quarter. After that it is all new territory with no play book. What is for certain in my view is that when economic machineries world wide come back on line, resource equities will rocket and not lag as is traditionally the case (due to resource destruction as inventories are exhausted and production is halted during this downturn and accommodating the fact that resources are not renewable and are getting more scarce).
Regardless, there is also evidence that as investors sit on the sideline, the desire to re-enter the market is still strong and probably getting stronger with each passing day like a spring that is compressing. One can see this in the fact that the trade volume is not really dropping and swings of over 200 points in the TSX are becoming mainstream and more frequent.
Chances are the market will recover stronger than it was prior to the fall. Whether this recovery will be rapid or slow (V versus a U shape) is the trillion dollar question. I believe that due to the hit and run tactics being played out, the bottom will be U shaped but I think the recovery will be a lot faster than the 2-3 year pessimistic view of some analysts simply because as deflation builds, so too does the threat of massive inflation when the system corrects.
Jan. 21, 2009
The Obama inauguration saw one of the steepest drops in the market since the great depression. While I believe that this was largely due to coincidence, the current patterns of ups and downs averaging flat returns supports my view that the market is taking a "hit and run" approach to try to recuperate lost assets. While fundamental analysis still holds water long term, I don't believe that sentiment and fundamentals play any role in this short term trading strategy.
It stands as no surprise however that the market is punishing financial institutions given that it is my belief that they still have a lot of bad credit assets that they will continue to roll out until at least the end of the summer. That said, financials are still not a good sector to go into yet even though their discount trading levels are very attractive.
I still believe that we have hit a low back in November 2008 and that the market is not likely to slide beyond that but then again anything can happen. Take comfort in the fact that if you enter the market now, the amount that you can slide down realistically is much less than what happened between July and November 2008.
Jan. 8, 2009
The start of the year had a sudden rise in the stock markets but it quickly fell yesterday. Some of the speculation is that significant numbers of investors thought that the world was on the verge of economic recovery. The onslaught of bad economic news (more layoffs, more loss summaries, etc.) brought that sentiment to a halt as the market dived 350 points on the TSX yesterday. Today we have lukewarm interest in the markets.
At first I thought that perhaps my view that the market would be basically flat through January might be wrong, but the sudden drop yesterday that erased a whole weeks worth of gains lends support to my view.
I suspect that the sudden interest in the market in the first week of trading was largely due to hedge funds, various investment firms and private investors rebalancing their portfolio after their December 2008 tax loss selling.
I also suspect that in this new trading environment, a vast number of private day traders are taking a hit and run approach. They trade into the market when it is down but showing some growth movement and then they dump their holdings to capture some of the gains. They then repeat this cycle as the market falls back down (some perhaps also shorting the market on the way down too). While this technique does not gain huge amounts of profit from stock growth and requires lots of direct decision making and trade activity, in the long term, the constant taking of small profits can end in the same result of a 20% plus profit by years end.
This pattern is definitely being seen in the gold markets as the yellow metal gains value and then suddenly reverses as investors sell of the gold to ratchet up the value of their pile of money.
Nonetheless, market behaviour is still holding to my expectations that commodities (primarily gold and energy) are just waiting to bust out of the gates (each positive day usually shows massive gains in these sectors) with financial service firms still lagging behind.
Analysts have switched to a buy recommendation on Canadian insurance companies given that we have basically hit rock bottom and unlike the banks, they do not directly sell bad asset backed commercial paper. I expect that the banks will continue to roll out writedowns of bad bad ABCP until the end of the summer of 2009 at the very least.
On different fronts, some bonds are trading at historic highs and the threat of a bubble bursting is there. However, until economic stability and the glimmer of economic recovery arrives in the world, I believe the bond bubble will not burst.
Because of the threat of this bubble bursting, bonds are likely only a good holding for 6-12 months max while long term investors are better off staying in the equities market or moving into the equities market right now to avoid bond losses long term and to take advantage of the enormous growth potential in a currently heavily discounted stock market.
Dec. 31, 2008
Now that the year has come to an end, we see that 2008 is the worst performing market year next to the 1931 Great Depression era.
The year ended with the TSX gaining about 8% in the last week probably due to tax loss selling and savvy investors buying the discounted selling of good equities.
Gold started to gain ground again, heading towards $900 US an ounce as political turmoil arose in various regions worldwide and as the US dollar started to falter in value. I expect that due to the huge amount of money printing at the US central bank, gold will likely gain even more ground and probably topple the $1000 an ounce peak in 2008.
Energy stocks that were greatly beaten down, seemed to have bottomed out and are starting to gain ground again. Without a doubt, energy will recover faster than in previous down cycles due to the growing scarcity of the resource and the increasing cost to deliver. Once economic conditions start to recover, I expect oil prices to soar.
The financial institutions I believe will still have issues since I believe that they still have asset backed commercial paper write-downs to reveal. Most of it is out, but I expect more to roll out until at least the summer of 2009. Regardless, the financial institutions have a lot of messes to clean up which the bailout money will not resolve on its own.
In North America the rest of the economic stimulus packages probably will not hit the streets until Feb. 2009 and in Canada probably March 2009 due to the political stay of execution that was granted by the Governor General. This I believe will keep balanced fund performances at bay for at least 2 to three months with sideways growth (ups and downs averaging to no growth). While the equities market is trading at a huge discount offering great value and unheard off potential growth, I feel that resources might move in the first quarter due to monetary deflation that awaits but I expect financials and general market conditions to be static for 2 to 3 months.
So called defensive investments (like Walmart) will likely offer good dividends and moderate positive growth but are unlikely to save the day.
Treasury bills I believe will still be a losing bet as more investors flee the market thinking that T-bills are better. For sure, the long term bonds will make investors lose big time since it is likely a guarantee that 10 year interest rates will exceed the bond rates currently offered.
Here's to a better 2009!
Dec. 9, 2008
The last month has had interesting ups and downs as economic data worsened to no surprise. Hedge funds are still deeply entrenched in the system creating the risk of downswings in the market when investor sentiment goes south and the funds are forced to sell in order to cover their loan margins or due to quarterly exodus from the hedge funds.
ETF's are being widely promoted only because of their low MER's but in reality they can be more volatile than mutual funds and without someone at the helm to help guide your way, they can lead to disastrous results. For example Horizon Betapro has bull and bear funds. The question is which direction is the market going in one day? Worse, even if you chose the right direction for the market, the two opposing funds in each category do not go up and down by equivalent amounts.
Nonetheless, electronic trading using computerized indicator programs, ETF's, hedge funds, short selling the market and profit taking from short term traders is what is likely responsible for the majority of ups and downs and essentially flat average movement in the market since we hit the lows.
In my opinion there is mostly upside potential right now demonstrated by one of my own holdings which gained almost 90% in 3 weeks during the summer highs and has fallen to 1/20 of its high value when I recently moved back in and bought it. It is now sitting at a solid 35% gain after 2 weeks despite the massive ups and downs recently. This in my view demonstrates that good stocks are at a discount right now with huge growth potential compared to GIC's and bonds, and that there is still a huge market of investors just waiting to step back into the pool.
As of this morning the Bank of Canada dropped it's interest rate by 3/4 of a percent; no surprise here. Typically, this will have a deflationary effect on the value of Canada's currency internationally which can be a good thing for our commodity heavy economy (we become more competitive price-wise to the world).
While it is true that Canada's economy has cooled somewhat as world growth slows and demand for resources decreases but what is also true is that there is a growing amount of inflationary pressure in the system as the US government prints extraordinary amounts of money to stimulate their economy. In a nutshell, when the true value of the US dollar emerges, there will be a huge exodus from the currency and a rush towards gold to ride out the inflationary pressures that will pop at that time.
Second, as I mentioned previously in my comments, the one right thing for governments to do in a world slow down is to spend money on infrastructure. This will keep people working, lift consumer mood, and focus on internal growth. Infrastructure building will also create a huge demand for resources and Canada is once again in the best position to grow from this due to it's falling currency value and the huge amount of resources available.
President elect Obama, has openly declared that his party will implement the largest infrastructure development plan ever seen since the 1950's. This is the wild card that speculators who left Canadian commodities didn't see and which I mentioned would alter the end path for this low market. As a result, there were huge increases in the commodity sector as speculators ran back. Funny how speculators invest without foresight and those with foresight profit from their lack of foresight.
Anyway, two troubling recent developments is the political mayhem in Ottawa and trouble with the Obama regime present the possibility for stagnant growth in the short run (at least until the new year).
The parliament showdown that has effectively put the possibility of an economic stimulus package on hold until at least February or March. Right or wrong, Dion's attempt to grab power has pushed the government to go on hiatus until late January in order to create a new budget. Even if Dion's attempt to grab power had succeeded, Dion and his coalition party did not have any evidence that they had a budget or a stimulus package on the table. Hollow stimulus promises and rally cries to the unionized workers do not create a budget. So Dion's attempted grab for power created a "no win scenario" from the get go. That said, it is my opinion that the market is reacting to political instability and a lack of a stimulus package being implemented any time soon. I feel that the market while it has huge upside potential right now will likely have stagnant growth at least until the end of January when the confidence vote showdown will come to a conclusion. At that time, if the Conservatives win, there could be rapid support for Canadian equities and if not, it will take at least another month or two for a coalition government to roll out a new budget.
In the US, there are indications that while President Elect Obama plans to roll out an infrastructure stimulus plan, it will not arrive anytime soon which means that the US economy still has downward potential in the short run. Of greater concern (although the validity needs to be worked out) is whether Obama has the right to become president. There are reports emerging that there is a challenge to his heritage and his right to be president. He apparently is the son of a US citizen and a British citizen (his father apparently was British when Obama was born) which implies that Obama is not completely of US heritage and therefore has no right to the presidency. If this challenge is indeed correct this could create political unrest in the US which would further challenge their economy.
Based on these events, there may be an opportunity to step out of the market momentarily and consider things like global bonds which are doing extraordinarily well right now as the world's governments borrow money to stimulate their economy and jump back in when the markets move in the new year. Consult with your financial advisor before making this decision though.
Nov. 12, 2008
Over the last week, we saw the floor breached momentarily and then huge support for movement back into the stock market. Today's close of 8922.57 came close to the Oct. 27 momentary low point of 8537.34 points on the TSX. News reports state that without a change in investor sentiment their is no floor and the market can fall a lot farther.
Today's downward activity was in my opinion a result of several storm heads from the news. First, American Express turned into a bank to access free federal money. Second, Circuit City declared bankruptcy. Third, Best Buy stated it has had it's worst sales records in 42 years of business. Fourth, a change in the direction of the bailout plan according to US Treasury Secretary, Henry Paulson that indicates a blind lack of direction. Lastly, a growing realization that the total bailout package will likely grow to more than $10 Trillion US, a number equalling the gross domestic product of the US.
Investors are wrongly assuming that with the US economy grinding to a halt, that there will be no economic activity for Canada. Investors are fleeing for the exit, taking Canada's commodity and financial sector down with the exodus and artificially favouring the US greenback. This in turn creates a vicious cycle of disfavouring gold which traditionally rises and falls in opposite directions to the US dollar.
Reviewing the foreign exchanges, I've realized that the Canadian dollar has remained relatively stable compared to the Euro and other world currency standards. It is the US dollar that has artificially risen and with all commodities generally priced in US dollars, this foreign exchange effect has created further appearances that commodities have fallen in price (contrary to gold producers in Canada that point out that in terms of Canadian dollars, gold prices in Canada have remained consistent).
Now the big reality check! If the US bailout package will total $10 trillion and equal the yearly gross domestic product of the US, how will the US Treasury raise that kind of cash??? The end answer that astute analysts have noted is that the US will be printing money which has an inflationary effect on the US economy (more money means less value to the greenback). As commodity prices rise in the US, investors will once again flee the greenback for the inflationary protection of gold.
We are in new waters where old formulas don't hold anymore. Key facts to note is that if the stock market were indeed dead, there would be no upward activity. In fact there is sporadic upward momentum displaying the huge pent up force of cash on the sidelines waiting to enter the market once the illogical investor negative sentiment ends.
Yes, there are major companies declaring bankruptcy, companies being swallowed up by others (Panasonic just ate up Sanyo) and major layoffs which is not unusual during economic slow downs. That said, we still have positive sales data that has surpassed analysts expectations of profitability.
Sure there is the chance the market can slide more. Sure there is the chance we can breach the last floor and sure the doom and gloomers want to point to this being the second great depression in order to sell headlines. Will this be a reality? I highly doubt it because central governments are already reacting to keep their economic machinery running. Just look at China injecting $560 million into infrastructure activity in order to keep their economy robust.
My thoughts are that there will still be stormy waters ahead. This is also still a great time to enter the market from a long term investment perspective and I have a strong belief that the old market prediction formulas will fail and there will be positive surprises that will catch the old guard by surprise.
Nov. 4, 2008
Last week the market floor was tested and breached. The debate is whether that was due to illogical investor sentiment or due to true market fundamentals (investor feelings versus true market mechanics). Given that today as I write this, we have soared above the 10,000 mark on the TSX with commodities taking the largest surge, my feeling is that the momentary breach last week was due to sentiment and perhaps panic from a falling Canadian dollar that forced investors who had held Canadian investments through US dollar accounts to flee as the gap widened.
As fast as the Canadian dollar fell reaching a low of about $1.27 Cdn to 1 USD, it surged back in less than a week and currently sits at $1.15 Cdn to 1 USD. The market fundamentals have kicked in again as the plunging US dollar (versus both the Euro and Cdn dollar) have made investors run back to gold which is now up $33.70 US compared to yesterday.
So what does this mean. The data supports that most market fundamentals are intact. There is also support for my feelings that we hit the bottom of the market on Oct. 10 but had a momentary breach due to investor panic and not market fundamentals. As it stands, equities are cheap right now. Financial institutions are still a troubled sector and I wouldn't recommend purchasing them even though their valuations are phenomenally low right now.
UBS AG in Switzerland shows an unexpected 3rd quarter profit which lends support to the view that the world recession will not be as deep or prolonged as the worse fear mongers believe.
From the greater picture, my feeling is that the world economies are slowing but they have disconnected from the US economy. This is because countries like China are reported to have only 8% of its gross domestic product related to US trade. Furthermore according to Leonard Melman's article in the January 2008 edition of Resource magazine, at the peak, the US was constructing $500,000 new home units while China was estimated at building 15-20 million new home units. With China's growth still at about 9% this year compared to US and Canada at a -.3% growth, there is a lot of logic to the view that the world economies have disconnected from the US.
Recently, the news on BNN reported that due to the credit crunch which has frozen the availability of world credit that this is proof that the US controls the world economies. My feeling is that this is not the case. The world economies are suffering some slow down due to the lack of credit but not because their economies are not viable. The reality is that credit is not available even for the credit worthy (evidenced by the Libor and Ted Spreads). For example, Ford Motor company not only is not credit worthy but they showed more than 30% loss in sales this year due primarily to the heavy truck and SUV lines. Even if they were given the credit, there is no proof that they could increase their sales. That said, companies in China that are being stalled by lack of available credit, could demonstrate increased sales if they could get their product to market.
So my view is that the world economies are not tied to US trade but have fallen victim to a world credit freeze due to all of the world banks being naughty with their asset backed commercial paper trade and all falling like dominoes with the US being the first fallen tile.
Currently analysts are suggesting that because we are going into a recession that commodities will not be favored for a long time as has been the case in past history. My view is that we are in a new rule set where commodities are not abundant anymore. When the world economies recover, inflation will take hold like a hurricane with commodities leading the way because it is a simple supply and demand economics (there isn't a lot of supply, so if there is demand, the price will surge faster than other sectors). As I mentioned, commodities are surging today leaving the reporters at BNN dumbfounded because it is illogical in their view but lending support to my view that regardless of the world economics, the emerging countries want to grow and will push to grow no matter what. With financial institutions still sorting out their messes and I believe some more messes still to be revealed, consumer spending down and world growth slowing a bit, there is really no sector to hide in but on the balance of probabilities, I still hold the view that a balanced portfolio with less exposure to financials and a little more in commodities will still be the winning formula in the short term.
Oct. 27, 2008
The big question on everyone's mind is whether we have hit bottom or not. The data still supports that the low of the market from Oct. 10 is probably the floor to this crumbling market. Many days in between market drops tested the firmness of this floor and so far it has held. On Friday the market did dip below that but it recovered to a level well above the floor in the last hour of trading. Today, as I write this comment, the market is still showing a negative trend from Friday due to negative news from overseas market losses but the news is having an effect like a water ripple at the other side of the pond. The Oct. 10th floor is still being tested (albeit the negative swing today is not as hard as Friday) but we are basically hovering above the Oct. 10th floor as we move into midday North American trading. Unless there are any serious changes in investor sentiment, we should still remain above or around the floor mark.
In other market news, the US dollar is showing some signs of eroding which is not much of a surprise. The Cdn dollar was for the most part staying put in the world markets (when you compare it to Euros and other major currencies) but it was the US dollar which was skyrocketing for no sustainable reason (the theory was it was everyone running back to old reliable when the rest of the world started to experience economic slowdowns). Because of the ramifications of the US Federal government bailout package, I expect the US dollar to fall in the world market once again driving investors back to gold as they seek a safe haven from a falling US dollar. The Canadian central bank is expected to form monetary policy such that the Canadian dollar will at best hit par with the US dollar (to avoid the drop in US business for Canadian goods which we experienced for the first time in decades when the Canadian dollar shot past the US dollar in value).
This bodes well for commodities and gold prices if the US dollar falls as I expect it will. Financials will still remain troublesome investments until they finally work out the problems with restructuring.
Various analysts still hold the position that overall this is still the time to enter the market although with some caution as there are still going to be volatile days in the market. Based on this probability, using a cost averaging approach to enter the market makes more sense right now.
Oct. 21, 2008
The last two weeks have been quite a rollercoaster ride with rapid and vicious downward movement in the market plus equally and perhaps more impressive upward momentum as well.
About three weeks ago, billionaire mogul, Warren Buffet, pumped in $3 billion into GE and another $5 billion into Goldman Sachs and has stated that he is into buying American stocks right now (more precisely American stocks with multinational exposure).
Does he think it's the bottom? He outright states he doesn't know but he thinks stocks are awful cheap right now and in 3 to 5 years time, he knows he is going to profit from his current market decision.
The TSX last week displayed some meteoric movement up as well as a small rapid down movement which in total creates a double dip that analysts say is typical of the bottoms of previous cycles. More generally, market downs seem to have a large dip and then an even larger second dip before the road of recovery.
As it stands, I believe that Dec 2007 was the first large dip down and Oct 2008 was the second massive dip down. Is it truly the bottom? Who knows but there is more pressure for the market to move up from this point forward. Current market data seems to be supporting that notion with large rallies up and small downward slides resulting in a net movement into profitable territories.
The most important thing to bear in mind is that down cycles are not new to the world's financial markets and each time afterwards, the market resurrected even stronger than before.
The recent bailout packages employed by many of the world's governments may not be popular and will not solve all the problem immediately, but they seemed to have had the effect of creating a "hard reset" on the international markets by shaking out a lot of the back asset backed commercial paper, over leveraged firms, speculative investors and other bad elements for market prosperity. I still believe that there is still some of this remaining and it will likely be shaken out in the first quarter of 2009 creating another downward blip on the market but unlikely to create world panic like we have seen in this month.
As it stands, many analysts feel that we have somewhat hit a bottom and that all of the fundamental analyses point to "buy" signals for oversold blue chip stocks.