Norquay's Financial Fridge Magnets

Weapons of Mass destruction: Real ones this time!

2011-12-27T10:42:00.001-08:00

Our American neighbours have suddenly become quite respectful. When North Korean dictator Kim Jong II died a few days ago, they approached the Chinese government and held a meeting about the possible risks associated with the transfer of power to the Korean heir to the throne. Both nations are concerned that there could be political unrest in North Korea. And North Korea has nuclear weapons.
Those of us who grew up in the cold war know that these risks are real. In the 1960’s they built fall-out shelters and the Distant Early Warning Line. Remember the Diefen-bunker? It was a radiation-proof fortress built in a desert near Brandon Manitoba to house government officials in event of a nuclear attack. Remember “the hole?” It is a mile-deep tunnel drilled into the Canadian Shield near North Bay Ontario. It was built to house the NORAD command centre: they said it could withstand a direct nuclear hit. In the 1960s, Canadians were ready for trouble and made an effort to defend themselves.
Am I ready? Are you ready? Of course we’re not ready! The previous generation was ready because they survived the depression and the war. We survived rock and roll and the “dot.com” bust. For us, nuclear weapons and political unrest are part of information overload. We’ll just keep on dancin’ and see what happens.
In my investment book, Beyond the Bull, I discuss how information overload destroys your long term rate of return. The key to improving your long term return is to be constantly looking for specific economic information that is relevant to your specific investment techniques. Anything that is not what you are looking for is irrelevant overload. But if you have no pre-planned investment techniques, all economic information becomes equal in value. None of it has value because it’s not tied to your action plan.
Americans have military techniques: when they, or their allies, feel threatened, American aircraft carriers move into the region near the threat. In this case, they’d like to move those carriers into the Yellow Sea. The Yellow Sea borders both Korea and China: hence, they are being very respectful to China. Perhaps those carriers that have just been freed up from supporting U.S. operations in Iraq will find their way to this new theatre.
Similarly, Canadian pension plan managers have investment techniques: when one area of the investment world is underperforming, they like to redeploy their investments to more lucrative assets. For example, their stock market assets have produced a low rate of return since 2000, bonds have produced a good solid rate of return, and gold has been stellar. They would like to move assets from the stock market to bonds and gold. But it takes even longer to move a giant pension fund out of the stock market than it takes to move a fleet of aircraft carriers. The pension funds are so big that their selling can drive the stock market down. They have to make their moves stealthily, under cover of bullish rhetoric and strong earnings.
Investors with less than $50 or $100 million don’t have to pussy-foot around like that. We can switch from stocks to bonds to gold and back easily. What most of us are missing is neither intelligence nor liquidity. Most of us need investment techniques that will help us separate valuable information from noise. Most of us need to be like the American military or the Canadian pensions: we need to know what kind of information we are looking for and how to act when we find it.

Greco-Roman Economics: Tragedy or Comedy?

2011-12-12T07:47:00.001-08:00

Greece and Rome, once cultural centres of the western world, have become modern day theatres in the drama of world economics. The tragedy is the outrageous debt levels Italy and Greece chalked up and the naiveté of those who kept on lending them the money. The comedy is the performances of politicians and labour leaders scrambling to centre stage to present their lines on how to solve the problems.
“To be or not to be…” That is the question the European unity is asking itself. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous debt levels and, by opposing them, give rise to a sea of troubles… The economic scene has dramatically shifted since last summer’s performance by Americans when they faced their country’s debt downgrade. One after another, self-righteous Senators and Congressmen marched into the spotlight and delivered their scathing political lines. I am told that, in international investment circles, Americans are considered to be narcissists: they focus too much on themselves and have surprisingly little interest or expertise in non-American economics. It must be difficult for them to see their stocks and bond markets rocking and rolling to the beat of a European concert. They are not used to having Greek and Italian politicians move their markets.
American politicians, like Canadian investors, are not in charge of this drama. We are part of a supportive audience, applauding on cue, anxiously waiting for the next act.
I wonder what’s going on back stage. I’m wondering if, while all eyes are focused on the obvious, if there’s not something subtle going on behind the scenes.
Subtlety #1. Consider, for a moment, the basic plot of both 2011 Econo-plays: Down Grade America, and The Wheels Fell Off the Euro Van. In both cases, governments spend far more that they earn. In both cases, they have to spend less – and (horror of horrors) they may have to raise taxes to earn more. Both these economic actions (austerity and increased taxation) tend to cool off an economy.
Subtlety #2. Pension fund managers, the ones who control many hundreds of billions of dollars in investments, like to have lots of money invested in the best performing financial assets, and much smaller amounts in the weaker performing assets. Since the year 2000, gold has been the best performer, bonds have been great supporting actors and the stock market has been the worst. Pension plans would dearly love the stock market to go up. But, when economies cool off, stock markets usually cool off too.
Subtlety #3. The Stock markets have been particularly volatile since this year. January 2011 saw the S&P500 at 1260 and it’s around 1260 now. (For you historians, it was 1260 in January 1999 too.) There have been wild up moves and wild down moves this year, but no real progress in either direction.
I am wondering if our friends, the pension fund managers, are taking advantage of the wild ups and downs of this year’s stock market drama, to quietly achieve their goal of reducing their stock market holdings. Pension funds like to move stealthily. Because they are so big, they need time to accumulate and distribute their gargantuan positions. And the Greco Roman drama being played out now, along with all its volatility and emotion, is giving them what they need: the opportunity to sell without being noticed.
Individual investors or small institutions like CastleMoore don’t need time. We can sell out or buy in quickly, whenever we observe danger or opportunity.
In my investment book, Beyond the Bull, I wrote about developing investment techniques: pre-planned procedures that you will follow so you can buy when opportunity presents itself or sell when markets become dangerous. Our techniques will be different from the techniques of the mega investors because we have liquidity and they don’t. But 2011’s wild gyrations and Greco-Roman Euro-drama have given them just what they need: an emotional distraction that allows them to quietly distribute billions of dollars of stocks. Readers who have access to your pension plan’s investments, check to see if they have reduced their exposure to the stock market in 2011. It’s what their prudent management plan should call for. The process of institutional selling in sideways markets is called “distribution.” It is always followed by a bear market. 2012 could prove to be a dramatic year too.

Singin’ The Blues Again.

2011-11-30T09:25:00.001-08:00

In August we observed that the Mediterranean region had become a hot-spot of human activity. On the north shore we had the debt burdened nations of Greece, Italy, Portugal and Spain rocking the European banking system. On the south shore we had the nations of Egypt, Libya and Tunisia violently turfing out the military dictatorships that had dominated them for so long. Crisis sometimes brings out the worse in people. When we observe the hot-heads on the north shore or the civil warriors on the south shore, we know we are not observing harmony, cooperation and understanding.
As a financial philosopher, I am concerned about two things: will the bad energy that surrounds the Mediterranean spread? – And what should we do to protect ourselves?
My first concern seems easy to answer, doesn’t it? It’s already spreading. From a sociological point of view, the “Occupy” movements seem an extension of Mediterranean unrest. In the USA, the emergence of The Tea Party, a protest movement of the right, seems like a reaction to corruption and incompetence in the status quo. In Canadian politics, the demise of the Liberal Party and the Parti Quebecois in this year’s federal election could be interpreted as discontent with the establishment. A good observer can make the case that the hot-headed rebel spirit that has affected the Mediterranean region is spreading.
In a September article I commented on the late Col. Muammar Gaddafi, wondering if he had a good “plan B.” Now that he’s been hunted down and executed, we see his plan B wasn’t effective. Now I wonder about Bashar al-Assad of Syria. He’s in a deep hole right now: even his plan A seems unbelievably bad. Former Egyptian dictator, Hosni Mubarak is also in serious trouble. On trial for crimes relating to the deaths of the protestor/revolutionaries, his fate seems unavoidable.
Contrast the Plan B’s of these dictators with the plan B of arch-villain, Adolph Hitler. When Hitler’s reign ended, he disappeared. Some say he was killed, others say he escaped. But we don’t really know. Whatever Hitler’s Plan B might have been, it seems a lot more effective than Gaddafi, Assad, or Mubarak’s plan B.
My concern is your plan B. As the bad energy of the Mediterranean continues to spread through our complex world of international finance, how will you escape the ravages? The answer, of course, is quite simple: a good financial plan B involves selling your down trending investments and buying securities in up trends. In the August 2011 stock market selloff, we were told that gold and bonds were safe. But the truth is gold and bonds were going up as the stock market came down. The level of risk or safety in a given investment is a matter of judgment. The price trend is a matter of mathematics. But, whether you are making a judgment or following a mathematical model, in times of danger, your plan B must include a plan to sell. Whether you judge a given investment to be too risky or whether you see it’s in a down trend, you’ll sell it. So, in reality, there is no need for me to be concerned about your plan B – it’s easy for ordinary investors to sell.
The problem lies with those who cannot sell: the big pension funds and the big mutual funds. Because of their sheer size, their selling drives the market down. If they are too aggressive in their selling, they can cause the markets to go lower. Their plan B’s are different from ours: they try to ride out the storm. That’s why they use economic forecasts. That’s why they diversify. That’s why institutional money managers are so expert at understanding the underlying value of the investments they own. The tools of illiquid investors are diversification, financial analysis and economic know-how. They don’t need to develop skills on when to sell out because they never sell out.
Expertise on knowing when to sell is left to smaller investors and smaller investment managers. It’s our advantage in down trending markets.

Blue suit protesters

2011-10-24T10:41:00.000-07:00

Have you ever meet one of those old fashioned 1960s left wing “save the world” radicals who seem to get off on protesting? They love to raise their voices in righteous outrage at the latest atrocity. They love the lime light – they love the sound of their own voices blended with a thousand other voices, all yelling in unison over some noble cause. The 1960s protest movement was associated with being young and hip and anti-war. But that’s all changed: the new generation of protesters is all about fiscal fairness and economic conservatism. And their leaders inhabit high places. Last weekend’s G-20 meeting illustrates the new era of protesting. This time it’s the blue suit boys protesting against the left-wing radicals. Canadian conservative finance minister Jim Flaherty protested the precarious predicament in Europe brought about by left wing Greeks building their economy on a mountain of debt. And that Olympian mountain of debt is threatening the world’s banking system. Greece’s problems are our problems.
What’s their problem? It’s simple. The Greek people collectively owe so much money the only way they can make their interest payments is by borrowing even more! It’s like kiting, on a grand scale. Kiting is a pre-bankruptcy phenomenon where an individual is so far in debt that he borrows on one credit card to make a payment on the other one. He keeps going back and forth between the credit cards alternatively borrowing from one in to make a payment on the other, until he max’s them all out and can no longer make any payments. There are only two things the kiter can do: dramatically decrease his spending and make payments from his earned income – or go broke. That’s the situation Greece is in right now. And, it appears that the old fashioned left wing style of protest is still alive and well in Greece. Unions are out if full force, shouting angrily that they don’t want to dramatically decrease Greece’s spending. Their problem is they don’t want to take the decrease in standard of living that is required to keep their economy going. And our problem is, when the Greeks default on their debt payments, the world’s banking system takes the hit.
That’s why Jim Flaherty and the G-20 blue suits are protesting. We are in trouble because of Greek monetary mis-management. But it’s not just the Greek borrowers who caused this problem. Who loaned them the money? What lender would advance money to someone they knew couldn’t pay it back? What kind of banker lends money without doing a credit check on the borrower? From one angle, the European bankers did it to themselves! If they had been more prudent in their lending practice, they wouldn’t be in the jam they’re in. Perhaps borrowing from the Greeks would have earned the banks an extra ¼ of 1% interest. That might have seemed like easy money for the Euro-banks if they didn’t check out the credit risk. Jim Flaherty and the blue suit protesters were waving their placards at loose lending as well as blatant over borrowing. The whole thing stinks.
And the stench seems to have crossed the Atlantic. A good old fashioned anti-establishment “Occupy” protest is spreading all over North America: the Occupy Wall Street movement. Young activists are raising their voices in unison, calling for an end to corporate greed. They could easily add sovereign debt greed to their list if indignities. But, it all makes sense, doesn’t it? Irresponsible mortgage lending almost broke the banks back in 2008 and 2009. Those same banks that had loaned American homeowners more money than they could afford to repay, were the ones that almost went under in the American sub prime mortgage fiasco. And now, in late 2011, the Euro-banks are threatened by irresponsible sovereign debt lending. And the Occupy protesters seem to have picked up on that vibe. Somehow, they seem to have recognized that same thing that Jim Flaherty and the blue suit boys have recognized. The big banks went way too far.
Now what are we supposed to do? It’s clear that the banking binge of the early years of the twenty first century has led to the current monetary morning after. It’s equally clear that there’s not a thing an ordinary person can do about it. We can’t save the world. But we can save ourselves.
In my investing book, Beyond the Bull, I outline a five step program for investment survival. Step 2 is having a plan and step 3 is acting on that plan. Protesters all over the world are warning us that there is danger blowing in the financial winds. And so far, the blue suit boys have muddled through it all and kept the boat floating. Each of us has to do the same thing in our personal financial world. This is the time to adjust your investments – the time to take less risk than you have ever taken. Once your financial house is in order, once you save your own world, you can pick up your placard and joint the blue suit protests.

Apple - Rim

2011-10-12T07:43:00.001-07:00

What marvelous creatures we investors are: so different and yet so much the same. Consider the pickle barrel that Steve Jobs and Jim Balsillie were in before Jobs’ untimely death: Jobs was the Chairman of Apple Inc. (AAPL), Balsillie of Research in Motion (RIMM). Both are/were billionaires because of their ownership of industry leading high tech firms. Since mid-2008, Jobs had seen his AAPL stock rise from under $165 per share to over $400 per share. Balsillie saw his RIMM drop from almost $150 to under $22 in August -2011. (These prices are all in US dollars) Jobs got way richer at the same time Balsillie got way less rich. Yet both are way richer than most of the readers of this article.
Big institutional investors like pension plans and mutual funds might own shares of both AAPL and RIM – and their holdings have been affected by the rise and fall of these two high tech giants. Although the professional decision makers for these mega investors may not personally own the shares, they participated in the rise and fall of these two high tech stocks. And their decisions to buy or sell their clients’ shares affect the rise and fall of AAPL and RIMM share prices – and they also affect the rise and fall of the financial net worth of Jobs and Balsillie.
Then there are the ordinary investors who may own shares of AAPL or RIMM. Most of us can buy or sell our whole position without affecting Jobs’ or Balsillie’s net worth at all.
Isn’t it fascinating how different we all are with respect to AAPL’s rise and RIMM’s fall? Different, yet, somehow, the same. Jobs and Balsillie were both Chairman of the Board and significant shareholders of their respective companies. One is a hero; the other – somewhat less than a hero. One became a lot richer than he was – one, somewhat less rich.
The mega-money portfolio managers are in the most interesting predicament. Imagine sitting at their computer screens, managing multi billions. Imagine you managed a huge portfolio of high tech stocks in June 2008, and your clients had approximately equal portions of RIMM and AAPL. Now, because of the rise and fall of these two giants, they have 20 times as much AAPL as RIMM. As the manager of these mega-funds, what should you do? One possibility is to readjust your holdings so you have equal amounts again. In this case you would sell a few gigs of AAPL and use the proceeds to buy RIMM. They call this “rebalancing:” it’s the kind of thing value investors do when one stock runs way too high and the other way too low. The mega-money managers realize that years from now AAPL might not stay the hot-stock darling it is today, and RIMM might not remain the ugly sister. Because their positions are so big, the mega-bucks managers can’t really sell out of the market all together. So they adjust the percentages of their holdings, maintaining a diversified portfolio at all times. It’s the prudent thing to do.
And what about you? What should you do? Most professional advisors encourage small investors to behave like large investors. Ordinary investors are encouraged to own large diverse portfolios and let the professional mega managers run them. That’s what the mutual funds business is all about. Small investors trying to behave like big investors.
But that is a serious error.
In my investing book, Beyond the Bull, I encourage readers to develop their own way of investing and to take advantage of their edge. Small investors have one huge advantage over mega-money. Liquidity. We can buy or sell RIMM or AAPL without affecting the price at all. So, why would we have owned a single share of RIMM since June 2008? Why not just sell out and be done with it? Why not just own AAPL, and nothing else, and get richer like Steve Jobs did? In fact, why would we ever own any investment that is not in an up trend? Why should we behave like mega-money at all?
We are all the same, yet so different. If we are high tech genius’, we should start a high tech company and get rich like Jobs and Balsillie. If we love the markets, we should get a high-priced job with a mega-money pension fund manager and prudently rebalance our way to the top of the heap. And if we are an ordinary investor, we should figure out how to tell an up trend from a down trend. Whatever of these three we pick, we can be successful in the world of money.

Gaddafi’s Plan B

2011-10-12T07:31:00.000-07:00

The hunt is on. No one feels sorry for deposed military dictator Muamar Gaddafi. Somehow it appears to us that justice is being done. Earlier this month we heard that his interior minister had escaped to Egypt with his family. Has Col. Gaddafi done the same thing? The western press had always presented him as a mad man. But our own rational minds told us he couldn’t have been completely crazy because he held power all those years. We know there was some modicum of ruthless ration in that cloudy mind. Near the end of his regime, he was still shouting victory and defiance from wherever he was hiding. Did he really believe his own bull? Surely he saw the signs. Tunisia fell. Egypt fell. NATO forces had destroyed his military installations. Surely he saw. Was he, in his most desperate hour, able to muster up enough IQ to create and execute a Plan B? Or is he hiding in some hole like Sadam, when Iraq fell?
In my investment book, Beyond the Bull, I wrote about the concept of being objective. Holding our minds in an objective state helps us stay rational in an irrational world. I recognize the possibility that Col. Gaddafi’s world was irrational most of the time; but his predicament at this very moment is the result of a rational sequence of events. And his survival now depends of the viability of his Plan B. Beyond his world of power and wealth, beyond the illusion, was a rational sequence of events involving rebels, Tunisia, Egypt and NATO. Now that the man hunt is on, we all see how important it is to objectively see through the illusion of power and wealth and to objectively formulate a realistic Plan B for our survival.
In 1969, when Gaddafi took power, the Dow Jones Industrial Average closed the year at 800.40. When power was taken from him last week, the DJIA was 11,500. Col. Gaddafi got rich AND America got rich. How have you made out since 1969? Gaddafi’s time of prosperity and power has ended. Some say America’s time of prosperity and economic dominance is ending. (based on the failure of her biggest bluest chip companies in 2008-9 and the long term decline of the US dollar) But let’s stop pretending to be objective – there’s nothing we can do about Libya or America. What counts is us. Will our period of prosperity end? What are the signs we should look for? Do we have a Plan B?
Colonel Muamar Gaddafi is teaching us all we should do.
Lesson One: live in your world. Know your world. Know your strength and your weakness. Know yourself.
Lesson Two: objectively observe the world around you. How does it affect your world? What are the signs that your world is in danger?
Lesson Three: when you see these signs, what will you do? What is your Plan B.
In my book, Beyond the Bull, I write about Five Keys to economic success. The three lessons Col. Gaddafi is teaching us all right now are the first two keys. Now that he is a fugitive, he is involved in the third key: execute your plan.
Our sheltered world, our world of western wealth and peace, is quite different from Col. Gaddafi’s desperate world. Gaddafi’s Plan A kept him in power since 1969. Our Plan A gave us our life style since 1969 too. What we have in common with this hunted man is our need for an effective Plan B. Like him, we hope we’ll never need our Plan B. But when we see the signs, we’ll know it’s time.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

Suspicion!

2011-10-12T07:26:00.000-07:00

Elvis sang it in 1962: “Suspicion! Torments my heart. Suspicion… keeps us apart.” His peaceful relationship was being torn apart by his suspicion that his woman was not, in fact, what she appeared to be. The investment world is a little like Elvis’ love life… things may not always be what they appear to be. In the investment world it pays (literally) to be suspicious.
Case in point: on September 1, 2011, the US dollar made an important show of strength. Market technicians would say the US dollar broke above a down trend line. On the same day, the Euro broke below an up trend line. Those were important events. I know that we are supposed to believe that western currencies trade in a free market, but I am suspicious that there is something hidden. Things may not be what they appear to be. I suspect there is another bank crisis looming – a crisis like the 2008/9 sub prime mortgage bank crisis. Only this time the culprits are the European nations of Portugal, Italy, Ireland, Greece and Spain. These so-called PIIGS of Europe are having difficulty paying their debts and are facing the usual consequences: bail outs, higher interest rates and credit downgrades. All this is old news. But September 1, 2011 marked a suspicious event in the currency world. It triggered a short term rise in the US dollar and a short term fall in the Euro. Something’s not right here.
In my investment book Beyond the Bull, I explain that in the financial world, everything is connected to everything else. This is how foreign exchange is connected to the European banking system:
European banks are highly leveraged. For every Euro of capital a bank has, it can create over 25 Euros of debt. By way of comparison, conservative Canadian banks can create less than 20 CDN dollars of debt for every CDN dollar of capital. The strange part is that the European banks hold most of their capital in US dollar denominated investments, even though the majority of their loans are in Euros. You can see how troublesome it is for them when the US dollar is weak and the Euro is strong. It really puts the squeeze on the European banking system. Their capital base drops in value because it is mostly US dollars. When the US dollar is weak, the European banks could have to start calling in their loans… for every one Euro their capital shrinks, theoretically, they’ll have to call 25 Euros of loans. That’s what went wrong in 2008/9. And one of the ways that crisis was handled was by strengthening the US dollar. In the three months from August to November 2008, the US dollar rose 20%. That means the European banks’ reserves would have risen by almost 20%. This currency driven increase in European bank reserves contributed to the saving of the banking system. My suspicion is that the September 2011 up surge of the US dollar and down surge of the Euro was a deliberate manipulation of the currencies. The G-8 nations have started to move the US dollar up and the Euro down because there is another bank crisis brewing.
Let us not be like Elvis; his suspicion was a curse that was ruining his love life. Let our suspicion be a blessing that will enhance our financial lives. Like Elvis, we don’t know what’s going on behind the scenes. But, unlike The King of Rock and Roll, we can use our suspicion in a constructive way.
In 2008, many of us were caught off guard – we were not suspicious enough. But not this time. Let the September 2011 up surge of the US dollar and the down surge of the Euro be a warning for us. Let us mentally prepare for a possible down-jolt in the stock market. Let us review our plan “B.”
In my investment book, Beyond the Bull, I encourage people to develop their own investment techniques. At my investment firm, CastleMoore Inc, we have preplanned investment techniques. We are ready for a crisis. Here are the essential ingredients for a good plan B: (1) observe the financial world, looking for something specific, (2) when you objectively observe that “something specific,” act in a pre-planned way. In this case, we see the sudden rise of the US dollar and simultaneous decline of the Euro. By the process of logic combined with suspicion, we recognize the increased risk in the stock market and the possibility of a 2008/9 style decline. In fact, the stock market sell-off of August of 2011 might have been the beginning of such a decline. What specific financial event can we look for that will be our signal to sell? And what will we do when we see it? What’s our plan B?
The world of finance is so much simpler than Elvis’ world of love and relationships. A financial plan B is just a matter of good business practice. What would Elvis have done if he found his woman with another man? For Elvis, plan B involved mending a broken heart. For us, a financial plan B means avoiding a broken heart.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

China – Shmina! It’s all bull!

2011-10-12T07:21:00.000-07:00

We have been told for decades China is the waking dragon whose economic emergence will somehow fuel the world’s economy into prosperity. But, not according to Jim Chanos’ article in the September 26 edition of Bloomberg Bussinessweek. He points out that local governments in China have racked up $1.6 trillion in debts they can never pay back. Makes the Greek Euro-crisis look like a flea on a tiger’s back. He also points out how Chinese accounting is different from Western accounting. “The further down you drill on China, the more bearish you get…” His article concludes that American investors should sell short certain Chinese stocks and Chinese currency. Selling short is a technique where you make a profit when the stock goes down. Those Canadians who owned shares of Canadian/Chinese company, Sino-Forest know just what Chanos means. Sino-Forest stock dropped from $19.40 to $1.29 in June 2011 as certain accounting problems came to light.
In my investing book, Beyond the Bull, I point out how important it is to know about the concept of deceit in the investment world. Deceit is part of our modern commercial world. In the old days smoking cigarettes was OK. In late 2007 the world’s bankers were told that US mortgage-backed paper was a sound investment. In May 2008, just before the crash, we were told that we should buy resource stocks so that we would own “assets in the ground” to protect our portfolios against possible problems in the banking system. In a world dominated by politicians and financial salesmen, we know that economic reality is never as rosy as they say.
How can we survive in such a world? How can we thrive?
They key is in our focus. If we focus on the words of the politicians and financial salesmen, we know what to expect: more deceit. The key is to focus on our own personal financial world. What’s in our own portfolio? Is it going up? If it’s not going up, why are we invested in it? Our focus should be the price of our investments over time. If those investments are going up, we are succeeding. And, when the price trend of our investments turns down, we simply sell them. It’s a very simple plan, but it works.
A case in point would be the Canadian stock market. At the very top in the year 2000, the TSX composite hit 11,423. On October 4, 2011, it traded at 11,250. Holding a portfolio of Canadian stocks for the long term has not been a profitable way to invest. Gold, on the other hand, traded at $294 in the year 2000. Today it’s $1650. Gold is in a long term up trend, stocks are not. Financial planners will tell you that gold in speculative and stock mutual funds are not. That’s the deceit. Reality is gold has been going up for 11 years and stocks have been going up AND down. That’s reality.
A similar case can be made for the bond market: in early 2000, long term Canada bonds yielded 6.25%. Now the yield is under 3.25%. In the bond market, bond prices rise when interest rates fall. Those who bought long term bonds in 2000 and are still holding them have received 6.25% interest each year and racked up a sizeable capital gain. Financial planners told us that the stock market has outperformed the bond market over long periods of time: but that has not been true for the past 11 years.
Financial planners are usually mutual funds salesmen trying to persuade us to buy their product. It’s the “persuasive” element of this situation that gives rise to the deceit. The truth lies in the mathematics of your portfolio. Your investments are either in up trends or they’re not.
The key is our focus: if investors and financial planners had focused more on bonds and gold – and less on the stock market, they would have been much more successful during these past 11 years.
Beyond the Bull Accounting. Check in on your portfolio: is its focus correct? Does it contain only investments that are in up trends? At what price did you buy? What is the price now? Is your portfolio like a Chinese stock? – the story sounds good, but it doesn’t add up. The remedy? Sell your losers.

protection

2011-08-18T11:53:00.000-07:00

Dr. Renee Heffron of the University of Washington discovered that women who use hormone-based birth control pills or injections are more likely to spread AIDS to their non-infected husbands than women who do not receive the injections or take the pill. The study was done in seven African countries. Western charities have been trying to help Africans deal with a very large AIDS problem and a rapidly expanding population. But it looks like this one backfired. Providing women with hormone based birth control methods may solve one problem, but it causes another.
What complex beings we humans are. This tragic African problem illustrates how difficult it is to fix things that break. It’s better to prevent it from breaking in the first place. Too late for that; Africa is broken; how can we fix it? Add poverty and racial tension to the mix, and we see an even greater tragedy. How can anyone fix that?
African problems make our economic problems seem small. But the same Mr. Fix-it situation applies. In my investment book, Beyond the Bull, I point out how everything is connected to everything else. Our attempts to fix one economic thing affect the rest of the economy. For example, in 2008 and 2009 the western nations instituted a coordinated package of economic stimulus in an attempt to save a collapsing banking system and revive weak economies. And they actually did save the banking system. But the economic growth they had hoped for never materialized. Instead they got inflation. Metals, food and energy prices all went up. And now, Europeans and Americans are instituting austerity programs, cutting government spending in the hopes of balancing their budgets. Even the City of Toronto is cutting spending. Austerity is the economic fix-of-the-day now, just as stimulus was the fix- of- the- day in 2008 and 2009. We can only hope it doesn’t backfire like the African birth control fix.
What’s your personal economic fix-of-the-day? During the “Roaring ‘90s” (1991 to 2000) the Buy-and-Hold investment concept became more and more popular. By late 2008 – early 2009, people realized it no longer worked. Their ten-year stock market returns were abysmal. Some gave up and put their money in the bank. But, much to their dismay, the world banking system became quite shaky. Others gave up and put their money into treasury bills. Much to their dismay, they achieve almost no return. How can we get a reasonable return on our money without risking serious loss? What should investors do to fix their problem?
Maybe we can learn from our African neighbours. If we lived in Africa, our problem would be to not get AIDS. Seems pretty straightforward, doesn’t it? Everyone reading this article can easily figure out a plan to not get AIDS. Hint: It’s something to do with your sex life. Easy fix. We all realize it’s not 100% guaranteed, but any African can take measures to avoid AIDS and dramatically reduce their risk.
Is there some obvious way we can live our lives as investors without exposing ourselves to serious risk of loss? Yes, there is. We can own investments that are in up trends and not own investments in down trends. For example, during the dramatic August 2011 decline in the stock market, gold went up and bonds went up. Because everything in the economic world is connected to everything else, there are times when a decline in one area of finance actually causes a rise in another area. There is no need to sit idle and watch your losses mount up. You protect yourself by selling. We have to be vigilant and active, not passive. By becoming an active investor who protects against loss, we can thrive in times when others don’t.
Sex in an African country is a lot like investing in a western country: it is our responsibility to protect ourselves. In the arenas of health and wealth, we can’t save the population from its fate. But we can protect ourselves.
Ken Norquay, CMT
CastleMoore Inc,
“Buy, Hold and Know When to Sell.”

Precious Metals August 2011 Top

2011-08-08T13:23:00.001-07:00

Friday August 5, 2011. Thursday’s price action in the price of gold and silver was a short term top. Investors who are planning to buy gold should postpone their purchases for a few months. Speculators should sell now and realize their gains. More aggressive speculators can bet on the decline.
Technicians refer to yesterday’s chart pattern as a Key Reversal Day or an outside reversal day. The price went up in the morning to a new high, then reversed and closed below the low of the previous day. And all this was done on a day of huge volume of trading. Check the charts of the ETFs for Gold and Silver. (Symbols GLD and SLV) See what a Key Reversal Day looks like. It was Thursday August 4, 2011.
This particular reversal was underlined by another statistic: the percentage of investors who are bullish on gold. This is a contrary indicator. When investors are excessively bullish, it’s time to sell. When they are excessively bearish, we should buy. The US financial research firm, Ned Davies, reports that recently there were more gold bulls than any time in the previous five years. Excessive optimism accompanied yesterday’s Key Reversal Day. Rarely is a sell signal so clear to a technical trader.
In my investment book, Beyond the Bull, I suggest that individual investors should improve their own investment techniques by studying the techniques of others. The opening dialogue to this article about trading gold based on Thursday’s price action is a good example. Many investors dismiss technical trading. They try to use economic data and financial events as a way to help them make investment decisions. If they feel, as now, that the US economy might be weak for a while, they may decrease their holdings of stocks and increase their holdings of bonds. For these investors the idea of selling because of price action seems crazy: we should sell because of economic action. And, human nature being what it is, they will often argue why their approach is good and someone else’s approach is not. Instead of pondering the performance of their portfolio and searching for investment techniques that improve performance, they use their intellects to defend their ego: my way is better than your way.”-Buying and holding for the long term is better that trading.” “-A diversified portfolio is better than a focused portfolio.” “-It’s always better to have all your cash working for you.” These statements all come from one’s ego, not from one’s desire to make money in the investment world. Rather than thinking from an ego position, I recommend using scientific methodology to develop your investment judgement. Scientists ponder a theory, and then test it by conducting experiments and making observations. In the investment world, we could ponder the theory that “Key Reversal Days” herald declines. Then we would take note of last Thursday’s action; then sit back and observe what happens over the next few months. We would test the idea.
If we were more ambitious, we could examine many stock charts, looking for Key Reversal Days in the past, and see if, in fact, the price did go down after such an event. We would look for proof in the real world, rather than defending our own theory.
One of the reasons why most investors resort to ego gratification rather than scientific observation is because of the competitive nature of the investment world. In a competitive world, we compare ourselves to everyone else. This is especially true for investment professionals. They all want you to believe their truth, not the truth of the other professional who is competing for your business. They are proud of their reputations. They enjoy being right. So intense is this competition that it draws ego driven clients to the investment world. When I attended Merrill Lynch’s training program in 1976, they talked openly about the kind of personalities that made the best stock brokers; competitive, intelligent, aggressive, ego driven personalities. The investment world is a world of big egos.
In order to add other investors ideas to your own repertoire of investment techniques, you have to be open, objective and respectful – the exact opposite of egotistical. One of the most successful investors of the modern era was Sir John Templeton. His book was entitled: The Humble Approach. If you have occasion to see videos of today’s investment icon, Warren Buffet, you will see a portrait of a humble man. Re-read the first three paragraphs of this article: they seem to have been written from an ego position, don’t they? Cocky, confident, full of advice. Don’t be seduced by that egotistical manner. Observe the author’s theory objectively and humbly. Make a few notes and observe the price of gold, silver and precious metals mining companies over the next few weeks and months. See if the notion of a “sell signal” can be useful in your investment world.
Monday August 8, 2011. Gold opened at a new all time high price, negating Thursday’s egotistical sell signal that was “so clear.” Gold went higher in the short term, not lower. The sell signal didn’t work. Will the technical trader who gave his advice in such a cocky confident manner become more humble? More importantly, will you become more humble? My book, Beyond The Bull, challenges investors to learn from other investors’ victories and defeats. What can we learn about using sell signals in our own investing? The arrogant and the cocky like to show you those times when their signals worked in order to persuade you to do business with them. What can you learn from a person who shows you the time the technique didn’t work in order to persuade you to do business with him?

It’s a Dog Fight: a comment on recent volatility

2011-08-04T10:17:00.000-07:00

I am an officer at the investment firm CastleMoore Inc. My partner and I wrote the following report to our clients: CastleMoore Special Midsummer Report
"Commentators sometimes refer to “the dog days of summer,” because the hot weather makes market participants behave like dogs in a heat wave: they just want to go and lie down in the shade. Not this summer. Financial commentators agree – there are no lazy slow moving dogs in the investment world.
European governments have been fighting with their citizens to implement constraint and reduce deficits. American Republicans have been fighting the same fight with the Democrats. And all this is set against a
backdrop of faltering economic news: western economies are not as strong as expected. Bond markets have been sharply higher and stock markets sharply lower. The price of gold went straight up, but oil went down. And the financial media loves to fan the flames of the financial fires.
Rather than participate in the excitement, let’s sit back and observe the action from an intellectual distance. Let’s be objective.
Three things are happening this summer: investment volatility, weakening economies and a continuation of debt/banking instability. The volatility is new, but the other two problems have been around for a long time. How are your investments positioned for the new part: the resumption of financial volatility?
CastleMoore accounts currently hold a large percentage of assets (40-70%) in the bond markets. This past two weeks, when volatility heated up, both the Canadian and the US bond markets surged up. Our preplanned strategy worked.
CastleMoore accounts currently hold gold (8-14%). This past week, gold also went up sharply. Again, we were well positioned.
But the stock market dropped like a stone. How were we positioned for that? We had been shifting out of resource stocks into health care, consumer and utility stocks. Of the nine stocks or equity ETFs held in our Focus (Tandem Active) or Class accounts, five were the same or higher during the steep decline of this past week. During that week, the S&P 500 Index dropped approximately 450 points. Only four of our nine picks declined with the market.
In addition to picking the right stocks, we had been cautious about increasing our exposure to equities,using a “go slow” strategy to increase our holdings of stocks while also maintaining cash reserves (5 – 23.5%).
Our message to our clients has been one of over caution for quite some time. Now it’s starting to pay off."

Murdock Schmurdock!

2011-07-20T10:41:00.000-07:00

The News of the World scandal is not about billionaire Rupert Murdock. It’s about ordinary people like you and me. We have yet another excuse to sit in judgement, brazenly criticising everyone associated with this British illegal cell phone ease dropping affair. We condemn the gossip mongers who read that filthy newspaper, we condemn the regulators for not catching the offence sooner, and we condemn the newspaper’s management for allowing (encouraging?) cell phone wireless-tapping. We human beings, it seems, have a strange attraction to the seedy side of life.
In my investing book, Beyond the Bull, I maintain that if we want to become better investors, we have to change the way we think. The News of the World scandal clearly illustrates a faulty way of thinking. This negative thought pattern is known as the V-A-R Triangle. The thinking pattern involves people who are cast in the role of Victims, Abusers and Rescuers. In this scandal, the Victims are all those people who were spied on illegally: this includes everyone from the Royal Family, and a series of celebrities, to victims of kidnapping. The Abuser role is being filled by the reporters of The News of the World. The Rescuer role is being assumed by British politicians. There’s even a US Senator who wants to be the Rescuer of those who perished in the World Trade Centre tragedy (the would-be Victims) from having beenspied on by these over-zealous English reporters (the would-be Abusers).
The V-A-R Triangle is a thought pattern. Whenever we consider a situation from the point of view of either Victim, Abuser or Rescuer, we are in this unhealthy pattern. This pattern of thought is particularly harmful when we consider ourselves to be a Victim, Abuser or Rescuer. For example, the US Senator who is calling for an investigation into wireless tapping around the 9/11 incident is putting himself in the role of Rescuer. Once we start to think in this pattern, our objectivity goes out the window. We lose contact with reality. The results can be disastrous.
Here are a few historical examples where this V-A-R thought pattern has led to disaster:
Nazi Germany: Hitler portrayed the German people as Victims of a conspiracy of Jewish bankers, whom he presented as the Abusers. He and his Nazi Party were to be the Rescuers. This thought pattern turned the ordinary German into the greatest abusers of the twentieth century. The massacre that followed was the result of V-A-R thinking.
Canadian Court Rooms: in the late 1900s there were many court cases where “the accused” was put in the role of Abuser, an innocent child was placed in the Victim role and the police, assisted by a certain child pathologist named Dr. Charles Smith, cast themselves in the role of Rescuers. Many people were falsely sent to jail because of Dr. Smith’s testimony. It turned out that Dr. Smith was a fraud – and his testimony was false. Many cases where Dr. Smith had been the expert witness were re-tried and many of those sentenced to long jail terms were released. The Abusers had become Victims: the Rescuers had become Abusers.
These examples show how harmful a thought pattern can be. This particular one, the V-A-R pattern, is the most harmful and the most wide spread destructive thought pattern I know. As The News of the World scandal heats up, notice how damaging it becomes. Notice how it draws you in: the V-A-R thought pattern invites every one of us to join the rescuers.
How does it work in the investment world? How does this pattern destroy your ability to earn a respectable rate of return on your money? It happens when the market goes down and we lose money. Our loss causes us to cast ourselves in the role of Victim. Our Abuser can sometimes be our financial advisor; sometimes it’s some politician. And our rescuer? That’s who we look for.
Consider the 2008-9 stock market crash. The Canadian stock market dropped almost in half in eight months. Investors felt victimised. The abusers most commonly blamed for that fiasco were George Bush, the big-bonus deal makers at the big brokerage houses, the greedy banks, and former FED chairman Allan Greenspan. The Rescuer? What White Knight would restore our RRSPs to their former levels? Some selected a new financial advisor; some voted for a Democratic president; some hoped “the market” would recover as their financial planner predicted: the market itself would rescue us.
But if we want to become better investors, we have to get out of this thought pattern all together. Finding another rescuer is not the answer. We need a new thought pattern.
This is what the V-A-R teaching recommends. If you find yourself in the role of Victim, ask yourself the question: “What did I learn from this negative experience?” If you find yourself cast as the Abuser, ask yourself: “How can I challenge this person’s (the Victim’s) beliefs? If you fancy yourself as the Rescuer, ask yourself: “How can I help this person help themselves?” Once your thought pattern shifts in this way, you will find yourself taking responsibility for your own actions.
Instead of a victim of a market crash, you will become a defensive investor who won’t be caught in a market down draft again. Instead of blaming someone else for your loss, you will accept responsibility and learn a new way of investing based on not losing money in a crash. Instead of a high powered securities salesman offering to rescue innocent investors from a corrupt system, you will become an educator, teaching people what to look for in the investment jungle. Instead of pretending you have the Holy Grail of Investing and having all your clients investments exposed to the ups and downs of the market, you will use compassion as you advise your clients about being cautious in their portfolios.
And what about Mr. Murdock and this nasty little thorn in his side? What can we learn from him? Try this: put yourself in his shoes. He thinks he’s the Victim. His over-aggressive reporters are the Abusers. And now, the press and the public are also his abusers... and members of the British Parliament. Let’s step into Mr. Murdock’s shoes and ask ourselves: “what did I learn from this experience?” The answer might be a variation of, “When you live by the sword, you die by the sword.” For Mr. Murdock in particular, “When I live in a world of sensationalism, gossip, accusations, muck-raking and meddling in other people’s business, I could die in that world.”

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tradesman Saves World Economy

2011-07-14T13:28:00.001-07:00

My father tried in vain to save the global economy. It didn’t bother him when he failed – but the possibility of failure didn’t prevent him from trying.
How could a tradesman who worked in a steel mill in Hamilton save the global economy? In his view, it was relatively simple. Just keep doing what he had always done. The economic activity that created the modern global economy is the same activity that will save it. It’s ordinary working people who will correct the economic errors made by the MBAs who have leveraged the world beyond its limit. This is his reasoning:
In 1952 my father and his young wife bought a house in the east end of Hamilton: 10% down, 90% financing. He had a steady job and paid off their mortgage in 20 years. I remember their mortgage-burning ceremony. It was an important day in their lives: the day they became debt free. In the 1950s it took only one income to buy a house. He went to work and my mother stayed home with the kids. That was the formula. Those Canadians who grew up in the Great Depression of the 1930s and fought in the Great War of the 1940s formed the basis of the economic world that is falling apart today. The “family formation formula” worked in the 1950s and 1960s. Now it’s almost impossible for a young tradesman to buy a house with 90% mortgaging and support a stay-at-home-mom. The numbers just don’t add up. That’s why it’s coming undone.
My father didn’t realize that his solution to today’s global financial riddle is a variation of Austrian Economics. The founders of Austrian Economics believed that the economy is self-correcting. When things go wrong, there is no need for a big government bail-out: just let things take their natural course and eventually everything will work out. For example, the MBAs who masterminded the sub prime mortgage fiasco in the early part of this century eventually blew up the US real estate market. My father’s view was: who cares? His mortgage was paid off in 1972. If some appraiser told him his home was worth $200,000 in 2006 and $150,000 in 2011, he didn’t care. He bought it for $7,000 in 1952. Those real estate speculators and their bankers who bought and financed some house they thought was worth $200,000 – they’re the ones with the problem. Was it his responsibility to bail them out?
In my father’s view, the collapse of US house prices is a good thing. If prices fall enough, young tradesmen will eventually be able to buy a house with 10% down – and their wives will have the option of staying at home with the kids. And if this causes the mortgage bankers and realtors to miss a few payments on their Mercedes, that’s their problem too.
Today’s European PIIGS sovereign debt default problems and American debt-ceiling default problems can be handled in the same way. Let the ones who got into debt in the first place solve the problem. And let the ones who loaned them the money solve the problem. And, of course, that’s exactly what’s going on in the world today. The wisdom in my father’s neo-Austrian approach is the same wisdom that’s found in the Alcoholic’s Serenity Prayer. “God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and wisdom to know the difference.” In the world of finance, this translates into serenely and objectively observing the economic world and courageously reacting to it by getting our own economic house in order.
With this principle in mind, let’s make some serene observations about the Canadian economy now and the Canada of my father’s era, the 1950s and 1960s.
Observation #1: in the 1950s, municipal governments started adding fluoride to city drinking water. Yes, it was an additional expense for the city, but it was good for dental health. Today, the city of Toronto is considering stopping this program because it costs too much and the city is spending way more than it earns. The city of Calgary recently stopped their fluoridation program for the same reason. It’s up to individuals to buy fluoridated tooth paste if they want stronger teeth.
Observation #2: the city of Toronto is currently releasing a long list of ways to decrease spending. They are seriously over spending and are desperately trying to reduce expenses. In the mid to late 1990s, the government of Canada found itself in a similar situation. Finance Minister Paul Martin stick-handled the federal government through an austerity program in those days. The European PIIGS countries are involved in the same ‘austerity or else’ process. Our American neighbours are currently negotiating a spending reduction program. It seems there are many governments today who are in the same predicament as Canada in 1993.
Observation #3: have you noticed that municipal and provincial governments no longer cut the grass along Canada’s highways? In my father’s day, they created summer jobs for university students by cutting that grass. They believed that putting money in the hands of university students would stimulate the economy because (a) the students would spend the money, and (b) educating Canadians was good for Canada in the long run. Now it is more common for university students of get student loans and to emerge into the work force carrying a huge debt load. Governments owe less, individuals owe more.
My father’s primary approach was to live within his means and pay off his debts. And that’s what a whole series of governments seem to be trying to do today. So, it appears that the world’s big debt problem is being solved. But the second part of his approach seems much less popular: keeping his own economic house in order. Today’s investors seem reluctant to take responsibility for their own financial fate. They keep hoping the stock market will bail them out like the governments bailed out General Motors and the banks. They keep hoping they will get back the money they lost on their mutual funds. They keep hoping...
In my investment book, Beyond the Bull, I encourage people to be active investors, not passive. This is the wrong time in the cycle to buy and hold for the long term. The long term is over. It has been replaced by a series of short term ups and downs... like when my father was growing up. It’s time to replace your passive invest plan with a conservative responsible active plan – a plan that involves serenely observing the economic world and reacting to it in a pre-planned way.

Greco-American Debt

2011-07-10T13:53:00.000-07:00

My friend Richard, the engineer, sometimes likes to play dumb and ask me questions about the economy when he already knows the answer. It’s his way of keeping me sharp. This week he asked me: “Why is the Greek debt crisis so important to Europe.” With a population of only 6 million people, Greece represents a very small fraction of the European community. Why not let the Greeks default on their sovereign debt and let them live with the consequences? Why should the rest of Europe bail them out by lending them even more money?
To add further to this irony, he pointed out that the Americans are having a debt crisis now too. Unless they legislate an increase in their own debt ceiling, they too will default. Everyone knows neither the Greeks nor the Americans have the cash to pay off maturing debt. Both nations have to borrow more. But everyone believes the American crisis is not a real crisis: it’s just political bull. Republicans are trying to embarrass a Democratic president, and at the last minute, they will pass the required legislation. But the sorry truth is that neither nation can pay its current debts unless they borrow more.
Richard baited me further by making up a story of two neighbours: an American and a Greek. They each borrowed half a million dollars and opened a restaurant. One served hot dogs, hamburgers and steaks; the other offered souvlaki, mousaka and tzatziki. Both of them were unable to make it work, and both defaulted on their bank loans. Richard challenged me: “Why is this any different from a country defaulting on its loans? We don’t expect the bank to loan them even more money! And don’t tell me it’s because they are so big! On the grand scale of world economics, Greece is simply not that big! There are many cities bigger than the nation of Greece – no-one would bail out New York City, London or Tokyo.”
I reminded him about the 2008, 2009 banking crisis. I reminded him that most European and American banks were over leveraged, just like Greece and the USA. Except in the world of banking, it means the banks loaned too much money to borrowers who couldn’t make the payments. Let’s say that a certain European bank had a loan portfolio that was 22X its capital. And let’s say that part of that capital was invested in Greek Short term notes. And Greek Short term notes were downgraded from A to D. And because of that, the Short term notes dropped in value from 500 million Euros to 400 million Euros. In other words, our bank just lost 100 million Euros. Now it is forced to call in 100 million X 22 Euros in loans, to get back on side. That’s the real problem. That’s what happened in 2008 when the US sub prime mortgage backed paper was downgraded. Once bankers realized they couldn’t find buyers for those US dollar junk mortgages, their value dropped and the crisis unfolded. French banks own a lot of Greek paper. German banks own a lot.
The immediate problem is not with the ones who borrowed the money and can’t pay it back. The problem is with the bankers who loaned them the money. In 2008 their toes were trampled by American investment dealers, and now they are dancing with Zorba the Greek.
Then it was my turn to challenge Richard.
If the situation in Greece (or Italy, Spain, Portugal or Ireland) is really this dangerous, what have you done to protect your investments? In 2008, 2009 the stock market dropped in half. Individual investors need a plan to protect themselves against another banking crisis. What’s your plan? I turned the tables on him: “Why is the Greek debt crisis so important to you?”

The Golden Fleece of Europe

2011-06-21T11:50:00.000-07:00

In my May 31 article, Mediterranean Blues, I suggested that one possible reason why the P.I.I.G.S. of Europe (Portugal, Ireland, Italy, Greece, Spain) might be in financial and political turmoil is because of political corruption and over-borrowing. Over borrowing had been used to create artificial prosperity in the PIIGS’ economies for political gain – in a democracy, prosperity leads to re-election. Political corruption was doing to Europe what mortgage lending corruption had done to the USA: endangering the banking system and ruining the economies. Under my scenario, the nations of southern Europe were taking advantage of the good credit of the nations of the north. But there is another, more sinister possibility.

Perhaps the nations of northern Europe have intentionally victimised the nations of the south.

Costas Los, President and Chairman of the marine insurance company The Strike Club, offered a “more European” way of looking at the over-leveraging of the Mediterranean nations. He reminded me of a by-gone era in Europe: the era of European empire building; the days when Europeans colonized the world. He suggested that the same gene that inspired the Spanish Conquistadores, the British Empire on which the sun never set, France’s Napoleonic era and the German Third Reich; this same gene might be responsible for today’s European debt crisis.

Here’s what he inferred: the imperialist nations of northern Europe recognized that the southern European have-not southern European nations were asset rich and cash poor. With this in mind, the northern nations loaned the Mediterranean nations money they knew would never be repaid. Their goal was the confiscation of assets. Inevitably the Greeks and Italians would be unable to pay and their assets would come under the control of the lenders, the northern nations. Instead of Napoleonic or Nazi armies, this invasion would be done by an army of blue suited bankers. But the result would be the same: the Mediterranean nations’ assets would come under the control of the North Sea nations. Bankers’ imperialism.

Thank you, Costas, for this enlightening point of view. As North Americans, we often see the world from our own narrow prospective.

Ironically enough, that’s precisely what I encourage investors to do in my book, Beyond the Bull. I suggest that objective investors make more money than subjective investors. Objectivity allows us to make changes when we need to change. Who is responsible for Europe’s debt problems; the people of the north or the people of the south? If we think it is important for us to know, we should objectively examine both sides of the question. But one thing remains clear: who is responsible for our own personal finances. We are. And if the problems of Europe upset the financial system as the problems of the United States did in 2008/9, it is our responsibility to take action. We can’t afford to ride out yet another severe decline in the stock market. We need to take action.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

Mediterranean Blues

2011-06-01T12:55:00.001-07:00

On the south we have Libya, Tunisia, Egypt and the sequential overthrow of long standing Islamic dictatorships. On the north we have four of the five the PIIGS of Europe, those countries whose governments borrowed too much from the future so they could live high off the hog today: Portugal, Italy, Greece, Spain.

The Mediterranean region contains the roots of western civilization. The Egyptian, Greek and Roman Empires dominated our early history. Similarly, the noble Persian Empire was once the jewel of middle eastern culture. What happened? Today, in 2011, there is chaos where there once was culture.

How could this have happened? What lessons we can learn from the observation that the Mediterranean region is in chaos.

As a financial philosopher I have no trouble understanding the PIIGS of Europe: they pushed their luck too far. The five PIIGS nations borrowed too much money on behalf of the people. (The fifth PIG is Ireland – not a Mediterranean country.) They ran up huge debts and were unable to pay when the time came to pay. As members of the European Common Market, these have-not countries found a way to have. The Mediterranean PIGS’ governments spent way more than they took in and ran up huge debts. Their governments had borrowed their way to prosperity. And, in a democracy, prosperity leads to re-election. The governments of the European Mediterranean countries sunk their countries over their heads in debt so they could win votes and keep power. When those governments couldn’t make their monthly payments, governments had to cut back on spending and refinance. And the people rioted! Easy enough for a financial guy to understand. And easy enough for a political guy to understand too.

But why are the people of Mediterranean south suddenly rioting? Did their governments push their luck too far too? Some blame rising food prices for the north Africans’ uprisings. They argue that the dictatorial governments of these countries were benefiting from rising oil prices and the people were suffering from a punishing rise in food prices. Those dictatorships could have avoided the riots by subsidising food prices using the proceeds of excess oil profits. But the dictators had run up serious deficits and accumulated serious debt. They couldn’t help the people with food subsidies. And the people rioted! This explanation is not so easy for a financial guy to understand because we have no access to the dictators’ national bank books. We can’t verify that they pushed their luck too far. But it does seem possible that over-borrowing may be contributing to the overthrow of the North African dictatorships. We suspect the North African dictatorships borrowed excessively to keep power in their way: by maintaining a huge army and police force.

The Mediterranean theme seems to be corrupt governments borrowing excessively to stay in power. Dictatorship or democracy, the pattern is the same.

What about the people of the USA? Has the American government, in their heroic effort to kick-start house prices and create more jobs, borrowed too much money, just like the Mediterranean nations? We know that the American housing market is in shambles because big mortgage companies loaned billions to new home buyers who could not afford their mortgages. The whole sub prime mortgage financial fiasco came undone in 2008/9, and it’s still unravelling. Has the American government now fallen into the same trap as the yesterday’s over-leveraged home buyers and the Mediterranean nations: borrowing too much?

I have accused the Mediterranean governments of abusing their borrowing power in order to hold onto power. And now it’s payback time. And now it’s coming undone. But we would never accuse the American government of corrupt practices because, to us, they don’t seem corrupt. Canadians support the USA’s noble efforts to re-kindle their failing economy: it seems the right thing to do. But, right or wrong, the results will be the same in America as it is in the Mediterranean: political and economic chaos.

It’s tempting to pontificate about the rise and fall of the world’s economic and political tides. But let’s be practical. There’s nothing an individual Canadian investor can do to stop these tides. Fate will unfold according to its own agenda. We are merely observers.

Our impact will be felt only to the extent that we manage our own financial affairs in the midst of these economic storms. If the world’s economy comes undone again, as it did in 2008/9, we can’t stop it. But we can react to it.

Imagine if you had reacted to the bank crisis of 2008. If you had sold your stock portfolio any time in the last quarter of 2007 or the first half of 2008 and bought it back a year later, your RRSP would be significantly ahead of where it is now. But most investors would rather ponder the economic fate of the world and not react to it.

By now, “buy-and-hold” investors have made back most of what they lost in 2008/9. If the stock markets can rise by another 15%, they’ll break even. But if the market drops in half again, like it did in 2001/2 and 2008/9, they will be behind the 8-ball again.
In my investment book, Beyond the Bull, I wrote about having investment technique. An investment technique has two parts: (i) objectively observe the financial world, and (ii) react to it in a pre-planned way. We have observed that American consumers borrowed too much mortgage money – and this led to a 50% drop in the stock market. We now observe that over-borrowing in certain Mediterranean countries has put those economies at risk. If this Mediterranean Blues phenomenon spreads, there is a risk that the stock market could drop again.

Our advice? Don’t let the Mediterranean Blues catch you off guard. If this economic phenomenon triggers another decline in the stock market, act. In a bear market, whoever sells first wins.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Count Down to the G20

2011-05-17T13:46:00.000-07:00

World Economic Review
Devil: world banks hold most of their reserves in US$-based investments. A lower dollar hurts these banks and puts the world’s shaky banking system at risk again.

Deep Blue Sea: the US economy is the engine that powers the world’s economy. It’s sputtering and coughing right now because of the collapse of the American real estate market. A lower US$ would help the American economy recover because it makes US exports more competitive in other countries.

The May 26 G20 meeting will face this devil-deep dilemma. Let’s see what we can glean from the trend of the US dollar vs. the basket of international currencies. In late April and early May it looked like the banking system was going to be sacrificed to help the US economy because the US dollar kept going down. It was sinking toward the ultra low level it hit when the banking collapse was in full bloom in 2008. Then, seemingly out of no-where, on May 5, 2011, the US dollar rose dramatically and began a zigzagged up trend. Are the economic powers that be trying to control the word’s currencies as May 26 draws near? Will they try to hold the US dollar where it is for the next few weeks?

Let’s review this devil-deep scenario from the Canadian perspective. Canada gets economic enjoyment when America has a modest amount of inflation. Our resource based economy thrives on other nations’ inflation. The 17% decline of the US dollar in the past 50 weeks has been accompanied by a rise in commodities such as grain prices, fuel prices and metals prices. This has been good for Canada. But, some analysts look at the recent collapse of gold and silver prices as a sign that this game is over. And they suggest that the current blow off in gasoline prices will be the final blow-off in the current inflation game. If the commodities inflation game really is over, that would not be a favourable development for Canada. Toronto stock market investors would want to sell their natural resource investments and stock up on health care or consumer staples investments. Yesterday’s leaders, the Canadian resource stocks, would become tomorrow’s trailers, if the US dollar starts to rise and American inflation cools off.

And it’s your portfolio of investments that hangs in the balance. That part of your RRSP or pension fund that is invested in the Canadian stock market depends on the price of the US dollar. In my investment book, Beyond the Bull, I explain the importance of getting experience in the investment world. Getting experience means taking action based on your knowledge of changes in the world’s economic situation. The devil-deep scenario outlined above has been with us for quite a few years now, following the 6-year devaluation of the US dollar from 2002 to 2008. And it’s still with us. But it seems easier to express an opinion about the market than to take action. It’s easy to think about economic things; it’s not so easy to do something in reaction to economic things.

When the financial press starts to report the important news that will flow from the G20 meeting a few weeks, remember how important it is for them to find balance among the various currencies. And remember how important it is for you to take action to protect your own investments in response to G20 currency policy.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

The DARK ART of Election Forecasting

2011-05-02T11:05:00.000-07:00

A week before the election, I made the following wild and crazy forecast:
1. The Liberals will get trounced.
2. The NDP will make huge gains.
3. The Conservatives will get their majority.
4. The PQ will shrink.
5. Mr. Ignatieff will resign as Liberal leader; the Liberals will elect Bob Rae as their new leader.
6. Mr. Rae will negotiate a merger of the NDP and Liberals – let’s call the new party the Liberal Democrats.
7. The Liberal Democrats will be the opposition, when the recession/depression sets in, in 2012. The PCs will be blamed for the nation’s economic problems and when the next election comes in 2016, the New Liberal Democrats will form the government with the biggest lop-sided victory since Chrétien smoked Kim Campbell.
8. Scenario B is where the PCs get a minority again – under this scenario, the Liberal Democrats, along with the remains of the PQ, will defeat the
government and form the dreaded coalition. The coalition will form the government and lead Canada into the 2012 recession/depression. When the coalition breaks up and the election comes, Mr. Harper will win the most lop sided election since John Diefenbaker’s 1960s victory.

As you can see, in my view it is irrelevant who wins this election: a recession or depression is coming. Canadian politics can’t trump world economics.

And, as you can see, my naivety in politics has lead me to predict the formation of a new left-leaning party in the same way that a new right-leaning party was formed in the 1990s. Liberal and NDP supporters may urge me to stick to what I know best: the investment world. And keep my crazy political views to myself. And I would do that, were it not for one important concept: bullmanship.

In my investment book, Beyond the Bull, I talk about the different kind of lies found in the investment industry. My venture into political commentary sets me up for the creation of “the advertising lie.” In the investment world, we all present ourselves as qualified to help people make investment decisions – and we advertise that premise. Having made a starry eyed prediction about a Canadian political mega-merger, I can now wait… if my long-shot prediction does not come true, I will simply never mention it again. But if it does come true, I can quote myself time and time again as a political visionary who saw into the future. I will set myself up as a wise and insightful commentator who can truly see what lies ahead in Canadian politics. But I’m really a long-shot observer with a big imagination.

This is how the stock market’s advertising lie works.

Here’s what I mean. In Atlanta, USA, there are many people who have inherited shares of Coca Cola from the original inventor of Coke. Or from those local investors who bought into Coke 100 years ago and are still holding today. And today they are millionaires today because of their forefathers’ original wisdom in buying Coke shares when it was a small time local enterprise. This story is used time and time again by the investment industry to illustrate the wisdom of buying great companies and holding them for the long term.

It’s a true story: why am I referring to is as a lie? Easy: because the securities salesmen could have told the same story about General Motors a few years ago. Those who owned GM when it first became a company would also be millionaires today, except for one tiny detail: GM went bankrupt in 2010 and all the shareholders wound up with nothing. The reason the stock brokers tell the bullish Coke story is to persuade you to buy what they are selling. And the GM story does not support that goal. If you were a real estate agent trying to persuade an investor to sell his stocks and buy a commercial property, you might tell the GM story – or the Nortel story – or any other “they went broke” story. The stories are all bullmanship, designed to persuade you to buy whatever they are selling.

Now that I have boldly predicted the merger of the Liberals and the NDP under Bob Rae’s leadership, I just have to wait. If it does not come true, I will simple never talk about it again. If a merger does materialize, I will quote myself extensively and sell my services as a political visionary. I can’t lose.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Royal Numbers

2011-05-01T16:36:00.001-07:00

The royal wedding is over and the royal honey moon has begun. CBC carried a story that Great Britain lost 5 billion pounds because of the wedding. Who could know how much theoretical revenue the British people lost because they stayed home to watch the wedding on the telly. They also reported that security cost the British people 20 million pounds: that’s $31.6 million Canadian. That’s interesting for Canadians: in June 2010, we spent $1,000 million (that’s $1 billion) on security for the G20 conference. Who would possibly believe that the Canadian government spent over 30 times the money on security for a one-week conference than the British paid for a one day event?

Who comes up with these crazy numbers? And who believes them?

In my investment book, Beyond the Bull, I warn about believing financial data. If a writer is trying to persuade his audience, the data he uses is suspect. If that British reporter was one who believes the British monarchy should be abolished, he might exaggerate the wedding’s expense as a way to support his anti-monarchist views. He might be inclined to inflate the expense of the royal wedding and understate the increased revenue it generated. His personal bias about royalty would be expressed in his economic estimate.

Financial estimates most often reflect the personal bias of the estimator, not economic reality.

The same can be said for official government statements: their economic “data” might be skewed to make a situation look and feel better than it really is. This is the irony of a free economy. The health of an economy depends on the spending habits of the people. When the down part of the cycle arrives, official government spokesmen act like some British newspaper reporters: they report in terms of official government bias. They try to make the economic situation look safer than it is so people will spend freely. And if their deception succeeds, the economy actually could recover. But if their bias and exaggeration is not believed, the people might curb their spending and make the economy worse! It’s one of those rare occasions when lies, biased reporting and intentional exaggeration is good.

How does this affect your investing?

Whenever you hear financial data, be suspicious. If that data comes from a salesman who is trying to persuade you to buy his product, it is suspect. In my chapter on the different types of lies that permeate the world of the stock market, I recommend that you don’t believe any of the data. Certainly some of the data might be accurate and certainly some is just persuasive bull. But the average investor is not in a position to sort the true information from the persuasive bull. My advice? It’s all suspect because it’s all persuasive. Once a novice investor accepts this premise, he enters a more realistic world: he learns do be an effective investor in the world of the unknown. His suspicion makes him cautious. Cautious investors do better than faithful unsuspecting investors.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Redefining 'Blue Chip'

2011-04-20T13:42:00.000-07:00

The sales slogan most widely used by the financial planning industry in the 1990s was simple. We could all become wealthy if we simply bought a portfolio of blue chip stocks and held them indefinitely. And, in the period from 1991 to 2000, it worked. But it hasn’t been working lately, has it? Why not? What has gone wrong? Blue chip used to mean “big.” Somehow the safety of owning a big widely recognized company seemed a reasonable thing to do. “Small” was held out as risky or speculative, not so reasonable. Big was good in the old days.

But the twenty first century has seen that idea deteriorate badly. The biggest manufacturing company in the world went bankrupt in 2010. The biggest bank, brokerage firm, insurance company and mortgage company all needed bail outs in 2008/09. Between 2001 and 2008, the currency of the biggest country in the world dropped over 40% against the basket of smaller world currencies. We can no longer consider General Motors, Citibank, Merrill Lynch, AIG, Federal National Mortgage Assn, and the US dollar to be blue chip investments.

And now the credit rating company, Standard and Poor, has issued a warning that it could consider downgrading its AAA credit rating for the biggest and bluest of all: the sovereign debt of the USA herself! In the 1960s, folk singer Bob Dylan crooned: “You mothers and fathers throughout the whole land, don’t criticise what you can’t understand… The times, they are a-changin’”

My mother and father were teenagers in the 1930s. Imagine what they thought about the stock market and the economy. When the times changed in the 1950s, they were reluctant to participate in the investment world at all. For them, the stock market was speculating. It was more important to have a good job, spend only what you earn, and salt away your savings for a rainy day. They knew all about rainy days.

Those who were teenagers in the 1990s learned a whole different set of values. Buying and holding blue chip investments was one of their truest lessons.

I wonder what the teenagers of 2000 to 2010 learned about the stock market. They saw the market drop in half twice – the 2001/02 bear market and the 2008/09 decline.

I hope they learned that Bob Dylan was right. And when the times change, we had better change with them.

Now we see that the concept of “blue chip” has changed. Bigger no longer means better. How should the typical investor change in reaction to this new fact?

Big blue chip Microsoft stock is approximately the same price it was 10 years ago. The smaller Apple has gone up by 30X! Yes, there’s money to be made in the stock market. But blue chip is not the ticket.

In my investing book, Beyond the Bull, I suggest investors take stock of themselves. Know yourself. What was the stock market doing when you learned about it? Did you learn in the roaring 1990s bull? Or the swing-up-swing-down market of the 2000s? How was the market’s performance when you first began your investment adventure. If your first investments were made in the 1990’s you might believe in buying blue chip stocks and holding them for the long term: that’s what was working in the 1990s. If you learned to invest in the 2000s, you learned that buying low and selling high was a proper way to invest.

I learned to invest in the 1970s. It was one of those buy low, sell high eras. But, I worked for Merrill Lynch: their main focus was on blue chip American stocks. So, that’s what I learned. But, because I have had to earn a living in the financial markets these past 36 years, I have had to change my style as the times changed. Bob Dylan was right.

My advice? Leave yesterday’s blue chip dinosaurs to their financial fate. Stay light on your investment feet: we are in a buy-low-sell-high market.

Sometimes the hardest thing to change is your mind.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Voting Chevy

2011-04-05T19:21:00.000-07:00

With a federal election campaign in full swing, we keep hearing that the electorate have short memories. Let’s test those memories.

Remember the General Motors bail out of 2009? Most of us recall the irony of the super-supportive NDP, with six sitting Members of Parliament elected by the people of Oshawa, Windsor and Hamilton backing the Conservative government’s multi-billion dollar tax-payer loans to GM in order to preserve manufacturing and steel making jobs in those three cities.

But do you know the hidden story?

My father tried to bail out GM single-handedly: at the age of 85 he bought a brand new Chevy. He believed in the North American auto industry: those cars were made of Canadian steel and he had worked as a machinist for the Steel Company of Canada for 30 years. In my father’s day, GM was the pride of American manufacturing and Stelco was the pride of Hamilton. For him, buying a Chevy was an act of patriotism. His purchase was helping his neighbours keep their jobs. But, in spite of his heroic octogenarian effort, both GM and Stelco declared bankruptcy. His sincere effort had been wasted.

Just before GM declared bankruptcy, the governments of Canada, Ontario and the USA had promised them bail-out loans totaling thirty-three billion dollars. Buying a Chevy had not been enough. Now my father, along with all the rest of us tax-payers, had loaned GM a very large sum. We all hoped the Conservative government, with the support of the NDP, working on behalf of my father, would somehow spin this straw into gold.

But even the big bail out loan didn’t prevent the inevitable. On June 1, 2009 General Motors declared bankruptcy. The common stock went to zero and was de-listed. I wonder how many pension plans owned GM stock. It seems logical that the pension plan of a company who sells steel would own shares of its biggest customer. If it did, then GM had declared yet another “gotcha!” on my father by stinging his pension plan.

The following year, the new streamlined stripped down General Motors issued new stock: over $20 billion in new stock! The various governments had recouped part of their loans!

Why is it important for readers to remember this ironic corporate fiasco? In my investment book, Beyond the Bull, I encourage investors to be objective: try to see economic situations for what they really are. Try to learn from the way other people behave in the economic world. That’s how you can become a better investor. But it’s not easy.

Now that Canadians are in an election campaign, political parties are aggressively trying to persuade us to see the situation the way they see it – and to vote for them. The Beatles once sang: “Try to see it my way…” There’s no objective thinking in an election campaign!

And what about my father? He passed away last summer, leaving me to drive his new Chevy. With gasoline prices flying through the roof, I’ll probably trade it for a small car with better fuel efficiency.

And what about you? Are you objective in your economic thinking? When your RRSP dropped 30% in the 2008/9 stock market crash, were you able to stay objective? Are you able to objectively look at the various candidates in this election? Or is it easier to slip back into your old familiar patterns of seeing the world the way you’ve always seen it?

Most investors are like my father, still thinking in the old ways. Most investors think that big blue chip companies are safe investments. But GM was once the biggest. Stelco was once the biggest. Buying and holding big blue chip companies no longer works. It’s time to be objective; it’s time to re-think the old ways.

The first step in becoming objective is to remember. Remember what happened in the past and learn from your mistakes.

Can we be objective about this election? When all the votes are tallied, will the NDP be re-elected to those six union-town seats in the House of Commons?

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

Revenge of the Sub Prime Mortgage Nerds.

2011-03-03T17:18:00.000-08:00

My apologies go to Twentieth Century Fox for my paraphrasing their 1984 movie, Revenge of the Nerds. The story line featured nerdy good guys outfoxing their tormentors, the jocks and socialites; the movie ended happily with the nerds getting the girls. Classic 1980s Hollywood comedy.

A rather comedic development occurred in the USA’s real estate collapse and world banking neo-failure: it looks like the nerdy homeowners are getting revenge on the big banks. It seems there are a significant number of foreclosures where the mortgage documentation wasn’t quite right. A computer signed the mortgage document instead of a human being. And the computer notarized the fake signature: they call it robo-signing. Judges have been throwing them out of court. Assembly line mortgage documentation didn’t hold up in court. One American mortgage officer was able to crank out 5000 mortgages per day using robotic mortgage underwriting. And now the banks are having trouble enforcing their foreclosures.

What a miracle is the human mind. In my investment book, Beyond the Bull, I postulate that there is no mind more crafty, more imaginative, more persuasive than that of a good stock broker. But maybe I was wrong. A good mortgage lender who is out on a limb is pretty good too. Let me ask you this: if you were stupid enough to hold a portfolio of mortgages with faulty supporting documentation and if your foreclosure actions were regularly being thrown out of court, what would you do? Here’s what they did: they pretended to be noble. In a gesture of humanitarian kindness, they offered to let the defaulting homeowners pay a reduced affordable monthly payment and allowed them to stay in their houses. Ah, the milk of human kindness! This, they rationalized, would keep millions of houses from being sold on the open market at fire-sale prices, and would actually help both the banks AND the home-owning public. All those forced sales were depressing the housing market, and if we just keep those houses occupied, well maintained and off the market, eventually, we will all muddle through this crisis.

This illusion, as all other illusions, has its flaws. What’s a $300,000 mortgage on a $250,000 house really worth? And if the monthly payments are so low that the $300,000 loan actually increases over the years, what’s it really worth? And if the banks reported the true value of that loan (and the millions of others just like it), what would the banks be worth? That’s the beauty of being noble. Everyone else tries to be noble too. The bank regulators don’t want another crisis; they don’t want to force the banks to be more accurate in reporting the value of their mortgage portfolios because, after all, the banks are being so kind to those poor folks who are unable to pay. Maybe this is the way banking will be conducted in the future – instead of having faith that people will pay their debts, maybe we can all have faith that it doesn’t really matter if people pay or not. Banking in the Age of Aquarius.

In early 2009 when American tax-payers bailed out their biggest banks, homeowners complained that it wasn’t fair. It was banker’s greed that pushed the mortgage business to ridiculous extremes, endangering the banking system, pushing the economy into recession and forcing millions of homeowners into foreclosure. President Obama’s bank bail out scheme was making those tax payer/homeowners responsible for the banks self-inflicted problems! It didn’t seem fair. But so extreme was the banks’ greed that they even screwed themselves! The homeowners who could least afford their mortgages are now getting their revenge. They are getting to stay in their homes at much reduced monthly payments. Sweet!

So, when all’s said and done, who really got screwed? People who moved into houses they couldn’t afford seem to be emerging from their debacle in reasonable shape. The banks and mortgage companies whose greed squeezed the system so hard, got bailed out. So, who got screwed?

It’s the responsible Americans who still need justice. They bought houses they could afford and dutifully made their mortgage payments. But their houses have dropped 30% on average anyway. There’s no revenge for them.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Why are Africans rebelling? The Simple and Elegant Answer.

2011-02-22T11:38:00.000-08:00

My long time friend Hank, smiled at my complex argument: African dictatorships are all coming unglued because of The Muslim Brotherhood and the Islamic Revolution. He smiled even more when we discussed the western press’s view about the north African people’s desire for Western style freedom of expression and self government. He actually started to chuckle as he explained his simple and elegant version of the real problem.

“Ken, you’re a chartist: get a chart of the price of grain for the last six months. Then you’ll see what the problem is.” So, I looked up the price of sorghum, an important cereal crop in Africa: it had risen 86% in the past 6 months! The price of wheat has gone up 67% in the same time! Hank pointed out that these people do not enjoy the same high income levels as we westerners. Food takes up a far larger percentage of their take-home pay. As long as they could get by in their modest lifestyles, they lived in peace. But now that the price of food has blown through the roof, they are hopping mad!

He chuckled even more as he pondered what he would do if he were an advisor to the north African dictators. He pointed out that all these countries are oil producing nations and that the price of oil has also risen in the past six month, though not as much as the price of grain. The dictators should simply use the excess profit on their oil exports to subsidize the price of food imports. Simple and elegant.

Neither of us did the math: how much grain is consumed vs. how much oil is produced. Does it add up? In these dictatorships, who controls the oil revenue and who buys the grain? I’m sure that implementing Hank’s simple and elegant solution might not be that simple. But his analysis is compelling, isn’t it?

In my investment book, Beyond the Bull, I encourage readers to try to see investing through the eyes of other participants in the investment process. That principle would also serve us well in the political arena. If we could walk in the same sandals as our north African friends, what would we learn?

Diverting state income from oil revenue to feed the people seems like good politics and good business to guys like Hank. But maybe it’s not that simple or that elegant. Maybe that oil revenue is used to pay the army and the police. Maybe oil revenue is used to prop up the bureaucracy of friends and supporters that a dictator needs to manage the various branches of government. Maybe these nations have borrowed against future oil revenue… maybe they’re seriously in debt like some European nations and need every penny of oil revenue just to repay their loans prop up the regime. Maybe this – maybe that: but who really knows?

Question: In a world that’s coming undone at the seams, what can we really do?

Answer: we can be a little more like my friend Hank: smile, live a simple and elegant life and keep your own house in order.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

What Drum is she Marching to?

2011-02-15T11:43:00.000-08:00

The US and Canadian stock markets have gained back most of what they lost in the 2008 crash. Top to bottom, the S&P TSX 60 lost almost 50% in 9 months. Now, three years later in mid-February 2011, it has regained almost 75% of the loss. Those who believe in buying and holding the stock market are breathing a huge sigh of relief: it won’t be long before they break even.

Yet, somehow, we are told, the economy is still lacklustre. Unemployment is high and the housing market is weak. There’s no real spark in the economy. In fact, the America Federal Reserve Board tried to juice up the US economy with their Quantitative Easing 2 program in autumn 2010. How can the stock market stay strong when the economy stays weak?

In my investing book, Beyond The Bull, I explain the Counter-Cyclical Model. There is a relationship between the stock market and the economy, but it’s not what most people think. The stock market leads the economy. For example, the stock market bottomed in March 2009. Six months later the economy bottomed. The stock market led the economy by six months. That’s how the counter-cyclical model works. What does this mean for stock market investors?

This week the Canadian and US stock markets hit new recovery highs: they are still going up. If the counter-cyclical model holds up again for this cycle, the economy should be stronger in August 2011 than it is now. Knowing that doesn’t help us invest in the stock market, does it? We need something that leads the stock market to help us decide whether we should invest our 2011 RRSP contributions in the stock market at these levels.

I explain in Beyond the Bull what leads the stock market: it’s the bond market. Long term interest rates lead the stock market. For example, in December 2008, three months before the March 2009 stock market bottom, the US long term bond market staged a spectacular rally. For a brief time, it looked like the counter cyclical model was heralding a stock market low and eventually, an end to the recession. But, Quantitative Easing 1 threw a monkey wrench into the works. Whenever the Fed launches an easy money program, investors worry that inflation will heat up too much: long term bonds are not a good investment in times of high inflation. And, that’s exactly what happened this time: after a short spectacular up surge in December 2008, the US bond market dropped in a series of zigzags to the same level it was when the bear market of 2007-2009 began! The bond market is not correlated to the stock market in this cycle. It’s different this time.

Quantitative Easing is what’s different. The Americans are flooding their economy with dollars: their monetary printing press is going full bore. They are desperately trying to re-kindle a small amount of inflation. The normal lead-lag relationships in the economy are not working in this cycle. The president of the USA said it in his annual address to his people last month: QE2 has kept the stock market buoyant. Some of the money the American printing press is generating has found its way into the stock market. I wonder what will happened when QE2 dries up. Will the stock market’s up trend dry up too?

When the normal relationships in an economy change, investors have to be ready to change too. For now, the stock market is in a strong up trend and investors who are participating are doing just fine. It’s a bit like the children’s game of musical chairs: be ready to find a chair when the music stops.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Cheap Chinese Junk Backlash

2011-02-07T11:56:00.000-08:00

Have you noticed the latest social movement? A whole new industry is being formed. I call it The Cheap Chinese Junk Backlash. And it’s at the cottage industry stage now.

Dozens of new business’s are starting up: their goal is to help people simplify their lives. Some of these entrepreneurs call themselves “Organizing Experts.” They help people organize their living space by cleaning out old junk, installing shelves, filing and putting things in boxes; turning chaos into order. Others call themselves “stagers.” They reorganize your house when you are trying to sell it. They clean up the clutter, reorganize the furniture and engage in minor redecorating. It’s not a complete make-over like the television shows; it’s just a tweak here and a twiddle there to make a home simpler and more presentable.

They seem to have certain principles:
1. Go through all your stuff. If it isn’t useful, beautiful or sentimental, throw it out.
2. Go through your stuff again. Repeat #1… you still have too much stuff!
3. Every time you buy one new thing, you have to throw away two old things.
4. Clothes: if it doesn’t fit, donate it to a charity.
5. Clothes again: if you haven’t worn it for a year, donate it too.

Apparently there is big demand for these simplifying services. It started in Europe centuries ago. They called it “minimalism.” The minimalist’s goal is to live a simpler, more meaningful life, without stuff. They value learning and spirituality more than they value owning things. It reminds me of the ancient Greek city states: the Athenians lived a rich colourful life, with lots of stuff. The Spartans were the minimalists, living a simpler, more militaristic life style. Minimalists appeared in Christian Europe when St Francis of Assisi’s monks dressed in sack cloth and lived in materialistic poverty. And now we’re seeing the beginnings of this movement in North America. Today’s home office organizers and stagers herald the beginning of a wave of simplification that is swelling up in today’s over stocked society.

What’s causing this backlash? Is it a reaction to American advertising, where we were all told we should envy our neighbour's stuff? Is the same thing happening to the US consumer goods industry as happened to the US housing industry? Too much excess: they pushed it too far…
In my investment book Beyond the Bull, I suggest investors examine the actions of other people to help them decide how they themselves should behave. Maybe we should use the organizers’ and stagers’ principles to re-organize our portfolios. Let’s ponder these principles:
1. If the price of your investment is lower now than when you bought it, sell it. If it’s lower than it was a year ago, sell it. Two years ago? Sell that too? Investing is about making money, not hoping to make money.
2. What is the rate of return on a given investment over the past 10 years? Why am I keeping this investment?
3. Does this investment still fit? Does it still have a place in my overall financial plan? If I need 8% return and I’m only getting 3%, should I get rid of my portfolio and re-write my financial plan.
4. Who has made more money on my investment portfolio over the past 10 years: me or my financial planner? If it’s your financial planner, fire him. If you are your own financial planner and you are not making money, fire yourself.
5. What is higher – my mortgage rate or the rate of return on my mutual funds. If it’s the mortgage, sell the mutual funds and pay off the mortgage.

It’s time to simplify your investment life. Invest in fewer things and keep only the ones that make money for you.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Egyptian Guerrilla

2011-02-02T12:43:00.000-08:00

The Russian Communists embarked on their revolution in the aftermath of WWI, when their country was in chaos. That’s how modern revolutionaries work. The Chinese Communists revolted in the aftermath of WWII, when their country was in chaos. Mao Tse Tung wrote the definitive book on how guerrilla warfare works: they create chaos, then present themselves to the population as the best ones to restore peace. That’s how twentieth century revolutionaries worked. They were well organized, well equipped and intentional. And in the last century the world’s biggest monarchies fell; Russia and China.

There are extremist factions in the Islamic world who follow this same pattern: they too, have read Mao Tse Tung’s book. The first nation to fall to the Islamic Revolution was Iran in 1979, when the Shah of Iran was deposed and Ayatollah Khomeini took control. He and his successors have been in control of Iran ever since.

Chaos is erupting in Egypt, Tunisia and Yemen. Protesters are demanding the downfall of the dictators who rule those countries. Who knows how many nations will be involved when the chaos finally stops spreading? Will it spread to Libya? Lebanon? Jordan? Saudi Arabia? Will it eventually spread to the Islamic states of southern Russia? What about Pakistan? Are these current upheavals something that just started in December or are they part of the Islamic Revolution that started in the 1970s?

This is a strange concept for our western minds to follow. Our understanding of hostilities flows from European traditions of war. In Northern Europe two thousand years ago, war was tribe-against-tribe. It evolved to city state-against-city state. Then country against country. Modern wars are fought between armies; country against country, army against army. It’s our way of thinking about war. For western minds to understand the Communist revolutions or the Islamic revolution, we must think differently. These are wars of insurrection: the soldiers fight from among the people. And the combatants are citizens of the same country. The Islamic Revolution is a religious concept, not a national or political concept. They fight by different rules. That’s why it is so difficult for the west to defeat these persistent soldiers: they are hard to find until it’s too late.

How will we westerners react to a threat to our oil life line? What would America do if Arabian oil stops flowing? We have observed that the Americans can bring a country to its knees by destroying it’s infrastructure. We’ve all seen the tapes of American bombs destroying bridges, buildings and power plants. But that kind of activity seems out of place in the Islamic Revolution scenario. It simply creates even more chaos and helps the extremists.

In the last century, almost no one predicted the devastation that followed the Nazi’s ascent to power in Germany. But history has accurately recorded the unification of Germany and Hitler’s story. And history is currently recording the methodical and chaotic spread of the Islamic Revolutions.

In late 2010 and early 2011 the spread of chaos has re-emerged in Northern Africa. And it’s still spreading. What kind of risk does the continuing progress of the Islamic Revolution have for the Canadian people? What should an ordinary Canadian do?

First we have to wake up to the danger. Whenever you buy an airline ticket, you encounter the Islamic Revolution: these are the guys who refined hijacking in the 1970s. And they took it to a whole new level on September 11, 2001. We know that active cells of revolutionaries have been caught in Toronto, Madrid, London, the USA, India, The Philippines and Germany. We know that there are particularly strong Islamic revolutionaries operating in southern Russia. And now we are seeing instability in North Africa. Because it’s a religion, not a country, we westerners have difficulty identifying the source of the violence. We are used to hostile countries (Japan in WW2) or hostile political parties (Nazis in WW2, Communists in The Cold War). But the Islamic Revolutionaries are religious. We have been taught not to be prejudiced against people because of their religion. Nevertheless, we do have to wake up to the danger. It would have been better for the world to have woken up to the Nazi threat long before 1938.

Secondly, we have to look for patterns. An old university friend introduced me to Chairman Mao’s works in the 1960s. Now, instead of viewing the news of hijacked airplanes, car bombs, honour killings, subway attacks, suicide bombers and violent demonstrations as individual unrelated news stories, I see them as part of a pattern. I see the underlying theme. Slowly and intentionally the Muslim extremists are taking political power. First it was Iran – then Afghanistan (the American invasion has reversed that one for now), then Palestine… and now we have unrest in Tunisia, Egypt, Yemen and Jordan.

Canadian note: Remember the old FLQ kidnappings in Quebec in the early 1970s? Bombs in mail boxes? The murder of Pierre La Point and kidnapping of James Cross? That was the beginning of a Mao Tse Tung style guerrilla operation. Fortunately for Canada, Prime Minister Trudeau had also read Chairman Mao’s famous book; he invoked The War Measures Act and snuffed out the FLQ before the movement took root in Quebec. Trudeau saw the pattern early and acted decisively. Unfortunately, the Islamic Revolution has evolved way beyond the early stage. It is firmly rooted in Muslim communities, both in the Arab world and Canada, Spain, England, USA, India, The Philippines and Germany.

Thirdly? Once enough people take steps one and two, we will know what to do. Until we wake up to the danger and see the pattern, we will view the Islamic Revolution as if it were a hockey game on Saturday night. Entertaining, lots of fights, but if our team loses, who really cares.

In my investing book, Beyond the Bull, I encourage investors to develop their own personal investment techniques. An investment technique involves two steps: Step 1 – observe the investment world. Step 2 – react to what you see in a pre-planned way. That’s how we improve our lot as investors. This same notion will work well in the much larger arena of international politics.

There are long term patterns in human history and human economics. Empires have risen and fallen. We Canadians are both observers of history and economics and a participants in history and economics. As individuals, let is observe our world and react to it. Let us be vigilant and remember the words in our national anthem: “we stand on guard…”

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Mexican Mafia Tourista Tours

2011-01-25T12:07:00.000-08:00

Mexico has been getting a lot of unwanted publicity because of crimes done to Canadian tourists. Several were killed in a hotel explosion, apparently caused by an illegally installed gas line. A couple was allegedly assaulted by the Mexican police: one claims she was raped by the police. Another was killed in the cross fire of a drug war. Based on these and other news stories, Mexico seems to be more dangerous for Canadian tourists that it was a few years ago.

Americans seem more attuned to this danger than Canadians. The drug war in Mexico has been an important media event in the American press for many months. Americans are avoiding Mexico in droves: tourism statistics reflect the danger that Americans perceive regarding Mexico’s organized crime problems. But Canadian tourists continue to flock to Mexican sunshine in spite of the higher incidence of Canadian vacationers’ problems.

Canadian Mutual Funds Investment Forays
The Canadian mutual funds business has been spared unwanted publicity regarding the long term rates of return on equity mutual funds. The Toronto stock market is up less than 1% per year on average, over the past 10 years. And we are the lucky ones: the US stock market is up even less for the same 10 year period. Both Canadian and US stock markets dropped about 45% in 2001/2002 and again in 2008/2009. It’s hard for equity mutual funds to achieve a good long term rate of return when they lost almost half their value twice in one 10-year period. Based on these statistics, it’s a wonder that anyone still buys mutual funds. Most equity mutual funds managers under perform the averages. For completion, both stocks and equity mutual funds often pay dividends, which would add to the low performance mentioned above. And mutual funds do charge management fees, which detract from long term performance. I wonder if Canadian RRSP savers will continue to buy mutual funds. Will they be like Canadian tourists, visiting Mexico’s sunny shores even though the risk has increased? Right now Canada is in the midst of RRSP season, where people make that decision: where will I invest my money?

For guidance in this area, I recommend that small investors observe what large investors are doing. Large pension funds are in an embarrassing position: they own too much of the lowest performing investments and not enough of the better performing investments. A recent study by the investment firm, Gluskin Sheff, revealed that the worse performing asset class in the USA for the past ten years was the stock market. The best two asset classes were gold and long term bonds. Since pension funds are obliged to be managed in a prudent manner, we can be sure pension fund managers will be quietly selling their excess inventories of stocks and accumulating long term government bonds and precious metals.

Tourist mentality
What should Canadian investors do about the stock market: own a lot to the investments that are going up most strongly and avoid the weaker ones? What should Canadians vacationers do about Mexico? Just how much risk is there? Trusting the Mexican department of tourism seems as unwise as trusting your mutual funds salesman. After all, they both want your money. Both have something for sale and both put their interest ahead of their customers’ interest. And both of their marketing departments use pictures of Canadians drinking cocktails under a palm tree.

Palm tree mentality
Maybe that’s the problem: investors are thinking like intoxicated tourists lounging in the tropical sun when they should be thinking like those Americans who are staying away from Mexico because they perceive it to be unsafe. Or those pension funds managers who realize that having so much exposure to the stock market is not really as prudent since the year 2000 as it was in the 1990s.

In my investment book, Beyond the Bull, I advise investors to refine their investment techniques by borrowing ideas from other investors. In this case, we should look at the actions of the pension funds managers. That’s what I advise ordinary Canadian RRSP investors to do: reduce risk. Sell off some of your stock portfolio and replace it with government bonds and precious metals.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

High Risk Mortgages

2011-01-19T13:24:00.000-08:00

Bears
If you’re out for a walk in the Canadian bush and you encounter a bear, what should you do? Some say you should make loud noises and make sure the bear knows you are there. Others say you should quietly retreat.

Finance minister Jim Flaherty is quietly retreating.

The Canada Mortgage and Housing Corporation (CMHC) went for a walk in the high risk forest of financial leverage. Only a few years ago, qualified borrowers could buy a home with 0 down payment and pay their mortgage off over 40 years. Our American cousins did much the same thing.

In 2007 and 2008 the Americans came across a bear in their woods: and they got mauled! American house prices were slashed and the banking system almost collapsed. Jim Flaherty is aware that the same bear could show up in Canadian forests. And he is beating a slow intentional retreat.

Last week he announced further retrenchment of CMHC policy. Borrowers would now have only 30 years to repay their mortgages. And home buyers would need a 15% down payment. And CHMC will insure high ratio mortgages for buyers of homes now – they will no longer insure borrowers who are re-financing their homes.

It appears that Canada has learned from the USA’s experience. Financial leverage means financial risk. And now the federal government is attempting to gently de-leverage the real estate market in Canada by quietly retreating from the forest of financial maxi-leverage.

But I’m wondering about those unfortunate Canadians who got in at the point of maximum leverage. We know what happened to the Americans. What about our Canadian neighbours who borrowed the maximum on their homes and bought into the old mutual funds leverage game.

Double Bears
2006 and 2007 were the days when you could refinance up to 100% of the value of your home and repay the mortgage over 40 years. And in 2006 and 2007 the stock market seemed like a good investment. Hundreds of Canadian Financial Planners (FPs) used high pressure sales tactics to persuade thousands of Canadian home owners to borrow millions of dollars against their homes and buy equity mutual funds. The sales pitch was: over the 40 years it will take you to pay off your new mortgage, the stock market will go up about 10% a year on average. At the end, you will own your home free and clear AND you will have a multimillion dollar portfolio of mutual funds. Average Canadians could retire wealthy, like that legendary barber we all read about.

Then the equities markets dropped in half from May 2008 to March 2009. “Not to worry!” said the FPs: “You still have 37 years left!” Now (January 2011), 2 1/2 years later, some of those high leverage mutual funds speculators are almost breaking even. And they still have 34 1/2 years left! Well, they are almost breaking even on the value of their mutual funds – but they’ve been making mortgage payments for 5 or 6 years: I’m not sure how long it will take them to break even on that part of the equation. And I hope their house values continue to hold up.

I am pleased that our government is returning Canada to mortgage normalcy. And I am pleased that the opposition agrees. It gives over-leveraged Canadians a chance to hold off the bear for a while. Restrictions on CMHC mortgage insurance are welcome.

But, what’s really required is some restriction on the high pressure high risk sales tactics that many mutual funds salesmen / financial planners use to persuade people to “max-out” on their capacity to borrow money to buy mutual funds. Investment dealers are regulated in this area, but mutual funds salesmen are not. Ordinary homeowners are being told that high risk leverage is low risk investing. It’s not. Our American cousins have taught us that high leverage means high risk.

When you walk in the woods, you need to keep your eyes open for bears. Mr. Flaherty has a good eye on the forest of high leverage borrowing. Now, I hope he’ll shift his focus to the bears in the stock market/mutual funds jungle too. It’s time to stop the leverage game there too.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Too much borrowing

2011-01-04T11:10:00.000-08:00

Mr. Carney, the governor of The Bank of Canada, seems concerned about the high level of consumer debt being carried by the Canadian people. And so he should be. Expansion of the Canadian economy is directly related to expansion of Canadians’ debt.

The way money is created in Canada is directly related to Canadian banks lending money to the Canadian people. A healthy economy creates money through the mechanism of bank loans. When we borrow $20,000 to buy a car, the money supply grows by $20,000. When we pay off our bank loan, the money supply shrinks by $20,000. If we stop borrowing, the Canadian economy stops growing. If the citizens’ debt level is too high, it means someone else will have to do the borrowing that causes economic growth; someone other than Canadian consumers. If consumers are overburdened with debt, who will borrow?

Will the resource industry step up to the plate and borrow more money? Will oil companies or mining companies finance their expansion by borrowing from Canadian banks? Is this where future growth will come from?

What about manufacturing companies. Will they heat up our economy by expanding their operations with borrowed money? If you were a banker, how much money would you lend to GM, Ford and Chrysler?

What about the retail sector? How much wisdom is there in lending money to yet another developer to build yet another box store shopping mall?

This is the governor of the Bank of Canada’s dilemma: who will finance Canada’s future economic expansion now that consumers have borrowed too much?

Classical Keynesian economic theory has an answer: the government should be borrowing now. Under this theory, when the economy is healthy and expanding, consumers and industry borrow and expand the money supply. And when the economy is shrinking, the government borrows – they call it deficit financing. In this way, according to the theory, economic expansions would be numerous and long: economic slow-downs would be infrequent and short. It’s time for the government to expand our infrastructure with borrowed money. It’s time to regenerate those make-work projects from the 1970s. But, somehow, governments seem reluctant to do so. Politicians seem more concerned about controlling deficits that creating them. Politicians are out of step with the system’s financial needs.

No wonder Mr. Carney is concerned. He’s caught between over-burdened consumers who can’t borrow and reluctant politicians who won’t borrow.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Seasonal Risk

2010-12-15T12:16:00.000-08:00

Year after year Canadian drivers experience winter’s fury: ice, snow and wind conspire to make out driving difficult and dangerous. And every year, every storm brings a rash of driving accidents. Somehow, even though we know ice and blowing snow is going to happen, and even though we know how to drive in dangerous conditions, the vast majority of Canadians take unnecessary risk. It’s one of those quirky ironies about being a Canadian. Is it Canadian human nature to be oblivious to danger?

It’s not human nature: it’s the power of advertising. We can be lulled into oblivion or sharpened into “yellow alert” by effective advertising.

Yellow alert
Consider those horrid pictures on cigarette packages. There was a time that they discouraged people from smoking by graphically illustrating how awful the smoking diseases can be. Then there is the campaign to prevent drinking and driving; an effective ad campaign that has saved many lives. Another effective campaign is the awareness advertising that focuses on the prevention of sexually transmitted disease by the use of condoms. These advertising efforts are examples of focused intention causing the population to become more conscious of risk in their lives.

Throw caution to the wind
Then there is the serious effort of the investment industry to persuade small unsophisticated investors to maintain their risky investments. For years financial salesmen have been telling their customers that the stock market goes up about 10% on average, and that they should buy high quality equity mutual funds and hold them no matter how dangerous the investment climate gets. The investment industry is not the only industry that would sacrifice the well being of their customers for their own profit. The beverage industry tells us all to get excited and drink carbonated, flavoured sugar water knowing full well the addictive nature of sugar and the adverse effect it has on our health. Children’s breakfast cereal advertisers float in the same boat.

But, clearly there is no intentional campaign to get Canadian drivers to take to the road no matter what the risk. Is there some unintentional influence that makes us take unnecessary driving risk?

Canadians are hard working people. We have habits that serve our work ethic. Getting to work is one of these habits. Being on time is another. Sticking to the plan is another habit that we Canadians have that enable us to maintain our modern efficient economy and our personal life styles. Our national symbol is the beaver; and the Canadian population has certain habits that epitomise our hard-working nature as a people. Our work ethic is not an intentional campaign, but it is an important part of Canadian culture.

This is where the repetitive winter driving accident problem begins. Our work ethic is fine, but we need to be awake to our habits, even our good habits, when risk increases. When there’s a winter storm, maybe we should take a day off. Maybe we should reschedule that out-of-town trip.

Exercise
In my investment book, Beyond the Bull, i encorage investors to not set their investing aircraft on autopilot. Risk levels in our lives change with time. We have to change too. Breaking old habits and bringing more intention to your life can be a tough process. Here’s an exercise that will help: review the paragraph above entitled “Throw caution to the wind.” These are instances where commercial endeavours hope to make profit from you by distracting you from the risk associated with their products. New Years resolution season is just ahead. I encourage you to reconsider your financial plan and your diet from the point of view of changing your habits to reduce your risk. The holiday season is a good time for pondering our lives. Use December 2010 to ponder the health and wealth risks created by big money advertising.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Financing Santa Claus

2010-12-09T15:14:00.000-08:00

It’s no secret: the December holiday season has been commercially exploited in a big way. Every year we hear reports of how much money consumers are spending on this or that product or gift. Those few gentle souls who still value the spiritual aspect of Christmas often express their disapproval, feeling that our spiritual lives are somehow diminished by the crassness of buying and selling. But in the godless world of Santa Claus finance, commercial salvation is all about dollars and cents.

This is the annual pattern:
1. Autumn of each year: consumer buying starts to heat up.
2. December of each year: consumer buying accelerates into Dec 24.
3. December 25: one Day of Rest.
4. December 26: Boxing Day sees the annual climactic fury of commercialism, crowded stores chock full of frenzied shoppers.
5. The shopping action drops off for the remainder of the year and the January sales begin.
6. Shopping activity tapers off as spring draws nearer.

Retail shop keepers know this repetitive annual pattern and try to line up their businesses to take advantage of it. And because it happens every year, we all have the opportunity to do the same thing; to line up our personal spending so as to take advantage of the holiday consumer spending cycle.

This seasonal shopping phenomenon also occurs in the stock market. Analysts like Don Vialoux and Brooke Thackeray have written extensively about the seasonality phenomenon. They co-manage an exchange traded fund using seasonality in the stock market as their profit-generating edge. (Symbol HAC). But there is another way to use seasonality to enhance your stock market success. Do what squirrels do.

They Can’t Count the Days
Squirrels can’t read calendars. Yet, somehow they know when to gather nuts. No one warns them that Christmas is coming, but they somehow gather nuts at the right time. Not a single squirrel has a financial plan that tells them to save nuts for the winter. But, somehow, the nuts get saved.

I’m not suggesting squirrel-worship here. Squirrels are quite stupid. Yet, stupid as they are, somehow they know what to do and when to do it. Let’s try to imagine what causes a squirrel to start harvesting nuts every autumn. Maybe there’s something in the world of nature that can help us collect more financial nuts our human world.

The Acorn Model
Squirrels gather nuts when they see them. No nuts, no gathering. See the nuts: gather the nuts. It’s that simple. When they see nuts, they gather them. Observation - action.

Let’s try the squirrel’s tactics. In the investment world, what are we looking for? And when we find it, what should we do?

In the arena of the stock market, the equivalent of “nuts” is “frenzied buying”. When we see frenzied buying of stocks, we should sell. It’s frenzied buying that we should look for. Squirrels act when they encounter lots of nuts. We should act when we encounter frenzied buying in the stock market.

In shopping malls we easily observe the frenzied buying of consumer goods: we see it every winter. But it’s not so easy to spot in the stock market.

Remember Y2K? In January 2000 the stock market had been going up for years. Every month some hot new high tech stock would jump to a huge premium: they called it the Dot Com Craze. Now bankrupt, Nortel had become the biggest company in Canada, accounting for 1/3 of the capitalization of the Toronto Stock Exchange. Some offices of TD Bank’s discount brokerage subsidiary had to close down for a short period: they were unable to process all the new accounts that novice investors wanted to open. That was frenzied stock market buying. About two years later the stock market had dropped 45%.

Remember 2008? – The price of oil hit $150 a barrel. Gold hit $1000 an ounce. Potash and copper were red hot commodities. That was a resource stock frenzy. After that frenzy, the Toronto Stock Exchange dropped in half in nine short months.

Remember back in 1981 when crazed investors lined up outside the Bank of Nova Scotia to buy silver? That was frenzied buying in precious metals.

Whenever you see investor frenzy, sell your stocks and squirrel away the cash.

It’s just like the shopping frenzy we see every Christmas: both Boxing Day and stock market frenzy mark the end of the cycle, not the beginning.

In my investment book, Beyond the Bull, I encourage independent investors to develop their own investment techniques. An investment technique has two parts: (1) look for a specific economic event, (2) react to it in a pre-planned way. That’s what squirrels do when they hoard nuts. That’s what retailers do as Christmas approaches. And that’s what investors should do too. The specific event investors are looking for is a stock market buying frenzy. And the pre-planned reaction is to sell your stocks and squirrel away the money.

Stealth Frenzy
Should we be gathering our nuts now? Is this a time of frenzied buying? Where are we in the cycle?

The particular cycle we are currently in, featured “frenzy-bordering-on-madness” in the US real estate market. From 2003 to 2006 anxious buyers clamoured after houses, paid for in part by sub prime mortgage loans they couldn’t afford. And in 2008 it all came undone. Real Estate Boxing Day has long since passed: US house prices peaked a long time ago. And in the complex world of finance where everything is connected to everything else, the consumer-driven economies of North America are nearing Financial Ides of March.

Stock Market Boxing Day has long since passed too. Optimistic economists are already forecasting the return another fabulous season of unbridled consumerism. But it’s way too early in the cycle for that. We are still in the down part of the cycle. US real estate, consumer spending and the US stock market are still in the post-frenzy cool down phase.

Secondary Frenzy
In the stock market, the frenzy-generating emotions of fear and greed come in waves. The market moves in zigs and zags, not in smooth gradual transitions. In 2008 and the first few months of 2009, the market zigged down. From March 2009 to now, it has zagged up. We are currently seeing signs of a mini-frenzy in the stock market. There are more bullish investment advisors now than any time since the March 2009 lows. Junior stocks are significantly outperforming blue chip stocks. These sign posts warn of a possible stock market buying frenzy this winter. Those readers who still own lots of stocks should get ready to sell your stocks and squirrel away your money until the down cycle ends.

To order your copy of Beyond the Bull and/or The Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

“Yes, Vir-Gennia, there is a Santa Claus.”

2010-11-23T09:07:00.000-08:00

Let’s revisit the old Christmas story about Virginia, the little girl who wrote to the newspaper editor to ask him if there really was a Santa Claus. Only instead of a little girl, our inquisitive child is America’s biggest manufacturing company. General Motors just floated the second largest public issue ever floated; she sold $20 billion of treasury shares so far, and there is a possibility that number could rise to $23 billion because of certain options issued to her investment bankers. Yes, Gennie Motors, there is a Santa Claus – and he came early this year.

I feel like the wide-eyed child on Christmas morning. I am just fascinated by the investing world. Yes, investors tend to be intelligent and well informed. Yes, they tend to be sophisticated and positive. But, my, don’t they have short memories!

Didn’t Toyota sell 600,000 more cars than GM in 2008, to become the world’s biggest auto manufacturer? And didn’t GM, the second biggest car company in the world, go broke anyway? How can a company (GM) sell 8.3 million cars in 2008 and declare bankruptcy in 2009? And then, miracle of all financial miracles, how can they raise $20 billion in new capital in 2010? What’s wrong with this picture?

The only logical course for a typical investor is to revisit his understanding of Santa Claus. When we were seven years old, our beliefs were quite different from when we were only four. But maybe we were wrong when we were seven – maybe our opinions as a four-year-old were closer to reality than when we were seven. What is reality and what is fantasy?

Reality check #1: The governments of Canada and the USA invested billions in GM in 2009.
Reality check #2: GM declared bankruptcy anyway, and her shareholders lost all their money.
Reality check #3: investors just ploughed another $20 billion into GM.

Ordinary investors need to live in the real world, not the illusionary world of high finance. Our world is the world of low finance: this is the world in which we must survive. Our job is to be the guardian of our own personal wealth. Check in on your own reality. It’s not about GM – it’s not about government bail outs. It’s about your financial survival in the real world.

General Motors stock is a great vehicle for day traders: it is newsy, volatile and trades millions of shares per day. But if it starts to drop in price, big American pension funds will jettison it just as fast as they recently bought it. The reality of GM in the twenty first century is stark and Grinchy… not what you want in your stocking on Christmas morning.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

The Election That Doesn’t Matter

2010-11-02T10:49:00.000-07:00

Two years ago the Americans elected President Barrack Obama: his job was to save the economic world. And, so far, the economic world has not collapsed. Whatever they did, it worked!

But, there is a certain inevitability to America’s demise: and Canada’s demise too. Canada’s financial future is tightly tied to America. Pierre Elliott Trudeau once said: “When the America sneezes, Canada catches a cold.” When America needs to be rescued, Canada could use a hand too.

Why did America’s mortgage melt-down almost blow out the world’s banks a few years ago? What went wrong? And whom should we elect to fix it?

Humble Beginnings
America’s last melt down occurred from 1929 to 1945: sixteen years of depression and war. When it was over, her international competition lie in ruins: European and Asian infrastructure had to be rebuilt. And America was in business to help her former enemies rebuild. When the troops came home from WWII, America had a new beginning. Ordinary soldiers-turned-workers got to reap the rewards of their victory. All those young women who had kept the home fires burning, were looking for husbands and families. That generation’s humble dreams had been shaped by those years of depression and war. They borrowed some money to buy a house – and their dream was to own that house mortgage free. Their goal was to get a steady job and establish financial security. These are the ones who gave birth to the Baby Boom generation.

Bigger dreams
The Baby Boomers wanted more. Raised in times of prosperity, the Boomers expected more than 2.4 children and a small house in suburbia with a late model Chevy in the driveway. Actually, those 2.4 children seemed like a lot of work: if we’re going to work that hard, we deserve a bigger house… even if Mom has to get a part time job to help out with the mortgage payments. Maybe it would be smarter to have 1.8 babies so she can have that part time job. After all, a bigger house and a bigger car means a bigger mortgage and a higher family income. And what’s wrong with a full time job? Women are as good as men! Why shouldn’t women have full time jobs, the same as the men? So what if we have to cut back to 1.4 babies! Why shouldn’t we go on vacation to the same places rich people go to? Why shouldn’t we live in big houses like rich people? In fact, why shouldn’t we all retire rich like Warren Buffet? And whom should we elect to help us with this new expanded version of the American Dream?

Even Bigger Dreams
Young adults today understand leverage: they know how to borrow and buy. They live in a world of monthly payments and plastic money. Student loans? No problem! Max’d out is part of their vocabulary.

In November 2010, the average American owes 128% of his/her annual income. (Incidentally, the average Canadian owes 148% of his/her annual income.) How far can they push The American Dream? And whom will they elect to set the stage for the next generation’s financial ambitions?

I feel like a Yuk Yuk’s comedian telling a joke that’s far too long. America has come a long way since WWII. In order to explain the futility of the American save-me election, I will revert to the comedian’s line: “-but, seriously folks…”

Seriously
How far can they push The American Dream? Over the years America’s bankers have degenerated just as seriously as America’s consumers. In the 1950’s, the financiers of that era worried about banking in depressing war-like times. That’s was their experience. They had learned to be conservative: to lend relatively small amounts of money to consumers. And only those with steady jobs. And good collateral. And a conservative life style. And they would consider only the husband’s income: what if the wife got pregnant and couldn’t work? (Actually, they were reluctant to lend money to single women with good jobs because they might get married and stay at home with the kids… and not be able to pay back the loan.) The March 15, 1958 edition of The Saturday Evening Post featured an article entitled “We Couldn’t Pay Our Bills” written by “An instalment plan slave.” It was a different era. Today’s readers should ponder this for a while. What would it have been like to lend money to consumers in the 1950s? Those consumers had modest dreams, shaped by their experience in the 1930s and 1940s. And the bankers had learned their trade at the same time.

In Canada, the bank act is refreshed every ten years. Parliament amends and re-approves it. Every ten years bank executives lobby for the banks to be allowed to be more aggressive. They are the surging horses, and the government holds the reigns. Ever since WWII, the bank act has become a little more liberal every ten years. Each generation of consumers has become a little more aggressive about borrowing to buy.

And now that game is over. The utter collapse of the American mortgage business and the near collapse of the world’s banking system have made that clear. The collapse of American house prices has changed The Dream. And it won’t be long before the bank act changes yet again.

Whom will Americans elect to change their bank act? What kind of changes will they make? Whom will they elect to re-establish financial prosperity?

Do you see that they have no choice? America is max’d out. It doesn’t matter whom they elect; they have blown it. Collectively, it’s payback time. Democrat or Republican: it’s still payback time.

Enough
Don’t worry about an American Dream based on borrowing and buying. Don’t search the horizon for a White Knight politician who will save us all. Dream the humble dream of those who experienced the depression and the war. And save yourself. Sell off your assets and pay off your debts. And vote your conscience.

Canadian Afterthought
Yes, you read that right: on average, Canadians are further in debt than Americans. It doesn’t matter whom we elect either: it’s payback time in Canada too.

The End of the Equity Cult?

2010-10-14T07:33:00.000-07:00

Robert Buckland, Citigroup’s global equities strategist, published an article on September 2, 2010, entitled “The End of the Equity Cult?” He was openly bearish on the long-term outlook for global stock markets.

He pointed to the popularity of stocks in US pension funds: “U.S. pension funds allocated just 17 percent to equities in 1952, according to Citigroup. By 2006, those same funds were putting 69 percent in stocks and just 18 percent into fixed income.” He described this 50-year invest-ment style change as an “equities cult.”

Those who follow my Fridge Notes (http://kennorquay.blogspot.com/) will see the similarity between Buckland’s views and my own. There is a big problem in stock market investing: the long-term up-trend is over. More precisely, it was over ten years ago. We are in a different era now. For the past ten years, stocks have not been good long-term buy-and-hold investments. They provide great returns when they go up and big losses when they go down. The Golden Age of Mutual funds is over.

But there’s a big difference between Mr. Buckland and me. He is the chief equities strategist for the biggest bank in the world. I am some obscure financial philosopher in a small investment management firm in Canada. Buckland has credibility ― big credibility.

Hold that thought. Hold the thought that one of Wall Street’s giants has openly discussed the high level of risk associated with the stock market at these levels.

The following quotation is from my article on financial hangovers, which appeared in the June 2010 issue of The MoneyLetter):
“In June 2010, the investment manager Gluskin Sheff released their calculations of the 10-year rates of return of a variety of US investment classes. The 10-year rate of return for the US stock market was -2.3%. Big American pension plans have lost money in the stock market over the past ten years.
“What about the bond market? The ten-year return for US bond portfolios has been 11%.
“Based on the math, it’s clear that the big US pension funds should be heavily invested in the US bond market and only slightly invested in the stock market. On the surface, it seems simple and logical.”
I was warning MoneyLetter readers to lower their expectations toward stock-market investing and to sell a significant percentage of their stocks and replace them with government bonds because that is what America’s big pension funds will be doing until they get their giant portfolios in line. The stock market has a huge overhang of stocks waiting to be sold and replaced with bonds.

Question: When Ken Norquay writes his Fridge Notes, who pays attention?
Answer: His mother, a few clients, and a few followers.

Question: When the global equities strategist for the biggest bank in the world declares the end of the equities cult, who pays attention?
Answer: The biggest financial institutions in the world.

Does Buckland’s pronouncement mean that the bearish case for the stock market is receiving more and more credibility in big-money management circles? Will this result in an acceleration of the pension funds’ desire to reduce exposure to stocks and increase exposure to bonds? Is the jig finally up? Is the next stock-market sell-off imminent?

On August 13, 1979, Business Week published a famous article entitled “The Death of Equities.” It made the point that stocks were no longer a viable investment ― similar to Buckland’s view. Business Week is a credible resource in US investment circles. The Dow Jones Industrial Average closed at 875 that day. Exactly three years later (August 13, 1982), the 16½-year-long bear market finally ended. Long-term bear markets end with a huge wave of selling, moving prices even lower. Pessimism has taken over completely and investors, especially professional fund managers, have finally give up on the stock market. Those who once believed no longer believe.

Is this what’s ahead for today’s stock market? Will the long-term bear market that began in the year 2000 end in three years, now that big-money management can accept the obvious truth about their unfortunate situation? Will the secular bear market end in autumn 2013?

Academics and theoreticians can continue grappling with this interesting conundrum. But what should an ordinary investor do today?

Sell stocks. Buy even more government bonds. Whether you call it an equities cult or an overhang hangover, the game is over. The long-term up-trend in American stocks ended ten years ago. And the long-term bear market isn’t over yet.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Talk’s Cheap

2010-10-13T13:37:00.000-07:00

When I was the manager of a small office of Merrill Lynch back in the early 1980s, my boss used to say, “Talk’s cheap. It takes money to buy land.” I never really understood the part about buying land, but I came to a true and deep understanding of “talk’s cheap.” As a stock broker in those days, I talked for a living. I would phone investors and offer them trading ideas. The extent to which I could talk them into buying was the extent to which I could earn a living.

It became easy to talk people into buying something. I was taught what to say. I learned the jargon. I became really good at talking people into buying. But I soon realized that cheap talk wasn’t really what counted. What counted was what my clients actually owned.

If my clients owned stocks during up-trends, I could make a really good living using my skilled cheap talk. And if they owned stocks during down-trends, no matter what I said, I couldn’t talk them into anything.

Most of us who invest get a certain satisfaction from talking about economic things. We love to read the financial press and follow the latest theories on what’s happening in the economy. We love the talk. And most of us have a viewpoint: we think we understand the economy and we might even have an opinion about what’s going on in the financial world. Most of us love to participate in the talk.

But here’s what we should be talking about: what investments do you own?

In my investing book, Beyond the Bull, I refer to the cycles in the stock market and how they relate to interest rates and the economy. But the most intriguing discovery I offer readers is how the talk changes through the cycle.

At the bottom of a stock market cycle, the talk is all gloom and doom. At the top, the talk is all optimism and enthusiasm. That’s how we identify the tops and the bottoms: we observe the talk. It’s called the Theory of Contrary Opinion ― and here’s how it works. When the talk is excessively negative, we buy. When the talk is inordinately positive, we sell. So the investments we own should be contrary to the talk about those investments.

For example, government bonds have gone up about 10% in the past three or four months. And the talk has been about the inevitable bankruptcy of the USA, about the fact that America can never repay her foreign debt, about the possibility of hyperinflation in the US, and about the US dollar being fiat money. As long as this negative talk persists, US bonds will continue in an up-trend. When the talk turns positive, as it inevitably will, bonds will be near a top.

A second example is gold: people love gold these days. An overwhelming majority of investment gurus are talking very positively about how the gold standard may soon return, how the currency wars that are developing will be positive for gold, and how all this talk of economic disaster is really positive for gold. And the more positive the talk is, the harder it is for the price of gold to go up.

The investments we own should reflect these two examples of economic cheap talk: we should own a lot of bonds and little or no gold.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

American Alzheimer Investors

2010-09-17T09:32:00.000-07:00

I have been living temporarily with an older lady who is afflicted with dementia. She forgets a lot and repeats herself a lot. A lot! She lives in her own little fantasy world.

But for me, it’s easy to live with someone who lives in her own little world, who forgets and who repeats herself over and over. After all, I’ve been in the investment business since 1975.

David Rosenberg of Gluskin Sheff observed that the S&P 500 index is currently at 1,109 and reminds us that it first hit 1,109 on April 1, 1998.

During the whole 12 years and five months since April 1998, our friends in the financial planning business have been telling us the market goes up on average about 9% a year and we should buy high-quality stocks and hold them for the long term. When the stock market went up, they were happy; their buy-and-hold slogan could be repeated like a meditation mantra. And the followers of these dollar-store gurus were lulled into a mindless paradise, dreaming of financial security. No worries: soon we’ll all be rich like Warren Buffet. And when the market went down, they repeated the same mantra. Eventually, they were right: the market did bounce back up.

But they seem to have forgotten the part about the market going up 9% a year. All those planned projections of financial well-being based on a 9% return seem to have disappeared like a sweet dream in the morning.

Human nature is an amazing thing. In my investment book Beyond the Bull, I discuss the ways in which investors can be their own worst enemy. Our minds naturally try to avoid pain. It’s a painful experience when US stock market investors realize that they have had no growth for 12 years. Our minds seek to avoid these painful messages. Sometimes it’s less painful to slip into a state of voluntary Alzheimer’s and forget about investing ― to repeat the ‘buy and hold for the long term’ slogan over and over. And to fantasize about a recovering economy.

I am enjoying the opportunity to teach my mother. Medical professionals say Alzheimer’s patients can’t learn, that they are, in fact, un-learning what they once knew. And, to a certain extent, the professionals are right. But I have been successful in teaching her how to breathe in a certain way. My years in the martial arts have taught me that deep, controlled breathing relaxes the body and eases muscular tension. Breathing in that way relaxes the body and helps us avoid physical pain. My mother has been able to learn to use my breathing technique to help ease her headaches. I wish I could teach the voluntary Alzheimer’s investors some techniques to ease their financial headaches.
American stock market investors need to learn about selling their stocks. Buy and sell ― not just buy. It’s a little like breathing. We buy stocks at certain times (breathe in) and sell them at other times (breathe out). Holding your stocks when they are going down is like holding your breath. If you do it long enough, you will not like the results.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Rebirth of a Philosophy of Life

2010-09-14T12:47:00.000-07:00

My father died last month.

His generation was quite different from ours. He was born in the 1920s, was an impressionable teenager in the late 1930s, and fought in a war in the 1940s. His generation experienced the ups and downs of life much more intensely than our generation. In his day, the economy heated up for short periods and cooled off for long periods. The attitude of his contemporaries was: we will survive. We baby boomers experienced long periods of economic prosperity interrupted once in a while by short, inconvenient cool-downs. Our attitude: we want it all. The dark side of my father’s generation was the fear they’d lose it all. The dark side of ours is entitlement: we think we deserve it all.

My father crossed over in his 88th year, leaving his soul mate behind. My mother was his dependent. She, as did the other women of her generation, relied on her man to provide for her; her job was to keep the home. Women of her generation accepted their roles as mothers and keepers of the hearth. (She had her brief career when he was off trying to win a war.) My mother is deep into her adventure with Alzheimer’s now. Now she truly is dependent. But my father continues to provide for her, even after his death. He has left me to look after her and he has left her some money. The combination of a steady job at the steel mill and the lessons he learned in the 1930s allowed them to save a sufficient amount of money. He had learned that you never risk your capital and you live a frugal life.

His son was of a different generation; he learned different lessons. His teenage years were the 1960s. What economic lessons did the 1960s teach? Nothing compared to the 1930s. What survival lessons did the 1970s teach? Nothing compared to the 1940s. The baby-boom generation was raised in a time when my father’s dreams were all coming true. Our generation was the dream-come-true generation. My father’s son, and all the other so-called baby boomers, learned that dreams can and do come true. And his son, unfettered by threats to his survival or the fear of losing everything, set out to make his dreams come true.

My father’s dream was to have a steady job, own his own home, and retire to financial security. His dreams came true. Initially, baby boomers had similar dreams, but expected them to come true. And why would we be content with just one home? Surely we could assemble a few rental properties too. And what about our RRSPs? Why settle for financial security when we can have prosperity? That famous financial-planning book of the 1990s was called The Wealthy Barber, not The Financially Secure Barber.

The boomers were raised by the Depression generation. Boomer values were once the same as my father’s values. But all that changed in the 1990s. As boomers’ attitudes shifted in those years from security to wealth, they ploughed billions into the stock market. Billions and billions! It was a change of social mood. It was a generational shift. It was the abandonment of my father’s “we will survive” attitude and the embracing of the “we want it all” approach. And it was the final chapter in the story of the Golden Age of the American Stock Market.

In my book Beyond the Bull, I discuss the mechanics of the stock market. It is important to understand the details of exactly what makes the stock market go up and down. In the 1990s, it was baby boomers buying billions and billions of dollars of mutual funds that made the stock markets of the world rise in unison. Money moved from seeking security to seeking growth. The actual flow of money into the stock markets is what made the market go up. And that change of attitude was complete at the end of the 20th century as the stock market ripened into the dot-com high-tech craze. The inevitable “correction” occurred in 2001/2002, when the blue-chip stock market averages dropped in half. Then the swan song finale occurred when the market surged into the oil-and-gold resource craze of 2005 to 2008. The “inevitable correction” knocked the stock market in half in 2008.

Will there be another stock market craze that will take the stock market up yet again? Where will the money come from? What fuel will fire the big bull market that the wealthy barber needs to break even?

The boomer dream of buying the stock market and holding it until you become wealthy is over.

I invite you to share my father’s dream instead. Learn what he learned about frugality in the 1930s. Learn what he learned about survival in the 1940s. His dream was to have a steady income and a modest life ― and not to take inordinate financial risk. Frank Alfred Norquay (1922 – 2010): may you rest in peace and may your dream be reborn in this generation.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Shooting Star Month

2010-08-12T11:03:00.000-07:00

Each summer we get a special treat. In mid-August, the earth’s orbit passes near the asteroid belt, resulting in the season of shooting stars. We see far more shooting stars in August than any other month. Shooting stars are really meteors that enter the earth’s atmosphere and burst into flames. All we have to do to see this annual show is gaze at the night sky in mid August: the odds are we will eventually see one. If we stay long enough, we will see several. It’s a seasonal thing, tied to the orbit of our earth around the sun.

But, in order to see it, we have to look up. And most of us spend our busy lives attending to our earthly affairs; we rarely have time to gaze upward at the night sky.

I wonder who first discovered Shooting Star Month. Ancient literature has many references to the heavens. The Greeks seemed to have particular wisdom in this area: was Shooting Star Month discovered by an ancient Greek who spent a lot time looking up? In order to notice the August shooting star phenomenon, he would have had to look up all year long. Only then could he notice the increase in shooting star activity in August. And he would have to verify his work by looking up over several years. Discovering nature’s patterns is difficult work.

But, once some noble hard working Greek discovered the phenomenon, it becomes easy for the rest of us to participate in his genius and enjoy August’s shooting star show. All we have to do is read about it somewhere, wait for mid August and look up at night. The hard work had been done long ago.

In my investment book, Beyond the Bull, I discuss the phenomenon of using other people’s knowledge for our own financial benefit. Is there a financial pattern that someone may have observed long ago, that we might be able to use for our own well-being. Is there a Shooting Star Month in the financial world?

It turns out there are many examples of such occurrences in the money world. The most relevant right now is known as secular alternation. Secular alternation refers to the tendency of the stock market to alternate between long term secular bull markets and long term secular bear markets. This financial gem is the key to planning our investment futures. Here are examples of how secular alternation has worked for the past 100 years or so:
1. In the late 1800s, there was a rail road boom in North America. This rail road boom gave rise to a stock market boom that ended in 1906 when that secular bull market ended.
2. 1906 to 1921: this secular bear market included World War 1 and hyper-inflation in Germany. [15 years]
3. 1921 to 1929: the roaring 20s produced a short powerful secular bull market. [8 years]
4. 1929 to 1942: the US stock market experienced a secular bear market accompanied by a depression and a world war. [13 years]
5. 1942 to 1966. Secular bull market. [24 years]
6. 1966 to 1982. Secular bear. [16 years]
7. 1982 to 2000. Secular bull. [18 years]
8. 2000 to now. Secular bear. [10 years so far…]

During the secular bull markets, the stock markets went up a long way. Those who bought stocks and simply held them as long term investments did well during these times. The secular bear markets either took stocks down a long way or took them sideways for a long time. Simply buying stocks and holding them resulted in either severe or minor losses. In the long term secular bull markets, investing in equity mutual funds was profitable. In the secular bear markets, it was not. Secular alternation dictates which investment strategies make sense at any given time.

What makes sense in a Secular Bull Market? Ordinary stock market investors can buy reasonable stocks and hold them for extended periods. In a rising market, that strategy works. “Buy and Hold for the Long Term.”

What makes sense in a Secular Bear Market? Ordinary stock market investors have to buy reasonable stocks when they are depressed in price and sell them when they are reasonably priced. “Buy Low, Sell High.”

What makes sense today? We have been in a secular bear market for ten years. If stock market investors have been buying low and selling high, they have had great opportunities to earn solid investment returns. If investors had been holding stocks for the whole ten years, they have been disappointed. They feel like the sky gazer who looks for shooting stars in January.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Cold War: yellow alert.

2010-08-06T08:14:00.000-07:00

Do you remember Barry McGuire’s 1965 hit, Eve of Destruction? “If the button is pushed, there’s no runnin’ away… Can’t you see the fears that I’m feeling today?” His protest song reflected the wide-spread belief that we lived in a time of danger.

In the 1950s, The Saturday Evening Post featured articles like: Will A-bombs Fall? – and College Communists. The underlying sentiment was the same as McGuire’s protest song: we live in a time of danger and we need to stay alert and protect ourselves.

That sentiment was a big part of life in the 1950s and 60s: two generations had been involved in world wars. The widely recognized baby boomers had parents and grandparents who were directly involved in massive world wars. War had become part of their personal psyche. Danger was part of their up-bringing. For them, world politics involved constant vigilance: in order to protect ourselves, we need to see danger way earlier and respond way earlier. They lived their lives on yellow alert.

But 60 or 70 years of relative peace have lulled their baby boomer children and grandchildren into complacency. Bobby McFerrin’s reggae song, Don’t Worry, Be Happy reflects their rosy optimistic state of un-alertness.

We see the same phenomenon in the financial world. The 1929 to 1932 collapse of the stock market and the 1930s depression impacted our parents and grandparents: they handled their investments with caution, constantly maintaining monetary yellow alert.

In my investment book, Beyond the Bull, I discuss the concept of yellow alert as it applies to investing. In my CD, The Five Levels of Investor Consciousness, I site modern day examples of a variety of financial disasters and how they destroyed investors wealth. My goal is to help people do their investing in the mindset of yellow alert.

But so far, it’s not working. It seems the impact of the 1982 to 2000 bull market has lulled investors into complacency. In the 1990s mutual funds boom we were told we could become rich like Warren Buffet by buying mutual funds and holding them for the long term. But when the bear market began in the year 2000, the rules changed. And now, ten years later, Warren Buffet is even richer, but investors in typical equity mutual funds are not. After ten years of poor performance, stock market investors should be getting back to the yellow alert attitude of the previous generation. But that’s not happening. Stock market investors are still complacent.

What will it take to wake people up?

That’s the problem. We know from studying the alertness of the population for 100 years that it takes a disaster to wake people up. Two world wars put our parents and grandparents on “international politics yellow alert.” A stock market crash and a depression put the same generations on “financial yellow alert.” Will it take another mega-war to alert this generation to the notion of international self defense? Will it take the another stock market crash to alert us to the notion of financial self defense? What will it take?

Here’s how it looks so far:
1. Yellow Alert International Politics Observation: A dictator in North Korea has openly threatened nuclear war. He is intentionally provoking a war with South Korea and with The West. Rosy Complacency Response: This dictator no longer has the unfailing support of The People’s Republic of China and is not going to start a war without it.
2. Yellow Alert Observation: The government of Iran is developing a program designed to give them nuclear weapons. The Iranian president is openly denying it, but Iran’s nuclear program just keeps rolling along. Rosy Complacency Response: When Iraq tried to do the same thing decades ago, the Israeli Air Force bombed the nuclear installation. No problem. If worse comes to worse and Iran doesn’t stop their nuclear program, the Israelis will stop it for us.
3. Yellow Alert Financial Observation: America’s biggest bank, insurance company, auto manufacturer, stock broker and mortgage company all had to be bailed out in the last two years. Certain sovereign states are unable to pay their debts and are being bailed out by the European Common Market. This indicates that the decline of corporate America may not be over. Rosy Complacency Response: the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news (the so-called wall of worry).
4. Yellow Alert Observation: Americans are currently debating re-stimulating their economy because some are worried that a second wave of recession could start at any time. Such an occurrence could trigger another dramatic 2008-style sell-off in the stock market. Rosy Complacency Response: same as above - the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news.

Advice for those who have achieved yellow alert status: reduce risk in your portfolios. For most people, this means investing less in the stock market and more in the bond market. Change your asset mix and become more safety oriented, less growth oriented.

Advice for those who are continuing with their original plan of buying and holding for the long term: listen more to your own instincts; less to your financial planner, mutual funds salesman or stock broker.

Conrad Black

2010-07-23T11:10:00.000-07:00

Conrad Black is still a star. The media still love him. Newspapers and electronic media report everything that happens to him with great enthusiasm and in great detail. But let’s face it: Lord Black is a has-been. His days of power and influence are over. We don’t see sports reporters following the lives of Bobby Orr or Wayne Gretzky. We don’t see Parliamentary reporters telling us detailed stories of Brian Mulroney or Jean Chrétien. So why do editors and journalist still love to tell us about Conrad Black?

Perhaps it’s because he was once a media baron; he’s one of them. He’s a member of the club ― their club. Maybe that’s why they love to tell us every little thing about his Lordship’s up-and-down career. Maybe they actually do have a sincere affection for this man, even though he has been convicted of several serious criminal offenses. They are experts on Conrad Black. But I wonder what good their expertise can do. Just because they know him and love him and report all the details of his life, are we obliged to pay attention? Or would our time be better spent following the story of someone we love, someone who is interesting to us, someone who is a member of our club.

In Beyond the Bull, my book on investing, I discuss the importance of paying attention to the news. In the investment world, we need to pay attention to news that affects our investments ― and to ignore news that is irrelevant. Part of learning to become a better investor is learning what’s important for us and what’s important for someone else. The endless stories about Lord Black’s adventures in crime and their consequences seem to be important for someone else.

I wish investing were always this simple. But the financial world is a perverse place. Sometimes what seems important is useless and what seems useless is important. In a way, stock market news is a bit like Conrad Black news: interesting, but not important to investors.

The investment firm Gluskin Sheff released a study on the long-term profitability to Americans of certain investments over the past ten years. Of the asset classes they studied, the US stock market was the poorest performer at -2.3% (annual return for 10 years). The best performing asset class over the past ten years was gold at +33%. US government bonds rang in at +11%. You’d think that prudent investors would naturally have their investment in the better-performing bonds and gold, and not in the poorer-performing stock market.

Yet day after day, we see an endless stream of news about the stock market ― and hardly ever do we see news about gold or bonds. The financial media seems hooked on the under performing but glamorous stock market and uninterested in bonds and gold: the investments that are leading the pack. It’s like sports writers filling the dailies with Orr and Gretzky ― or Parliamentary writers following Mulroney and Chrétien . . . or Conrad, Lord Black. Interesting, but not important.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

The Zen of Real Estate

2010-07-20T09:50:00.000-07:00

Some of the most hard working and well-paid realtors in Canada sincerely believe that real estate prices can only go up over the years. It’s the safest investment in Canada. Until only a few years ago, American realtors felt the same. They talk about bricks and mortar and say it’s “real.” They’ll say things like: “Land – they’re not making any more of it!” The inference is that land, bricks, and mortar are somehow “real” and stock market investments are not.

In the 1970s I was a real estate appraiser. Since I became a stock broker, I have met many real estate agents who smugly compared real estate investing to stock market investing. They always conclude that real estate is safer and more profitable. The vagaries of market psychology and economic turmoil can move stock prices up and down wildly. Canada’s biggest bluest chip company, The Royal Bank, for example, went from $60 a share in 2007 to $26 in 2009 and back over $62 in 2010. They claim that real estate is much more stable: you can bank on your real estate investment being there when you retire – whereas you don’t know what to expect from your stock market investments. And that’s because real estate is real and the stock market is not so real.

Half of that statement is true: “the stock market is not so real.” The only part of the stock market that’s real is your month-end statement of your portfolio’s value; that’s what you could have sold your portfolio for on that date. And if they printed another statement the next day, the value would be different. That’s the real part. All that opinion about what the market will do in the future, all that analysis, all that economic information – that’s just bull. That’s the part that’s not so real.

In my book, Beyond the Bull, I explain how investors should behave in the “not so real” world of the stock market. We can succeed in stock market investing because we understand it’s not real. We know it changes every day. We know about unforeseen events and we understand risk. That’s what stock market investing is all about. And that’s the Canadian realtors’ blind spot.

Japanese realtors can see what North American realtors cannot. In Japan they understand the concepts of Ken and Zen. In Japanese culture, Ken is the concrete world of atoms and molecules, logic, science, cause and effect. In real estate, the world of Ken refers to the bricks and mortar, lot size, location, the physical attributes of a property. Then there’s the world of Zen, the mysteries of your mind. The Zen of Real Estate refers to the trendy-ness of a neighbourhood; the kind of people who are moving in; the best way to generate a bidding war; the credit-worthiness of the buyers; the willingness of banks to mortgage a property; all those mysterious human forces that blend together to create the value of a home. In Canada, we understand The Ken of Real Estate; but we are babes in the woods in the world of Zen. The only Real Estate Zen Canadians ever think of is how much money we’re going to make and how high mortgage rates could go.

Our American cousins are much more sophisticated about the nebulous nature of Zen Real Estate. Their home prices have fallen in a steaming heap of sub prime mortgages and unconscious credit underwriting. They’ve seen home-owners dropping off the keys to their houses at the mortgage company and driving off. They’ve seen the dark side of Real Estate Zen.

The interesting part of the Zen-Ken Japanese approach to real estate is how they turn Zen into Ken.

Imagine that you bought a house for $250,000 in the year 2000. You put $100,000 down and took a mortgage of $150,000. And now someone tells you your house worth $350,000. The Ken of Real Estate is the actual house and land you bought. In addition, it’s the new roof you installed, the shrubs you planted and the new sink in the bathroom. It’s the real part of real estate. The Zen of your Real Estate is the $350,000 someone told you your house was worth. It’s the floating rate mortgage you put on it when you bought it and the secured line of credit you picked up 5 years ago. It’s the re-zoning application for those vacant lots on the next block. Our question is: “How can we turn mysterious imaginary Real Estate Zen into concrete Real Estate Ken?” Here’s one way: sell your house for $350,000 and redeploy your equity by buying two “fixer-upper” houses for $300,000 each, with $100,000 down and a $200,000 mortgage on each. Now you have two houses, one for your family and one for rent: Ken Real Estate. The real part of real estate.

But the part that most Canadian real estate fans do not really understand is: when you change the Ken of Real Estate, you change the Zen too. The Zen of Real Estate is inseparable from the Ken.

Imagine that you were able to do it again: you sold your two houses and reinvested and re-mortgaged again. Now you would have four properties in the concrete world of Ken Real Estate. And, of course, you have the accompanying Zen Real Estate risks – more mortgage debt and more rental vacancy risk. Let’s let our imaginations continue until your inevitable death. Now your heirs own those properties. You have physically left the Ken part of your world. You are 100% Zen now. But your Ken Real Estate still exists. AND the Zen of those houses still exists too: the mortgage risk, the trendy-ness of the neighbourhood, the willingness or ability of the banks to mortgage it. The Ken and the Zen of those houses still exits, even though you have personally moved into the world of Zen. (That’s the estate part of real estate.)

Because of Zen, real estate has more in common with the stock market than Canadian realtors would like to admit. Because of Zen, house prices don’t always go up. Because of Zen, real estate investors have to manage risk too.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Prophets of Doom, Prophets of Profits

2010-07-13T10:27:00.000-07:00

July 7, 2010

The stock market can be confusing at times.

For example, eminent market timer and financial astrologer, Arch Crawford, has been writing about a catastrophic event that will occur at the end of this month. Before you balk at the notion of a financial astrologer, understand that Crawford is one of the few investment advisers who correctly predicted the 1987 stock market crash and has received the prestigious stock market Timer of the Year award on several occasions. He is warning of an historic tragic event at the end of July, beginning of August 2010.

On the other hand, we see our G8 economic leaders cautiously, optimistically telling us everything is OK… the 2008-9 banking crises are over and the economy is struggling ahead. The danger has passed.

Arch Crawford is using objective planetary alignment as the basis of his advice. But, other astrologers are observing the same data and coming to other conclusions. Because of his stellar track record, many of Crawford’s followers have sold all their stocks.

And, of course, the G8 economic leaders are using objective economic data to formulate their Don’t Worry, Be Happy hypothesis. And because of the prestige and authority accorded to theses elite officials, many business owners and managers are forging ahead with their investments.

What should we do?

In my investment book, Beyond the Bull, I warn investors not to be bamboozled by economic bullmanship. Don’t react to some salesman’s persuasive economic forecast. By its very nature, investment advice is biased. The giver of the advice is always trying to persuade you to do something. Arch Crawford is urging his subscribers to sell out of the stock market. The G8 leaders are telling us it’s OK to borrow and spend again. And because it’s persuasive, financial advice can never be totally objective. This truth is at the very core of what the stock market is: it’s about thousands of salesmen trying to persuade millions of customers to buy or sell something. Stock market advice is never objective data: it’s all persuasive.

This fact, once thoroughly understood, will make the difference between your long term success or failure as an investor.

Most investors like to stay informed about the financial world and formulate a plan based on the advice of those they trust. This is not a correct way for you to manage your financial affairs. It results in confusion and low long term financial returns.

There are good investment advisers and there are bad ones. Even the best don’t get it right every time. It’s a percentage business: a certain percentage of the advice will work and a certain percentage will not work. Our problem as individual investors is knowing whose advice to follow and when to follow it.

Question: How can we obtain objective investment advice?
Answer: Look for it.

Most investors are not looking for investment information. Most are passively tuned in to the never-ending stories of profit and doom in the financial world. Most are simply being entertained by the financial press. If only we would exchange our love of financial news stories for a need for objective data; we would change our investment world. We would go from the world of salesman’s stories to the world of the financial survivor.

It’s like the difference between the mother who listens to all the breakfast cereal ads on kids’ television and buys a box of brightly colored candy-cereal and the health-conscious mother who studies nutrition and helps her children make their breakfast from scratch. It’s a different way of looking at your world. It takes work to live in a different world.

What world do you want to live in? A recently published study was released by the Canadian investment firm, Gluskin Sheff: it ranked the best and worst performing American investment assets over the past 10 years. Gold was the best performer at 33%. Bonds were 11%. The American stock market lost money over the past ten years; -2.3%. The higher the percentage of gold in your portfolio, the better your ten year performance. The higher the percentage of stocks, the worse ten year performance. The study also ranked investment real estate, corporate debentures and cash. Most of us would have wanted to own the top performers and not the bottom. Why didn’t we? Because we chose the entertaining world of the stock market. Because we have a trusting relationship with someone who also lives in the world of the stock market. We mimicked the mother who watched kids-TV and bought the candy-cereal.

Even if there is no catastrophic event this summer, we should follow Arch Crawford’s advice anyway. Maybe we should just sell our stocks and re-plan our approach to the investment paradigm. Maybe it’s time to look for another way to think about investing.

And to those readers who have good exposure to the bond market and to gold, congratulations: welcome to my world.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

G8 Mop-up

2010-07-13T10:26:00.000-07:00

July 2, 2010

It’s all over but the whining. The super expensive security program that commanded the media’s focus before last week’s world economic summit continues to command their attention. Notwithstanding the criticism, it did work. The international leaders who visited Canada for those few days all returned home safely. Congratulations to the security forces who succeeded in keeping our visitors safe.

Those visiting dignitaries all issued their summary statements at the end of the conference, as they usually do: reassuring words designed to give us the impression that the worlds banking and economic system is still safe. We are economically safe – that’s been the continuing theme of the G8 conferences since the crisis of 2008.

Pretty boring stuff. No wonder the media focused on the one-day riot where so-called protesters got violent, vandalized police vehicles and smashed windows. It was the only juicy bit in the whole conference.

And now the media has taken the usual tack: the police over-did it. I saw a photo in the Toronto Sun: police had seized a quiver of arrows with huge cloth-filled bags on the tips. Apparently these arrows looked like they were designed to be soaked in gasoline and lit on fire. Imagine the effect of flaming arrows coming down on police lines? Naturally, those carrying these potential weapons were arrested and held for questioning. After the conference was over and peace returned, the Robin-Hood protester claimed the arrows were part of some theatrical group’s props. In other words, Robin Hood came up with a great alibi. I’m sure the guys they caught with tire irons were merely going to help people who had flat tires. And the ones they caught with baseball bats were only trying to help out by trying to organize a friendly game of softball. Why would those mean old police arrest people who were only trying to help out?

In my investment book, Beyond the Bull, I wrote about what it takes to become a successful investor. One of the keys is to not be distracted by the juicy stories. Last week’s conference was a total bore except for the juicy security stories. But it’s the boring part that’s interesting to investors. Those of us who are planning our retirement or managing our family’s finances need to know those boring bits. Two years ago the Canadian and US stock markets dropped in half in nine months. People’s savings were devastated. Can this happen again? The lesson we all learned was that we can be punished for other people’s crimes. In the time leading up to 2007-8, certain bankers became outrageously reckless: when their greed–crazed lending practices blew up, it was our RRSPs that lost 30%+. Governments rushed in to bail out these monster failures and the system survived. Did the governments bail out your RRSP? Will the government bail you out if another wave of bank failures starts? Not a chance! We have to bail ourselves out.

For investors, the G8 conference was not a “bread and circuses” entertainment event: we really need to know whether another 2008-9 stock market crash is possible. We really would like to know so we can make adjustments to our investments to protect ourselves from further loss. And we don’t want to hear the governments’ “Don’t Worry – Be Happy” rhetoric. [Bobby McFerrin’s 1988 reggae song]. We need to know about risk: did this G8 economic summit increase or decrease the risk of my losing my shirt in the stock market again? The real G8 security story is – did all those important politicians and economists make my world safer? Or do I have to make my own financial world safer?

Our Advice: make your own world safer. Reduce your exposure to risky assets and increase your holdings of safe investments. This is a time to focus on not losing your money. There are no super expensive security forces keeping your investments safe. You have to do that yourself.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Seasonally adjusted thinking

2010-06-22T12:28:00.000-07:00

Farmers know how things work: they plant in spring and harvest in fall. Their business is in sync with nature’s cycles. If modern central bankers could do the same, we wouldn’t need to have G8 or G20 Economic Summits to save the world.

Modern economies work in cycles, just like nature’s seasons. There are times of expansion, when economies run smoothly; and there are times of economic contraction, when financial things get rough. Classic theory calls for governments to stimulate economies when things are rough in hopes of smoothing them out. And we all know that stimulating an economy costs money. Governments are supposed to recoup those costs in the good times. They are supposed to sow (stimulate the economy by lowering interest rates and increasing government spending) in weak economic times and harvest in the good times. (Harvest means increase taxes and pay off government debt.) And if they consistently did this, there would be no need for a massive meeting in Toronto this week.

Why can’t they get it right? Why were crazy European bankers and American mortgage companies allowed to blow up the world’s economies in 2007 and 2008? Why did the world’s taxpayers get bagged for billions of bail-out bucks in 2008-9? And why will this G8 – G20 meeting resolve to recoup those billions now, before the world’s economies move from the rough times to the smooth times? Why can’t they be like farmers and line up their G8 – G20 business with the natural cycles of the economy?

It’s because of the law of cause and effect.

In nature, the interaction between the earth and the sun causes the seasons. We human beings found nature’s cycle and lined up our agricultural activities with hers. Human beings have been doing this for millennia because we can objectively observe nature’s cycle.

The economic seasons are not as easy for us to objectively observe. That’s because we human beings are both the cause and the effect of economic cycles. It is our collective activity that makes up the economic cycle. When masses of people borrow money and buy things, that causes economic expansion. And when we all stop buying and pay off our loans, that causes a recession. We cause the cycles. What makes people borrow money and buy things? Desire for nice things the confidence that we can pay back the loans. And what makes us stop buying things and pay off our loans? Fear that we can’t pay off our debts and will lose what we have. Confidence and fear: desire to have things and fear of losing what we have. It’s difficult for most of us to be objective about our own desires and fears.

That’s what went wrong in the earlier part of this century: normal desire turned into greed. Bankers and mortgage lenders wanted bigger and bigger bonus’s. The sellers and manufacturers of things kept up the advertising pressure. Consumers became addicted to buying nice things. (Remember the slogan: shop ‘til you drop?) The western world went into a consumers’ feeding frenzy and the business world kept right on feeding it. Normal desire for a reasonable life became greed for more and more. Look in your basement and in your garage. Are they full of “stuff” you no longer use? Check your neighbour’s basement and garage. More stuff? That’s what went wrong. Collectively we bought too much stuff and borrowed too much money.

And this week the G8 – G20 Economic Summit will try to sort all that out. In order to create economic spring time, they’ll need to inspire confidence in ordinary working people. Can they persuade the public it’s safe to keep on buying and keep on borrowing, but within reason? Tough job.

What’s emerging from the series of G8 – G20 meetings since 2008 is this:
1. Blaming the banks. Increased regulation and taxes for the banks
2. Preserving the status quo: even though the big financial corporations have failed, we must preserve the system in its current form.
3. Bail outs are OK. Shifting of economic risk from the big institutions to the citizens/governments is OK.
4. Ordinary citizens can trust the G8 – G20 to do the right thing and it will all work out.

What should we expect form the June 2010 World Economic Summit?
1. Regulation and taxation of the banks.
2. Assurance that the current system still works.
3. Austerity measures to help governments recoup what they lost in the bail-outs and stimulus deficits.
4. Statements by our leaders that everything is fine and they’ve reached a satisfactory compromise.

Farming wisdom is not part of the G8 – G20 mentality. Their job is to take credit when things go well, and to take credit for fixing things when they go wrong. The closest they ever come to farming is closing the barn door after the horse has left.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Group Think and Disastrous Leaks

2010-06-15T13:44:00.000-07:00

British Petroleum’s disastrous oil leak in the Gulf is giving us a sinister example of how futile American group-think can be. George Orwell coined the phrase ‘group think’ in his classic book 1984. It was his sarcastic word for those times when we all think the same way, and we all get it wrong.

This horrible oil-rig accident is very serious: it’s a huge eco-disaster and it’s running out of control. There is no controversy about that. There is unanimity about getting it under control and stopping further damage.

What’s interesting is the American people’s group-think reaction. Somehow the people’s focus is turning toward President Obama; somehow the people seem to blame him. His popularity is dropping on the opinion poles for his failure to act. Or is it his failure to react? Or is it his failure to . . . to . . . ― “Well, we’re not quite sure what he should do, but he sure isn’t doing a very good job!” Isn’t it interesting how they seem to be blaming Mr. Obama for the oil-rig disaster?

And isn’t it interesting how President Obama feels the pressure of public group-think and has engaged BP’s management publicly, demanding that they do what they are already trying to do: namely, stop the disaster. And now, before the disaster is even under control, they’re talking about BP’s liability for the clean-up.

I am fascinated by the American public’s focus on the politicians. Surely they don’t really believe the President or the Senators and Congressmen can help. Or maybe they do. When Mr. Obama took control of the White House, the world was in the middle of a banking crisis. And by simply following the advice of his experts, he participated in saving the world from a banking calamity. Then, in the role of White Knight, he went on to chastise those banking leaders who caused the problem. And then he took several deep bows for his cool thinking under fire. He was so popular he was given the Nobel Peace Prize before he actually did anything.

Now the Gulf eco-disaster has placed his White Knight image in jeopardy: the president who can fix anything can’t fix this one. Nobody can fix it. Just as he took the credit for fixing the banking crisis, he is taking the blame for not fixing the oil-leak crisis. Group-think, American style: the president gets the credit for everything that goes well and gets blamed for everything that goes wrong. What interesting people our American cousins are. They love their heroes. And they love to despise their heroes when they disappoint.

Perhaps we Canadians can learn a lesson from them. In my book on investing Beyond the Bull, I put forth the idea of learning from others. Can we become better investors by learning from Americans’ impatience with their former heroes?

Remember the hero of the investment world in the 1990s? (Warren Buffet was only the icon.) The hero was your personal financial planner who became a financial White Knight leading us all on a crusade for personal wealth. All we had to do was buy the mutual funds he championed and hold them steadfastly until the End of Time. In financial Camelot, we would all retire rich and live happily ever after. I’m sure several Certified Wizards of Retirement Planning (CWRP) felt they should be nominated for a Nobel Prize.

But now it’s our stock market mutual fund investments that have blown up and are leaking our retirement savings. Have you noticed how equity mutual funds no longer advertise their ten-year returns? The stock market has become a retirement disaster for yesterday’s steadfast financial planners. Yesterday’s investment heroes have disappointed.

But we Canadians are different from Americans. They get disillusioned fast! We are slow to blame. They expect problems to be solved now! We will wait patiently and hope for things to get better. Americans criticize their president or fire their financial planners. We politely look the other way.

But my analogy doesn’t really work, does it? That oil well really is spewing black gunk into the Gulf’s rich waters and no White Knight has yet stopped it. But to stop the financial leak in our retirement plans, all we have to do is sell our stock market investments. It’s so easy. But financial group-think is hard to shake off when you’re part of the group. Maybe that’s why we Canadians are so patient with our investment disasters: we have no one to blame but ourselves.

Our advice? Invest in stock market mutual funds when the stock market is moving up. And when it’s not moving up, invest in something that is.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com
(Bullmanship code SS32)

Contact Ken directly at ken@castlemoore.com.

Invest like an Israeli

2010-06-09T09:49:00.000-07:00

Looks like Iran will be getting nuclear weapons. Today’s UN resolution levies sanctions against Iran unless they stop their relentless drive to become a nuclear power. Experts tell us the sanctions will not stop them: it’s just a matter of time until Iran’s Islamic fundamentalist government gets the bomb.

The United States has been adamant that Iran should not become a nuclear nation. But it appears the United Nations was less adamant, and the recent watered down UN sanctions against Iran reflect that lack of conviction. Iran will soon be a nuclear power. The Ayatollah will have the bomb. The concept of the car bomb takes on a whole new meaning.

How would you feel if you were an Israeli?

Most of us have no power in world politics. We are pawns. Collectively, the United Nations has made her move. And we pawns will learn to live with it. But the Israelis have a real problem. They can’t afford to be pawns and live with the build up of nuclear arms in the Arab world. They have to have attitude or they won’t survive. And as we see from last week’s news of potential arms smugglers trying to run the Israeli naval blockade of Palestine, they do have attitude. Israel is aggressive in the defense of her territory.

What can we learn from the Israelis? - Attitude!

Let me explain how attitude affects our investing.

Most of us have no power in world economics. In a few days the G-8 and G-20 nations will meet and take some sort of joint economic action. And we pawns will learn to live with whatever they collectively decide. And what will we learn? Does it really matter what they decide? We will have to live with it, no matter what. You see, nuclear war has already broken out in the financial world. In 2008 it was the banks that blew up. In 2009 it was the US auto manufacturers. In 2010 it’s several of Europe’s sovereign nations. G-8 governmental financiers are trying to repair the monetary world after the economic nukes have done their destructive work. And most of us are content to sit and watch.

In my book, Beyond the Bull, I urge investors to adapt the attitude of the financial warrior and abandon the sugar and spice world of bullish optimism.
Let’s not be like the naïve 1930s British Prime Minister Neville Chamberlain who tried to negotiate “peace in our time” with Adolph Hitler. Or the modern day pundits who advise dealing with Iran after she gets the bomb. Or today’s die-hard investors who have bought their equity mutual funds and will hold them no matter what.

It’s about attitude. Do I fight my own battles or do I simply follow the views of some economic guru or financial planner? When there’s danger, act decisively. We are not pawns in our own financial affairs. We do have power in our own worlds. Our opinions and decisions do make a difference in our own RRSPs and our own investment accounts. That’s where we can benefit from a little of that Israeli attitude. How should we act when our personal financial world is threatened by economic instability? Like the Israelis, we need to be aggressive in the defence of our territory.

Our advice is simple: sell your riskier investments and replace them with safer investments. We live in dangerous times.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Safety First: The June Economic Conference

2010-06-08T14:15:00.000-07:00

Protection
The media is full of interesting articles about Canada’s preparations for the big G-8 economic summit we will be hosting later this month. Their angle zero’s in on the physical protection of VIP participants from attack by protesters and terrorists. The focus has been on the amount of money and inconvenience that security problems are causing. Some Toronto residents are upset because they will have to show passes to get in or out of the secure area. Others are amazed at the high cost of security for the few days of this conference. The police and military will cost a lot of money and they will cause some inconvenience to those who live in the area. But they will protect the G-8 participants from external attack by protesters or terrorists. Security is expensive and it’s inconvenient: and unfortunately, we need it.

But importance of G-8 security runs much deeper than its price tag. The whole purpose of this conference is to deal with another kind of security: economic security. The real story of the G-8 summit is a world economic system that needs protection. It has been shelled by an economic turn down and a banking system melt down. G-8 VIPs are all acting as if those problems have passed – but ordinary people know better. General Motors has not been saved because a few thousand people borrowed money and bought a new Chevy. And the financial system has not been saved because the taxpayers of the world poured a few billion into banking’s black hole. The world’s economic whiz kids will be meeting in Toronto to concoct new rules that will prevent the bank’s big bonus boys from blasting another hole in your retirement plans. They are hoping to protect us from a recession/depression and more big 2008-style losses in the stock market.

“Two out of Three Ain’t Bad”
So far we’ve talked about two levels of security: second line security is the G-8 conference participants trying to protect us. Third line is the police and military trying to protect the G-8 conference participants. What’s missing? What is first line security?

First line security is us trying to protect ourselves. And this is where the financial security system breaks down.

How do ordinary citizens protect themselves from economic danger? We act conservatively. We save our money. We live will within our means. We don’t take investment risk. We pay off our debt. This is where the today’s economic safety system breaks down. If everyone becomes more economically responsible, who will borrow from the banks we just saved? If we make our old car last another year, who will buy that new Chevy and save GM from bankruptcy? If we pay off our mortgages, how will the Royal Bank set yet another new record in profitability? It’s dangerous for ordinary people to protect ourselves from economic danger. The system needs us to be the risk takers. Modern economic theory requires we consumers to keep on consuming – to keep on borrowing and keep on buying. And if we stop spending, the economic music will stop and everyone will have to rush to find a chair. First line security in the economic world is actually the opposite of security: when consumers stop consuming, they collectively pull the trigger that ends the whole game.

The Dilemma
First line financial security is us ordinary people NOT protecting ourselves economically – continuing to spend as if there were no danger. Second line security is the G-8 leaders giving us the confidence to keep right on spending. Third line security, the only real security, is offered by the police and military who are trying to protect G-8 participants from protesters and terrorists.

The music has already stopped. It stopped when America’s biggest blue chip financial companies and manufacturers needed to be bailed out. That sound you hear is not the music of a thriving economy: it’s politicians, bankers and economists whistling as they walk by the palliative care ward of America’s and Europe’s biggest baddest banks. It’s time for typical investors to find a chair.

What Should We Do?
In my book, Beyond the Bull, I encourage investors to act like financial warriors and leave behind the bullmanship of the economists’ and the politicians’ worlds. The June G-8 conference will feature the bull – optimistic talk and reassuring rhetoric. But in the background there will be hard working police and soldiers trying to protect people. Those are the real protectors: they have discipline and they do their work methodically. In the financial world, that’s how we all should act.

Protect yourself. Spend prudently. Save your money. Invest more conservatively than you ever have before. Pay off debt. Live well within your means.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Two Steps and a Stumble

2010-06-01T08:31:00.001-07:00

Do American rules work in the Canadian Economy? 20th century market technician, Edson Gould, devised a rule about interest rate increases: they call it Two Steps and a Stumble. In Gould’s day, if the US Federal Reserve Board raised interest rates twice (two steps), the stock market would fall (“stumble”).

Today the Bank of Canada raised interest rates: that was step one. I wonder if Gould’s guideline applies to the Canadian Stock Market now. In my book, Beyond the Bull, I observe that the rules of the stock market seem to change over time. What worked in the 1990s might not work now. Gould was a market technician from the 1920s to the 1970s. This quotation will give readers some flavour for his era: “The Dow Jones Industrial Average came down from 120 in the summer of 1931 to 40 in the summer of 1932, doubled to 81 in September, kicked back to 50 in February, 1933 and doubled again to 110 by July, 1933.” - Edson Gould. What a time that must have been! Today’s stock market volatility seems tame compared to the 1930s.

Will the rules or guidelines of a bygone era help investors today? If the Bank of Canada (B of C) raises its rate again (step two) will it trigger a decline in the stock market?

The B of C raised interest rates to protect us from inflation. If house prices go up, that’s inflation. If food prices go up, that too is inflation. When energy prices, consumer prices, metals prices – when prices go up, that’s inflation. The Bank of Canada just raised interest rates to protect us from rising prices.

When the stock market goes up – is that inflation? If your RRSP is invested in stocks or equity mutual funds, and they go up in price, is that inflation? Maybe inflation is not all that bad.

If Gould was right, two increases in interest rates triggers a decline in the stock market. That means your stock market investments are at risk. Is it correct for the B of C to raise interest rates knowing that it puts RRSPs and pension plans at risk?

Running the Bank of Canada is a tough job. When you mess with interest rates, it helps here and hurts there. Damned if you do and damned if you don’t.

But most readers are not running the Bank of Canada. You’re running your own personal finances. What will you do?

Most readers will do nothing. Most did not learn from the 2008 – 9 stock market slam-dunk. Most Canadian investors would rather ponder the strategies of the Bank of Canada rather than ponder their own strategies. And if the stock market does stumble, most investors will suffer their losses and blame someone else for their demise. And most will say: “Don’t worry, it’ll come back some day.” To the “Don’t Worry Be Happy” crowd, we say: read the second paragraph above, the excerpt from Edson Gould’s article about the stock market in the early 1930s.

Our advice? Reduce risk. Own fewer equities than you normally own. These are dangerous times for stock market investors.

Welcome to Jamaica, Mon

2010-05-27T08:39:00.000-07:00

State of Confusion
Kingston Jamaica is in a state of emergency: the police are attempting to arrest an alleged leader of a drug and guns dealer. There have been gun battles off and on for a week. But here seems to be some confusion about who are the good guys and who are the bad guys. Some Jamaican immigrants claim the Jamaican police are corrupt, sometimes using their power to extort money from ordinary citizens. And most accept bribes from organized crime. The press is hinting that some Jamaicans portray this alleged gang leader as a modern day Robin Hood, selling drugs and guns to rich Americans and giving some of the money to poor people who live in his home neighbourhood.

In Canada we automatically assume the police are the good guys and the alleged gang leaders are the bad guys. We assume the establishment has integrity. No so in Jamaica. They live in a different world.

Spectrum of Trust
We Canadians trust our institutions implicitly: we believe what the authorities tell us. Jamaicans implicitly distrust authority figures. If there were some way to measure the trust inherent in a society, Canadians would rank very high – we just trust people – it’s our nature. And Jamaicans would be at the other end of the spectrum – their society doesn’t trust anyone: its their nature.

In my book, Beyond the Bull, I discuss how our human nature helps us or hinders us in the investment world. Which is more useful: trusting the system or distrusting the system? – acting “Canadian” or acting “Jamaican?”

Let’s look more closely at Canadians’ propensity to trust the system. The danger is the we trust too much. Too much trust becomes naiveté. The famous 19th century American showman P.T. Barnum had a saying about those who trust too much: “There’s a sucker born every day.” Are we suckers in the investment world if we trust too much in the establishment?

Do we trust our government too much? When they bail out the banks and auto makers with our money, will it work? When they introduce a new tax, will that work?

Do we trust economists and bankers too much? When they tell us it’s safe to borrow money and buy a bigger house or a new car, should we believe them? When they tell us mortgage interest rates will go up, is it true?

Do we trust our investment advisors too much? When they tell us it’s safe to invest in the stock market, is it really safe? When they tell us stocks are better investments than bonds, is that accurate?

Too much of a good thing
Regular readers will know this writer’s view: every Canadian investor needs a little Jamaican spark in them. We would all benefit from a little disbelief in the system. The American system broke down in 2008-9 when the biggest blue chip bank, insurance company, mortgage company, stock broker and car manufacturer in the USA needed to be rescued by the government. This year the European common market is breaking down because they trusted the Greeks, the Spaniards, the Portuguese, the Irish and the Italians too much. One reason the world’s economies are breaking down is that we all trusted too much. The hallmark of twenty first century investing is naiveté. Naïve investors, from the most sophisticated banks and institutions right down to ordinary individuals trying to save for their retirement – all trusted too much.

The cure
What’s the cure for naiveté? Should we all take a lesson from down trodden Jamaicans who are trying to protect their modern day Robin Hood? Or are those poor souls just as naïve as yesterday’s bankrupt bankers?

The “cure” for naiveté is responsibility. Trust yourself. Take responsibility for yourself. Keep yourself in a state of alertness about what can go wrong in your world and react to it. The cure for naïve Canadian investors and unbelieving Jamaicans is the same: “to thine own self be true.”

In a few weeks or months, peace will return to the poor side of Kingston Jamaica. The police will still be the police and the drug business will still be the drug business. And the poor will still be poor.

Over the next few weeks or months (or years), the financial markets will do whatever they do. But for millions of investors things could be quite different. If the stock market goes down like it did in 2008, their retirement could be less comfortable than they had expected. The key for Canadian and American investors is to preserve capital in risky times. Poor Jamaicans have little hope of escaping poverty. But Canadian and American investors do have hope of holding on to their life styles. We must take responsibility, figure out who are the good guys and who are the bad guys and protect what we have.

In economic terms, we live in high risk times. Dinosaur capitalism is dying. Don’t trust big government or big business: those who used to be good guys are no longer so good. Sell your higher risk investments and keep your capital safe. To thine own self be true.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Focus Too Narrow

2010-05-21T08:43:00.000-07:00

The financial press has missed the boat. In its coverage of May’s extreme volatility in the stock market, they have focused on European debt problems. Reporters worry that the economic problems of Iceland and Greece will spread to Italy, Portugal and Spain. They blame the stock market’s wild ride on economic problems. But they may have overlooked the real story.

The North Koreans did not miss the boat. Apparently, earlier this year, a North Korean submarine fired a torpedo at a South Korean naval vessel and sunk it, killing 45 sailors. And when the United Nations called them on it this week, the North Korean dictator threatened all out war on South Korea. North Korea believes that China is her ally. South Korea believes that modern G8 nations are her ally. Did North Korea’s navy commit this act to intentionally start a war? Have they been preparing for war for years? Was the sinking of the South Korean vessel supposed to trigger war? Didn’t George Bush include North Korea in his Access of Evil speech when he was preparing America’s response to the 9 – 11 terrorist act? The financial press has missed the boat on this long-storming sea of trouble.

On May 6, 2010 the Dow Jones Industrials dropped 900 points in the twinkling of an eye. Is it possible that Fat Finger Day happened because of a leak in naval news? Did someone find out the results of the UN study before it was released and those fat fingers pushed panic button, selling stocks in anticipation of renewed conflict in Korea?

Or maybe the real story is a cold war – an icy stand off between China and the west. That would certainly end the rosy glow of China – American trade relations. That would certainly change the investment world.

The heads of state of various countries will continue to posture and position themselves economically and militarily. And financial press will continue to report whatever they feel is important. What will you do?

Don’t you miss the boat. Remember what happened to the stock market in late 2008 and early 2009? It dropped in half. Remember what happened to your RRSP? Were you one of the millions of investors afraid to open their 2008 year end investment account statements? The stories about European debt indicate an increased level of risk in the economic world. The threat of war, cold or hot, also indicates an increase in the level of risk in the economic world. It’s time for ordinary investors to DECREASE the risk in their own personal economic worlds. It’s time to sell your risky securities and buy safer ones. Don’t allow your portfolio to be torpedoed again.

Financial Addiction

2010-05-20T10:20:00.000-07:00

Have you ever tried to quit smoking? All the education in the world doesn’t help. They can tell you about diseases and show you graphic photographs of cigarette sickness; they can make laws about where you may or may not smoke – but that’s not what it takes to quit. In order to shake that addiction, you have to suffer through the withdrawal symptoms. You have to feel those urges and not satisfy them. It’s your will against the addiction: and you have to win.

In my book about investing, Beyond the Bull, I discuss the concept of financial technique… the opposite of addiction. A financial technique involves scanning the economic world for certain events, and react to them by buying or selling our investments in a preplanned way. And it’s about learning from our experience. It’s a way of using ration and reason in our investing. But, that doesn’t work for some people. For some people, no matter what the economic world does, they keep right on doing what they’ve always done. Are they addicted? Are “buy-and-hold” investors and their advisers addicted to the stock market? Is it some perverse form of gambling addiction?

Education
I have written several articles hoping to alert people to the dangers of investing in these times of financial change. Check this site: (http://kennorquay.blogspot.com/)

On May 13, Financial Frost – in May pointed to the dangerous and dramatic increase in volatility in the markets. On May 6, Helen’s Greek Restaurant highlighted the twenty first century phenomenon of millions of people borrowing way more than they could ever hope to repay. On April 30, Brain Feel vs. Gut Feel reviewed another indication that the stock market is topping: the excess optimism of stock market investors. April 22’s Price Tag on a Viking Curse highlighted the Icelandic people’s defiance of their own government when they voted to default on their government’s loan guarantees. In Trudeau was Right on April 14 I told how the old rules of investing had become obsolete, and new rules were emerging. The game has changed. On April 14, Consequence of Error showed that there are times to take risk and times to avoid risk. On March 31, I discussed why house prices will fall in the last half of 2010.

The common theme in these articles is investor education: if investors know more about risk, they can protect themselves by selling out of a falling stock market. But logic and reason won’t work for those who are addicted to the stock markets. Like the alcoholic, they’ll have to hit rock bottom before they’ll change their habits.

What’s it like for a stock market junkie to “hit rock bottom?” When an alcoholic or drug addict sees his life ruined, or when a smoker gets his first heart attack, he becomes open to change. Is it the same for buy-and-hold believers? How much money will they have to lose before they see the problem?

Alcoholics anonymous is a sophisticated program to help alcoholics overcome their addiction. Step one is admitting you have a problem. Maybe those who are frozen in investment paralysis don’t realize they have a problem. Is that possible?

Not only is it possible, it’s intentional. Sophisticated financial salesmen continually tell us everything will be OK and it’s fine to hold your stocks and even buy more at any time. Any down turn of the stock market is merely “a correction” – it went up too far too fast and is correcting down to a normal level. They command an array of skilfully crafted charts and statistics to intentionally portray the stock market as safer than it is. No wonder the investing public is hooked on stocks.

My book, Beyond the Bull, takes a cold look at monetary reality: the financial world is rife with sophisticated intelligent salesmen who influence people owning billions of dollars in investments. We are not merely talking about fast-talking hucksters conning unsophisticated small investors. The big American investment firm Goldman Sacks has been accused of conning the most sophisticated institutional investors in the world. Large and small alike, these are the investors from whom the salesmen make their living.

This is where the addition occurs. Those who rely too heavily on one adviser/salesman should ask themselves if they are somehow hooked on the charm and the intelligence of that financial salesman.

Our advice is simple: check your monthly statements. How have you been doing over the past ten years? Most Canadian stock market investors will be disappointed when they realize how poorly they’ve done. Most American investors will be angry – they’ve lost money, on average. Once people realize the buy-and-hold approach no longer works, it is easier to sever their relationship with the charming and intelligent salesman to whom they are addicted.

Those readers who have both quit smoking AND ended a long term relationship will tell you it’s sometimes easier to quit smoking.

Financial First Frost – in May?

2010-05-13T11:23:00.000-07:00

First frost is a warning of things to come. Summer ends, winter approaches, and the seasons change once again. Time to put away your shorts and get out your woollies.

The action in the financial markets last week was should be viewed in the same way: a first-frost warning of change in the financial seasons.

Last week’s stock market mini-crash seemed to come out of nowhere. The story of Greek’s financial downgrading and rescue package was well know by May 6. Isn’t the stock market supposed to discount this type of news? Market technicians love to remind us that the stock market moves ahead of the news. Their theory is that the buyers and sellers somehow adjust their investment positions to take previously unknown risk into account. In this case, portfolio managers would have bought or sold currencies, stocks, gold, bonds, or t-bills to adjust for the new risk that Greece’s problems created.

But that’s not what happened here, is it? So far this month, every time new news about Greece appeared, the markets went down. And when the Europeans announced their bail out program, the markets recovered. The markets did not anticipate or discount anything: they reacted (over-reacted?) to every news announcement. And this week, the markets seem to have stabilized in reaction to the rescue package.

What does all this wild up-and-down action mean? Was last week’s volatility a first-frost warning of a change in the financial seasons, or was it just a freak spring snowstorm?

Last week’s significance is not in the news about Greece. Their financial fate will be determined by governments, big unions, and the gods of Mount Olympus. What’s important to ordinary investors is the volatility ― the explosion of wild swings in a variety of financial markets. In the months before the discovery of financial abuse in Greece, the markets had been quite boring. From day to day, they’d go up a little or down a little, but there was no real action. Then suddenly, just after 2:00 p.m. on Thursday, May 6, the Dow Jones Industrial Index dropped like a stone. At first, they blamed it on a trading glitch ― some trader added too many zeros to his sell order. Next thing you knew, the stock markets went wild, currencies went ballistic, commodities went crazy, and financial volatility spiked up. (Volatility is a measure of how far prices fluctuate in a short time.) It was last week’s volatility that is significant, not the news about Greece.

Times of low volatility, like the winter of 2009/2010, are sometimes referred to as the calm before the storm. The rule of thumb is: when volatility returns, the direction of the market will be in the direction of the volatility. Eruptions of volatility usually occur in two ways.
1. For the overall stock market, long-term tops often occur in times of low volatility and the increase in volatility triggers the markets’ new down trend.
2. For individual stocks, long-term bases often occur with low volatility. The stock goes nowhere, in a sideways trading range for a long time. When the stock moves out of that ‘base’ into an up-trend, it will be happen on increased volatility and volume of trade.

Thursday, May 6, 2010, (now called ‘fat-finger day’ because of the story that some trader accidentally sent in a sell order with too many zeros) witnessed a huge increase in volatility in many different financial markets. The direction of that volatility created first-frost warnings in the following new trends:
New Down Trends New Up Trends
1. Stocks 1. Bonds
2. Crude oil 2. U.S. dollar
3. Base metals (esp. copper) 3. Japanese yen
4. Canadian dollar 4. Gold

It’s time to test the old market technician’s notion that the stock market discounts the news. Fat-finger day gave us a clear warning that we are investing in high-risk times. Prices can change really fast. It’s time for ordinary investors to reassess the risk in their portfolios. It’s time to make those adjustments that will protect your investments from a possible repeat of the 2008 stock market decline. By doing the buying and selling now, you will be anticipating the next ugly financial news surprise and will not need to react to it. Bring in your harvest before first frost. Will you do it? Or will you react (or over-react?) to the next fast-breaking news story?

Ken

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, both by Ken Norquay, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

To sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com.

Contact Ken directly at ken@castlemoore.com.

Helen’s Greek Restaurant

2010-05-06T18:58:00.000-07:00

The chief cook and owner of Helen’s Restaurant visits Greece, her homeland, whenever she gets a chance. She knows the people. She’s one of the people. And she doesn’t understand why there is so much trouble in Greece these days.

I explained to her that the Greek government borrowed billions of Euros and now they have to pay it back and can’t. And now, the other nations of Europe and the International Monetary Fund (IMF) are refinancing them, but they are insisting that the Greeks make changes so they will be able to pay back the loans. And the people (especially the unions) do not want to make these changes.

The financial press has featured story after story about the very high percentage of Greeks who work for the government and the very low percentage who pay income tax. The press is acting as if we should have seen this default coming.

But Helen is the colour commentator. She knows the up-close-and-dirty bits.

At first was hard to get her to stop bluffing. She kept saying: “It’s only politics,” and dismissing it. But I would not be thrown off: “No, it’s not politics. They borrowed billions and now they have to pay it back.” Once she realized that I understood the real problem, she shifted her attitude. She started to tell me some of the socialist scams that have been going on in Greece.

She talked about the farm subsidies. Let’s say some bureaucrat decided that the Greek government would pay a five Euro subsidy for each sheep that a farmer had. When the civil servant asked the farmer how many sheep he had, the farmer simply made up a great big number. And no-one from the government ever went out into the pasture and counted the sheep.

She talked about holiday pay: how Greek civil servants received double pay when they took certain holidays.

She talked about Greek citizens notoriety for tax evasion.

I could just see it in her eye. She had known all along that the Greek people had been scamming their government. When she discovered that I understood it too, she stopped trying to deny it and revealed just how deep the scamming was.

This is the process that is going on in Greece today at the national level. The unions are very well aware that the jig is up. The gravy train has stopped. The feeding trough is empty. The game is over. But they are in denial. Greek citizens think the IMF and the other European nations don’t REALLY know they’ve been scammed; and with a little bluffing, they will be able to play the game a little longer. The current demonstrations are Greek workers pretending they are entitled to scam the Germans even more. (Helen pointed out that some Greeks still harbour resentment against the Germans from the Second World War.)

The Continuing Saga
The Greeks conned Europe in the same way the US sub prime mortgage deal-makers conned the banks. Massive loans were made to people who could not pay back the money. The Bank of Iceland did the same thing (refer to my previous blogs on this topic.
Western economies are built on people borrowing and paying back. Borrowing and defaulting doesn’t work. Based on the articles in the financial press, we currently live in the world full of defaults:
1. US sub-prime mortgages
2. Bank of Iceland
3. Dubai
4. Greece
5. Coming soon to a theatre near you: Ireland, Spain, Portugal, and Italy.

And don’t forget the 2008-9 bail outs for the world’s biggest auto manufacturer, bank, stock broker, insurance company and mortgage company. They defaulted too, but got by with a little help from their governments.

Helen is the chief cook and owner of her own financial entity in Canada. She sees we live in risky times. Is she financially safe here in Canada? Will people keep coming to her restaurant in tough times? Will her RRSP survive? In her quiet way she did know the Greeks are in trouble: the nation can no longer live by spending more than it earns. Yet, somehow, she thinks she’s safe here in Canada. Surely it could never happen here.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Brain Feel vs. Gut Feel

2010-04-30T07:18:00.000-07:00

Stock market analysis is a brain-power business. It’s not at all touchy-feely. At least, that’s what the analysts would like us to believe.

They love to grind the facts and figures of the latest news stories through the discipline of logic. Right now, the main focus of analysts is on Europe. A cloud of volcanic ash has played havoc with the tourist industry and a sovereign debt crisis is rocking the credit markets. Logically, none of this news is good for the world’s complex economy: the financial world is a riskier place than we had thought. On the other hand, the once bankrupt General Motors recently announced refits for several of its factories. Corporate profits seem to have rebounded from the depressed levels of one year ago. Logically, this is good news for the stock market: the economy is not as sick as we had thought. To what investment conclusion would our logical brains come, based on this analysis of current economic events?

Right now just over 70% of investment managers are bullish on the stock market. That’s the conclusion they came to. (The other 30% are either bearish or neutral.)

What should we do?
For every good-news story, there is an equally compelling bad-news story. And the Canadian stock market has gone sideways for the past month, reflecting the inconclusiveness of logical stock market analysis. So what should we do? Should we invest in the stock market right now? Logic doesn’t help much, does it? Instead of relying exclusively on our intellectual brain for guidance, let’s try another faculty: our instinctive gut feel.

Remember how we felt in the winter of 2008-2009? The market had utterly collapsed, down almost 50% in nine months. Our guts were in knots, growling over the losses. That’s the mysterious thing about gut feel: in the investment world, it’s a contrary indicator. When we feel least confident (as we did in the winter of 2008-2009), it’s the best time to buy. Contrarily, when we collectively feel most confident, it’s the best time to sell.

Determine your gut feel ― and act against it
In my investment book, Beyond the Bull, I explain how the Theory of Contrary Opinion works: the best time to buy is when everyone is negative and the best time to sell is when the crowd is optimistic. This is the irony of using gut feel to make our investment decisions. Once we determine what our gut feel is, we should act against it. When we feel most bullish about the market, we should sell. When we feel most bearish, we should buy. No wonder so few successful investors use gut feel in their buy-sell decisions. It’s like betting against ourselves.

How do you feel about investing in the stock market right now? Remember, about 70% of investors believe the market will be higher in six months than it is now. Logically, this is a time to be thinking ‘sell,’ not ‘buy’. But logic is not what we are being asked to use right now. The question is: How do you feel about investing in the stock market? Feel ― not think. In the investment world, it is difficult to separate our feelings from our thoughts. It is hard to separate our brains from our guts.

Let the Computer Do the Thinking
In the stock market, money is made by buying and selling, not by thinking and feeling. To assist in the buying and selling process, we use objective investment models ― an objective way of determining whether the stock market is going up or down. Once we have found that objective model, we let the computer do the thinking and feeling. We do the buying and selling.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Price Tag on a Viking Curse

2010-04-22T07:32:00.000-07:00

It feels like some ancient shamanic curse has been unleashed on the descendants of the Vikings!

In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.

Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.

Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?

The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.

In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.

We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.

And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.

Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?

There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!

Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.

Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.

The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.

Ken

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.

Trudeau was Right!

2010-04-14T12:06:00.000-07:00

Years ago Prime Minister Pierre Elliott Trudeau said the twentieth century belonged to the USA and the twenty-first century belonged to Canada.

And now, as the Canadian Dollar (CD$) flirts with the US Dollar (US$) on equal terms, it looks like his prophecy is coming true. Canadians have become economically smug these days. Here’s why:
1. Our banking system has held up better than the American’s.
2. Our economy suffered less in the down turn and has expanded more in the up turn.
3. Our real estate market is still in an up trend; theirs is in a hopeless down trend.

Canadians are not used to being smug. In international circles our citizens are know as polite and unassuming people. Our soldiers are well trained and fierce fighters. We have a good reputation. But, if Mr. Trudeau was right, Canada will soon be stepping up to the plate as a world leader.

Could this be real?

Are the reasons I listed above as to why Canadians are economically smug be the same reasons foreigners are willing to pay the same price for a Canadian Dollar as they are for a US Dollar? The sceptics are saying the high CD$ is temporary, caused by a short term surge in oil and metals prices, and it will cool back down once the current commodities boom is over.

In my book, Beyond the Bull, I discuss the idea of over-analysis. Sometimes we ramble on about what we think we know; we use the same tired old thinking patterns that worked in the past, to sort out what might happen in the future. And, if the rules change, as Mr. Trudeau prophesied, the old ideas don’t help us. If this is Canada’s century, we’ll have to learn to think Canadian instead of American.

Beyond the Bull encourages us to “feel” as well and think. Rather than run in mental circles of out dated logic, just kick back and say: “How does this feel?” Lets try it.

Review: CD$ came into the twenty first century in a down trend. It hit the bottom in the winter of 2002 at 72 US cents. By autumn 2007, it ripped upwards through par to $11.1 – then reversed and dropped back to par within only a few weeks. It fluctuated between $1.00 US and $1.05 US for four months before dropping to 77 cents again, one short year after our glorious run to $1.11.
We Canadians weren’t used to having such a strong currency. Somehow, we felt relieved that CD$ had returned to normal; a CD$ selling at a huge discount to the US$.

But now CD$ has crept back up to par against the US$ again, it somehow feels different. Last time, in early 2008, there was a flurry of Canadian buying of US cars with their high priced CD$. It was as if they wanted to cash in on their short term good luck and buy up those cheap US cars. This time there is no feeling of “temporary” or “short term” around a Loonie at par with a US Green-back. This time it feels different.

What should we do?

Well, let’s do the typical Canadian thing: doubt our new found prowess as world economic leaders and buy a cheap US car with our high priced Canadian dollars… just in case. Feels right, eh?

The Financial Philosopher
Ken Norquay, CMT
President, Market Street Investment House

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.

Consequence of Error

2010-04-14T12:01:00.000-07:00

Saturday’s tragic plane crash in Russia took the lives of many important military and government officials in Poland. And now, the obvious questions are being asked: why were so many top officials on the same plane, whose fault was it, what can be cone to prevent this type of national tragedy from happening again? We send our sympathy to our Polish friends.

But we also wonder about human nature. Is there some lesson we can glean from this event that will help us manage our own lives more prudently?

The key lesson from the Polish pilot’s now obvious mistake is to reassess our understanding of risk. What is risk? How can we realistically assess the risk in a situation BEFORE a tragedy? How can we avoid tragedy before it happens?

When I was a young officer in the Canadian Armed Forces, the pilot trainees were taught about the consequence of error. “If I make a certain choice and that choice eventually proves to be an error, what will the consequences be?” So, if a pilot were advised to go to another airport because landing at this foggy airport was too dangerous, the consequence of using another airport would be that all his passengers would have to be bussed to the correct destination: they would all be late. And if he decided to try the landing in the fog, and that proved to be an error, the consequence would be a crash. Canada’s student pilots would have had no trouble making the decision to choose the alternate airport because of the huge difference between the two consequences of error.

In my book, Beyond the Bull, I discuss the use of the military mind in managing our investments. Let’s see if this consequence of error method can be used to help us improve our investment skills.

Financial planners and mutual funds salesmen tell us that we should buy good quality stocks and hold them indefinitely. The problem with this approach is that it hasn’t worked for ten years. Today, the Dow Jones Industrial Average is approximately the same as it was ten years ago. The Standard and Poore’s 500 Index is about 15% lower than it was ten years ago. Canadian investors did better: we made an average of about 2% per year for those same ten years. The investment industry’s “buy-and-hold-for-the-long-term” choice has turned out to be an error. And the consequence of making that error has been a sub-standard rate of return for ten years.

But, what about the future? What would the possible consequences be if continuing to hold stocks for the long term proved to be an error? What if we simply sold our mutual funds and kept the money. What would be the consequence of that approach, if it proved to be an error?

Choice #1
If we continue to hold our equity mutual funds, and that proves to be an error, we run the risk of losing our retirement nest egg. The stock market dropped over 45% twice in the past decade. It could happen again: and if it does, the consequence of holding our stocks through that period is losing half of our retirement savings. (NOTE: this is not only a problem for small investors: big pensions lost many billions of dollars of retirees’ money in the two monumental stock market declines of the past ten years. It’s not just about your RRSP – it’s HUGE. If the stock market drops again as it did in 2008-9 or 2001-2, it will seriously affect the retirement plans of almost all Canadians.) This is the consequence of error of holding stocks when the stock market falls.

Choice #2
What if we sell out; and selling out proves to be an error? Selling out would be an error if the stock market went UP and we were not invested because we had sold. And the consequence of that error would be that we would earn only 2 or 3% on our cash instead of a much large return if we had stayed in the stock market.

This consequence of error exercise helps us develop judgement. In the case of the Polish airplane crash, there was an error in judgement that killed too many people. In the case of the stock market crashes, an error in strategy will impact the retirement plans of millions of Canadians. But the goal of the consequence of error exercise is valid: to help us assess risk properly and to reduce the effect of the errors in our lives.

Obviously we have more than just two choices in the investment world. I encourage investors to take advantage of the errors of other investors and to limit the effect of our own errors. Try to do what the mutual funds industry tells us can’t be done. Try to invest in securities that are rising in price and not in securities that are falling in price. Then we should plan the type of errors we want to make.

And what type of errors do we plan to make? (Obviously, we are trying to NOT make investment errors.) But, when we DO make an error, we’d like it to be the type of error illustrated in choice #2 above: an error where we earn a lower rate of return that we could have. And what type of errors do we plan NOT TO MAKE? The error shown in choice #1: holding investments in down trends and losing our capital.

In a perfect world, we wouldn’t make errors. But we live in this world. And in the investment world, we spend a lot if time flying in the fog. So we need to plan our actions in full awareness of the consequences of possible errors – and then be prepared to live with those consequences.

Ken Norquay, CMT
President, Market Street Investment House

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). This article and others by Ken are also available at http://kennorquay.blogspot.com. Contact Ken directly at ken@castlemoore.com.

Your house’s last hurrah: setting up the top

2010-03-31T13:02:00.000-07:00

The final upsurge of the 1996 to 2010 real estate boom is at hand. Sometimes history repeats itself. Readers who are investing (speculating?) in the real estate market should review this carefully . . .

In February, I wrote an article describing how the 1987 stock market crash set up the 1989 real estate market top (http://kennorquay.blogspot.com/ ― Friday, February 5, 2010.) House prices declined from 1989 to 1996. Tough times.

Then I pointed out that the 2008 stock market crash seemed to have been followed by an identical series of financial events and wondered if perhaps a real estate market top is at hand.

What Happened the First Time
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. (In the USA. they refer to trust companies as ‘savings and loan’ companies.) And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988/early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses, which resulted in an even greater flurry of home sales and house price increases.
5. In April 1989, a hush settled over the Canadian real estate industry. The top of the cycle had arrived.
6. House prices dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto (just south of The Bay); the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.

What’s Happening This Time?
1. Many investors were fed up with the stock market after the 2008-09 crash, when market averages dropped 50% in only nine months. Many disgruntled investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America, and the continuation of the US sub-prime mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to create a flurry of real estate activity. Volume of sales is up and prices are up. (Reference: Toronto Real Estate Board, February 2010)

The 1987 crash sequence led to a top in real estate in 1989. I wonder if the 2008 crash sequence is setting up a top in real estate prices now.

The Trigger Has Been Pulled
In 1988-89, the first up-tick in mortgage rates triggered the last surge of home buying. And when that surge of buying ended, the top was in. Earlier this week (March 29, 2010), Canadian banks announced up-ticks in their mortgage rates.

What to Expect
If this pattern is repeated, we should see a surge in home sales starting right now. Buyers who had been holding off will rush into the housing market. Volume of home sales and house prices will rise dramatically in April and May 2010. And once that buying spree is over, house prices will start to fall: the game will be over.

We hear that mortgage bankers are run off their feet this week, locking in today’s mortgage rates for 5 years because borrowers are worried that this is the beginning of many mortgage rate increases. It’s like a financial feeding frenzy to lock in these low rates now.

What to do about it
If you are an owner of investment real estate, you should sell to the surge of buying that lies immediately ahead. If the market does drop, as it did in the early 1990s, investors with lots of cash will be poised to buy at the bottom.

If you have been thinking of selling your too-large house and buying a smaller one, do it now. If you are more venturesome, you might consider selling now and renting for a few years.

If you are an ordinary homeowner who lives in the right size of house for your needs, there is nothing for you to do. You watched the price of your house rise these past 14 years, and now you’ll see it fall for a while. It’s all the same. Home is home, regardless of what you think it’s worth.

How long will Canadian house prices continue to go up when American house prices are going down? My guess: 90 days more. Then the game will be over.

In my book, Beyond the Bull, I talk about what it takes to become a better investor. One of the five keys is knowing when to sell. Another key is learning from your own experience (remember 1989 to 1996?). Another key is learning from the experience of others (think about our American cousins now or the Reichmann brothers in the early 1990s.).

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.

Financial Olympics

2010-03-30T09:22:00.000-07:00

People love athletic competition: there’s something exhilarating about winning. We seem to get a high from Olympic victories.

But there is another international competition going on this year. It’s a friendly competition between two great super powers, China and The United States. It involves currency. Right now, the Yuan is pegged to the US Dollar: it’s a dead heat. But, unlike the Olympics, the goal in a currency race is to lose. America wants to come in second. America wants the Chinese Yuan to become a free-floating currency like the Canadian Dollar. Their feeling is that, if allowed to float freely in the international currency arena, the Chinese Yuan would float upwards. That opinion is shared by most currency analysts. It’s as if the Chinese monetary athletes are taking performance-inhibiting drugs to keep the level of the Yuan low. If the Yuan were allowed to rise against US Dollar, Chinese goods would become more expensive for American consumers, and American goods would become cheaper for Chinese purchasers. A higher Yuan would favour America: the Americans want their currency to finish second. In the international currency Olympics, the winners or losers are the average working people of China and America.

US President Obama has alluded to this problem in some of his recent speeches. He is renewing his pressure on the Chinese to allow the Yuan to appreciate. And if the Chinese do not cooperate, America’s veiled threat is protectionist trade regulations. America could erect artificial barriers to Chinese imports into the USA.

But there’s another way to look at this race. Is America really talking about devaluing her own currency? That’s how it looks to the Chinese.

Right now China holds about 10% of America’s public debt; about $790 billion. Some analysts estimate that China owns approximately double that if they include non- Federal government securities. If these estimates are accurate, and the US Dollar was devalued by 10% vs. the Yuan, the Chinese would lose about $158 billion. Ouch!

And right now our American cousins are running massive government deficits – their country is going even further into debt. In order to finance that debt, they borrow. They sell treasury bonds and bills. And, so far, the Chinese have been willing buyers.

And now the Americans are rocking the boat so their consumers will lose [Americans would pay more for cheap Chinese imports.] and their workers will win [American exports would become cheaper for Chinese buyers.]. They talk about a more level playing field. They want the Yuan to win and the US Dollar to be devalued.

And how should the typical Canadian investor react to the Sino-American Currency Olympics?

As usual, our advice is to be over-cautious. An unnamed Chinese philosopher is credited uttering the curse: “May you live in interesting times.” “Interesting times” means challenging, disruptive times. You can see that his curse has come true: we do live in financially interesting times. In the past ten years, the stock market has dropped in half twice. We’ve had an international banking crisis. The prices of oil and gold have sky-rocketed. American house prices have dropped sharply. We’ve had two recessions. The world’s biggest manufacturer, bank, brokerage firm, mortgage company and insurance company all had to be bailed out by the American government. People have had to re-think their retirement plans. In the same way that the 1980s and 1990s were times of economic growth and stability, the 2000s have been times of instability and economic chaos. And now the Americans and Chinese are squaring off for a currency contest. These seem like good times to be over-cautious.

If financial instability increases this spring, it would be a good time to sell your higher risk investments [stocks, investment real estate] and purchase less risky securities. [Bonds, treasury bills] And how can we tell if instability increases? The stock market will drop. A stock market drop of 13% or more from last week’s market highs could indicate that the current 54 week rally has reversed. The risk is that the decline that began in 2007/2008 could begin again. In the financial Olympics, it’s sometimes best to not enter the race rather than lose.

Ken Norquay, CMT.
Financial Philosopher
President
Market Street Investment House
ken@CastleMoore.com

Links for buying Beyond The Bull:
www.gobeyondthebull.com Bullmanship code: K44N

Passing the Bucket: the Citibank bailout story.

2010-03-30T09:06:00.000-07:00

In early 2009, the American government bailed out Citibank, the world’s largest bank, by buying treasury shares. The USA wound up with 25% of the outstanding shares and Citibank got $25 billion of cash in the kitty. (In addition to buying shares, American tax payers loaned Citibank another $20 billion. Citibank has already repaid that loan.) And this week, the US Treasury announced it will start to sell its 25% stake, 7.7 billion shares.

What effect do you think this sale might have on the price of Citibank’s stock?

Well, on the day the sell announcement was made March 29, 2010, Citibank shares dropped 3% with a trading volume of over one billion shares. One billion shares is hightrading volume for this stock, but it has traded over 2 billion shares per day several times in the past two tumultuous years. As a market technician, I judge today’s trading action to be a significant indicator of things to come, but not an outrageously obvious danger signal.

One of the most important influences on any stock’s price is the presence of a large seller or buyer in the market. The sheer size of gigantic buy or sell orders can move the stock’s price up or down. Big institutional traders know this, and use stealth in their buying or selling. But when a shareholder of the size of this one (the US government) sells a stake as big as this one (25%), securities law requires the big buyer or seller to disclose their intention so as to be fair to all the smaller shareholders. That’s why the US Treasury made this week’s announcement. If it wasn’t a legal requirement, it would have been more effective for them to sell their giant stake quietly, with no fan fare. But they couldn’t do it this time. They had to announce their intention.

How do you think potential new investors in Citibank might react to this news that a giant seller will be in the market place until it sells 7.7 billion shares? Would it not be logical for new investors to postpone their purchase in hopes that this mega-sale might push the stock price lower? If it were you, wouldn’t you delay your investment in Citibank for a few months just to see if the price drops? After all, if the share price were to go up, the US treasury would flood the market with its 7.7 billion shares and cool the price back down. The risk that a new investor in Citibank will miss out on a big rise in the price of the stock vanished when the treasury announce their sale. The real risk is that government selling will drive the price lower.

And what about investors who currently own the stock and have been thinking of selling? What should they do? Most will sell now, before the government sells. This week’s announcement has put a lid on the price of Citibank shares until the government’s selling program is complete.

The government bailed out Citibank in the 2008-9 banking crisis: and now they will try to pass the bailing bucket to the investors of America.

In my book, Beyond the Bull, I discuss why stock markets were invented in the first place: to help large investors sell large investment positions. The Citibank saga is a perfect example it. And now we’ll see how efficient today’s markets are at finding liquidity for those really big players.

The Chancellor of the Exchequer will be watching too, because the British government bought a huge stake in Lloyds Bank and the Royal Bank of Scotland. They will be hoping that the Citibank share sale goes smoothly because they have a big investment position to sell too.

What about the Bank of Canada? Does our government have any shares of giant Canadian banks to sell? No. Our banking system came through the 2008/9 crisis in relatively good shape.

And what about you: what should Canadian investors do as big governments distribute their bank bailout bounty to the world’s investors? Follow their lead: sell your bank stocks now, before the longer term effect of the American and British government’s mega-sales takes effect.

Ken Norquay, CMT,
Financial Philosopher
Market Street Investment House
905-847-8511
ken@castlemoore.com

Links for buying Beyond the Bull:

www.gobeyondthebull.com Bullmanship code: K44N

Financial Valentine’s Day: The Flip Side

2010-02-11T10:29:00.000-08:00

In the 1950s, chick flicks were all about falling in love and getting married. And we all know the dark side of love and marriage is divorce. Human emotions run the full gamut through love and light to resentment and darkness. Do these human emotions affect our investments? Contrarians tell us that investors love the stock market at long term cyclical tops and hate it at the bottom. Can we make better investment decisions if we learn to read the market’s emotions?

Yes we can. And the year 2010 has just presented a text-book lesson. The first week of January saw over 50% of investment advisors in love with the stock market, and fewer than 20% shunning her. There had not been so much bullish love and so little bearishness since the stock market top way back in late 2007. Financial love was everywhere.

But the next three weeks featured an investment lover’s quarrel: the Dow Jones Industrial Index dropped almost 9% in 13 trading days: a real heart-stopper for the bullish love crowd. [The cover story was something about PIGS. Apparently Portugal, Ireland, Greece and Spain were experiencing difficulty meeting their debt obligations.] And now, at the end of the sudden short term drop in the stock market, many of the market’s enamoured suitors have changed their minds. Three short weeks ago they thought she was beautiful: now they think she’s ugly.

Valentine’s Day came early this year. But infatuation has turned to distain: 40% of investors now expect the market to correct downward. [Recent Investors’ Intelligence Poll]

The stock market is fickle lover. When we love her the most, she lets us down. And when we love her least, she gives us her best. Now that investors are no longer starry eyed optimists, what can we expect from the stock market?

In my book, Beyond the Bull, I talk about human emotions and their effect on our long term investment performance. In order to invest successfully we have to by-pass our natural human emotions and somehow buy when we feel like selling. We have to embrace her when the others shun her; and we have to leave her when her bullish suitors most love her. It’s called the theory of contrary opinion and it’s the only market rule of thumb that has worked consistently over the years.

So, in three short weeks, investment advisors have fallen out of love with the stock market. It’s Valentine’s Day: it’s time to buy.

At CastleMoore, we have purchased some utility stocks and some energy stocks. Maybe next week, we’ll look at some high tech. But, as always, if she turns against us, we’ll sell out like we did in spring of 2008. It is no longer wise to marry such a fickle lover.

Ken Norquay, CMT
Chief Investment Strategist,
CastleMoore Inc, A portfolio
management company.

Links to Amazon for those interested in Beyond the Bull
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Toronto Real Estate: “Déjà vu all over again.”

2010-02-05T06:29:00.000-08:00

Baseball’s legendary Yogi Berra is credited with our headline’s déjà vu quotation. It means: “We’ve seen this before.”

The real estate industry released some great numbers this week. Home sales have increased by 87% over last January’s depressed levels and prices have gone up by 15% to 20%. For homeowners and real estate speculators, this is welcome news. Or is it? Is there more to this story than the collective sigh of relief of two thousand real estate agents? Let’s look more closely.

What’s happened so far?
1. Many investors are fed up with the stock market after the 2008-09 crash when market averages dropped 50% in only nine months. Many fed up investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America and the continuation of the US junk mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to give us the flurry of real estate activity that was reported this week. Volume of sales is up and prices are up.

Has this ever happened before? Remember the late 1980s?
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. [In the USA they refer to trust companies as ‘savings and loan’ companies.] And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988 early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses – that rush to buy resulted in an even greater flurry of sales and house price increases.
5. In April 1989 a hush settled over the real estate industry. The top of the cycle was in.
6. House prises dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto [just south of The Bay]: the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.

The Warning Signs.
IF mortgage rates tick up ever so slightly AND this triggers a flood of buying – beware. The real estate market will be in the same condition it was in 1989: a long term top.

Warning #2
Our American cousins are already well into the downward part of their real estate cycle. Both their housing and commercial real estate are in trouble. Remember Pierre Elliott Trudeau’s famous words: “When America sneezes, Canada catches a cold.”

Prudent Action
What should a real estate owner do in the face of all this? Here are some thoughts:
1. Homeowners: don’t do anything. Just keep living in the home you love. If you are thinking of selling your small house and buying a big one because you need more space, do it. But if you are thinking of buying a bigger home to increase your overall investment exposure to real estate, put off your decision until things stabilize. And if you are thinking of selling your large house and buying a smaller one, do it sooner rather than later.
2. Investors in houses: those who buy residential real estate and rent it out. Sell your rental properties when mortgage interest ticks up. You could be selling at the top. And, as the house prices drop, you will be in the perfect position to buy future distress sales.
3. Commercial and industrial. How did you feel when the recession was ON in 2008 and 2009? How did you feel when your tenants were laying off employees and subleasing their space? Imagine how real estate investors feel in the auto manufacturing towns of southern Ontario. Or the oil patch in western Canada. Consider selling your marginal properties and reducing the debt on your higher quality properties. Read more about the pickle our American cousins are in. Re-read the story of what happened to the Olympia and York’s $14 billion real estate empire in the early 1990s. This is not a time for complacency. Try to stay positive: if trouble develops, you want to be the strong one when the others are weak. In order to buy at the bottom of the cycle, you have to sell at the top.

In my book, Beyond the Bull, I discuss the correct attitude for stock market investors to take in a long term bear market. This is the same attitude that real estate investors should have now: the attitude of a fighter. It’s like the Kenny Rogers song: “You got to know when to hold, know when to fold ’em. Know when to walk away, know when to run.” There is a strong possibility that real estate investing is coming into a time like 1989 to 1996 - the down part of the cycle. It’s time to fold ‘em and walk away. The down part of the cycle brings opportunity for those in a strong financial position. Having more cash and/or less debt is strength.

Ken Norquay, CMT
President,
Market Street Investment House
416-253-4629
Here are the links to Beyond the Bull on the three major Amazon sites:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Swiss cheese: it’s about the holes.

2010-01-28T10:39:00.000-08:00

There is a high level meeting in Switzerland between the top bureaucrats and leaders of the biggest economies in the world. These conquering heroes are the same ones whose precedent setting cooperation saved the world’s banking system a year ago. They all lowered interest rates sharply, loaned billions to the banks and stimulated their economies dramatically. And it worked. The system survived.

But two nations will be particularly concerned this year. The Dutch will have noticed a crack in the dike and the British will be dealing with a sticky wicket. Between them they could lose 3.8 billion Euros. These two governments loaned money to the shaky Bank of Iceland. But the bank failed anyway. So, the Icelandic government is now being asked to make good on its loan guarantee. Earlier this month [January 2010] their parliament passed a bill scheduling the repayment of this mega-loan. But the people rebelled. 25% of Icelandic voters signed a petition stating they did not want to repay the loan to Britain and the Netherlands. They felt cheated. In the good times, the banks kept the profits; but when it failed, it’s the population who has to pay back the bank’s debt. Not fair. And, of course, it’s not fair that the citizens of England and Holland lose the 3.8 billion either.

Last year, the G-8 solved the banking crisis. Will the World Economic Forum be able to solve this year’s loss-of-faith crisis? How can they prevent Icelandic cynicism from spreading to England and Holland?

Will loss-of-faith spread to America? 140 US banks failed in 2009. Eight more failed on January 26, 2010! Over one third of American houses have mortgages that are bigger than the value of the house. Americans are ticked off with the president and with the Democrats. Are Americans losing faith too?

These are good times to be Canadian. Our economy never got as weak as most other modern economies. And our recovery seems stronger than most. And our banks are widely recognized as the safest in the world. No loss-of-faith in Canada.

This is my Economic Faith Metre for the Swiss Cheese World Economic Forum:
Iceland -lost faith
Britain and Holland -worried
USA -losing faith
Canada -full faith

Faith is important in modern economies. The whole concept of making loans in full expectation that those loans will be repaid is a matter of faith. No faith, no loans. No loans, no economy. It is very important that the G-8 leaders make great efforts to insure that people keep their faith in the system.

Now let’s talk about your faith: will the Swiss Cheese World Economic Forum affect your faith? How does your faith in the Canadian economy affect your retirement plans? In 2008 the stock markets of the world all crashed simultaneously. Citizens of all countries who kept the faith lost their shirts! In 2009, the world’s stock markets recovered some of the 2008 losses. Those who hung in there and kept the faith made back some of their retirement nest eggs. And what should we expect for 2010?

Our expectations are more a matter of faith than facts. Bankers don’t hang out their dirty laundry. They hide the facts so we’ll keep the faith. Here’s my assessment of the faith that Canadians have in the financial world: most investors have noticed that their investments have not fully recovered from the 2008 stock market crash. Most plan to sell out of the stock market if it ever goes back to the 2008 highs.

This is not faith: it’s hope. They are hoping it will go back up – and if it does go back up, they’ll sell and invest in something safer. The 2008 stock market crash broke investors’ hearts: they no longer love the market. And now they’re hoping to break even.

In my book, Beyond the Bull I discuss how the stock market reflects our human emotions. At stock market tops, investors love the markets. At bottoms, they hate the markets. And on the way down, they keep hoping it will go back up. Traders sometimes sarcastically refer to a bear market as “the slope of hope.” Where does faith fit into all this?

It’s faith in the world’s banking system that is at risk right now. It’s about ordinary people like Icelanders, Europeans and Americans keeping their faith in the banking system. And it’s about your faith too. It’s your investments that are surfing on this wave of human emotions. Will the financial waves recover or will they crash like they did in 2008 and early 2009?

We know what the attendees at the World Economic Forum will do. They will wheel and deal and do whatever they can to help us all keep the faith. But what will we do. Most investors are not economic leaders, they’re economic followers. They love the markets when it peaks, hate it when it bottoms and on the way down, they hope it will go back up. They feel love or hate or hope, but they seldom do anything.

What should investors do?

Let me re-phrase that question: the stock market has rallied over 50% in 10 months and another banking crisis seems to be emerging in Europe. Do you think investors should stop hoping the market will go higher and move into something safer now?

The TSX composite index has been drifting since September. Do you think the economic leaders attending the World Economic Forum will help this market go higher? Or will they trigger another 2008 sell-off?

It’s your portfolio: it’s your retirement nest egg that is at risk. Your financial future is a function of what you own, not what you think or what you feel.

The Swiss Cheese World Economic Forum is about what you think and feel: it’s about keeping the faith. Your financial future is about what investments you own and what you do with them. You may love or hate of hope whatever you want in the financial world. But the key to investment success is to own securities that are going up and sell them when they start to go down.

Your investments are the Swiss cheese: your feelings and thoughts are the holes.

Ken Norquay, CMT Jan 28, 2010.
Chief Market Strategist,
CastleMoore Inc
905-847-8511

These are the links to Amazon for those interested in my book:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

The President’s Problems

2010-01-27T11:06:00.000-08:00

Mr. Obama has a big job: saving the world is not easy. Last year he took command of America in the middle of a financial crisis. And today, the problem seems to have disappeared. The recession is over and the banking system has survived. His plan seems to have worked. Even General Motors seems to have survived.

Like all other US presidents, Mr. Obama, is a great speaker. And tonight when he gives his state-of-the-union address, he will be most eloquent in explaining how effective his government has been since they took command in the middle of a financial crisis.

If he did such a good job, why is he losing ground in the popularity polls and why did the Democrats recently lose a senate seat in Massachusetts? [The January 2010 bi-election to replace the late Senator Ted Kennedy was won by the Republican candidate.] What’s wrong? Why is the President behind the 8-ball?

The answer lies in a mysterious place: the tiny European island nation, Iceland. Iceland is home to the particularly aggressive Bank of Iceland. The bank has failed and the government of Iceland is being asked to repay 3.8 billion Euros to the British and Netherlands governments. These two governments loaned the money to the Bank of Iceland in an attempt to save it in the dark days of last year’s banking crisis. The Icelandic government guaranteed the loan and now it’s pay-back time. But now it appears the people of Iceland are rebelling. 25% of the voters signed a petition: they don’t want to repay the loan. The president vetoed a bill that outlined the repayment schedule. And now they will have a referendum. On March 6 the people of Iceland will decide whether or not they are responsible for the big bank’s blunders.

The people feel cheated. They feel that the bank got to keep the profits in the good times, but in the bad times, the people pay for the losses. Icelanders are in a bad mood.

Maybe Icelanders are not the only ones who feel cheated and who are in a bad mood. Maybe Americans feel the same about US bankers’ blunders as Icelanders feel about theirs. Maybe Americans are losing faith in the banking system like their Icelandic counterparts. And maybe that’s why they’re ticked off with president Obama. Obama saved the bankers by putting the American people in debt. Are Americans looking for a better way?

According to the US Federal Deposit Insurance Corporation’s website, 140 US banks failed in 2009. 8 more closed their doors yesterday! [Jan. 26, 2010] Yes, there is a problem. Something is not working. There is a distinct possibility that the people are losing faith in the banking system and in their government’s ability to save it.

Remember Jimmy Stewart’s movie It’s a Wonderful Life? When the people lose faith in a bank, that loss of faith causes the bank to fail. If the Icelanders vote NO, their banking system will fail. They’ll likely be bounced out of the European common market too. Iceland could become the banana republic of the north. It’s like It’s a Wonderful Life: they need a local hero to persuade the people that they should keep the faith. And if they don’t get an eloquent local financial hero, Iceland will become a ghost town.
President Obama is the eloquent local hero for the American people. Somehow he has to persuade the people to keep the faith in big American institutions. Otherwise, America will go the way of the old USSR: she will collapse and have to be rebuilt. Good luck, Mr. President.

Ken Norquay, CMT, Jan 27, 2010.
Partner
CastleMoore Inc.
www.castlemoore.com

Copenhagen Cop-out.

2009-12-18T09:53:00.000-08:00

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:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Country and Folk songs: Financial Wisdom in Disguise.

2009-12-08T11:06:00.000-08:00

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:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Stock market farming

2009-11-30T11:58:00.000-08:00

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:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Good Bye Dubai

2009-11-27T14:02:00.000-08:00

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.

The second wave: defend yourself

2009-10-28T11:42:00.000-07:00

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.
Ken@CastleMoore

Links to Beyond the Bull.
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Financial Swine Flu Shot

2009-10-27T11:37:00.000-07:00

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.
[http:www.who.int/csr/disease/avian_influenza/en/index.html] 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. [www.DrFeder.com]
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,
Ken@castlemoore.com

Links to Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

97 cents and rising

2009-10-14T12:59:00.000-07:00

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

Newfoundland gets it right!

2009-10-08T11:24:00.001-07:00

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
ken@castlemoore.com

links to Beyond the Bull:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Christmas in October

2009-10-06T14:56:00.000-07:00

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

ken@castlemoore.com

Swine Flu, Bear Markets and Human Nature

2009-09-29T11:58:00.000-07:00

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
905-847-8511
CastleMoore Inc

Links to Beyond the Bull
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

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

2009-09-14T13:33:00.000-07:00

THE BAIL OUTS
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?

THE MECHANICS
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.

THE SET UP
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.

THE LAST STRAW
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.

PANIC TO CONTROL
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.

CAVIAT EMPTOR: THE ROCK
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.

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

THE SECOND SHOE
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.

BUT THIS TIME IT’S DIFFERENT!
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.

NOT NEWS
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.

THEIR ADJUSTMENTS
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.

OUR ADJUSTMENTS
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?

IRONY
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?

FINANCIAL REALITY DOESN’T MATTER
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
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Today’s heroes – Yesterday’s villains.

2009-08-31T10:15:00.001-07:00

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:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Casino Bus Riders

2009-08-17T11:24:00.000-07:00

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
905-847-8511

The Amazon links for Beyond the Bull are:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

Mutual funds - is the honeymoon over?

2009-08-13T11:47:00.000-07:00

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
ken@castleMoore.com

Links to Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

"...the Slope of Hope."

2009-07-31T09:01:00.000-07:00

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:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

k

57 Banks go Bust

2009-07-21T13:50:00.000-07:00

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.

How to Break the Bank

2009-07-17T08:45:00.000-07:00

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.

US Dollar - a bullish prognosis

2009-07-13T11:57:00.001-07:00

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:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

US Dollar - a bullish prognosis

2009-07-13T11:57:00.000-07:00