Mixed Signals

Who's right - the bond market or the stock market? The bond market says we're still in a recession or worse; The stock market seems to be holding onto the hope of a sustainable economic recovery. If you haven't read David Rosenberg's column today, it's worth a read.

Now David does mention the 'D' word, but I don't think he's too far out of line: "True, we can’t see the soup lines; but the soup lines are in the mail – 99 weeks of unemployment cheques for more than 10 million jobless Americans. Don’t be lulled into the view that we are into anything remotely close to a normal economic cycle."

It seems to me that interest rates have been at record lows for what must be a record amount of time, and yet the economic data is rolling over despite all the fiscal and monetary stimulus. Rosenberg puts it this way: "In a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between these two states."

Bottom line - Rally's are still something to be sold into.

GB

Friday Morning Investment Advice on the Radio

Jobs numbers came out better than expected in the US this morning and markets reacted positively. US stocks were up over 1% but gains were trimmed back below that level after the ISM non-manufacturing numbers came in at a slower pace than expected for August. US markets are up about 1/2% while the TSX is just slightly positive. This will be the 8th straight day of gains for the TSX if it can hold its positive momentum for the day. It's currentlty trading just over 12,100.
According to the American Association of Individual Investors weekly survey, bullishness on US stocks jumped from a 17 month low. The proportion of investors who now anticipate a gain in stock prices over the next 6 months jumped to 30% this week from 20% last week. However, declining bond yield suggest a negative outlook. With mixed messages, the key is to be flexible and active in your investment approach. If you're tired of a buy and hold approach get active and give me a call at 868-5525 or visit yourlifeyourplan.ca.

Thursday morning radio Advice

North American markets are solidly in the green so far this morning. European markets are flat and Asian markets finished up over 1%. Key reports driving markets today are US weekly jobless claims, which declined from last week and the index of pending home resales, which rose for July. Investors are waiting on reports on productivity and factory orders out today. Tomorrow, key monthly jobs numbers are out in the US.

In the CC&L outlook, institutional investor confidence has been only mildly positive while retail investors are highly skeptical. This lack of conviction by a wide spectrum of investors is dampening market returns causing the market to trade in a range. Investor sentiment has as much to do with the recovery in markets as economic data. Technical indicators can be important in identifying when momentum shifts in the market. For more on using technical analysis call me at 868-5525 or visit yourlifeyourplan.ca.

Wednesday morning radio Advice

It looks as though investors are keen to start the new month fresh following a downer August in the US. US markets slipped over 4% last month. Driving the green machine today is positive manufacturing data. China, India, Russia and Australia all had strong growth signs. Despite mixed jobs numbers, manufacturing numbers in the US also came out higher than expected and the US markets are all up over 2%. The TSX is up almost 1% at this point. Most European markets are up over 2% and Asian markets also closed higher.

CC&L confidence comparison looked at both large and small companies semntiment and found that small companies sentiment was poor. Largely due to difficulties accessing credit. This may lead to increased merger and aquisition activity. To take advantage of this investment opportunity call me at 868-5525 or visit yourlifeyourplan.ca.

This Week's Economic Calendar

With second quarter earnings seasons at an end, it will be economic data that will drive the market. The economic line-up this week starts with the ADP Employment Report in the US on Wednesday, along with construction spending and the ISM Manufacturing Index. On Thursday we have productivity, pending home sales and factory orders in the US, and the European Central Bank policy announcement. Finally on Friday, we have the employment report and the ISM Non-Manufacturing Index in the US.

Looking at historical seasonal patterns, September has not been a good month for the markets, in fact it may be the worst. There are many reasons for this including tax-loss selling and 'cleaning house' before quarter end. Places to hide are energy, health care, utilities and telecommunications.

There is an interesting article by financial writer, Dian Chu, and posted on AdvisorAnalyst.com about M&A withing the technology sector. Bottom line - we could see some mega mergers in the near future. To read the article visit AdvisorAnalyst.com.

GB

Tuesday morning radio Advice

North American markets are on the rise so far this morning. The markets are going to be driven by economic data today. So far we have had Case Shiller Price Index reporting a better than expected home price increase in the US and consumer confidence coming in higher than expected. The Chicago purchasing managers index came in as expected at 56.7 which still indicate expansion. In Canada, GDP numbers came in at 2% annualized for the period April to June, which is down from the previous 1/4.


Confidence is a key factor when it comes to the economy and financial markets. In it's August Outlook, Connor Clarke and Lunn reviewed a number of confidence indicators. Business confidence as measured by CEO surveys is strong thanks to cheap borrowing, high profit margins and strong earnings growth. For a copy of good companies with high profit margins and strong earnings growth, call me at 868-5525 or visit yourlifeyourplan.ca.

Monday Morning Radio Advice

Consumer spending rose more than expected while disposable incomes fell in the US so US markets are lower. The TSX is holding it's green ground so far, led by energy and financials. Despite improving confidence in the economic outlook, European markets are mixed so far today. Asian markets finished mostly higher following the Bank of Japan's announcement to loosen monetary policy. The economy will continue to be a big driver this week, with reports on consumer spending, home sales, manufacturing activity and Friday's jobs report out of the US.


Currently, there are a number of conflicting indicators. One of these is confidence indicators. The other is what the bond market is telling us vs what the stock market is telling us. This week I will talk about some conflicting indicators and how you can position your portfolio to prepare for the various scenarios that may play out in the recovery. For a second opinion on your portfolio give me a call at 868-5525 or visit yourlifeyourplan.ca.

AM 1150 Kelowna - Radio Rallies & Reverals

North American markets opened higher this morning and continue to trend higher on a better than expected US second quarter GDP report. The University of Michigan Consumer Confidence number came in at 68.9, which was down from the previous month, but in-line with expectations. At the economic symposium in Jackson Hole, FED Chairman Ben Bernanke kicked things off this morning, reassuring investors that the FED will "do all it can" to ensure a continued economic recovery, and that it still has plenty of tools in the bag it can use.

Credit Suisse is still cautious on stocks from a technical perspective and still recommends high dividend paying ideas in the small and mid-cap space for three reasons: High dividends are appealing in a low interest rate environment; Dividend investing offers defensive characteristics; Since 1900, dividends have accounted for 92% and 72% of the total return generated by the UK and US stock market, respectively. On the theme of cash capacity, Merger and acquisition activity should continue to present some investment opportunities. Credit Suisse has produced a report on Canadian M&A ideas; If you'd like a copy, ask us yourlifeyourplan.ca or call 250-868-5525.

GB

AM 1150 Kelowna - Radio Rallies & Reversals

Q2 earnings seasons is at an end and so economic data will be the driving force behind markets for the next couple of months. Uninspiring economic news in the US has put a halt to yesterday's stock rally. While weekly initial jobless claims and continuing claims were lower than expected, they're still relatively high, and fail to shut the door on the possibility of a double-dip recession. Markets will be looking for direction from the Economic Symposium kicking off tomorrow in Jackson Hole with opening comments from FED Chairman Ben Bernanke, and the US GDP report on Friday.

In Canada, bank earnings are still coming out. Early this week we had a miss from BMO thanks to a short-fall in trading revenues; however, trading revenues helped CIBC to beat expectations. Today offers another split picture with RBC missing estimates while National Bank beat expectations.

Bond yields continue to fall with the 10 year Canada at 2.8% and 10 year Treasuries at 2.51%. The bond market is certainly worried about economic hardships ahead.

GB

The Fundamental Index - Chapter 4: The Index Funds Achilles' Heel

North American stock indexes started off in the red today. The news continues to be deteriorating economic fundamentals in the US. On the flip side, bonds continue to do well. The 10 year Canada is yielding 2.8%. ScotiaCapital has produced an informative report on bonds as well has a list of 5 contrarian stock ideas which are: under-followed; rated sector outperform; non-commodity related; sustainable dividend payers; and reasonably valued. If you'd like a copy, contact us at yourlifeyourplan.ca or call 250-868-5525.

Academic studies have presented strong evidence of mispricing in the market for a variety of anomalies; however, on average, active managers collectively trail the S&P 500 after fees over the long-term by 50 to 200 basis points (or more). The fact that the average active manager cannot win says nothing for or against the notion that skilled active managers can win. The data merely suggest that indexing makes sense if we can't pick good active managers.

In general an index should have the following attributes: it should be representative; it should be replicable; it should be transparent and rules-based; and it should be low turnover. Many of the indexes that are widely followed fall short on one or more of these attributes. The tendency then is for cap-weighted indexes to be dominated by past winners. So how do we separate portfolio weight from price?

Equal weighting the S&P 500 beat the normal S&P 500 by 150 basis points on average from 1990 through 2007, outperforming in both up and down periods. Despite the out-performance, equal weighting isn't perfect and introduces other problems including more turnover and the associated costs; but, it's a step in the right direction.

GB

The Dividend Alternative

Big Picture
Europe gets back on its feet

Following record second-quarter growth, Germany’s economic forecast for 2010 was raised to 3%, up from a previous forecast of 1.9%. The central bank in Germany reports that more than half of the decline in production due to the global economic crisis has now been made up. Global ratings agencies affirmed France’s top-notch triple-A credit rating as President Sarkozy planned a meeting with his top ministers today to gear up for a tough battle to cut the deficit and reform the pension system. The French economy grew by 0.6% in the second quarter, stronger than most economists had expected.

British retail sales jumped, with sales at non-food stores rising 1.8% in July versus June, strengthening the pound. The yen fell after expectations rose that Japan might take monetary easing steps. Canadian manufacturing sales rose for the 11th time in 13 months in June, up 15.3% from its May 2009 low. The use of shipping containers, a barometer of the global economy, has risen sharply this year, indicating stronger international trade, according to AP Møller-Maersk, the world’s largest shipping line.

Markets
U.S. data disappoints again

World stocks briefly hit a one-week high on Thursday, but fell back after reports that U.S. jobless claims rose and manufacturing in Philadelphia unexpectedly shrank. Canada’s dollar touched US$1.03 on Wednesday, amid speculation that a US$40-billion hostile bid for Potash Corp. by mining giant BHP would spark demand for commodity producers, but gains were erased when crude oil dropped below US$74 a barrel for the first time in more than a month. General Motors filed for a potential $20-billion public offering that will ask investors to look past declining market share and an ailing European division.

Intel will buy security software maker McAfee for $7.7-billion, as security becomes vital to Internet-connected devices. Facebook unveiled “Places,” a service that allows mobile phone users to share their location with friends, and opens the door to location-targeted advertising. Video website Hulu, owned by three U.S. broadcast networks, plans an IPO that may value the company at more than $2-billion. Profit rose 47% at John Deere, as U.S. farmers benefited from high crop prices and rushed to buy tractors before emission standards, and prices, rise next year. Staples’ revenues remained flat as small businesses spent cautiously.

Sectors
An Alternative to Sub 3% Bond Yields

10 year US Government Bond yields are below 3%. Credit Suisse believes the sharp decline in long-dated U.S. Treasury yields is an important event. They think three forces have driven 10-year yields down through 3.0%. One is investors lowering their U.S. economic growth expectations. A second is good old fashioned performance chasing. And the third, and perhaps the most important, is many Americans losing their appetite for risk. They believe the demand for U.S. financial assets with relatively high yields and relatively low volatility could remain elevated for several years. In their full research report, they list 24 U.S. equity securities that may be attractive in this environment - each has a current market capitalization in excess of $15 billion, a yield of 2.75% or greater, and a beta of 0.75 or less versus the S&P 500. For a copy visit Yourlifeyourplan.ca. The chart was produced by Bespoke Investment Group.

Friday Morning Radio Advice

Markets popped higher at the open this morning. GDP numbers came in higher than analysts expectations. Ben Bernanke expressed his concerns about slowing growth but was not specific about any actions. At this time markets are higher in North America and Europe and Asian markets finished higher too so a good ending to the weak so far.

In a piece penned back in June, "Deleveraging and Dividends", Scotia came up with a list of 18 companies with a track record of annual increases in dividends and similarily a consistent reduction in their share count through share repurchases. Call me at 868-5525 or visit yourlifeyourplan.ca.

Thursday Morning Radio Advice

Earlier this morning markets were extending gains from yesterday but have retreated to a flat stance in the US. At the open, US investors reacted positively to lower than expected weekly jobless claims. The TSX is still holding it's allegra on rising commodities prices. National Bank beat expectations but weighing on the banks is a lower than expected earnings number out of RBC. So far 2 banks beat expectations, CIBC & NBC and 2 banks missed expectations, BMO & RBC in Canada.
Both dividends and the return of cash to shareholders through share repurchase programs benefit investors. Not only do Investors like to see dividends credited to their account but they also like share repurchases because it reduces the number of shares outstanding, boosts earnings per share and provides support for share price. These policies are not mutually exclusive so why not invest in companies that do both. For a screen of high dividend yielding stocks call me at 868-5525 or visit yourlifeyourplan.ca.

Wednesday Morning Radio Advice

News of a disappointing durable goods order and sales of new homes in the US dropping 32% from last year is weighing on markets. The Dow dipped below 10,000 this morning and the TSX is trading around 11,500. Both markets are moving back to the green from a deep red start. The TSX is getting some support from financials after CIBC surprised to the upside and gold is higher. The Canadian dollar is lower but seems to be finding some support at 94 cents.


While 10 yr US government bond yields continue to fall below 2.5% corporate bond yields may be rising again. The Markit CDX North American Investment Grade Index of credit default swaps tied to 125 US and Canadian companies rose significantly. This measures the extra yield investors are willing to pay to own corporate bonds over treasuries and tends to rise when investors become more risk averse. Scotia McLeod came out with an updated Guide to Fixed Income Securities. For a copy give me a call at 868-5525 or visit your life yourplan.ca.

Tuesday morning radio Advice

North American markets are off over 1%. Existing Housing sales in the US dropped 27%, a drop that was twice as steep as expected. In Canada, earnings from BMO missed expectations and concerns over domestic growth and the global recovery is pressuring commodities. Oil is just below $72 a barrel and Gold is at about $1215. The Canadian dollar is trading in the mid 94 cent range. With pressure on stocks, bond prices rose. The US government 10 year yield fell to 2.53%. Not sure how much further it can fall. Bond prices and yields move in opposite directions.

Scotia came up with a list of cash cows. Following a period of significant corporate restructuring and a rebounding global economy, US corporations are now sitting on cash. US Corp held an aggregate of 831 billion in cash at the end of Q 4 2009. High FCF should lead to increased payouts and share buyback activity. For a copy of these Cash Cow companies call me at 868-5525 or visit yourlifeyourplan.ca

Monday Morning Radio Advice

Markets were on the rise this morning but are now flat. Firmer oil prices and the potential for merger and aquisition deals drove them higher initially but have pulled back on lower technology shares. There is no material news on the economy or earnings related out today. Earnings reports are over in the US and only the banks are left to report in Canada this week. In addition to banks reporting in Canada we have retail sales and corp profits later this week. In the US existing home sales, durable goods, corporate profits and consumer sentiment are out.

With the recovery in the US economy waning and expectations for an extended period of below trend economic growth, more and more strategists are discussing the merits of dividends. Barron's article, "The Power of Payouts" screened the S&P500 for stocks that trade below the market's forward P/E , with yields exceeding 3% and payout ratios less than 50%. For a copy of high dividend yielding stocks call me at 868-5525 or visit yourlifeyourplan.ca.

The Fundamental Index - Chapter 4: The Virtues of Index Funds

It's safe to say that index investing has caught on all over the world; its primary competition - the legions of actively managed funds. Volumes have been written about the superiority of one approach over the other. Theory says that current prices are the market's best estimate of an investment's fair value, which should be the discounted present value of future cash flows. Those who believe that current prices are a reasonable approximation of intrinsic value should prefer index investing. Investors who believe current prices don't always reflect an investments intrinsic value will prefer active management strategies.

The one guarantee in investing is that costs do matter. After all, the returns an investor gets to keep are the returns after fees and expenses, and for that matter, taxes and inflation. As investors, we cannot know what our returns will be, but we do know that higher fees require higher returns just to break even, and high fees don't go hand-in-hand with higher returns.

A quick look at the markets shows North American indexes to be all in the red. The big news this morning was the disappointing earnings number from Bank of Montreal and the 27% decline last month in existing US home sales, to the lowest level on record. Regarding the former, trading revenues were the culprit; Regarding the latter, despite previous stimulus measures and low interest rates, which served to move purchases forward, demand has basically dried up.

GB

The Fundamental Index - Chapter 3: Investors' Greatest Errors

North American stock indexes are flat today, bouncing on both sides of red and green. There really is no news, but watch for Canadian bank earnings reports this week and next, starting with Bank of Montreal tomorrow.

The reference to alpha is everywhere, and the assumption is that all efforts to generate alpha will be rewarded. The quest for alpha is a zero-sum game less costs, which means that most alpha, net of those costs, is negative. While the crowd is searching for positive alpha, most won't find it; however, identifying and eliminating negative alpha is every bit as profitable as identifying positive alpha. In case you're wondering what alpha is, it's the excess in return or shortfall in return relative to some benchmark, or in this case an index.

Eliminating negative alpha is not only profitable, it is also easier than competing with the crowd for positive alpha. Four major sources of negative alpha are: 1. over-reliance on equity returns; 2. ignoring re-balancing opportunities; 3. chasing winners; and 4. cap weighting portfolios. Cap weighted index investing suffers from these same sources of negative alpha, but at a lower cost. Fundamental index investing eliminates these sources of negative alpha.

GB

Equity Ideas

On the Canadian economic front, CPI numbers were tame. Following yesterdays poor weekly jobless claims report and Philly Fed Manufacturing report in the US, stocks are continuing their sell-off today while bonds continue their amazing run. I have to admit, I didn't think long yields would move lower, but here we are with 10 year treasuries and Canada's below 3%. Investors are lowering their economic growth expectations and along with it, their appetite for risk.

Continuing on from yesterday's theme of cash rich companies with attractive yields, Credit Suisse has also produced a report indicating their top 24 US stock picks - Each has a market cap in excess of $15 billion, a yield of 2.75% or greater, and a beta of .75% or less versus the S&P500. As a basket the average yield is over 4% and the average P/E multiple is roughly thirteen times trailing earnings. If you'd like a copy of the report, ask us at yourlifeyourplan.ca or call 250-868-5525.

The other theme Credit Suisse highlighted this morning is the case for an increase in global M&A activity. In their analysis, pharma screens as the most attractive for M&A activity based on its leverage, earnings volatility, valuation, and spread between free cash flow and bond yields. Large cash stockpiles and low-to-negative sales growth estimates over the next four years might also accelerate the pace of acquisitions of early life-cycle biotechs by major pharma as they look to fill in product pipelines.

GB

18 Cash Rich US Companies

North American stock indexes are all in the red today following a disappointing initial jobless claims report in the US, and a disappointing Philly Fed Manufacturing Index number; and so we say bye-bye to Tuesday's and Wednesday's gains.

I'm going to take a break from The fundamental Index discussion today as frankly I haven't read any more chapters from the book; but I'll get on it this weekend and pick up where I left off for next week.

Today I thought I'd bring your attention to a recent report from ScotiaCapital which highlights cash rich US companies with a history of increasing dividend payouts and share buybacks. With expectations shifting to an extended period of slow economic growth, more and more strategists are discussing the merits of dividends. This picks up on a recent article in Barron's titled: 'The Power of Payouts.' Following a period of significant corporate restructuring, coupled with the recent economic rebound, US corporations are sitting on a record amount of cash which should lead to increases in dividend payouts and share buybacks. If you'd like a copy of the report, ask us at yourlifeyourplan.ca or call 250-868-5525.

GB

RAFI Fundamental Index

Yesterday's gains have extended into today, and as we approach the last hour of trading, North American indexes are in the green. There really isn't any news and 2nd quarter earnings seasons is coming to an end. MBA mortgage applications in the US last week were higher than expected, but that's largely thanks to mortgage refinancing to take advantage of lower rates.

Continuing the discussion on fundamental indexing and finishing up chapter 2, the pioneer in fundamental indexing is Research Affiliates and their widely followed indexes, like the DOW 30 or S&P500, are the RAFI indexes such as: RAFI US Large Cap, RAFI US Small Cap, or RAFI Emerging Markets. You can invest in these indexes indirectly through funds or ETFs that try to replicate the indexes; or if you're so inclined, you can create your own fundamental screen. Research Affiliates would suggest you use criteria which is more representative of economic size such as: sales, cash flow, book value, or dividends; Company management is also less able to manipulate these numbers.

GB

Origins of the Fundamental Index Concept

A better-than-expected industrial production number from the US and a hostile takeover bid for Potash got North American stock indexes off to a good start this morning. On the bearish side of the economic fence however was a lower than expected US housing start number for the month of July, and according to the Federal Reserve's loan officer survey: demand for loans at the majority of US lenders in the US failed to rise even as banks eased their lending standards. Loan demand has become somewhat price inelastic and highlights the challenges faced by central bankers to preserve the economic recovery.

Now continuing my summary of The Fundamental Index, the reasons behind the growing popularity behind passive index investing in general are: market performance at next to nothing in fees, trading costs, or other expenses; and the fact that most active manager deliver less performance than the market, but for higher fees. The problem however with cap-weighted indexes is the market routinely miss-prices stocks, resulting in too much exposure to larger cap stocks which tend to under-perform, and too little exposure to smaller cap stocks which tend to outperform. According to work done by Research Affiliates, just by excluding the top 10 market cap stocks on the S&P 500 resulted in better performance over any one, three, five, and ten year period going back to 1926.

GB

Bric strength for portfolio foundaition

Big Picture
North American recovery slows

Canada’s trade deficit widened to $1.13-billion in June, from $695-million a month earlier, as demand from the country’s key trading partners softened. Canadian exports to the U.S. declined 1% and exports to Europe fell 20%. The U.S. trade deficit in June was the largest since October 2008, widening by almost $8-billion as imports grew 3% and exports fell 1.3%. In July, the U.S. budget deficit reached $165-billion as Federal spending eclipsed revenue for the 22nd straight month, but was $98-billion lower than a year earlier. U.S. jobless claims spiked to the highest level in nearly six months.

Canadian housing starts slipped 1.6% last month, amid a cooling real estate market. Home prices were up just 6.8% year-over-year in the second quarter, compared with 16.6% in the first quarter. An opinion poll showed consumer confidence in developed countries lags behind developing nations – 85% of consumers in India, 77% in China and 65% in Brazil see their country’s economic situation as good, compared to only 18% in the U.S., 13% in the U.K. and 5% in Spain. Australia and Canada showed fairly robust levels of confidence around 70%. After narrowly avoiding bankruptcy in May, Greece is feeling the consequences of aggressive austerity cuts. Unemployment has risen to 12% from 8.5% a year earlier and GDP is down 3.5%.

Markets
Stock markets reverse gains

Rising jobless claims and trade woes sent U.S. stocks down 3.9% in three days, erasing about half the rally that began at the start of July. A report on soft factory data in China added to worries of a global slowdown. Cisco quarterly results disappointed, even though revenues rose 27%. Internet-based phone service Skype filed for its initial public offering and expects to raise $100-million. Google and Verizon, the second-biggest U.S. phone company, reached a deal that would restrict Verizon from selectively slowing or speeding Internet content, preserving “net neutrality,” that is, treating all traffic on the Internet equally.

General Motors posted its second straight quarterly profit, as it prepares to sell stock so it can end its dependence on the U.S. government, which has owned a 61% stake since July 2009. Canadian Tire reported a 15% rise in second-quarter earnings, on cost reductions and a 2.5% rise in retail sales. Sales at Rona building company rose 2.1%. Canadian companies spent $1.82-billion in online advertising in 2009, up 14% versus 2008, and should top $2-billion in 2010.

Sectors
Emerging Markets Strength

From a technical perspective we can look at the Claymore Bric ETF CBQ. This is a representation of the Brazil, Russia, India and China (Bric) which can be used as one proxy for emerging markets. In the last year CBQ reached a high of $31.54 and a low of $23.65. In July, the current price crossed above the 50 day moving average and more recently the current price crossed above the 200 day moving average but has not been able to hold its position above the later indicator suggesting resistance may be the longer term trend at the 200 day moving average. Both relative strength and moving average convergence divergence (MACD) are both positive with the lows and highs rising. This trend appears to have started in May so could be construed as a bullish trading signal. Given strength in consumer confidence and technical indicators, maybe its time to consider building your portfolio with some Bric.

The Fundamental Index - Chapter 1 Efficient Indexing for an Inefficient Market

For the next 2 years, I'll be flying to Vancouver and back every other weekend to complete my goal of earning my Executive MBA. On such flights, I like to pass the time by catching up on some reading that I never have the time to tackle when in the office (like I'm not going to have enough reading to do already). The book I'm leisurely reading right now is The Fundamental Index by Robert Arnott, Jason Hsu, and John West. Over the next number of weeks, I thought I'd share some of the key insights behind the growing following of fundamental index investing.

A little over 30 years ago, the idea of cap-weighted index investing took root based on the idea that first, markets were efficient, and second, active money managers, after cost, can't reliably beat market indexes. Regarding the latter, the reason for under-performing market indexes by active money managers is: they essentially own the same thing.

Regarding market efficiency, I think the last decade has put a lot of doubt in investors minds; and this is the point of chapter one and the basis behind why fundamental index investing is superior to cap-weighted indexing. Keep tuning in as I sum up the key points from the next 13 chapters. You won't want to miss any as there are lots of 'aha' moments.

GB

Friday August 20, 2010 Morning Radio Advice

Once again markets are opening in the red. Worries about the economy and recovery are weighing on investors minds. US markets are down just over 1/2% and the TSX is down just shy of that. European and Asian markets were also down in a similar fashion. Bonds are rallying so if you are holding bonds you are safe today. Oil is trading below $74 a barrel and the Canadian dollar is close to 95 cents down from closing at 96 cents yesturday. Even gold is lower. There is little news today to change investor sentiment before the weekend.


Finishing the week on investment pitfalls and opportunities, Scotia research concluded that a disciplined investor tends to outperform an investor with tendancies to loss aversion, herding or availability bias. In addition, research showed a disciplined investor can generate the same return as the market with 1/2 the volatility. For a second opinion on your buy/sell discipline call me at 868-5525 or visit yourlifeyourplan.ca

Thursday August 19, 2010 Morning Radio Advice

Most Asian markets finished higher and it looked like we might be in for a positive start as some good economic news out of Germany and the UK sent European markets higher. Unfortunately, disappointing initial jobless claims and shrinking manufacturing in the US has pushed markets into the negative. Most markets in Europe and North America are down over 1%. The TSX is only a little over 1/2%. Shining gold is cushioning the fall.


Today's investment tip is not to react to news. An investment pitfall is availability bias which occurs when investors add more weight to more recent & readily available information. Some symptoms are choosing mutual funds that are heavily advertised, overreacting to the latest news and believing an opinion to be fact. Again a buy/sell discipline will help you avoid this pitfall. For a second opinion on your buy/sell discipline call me at 868-5525 or visit yourlifeyourplan.ca.

Wednesday August 18, 2010 Morning Radio Advice

Stocks are reversing their gains from yesturday. Less than stellar earnings forecasts from Deere and lower than expected revenues from Target are weighing on US markets. Also, energy stocks are lower after a report signalled inventories are high in the US. Inventory numbers come out this morning and that will likely drive prices up or down depending on the result. The Canadian dollar is trading just below 97 cents.

Our investment tip this morning is don't follow the crowd over a cliff. Herding is the tendency of individuals to follow the crowd. This is a pitfall because it leads to buying high and selling low. Again another reason to have a buy/sell discipline. For more on investment pitfalls and opportunities call me at 868-5525 or visit yourlifeyourplan.ca.

Tuesday August 17, 2010 Morning Radio Advice

Markets are definetly higher this morning in North America and Europe. Weaker than expected housing data in the US is being overshadowed by increasing producer prices and positive earnings reports out of Home Depot and Wal Mart. In Canada, Potash Corp turned down a hostile takeover bid for $39 billion by BHP. Not only is this leading to speculation that BHP may increase their bid for Potash but potentially M&A activity may increase in Canada which is driving commodities higher. The Canadian dollar is also higher, up almost a penny just shy of 97 cents.
I mentioned I would highlight some investment pitfalls this week. The 1st investment pitfall is loss aversion. This is where investors experience a more intense emotional response from loss vs gains of equal magnitude. One symptom of this is that investors may sell their winners too soon or hold onto their losers too long. This is why it is important to have both a buy and a sell discipline. For a second opinion on your buy/sell discipline give me a call at 868-5525 or visit yourlifeyourplan.ca.

Monday August 16, 2010 - Morning Radio Advice

Markets are flat to start the week. Japan came in with lower than expected growth numbers which is affecting markets worldwide. The TSX is being weighed down by lower oil, however that is offset by gold. Earnings reports are winding down so the focus has shifted to more macro news. Some news that may drive the markets this week. Today, manufacturing numbers are out in the US. Tomorrow, housing starts and industrial production in the US and manufacturing shipments in Canada. Later in the week, leading indicators in the US and Canada, along with CPI in Canada.

Investment Pitfalls & Opportunities was the feature article in the recent Scotia Outlook. Investors have avoided equity funds in favour of money market, bonds or balanced funds in the last couple of years. This behaviour is not consistent with previous up markets where investors pile into equities. Not only do investors have a reduced appetite for risk compared to previous periods but they are reacting more quickly to negative market activity. This week I am going to highlight some investment pitfalls along with what does work in this environment. For a copy of the outlook call me at 868-5525 or visit yourlifeyourplan.ca.

Friday Noon Radio

Economic data provided little direction to markets as the U.S. Consumer Price Index, Retail Sales, and University of Michigan Confidence numbers all were released in-line with expectations. The S&P/TSX Composite is flat. Four of the ten sectors are pushing the index lower led by Materials, Energy and Information Technology. In terms of breadth, 133 stocks are up, 91 are down, while 5 are unchanged. The Canadian dollar is trading higher at just over 96 cents to the US.

A recent article in Investment Week by Pacific Investment Management, one of the biggest bond manager in the world, suggests, Deflation is a growing threat to the U.S. economy . They warn that the U.S. is moving closer to deflation and a long period of stagnant growth, much like what happened in Japan in the 1990s. The article warns of striking similarities between the U.S. and Japan and that preparing for deflation is an 'important step' for investors. Deflation occurs when money supply contracts, leading falling prices, asset values and wages.


For some ideas on how to adjust your portfolio should deflation occur, call me at 868-5525 or visit yourlifeyourplan.ca.

Friday morning Investment Advice on the Radio

Markets are flat at the open this morning. Not much news from earnings coming out today however consumer confidence rose in August and consumer prices increased for the 1st time in 4 months in the US pointing to a stabilization that may ease concerns about deflation.
The Economist featured an article this week titled, Stocks and bonds rising in parallel presents a quandary. The analysis points out that a stock market rally arriving at the same time as when bond yields decline suggests that equity investors aren't worried and that bond buyers are either becoming risk averse or expecting a double-dip recession or deflation, according to The Economist. This comes at a time when it is clear that the Federal Reserve's quantitative easing isn't reviving the U.S. economy. "So the bond market is surely betting that the Fed's actions won't work and that Japan is the template; the equity market is betting that the Fed will be successful and the Goldilocks economy will return." The question on investors minds is who is right? The key is to be flexible and active in your investment approach. If you're tired of a buy and hold approach get active and give me a call at 868-5525 or visit yourlifeyourplan.ca.

FED Fails to Inspire

North American stock indices rallied off their lows yesterday after the FOMC announcement, but still finished in the red; However, after sleeping on it, markets have decided that the economic recovery is still in jeopardy of stalling and the FED isn't really adding any extra stimulus. Coupled with recent data that industrial production and loan growth in China are in decline, International stock indices all finished deeply in the red, and North American stock indices aren't faring any better.

In yesterday's 'Casey's Daily Dispatch', the following 'food for thought' was offered:
- Consumer bankruptcies are tracking over 1.6 million this year. That's up from 1.4 million in 2009, which was up 32% from 2008;
- The private sector still isn't hiring and as a result unemployment remains high;
- Food stamp use in the US is on the rise such that over 1/8th of the US population is using food stamps.

Another good read is the most recent 'E-Letter' from John Mauldin, which breaks down US GDP and analyzes where the growth is going to come from; Bottom line - he's sticking with his 'muddle through' scenario. If you'd like a copy of our 'Investment Portfolio Quarterly' ask us at yourlifeyourplan.ca or call 250-868-5525.

GB

North American stock indices have been trading in the red all day in advance of the FOMC announcement. Kicking things off this morning was a disappointing productivity report out of the US, marking the first decline in a year and a half. In Asia, markets fell after data showed Chinese imports grew at a slower pace while exports increased - that's not the best recipe for a global economic recovery. Now since the FED announcement at 11:15, markets have gained back some ground, but still remain in the red; in addition to keeping its policy rate unchanged, the FED looks to add additional stimulus buy buying government debt. I'll have more details tomorrow so tune in. Ultimately, it looks like the FED's policy rates will remain low for much longer and expect further stimulus through more quantitative easing in the future.

GB

Thursday Investment Advice on the Radio

Initial jobless claims in the US were worse than expected this morning and markets have sold off. In addition a bleak outlook by Cisco is weighing on technology. Canadian equities are lower with oil leading the way down approaching the US$76.00 per barrel. However, we are seeing some strength in gold prices which might help the Materials sector. Suprisingly, even with futher oil weakness the Canadian dollar is little changed around the US$0.9550 level.

Credit Suisse reported that while the S&P 500 has had a nice run since March '09, US equity fund flows have actually been negative. To emphasis the point, from the 2009 low to the 2010 peak, the S&P 500 gained 68% while US equity mutual funds suffered outflows of $42 billion; however, ETF asset increased by over $170 billion, potentially indicating a preference for ETF's over mutual funds. For an active investment approach using ETF's call me at 868-5525 or visit yourlifeyourplan.ca

Wednesday Investment Advice on the Radio

Very red, markets around the world are lower this morning on persisting worries about weaker growth in China and the US. North American markets are off about 2% so far. I mentioned yesturday to watch if the S&P 500 holds above the 200 day moving average. The S& P 500 is now trading below the 200 day moving average which is a bearish technical indicator.

Earnings reports are winding down in the US. As of last Friday, 445 companies in the S&P 500 have reported Q2 results - Earnings for the quarter are up roughly 36% year-over-year, and 76% of the companies have reported positive earnings surprises. Of the roughly 130 companies that have reported on the TSX, 54% have positive surprises. Although Canadian companies earnings appear to have underperformed US, a positive note for TSX companies is that earnings misses tend to get penalized heavier in the US than Canada. Despite the positive earnings results, we are now seeing investors focus shift from earnings news to more macro issues, which aren't looking positive. For a second opinion on how to invest in challenging times give me a call at 868-5525 or visit yourlifeyourplan.ca

Follow the fund flows

As we approach the last hour of trading, North American stock indices look to finish in the green, following a strong close in Asia and Europe. Strength is pretty much across the board led by Research in Motion which reached an agreement with Saudi Arabia, giving authorities there greater monitoring powers and averting a ban on Blackberry messaging service. Markets are looking ahead to tomorrow's FOMC meeting in anticipation of continuing stimulus measures. As of last Friday, 445 companies in the S&P 500 have reported Q2 results - Earning for the quarter are up roughly 36% year-over-year, and 76% of the companies have reported positive earnings surprises.

An interesting report out of Credit Suisse this morning shows that while the S&P 500 has had a nice run since March '09, US equity fund flows have actually been negative. To emphasis the point, from the 2009 low to the 2010 peak, the S&P 500 gained 68% while US equity mutual funds suffered outflows of $42 billion; however, ETF asset increased by over $170 billion, potentially indicating a preference for ETF's over mutual funds.

GB

Tuesday's Investment Advice on the Radio

Worldwide markets are lower after weaker-than-expected import data from China and disappointing productivity numbers in the US. The other important driver today will be the Fed reserve meeting on interest rates and the economy. The S&P 500 is trading at it's 200 day moving avarage which is an important technical indicator and a close below it could indicate a turnarround in market momentum. In Canada, commodity prices are lower and so is the Canadian dollar, off by over a cent.

U.S. consumers remain cautious and would rather save than spend. U.S. personal savings rose to 6.4% in June while Canada’s personal savings rate fell to less than 3% through the first quarter of 2010. Canadians are now saving significantly less than Americans for the first time since the early 1970s. All pointing to slowing growth for the US economy and requiring a different approach to investing. If you are concerned about how to invest call me at 868-5525 or visit yourlifeyourplan.ca.

Monday's Investment Advice on the Radio

Markets are on the rise so far this morning. Higher energy shares are the main driver. Key numbers to watch this week in Canada are merchnadise trade balance out on Wed. We expect to see the deficit between exports and imports narrow. In the US retail sales is out on Friday and tomorrow the Fed meets and some expect more stimulus could be announced.

Consumer spending and personal incomes in the U.S. unexpectedly stagnated in June, according to data released last Tuesday by the Commerce Department. Household purchases, which account for about 70% of the economy, were unchanged from May and incomes failed to increase for the first time since September. No wonder the markets are struggling despite good earnings. If you want to review your investment strategy call me at 868-5525 or visit yourlifeyourplan.ca

Scanning the CFA Newsbrief for headlines from around the world, the one that caught my eye yesterday was: 'China prepares banks for a sharp reduction in property prices'. The article originated from the Economist and is titled: 'Warning Signs'.

China's banks were instructed to stress-test for a decline of as much as 60% in house prices, and it will be bad news for the world if a housing meltdown materializes, according to The Economist. The government likely would respond to a housing-market collapse with additional support for the export sector, the magazine notes. "If it does, it will siphon demand away from other economies," according to The Economist. "But if it doesn't, the housing hit to China's economy will be more severe, which will have much the same effect -- a reduction in the demand boost from China to the rest of the world."

Other headline news, and closer to home, yesterday's front page of the Globe & Mail featured a story on the Canadian real estate market. This a great follow-up to my blog back on July 29 titled: 'Vancouver's Real Estate Bubble Troubles', and goes into more detail about the recent slow down.

The last headline I'll bring to your attention was on the front page of yesterday's Report on Business under the title 'Agriculture'. It talked about the recent run-up in grain prices, particularly wheat. Back on July 19, 27, and 28 I featured agriculture as a seasonal trade along with some current fundamental positives. Check it out for further reference at yourlifeyourplan.ca.

Turning to the markets, disappointing jobs reports in Canada and the US, plus a weak new home sales report in the US, has North American indices continuing their sell-off from yesterday.

GB

China prepares banks for a sharp reduction in property prices

Scanning the CFA Newsbrief for headlines from around the world, the one that caught my eye was: 'China prepares banks for a sharp reduction in property prices'. The article originated from the Economist and is titled: 'Warning Signs'.

China's banks were instructed to stress-test for a decline of as much as 60% in house prices, and it will be bad news for the world if a housing meltdown materializes, according to The Economist. The government likely would respond to a housing-market collapse with additional support for the export sector, the magazine notes. "If it does, it will siphon demand away from other economies," according to The Economist. "But if it doesn't, the housing hit to China's economy will be more severe, which will have much the same effect -- a reduction in the demand boost from China to the rest of the world."

Other headline news, and closer to home, the front page of today's Globe & Mail features a story on the Canadian real estate market. This a great follow-up to my blog back on July 29 titled: 'Vancouver's Real Estate Bubble Troubles', and goes into more detail about the recent slow down.

The last headline I'll bring to your attention is on the front page of today's Report on Business under the title 'Agriculture'. It talks about the recent run-up in grain prices, particularly wheat. Back on July 19, 27, and 28 I featured agriculture as a seasonal trade along with some current fundamental positives. Check it out for further reference at yourlifeyourplan.ca.

GB

PIMCO - "Your Global Invesment Authority"?

Pacific Investment Management Company (or PIMCO), is one of the worlds largest bond fund managers and has deservedly or arguably earned the title "the global authority on bonds". Their Total Return bond fund, managed by Bill Gross, is the world's largest mutual fund with $234 billion of assets under management, and has returned an average of 7.5% over the past five years, which is better than 98% of its peers according to Bloomberg.

PIMCO has emerged from the Financial crisis stronger; It has continued hiring as the competition has paused or pulled back, and assets under management have steadily grown to over $1.2 trillion. It enjoyed stronger net inflows than any other large US bond fund firm in the 12 months to the end of June. Any change in its stance makes waves, which helps explain why Spain's finance minster recently paid PIMCO a visit. Spain is the S in the sovereign 'PIGS'.

So what is PIMCO saying now that it is diversifying it's offering into stocks, ETF's and more? Mohamed El-Erian and Bill Gross having been talking for some time now about the 'new normal' - subdued global economic growth as a result of rich world over-indebtedness and insufficient consumption in developing countries. The new normal they believe means the end of the decades long bull market in bonds and mediocre returns in general.

GB

Economic Overview

From this weeks Economist:

The British economy expanded by 1.1% during the three months to the end of June, after growing a sluggish 0.3% in the previous quarter.

Brasil's unemployment rate fell to 7% in June, its lowest in six months.

In South Korea, GDP growth slowed to 7.2% in the year to the second quarter, from 8.1% in the year to the first quarter.

Mexico's unemployment rate fell to 5.1% in June from 5.4% in May.

India's central bank increased interest rates for the second time in a month. The bank raised the rate at which it lends to banks by a quarter of a percentage point to 5.75%. It raised the rate it uses to absorb excess cash by half a point to 4.5%.

Finally, world GDP growth from a year earlier is back above 4% and close to pre-recession and financial crisis levels.

GB

ECRI's WLI

In the August 3 edition of 'Casey's Daily Dispatch', it was pointed out that the financial media last week made much to-do about the continuing fall in the Economic Cycle Research Institute's (ECRI) Weekly Leading Index (WLI).

The ECRI is an independent institute dedicated to economic cycle research. Its founder, Geoffrey H. Moore, is considered by some to be the "father of leading indicators". The WLI is the institute's most widely monitored indicator and uses 19 specialized leading indexes and is calculated using proprietary techniques.

Questioning of the WLI's accuracy and reliability by detractors centers on: the axiom "this time it's different"; recent and current stimulus; bailouts; policy interventions; and structural differences in the economy. The latest WLI reading was -10.7; Without exception, according to Casey Research, every WLI reading of -10 or lower has signaled a recession is imminent or underway. The National Bureau of Economic Research has yet to declare an end to the recession in the US which they determined commenced in December 2007. "If the WLI continues it's string of accurate forecasts, they are about to be proven right."

GB

The Challenge of Ethical Leadership

"We have met the enemy, and he is us." - Pogo author, Walt Kelly.

In the July/August 2010 edition of the CFA Magazine, there's an article titled 'The Challenge of Ethical Leadership' where Jim Ware, founder of Focus Consulting Group and author of 'High Performing Investment Teams', asks the question: "Why do firms often engage in practices that betray their own principles (and best interests)?

Besides the moral case for good ethics, there's also a business case, which CFA charter holders understand all too well. Now more than ever, the investment industry needs strong ethical leaders. Investment firms all around the world are dealing with more compliance and legal regulations than ever before, so why not be ethical?

One theory behind unethical behavior, according to Scott Stevens, professor of computer information systems and management science at James Madison University, is the 'Prisoner's Dilemma' - If we take the high road and the other party takes the low road, we will lose. As investors we have a responsibility to encourage and reward ethical behavior because ultimately we shoulder the costs of unethical behavior. If you'd like a framework for judging good ethical behavior, ask us for a copy of the CFA Institutes Code of Ethics and Standards of Professional Conduct at yourlifeyourplan.ca or all 250-868-5525.

GB