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?

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.

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.