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
Wednesday, October 28, 2009
Tuesday, October 27, 2009
Financial Swine Flu Shot
In 1918 millions of people died because a serious flu spread throughout the population. A similar pandemic happened over 500 years ago in Europe when the Black Death wiped out millions. More mass deaths occurred when the earliest immigrants from Europe spread deadly diseases among the native population. Pandemics are serious.
But it’s the false alarms that help us think clearly.
Remember the avian bird flu? Apparently it had the potential to kill millions.
[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
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
Wednesday, October 14, 2009
97 cents and rising
The Big Three auto manufacturers stuck it to Canadian consumers in 2007 and they’re sticking it to us again. 2007 was the last time the Canadian dollar rocketed toward par; and it was the last time the auto industry stiffed Canadian car buyers.
There is a fixed cost to manufacture a car. Car dealerships sell it for cost + their mark up. And that’s how business works. But in 2007 things changed fast. The Canadian dollar went from just under 85 cents in March to just over $1.10 in November, 8 months later. That’s 30% in 8 months!
The Canadian dollar had 30% more buying power. Or did it? Did GM reduce the Canadian dollar price of a Chevy by 30%? Not a chance! They kept the Canadian dollar price the same and pocketed the extra profit. Ford and Chrysler did it too. And if an adventurous Canadian tried to buy a car from an American dealership, he soon found it was forbidden. Toyota and Honda did the same thing. Canadian consumers did not receive the benefit from the rise in buying power of the Canuck-buck because big auto manufacturers forbad their US dealerships from selling to Canadians. The American auto business stiffed Canadian consumers in 2007.
And now that our Loonie is flying high again, we see the same outrageous profit grab! So far in 2009, the Canadian dollar has moved from 77 cents to 97 cents in 7 months – that’s 26% in 7 months. And if we check a few auto import websites, we see that we can save 10% to 30% by buying from the Americans, even after paying the extra shipping, duty, conversions etc. Why don’t we try calling a few American car dealerships and seeing if they will sell us a new car? Don’t forget to tell them you’re a Canadian. Will they refuse to sell a car to us again in 2009?
Now think back to March 2009 when the Canuck-buck was 77 cents. What other big news event was making headlines? Auto company bailouts? Canadian consumers and tax payers forked up a couple billion Canadian dollars to help these guys stay in business.
And now that the auto industry REALLY needs to sell a lot of cars, and now that Canadian consumers have picked up 26% in buying power in 7 months, you’d think they’d open the flood gates! American car companies should funnel those high priced Canadian dollars to buy new cars from American dealerships. Capitalism: it’s the American way. Isn’t that why American exporters like a lower US dollar – so their domestically manufactured products are more competitive in foreign markets? Isn’t Canada a foreign market? Isn’t this the perfect opportunity?
This is an example of how economic theory and reality don’t match: the currency exchange has moved favourably for the American auto industry and the Canadian consumer. But, somehow, American dealerships won’t sell cars to Canadian consumers. Neither is capitalizing on the big move of the Canadian dollar. And it’s the big car companies who are stopping it.
Ken Norquay, CMT
Financial Philosopher
There is a fixed cost to manufacture a car. Car dealerships sell it for cost + their mark up. And that’s how business works. But in 2007 things changed fast. The Canadian dollar went from just under 85 cents in March to just over $1.10 in November, 8 months later. That’s 30% in 8 months!
The Canadian dollar had 30% more buying power. Or did it? Did GM reduce the Canadian dollar price of a Chevy by 30%? Not a chance! They kept the Canadian dollar price the same and pocketed the extra profit. Ford and Chrysler did it too. And if an adventurous Canadian tried to buy a car from an American dealership, he soon found it was forbidden. Toyota and Honda did the same thing. Canadian consumers did not receive the benefit from the rise in buying power of the Canuck-buck because big auto manufacturers forbad their US dealerships from selling to Canadians. The American auto business stiffed Canadian consumers in 2007.
And now that our Loonie is flying high again, we see the same outrageous profit grab! So far in 2009, the Canadian dollar has moved from 77 cents to 97 cents in 7 months – that’s 26% in 7 months. And if we check a few auto import websites, we see that we can save 10% to 30% by buying from the Americans, even after paying the extra shipping, duty, conversions etc. Why don’t we try calling a few American car dealerships and seeing if they will sell us a new car? Don’t forget to tell them you’re a Canadian. Will they refuse to sell a car to us again in 2009?
Now think back to March 2009 when the Canuck-buck was 77 cents. What other big news event was making headlines? Auto company bailouts? Canadian consumers and tax payers forked up a couple billion Canadian dollars to help these guys stay in business.
And now that the auto industry REALLY needs to sell a lot of cars, and now that Canadian consumers have picked up 26% in buying power in 7 months, you’d think they’d open the flood gates! American car companies should funnel those high priced Canadian dollars to buy new cars from American dealerships. Capitalism: it’s the American way. Isn’t that why American exporters like a lower US dollar – so their domestically manufactured products are more competitive in foreign markets? Isn’t Canada a foreign market? Isn’t this the perfect opportunity?
This is an example of how economic theory and reality don’t match: the currency exchange has moved favourably for the American auto industry and the Canadian consumer. But, somehow, American dealerships won’t sell cars to Canadian consumers. Neither is capitalizing on the big move of the Canadian dollar. And it’s the big car companies who are stopping it.
Ken Norquay, CMT
Financial Philosopher
Thursday, October 8, 2009
Newfoundland gets it right!
Newfoundland’s Government Finally Gets It!
The citizens of Buchins NL found out that their town is contaminated. It appears that the old mine wasn’t closed down properly and there could be a lead poisoning problem. Dirty business.
But at least the provincial government did the right thing this time. Two cabinet ministers made public statements about the problem shortly after it was discovered. The town folk are being asked to get blood tests: they’re trying to find out how big this problem really is.
Good for them.
These past few years there was a scandal in Newfoundland because of a cover up in the detection and treatment of breast cancer. Government officials kept secret the fact that there were problems in the diagnostic testing in Newfoundland’s medical labs. Those delays caused unnecessary problems for the women who were improperly diagnosed.
It looks like they learned from their previous mistake. In the previous cover up, they put their shame and embarrassment about the labs’ mistakes ahead of the health of the women who were worried about having cancer. This time the government saw fit to put the health of the Buchinsians ahead of their own political interests.
Good for them.
Politics is a dirty business, isn’t it? Our elected representatives take great pains to insult and blame each other for the most unlikely things. Lab technicians in Newfoundland screwed up in a big way. We don’t know how many women died prematurely because of faulty cancer testing. Then the government, in complete denial of the seriousness of the problem, delayed correcting the error. They would surely have many embarrassing questions to answer in the provincial legislature. Their delay and cover up decisions were all done to protect their own best interest.
Most Canadians are well aware that they are being deceived: they know the representatives they elect will say anything to get elected again. That’s how it works in a modern democracy. It’s all about staying popular: ranking high on the polls. We have learned to live with it.
The same thing is true in the world of commerce. We all know advertising is a form of deception. It’s all about selling your product. Customers expect to be lied to, to be told that this product is better than that one. Modern advertising is not about producing quality products; it’s about selling products. We have learned to live with it.
In my book, Beyond the Bull, I discuss this “deception” component of our lives. The book talks about how deception is a natural part of our lives in modern societies. It offers advice about investing in a world of deceit.
The first important fact we need to know is: deceit is a huge part the typical Canadian’s life. Bull is part of politics, medicine, commerce, advertising and investing. So relax! In today’s Canada, we get lied to. Wake up to it.
My second offering to Canadian investors is to stop being so judgemental about the lying. Relax! Politicians lie. Salesmen lie. People try to cover up their mistakes. So quit complaining about it. Just wake up to it.
By far the most important attitude we need to adopt in this world of bull is responsibility. Who is responsible if we re-elect a liar or buy from a liar or lose our money by trusting a liar? We are! And who is responsible for letting the lies continue? We are!
So, what should the women of Newfoundland have done when their test results said they were OK when they, in fact, had cancer? What should the Buchinsians do now that they realize they’ve lived in contaminated land for thirty years? What should Ontarians do when they see massive corruption in the E-health, Cancer Care and Lottario?
Lets do what Newfoundland’s provincial government just did. Come clean. Tell it like it is. And get it fixed.
Ken Norquay, CMT
Financial Philosopher
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
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
Tuesday, October 6, 2009
Christmas in October
It’s a Wonderful Life…NOT!
Every Christmas I like to watch Jimmy Stewart in the movie It’s a Wonderful Life. The story is set in the 1930s during the depression. Jimmy plays a young business man trying to protect the financial interests of his small town at a time when the stock market had plummeted, real estate had collapsed and the banking system was in trouble. Somehow he had to persuade the town’s citizens to hang in there and not trigger their own financial disaster by withdrawing all their money from Jimmy’s little savings and loan company [that’s an American term: in Canada we call them trust companies]. The movie focused on the every day human emotions of the 1930’s banking crisis and the tireless work of Jimmy Stewart trying to fix it. Today the role of financial hero has fallen on the broad shoulders of the various government officials and central bankers. Our citizens have faith that these highly educated and highly paid economic professionals will somehow get us through the crisis. I recommend you watch this movie: it’ll be part of the usual Christmas build-up. It’ll help you understand some of the human dynamics of a depression, a real estate crisis and a banking crisis.
Observation: it is now the first week of October – doesn’t this seem a bit early to be thinking about Christmas movies? Apparently not. Several retail stores started their Christmas selling season last month. I wonder why.
The normal sequence of sales promotion is: [1] back to school, [2] fall fashions, [3] Halloween, [4] Christmas, [5] Boxing Day and January sales. A few years ago I noticed some stores started their January sales in December. And now they’ve moved Christmas to September. Something seems wrong, doesn’t it?
Are there too many stores? Are too many consumers tapped out? Are there too many stores in deep financial trouble and are they so desperate that they need Christmas sales now?
Is Jimmy Stewart’s Wonderful Life of the 1930s closer than we think? If America’s auto industry and America’s finance industry had to be bailed out, maybe her retail stores are in trouble too. Maybe they shouldn’t have opened all those box stores. After a ten-year binge of building more and bigger stores, have they gone too far? Big new stores have big mortgages or big leases… big monthly expenses. We can imagine how financially stretched out retail stores might be; and if sales are below their projected levels, maybe they need to move Christmas to September to survive.
Government officials and central bankers saved the financial system and the American auto industry. Can they save the retail industry too? How would they save it? They provided money to the banks and car companies: will free money help the retail stores?
In the 1930s movie It’s a Wonderful Life, Jimmy Stewart tried to persuade the town folk not to take their money out of his little business. Now-a-days we tax payers are being asked to put our money in. Jimmy talked directly to the people: and the people decided what they would do with their money. Obviously we tax-paying town folk are not foolish enough to put our own money directly into failing companies: our governments do that for us. Now-a-days politicians do what they want with our money, claiming all the while that what they do is in our best interest.
Ask yourself this:
1. Would you have loaned your own money to General Motors?
2. Would you have bailed out Smith Barney or Citibank?
3. Will you do your Christmas shopping in October?
It’s a Wonderful Life showed us how the economic problems of the 1930s were solved by business people talking directly to consumers to sort out their problems. Now-a-days, we seem to want others to do that for us. We want the government to fix it.
What will you do? Will you buy your Christmas decorations in October? Is that what it will take to avoid the next business crisis?
Seems ridiculous, doesn’t it?
The modern re-make of Jimmy Stewart’s classic movie would be It’s a Ridiculous Life: the story of a small town business man who borrowed his way to prosperity. He has the big house, the great car, the trophy wife and he’s done it all on bank loans. He bought a house in 1980, rented it out and used the cash flow to buy a second house with almost no down payment. As real estate prices went higher, he kept on borrowing and buying more real estate and renting it out. Soon he had the biggest real estate holdings in town, the biggest personal income in town and the most mortgage debt of anyone in town. Then they closed the factory at the edge of town. 300 workers were laid off and our hero’s empire came all undone. The tenants couldn’t pay the rent. Our hero couldn’t pay his mortgages. The bank foreclosed on his properties and his high maintenance wife left him.
The ridiculous part is that this story is true. This is how the long term rise in real estate prices was maintained: the up trend was financed by the banks.
The 1930s It’s a Wonderful Life problem was resolved by the town folk acting reasonable and conservatively. Is this how our remake will be resolved?
Apparently not. In our modern movie, It’s a Ridiculous Life, aren’t we being encouraged to do the opposite? Aren’t they suggesting we borrow even more money and spend even more? Buy a new car – buy a house. And now, buy our Christmas presents in October.
Ken Norquay, CMT.
Chief Market Strategist,
CastleMoore Inc
ken@castlemoore.com
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
Tuesday, September 29, 2009
Swine Flu, Bear Markets and Human Nature
The latest news on the swine flu virus is that perhaps – according to an unpublished study – getting an ordinary flu shot makes it 30% more likely you will contract swine flu. Canadians are damned if they do and damned if they don’t. If they take the normal flu shot, they are more likely to get swine flu. If they don’t, they are more likely to get regular flu. What should we do?
Well, we’re Canadians, so we'll wait for some government official to tell us what to do.
But this dilemma illustrates an often forgotten aspect of our humanity: life contains risk. Getting the flu is an important risk. There are no 100% guarantees that we will escape the virus whether we get the shot or do not get the shot. It’s all about the odds.
As a financial philosopher and partner in an investment firm, I am often asked about financial risk. The stock market might go up or it might go down. If all my money is in stock market mutual funds, and the market goes up, I win! This is what happened during the 1990s. But if the stock market goes down, I lose! This is what happened in 2001 to 2003 and again in 2008. What should I do?
The pat answer from the investment industry is: invest in some stocks, but also hold a diverse portfolio of non-stock investments, like bonds, real estate or precious metals. But that’s not a real answer, is it? If you own $100,000 in stocks, it will go up or down with the stock market: if you happen to own real estate or bonds or gold, your stock mutual funds will still go up or down with the market. The investment industry’s pat answer does not address the basic truth that there is risk in investing in the stock market and we need to know how to handle that risk. What should we do when the market goes down?
Canadian investors are exposed to wealth risk in the same way that we are all exposed to health risk?
Health conscious Canadians are smarter than wealth conscious Canadians. They expect to take precaution and to do something to protect their health from a flu epidemic. Most Canadian investors are doing nothing to protect their wealth from the ravages of an economic pandemic. During the 2008 market melt-down, most financial advisors encouraged their clients to do nothing: to hang in there and not worry… The stock market would recover.
How would you feel if you got this kind of advice regarding the up coming flu season? “Don’t worry about the flu: if you get it you will recover. Just keep washing your hands and hoping you don’t catch it.”
In my investment book, Beyond the Bull, I point out that an important part of our human experience involves luck. When the experts believe there is a good chance we’ll have a swine flu outbreak, we see that as an increase in risk to our health. When they experts believe there is a good chance we’ll have a banking crisis or an economic melt down, we should see that as an increase in risk to our wealth. In both cases, a normal intelligent person would take precautions to protect themselves. Strangely, however, the investment industry doesn’t see it that way. The slogan “buy and hold for the long term” implies that there is no real risk in the stock market. It always goes up eventually. I suppose this is the same a saying that every flu pandemic will eventually end.
It’s about survival, isn’t it? Will we survive a flu pandemic? Will our investments survive an economic melt down? And, if it’s about survival, then it’s about protecting ourselves against reasonable risk. We hope to protect ourselves from the flu by using vaccinations. And a variety of government health experts are advising us on the vaccination process. But not a single government health agency is telling us “Don’t worry, be happy.”
What is it about the investment industry that makes professionals continually advise individual investors to do nothing – to hold onto our investments through thick and thin?
When I first entered the investment business in 1975, mutual funds guru John Templeton got it right. He used to say: “We shop the world for undervalued stocks. We hold them for three or four years and sell them when that value is recognized.” He wanted us to buy and hold Templeton Growth Fund in full knowledge that he would buy and sell stocks for us within the fund. Modern mutual funds do not talk about selling at all. They want us to buy and hold their mutual funds, and they want to buy and hold stocks within that fund. And they really do hold: how many mutual funds off loaded their stocks before the 2008 melt down? Mutual funds management has changed dramatically since 1975.
In my investment book, Beyond the Bull, I discuss the five keys to correct investing. One of those keys is to have a method of deciding when to buy and when to sell. Sir John Templeton used his value models to help him make this decision. Modern mutual funds managers seem to have methods for when to buy; but they seem weak in the area of when to sell. It seems like their business plans call for the market to go up all the time. And if the market goes down, their mutual funds go down too.
Modern wealth management is a bit like modern health management. Will we take that shot to protect ourselves from the flu? Will we sell our risky investments to protect ourselves from economic weakness? It’s up to us to decide when to protect ourselves.
Ken Norquay, CMT
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
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
Monday, September 14, 2009
The Second Shoe: a fresh look at the world of banking
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
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
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