Friday, December 18, 2009

Copenhagen Cop-out.

The Copenhagen climate change conference was a show case for human nature. The conference was rife with blow-hard politicians and self-righteous protesters. The human ego is an amazing thing. And now that they’ve all gone home, what did we learn from this spectacle?

Modern human beings have a strange focus on the grandiose. We love the billion dollar international deals where rich nations give to the poor. We love the massive national targets for emission reduction, the idea of all nations cooperating in a globally united effort. We love this focus on bigness.

But, in problems like this, the devil is in the details. Greenhouse gas problems seem easy to solve.

For starters, an automotive engineer friend tells me that diesel engines use half the fuel that gasoline engines use. It’s easy for a nation like Canada to introduce limits on the numbers of gasoline engines produced in Canada: then the manufacturers would simply build cars with diesel engines instead. The government could easily limit the number of 8 cylinder engines in passenger cars. They’d simply build cars with 6 or 4 cylinder engines. The government could easily regulate the weight of passenger cars: they’d simply manufacture lighter cars. In other words, our government could easily force Canadians to drive the same kind of cars people currently drive in Europe. And the auto manufacturers could easily produce them.

Why won’t elected politicians do these obvious things? Because they are focussed on the grandiose. They are not interested in the boring details of simply getting the job done. It’s human nature.

It’s so easy to see the futility of human nature in others; not so easy to see it in ourselves.

Consider the financial world; are we all focussed on the banking system, the world economy, the automotive bail out? Are we overlooking the obvious simple things we can do to save our own personal financial worlds?

What about your budget? Do you spend responsibly? Do you save money? Are you too far in debt? These things are easy to sort out.

And what about your investments? Are you making money? Or are you losing? Is your investment advisor worth the money you pay them? Do you remember how you felt last year when the stock market dropped 45% in 6 months? Did you wish you had sold out long before? Have you sold out now?

For advice in this matter, I turn to country singer, Kenny Rogers. In his song, The Gambler, he offers this simple advice: “You’ve got to know when to fold ‘em, know when to hold ‘em, know when to walk away, know when to run.”

But most of us have caught the Copenhagen flu: we focus on the grandiose problems of the world and forget all about the simple things we can all do to defend ourselves from future financial loss.

In my book, Beyond the Bull, I write about how your human nature impacts your investing. I encourage readers to focus on their own investment accounts, not on the grandiose world financial markets. Media coverage of the big and the bad can distract us and prevent us from quietly living our lives in a responsible way.

Focus on yourself first.

Ken Norquay, CMT
Financial Philosopher

Links to beyond the Bull:



Tuesday, December 8, 2009

Country and Folk songs: Financial Wisdom in Disguise.

It’s early December and the days are getting really short. Our native ancestors called this time of year The Season of Dreams: the time of thinking and remembering. In the stock market, we can turn thinking and remembering into money. For this reason, in my book, Beyond the Bull, I encourage investors to be objective in their thinking and objective in their remembrance.

Critics would say, “That’s crazy: we remember what we remember. There’s no ‘objective remembering’ or ‘subjective remembering.’ There’s only remembering and forgetting.”

This is not true. The human brain is not wired that way. We are creatures who seek pleasure and avoid pain. I suggest that your memory is like this. Sometimes we forget those painful times.

Do you remember what the stock market was doing in early December 2008, one year ago? Investors were afraid to open their monthly account statements. There was blood in the financial streets. People’s retirement plans needed to be re-written.

We’d rather remember that, one year ago in December ‘08, the S&P 500 index was around 900 and now it’s around 1100. We’d rather forget that two years ago, in December ‘07 it was around 1500. And we definitely want to forget that ten years ago it was around 1500 in the year 2000.

The days are getting shorter and shorter for those who would have us buy and hold for the long term. It’s just not working any more.

For guidance in this area, I recommend some simple philosophy from country singer Kenny Rogers. In his song, The Gambler, Kenny received the following advice from an old man on a train:

"If you're gonna play the game, boy, ya gotta learn to play it right.
You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.

Ev'ry gambler knows that the secret to survivin'
Is knowin' what to throw away and knowing what to keep.
'Cause ev'ry hand's a winner and ev'ry hand's a loser,
And the best that you can hope for is to die in your sleep."

The problem with today’s investors is they don’t know when to fold ‘em. They think they should always hold ‘em.

Further advice on this topic comes from folk singer Bob Dylan, who sang: “The Times, they are a-changin’.” It appears that the times have changed: buying and holding no longer works. Now we have to know when to fold ‘em too.

As you ponder your dreams in the next few weeks, remember. Your financial dreams are woven in this world of harsh reality: in this world of survival of the fittest. If your dreams of easy wealth in your retirement have vanished, remember that. Remember it objectively. For, when the Season of Dreams ends, it will be time to wake up.

There is real risk in the stock market. It requires offence and defence. It’s not a cake-walk to riches: “You got to know when to hold 'em, know when to fold 'em.”

Ken Norquay, CMT
Chief Market Strategist and Partner
CastleMoore Inc
“Buy, hold and know when to sell.”

Links to Beyond the Bull:



Monday, November 30, 2009

Stock market farming

Big news: It didn’t snow

Never in recorded history: that’s the last time the City of Toronto had a November without a trace of snow. 2009 will be the first snow-less November ever.

Whenever we talk about the weather, we habitually refer to weather’s history: “We haven’t had a storm like this since 1967…” We human beings live with weather day to day and we seldom have unique weather experiences. This November was unique.

In a way, the human experience with weather is a bit like our experience with the stock market. Each day is seldom interesting on its own; not really. Most days are more or less like many other stock market days – up a little, down a little. But let’s face it; these are non-events - like day to day changes in the weather. And now we have a November record of something that didn’t happen: it didn’t snow.

Day to day weather is like day to day stock market activity: boring.

But, when we string together enough non-event weather days, we notice something very interesting: the change of the seasons. Each day may be insignificant; but when we string 90 days together, real change happens. The same is true for the stock market. If we string together enough of the stock market’s non-event days, we can see the up trends and the down trends. And we can see the transitions between them. Now it’s getting interesting. Now investors can act like farmers. Farmers plant their crops when the weather turns from cold to hot. And they harvest when the weather turns from hot to cold.

Does the stock market have seasons? Are bull markets and bear markets like summer and winter seasons? Is there a time to plant and a time to harvest? You bet there is! Remember May and June 2008? That was stock market autumn: time to pull in the harvest. Remember late 2002 to early 2003? That was stock market spring: time to plant. Unfortunately for investors, the financial seasons are not mechanical and predictable like the agricultural seasons. We are forced to act like squirrels who can’t read the calendar: we have to watch for the signs to determine when we should gather our nuts.

What are the signs of financial autumn? Can history teach us anything about those times when the up trends turn down, when the bull markets give way and the bear markets emerge? In my book, Beyond the Bull, I review stock market cycles. It seems the secret lies in the attitude of investors. At long term stock market tops, investors are very optimistic. At bottoms, investors are overly pessimistic. It’s all about investor attitude.

As always in the stock market, the question is: what season are we in now? Should I be buying or selling? The answer? Look around. Are investors too optimistic or are they too pessimistic?

The statisticians who measure investor attitude report that investors are quite optimistic; and less pessimistic than they have been since 2007. This statistic is telling us to start up the combine and start bringing in the crops. It’s time to do what we wish we had done in May and June of 2008. Sell some stocks.

Ken Norquay, CMT
Financial Philosopher

Links to Beyond the Bull:



Friday, November 27, 2009

Good Bye Dubai

It seems yet another multibillion dollar bubble-enterprise has popped. The tiny but rich little city state of Dubai has blown its wad. This week they announced that they cannot make their loan payments. They need to postpone them for another six months.

Dubai’s early claim to fame was she pumps a lot of oil: around 240,000 barrels a day. Then they decided to diversify into tourism. They hired a group of high powered western MBAs, put together a great business plan and gave birth to a spectacular modern city, an architect’s dream come true.

But there’s a catch. They borrowed the money to build their Oz-city. Let’s calculate Dubai’s gross income if oil sells at $100 per barrel; then we’ll re-calculate at $50 a barrel. I apologize for this painstakingly obvious exercise, but I’m sure you see the point. Dubai’s most important source of income is totally dependent on the price of crude oil, which can rise and fall dramatically. So, when the government of Dubai borrowed the $59 billion to finance their dream city, the lenders would have known that their ability to repay those billions would depend on the price of crude.

But, it’s not that simple. Oil is a depleting asset. One day Dubai will run out. [Current estimates give them about 20 years.] Dubai’s ability to repay its debt is tied to fluctuations in crude oil prices and then they will run out. So, when calculating how much money they should lend this ambitious little city, the banks know all this. What bank on earth would ever lend Dubai so much money that she would be unable to pay the money back?

Maybe the bankers were in dream land too. Maybe they had seen the 1989 movie Field of Dreams and believed the slogan: “build it and he will come.” In Field of Dreams, some entrepreneur built a baseball diamond in the middle of a corn field. And, sure enough, by the end of the movie, there were people playing baseball on it. It’s the Las Vegas story: they built a city in the middle of the Nevada desert, and sure enough, people came. Maybe that’s what Dubai’s lenders were thinking. But last week’s neo-bankruptcy puts that dream in doubt.

We can’t blame the ambitious leaders of Dubai for going for broke. They took a mega-risk, in hopes that their little desert nation could emerge into a modern economy. And it looks like they will lose. It’s the bankers that worry me.

All an honest banker could ever have expected to make on the Dubai Dream Field loans was interest on their money. Why would they make such long shot loans? Our guess is there was something more in this deal than boring bank real estate financing. There was something sexy, some sizzle, something not cut from a conservative banker’s cloth. The Dubai deal smacks of some secret, yet unspoken. In the mean time, the Dubai default shock ripples around the world’s banking system and the world’s financial markets. It’s not a huge default. American billionaires Bill Gates and Warren Buffet were once worth more than this whole Dubai default. No doubt the world’s banking system will weather this little desert storm.

Now it seems it would have been better for the citizens of Dubai if their leaders had had more conservative business plans. And it would have been better for all of us if world bankers had been less aggressive. What about you?

Are you a high roller? Are you betting on a long shot high roller’s dream? After seeing what happened to the stock market in 2008, are you still over-exposed? In 2001-2 the stock markets dropped about 45%. In 2008 it happened again. The stock market has become a high roller’s game. In 2008 corporate America came undone. In 2008-09 world banking came undone. And the Dubai default is showing us that we still live in risky times because of yesterday’s high roller bankers. Is it time to become conservative again? Is it time to quietly re-think your personal financial plan and make adjustments for the high risk times we live in? It seems we can’t trust big banks or big corporations to provide a financially stable world. We have to provide our own financial stability. It’s time to become more conservative in our personal finances.

Ken Norquay, CMT
Financial Philosopher.

Wednesday, October 28, 2009

The second wave: defend yourself

The second wave: H1N1 and DJII

Canada is on red alert: the swine flu is back with vengeance. The so-called “second wave” is upon us. Children have died. Vaccinations are being distributed. Everyone is paying attention and trying to defend against the attack of this virus.

The H1N1 virus was first detected in Canada earlier this year. Then it went away. Medical professionals predicted that it would come back, perhaps in a more deadly form: this phenomenon was referred to as “the second wave.”

Why do they call it “the second wave?”

Doctors who follow the spread of disease through a population observed that it sometimes occurs in two surges or waves with an intervening period when the disease seems to abate. The sequence is: Wave #1, abatement, Wave #2. And the second wave is the deadly one.

This wave phenomenon was first observed by an accountant in the late 1920s in the stock market. Ralph Nelson Elliott noted that stock market sell offs, bear markets, often occur in two waves too. [In fact, Elliott outlined his Wave Theory before medical scientists observed the same wave phenomenon in the spread of disease.] From an investment point of view, here’s how the waves look: this is a chart of the Dow Jones Industrial Average.

Note: this site does not support my stock charting program: you'll have to imagine a chart of the DJII going back 2 years.

The first down wave started in October 2007 and ended in March 2009. The market dropped just over 50%. The abatement wave started in March 2009; when it ends, the second wave of selling will begin.

The same thing happened earlier this century. The US market dropped 45% in the two years from 2000 to 2002. Wave one went from February 2000 to Oct 2001; the abatement ended in March 2002 and the second wave of selling ended in October 2002, shortly after 9-11.

Canadians are seriously alert to the health risk, the second wave of H1N1. But we seem oblivious to the economic risk, the second wave of sell off in the stock market. Why isn’t Canada on red alert about our investments?

The answer to this mystery lies in the law of cause and effect. In the H1N1 wave count, viruses are the cause of the disease: human beings [our sickness] are the effect. In the stock market, human beings are both the cause and the effect. Our selling causes the stock markets to go lower and the effect is the declining value of our investment portfolios. When physicians advise us to wash our hands and get inoculated, they are trying to prevent the effect: trying to curb the spread of the disease by neutralizing the cause. When investment professionals tell us not to sell, they too, are addressing the cause: trying to prevent the selling that drives the stock market lower. If they succeed in preventing a serious sell off, the effect [lower portfolio values] will be avoided.

In the medical profession, the spirit is that we should all cooperate, wash our hand a lot and get the inoculation. Cooperation will help us all.

In the investment profession we have proof that cooperation doesn’t work. In 2007/9 the US stock market dropped over 50% in 17 months. In 2000 to 2002, it dropped 45% in 2 ½ years. Cooperation doesn’t work. The effect – a sharp drop in portfolio values, cannot be avoided by not selling. In my book, Beyond the Bull, Taking Stock Market Wisdom to the Next Level, I try to help investors understand the importance of this concept. Investment industry leaders sincerely try to keep the financial markets stable. 45% declines are not good for anyone. But the stock market is not a co-op formed for the benefit of everyone. Big declines do happen. And when those big declines occur, whoever sells first wins. There are winners and there are losers. It’s like a pandemic: not everyone survives.

The investment world is more like a theatre of war. In order to win, we have to behave like generals, conserving our resources, avoiding high risk times, retreating and fighting another day. In the financial world, we have to act like the physicians are telling us to act in the medical world. We have to defend ourselves.

The irony is that our financial defence [selling off our stock portfolio] will help cause the demise of those who do not sell. It really is like war. Massive selling drives stock prices down. The cumulative effect of many investors selling in a short time is what causes the down wave. But, if you sell early in the decline, other investors selling later will drive the stock market down to where it will be a bargain – time for you to buy back. There are winners and there are losers.

Defending against the H1N1 second wave helps you and it helps the rest of us. Defending against the DJII second wave helps you, but it could hurt the rest of us. It’s a tough decision for an individual investor.

But imagine how tough it is for a giant financial institution like Royal Bank’s mutual funds or the Teachers’ Pension Plan. They are so big that they can’t sell off all their stocks. Their selling [the cause] depresses the stock market and results in lower values for their portfolios [the effect]. Because they are so big, they are stuck. They can’t get out of the market. In big sell offs like the 2007-9 decline, they are doomed to experience portfolio loses. They can’t win.

What kind of advice do you think comes from the managers of these large pools of money? For them, defence is futile. Why should they advise you to defend yourself by selling off your stocks when they can’t sell theirs.

Our advice? Go to red alert. Defend yourself and your family against the second wave of both H1N1 and DJII.

Ken Norquay, CMT Oct 28, 2009.
Financial Philosopher
Chief Market Strategist,
CastleMoore Inc.

Links to Beyond the Bull.



Tuesday, October 27, 2009

Financial Swine Flu Shot

In 1918 millions of people died because a serious flu spread throughout the population. A similar pandemic happened over 500 years ago in Europe when the Black Death wiped out millions. More mass deaths occurred when the earliest immigrants from Europe spread deadly diseases among the native population. Pandemics are serious.

But it’s the false alarms that help us think clearly.

Remember the avian bird flu? Apparently it had the potential to kill millions.
[] But so far this threat has not materialized.

We never know ahead of time whether a flu warning will be really important, or just another warning. This article is taken from a Los Angeles doctor’s article for her patients:
The swine flu and its vaccine are not new. In 1976, an army recruit based in Fort Dix died following a mysterious illness. In addition, four of his fellow soldiers were hospitalized. Health officials disclosed to America that the illness was swine flu. Without knowing much about the details of their medical history and why they were susceptible to severe reactions to this illness, people became anxious that this could lead to a flu pandemic similar to 1918, and a vaccine was quickly prepared to be given to the masses. In the end, the illness never transpired. It came to be known as the swine flu fiasco of 1976 after twenty-five people died and five hundred became paralyzed all from the vaccine. In other words, more people suffered from the effects of the vaccine than the illness itself. []
Dr Feder recommends that we learn the facts and make a responsible decision about defending ourselves against disease. Good advice.
But it’s not the reaction we are seeing right now, is it? Right now, swine flu 2009 [H1N1] has hit Canada again. Government health organizations are scrambling to do the right thing. There is a huge campaign in the media to persuade us all to wash our hands a lot and get a vaccination. It’s in the news every day. Some say it’s serious, some say it’s not. Some advise getting vaccinated, some advise not. What should we do?
Let’s revisit Dr Feder’s advice: learn the facts – then decide on your course of action.
The problem with the swine flu media blitz is that no-one is trying to teach us – they all want to persuade us. And, as we know, when someone is trying to persuade us to take a certain course of action, the truth is the first thing to go. That’s why there are so many confused people in Canada. They’re getting the old razzle-dazzle. Politicians and civil servants are posturing to promote their own careers by doing “the right thing;” shills and mountebanks are taking advantage of people’s fear to build up their own egos. And relentless reporters are documenting the confusion with great aplomb. All this makes it difficult to learn the facts.
Normally the medical world is not this confusing.
Not so, in the investment world. Ego and persuasion are the norm in the realm of high finance. In my book, Beyond the Bull, Taking Stock Market Wisdom to the Next Level, I point out that all “facts” are suspect because they are always presented by some salesman trying to convince you to buy or sell. Salesmen’s “facts” are presented in such a way as to persuade you to do what the salesman wants. The typical investment professional does not present the pros and cons about a certain investment and ask you to make a decision. He presents the “facts” that will persuade you to do what he recommends.
Confused investors should take their cue from the current swine flu conundrum. Follow Dr Feder’s advice: learn the facts, make a decision.
And what might that decision be?
Last year at this time the stock market was in a full fledged sell off. From top to bottom, most equity mutual funds lost 45%! Most investors wish they had sold out in spring 2008.
And now that the market has rallied and most mutual funds have regained over half the loss, what do you think the mutual funds salesmen are saying? Are they be presenting the reality that mutual funds investors can lose 45% in 9 months? Or do they emphasize how well the market has gone up since the bottom in March?
Ordinary people really do want to make an informed Dr Feder decision when it comes to their health. But when it comes to their wealth, they prefer not to decide. Why? Health and wealth are important parts of our human lives. Why we are so anxious about the second wave of the swine flu and so oblivious toward a possible second wave of the stock market sell off?
Ken Norquay, CMT
Financial philosopher,

Links to Beyond the Bull:



Wednesday, October 14, 2009

97 cents and rising

The Big Three auto manufacturers stuck it to Canadian consumers in 2007 and they’re sticking it to us again. 2007 was the last time the Canadian dollar rocketed toward par; and it was the last time the auto industry stiffed Canadian car buyers.

There is a fixed cost to manufacture a car. Car dealerships sell it for cost + their mark up. And that’s how business works. But in 2007 things changed fast. The Canadian dollar went from just under 85 cents in March to just over $1.10 in November, 8 months later. That’s 30% in 8 months!

The Canadian dollar had 30% more buying power. Or did it? Did GM reduce the Canadian dollar price of a Chevy by 30%? Not a chance! They kept the Canadian dollar price the same and pocketed the extra profit. Ford and Chrysler did it too. And if an adventurous Canadian tried to buy a car from an American dealership, he soon found it was forbidden. Toyota and Honda did the same thing. Canadian consumers did not receive the benefit from the rise in buying power of the Canuck-buck because big auto manufacturers forbad their US dealerships from selling to Canadians. The American auto business stiffed Canadian consumers in 2007.

And now that our Loonie is flying high again, we see the same outrageous profit grab! So far in 2009, the Canadian dollar has moved from 77 cents to 97 cents in 7 months – that’s 26% in 7 months. And if we check a few auto import websites, we see that we can save 10% to 30% by buying from the Americans, even after paying the extra shipping, duty, conversions etc. Why don’t we try calling a few American car dealerships and seeing if they will sell us a new car? Don’t forget to tell them you’re a Canadian. Will they refuse to sell a car to us again in 2009?

Now think back to March 2009 when the Canuck-buck was 77 cents. What other big news event was making headlines? Auto company bailouts? Canadian consumers and tax payers forked up a couple billion Canadian dollars to help these guys stay in business.

And now that the auto industry REALLY needs to sell a lot of cars, and now that Canadian consumers have picked up 26% in buying power in 7 months, you’d think they’d open the flood gates! American car companies should funnel those high priced Canadian dollars to buy new cars from American dealerships. Capitalism: it’s the American way. Isn’t that why American exporters like a lower US dollar – so their domestically manufactured products are more competitive in foreign markets? Isn’t Canada a foreign market? Isn’t this the perfect opportunity?

This is an example of how economic theory and reality don’t match: the currency exchange has moved favourably for the American auto industry and the Canadian consumer. But, somehow, American dealerships won’t sell cars to Canadian consumers. Neither is capitalizing on the big move of the Canadian dollar. And it’s the big car companies who are stopping it.

Ken Norquay, CMT
Financial Philosopher

Thursday, October 8, 2009

Newfoundland gets it right!

Newfoundland’s Government Finally Gets It!

The citizens of Buchins NL found out that their town is contaminated. It appears that the old mine wasn’t closed down properly and there could be a lead poisoning problem. Dirty business.

But at least the provincial government did the right thing this time. Two cabinet ministers made public statements about the problem shortly after it was discovered. The town folk are being asked to get blood tests: they’re trying to find out how big this problem really is.

Good for them.

These past few years there was a scandal in Newfoundland because of a cover up in the detection and treatment of breast cancer. Government officials kept secret the fact that there were problems in the diagnostic testing in Newfoundland’s medical labs. Those delays caused unnecessary problems for the women who were improperly diagnosed.

It looks like they learned from their previous mistake. In the previous cover up, they put their shame and embarrassment about the labs’ mistakes ahead of the health of the women who were worried about having cancer. This time the government saw fit to put the health of the Buchinsians ahead of their own political interests.

Good for them.

Politics is a dirty business, isn’t it? Our elected representatives take great pains to insult and blame each other for the most unlikely things. Lab technicians in Newfoundland screwed up in a big way. We don’t know how many women died prematurely because of faulty cancer testing. Then the government, in complete denial of the seriousness of the problem, delayed correcting the error. They would surely have many embarrassing questions to answer in the provincial legislature. Their delay and cover up decisions were all done to protect their own best interest.

Most Canadians are well aware that they are being deceived: they know the representatives they elect will say anything to get elected again. That’s how it works in a modern democracy. It’s all about staying popular: ranking high on the polls. We have learned to live with it.

The same thing is true in the world of commerce. We all know advertising is a form of deception. It’s all about selling your product. Customers expect to be lied to, to be told that this product is better than that one. Modern advertising is not about producing quality products; it’s about selling products. We have learned to live with it.

In my book, Beyond the Bull, I discuss this “deception” component of our lives. The book talks about how deception is a natural part of our lives in modern societies. It offers advice about investing in a world of deceit.

The first important fact we need to know is: deceit is a huge part the typical Canadian’s life. Bull is part of politics, medicine, commerce, advertising and investing. So relax! In today’s Canada, we get lied to. Wake up to it.

My second offering to Canadian investors is to stop being so judgemental about the lying. Relax! Politicians lie. Salesmen lie. People try to cover up their mistakes. So quit complaining about it. Just wake up to it.

By far the most important attitude we need to adopt in this world of bull is responsibility. Who is responsible if we re-elect a liar or buy from a liar or lose our money by trusting a liar? We are! And who is responsible for letting the lies continue? We are!

So, what should the women of Newfoundland have done when their test results said they were OK when they, in fact, had cancer? What should the Buchinsians do now that they realize they’ve lived in contaminated land for thirty years? What should Ontarians do when they see massive corruption in the E-health, Cancer Care and Lottario?

Lets do what Newfoundland’s provincial government just did. Come clean. Tell it like it is. And get it fixed.

Ken Norquay, CMT
Financial Philosopher

links to Beyond the Bull:




Tuesday, October 6, 2009

Christmas in October

It’s a Wonderful Life…NOT!

Every Christmas I like to watch Jimmy Stewart in the movie It’s a Wonderful Life. The story is set in the 1930s during the depression. Jimmy plays a young business man trying to protect the financial interests of his small town at a time when the stock market had plummeted, real estate had collapsed and the banking system was in trouble. Somehow he had to persuade the town’s citizens to hang in there and not trigger their own financial disaster by withdrawing all their money from Jimmy’s little savings and loan company [that’s an American term: in Canada we call them trust companies]. The movie focused on the every day human emotions of the 1930’s banking crisis and the tireless work of Jimmy Stewart trying to fix it. Today the role of financial hero has fallen on the broad shoulders of the various government officials and central bankers. Our citizens have faith that these highly educated and highly paid economic professionals will somehow get us through the crisis. I recommend you watch this movie: it’ll be part of the usual Christmas build-up. It’ll help you understand some of the human dynamics of a depression, a real estate crisis and a banking crisis.

Observation: it is now the first week of October – doesn’t this seem a bit early to be thinking about Christmas movies? Apparently not. Several retail stores started their Christmas selling season last month. I wonder why.

The normal sequence of sales promotion is: [1] back to school, [2] fall fashions, [3] Halloween, [4] Christmas, [5] Boxing Day and January sales. A few years ago I noticed some stores started their January sales in December. And now they’ve moved Christmas to September. Something seems wrong, doesn’t it?

Are there too many stores? Are too many consumers tapped out? Are there too many stores in deep financial trouble and are they so desperate that they need Christmas sales now?

Is Jimmy Stewart’s Wonderful Life of the 1930s closer than we think? If America’s auto industry and America’s finance industry had to be bailed out, maybe her retail stores are in trouble too. Maybe they shouldn’t have opened all those box stores. After a ten-year binge of building more and bigger stores, have they gone too far? Big new stores have big mortgages or big leases… big monthly expenses. We can imagine how financially stretched out retail stores might be; and if sales are below their projected levels, maybe they need to move Christmas to September to survive.

Government officials and central bankers saved the financial system and the American auto industry. Can they save the retail industry too? How would they save it? They provided money to the banks and car companies: will free money help the retail stores?

In the 1930s movie It’s a Wonderful Life, Jimmy Stewart tried to persuade the town folk not to take their money out of his little business. Now-a-days we tax payers are being asked to put our money in. Jimmy talked directly to the people: and the people decided what they would do with their money. Obviously we tax-paying town folk are not foolish enough to put our own money directly into failing companies: our governments do that for us. Now-a-days politicians do what they want with our money, claiming all the while that what they do is in our best interest.

Ask yourself this:
1. Would you have loaned your own money to General Motors?
2. Would you have bailed out Smith Barney or Citibank?
3. Will you do your Christmas shopping in October?

It’s a Wonderful Life showed us how the economic problems of the 1930s were solved by business people talking directly to consumers to sort out their problems. Now-a-days, we seem to want others to do that for us. We want the government to fix it.

What will you do? Will you buy your Christmas decorations in October? Is that what it will take to avoid the next business crisis?

Seems ridiculous, doesn’t it?

The modern re-make of Jimmy Stewart’s classic movie would be It’s a Ridiculous Life: the story of a small town business man who borrowed his way to prosperity. He has the big house, the great car, the trophy wife and he’s done it all on bank loans. He bought a house in 1980, rented it out and used the cash flow to buy a second house with almost no down payment. As real estate prices went higher, he kept on borrowing and buying more real estate and renting it out. Soon he had the biggest real estate holdings in town, the biggest personal income in town and the most mortgage debt of anyone in town. Then they closed the factory at the edge of town. 300 workers were laid off and our hero’s empire came all undone. The tenants couldn’t pay the rent. Our hero couldn’t pay his mortgages. The bank foreclosed on his properties and his high maintenance wife left him.

The ridiculous part is that this story is true. This is how the long term rise in real estate prices was maintained: the up trend was financed by the banks.

The 1930s It’s a Wonderful Life problem was resolved by the town folk acting reasonable and conservatively. Is this how our remake will be resolved?

Apparently not. In our modern movie, It’s a Ridiculous Life, aren’t we being encouraged to do the opposite? Aren’t they suggesting we borrow even more money and spend even more? Buy a new car – buy a house. And now, buy our Christmas presents in October.

Ken Norquay, CMT.
Chief Market Strategist,
CastleMoore Inc

Tuesday, September 29, 2009

Swine Flu, Bear Markets and Human Nature

The latest news on the swine flu virus is that perhaps – according to an unpublished study – getting an ordinary flu shot makes it 30% more likely you will contract swine flu. Canadians are damned if they do and damned if they don’t. If they take the normal flu shot, they are more likely to get swine flu. If they don’t, they are more likely to get regular flu. What should we do?

Well, we’re Canadians, so we'll wait for some government official to tell us what to do.

But this dilemma illustrates an often forgotten aspect of our humanity: life contains risk. Getting the flu is an important risk. There are no 100% guarantees that we will escape the virus whether we get the shot or do not get the shot. It’s all about the odds.

As a financial philosopher and partner in an investment firm, I am often asked about financial risk. The stock market might go up or it might go down. If all my money is in stock market mutual funds, and the market goes up, I win! This is what happened during the 1990s. But if the stock market goes down, I lose! This is what happened in 2001 to 2003 and again in 2008. What should I do?

The pat answer from the investment industry is: invest in some stocks, but also hold a diverse portfolio of non-stock investments, like bonds, real estate or precious metals. But that’s not a real answer, is it? If you own $100,000 in stocks, it will go up or down with the stock market: if you happen to own real estate or bonds or gold, your stock mutual funds will still go up or down with the market. The investment industry’s pat answer does not address the basic truth that there is risk in investing in the stock market and we need to know how to handle that risk. What should we do when the market goes down?

Canadian investors are exposed to wealth risk in the same way that we are all exposed to health risk?

Health conscious Canadians are smarter than wealth conscious Canadians. They expect to take precaution and to do something to protect their health from a flu epidemic. Most Canadian investors are doing nothing to protect their wealth from the ravages of an economic pandemic. During the 2008 market melt-down, most financial advisors encouraged their clients to do nothing: to hang in there and not worry… The stock market would recover.

How would you feel if you got this kind of advice regarding the up coming flu season? “Don’t worry about the flu: if you get it you will recover. Just keep washing your hands and hoping you don’t catch it.”

In my investment book, Beyond the Bull, I point out that an important part of our human experience involves luck. When the experts believe there is a good chance we’ll have a swine flu outbreak, we see that as an increase in risk to our health. When they experts believe there is a good chance we’ll have a banking crisis or an economic melt down, we should see that as an increase in risk to our wealth. In both cases, a normal intelligent person would take precautions to protect themselves. Strangely, however, the investment industry doesn’t see it that way. The slogan “buy and hold for the long term” implies that there is no real risk in the stock market. It always goes up eventually. I suppose this is the same a saying that every flu pandemic will eventually end.

It’s about survival, isn’t it? Will we survive a flu pandemic? Will our investments survive an economic melt down? And, if it’s about survival, then it’s about protecting ourselves against reasonable risk. We hope to protect ourselves from the flu by using vaccinations. And a variety of government health experts are advising us on the vaccination process. But not a single government health agency is telling us “Don’t worry, be happy.”

What is it about the investment industry that makes professionals continually advise individual investors to do nothing – to hold onto our investments through thick and thin?

When I first entered the investment business in 1975, mutual funds guru John Templeton got it right. He used to say: “We shop the world for undervalued stocks. We hold them for three or four years and sell them when that value is recognized.” He wanted us to buy and hold Templeton Growth Fund in full knowledge that he would buy and sell stocks for us within the fund. Modern mutual funds do not talk about selling at all. They want us to buy and hold their mutual funds, and they want to buy and hold stocks within that fund. And they really do hold: how many mutual funds off loaded their stocks before the 2008 melt down? Mutual funds management has changed dramatically since 1975.

In my investment book, Beyond the Bull, I discuss the five keys to correct investing. One of those keys is to have a method of deciding when to buy and when to sell. Sir John Templeton used his value models to help him make this decision. Modern mutual funds managers seem to have methods for when to buy; but they seem weak in the area of when to sell. It seems like their business plans call for the market to go up all the time. And if the market goes down, their mutual funds go down too.

Modern wealth management is a bit like modern health management. Will we take that shot to protect ourselves from the flu? Will we sell our risky investments to protect ourselves from economic weakness? It’s up to us to decide when to protect ourselves.

Ken Norquay, CMT
CastleMoore Inc

Links to Beyond the Bull


Monday, September 14, 2009

The Second Shoe: a fresh look at the world of banking

2008 was a close call for the world’s banks. The system almost collapsed. The stock market did collapse. The only thing that saved the banks was government intervention: sovereign states all over the world poured billions into the banks to prevent the collapse. Let’s review the rules: what really went wrong?

Imagine that you and I decided to start up a bank. Our investors put up $1 billion of capital. A year later we have $500 million in deposits for a total of $1.5 billion. In Canada our bank would be entitled to loan out 17 times $1.5 billion. In other words, our bank could create $1.5 billion X 17 = $25.5 billion in loans. We make our profit by charging interest on the $25.5 billion in loans. And where does the $25.5 billion come from? It was “created.” Canada’s central bank created $25.5 billion and loaned it to us at the Bank of Canada’s overnight bank rate.

In Canada, our rule is we can “create” loans of 17X capital + deposits.
In the USA, it’s 22X.
In some countries in Europe, it’s 27X.

Years ago the world’s bankers decided to hold most of their capital reserves in US dollars [US$] assets. Mostly they would own US treasury bills or bonds. They wanted something safe. Their reserves were mostly in US$, but their loans were mostly local currency. So our bank would have held its $1 billion in reserve capital mostly in US$ and we would have loaned out the $25.5 billion mostly in Canadian dollars [CD$]. If the Canadian dollar went UP against the US$, we could get in trouble because our reserves were shrinking compared to our loans. If the CD$ became stronger and stronger, our 17X ratio might go to 18X or 19X. If this happened, we would have to call $1 or 2 billion in loans. When the banks are forced to call in loans, it’s called a credit squeeze and it is very bad for the economy. Business’s who rely on bank loans to operate need the money – they don’t have the cash to pay off those loans that have been called.

The world banking system needs a strong stable US$ to operate efficiently – and the world’s economies need a strong and stable banking system in order to operate effectively. And that’s where the 2008 banking crisis began.

In winter 2002, 62 cents US would buy one Canadian dollar. In autumn 2007 it took $1.11 US to buy that same Canadian dollar. The CD$ had gone up 79%! Another way of saying that is the US$ went down by 44%. The little bank we created for this article was under tremendous pressure. Our reserve capital had shrunk over those 5 years. The strong CD$ [weak US$] seriously impaired out ability to do business.

It wasn’t just the Canadian-dollar based banks that felt the pressure because of the long decline of the US$. The same story applied to Euro-based banks, pound-based, yen-based, etc. The US$ had been devalued against them all.

American brokerage firms had somehow persuaded the world’s bankers to hold pooled mortgage funds as part of their US$ capital reserves instead of treasury bills or bonds. Yes, they were not quite as safe as US treasury issues, but they paid a lot more interest. And with a booming US real estate market, how much risk could there be in mortgage investments?

The sub-prime mortgage fiasco became widely recognized in 2007. All the banks saw the defaults and they all wanted to reduce their exposure to this now shaky investment. Soon there were no buyers: only sellers. These vast pools of US$ paper that were now part of the banks’ capital reserve had no value. The world’s banks had lost their shirts. Our little bank would have been in serious trouble. No only did the currency of these junk mortgages go down, but the actual price of the mortgaged pools collapsed too. Our little bank would have had to call in loans to the tune of 17X the loss. European banks might have had to call 27X their losses. The US banks had not experienced the currency loss – but even so, bank after bank had to be bailed out because of their mortgage losses. The world’s banks were under pressure to call in loans on such a scale as to ruin the world’s economies. This all came to a climax as the US’s new president was being inaugurated. The nations of the world cooperated as never before and saved the banks.

It worked. The governments and central bankers actually did restore order. Here’s how:
1. Governments provided capital reserves to the banks so they would not have to call loans.
2. Banks began to raise their own capital. Canadian banks raised billions in spring of 2009 by selling preferred shares.
3. The US$ went sharply higher, stabilizing the value of the banks’ US dollar denominated capital reserves.

The stock markets recovered and now the economies appear to be recovering. The bail outs worked.

Americans do not want a stronger US$ right now. The US economy is in trouble. Their manufacturing sector is in tatters. A strong US$ makes it harder for them to sell US manufactured good abroad. Americans need a lower dollar right now.

But if a weak US dollar causes the worlds’ banks to fail, the US economy will go down too. What will they do?

In the last six months, the US dollar has dropped 14% against an average of the Yen, the Euro, the Pound, etc. If the decline of US$ continues at this pace, by New Years Day the US dollar will be back down to where it was in the height of the banking crisis. The pressure will be on the world’s banking system again.

During the last six months the worlds’ bankers have taken steps to shore up their weak capital reserve positions. They are stronger now than they were last winter. And they have already written off those disastrous sub-prime mortgage assets. So, if the US$ gets even weaker and their reserves come under even more pressure, they are better able to stand the punishment than they were last winter.

Every central banker in the world understands these dynamics. Every pension manager, every mutual funds manager, every portfolio manager understands these dynamics. As the US$ eases down, it helps the US economy and it hurts non-American banks. As long as things happen gradually, the parties involved can adjust.

What kind of adjustments do the parties involved need to make? Well, foreign banks and foreign governments need to continue to cooperate as they did last winter. Most observers believe this will work out just fine. But, what about those big investment managers? Their clients were hard hit when the stock market dropped so sharply last fall and winter. Many pension plans dropped so sharply that they were unable to meet their payment obligations. Bank stocks were particularly hard hit: after all, in a banking crisis, that’s where the maximum risk is. Will the big pension managers ride through the sharp decline as they did last year? Or will they try to sell off some of their stock portfolios? For the multibillion dollar stock portfolios, this is a theoretical question: they are so big that their selling is what forces the stock market lower. They are too big to sell. Even the adjustments they make to their portfolios must be done by stealth selling. Each day they feed a few big blocks of stock out into the market in an orderly and controlled way so as not to overly disturb the market.

What kind of adjustments do we need to make if the US dollar is devalued further? Should we sell our bank stocks? Should we sell all our stocks? We are not in the same position as the mega-money managers of billions – we can sell our portfolios in a heart beat. What do we wish we’d done last year when the US dollar was at this same level?

Those mega-money investment managers who understand these financial dynamics can’t sell out of the stock market when the going gets rough. And those investors who can sell don’t. The small investor has an edge over the large when it comes to selling out – but often doesn’t use that advantage. Why not?

In my book, Beyond the Bull, I try to persuade ordinary investors to develop investment techniques. An investment technique involves objectively observing the world of finance, looking for certain events. When the sought-after events occur, we act: we buy or sell based on pre-planned logic. In this example, we notice a decline in the US dollar and suggest this spells trouble for the banking industry. If the US dollar continued to go down and then the prices of bank shares start to go down, this would be a reason to sell your bank stocks. But that’s not how most ordinary investors behave. Instead of selling, they worry. And, instead of buying their stocks back after a stock market sell-off, they hope the stocks they held through the crash will bounce back up: worrying and hoping instead of buying and selling.

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc.

Links to Beyond the Bull



Monday, August 31, 2009

Today’s heroes – Yesterday’s villains.

Last week Royal Bank reported record high earnings. In the twilight of Canada’s recession, Canada’s biggest, bluest bank surprised us all. Other banks experienced healthy profits too. Bank analysts and the financial press reported that the Canadian economy and the real estate/mortgage sector had not been as bad as they had been predicting – and this was why the banks reported such strong quarterly earnings. This, plus one other factor: trading revenues from investment banking and capital markets divisions.

Apparently 21% of Royal Bank’s record high earnings came from traders. And we all know that traders are paid salary + bonus. And, because those trading profits were so high, we can guess that those employees’ bonuses will be really high too.

Wasn’t it just seven short months ago that new president Barrack Obama expressed outrage at the bonuses being paid by the US banks he was bailing out? Even though the traders and managers had made money for the failing banks and had done their jobs, they didn’t deserve their bonuses. For those American banks late last year, the economy was weak and the real estate/mortgage sector was collapsing. Times were so bad that US banks were failing despite the traders’ having done their jobs. The traders’ bonuses were reduced because the mortgage department lost so much money.

We wonder how that problem was eventually resolved. Did the American banks’ traders get paid less? Or did they simply have those bonuses postponed until the banks became profitable again? Or did they quit their jobs in New York and join the Canadian banks in Toronto?

How the rules change in the investment business. What works one year may not work the next. It appears that rule-changing can also apply to people’s paycheques. Traders who had earned their bonuses in US banks in 2008 were financial villains who did not deserve to get paid. But Canadian traders in 2009 are financial heroes, helping propel Canadian banks back to blue chip status. Either way, their fate seems to have been determined by the mortgage department, not the trading department. Because Canadian banks’ mortgage departments were profitable, Canadian traders will have no trouble collecting their 2009 bonuses. Because American banks’ mortgage departments were a disaster in 2008, their traders were criticised for their ‘undeserved’ bonuses. This time around, American investment bankers and capital markets traders were somehow dependent on the bank’s mortgage portfolio for their bonuses.

How about your personal investment bank – or your personal capital market: do your advisors deserve a bonus? Most mutual funds investors pay management expenses of over 2% of the value of their investments. When your investments go down in value, you pay them 2% of that lower value. If your investments are down 30%, your mutual funds manager receives 30% less management fee. In a strange way, it almost seems fair; but it doesn’t feel fair. In fact, it feels outright unfair.

In the world of finance, feelings count. When the banks were being bailed out by the government, it didn’t feel right that bank employees would receive big bonuses, no matter how good a job they did. Now that the Royal Bank has proven to the world that Canadian banks are high quality blue chip banks, there is no problem paying those big bonuses.

In my book, Beyond the Bull: Taking Stock Market Wisdom to the Next Level, I discuss how our feelings affect our investments. In seven short months, banks have gone from presidential rebuff to examples of blue chip stability. And in those same seven months, Royal Bank stock went from under $30 per share to over $55. Your feelings count.

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc.

Links to Beyond the Bull:




Monday, August 17, 2009

Casino Bus Riders

The Blue Chip Bus

I was driving to work today with Sheldon Liberman, portfolio manager for the investment firm CastleMoore Inc. We were on the highway being passed by a bus heading for Casino Niagara. Chinese letters and two-foot poker chips were painted on the side of the bus. We were quipping about the phenomenon of gambling in our culture and wondering about the minds and hearts of the enthusiastic passengers on that bus. And this was all happening before nine a.m!

Based on the fact that there were so many blue poker chips painted on the bus, I joked that the passengers were probably all financial planners and mutual funds salesmen.

Shel shot back with the following conundrum: has the expression “blue chip” lost its meaning? Blue chip used to refer to higher quality safer investments. But in 2008 the biggest insurance company in the world [AIG], the biggest bank [Citibank], the biggest stock broker [Merrill Lynch] and the biggest mortgage company [“Fanny Mae”] all needed to be bailed out. And in 2009 General Motors, formerly the world’s biggest auto company went into bankruptcy. It seems that blue chip stocks have become the area of highest risk in the stock market.

Maybe my guess that the casino bus was full of financial planners was closer to the mark than I first thought. Mutual funds salesmen are trained to sell the products of the biggest mutual funds in the industry. Somehow they have been trained to believe that huge mutual funds companies are safer than the smaller companies. Somehow big blue chip is touted as being better for their clients than small, efficient, entrepreneurial. Maybe that’s the problem with Canadian investors’ RRSPs: we are too heavily exposed to the blue chip sectors of the stock market and the mutual funds industry. Canada’s financial planners just keep betting on the favourites and losing.

In my book, Beyond the Bull, I observe that stock market rules change from time to time. And if we plan to accumulate a lot of capital for our retirement, we’d better take these rule changes into account. Right now it is clear that Sheldon is right: the meaning of the phrase blue chip has changed. Somehow “blue chip” has come to mean “dysfunctional” and “high risk.” Yet somehow the financial planning/ mutual funds community has not yet picked up on it.

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc

The Amazon links for Beyond the Bull are:


Thursday, August 13, 2009

Mutual funds - is the honeymoon over?

Too much of a good thing: The AIC buy-out.

Consider the recent marriage of Manulife Financial and AIC.

AIC’s founder, Mike Lee-Chin, is an inspiration to ambitious young finance students everywhere. The rags-to-riches story of the Jamaican immigrant who became a billionaire inspired me too. I knew Mr. Lee-Chin when he was merely a millionaire; he was the manager of Regal Capital Planners Hamilton office and I was the manager of Merrill Lynch Canada’s Hamilton office. He had a passing interest in my specialty which was technical analysis of the stock market. I had more than a passing interest in Canada’s top mutual funds salesman, rumoured to be earning a million dollars a year in commission!

In 1983 I moved to Toronto to search for opportunity in the financial capital of Canada. Mike stayed in Hamilton and proved that there was plenty of opportunity there too.

Apart from the human interest angle, will the Manulife-AIC wedding have any impact on the Canadian investment scene?

In my recently released investment book, Beyond the Bull, I talk about the three great drivers of the stock market: investor brains, investor heart and investor position. Brains is the easiest to understand: investors are motivated to buy and sell because of rational logical facts and figures about stocks and companies. Heart is easy to understand too: when investors are fearful or worried, they often sell stocks at too low prices – when they are full of confidence they sometimes pay too much for stocks. It’s the last one, investor position, that poses a potential problem to the Manulife-AIC newly weds.

AIC mutual funds’ core holdings include TD Canada Trust, AGF Management, CI Financial and IGM Financial. A quick check of Manulife’s website showed me that they too love the financial sector: about one third of their largest mutual funds are invested in this one sector alone. But, can a mutual fund own too much of a good thing? At one time it was rumoured that AIC had 10% of their total assets in one stock: TD Canada Trust. Portfolio managers refer to this as ‘concentration.’ Critics would say ‘over concentration.’ That’s an investor position problem.

If this mutual funds company wedding results in Manulife having too many of their collective eggs in one basket, they will be selling some of AIC’s TD, AGF, CI Financial and IGM stock. And the reason for the selling has nothing to do with the growth and value of these four companies. Nor does it have anything to do with Manulife’s portfolio manager’s emotional liking or disliking these four companies. The problem is their position: they own too much of a good thing.

Part 1 of the problem
Manulife may have to sell significant amounts of financial stocks because of this merger. This selling could dampen the performance of that sector over the next few months.

Part 2 of the problem
Use your imagination: if you were managing a big mutual fund or pension fund and you saw this AIC-Manulife wedding, what would you do? What if you had been planning to sell of some of your financial stocks over the next few months? Would you wait until the Manulife selling starts, or would you sell now? Of course, you would sell now. This selling could also dampen the performance of the financial stocks for a while.

Using position analysis, we might expect the financial sector, specifically TD Canada Trust, AGF Financial, CI Financial and IGM Financial to under perform the market until Manulife’s possibly over weigh position is liquidated.

Part Three.
What about the brains and the heart? Are there logical or emotional reasons why bank stocks and mutual funds management stocks might under perform? Wasn’t it only last year that the biggest banks in the USA and Europe were being bailed out? And isn’t the mutual funds industry in consolidation? AIC shrunk from $14 billion to $3.8 billion: it seems unlikely that AGF, CI or IGM would be thriving in times like these.

Part Four: it gets worse
Speculation has it that Mr. Lee-Chin received a dowry of around $150 million in Manulife Financial stock in exchange for his beloved AIC. Talk about an over concentration! Is it reasonable to assume that he might like to sell some shares of Manulife? Could his selling contribute to the under performance of Manulife stock?

Manulife management knows all about their position problems and will act prudently, so as to protect their shareholders and unit holders. They will have made plans for this wedding months ago. My company, CastleMoore Inc, manages investors’ portfolios too. We have no plans to buy financial stocks until the honeymoon ends.

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc

Links to Beyond the Bull:


Friday, July 31, 2009

"...the Slope of Hope."

The Slippery Slope of Hope

Have you noticed how strongly the Canadian dollar and US stock market are correlated lately? Every day that the stock market ticks up, the Canadian dollar ticks up too. In fact, if we check the long-term trends, this correlation dates back to 2002. From 2002 to 2007, the US stock market went up and the Canadian dollar went up.

For Canadians, another way to describe a strong Canadian dollar is “a weak US dollar.”

But the US dollar’s weakness went hand in hand with world stock market strength from around 2002. Not only that, but the weakening US dollar accompanied stronger prices for agricultural commodities, basic materials and energy. It seems we can tell the story of world economics by following the story of the US dollar.

How can we use this information for managing our investments?

In a previous article, we wrote that the 6-year US dollar down trend that started in 2002 and ended in 2008: “… the US dollar bottomed at a price of 71 currency basket units. Then, in the last half of 2008 it rallied to 88 units, dropped to 78, surged back up to 89 and dropped back down to 79: all this in one year.” [See “How to Break the Banks,” July 17, 2009]

Does the end of the decline of the US dollar proclaim the beginning of a down trend for world stock markets, commodities, materials and energy prices too?

That is exactly what it means.

In “How to Break the Banks,” we illustrated how the long-term weakness of the US dollar undermined the world’s banking system because the US dollar is the banks’ reserve currency. If the dollar gets weaker, it will put pressure on the world’s banks at a time when they are already shaky. But, if the correlation between the US dollar and the market continues to hold, a strong US dollar will put pressure on the world’s stock markets and commodities markets. The US dollar and the world’s banking system have a direct correlation: both are strong or weak at the same time. But the US dollar and the world stock market have had an inverse correlation for the past ten years: when one was weak, the other was strong,

Which will it be: a weaker banking system or weaker stock and commodities prices? Or, to ask the question from the other side of this correlation: a weaker US dollar or a stronger US dollar?

The only way the world can have strong banks and strong stock and commodities prices is for the US dollar and the markets to become uncorrelated. A new bull market in the US dollar would then help world banks, but not hurt the financial markets. Can they do it?

My book, Beyond the Bull, discusses two 10-year correlations between interest rates and the S&P500. For the first ten years, the stock market went up every time interest rates went down. For the second ten years, the stock market went up every time interest rates went up: the exact opposite. So, we know these correlations come and go. And we can always hope the US dollar vs. stock and commodities price correlation will go away too.

But managing your investments by hoping doesn’t work very well, as we learned in 2008 when the stock market dropped 40%+ in only a few months. Professional stock traders have a saying: “the slippery slope of hope.” When unsophisticated investors hold onto their stocks in a huge bear market, the traders mock them, saying: “They are sliding down the slippery slope of hope.”

Our advice? DON’T LOSE YOUR MONEY! If the slippery slope of hope develops because the world’s banking system needs a stronger US dollar, do what you wish you’d done in 2008. Cash in your chips and sit on the sidelines.

Ken Norquay, CMT
Chief Strategist, CastleMoore Inc

Links to my book, Beyond the Bull:




Tuesday, July 21, 2009

57 Banks go Bust

57 banks go broke

Fifty- seven American banks have failed so far in 2009. [Source: David Rosenberg of Gluskin Sheff]

When a bank fails in Canada, the Canada Deposit Insurance Corp makes good: CDIC insures that depositors get their money back, up to a certain limit. The Americans have a similar program. Because of this insurance, U.S. and Canadian depositors are not really at risk unless they deposit too much money in a single bank. With these bank failures happening in their own back yard, Americans are vigilant about making sure they don’t put too much money in any one bank. In 2009, there is clear danger in the US banking system; bank customers have to take the usual precautions seriously.

Why is it that a bank’s Guaranteed Deposit customer thinks so differently from a Mutual Fund customer? At the first sign of danger, Canadian bank customers review all their deposits to make sure they hold no more than the CDIC insurance maximum of $100,000 in any one bank. Amounts over $100,000 are not insured. If the bank fails, uninsured investors could lose their money.

Yet, in times of economic danger, those same customers won’t walk across the office to the bank’s mutual funds desk and redeem their stock market holdings. A stock market sell-off is way more likely than a bank failure, yet people do not protect themselves. What is it about the psyche of the average mutual funds investor that is so different from that of the average depositor, even when the investor and the depositor are the same person?

It’s the way these two different investments are sold.

A banker who persuades you to invest at today’s low interest rates will emphasize how safe Guaranteed Investment Certificates are. True, you don’t get much interest, but you are “guaranteed” not to lose. The banker’s pitch attracts investors who are afraid to put their capital at risk.

A bank’s mutual funds salesman or financial planner who sells you a stock market mutual fund will emphasize growth and higher long-term returns. The sales pitch includes a warning that mutual funds prices will fluctuate over time and that we should not sell because the stock market will be a good long-term investment even if it goes down for a while.

In other words, the mutual funds salesman prepares clients to take risk, but the GIC salesman prepares clients to avoid risk. So, at a time when 57 US banks have failed in six months, the GIC client checks his guarantee. But at a time when America’s biggest bank, stock broker, insurance company, mortgage company and car company had to be bailed out, the hapless mutual funds investor is told to hang in there and not worry.

It is clear that there are times of high economic risk, as well as times of less risk. But is there ever a time to ignore risk? Responsible investing is all about monitoring risk and making changes when financial risk changes. That change might be adjusting your GICs so that you don’t have over the insurable maximum of $100 thousand with any one bank; or it might be selling your stock market mutual funds and switching to some low-risk money market fund. But is it ever reasonable to expose yourself to big financial losses?

If those 57 American banks had been more risk averse, they might not have failed.

Friday, July 17, 2009

How to Break the Bank

The heads of state of the G-8 economically largest countries must be feeling very good about themselves. Last year they rescued a banking system that was coming apart at the seams; this year, the grey suit drama has been replaced by bread and butter banking. Those banks that survived are going back to basics. The G-8 central banks succeeded.

The heads of state put on their show in Italy last week. But the important players are the backroom bankers who meet before and after the politicians’ event: these are the meetings the financial press does not report. Now that all the secret meetings between the G-8’s boring bankers are over, it’s time to wonder what really caused the near collapse of the world’s banking system in 2008. We all know the cover story: the US sub-prime mortgage fiasco, billions of mortgages had been packaged and sold to bankers all over the world, mortgage loans that American homeowners couldn’t pay back. But, what was the real story? What was the real problem that took the world’s banking system to the brink?

We think the real story is in this 10-year chart:

[sorry - this blog site will not reproduce the chart I included in this article. I hope you can visualize it by reading the text. KN]

This chart measures the US dollar by comparing it to units of a basket of major currencies: the euro, yen, British pound, Swiss franc, and many others, including our Canadian dollar. As you can see, the US dollar peaked in 2001/2002, at 120 units. It went down for six years and finally bottomed in spring of 2008 at 71 units. That’s a 40% devaluation of the US dollar!

Why is this decline the real reason for the world banking crisis of 2008? It’s because the US dollar is the reserve currency of the world. And when the US dollar is devalued by 40%, the world’s banks’ reserves drop by an average of 40%. Yes, it is true that the American sub-prime mortgages contributed to the banking bust, but the real problem began six years earlier, when the US dollar peaked in 2001/2002. The fact that all those now-worthless sub-junk mortgages were also denominated in US dollars added fuel to a fire that was already burning.

Was it the Bush Republicans’ policy that depreciated the US dollar and brought the world’s banking system to the brink? Was it free market currency trading that drove the US dollar down? We may never know. But it is clear that the 2008 G-8 secret meetings produced a stronger US dollar.

Look again at the chart: the US dollar bottomed at a price of 71 currency basket units. Then, in the last half of 2008 it rallied to 88 units, dropped to 78, surged back up to 89 and dropped back down to 79: all this in one year.

It’s not hard to guess what the G-8 back room bankers decided in 2008 – they needed the US dollar to go up. And it did. And the world’s banking system did stabilize. Their plan worked. Can we guess what they might have decided at last week’s G-8 meeting in Italy? Their common goal would have been continued stability in the banking system. American officials would like stability at a low US dollar so as to help US exports in a weak economy. Other nations’ officials would like stability at a higher US dollar so as to help their exports in a weak economy. And, by now, a week after the high profile G-8 meeting, the back-room bankers will have reached a compromise.

We will see what that secret compromise was over the next few months. Will they let the US dollar decline and risk the banking system again? We doubt it. Will the Americans allow a big up surge in the US dollar and pressure their already weak economy? We doubt that too. It seems most likely that they will allow the US dollar to fluctuate in a narrow band of, say 80 units to 90 units.

What does all this mean to the average investor? What effect would stability have on the stock markets and bond markets? Last year the stock market crash ruined many Canadian’s retirement plans. Will a stable US dollar help us make our money back? Will it help us get our jobs back?

I’m afraid not. This is why:

Just as the six-year long devaluation of the US dollar hurt the banks, it helped Canada. No only did the US dollar go down when measured by the basket of currencies, it also went down when measured against a basket of commodities. Another way of saying that is: commodities went UP against the US dollar. The six-year decline in the US dollar was a six-year rise in energy prices, in raw materials prices and in food prices. Rising energy prices worked wonders in Alberta. Rising metals prices worked wonders in northern Canada. Rising grain prices worked wonders in the prairies. It was six years of boom time for Canada and six years of boom time for the Canadian Stock Market. Remember what happened in the last half of 2008 when the US dollar went up? Energy and materials prices went down. The Canadian stock market collapsed. Canadian pension plans lost billions. A strong US dollar doesn’t work for Canada.

If the US dollar stays at the same value it is now, does that mean energy and metals prices will stabilize too? Does it mean the Canadian stock market will stabilize at these levels? Will your RRSP stabilize? Will company pension plans stabilize? Will the price of your home stabilize?

If the world’s economy experiences an outbreak of stability, it will give us all a chance to re-evaluate our lives and get back to basics. Instead of scrambling to buy a bigger house with a bigger mortgage so as to increase our exposure to a red-hot real estate market, perhaps we can find the house that matches our family’s needs. Instead of ploughing more and more money into a red hot stock market in hopes of ballooning our RRSPs, we can choose a more balanced portfolio of more conservative investments. Instead of getting rich in a fast bucks bubble economy, we can focus on bread and butter living. As the world’s banking system stabilizes, we can stabilize too. Back to basics.

Monday, July 13, 2009

US Dollar - a bullish prognosis

The July G-8 Meeting and the US Dollar

Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.

The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.

But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.

Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.

And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.

This is the perfect set-up for the American dollar’s up trend to continue.

G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?

The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.

Ken Norquay, CMT
Chief Strategist, CastleMoore Inc

Links to my book, Beyond the Bull:



US Dollar - a bullish prognosis

The July G-8 Meeting and the US Dollar

Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.

The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.

But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.

Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.

And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.

This is the perfect set-up for the American dollar’s up trend to continue.

G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?

The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.

Tuesday, July 7, 2009

July 09 Murphey's Law

Early July 2009- Murphy’s Law Applied

“If something CAN go wrong, it WILL go wrong.”

My unofficial mentor in technical analysis was Bob Farrell, former chief market strategist for Merrill Lynch. He was a master of Murphy’s Law. Bob [now retired] tried to assess current market opinion: when he found a significant consensus, he wondered what could go wrong. What would cause grief to the maximum number of participants in the stock market? Let’s try his technique.

Right now I notice that the consensus opinion about the US stock market is this:
1. The market bottomed in early March 2009.
2. There was one great three-month rally which peaked in early June.
3. Now there will be a reasonable correction, which may test or confirm the March lows.
4. Once that is over, the market will continue up in a multi year cyclical bull market.
5. The best strategy is to wait for the correction and then buy into this market.

What could go wrong? What events would frustrate the most investors? What would Murphy have to do to catch us all off guard?

Bullish Scenario: the market correction is very shallow and the upsurge starts sooner rather than later.

Bearish Scenario: the market correction is not just a normal correction – the dam lets go and the market has another big decline like it did last year.

Self-psycho Test: Does either of these two possibilities make you nervous? Do you feel a tiny twiggle of unrest in your stomach when you realistically assess these two reasonable scenarios? If so, you have bought into the consensus and you are in danger.

Let’s review the bullish scenario: the market corrects only slightly, and then launches into a multi-year cyclical bull market. The stock market is a lead economic indicator, often bottoming about 6 months before the economy. Six months after March is September. If our bullish scenario unfolds, we should see some signs of economic recovery this fall. Before that, we should see the market go higher than the June highs. This scenario doesn’t really rock your stomach with worry, does it? Logically, if our bullish scenario unfolds, we would add to our stock portfolios if the market exceeds the June highs; and add still more if those earnings reports and unemployment figures start to stabilize.

Let’s face it: it’s the bearish scenario that rocks your boat! Last summer the market eased downward in July and August. Then the wheels fell off! Mutual funds and pension plans recorded serious losses: it will be years before they can break even. This is the scenario we all dread. Logically, if our bearish scenario unfolds, we should sell our stocks now. Sorry, I did not emphasize that enough. “WE SHOULD SELL OUR STOCKS NOW.” [Just like last year at this time.]

Self-psycho Test #2: Does the notion of selling out of the stock market now make you nervous? Do you feel a tiny twiggle of unrest in your stomach at the thought of not owning stocks at all? If so, you are way too bullish AND you didn’t learn from 2008. Murphy’s Law will get you.

In my book, Beyond the Bull, I discuss the emotional aspect of the stock market. How you feel is important. Uncomfortable feelings come from false beliefs and false logic. When you feel serious negative emotions about the markets, pay attention to them.

Ken Norquay, CMT
July 7, 2009

Friday, June 19, 2009

When is a good attitude a bad attitude?

In the 1980s Ken worked for a large stock brokerage firm. Because he was known as a technical analyst, the head of stock market research asked him about market psychology. As a financial analyst, he couldn’t understand how people’s attitudes about investing could affect the stock market. The financial world was all about corporate earnings and book values. Everything useful in the stock market could be expressed mathematically: it was all about accounting. Things like optimism, fear, concern, and capitulation meant nothing to a fundamental analyst.

But Ken maintained that the key to understanding risk in the stock market was to understand investors’ attitudes. The more optimistic they are, the more risky the stock market is. The more cautious and concerned investors are, the less risk. And when investors are outright scared of the stock market, the risk is at its lowest. In his book, Beyond the Bull, he explains how investor attitude changes during the normal course of a stock market cycle. It’s the most important part of stock market analysis.

Case in point: here and now. How do investors feel about the market now, in June, 2009? Are they afraid? Are they cautious? Fearful? Or are they confident the market is about to give them back what they lost in 2008? Are they bullish or bearish? Are they “afraid” of missing out on the next bull market?

We are in constant contact with ordinary investors and stock brokers. And right now they are REALLY BULLISH. It seems that most of them were fully invested in the stock market at this time last year, June 2008. Within 5 months they had lost 45%! Winter of 2008 and ‘09 was a long painful financial experience for most of them. But spring brought new hope. ‘Midst news of increasing unemployment and GM’s bankruptcy, the stock market rallied. Analyst after analyst talked about the market “climbing a wall of worry.”

Review: “Climbing a wall of worry” refers to a phenomenon that occurs at important bottoms in stock market cycles. Economic news is so bad that the investing public worry that the economy is getting worse and the stock market will continue down. In other words, the stock market goes up, but investors do not believe it… they are too worried.

Is that what’s happening now? That’s not what we see.

What we see is “don’t worry, be happy.” It started with last year’s lightning losses in the crashing stock market of September 2008. People were shocked! Then came Obama-mania: hopes that the new president’s stimulus package would somehow save us all. Surely a new economic age had begun: surely the economy would rise like a phoenix out of the ashes of America’s fallen corporate giants. Then came a normal bear market rally: March 9, 2009 to now. The Canadian stock market has retraced about 40% of its 2008/9 drop; the US market about 30%. This rally has both Canadian and US investors breathing a huge sigh of relief. “Another four or five months of this and we’ll break even for the year!” The latest stock market buzz-phrase is “green shoots.” These are the early signs of economic recovery: the green shoots of spring, growing out of the icy soil of winter… optimistic hope that the worst is over and the recovery is just around the corner.

That’s not a wall of worry. The wall of worry is about investors NOT believing that things are getting better. In June 2009, investors think [hope?] things ARE getting better. They think they WILL make back the money they just lost in 2008. If they are worried at all, they are worried about missing out on the recovery.

When the 2008/2009 bear market finally does end, the first move up will be met with an attitude of disbelief. Investors will have a bad attitude toward the stock market. The green shoots they see now will be replaced by the green light they don’t see.

Wednesday, April 15, 2009

Breakfast with Michael Ignatieff

This morning [Apr 15] we attended a breakfast meeting with Michael Ignatieff, the Liberal leader of the opposition. One of his comments related to Canada’s emerging leadership in the field of bank regulations. He felt Canada should be aggressively showing leadership, trying to help other nations regulate their banks more like Canada regulates our banks. At this juncture of the worlds banking crisis, Canada has a lot to be proud of.

What beautiful irony! We remember a time when Canadian banks were scrambling to merge with each other. Bank presidents told us all that Canadian banks needed to merge so they could become more competitive internationally. They thought that bigger would be better. By world standards, ‘the big five’ Canadian banks were too small. The government of that day decided not to allow further mergers. And today, it appears that Canada’s small banks are emerging as the best banks in the world. Maybe the competitive edge comes from smaller, not bigger.

We wonder what the leader of the opposition will say when today’s government is asked to consider the wedding of two of Canada’s biggest energy companies, Petro-Canada and Suncor. The presidents of these oil giants tell us they need to merge to become more competitive internationally. They too think bigger is better.

In a time when America’s biggest auto manufacturers, banks, mortgage companies, insurance companies and stock brokers have all collapsed, some still believe that bigger is better. When will they learn that small and flexible is better? Small, lean and efficient is better.

Don’t get caught thinking big.

We remember the late 1990s mutual funds boom. Salesman/planners used to tell their customers that they should own the biggest mutual funds with longest term track records. In other words, the average investors’ advisors were telling them bigger is better. And now, ten years later, we can look at the performance of those equity mutual funds: 10 year, 5 year, 4-3-2-1 year performance: all bad. Down 40% in the past year alone! Bigger is not better.

The Ontario Teachers’ Pension Plan is Canada’s biggest private pool of money. The Financial Post [Apr 2, 09] reported that they lost $21.1 billion in 2008. Six moths earlier they had reported a $12.7 billion short fall in funding. It looks like there might not be enough money to pay Ontario’s teachers’ pensions. It is very difficult to manage large pools of money. Bigger is not better.

In his book, Beyond The Bull, Ken Norquay explains how important it is to understand how other investors behave in the financial world. By adapting to how they think, we can make better decisions for our own investments. And right now we know that we should not do what the big guys are doing.

That’s the approach CastleMoore takes: small and flexible beats big and illiquid. There were times in 2008 when CastleMoore clients were completely out of the stock market. The biggest pools of investments can’t do that. They’re too big. It’s their selling that drives the stock market down. In the face of really big selling, who can buy? Who would buy?

Small investors should act like small investors; their flexibility is their edge.

Ken Norquay, CMT
Chief Investment Strategist,
CastleMoore Inc.
“Buy, Hold and Know When to Sell.”