Vancouver Investment Advisor Ritch Wigham

What Are You Still Waiting For??

The last two years have been nothing short of historic. I can say the same about the two years before that and the two years before that, and before that… So, what is my point?

The market has never been a static place. On a short term basis the market is always changing up or down, on a long term basis the market has a definite upward bias.

For the last two years however the market has seen a fairly persistent rally from what were lows of devastating consequence. The previous five months before March of ’08 resulted in a wealth destruction in equities that truly had no precedent. I do not believe at any time in the modern financial system did we have a period were we were literally set back by a decade in the development of personal wealth. The result in Canada was the massive move into all things real estate while, the U.S. saw real estate wealth destruction that had never been seen before, as banks collapsed and record numbers of home foreclosures devastated the real estate market. Price declines back to levels not seen in twenty years in some places. This reaction occurred due to a massive flight to safety as interest rates declined in some places to levels not seen in literally hundreds of years, as liquidity was injected into the international monetary system to thwart a meltdown of international commerce that could have resulted in the collapse of the world economy as we know it.

So for the last two years the market recovery from Dow 7000 left many if not most retail investors, behind, perplexed and licking their wounds. A most understandable reaction. I have heard every excuse from” I don’t need the money” to a more truthful “ My wife won’t let me, we are buying more real estate” for not investing in the capital markets. Well, no more excuses. We have now made a classic 10% correction in a bull market. Is this the new bottom? I believe it is.

Before I give you my reasons for this I would like to deal with why this has occurred.

From my experience the market is always looking for a convenient excuse to make a move whenever it has become either overbought or oversold. If you look at the recent correction it has been blamed on the “CRISIS in EUROPE”. This crisis has now overshadowed all the other positive market fundamentals. Such as:

1. Great earnings recovery across almost all sectors.
2. The prospect of higher interest rates to slow inflation brought on by recovery
3. Stabilized real estate in general in North America
4. Relatively low earnings multiples in most industries and sectors
5. Low commodity prices for most food stuffs.
6. Still historically low borrowing costs
7. Modestly improving employment picture in most countries

There are more, and the bears would love to knock the ones I have mentioned, but it doesn’t change the fact that we are substantially better off than we were two years ago if only because there is a level of stabilization. After the actions that were taken during and after the melt down of ’07 and ’08 I have to feel that this can be dealt with. The world now has an understanding that it has never had, that what is bad for you is also bad for me and if my population suffers from your problems then I have a problem. Politically you might not like each other but economically there is an understanding that we are “joined at the hip” like never before. This is why we are going forward.

As for the European problem, let’s put this into a little bit of context as to just really how harmful this is:

After the Second World War Europe was devastated; the countries were broke, there was destruction of infrastructure, destruction of political stability, destruction of any form of cohesive economic future. Destruction of hope in the terms of many millions of people. Individual countries survived by surviving. As time passed Europe as a whole survived by relying on neighbors and creating new alliances that ultimately resulted in the European Economic Union (The EEC). Arguably the most important series of agreements in human history. This series of alliances also resulted in a nearly common currency, naturally called the EURO. (Britain and Switzerland maintain their own old script) In the last few years this currency has become a “reserve currency” like the U.S. dollar. A supposed storehouse of wealth, that other wealth can be measured against. Before the current troubles, by most estimates about 20% of the world’s reserves were in Euros’. Very convenient compared to the baskets of currencies that used to clutter up central bank books, prior to the advent of the EURO. This is where the current problem occurs. For the last number of years you could own Euros’ versus the relative value of the U.S. dollar and feel good about the fact that you might be hedged against problems in the U.S. You could also borrow Yen at a zero or near zero interest rate and buy European assets while not holding U.S. dollars. This is very good if it lasts, not so good when it comes to an end. So for the last couple of years you could borrow cheap Yen to buy strong Euros’ to buy cheap U.S. assets in dollar terms. What could go wrong? Well if the European Union collapses there is no strong Euro to base this trade on and consequently the Yen gets very strong as everybody scrambles to pay off their Yen denominated loans. This cross or “CARRY” trade occurred to a lesser degree in a number of other currencies as well. As of this morning, the Yen /Euro cross is at 110. A level it has not been at since 2001. The Aussie dollar is probably the most affected currently having lost 15% of it value as it is being sold for a number of reasons on top of the problems in Europe.

The end result of all of this is a concerted effort by all of the world’s central banks to try and fix this problem:

Look at the charts above and you will see some very dramatic moves. Now look at the chart below and you will see that the EURO has only gone back to where it was before the crisis:

Now you can see that Euro/U.S. have really only gone back to were they were not more than a year ago.

So if you look at all of these charts I have posted, what strikes me is that all of these “currencies” have gone back to levels that are by no means excessive or even record setting over a period of time. What we really have here is a re-alignment of the current currency or economic relationship of the different primary world economies.

Short term dramatic, but really not more than a correction or if you will a slowing down or even a “rationalization” in the economic relationship of these countries. Does it hurt? Yes. Is it a crisis? Sort of.

I suggest that there have been many much greater hurdles overcome since the Second World War in Europe than the one that is dominating the headlines now. The stakes for Europe are un-doubt ably high economically, but are much more dramatic politically. I personally believe that if Europe could recover from the calamities of the last one hundred years that this is simply not much more than a higher hurdle than has been overcome in recent times. Not to mention the vested interest that Japan, the U.S. and China have in the “Union” overcoming this disruption to their own respective trading plans. The last thing that the U.S. needs is a stronger dollar to thwart the gains in trade it has made as the “recovery” takes hold. Or the Chinese loosing one of their great consuming markets. As the French and British stop buying Chinese made goods. I haven’t even mentioned the problems everywhere else(Middle East oil exporters) as they are hung with reserves that are loosing their purchasing power very quickly.

So what we have is a very propitious correction that has allowed us to take another look at the capital markets before they recover from this correction, and move inevitably higher as the world wide recovery continues to expand and the commodity markets also, inevitably move to higher pricing points.

So don’t wait again sitting on the side lines saying to yourself “I should have gotten in last year” here is your opportunity to enter at levels not seen for some time.

Looking forward to talking to all of you soon, give me a call

Ritch Wigham
Mackie Research Capital
http://ritchwigham.com/
PH. (604)-662-1853
T.F. 866-662-1853

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

So you want to do it yourself..

It is a function of our time that a great many people want to “do it yourself”.  The classic DIY of our time is to be your own broker. People have always wanted to DIY, whether it was renovating your home or fixing your car, the human brain relishes in the feeling of accomplishment and satisfaction that you get from doing it right and doing it yourself. Great for an oil change or painting your bedroom, what could possibly go wrong?? Right? Well usually not too much. Nowadays if we don’t do these things on our own we are willing to pay someone to do them for us. This is for convenience, and some people feel, it saves on their precious time, the time that none of us seem to have enough of. It certainly isn’t because we can not do them ourselves.

So why do so many people seem to think that they can take care of their investments better than a professional can?

From the people I have talked to it stems mostly from a dissatisfaction with their past investment advice. Why is this? The answer I get is that if they happened to lose money it was the” broker didn’t understand what I wanted” or just bad advice. If they had “made” money it didn’t seem that enough had been made or that the profits weren’t large enough. There then can only be two reasons for this to occur. Bad broker or bad client. It can not be only the brokers fault if it was not communicated as to the desires of the individual who has opened the account. It certainly is the brokers responsibility to have asked the pertinent questions as to the objectives of the client. If there is a problem it must be discussed. It seems to me that clients will very often say” I just did what my broker told me to do”. That is fine as long as what is being done was in the context of what your objectives were. Ask yourself for example, Would I have bought that junior miner if I was in charge of my own account? If the answer was yes then it must also be yes for your brokerage account. If the answer was “no” the first thing you should ask your broker is why would he/she recommend such a stock when you had made it clear that risk such as that, was not what you had intended!

When I pose that scenario to people that do it themselves I invariably find that yes, they bought that junior miner, and yes they lost money, or made a bit, and no it would not fit their profile as explained by themselves for their objectives.

What’s my point? You cannot blame someone else if you were willing to assume the risk. If you feel that the risk was not appropriate you must decide this before not after the fact. I know plenty of people who maintain two accounts for this very reason. One for long-term investment objectives and one for more immediate speculative reasons. This allows them to be more objective. It is also a very good idea to separate these accounts. Many people try and do it all themselves and find that they cannot separate the two, or combine them and find that neither is satisfied. A very good reason to have either one or both with a professional broker who can understand the objectives of either account as it is laid out by the client. Set out the objectives and understanding for the account and it should be clear what is desired and consequently recommended for that account. This is like buying a bouquet of spring flowers all pretty and lots of colours, when what you really wanted was a dozen roses for your girlfriend. Initially it might be pretty but becomes disappointing as the individual poesy’s die off. Should have bought the roses!

Costs, commissions, charges, fees, call them what you will, nothing is for free. There is certainly the feeling by a lot of the DIY crowd that they can do it a lot cheaper than with a broker. I challenge this. First if you are a very active trader you will always find that a fee structure can be negotiated that is acceptable to both parties. If you are not as active isn’t it worth paying a bit to someone to make sure that your instructions are followed and monitored on your behalf? Almost all the traders I know that actually have a profession and are not brokers or have the time to sit in front of a screen all day, use a broker. Why, because they don’t change their own oil either. It is just more efficient and ultimately they realize that they save way more money paying me then they give up trying to do it themselves. From proper execution to the knowledge that they will be immediately made aware of what is happening with their money when they are otherwise involved with their daily lives. As opportunities arise they can also be made aware of these. Private placements, underwritings warrant issues, all of these are much more efficiently dealt with by a broker. Unless, if all you are interested in is mutual funds (which may be cheaper to acquire through a broker than online) you still require a broker to really be able to access these products.

Lots of people enjoy surfing the web to find the next great idea. How many of those same people understand what they are really looking at. Even if you do it is just good sense to be able to get a second opinion. Some of the best ideas I have related to my clients have come from clients themselves. After I have gone over the pros and cons and made the assessment as to who it would be appropriate for. Great ideas have to come from somewhere, how many have the time too really check the ideas out. Let alone asses the potential risk that it may carry. There is so much on the web now that if you don’t understand the processes for publicly traded companies you are inherently at a disadvantage before you start. It is very hard to distinguish sometimes between a fly by night Exploration Company and a legitimate explorer with properties of merit. When even the good ones have a relatively low success rate you must be able to access a second opinion before you start. Most brokers have access to this type of expertise whether it is mining, high tech or bio-medical. If you don’t know the risks you should always seek out advice from a person who is a professional or has access to an expert in the field. It is called being prudent. Advice costs, negotiate your best deal, and find a broker who understands your needs.

Talk to you soon

Ritch

The Chinese are Coming… Again!

The first corn exports of any significance have just been booked for the Chinese market. There are a number of factors within this development that we must pay attention to:

1. It has been years (like 10 or so) since any amount other than a token was exported from North America to China.
2. The drought that was last year and excess moisture this year has obviously created concerns within the agricultural ministry about supplies for the balance of this year.
3. the need for better more resilient seed in the Chinese market has become more immediate than previous years(Monsanto drought/moisture resistant GMO seeds)
4. the need to import more “FERTILIZER” (read Potash Corp etal) will become imperative.
5. The importation of food crops into an expanding economy suggests that this is a tool that will be used to help control inflation and may signal the importation of other food crops as well(read wheat)

In the coming months this development will become more and more of a factor in the markets. I want to remind everyone what happened a very few(two years ago) with the rice price and fear that hyper priced rice brought with it when drought affected the distribution of the crop world wide. A very small reduction in production creates a very real and immediate impact on pricing. Remember that our old rule of thumb was that” a 3% drop in world wheat production was worth about $1.00/bushel to the farmer”. I am not sure what the numbers are for corn or rice but I am sure that they would equate to a similar movement on a percentage basis.

I believe that this export news is a pre-cursor to another round of food grain tightness that will be very beneficial for our investments in the near term and suggests that the liberal pricing of grains and potash and other crop inputs is has reached a bottom for this recent time period.

To learn more, see this article from the Globe and Mail. (http://www.theglobeandmail.com/report-on-business/economy/boatloads-of-corn-mark-turning-point-for-china/article1566844/)

Talk to you all soon

Ritch

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

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The European Confusion

I won’t use the acronym..

The European Union is experiencing it’s first real on-shore crisis. The Mediterranean countries plus Portugal have created what may become a devastating set of circumstances for the common currency that the union adopted some years back.

In a nut shell the debt to GDP (gross domestic product) ratio that is used as a bellwether or gauge of a sovereign countries ability to re-pay its debt has been extended past that particular countries ability to re-pay that debt.

Greece is the first of these over-extended countries to come into crisis. The others are Italy, Portugal, Ireland and Spain. Pick your favourite for who comes after Greece. The problem with this Union is that Greece does not stand alone. Due to the common currency the other countries sharing that currency are forced to paddle in the same boat. So if Germany and France don’t come to some form of rescue it impacts them as well.

Originally (a few weeks ago) it was thought that the rest of Europe would come to the rescue of Greece and we would all move forward. A small bump in the road toward a better and stronger European Union. That has turned out to be “not” the case. The IMF (International Monetary Fund) had to be called in because as it turned out Greece was not the only problem for the stronger countries. It has turned out that due to “incestuous” cross borrowing contamination between the worst offenders that the intertwined borrowing of these countries has made it one larger pot of trouble. Greece owes Spain money but Spain also owes Greece money and they all owe each other money that none may be able to pay back. This creates a large problem because it is almost like one great big sovereign debt that has actually no ability to pay itself off. The fear then becomes how do you stop the domino effect of a series of countries, all with the same common currency paying off this debt?

At the moment the bond market is trying to distinguish between the debts of these laggards by penalizing with interest rates the debt of one country verses the other. I.e. Greece v. Germany. The problem with this is eventually how do you distinguish between the players if the common currency has to be devalued while some parts of Europe are solvent and others aren’t?

It is a certainty that at some point (especially if they feel like they are standing alone) France and Germany will not pay the debt of their profligate partners in this fragile union.

That is what the world is afraid of. What happens if the E.U. breaks down?

What happens is that some parts of Europe become insolvent and others regain their old currencies and move forward. The prospects of this are untold. I don’t believe any one can accurately measure what the ramifications of this will be. I can tell you that the whole world will pay and pay dearly. After the melt down of the last two years I don’t believe that the leading countries will let this happen. The pain of the recent past was too severe to have been forgotten this soon. What ever gains we have made to leave the “Recession” behind will not be jeopardized by what are the relatively minor problems of a relatively small country such as Greece. If the problems spread to the other countries in this group a series of events that can not be controlled, may be unleashed, and those effects would be even worse.

The way the world would have dealt with this if Greece had not been a part of the E.U. is it would have been to crush their currency, and impose severe borrowing penalties (interest rates) until Greece had at least started to fix their problems. Since Italy, Portugal, Spain and Ireland are also involved the only outcome is then for the common currency to be devalued and stiffer penalties being imposed on the borrowing costs of all of the countries collectively. This may not seem very palatable to Germany or France but they really do not have a great deal of choice in the matter unless they start the breakup of the E.U itself.

The conclusion then is that the Euro Dollar will decline and the pricing of commodities as we know it will change. Remember that the modest and as yet fragile recovery in the U.S. is largely based on a cheap U.S. dollar relative to the rest of the world. This is a fact that should not be lost on us hear in Canada as this is exactly the mechanism that we used when we allowed our dollar to trade down to the $.60 cent level to stimulate our economy in the 1990′s and early 2000′s

So if I was in Europe, what I would do is buy gold and essentially convert my holdings to U.S. dollars and understand that the U.S. period will do whatever it can to keep their currency relatively week while helping Europe through the IMF to keep their Union together and thus keep the current fragile world recovery in tact.

Till’ next time

Ritch

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.