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

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