Saturday, November 29, 2008

This Month's Stock Market Is Brought to You By The Letter W

No one is perfect. I am not that smart. Yet all the signs are there for a market turnaround. I am quoting a previous blog...On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good. North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally.

If you polled most economists, they would probably speculate as to another six-nine months of economic contraction. Markets tend to come out of a protracted drop sooner than the economy - does that mean we are near the end?

Leon Tuey, Octagon Capital Corp.'s technical analyst predicts we're about to be hit by a "tsunami rally."Leon Tuey wrote in a research note Friday that "conditions are ripe" for a huge turnaround in the coming months, and that investors had best “abandon bonds and buy stocks” to take advantage."Conditions are in place for a monster rally," Mr. Tuey wrote. "There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity."

The unprecedented monetary growth and co-operation of the world's central banks will help to turn the economy around. Clearly, that's their goal.

Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic downturn.

By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it's 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.

Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.

Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.

Wow!!! An expert (supposedly) who is going out on a limb and saying the worst is over.

“It’s going to be a really tough Christmas shopping season, but a lot of this is built into the stocks, and there is huge stimulus coming down the pipeline,” Alan Gayle, senior investment strategist at Ridgeworth Capital Management in Richmond, Virginia, said on Bloomberg Television. “We are cautiously bullish.” Ridgeworth manages $70 billion.

Wow!!! Another expert (supposedly) going out on a limb and saying the worst is over.

Martin Murenbeeld, chief economist with Dundee Wealth Management discusses in the linked video how to get out of a depression-vortex.

Wow!!! Another expert (apparently) going out on a limb and saying the worst is over.

Is it just me or are we seeing a pattern emerging?

Thursday, November 27, 2008

Here's an exercise in futility to try...

Below are six different covers of TIME magazine. Your exercise is to put them in date order from the start to finish during this "financial crisis". Try and see how you do...answers below.

Here is the answer:
  1. Energy Crunch - Jan 1974
  2. Trying to Build Confidence - Jan 1978
  3. Squeeze of 1979 (Oct 1979)
  4. Crash - Nov 1987
  5. How Bad Is It - Jan 1992
  6. Is The Boom Over - Sept 1998

As you can see, time goes on, markets go up and down, and people panic when things don't go right. I was having a conversation with a client (kudos to Mark) on Tuesday and he mentioned that he kept hearing the phrase "we are going through a period of economic uncertainty" on the radio, TV and in the news. He asked me a simple question;

"Have we ever been through a period of economic certainty"?

Unless you live in a third world country where your economic status is poor and likely to stay that way, a democratic free market society always leads to rises and falls in the market and economies. The phrase economic certainty is an oxymoron.

In a recent column, Jonathan Chevreau of the Financial Post references an article by Murray Leith, a Chartered Financial Analyst (CFA). Here is some of the text of the article...

Six months ago, the S&P/TSX Index was at a record high and investors extrapolated the best of times. This caused the market price of many Canadian equities, particularly the cyclicals, to rise well above what Leith considers "intrinsic value." Now, with the market down 50% from the highs, "many businesses are priced well below intrinsic value ... in many cases we believe there is a very wide gap between price and value." Leith includes U.S. stocks in that statement.

Now we come to the gist of the statement about stock market risk. With stock prices plummeting and we in the media disseminating 24/7 doom and gloom, Leith says it's hard to convince average investors that stocks offer a compelling risk and reward proposition. Now comes the sentence that prompted my paraphrased blog title: "Some might feel it is not prudent to declare 2008 'a stock buying opportunity of a lifetime' without offering the caveat that risks are unusually high. We do not provide an extraordinary 'risk' qualifier because we genuinely believe the opposite is true."

Leith argues that risk is a function of a company's market value relative to its underlying intrinsic value. And "with many stocks trading well below our assessment of intrinsic value, it is our thoroughly researched and reasoned opinion that overall stock market risk is presently low .... the odds of losing money over a reasonable investment horizon (three to five years), on quality companies, with strong franchises and solid balance sheets, is very low given that prices are so attractive."

From the end of the Chevreau article comes the following:

Time to buy -- anything! -- Gadsden predicts

So let me close with a prediction by a once-bearish financial advisor -- Stephen Gadsden -- who happens to have been my co-author on our 1999 book, Krash!

Subject Line: You May Quote Me.

It’s November 21, 2008. Investors have given up. Stocks are a pariah. The world’s equity markets are finished.

It is now time to ‘Buy.’ What should you purchase? Anything you like. Stephen GadsdenCo-author of KRASH!

To RRSP or Not to RRSP?

That is the question. Whether 'tis noble to suffer the slings and
arrows of declining stock markets, what do I do with my money in 2009.

I have often wondered of late - what will be the reaction of people who normally make their "last minute" contributions to their RRSP's given the recent market declines. Most clients who contribute monthly (and continued to do so) are now reaping the rewards of buying at reduced prices. While my personal opinion is that the smart money would seem to be on buying at huge discounts; I am sure there are likely people out there who remain fearful of further market declines. One amusing thing I have heard from several clients is that they intend to shred or burn their year end investment statements instead of reading them. Not sure that ignoring reality is beneficial, but if it works for you, then go for it.

Here is a simple fact to consider. If you earn over $40,000 per year, and make a $1,000 contribution to an RRSP, this provides a tax "refund" of approximately $310. In other words, when you file your taxes, you get $310 back from the government. Essentially, you are out of pocket $690. If your investments then dropped by 20%, you still have $800 on a $690 investment.

Now while holding onto your funds may be necessary for some people, reality is that people still want to retire, children still need help paying for education and these things cost money. Everyone loves a bargain when shopping for a gift, yet buying investment products at a discount still seems a difficult concept for some people.

Here is a small amount of historical perspective - since 1956, Canadian stock markets have gone through 11 periods of "bear markets" and 11 periods of "bull markets". The average bear market lasted for 10 months and led to declines of an average of -26%. The average bull market lasted for 46 months and led to increases of an average of 186%.

So what should you do? Unless you have abandoned the idea of retirement or saving for a child's education completely, then it's simple - follow your plans as if the markets had never gone down. If you want to alter the plan at all, then SAVE MORE. There will never be a downside to having more funds for the future and everything is on sale. Reviewing your current plans to ensure that your goals have not changed, discussing your "risk tolerance" and then sticking to the plan will always win out in the end. Saving for retirement is not something you stop doing when markets go wrong - if that was the case, then you should do more when markets go up. I have often said to people that whatever you think you should do, do the opposite. The reason is that people can be influenced by the media. Negative stories sell therefore it's easier to tell you how much you lost then tell you how to make up for it.

Wednesday, November 26, 2008

Tax Free Savings Account Mania Hits Canada

The next time you sit down to watch the "idiot box" for an hour, take note of the number of commercials for the new TFSA's coming January 2009. No wonder. According to a survey by Scotiabank, Canadians want to learn more about the tax-free savings account with 61% of poll respondents looking for more information. Several financial services firms are already accepting pre-registration for the account. The Scotia poll found that 40% of respondents who had not already taken advantage of pre-registration are still interested in opening a TFSA.

"Information is vital for Canadians to understand the benefits of the TFSA and how they can incorporate it into their financial plan," said Gillian Riley, managing director and head of retail deposits, Scotiabank. "As part of our efforts to inform and educate Canadians, we have trained our advisors to be prepared to answer questions and provide solutions around the account. We have also developed an online TFSA calculator that, by asking a few simple questions, can determine how much money an individual can save using the TFSA."

Wow. You would think that suddenly every Canadian over the age of 18 has an extra 5G's lying around waiting for just such an opportunity. Most experts agree that the bulk of deposits will come from the upper crust of society who want to shelter more money. Yet it will benefit all Canadians but raises an interesting question? Are you planning on making an RRSP or TFSA contribution this year? Tim Cestnick from the Globe and Mail writes about the differences and whether you should do an RRSP or TFSA. One important point - this assumes you invest the money in identical investments. Most people considering the TFSA are looking at depositing money for an emergency and therefore will have no risk attached to the funds.

Alison Cunliffe wrote in the Toronto Star puts forward the idea from an adviser that "Now that TFSAs are available, though, that counsel changes, Baldwin says: fill up your tax-free account, then your RRSP, at least for the next few years, until the amount of money involved starts to get significant".
While that certainly seems reasonable, let me ask one important question. When/If the stock markets recover, do you want to wait until later to buy into the market. Perhaps a better suggestion would be the following - commit to your RRSP's as you did in the past, but now take your resulting tax refunds and apply them to the TFSA. This serves a multitude of purposes - you are buying low on the investment side, saving for retirement, and still setting aside money for an emergency. Obviously this still needs to be looked at on an individual basis and we look forward to the challenge of making the best suggestion.

Tuesday, November 25, 2008

Market Bottom? Again?

Jeff Rubin of CIBC believes we are on the way out of this mess. MSNBC map shows the extent of the downturn. Warren Buffett likes a bargain but we cannot all be Warren Buffett.

Every time we see the light at the end of the tunnel, we suddenly seem to enter another tunnel. Before I left for my holidays, we forewarned that we should expect another drop in the markets. The amount was the unexpected news. To refresh, David Rosenberg, North American economist at Merrill Lynch, studied the 12 major troughs in the S&P 500 since 1932. What he found was that the market retested its lows “without fail” in every case. On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good. North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally.
Once again we have seen the evidence pointing out that history does tend to repeat itself - while the price of gas at the pumps looks nice, the corresponding drop in the Toronto Stock market makes people realize you cannot have your cake and eat it too. So this leads back to the obvious question as to where we are going to be in the future. If you polled most economists, they would probably speculate as to another six-nine months of economic contraction. Markets tend to come out of a protracted drop sooner than the economy - does that mean we are near the end?

When Barack Obama announced his "economic team" for the future, he discussed the need for an immediate stimulus package to get people back to work. Realizing that the US economy faces job losses, he wants to spend his way out of the issues. While this will lead to short term economic solutions, it will eventually lead to higher inflation in the future. This will mean higher borrowing costs, mortgage rates etc.
The cycle continues - until people realize that they need to save money and not spend for the sake of spending. The one saving grace in the future is the "downloading" of wealth. That is the expected trillion dollar transfer from those born pre-world war two to their children. Since the baby boomers represented the first major segment of society to "invest in the markets", it stands to reason that the transfer of this wealth will represent a major future economic stimulus.

Monday, November 24, 2008

Ah Yes, I Remember It Well...

I am back from my "vacation". What is a vacation? It's supposed to be a time to relax, not work, and spend time with family and friends. Well guess what? That's exactly what I did. One week (I was away on a cruise and for anyone who thinks me callous to leave with the current economic situation, I booked the trip back in June) aboard a Caribbean cruise ship with my wife and kids and 1400 other people trying to forget their past troubles and gambling their way into future ones.

It's important to recharge the batteries every now and then, and let me say I truly appreciate the fact that most clients I spoke with told me to go away and forget everything. Unfortunately all good things must come to an end, and I did have to come home and get back to work so here we go.

Hey there guys and gals, it's the wolfman playing a real blast from the past. So it's time to get your groove on and check this out.

Seems like only yesterday that people were getting rich on the backs of Nortel. Now, based on a 1 for 10 dollar stock split, the current value is worth somewhere in the area of...well I'm sure you get the point.

With the end of the year approaching (and based upon latest economic data, the end of time), I wanted to provide some timely recommendations on how to deal with the latest "current" financial market crisis and other pending issues.

The introduction of the new cell phone legislation in Ontario will undoubtedly lead to greater technology innovations to enable its citizens to stay connected to the ones they love (and hate).

In addition, President-Elect Barack Obama has put forward a clearly defined US team to lead us into the future, as shown on the picture below.

Lastly, we need to realize that the people in charge of things really know what's best for us. As you can certainly see below, it takes a great deal of foresight and thought to run a country/large business in today's economy. Tomorrow, I will try to provide a lighter look at the news.

Sunday, November 23, 2008

Do You Want To Buy A Car Real Cheap?

The Canadian automotive sector accounts for 9% of all jobs in this country. Based on what has been happening within their industry, it appears the Canadian "employment rate" is about to drop. So it doesn't look good but I'm sure there is some good news here right?

General Motors, Ford and Chrysler are all running out of money. Nouriel Roubini explains the impact of "bailing" out the industry as a whole. The economy will worsen in the coming months and cause the market to fall another 20 to 25 percent in the United States and abroad, said Nouriel Roubini, the New York University business professor, on CNBC’s “Squawk Box” on Monday.

There's going to be negative growth all the way to the end of 2009," he said. “The surprises from now are going to be on the downside, for the economy, for earnings, for the financial system."
Job losses will accelerate in the next months, Roubini said, and he expects a weak economic recovery in the short and mid-term.
“There's going to be a very slow recovery, because you have the financial system that's impaired; earnings are not going to grow very fast, and therefore the stock market will go sideways for quite a while,” he said.

Wow. While I'd like to say he's just being negative, Roubini predicted much of the mess we are in now back in 2006. With the latest announcement from the US fed that they are not bailing out the big 3 automakers until they get their houses in order, it looks more and more like one or all of them will need to restructure their "economic" situation. Lower salaries across the board and fewer private jets for executives will be a step in the right direction. If you had not noticed, all of the Dominion grocery stores are now "Metro". Following in the direction of Loblaws and their "Great Canadian Superstores", you can probably expect something similar in the auto industry.

Thursday, November 13, 2008

On the Road Again...

Right from the home of Jerry West, and where John Denver called "home" we're working hard in Bridgeport, West Virgina. If you have ever travelled extensively to "business conferences", you will certainly remember the deer in the headlights appearance of most people. Had breakfast with a roomful of them this morning.

On to the good news....

Now to the bad news - you go away for 24 hours and all he(double hockey sticks) breaks out. A 500 point drop on the TSX and 400 for the Dow seems to show that past predictions are accurate. To refresh your memory, what he found was that the market retested its lows “without fail” in every case. On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good.

For everyone who complained about the price of gas at the pumps in July, the price of a barrel has dropped from a high of $147 to $56. It's cheaper to gas up your car now, but you don't want to go anywhere.

Sorry for the short notes - on to Charleston South Carolina today.

Monday, November 10, 2008

Youse Guys Remember When I Told Ya..

Having never been a fan of the Soprano's, I don't like to use the word "Youse". Nonetheless, it seemed appropriate to use it based upon what has been happening in the real estate market.

Real estate markets globally are now feeling the effects of this global recession. We are slowly following the US markets as they head south. Having already seen the US housing market plunge, former federal reserve chairman Alan Greenspan speculates that there is room for a further 5% to 10% reduction in prices before markets stabilize in mid 2009. With prices dropping, the sales of existing homes are also in decline but in a different way. The effects appear to be more regional in nature (likely related to local economies) as noted in Bloomberg, with sales in the northeast dropping by 17.9%

Does this mean the same will happen north of the border? While some people may believe otherwise, the Toronto Real Estate board announced in a recent
Globe and Mail article, that Toronto prices are down 13% and the surrounding 905 region was down 8% year over year. A paragraph from the article bear closer scrutiny.

As of August, there were more condos under construction in both Toronto and Vancouver separately than there were in all Canadian cities combined a decade ago, Mr. Wolf and Ms. Kwan said. “And as in the U.S. two years ago, we are now seeing completed units pile up unsold in Canada, a clear sign of overbuilding and an ominous sign given the voluminous supply still in the pipeline,” they said.

Yet a
study from the University of British Columbia seems to contradict this with respect to Toronto. Their study shows that with the exception of Toronto and Edmonton, houses in Canada’s major cities are overvalued, priced up to 25 per cent higher than they should be to balance with rents -- given interest rates, holding costs and historical rates of price appreciation.

Even with interest rates dropping, the number of houses for sale has swelled to over 27,000. Listings are lasting much longer and we are now fully into a "buyers market". Jason Kerby penned probably the best article in MacLeans about
"Canada's Brewing Real Estate Storm". One paragraph from the article really stood out to me.

And in Edmonton, where prices in July fell 5.3 per cent from a year ago, the city's real estate board felt compelled to urge calm. "Edmonton's resale housing market is not 'plunging,' " the board said in a terse statement. "There is no cause for concern." Of course, when you issue a press release insisting there's no reason to panic, that's often a reason to panic.

The great unspoken fear lurking in the backs of everyone's mind is the kind of collapse of house prices that followed the bubble of the late 1980s. It was certainly a zanier market than today, with national prices climbing at 25 per cent a year, compared to 10 per cent this time around. Also, when adjusted for inflation, prices haven't soared as high this time. The average single family home in Toronto peaked at $420,000 in 1989 whereas in July the city's average stood at $371,000. When the Bank of Canada jacked interest rates as high as 14 per cent to fight inflation back then, the party ended with a squeal of rubber and the sound of shattering glass. In a matter of months many homes lost more than half of their value.

Having bought my first home at the end of that bubble, I often believed I was seeing similar aspects in today's markets. As such, for the past few years, I have been advising clients to remain cautious about having all of their eggs in a real estate basket. More people are reaching the "my bank owns my home not me" stage and when (not it) rates start to climb in a few years, it could lead to the declines of the late 1980's through mid 1990's.

Friday, November 7, 2008

Do We Call This The Obama Bounce?

For anyone unaware, I am a passionate hoopster and the fact that the new US President loves the sport makes it even better. For anyone who did not watch his "Yes We Can" speech, see if you can watch it without also feeling we are watching something more meaningful than the first African-American President.

Now that Barack Obama has added a new chapter to American history books, could he also be presiding over a significant bull market in the US. As I previously mentioned, it's expected we would "bounce" along for awhile as markets continued to react to the global recession we now seem to be locked in to. However, remember this - markets go up before recessions end. When will we emerge from the darkness? Mid 2009 seems to be the consensus, but who can really say. For the younger investors who have never gone through something like this before, take heart in the words of Jonathan Chevreau, who states "this catastrophic meltdown is actually good news for young investors just starting down the road to building portfolios of bargain-priced blue-chip stocks".

Another recent development - as mentioned in a previous post, the pending introduction of the Tax Free Savings Account (TFSA) will alter the way we save money. A certain mutual fund dealer just announced that it will begin offering a high interest savings account similar to the ones from Altamira, Dundee, ING and President's Choice. This will undoubtedly enhance our ability to offer competitive products, and better position funds as we emerge from the "market hell" of recent weeks.

Recently I decided to look at the returns for clients on their investments in a new light. Since saving for retirement is supposed to be a long term proposition, why not look at the returns for clients over the past five or six years. A fascinating fact emerged - clients who were invested properly (according to their profile), remained steadfast in their approach, continued to buy regularly as markets went up and down, while not bailing at the first sign of trouble did fine. I was pleasantly surprised. I called one client to tell him that he had in fact averaged roughly 6.5% since inception on his investments. He though I meant over the past six years, but I meant he had averaged 6.5% each year since inception.

All that being said, January is just around the corner, and at that time, clients will be receiving their next investment statements. Unless things change dramatically over the next seven weeks, the picture on the right represents what I expect many people to see. The question then begs do we change our philosophy when the markets go down, or stay the course and keep the destination in mind. Statistics have consistently shown that investors buy high and sell low when they try to "time the market". This link from CNN, while lengthy, truly explains why most people need to take a patient, long term approach to investing.

As always, please provide comments (below) as to what you think of this blog and where it needs to go in the future.

Thursday, November 6, 2008

Where Do We Go From Here?

Four months ago, when markets were high and we wondered if it would ever end, this picture ("hanging on to your nest egg" from the Toronto Star) may not have meant that much to you. It was around this time that I first began formulating the thought of a "blog" to discuss those issues which mattered most to my clients and their friends and family.

With the recent market troubles, most of my columns had focused on the stock markets, interest rates, and how "not to panic". While I am not saying we are out of the woods yet, and the "r" word (recession) has become part of the daily news, there are positive signs emerging. So my question to you is very simple; where do we go next?

What type of information do you want to read about? How often do you want a posting from me? Blogging can be quite time consuming and I need to know what enough people will benefit from it. The good news is that traffic to the blog has steadily increased. I remain hopeful that it benefits you the readers as much as myself.

Please use the comments section below and let me know what you like/don't like, what you want from this blog, and any areas which you feel could use improvement.

Tuesday, November 4, 2008

We Have Hit The Bottom Right?

A wise man once said "If I knew where the stock market was going to be in a year from now, I certainly wouldn't be wasting time talking to you".

While I'm not sure that this truly represents wisdom (I have used this phrase many times myself), it does ask one important question. Are we done yet? The recent improvements in credit markets and rise in global stock markets seems to indicate so. The US election today (looking like an Obama victory) will also lead to some changes. But some experts are hesitant to say we are on the way up just yet. In his
Globe and Mail column, John Heintzl points out some interesting facts about past market "corrections" (perhaps the better word is collapses).

David Rosenberg, North American economist at Merrill Lynch, studied the 12 major troughs in the S&P 500 since 1932. What he found was that the market retested its lows “without fail” in every case. On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good.

With the U.S. economy unravelling faster than most people could have imagined, this would be a strange time indeed for the stock market to ignore history, not to mention reality.

What does that mean to the average investor? It would seem to mean we can likely expect another sharp drop in the markets sometime in about one month. The when seems to be obvious, it's the amount that needs to be determined. The critical thing in this study was that it was after the second "trough" that stocks moved higher for good.

North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally. However, the confluence of forces we have seen over the past four months are unlike most things in history. Previously on my blog, I showed that over the past 22 years, the TSX (and for that matter the S&P 500) had experienced their best growth during the month of December by a wide margin. With a 2.6% average annual increase, are we now headed back to the important psychological 10,000 mark on the TSX, or are we likely to take another step back before pushing ahead.

Let's put the December 1st date on our calendars, and see where things are headed.

One last point - as you may be aware I will be away from the 12th to the 24th of November on vacation. Needing to buy some US$, and with the dramatic fall of the loonie, I recently recommended to someone that she wait until it hit 85 cents to buy her US$. At the time the loonie had dropped to 75 cents and had experienced the greatest monthly drop in history. While my recommendation seemed like madness at the time, as you can see it was not only deemed likely, but has now happened. At market open today, the loonie had risen to 86 cents.

Based on my recent history of guessing, here are my future bets:
  • The Maple Lea(ves)fs will not make the playoffs but the Raptors will get into the second round and MLSE will get a little richer
  • Obama will win the election and more importantly 60 seats in the senate (preventing filibusters)
  • Stock markets will rise and fall and rise and fall.....
  • Canadians will eventually stop complaining about the stock markets and go back to griping about the weather and the price of gas

Monday, November 3, 2008

Some of the Results of a Scary Halloween

Here's some examples of the type of 'work' I do during Halloween.