Radio Rallies & Reversals

As 2010 comes to a close, here are some seasonal strategies to consider to start the new year:

One seasonal anomaly is that small cap stocks tend to outperform large cap stocks from roughly mid December through the beginning of March. The same could be said for both retail and materials stocks; and what about January being a predictor of the rest of the year? Investors and money managers are setting up their expectations for the rest of the year. If they are expecting a good year, they are more inclined to move more money into the market in January, boosting the performance of January and the rest of the year. From 1950 to 2007, January has predicted the rest of the year for the S&P500 with an accuracy rate of 74%.

GB

Twas the week before Christmas

Here's the economic calendar this week:

We have CPI and retail sales data for Canada tomorrow; On Wednesday we have CPI, manufacturing and capacity utilization numbers for the US, followed by housing data on Thursday.

With five days till Christmas expect market volumes to decline as investors and traders start to take their Christmas holidays. What's in store for the new year? Well the Bush era tax cuts have been extended for virtually every American household in addition to a one year cut in payroll taxes, a thirteen month extension of unemployment benefits, temporary business tax relief, along with other assorted measures. Throw in $600 billion of quantitative easing and I think you've got a few more chapters for the precious metals story.

GB

K96.3FM Radio Spot

Jim Flaherty, the Finance Minister for Canada announced a proposed "Pooled Retirement Pension Plan" yesturday.

They will pool contributions from many individual companies and workers, allowing them to take advantage of large retirement funds. Argues it would make it easier and more affordable for small employers to offer pension plans and give self-employed the option to participate in a pension plan. The alternative is to beef up CPP. The max monthly CPP benefit at age 65 is $934.17 per month.

The Government is concerned individuals will come up short in retirement. Some emerging trends are increased debt levels, less savings and longevity affecting retirement. About 2 months ago I was at a presentation by Moshe Melevski on retirement planning and he made some interesting observations. 82% of workers employed by public employers have defined benefit pension plans while only 28% of workers employed by private businesses have defined benefit plans. Of the top 60 companies in Canada only 16 left have a defined benefit pension plan. Claude Lamoureux, former CEO of Ont Teachers Pension Plan said "If this trend continues the only Canadaians covered by defined benefit pension plans will be politicians, government employees and members of parliament...

The reason why pensions are so important in retirement is because they are the main positive factor contributing to your replacement of after tax income when you retire.

What trips up gold?

I've been getting lots of questions about gold lately. From a contrarion standpoint, that by itself could signal that the end is near. On the one hand, Fed policy would suggest that gold's upward trend is still intact. On the other hand, Terry Coxon provides a number of reasons why gold might falter:

1. Punitive regulations forcing people to sell their gold is one reason. It's happened before, but unlikely this time as we're no longer on the gold standard. A punitive tax on gold would be more probable.

2. Deflation, brought on by deleveraging, which in turn is brought on by say another leg down in real estate, would certainly hurt gold. Bond yields are on the rise, and as a result, so are mortgage rates; however, more quantitative easing would solve that problem, and the Fed basically has issued a blank cheque;

The list of reasons gold trips up goes on-and-on, but perhaps the best reason is that at some point, other assets, including those that produce income, look cheap relative to gold, and so money leaves gold for these other assets.

GB

Ten Year Bond Yields - Stay Long Equities?

As Alex Daley of Casey's Research points out, "there are a lot of troubling signs with the equity markets these days; with valuation ratios at multi-year highs despite troubles in the EU and continued joblessness. To make matters worse, there are fewer and fewer bears." From a contrarion standpoint it's time to take some money off the table, but one reason to stay long equities, at least in the short-run, is it looks like the wheels are coming off the bond market. Ten year government bond yields everywhere are up roughly 100 basis points since QE2 (by the way, wasn't that supposed to reduce bond yields?), which means in the past 3 weeks bond portfolios are probably down somewhere between three and four percent.

Fund flows have reversed in a major way and now favor equities, while bond inflows have gone negative for the first time since the crash; investors big and small are shifting back into stocks in search of that increased return. To quote John Mauldin: "The markets are going up. The call-to-put ratio is high and rising. Bull-bear sentiment is very high. The world is bullish. What could go wrong? Bartender, another round please."

GB

K96.3 FM Radio Spot

BOM analysts saying that Bank of Canada Governor Carney is going too hard on the debt message.
They say that Canadians are saving again…and that what they care calling the ‘green line’ is up – that is assets as a percentage of debt has gone form 417% to 610% - asset value over debt – and they say that must be factored in as a function of wealth …

I would tend to agree with BMO. About a month ago we talked about Canadian mortgage debt is $1 trillion, highest ever. Canadian Mortgage association says Cdn homeowners on solid footing, not overextended. Canadians with debt have an average of $150,000 or 50% equity so it can represent a good chunk of your net worth. Compare that with the US where poeple have a negative equity position and I think we are in better shape than our neighbours. Where it can be a problem is if interest rates rise. Today a 5 year mortgage rate is less than 4%, amortized over 25 years, a $100,000 mortgage payment is $526 per month. If we run the numbers. For every 2% increase in rates your payment jumps by approxiamately $100per month. Provided you can withstand a rate increase in the future I think it's okay to have some debt. In financial planning it's maintaining a reasonable balance when you are trying to increase your net worth and it's a good thing if your asset to debt ratio is high and increasing.

K96.3 FM Radio Spot

The Merits of buying a Condo at Big White vs. Renting

I did a little research. I was talking to my neighbour Gary Turner who is a real estate specialist at Big White to get the inside scoop on condo prices up there. Condo prices range from under $100,000 to $4.8 million for the highest listing. The average price is just over $200,000. There are 255 listings currently which represents 2 years of inventory (lotsa supply). Since 2005 prices have dropped 25-30%so if you are buying this may be a good timing. However, some things to consider are taxes, strata fees and what they include, the age of the building and whether it's in need of repair.

Rental of a Condo could run you about $10,000 for the season for a 3 bedroom. So for example if you compare that with buying a condo at a price of $250,000. You put 20% down ($50,000)and finance $200,000 which will cost you about $12,000 per year plus $3,600 for strata fees, $1,500 for taxes and incidentals will take you to $20,000 per year. From a financial standpoint it appears renting is the better option however there are other considerations that weigh in favour of buyig a Condo. There is pride of ownership, paying down your mortgage is like a forced savings, your condo may appreciate in value if you get the timing of purchase and sale right and finally the interest can be tax deductible if you rent it out. The main point is the experience at Big White is priceless.

Is the Santa Claus Rally Almost Done?

Is the Santa Claus Rally almost done?

On the one hand, the S&P500 has broken through key resistance levels to close at a two year high. At 1240, the S&P500 is well above the 61.8 percent Fibonacci retracement of the 2008/2009 bear market slide. This increases the probability of a further retracement to another key level, which is 76.4% or 1362.

On the other hand, recent volume is well below average. The 15-day moving average of the advance/decline ratio on the New York Stock exchange is in decline, currently sitting at 1.5 after peaking in July at twice that. According to Paul Hussman, PhD: "Don't take risk in overvalued, overbought, over bullish, rising yield environment." More on this tomorrow.

GB

K96.3 FM Radio Spot

So we tend to be a frugal lot, we Canadians but it seems we can save money and save on average $2389.55 each year.

- Stop betting $2/wk on lottery tix - $104/yr
- Stop using other banks ATM’s - $76/yr
- Unplug appliances at home - $216/yr
- Stop using premium gas - $522/yr
- Stop paying for an annual gym membership - $813.60/yr
- Stop bundling telecom services - $271/yr
- Stop smoking - $208/yr
- Pay credit cards on time - $99/yr
- Stop drinking bottled water - $345/yr
- Stop using car washes - $130.75/yr


TOTAL SAVINGS: $2389.55
So what would that be worth in today’s dollars if we had invested that amount say, 10 years ago
What could that have turned into?

If we assume a 7% return it would amount to about $35,000. The main point is that your money will double every 10 years at a return of 7%. It has a snowball effect so several variables can affect the end result. The earlier you start, the amount you put in, the rate of return and whether it is registered or taxable. The key to this excercise is understanding the snowball effect and the bigger the snowball the bigger the double.

K96.3FM Radio Spot

Looking like a turnaround in US economy in the works:

Employment number up
Housing numbers up
Manufacturing numbers up
Balance of trade down in both US and Canada
Consumer confidence up

Is this real or are we living in some sort of fantasy.

You have to be careful when you look at numbers on a one off basis. The key is to look at the trend. For example, despite last weeks positive number in housing the trend for housing for the last 3 months is down.

David Rosenberg has a contrarian view(cheif Strategist for Gluskin Shelf) His top themes for 2011 are:
1. global growth is gowing to slow, so be cautious with your cyclical exposure
2. deflation is still a risk, so bonds will enjoy positive returns
3. biggest macro risk is another leg down in home prices
4. The US$ will strengthen and the Cdn $ is overvalued
The risk is that all the government intervention is creating a fantasyland. If David Rosenberg's themes play out in 2011, then we could see the big bad wolf huffn' n puffn'.

Radio Rallies & Reversals

According to Richard Russell, the 86 year-old writer of the Dow Theory Letters and financial icon, "Stocks are not priced to produce profits over the coming years." Looking at historical dividend yields as far back as the Great Depression, an overall dividend yield today of below 3.5% is not only risky, but dangerous. I can't say that I disagree, but what makes it difficult to read the tea leaves is all the government and central bank intervention - Expect dividend yields in the short-term to go lower yet.

I'll close by sharing David Rosenberg's top then themes for 2011:

1. Taking a contrarian view, the outlook for the first of is negative;
2. Global growth is going to slow, so be cautious with your cyclical exposure;
3. Soveriegn debt issues aren't going away - Expect volatility to intensify;
4. The US$ will strengthen against the Yen and Euro;
5. Emerging markets will struggle as central bank try to curb inflation;
6. Bonds will enjoy positive returns;
7. The CDN$ is overvalued;
8. Deflation is still a risk;
9. Corporate bonds are no longer cheap, but focus on the mid part of the yield curve and credit spectrum;
10. The biggest macro risk is another leg down in home prices.

GB

K96.3 FM Radio

DEBT TO INCOME RATIO HAS REACHED 146% IN CANADIAN HOUSEHOLDS
CARNEY SAYING THAT IT IS A REAL PROBLEM THAT CANADIAN FAMILIES HAVE TO DEAL WITH…
SAYS IT IS INTERFERING WITH LONG RANGE FINANCIAL PLANNING …

Carney identified this as the main domestic risk. Our debt to income ratio is worse than it was in the US in 2006. This could create a deterioration of [economic] activity and financial stability.” He also said that with housing affordability on the decline and households “increasingly stretched” financially, “the probability of a negative shock to property prices has risen as well.”

So whenever debt reaches high levels it has a snowball effect because it affects growth in the economy and personal savings and investment. This is the current issue in the US. They are trying to stimulate spending and the consumer is tapped out because they are trying to pay down debt. When interest rates rise it further burdens borrowers. Your financial plan is not very productive, it becomes debt reduction. Let's hope you have an asset on the other end so it is like a forced savings. The general rule of thumb is that if your interest rate is higher than your earning potential in your investment you should pay down debt.

Radio Ralies & Reversals

Well the news today was China's reported November exports of $153 billion, a 34.9% increase year-over-year, while imports rose 37.7% to over $130 billion. Total trade was close to $284 billion, a record high, and China's November trade surplus of $22.9 billion is the second highest of the year. On the news, Asian stock indexes are down, along with energy and metals, as tighter monetary policy is expected.

Now in Canada, Bank of Canada Governor, Mark Carney, warned of rising debt levels, something I've talked about several times in the past year. Highlighting the type of ripple effect that helped turn the U.S. subprime mortgage crisis into a financial system meltdown and a global economic slump, the central bank said a decline in borrowers’ creditworthiness would “prompt a tightening of credit conditions that could trigger a mutually reinforcing deterioration of [economic] activity and financial stability.”

Equally troubling, the central bank said that with housing affordability on the decline and households “increasingly stretched” financially, “the probability of a negative shock to property prices has risen as well.”

Consequently, the report again identified Canadians’ unprecedented debt-to-income ratio – currently about 146 per cent – as the main domestic risk.That's worse than it was in the US back in 2006.

GB

K96.3FM Radio Spot

Christmas spending.
We always overspend don’t we.

MIT researchers have come up with a wallet to help us stop spending so much.

Bluetooth connected to your bank account …

‘The BUMBLEBEE’ actually buzzes like a bee when you buy something…and the buzz gets louder and longer with the size of the purchase

Controlling spending has to be a big part of wealth generation …I assume

I would think the stinging feature would be popular for alot of people. An important part of controlling your spending is definetly being aware of it. Whenever we create a financial plan for our clients we have a detailed spending section and a cash management strategy. The unfortunate part is that for some reason nobody wants to complete these sections. I recently revisited my personal financial plan and went through this excercise myself. I almost fell off my chair. For those of you interested in doing this a good way to do it is to download your bank transactions to excel or quicken so you can categorize the items. This will give you a good sense of where you're money is going. The old saying is "It's not what you make it's what you spend that counts".

Radio Rallies & Reversals

After falling to their lowest in over 50 years, profit margins are already back at levels exceeded only well into previous economic expansions. The V shaped recovery cannot be attributed to sales, as GDP growth has been tepid. Profits owe their V shape in part to employment's L shape. In the US, businesses are producing the same GDP as in 2007, but with 7.5 million fewer jobs. What are companies doing with all the money they are making?

Cash flow is near a record high. Expect more dividend increases and share repurchases next year. As for jobs, it's estimated that payrolls would have to grow by 800,000 per month in the US to match the performance of profits. If small businesses are nervous about overreaching and sensitive about their access to cash, big firms are increasingly focusing their expansion abroad, thanks to cheaper labor; so while employment may be rebounding in North America, labor's share of the economic pie is not.

GB

K96.3FM Radio Spot

BOM reporting Q4 profits 14% higher than expectations.

Banks seem to be thriving in this recession.
Good thing?
I suppose we need them to be healthy.

Look what happens when they’re not – US

I think it's a good thing we have such a strong banking system that's reverred around the world. That's a solid foundation for our economy. Banks tend to do well in a low interest rate environment. Even banks in the US are doing well. The US Treasury sold its last Citigroup shares for $10.5 billion, bring taxpayers profit on the $45 billion bailout to $6.85 billion, or so they say. Mind you it took life support for the economy of over $1 trillion to accomplish this. Do you know how much a trillion dollars is David?

I was having coffee this morning with a fellow hound and he asked me that question. If you started spending the day Christ was born and spent $1 million dollars a day you would still have money left over today.

Radio Rallies and Reversals

I thought I'd highlight some headlines from yesterday:

The US Treasury sold its last Citigroup shares for $10.5 billion, bring taxpayers profit on the $45 billion bailout to $6.85 billion, or so they say; and the Obama adminsitration and congressional Republicans have agreed to extend all Bush-era tax cuts for two years, plus continue unemployment benefits for two million people which would otherwise end in January. In Canada, the Bank of Canada kept the overnight policy rate at 1% citing further risk to the economic recovery and signs of a slow down.

On the news, overseas markets are largely in the green today; however, North American markets, which opened in positive territory, are currently in the red, thanks to a report in the China Securities Journal that the timing is right for the People's Bank of China to increase interest rates due to rising inflation.

GB

96.3FM Radio Spot

Price of gold at $1406 – a new record
Silver @ $30 – a new record

Can we trust it – or is it a 21st century version of the Tulip Bubble in 1637

How do we generate wealth in such uncertain times.
How do we generate wealth when the reality is for most Canadians that every penny of household income is gobbled up in monthly expenses?

I thought would go back in time to put some perspective around the current price. I was reading a report issued by Scotia Capital in April 2006 and they were calling for a gold price target of $555. That's what I do for fun. Gold has come a long way since then.Where gold goes silver will follow. Gold prices are influenced by a number of factors. Gold is priced in US$ so when the US$ weakens gold prices tend to rise against most currencies or when political, social or economic uncertainty makes stocks and bonds less attractive to investors. Since stocks and bonds are attractive right now gold is driven by US$ weakness and maybe the Indian wedding season. If we have a 3rd round of monetary easing in the US we may see gold go higher. At some point like everything rational judgement shifts to irrational judgement and a bubble forms. Where that point is I don't know but for now there are certainly enough factors in support of gold to drive the price higher. If you concentrate your holdings in gold you have an opportunity to create wealth by speculating on the price of gold. Gold should form part of your diversified portfolio but I wouldn't roll the dice on it.

Where do all the billionaires live?

In case you're interested in where the wealthiest people in the world live:

There are 10 billionaires in Tokyo, Japan. Notable resident is Nobutada Saji, head of Japanese brewing company Suntory;

There are 10 billionaires in Mumbai, India. Notable resident is Mukesh Ambani, Chairman of Reliance Industries;

There are 10 billionaires in Chicago, Illinois. Notable resident is Oprah Winfrey;

There are 17 billionaires in Los Angeles, California. Notable resident is film screenwriter and producer, Steven Spielberg;

There are 21 billionaires in Hong Kong. Notable resident is Li Ka-shing, head of Hutchison Whampoa and Asia's richest and most powerful person;

There are 27 billionaires in Moscow, Russia; 28 billionaires in London, England; and

The most billionaire (55) live in New York, New York, including the current mayor, Michael Bloomberg.

GB

K96.3FM Radio Spot

"If you're happy and you know it, vote for me" The Saturday Globe had an article on hapiiness and it's effect on productivety. Politicians are warming to the idea that happiness should be a goal of policy.

This has been a popular subject lately. The idea has already caught on in Britain. The Brits unveiled plans to launch a Happiness Index and France made a similar move last year. I wonder whether it will be something like the Big Mac Index the Economist puts out.

Social Capital (relationships, community involvement), Income and wealth are a few variables in the happiness equation. These are all important for retirementy but the degree of importance is debatable because the notion is somewhat elusive. They interviewed a number of people, including politicians. Pat Martin NDP MP's response was the best "I saw that report and agree that happiness isn't a function of income or wealth. Personally I like to dress up in a chicken suit and sit in a washtub full of mung beans until they sprout...but that's just me." Maybe they should talk to Ronald McDonald. I think we should follow the French model; good wine, crusty bread and don't work too hard or long.

Radio Rallies & Reversals

Here's the economic calendar for this week:

Today we've got building permits in Canada; Tomorrow we've got Consumer Credit in the US and the Bank of Canada policy announcement; On Wednesday we'll get Canadian Housing Starts followed by New Home Prices on Thursday; and on Friday, we'll get a read on US Consumer sentiment.

On 60 Minutes, Fed Chairman Ben Bernanke went on the record as saying that QE3 is a possibility if economic activity doesn't pick up. The fear is that all this stimulus will cause distortions in financial markets not to mention create unexpected asset bubbles. I think we'll already seen plenty of examples of financial market distortions, and as for asset bubbles, that's the whole point according to Jeremy Grantham - Make people feel wealthier in the hope they'll spend.

GB

K96.3FM Radio Spot

Noticed that philanthropic giving is down 15% this year as the recession continues to bite down on everyday people and their pocket book. How do people plan around giving. Should it be part of a budget plan. What is a reasonable commitment?

I know that the past couple of years have been difficult but charitable giving is still a growing priority for many Canadians. In the 10 years prior to 2007 donantions have increased by 136%. While generosity and belief in the community are primary motivators tax incentives that began in 1996 is also a contributor. It is possible to eliminate taxation on 75% of income except in the year of death and the year prior to death, when this figure jumps to 100%. There are a number of ways to contribute to charity. Some well known ways are through payroll deduction but some creative ways include purchasing a life insurance policy, gifting securities - like stocks, bonds, mutual funds, real estate, RRSPs/RRIFs and business interests (which by the way have a tax benefit), growing a moustache in Movember (Scotiamcleod raised over $14,000 for that) I am a hairless cat so I didn't participate in that. Our office adopted a family for Christmas from the women's shelter.

Radio Rallies & Reversals

European markets have rolled over, giving back gains after the weak US jobs report for November. A gain of only 39 thousand jobs was well below expectations after the better than expected ADP report on Wednesday; despite this, American shoppers spent over $1 billion online on Monday November 29th, the biggest one-day total ever recorded, according to comScore, an internet-research firm. Monday's sales alone were 16% higher than last year's "Cyber Monday" total of $887m. And in traditional bricks-and-mortar stores, the story is similar. The National Retail Federation estimated that 212m people hit the shops over the Thanksgiving holiday weekend, 9% more than in 2009, while the average amount spent by each rose from $343 to $365.

So what's the upshot of the weak jobs report? As I've said before, bad news is good news - Expect the US Fed to continue it quantitative easing program and perhaps expand it.

GB

Radio Rallies & Reversals

Well December seems to have gotten off to a pretty good start. Global stock indexes were in the green thanks to an encouraging ADP Employment Report in the US and better than expected economic numbers out of China. US bourses experienced what is called a '90% up day', where upside volume equals 90% or more of the total upside plus downside volume, and points gained equal 90% or more of the total points gained plus points lost.

From a seasonal standpoint, December is historically a good month for stocks. Since 1871, the S&P500 has been positive roughly 54.68% of the time, since 1960 that number moves to 70%, and since 1980, the S&P500 has been positive 73.33% of the time; and the momentum seems to carry right through to May.

What are some of the sectors to watch? Agriculture and small caps; but keep in mind that small caps have been outperforming since the bottom in '09. Sectors that rotate out of favor this time of year are natural gas, and metals and mining.

GB

Radio Rallies & Reversals

The latest Case-Shiller home price data, for the month of September, is a three-month moving average of homes sold in July, August, and September. The data shows a monthly decline across all markets, with the single exception of the Washington metropolitan area. The 20-city index was off 0.7% in September, after falling just 0.2% the prior month. Fully 15 of the measured markets are down over the past year.

The latest Case-Shiller release also included quarterly data on the national home price index. From the second quarter to the third, home prices nationally were off 3.4%. And as of the third quarter, home prices are down 1.5% from the previous year.

Falling home prices are nice for those looking to buy new homes. But falling prices also exacerbate ongoing crises, including the economy's flirtation with deflation and the problem of rampant negative equity. As values fall, ever more homeowners find themselves owing so much more on their homes than they're worth that default becomes the most attractive option—which leads to rising bank-owned supply and more downward pressure on prices.

What's the upside? Expect more policies favorable to a lower US$, higher stock prices, and higher commodity prices.

GB