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December 2008 Archive 3 weeks that shook the world
Posted by Michael Kane on December 31, 2008
The tumultuous year that was 2008 had many moving parts to it, but no period was more dramatic than weeks 38, 39 and 40. Here's a little trip down Memory Lane: Sept. 15 Sept. 16 Sept. 17 Sept. 18 Sept. 19 Sept. 20 Sept. 21 Sept. 22 Sept. 23 Sept. 24 Sept. 25 Sept. 26 Sept. 27 and 28 Sept. 29 Sept. 30 Oct. 1 Oct. 3 Once, on-air, I compared this period to the fall of Communism in the early 1990s: it seemed as though every morning I arrived in the newsroom, another government had collapsed. One of my colleagues mused: "Yeah, maybe this is the fall of Capitalism."
Click here to watch Michael walk through this historic period day by day, on Lunch Money.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit.
More » A sign of the times
Posted by Howard Green on December 24, 2008
You know the world has changed when Canadian bank CEOs agree to come on TV when you ask them. TD's Ed Clark joined us three times between Nov. 20 and Dec. 9. Bill Downe of BMO was on twice this fall. Even the media shy Gerry McCaughey of CIBC sat in front of our camera in October. Normally, you lobby bank CEOs and their public relations departments for months, sometimes years, to get them on the air. These gentlemen used to be business royalty. Now they're walking with significant trepidation in their steps. For sure, Canadian banks are still vertical compared with many of their counterparts in other countries. But only the 5 gents who run Canada's big banks know how close they may have come to serious trouble, like their brethren elsewhere. Given the global meltdown, I suspect none of them has the hubris to think catastrophe couldn't befall their institutions. When I think back, there was only one guest the entire year who predicted widespread bank failures. He's a small cap mining guy named Paul Van Eeden. Last February on Market Call Tonight he began talking about where he thought things were headed. We had already been in a credit crunch for six months and central banks were furiously cutting rates. Van Eeden said on the air that banks would fail. This was a very strong statement he was making, and I felt it my duty to question him closely on behalf of viewers who might be alarmed by his commentary. However, alarms about the banking system were ringing loudly before that. At the World Economic Forum at Davos, Switzerland, in January, no CEOs of major publicly-traded banks were giving interviews. I approached both Josef Ackermann of Deutsche Bank and Jamie Dimon of JPMorgan. They both laughed at my request. But I do recall speaking privately with the CEO of a big U.S. bank who was reacting to the unexpected 75-basis-point cut in the Fed funds rate while we were there. In a moment of prescience, he said the Fed was trying to head off a severe recession. This U.S. bank CEO said if Ben Bernanke thought he could get away with just two quarters of negative growth, the Fed chairman would take it in a flash. This banker was right. However, no one on BNN that I recall other than Van Eeden publicly predicted so boldly what came after: the collapse of Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and many smaller institutions in the U.S. and around the world, not to mention the collateral devastation in the global economy, commodity markets and stock portfolios everywhere. Just to clarify where bank CEOs sit in the food chain nowadays, I'll leave you with a scene from the second week of October, when the U.S. government moved to take stakes in key financial institutions. The bosses of the top 9 banks in the U.S. were summoned to the Treasury Department in Washington. A person familiar with the matter said that calls had gone out from Henry Paulson to the 9 CEOs, requesting their presence at a meeting the next day. Those invited were not told why they were being asked to attend. Aside from Paulson, among those on the other side of the table were Fed chair Ben Bernanke and Tim Geithner, the president of the New York Fed, who is soon to be Treasury secretary. In a terse meeting, the bank chiefs were each told how many billion dollars their firms would be getting from the federal government in the form of preferred share investments. They were then told they had until 6 p.m. to get their boards of directors to sign off on what they'd been ordered to do. Meeting adjourned. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Time for a portfolio tune-up
Posted by Frances Horodelski on December 24, 2008
As we look forward into 2009, let's make one assumption: the financial system will be fixed and eventually be working again in a more usual way. It may be smaller, there may be fewer players, less leverage, and risk tolerance will continue to be depressed – but things should be more normal. And if you agree with me on that assumption, then you can start positioning yourself now by following some tried and true portfolio management steps. Asset allocation For example, let's assume you began the year with a 50:50 bond/equity allocation. The 7-percent return from bonds and the 40-percent negative return from equities has resulted in a 64 percent/36 percent bond/equity allocation. To bring these weightings back into line with the target, an investor should sell bonds and buy stocks. This may be the simplest way to sell high and buy low. It doesn't work immediately. However, over time, it's a tried and true way of ensuring you own the most efficient portfolio for your needs.
There are a variety of ways to establish the right asset allocation, but all of them include an assessment of how much money you have to invest, what your future needs will be and what rate of return is required to ensure you have enough money to meet those needs. Included in that calculation is the assessment of your own tolerance for risk – i.e. how much volatility you can accept over your investment time horizon. Theoretically, the longer the time before you need your assets, the more risk you can take. In the real world, risk is more than just a four letter word and has to be adjusted for your emotional reaction to the potential for short-term losses. Some use a simple rule of thumb for determining asset allocation. The Rule of 100 for example, subtracts your age from 100 to establish your equity exposure. For example, if you are 65, your asset allocation, or the percentage you should have invested in stocks is 35 percent. This is based on the assumption that as you age, your portfolio should be less exposed to the riskier equity asset class. However you do it, asset allocation is ground zero for portfolio construction. Sector allocation Reviewing sector weightings is also a good exercise to ensure your portfolio is well positioned. This is sometimes more difficult to do in Canada where financial services, materials and energy make up a disproportionate segment of the overall market. While diversification didn't seem to work this year as everything has gone down together, over time, diversifying and rebalancing can reduce the risk of your portfolio and ameliorate the impact of dropping prices. For example, at mid-year, had investors rebalanced their portfolios to sell winners in the energy and materials segments, and redeployed into depressed utilities and consumer staples, overall portfolio losses would have been less. One way to establish sector exposure is to use broader sector allocations rather than the 10 sectors that the S&P/TSX uses. For example, four broad segments could include companies from interest sensitive, consumer, industrial and commodity basic sectors. Re-weighting periodically to a predetermined level would maintain exposure to all segments of the economy but reduce the overexposure to any one segment in the event that it sharply outperforms the others. Segments of the market have a tendency to overshoot on both the upside and the downside. Being disciplined and re-weighting periodically can keep you from getting too enthusiastic at the top and too pessimistic at the bottom. Make the taxman pay One of the opportunities individual investors have to make the declines of 2008 a little less painful is to reduce taxes by generating losses in your portfolio. A capital loss can be used to offset capital gains this year, from the past three years and indefinitely into the future. The last day for tax-loss selling in Canada is Dec. 24; in the U.S., the last day is Dec. 26. Investors often worry that by selling they may potentially miss the upside in the security they sold because they're restricted from buying the security back for 30 days. However, "pair trades" can continue to give you similar exposure. For example, you may wish to sell individual technology stocks and, in turn, replace them with an ETF that gives you broad exposure to the sector. There are many ways to adjust a portfolio to keep the exposure you want for a potential rebound, but still generate losses to reduce your overall tax bill. The bottom line A portfolio is not a static exercise. I like to say it is a living and breathing thing that needs to be analyzed and adjusted on a regular basis. Everyone's portfolio this year has suffered from one of the worst bear markets in decades. But now isn't the time to just shove your statements in the drawer and wait for things to come back. Now is the time to be proactive, exercise prudent portfolio management tools and be set to benefit from what might be a better 2009. Let's hope. Frances Horodelski is a Chartered Financial Analyst If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More » A return to thrift
Posted by Linda Nazareth on December 24, 2008
At the end of 2007, Oprah Winfrey showcased Samsung video cameras (value $799 US), Ugg boots ($120) and Williams-Sonoma cupcakes ($59 for nine) to her viewers. Sales of those products soared, and U.S. retailers managed very decent returns overall for the holiday season. Things were fine for Canada too, and for the rest of the world. Flash forward a year. At the end of 2008, Oprah eschewed any kind of spending and taught people how to make "cocoa cones" as gifts (hot chocolate mix and marshmallows in cellophane wrap, generous price estimate: $1 each). She also urged viewers to maybe just shun presents altogether and instead put nice notes to loved ones into pretty boxes. Retailers, meanwhile braced for what some were expecting to be the worst spending season since the 80's. A lot has changed over the year. We're now engulfed in a global recession. The U.S. most definitely is facing its worst economic crisis since the 1980s, if not the 1930s, and Canada is not as comfortably immune as any of us would like. The 2008 economic year is not one many of us are likely to forget. It might be a waste of time to point fingers at who or what caused this mess, but let's My explanation starts with the period after 2001, when in an effort to kick-start the U.S. economy, the Federal Reserve reduced interest rates to levels that were really negative after inflation. Consumer spending boomed, debt spiralled and the housing market exploded. Everyone wanted in and some really bad loans were made, arguably to people who were not going to be likely to pay them back. In retrospect, the borrowers, the lenders and maybe the Fed all made mistakes. The biggest mistakes though, were arguably made on Wall Street, where those loans were then repackaged into a bunch of glitzy debt instruments and sold, then bought by various investors. At the beginning of this year, we knew there were problems, and that maybe there would be some terrible news ahead. But even really smart people thought it would be contained, that Wall Street's problems would not become Main Street's in such a gigantic way. Actually, in the summer of 2008 it looked like the world's main issue might be inflation. Sounds quaint in retrospect, but commodity prices had taken off and U.S. consumers were choking on pump prices. Short of a major U.S. recession, it was hard to see what could cause prices to fall. Now we have confirmation that this is a major recession. The phrase is getting a tad over-used, but it really has been a perfect storm. We're seeing a deflationary spiral where prices for everything from raw materials to consumer goods are being slashed in an attempt to make people buy. Let's put 2008 behind and look forward. Looking at the so-called post recession period means taking note of two big adjustments: one is what economists call cyclical, the other is structural. The end of the cyclical recession in the U.S. means getting to the point where GDP, employment, industrial production and other measures of activity stop declining. That will probably take the first six to nine months of 2009, maybe a little less in Canada. You move into the next phase of the cycle by lowering interest rates (already down to basically zero in the U.S.) and by boosting government spending (which governments around the world are apparently game to do. Keynesian economics is all the rage once more). Eventually, if you do those things enough, you all but stop the bleeding in terms of recession. (Yes, these solutions do raise a lot of questions about printing money, creating bubbles, running deficits and a whole host of new problems. But no one has time to worry about that right now, and I certainly don't have space to write about it). Then again, it is hard to know what the end of recession will mean anyway. A lot has to do with the structural adjustment to the economy. Put another way, it depends on whether people go back to their old patterns of spending and making economic decisions. Will lower interest rates send consumers back to spending like before? It is doubtful that will happen, even over the period of a few years. For one thing, housing prices are not going back to peak levels anytime soon. More important, in the aftermath of the recession, we will be dealing with fear in a way that we have not seen in decades. Retirement funds will have been hit and savings will have been dented. And here is the real kicker: the unemployment rate can keep rising for a year or more after the trough of the recession. In the 1990/91 cycle, the unemployment rate hit 7.8 percent in June of 1992 – 15 months after the U.S. National Bureau of Economic Research said the recession was over. If that happens again, then the U.S. rate could go considerably higher than its current level of 6.7 percent – maybe to the 10 percent plus it hit in the early 1980s. In Canada, the damage is not likely to be that brutal, but certainly the current 6.4 percent rate could rise closer to 8 percent by the time we are done. The key thing here is not that she's saying you can save money this year by making some gifts (a cyclical switch), but she's promoting the concept that it is not cool to spend lavishly anymore (a structural switch). And she's right: we are headed into an era when the catch phrases will be "fabulous and frugal" and "thrift is cool." Those aren't just cute magazine catch-phrases: they are going to be enforced by the lenders and the credit card companies who will be smarting from their losses well into 2009. Over the longer term, a return to thrift will strengthen U.S. and Canadian household balance sheets and ensure that the house-of-cards economic scenario doesn't repeat itself a few years down the road. In the short term, however, it means a very different consumer picture. If you don't like the cocoa cones, you can always bake your own cupcakes. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »S&P 500 tops 50-day average
Posted by Andrew Bell on December 17, 2008
Hard to find any reasons to be cheerful these days but Bloomberg's got one. It says the bounce in U.S. stocks after Tuesday's Fed rate cut has pushed the S&P 500 above its average level during the past 50 days -- the much-watched 50-day moving average. That's traditionally seen by many investors as a good sign. The benchmark has slipped about 0.3% today after yesterday's 5.1% climb to 913.18, which has taken it above the 50-day moving average for the first time since Sept. 3. Here's a graph at Seeking Alpha. The S&P 500, which has slid 38% this year, has spent most of the year trading under the moving average. It has now rallied 21% since hitting an 11-year low on Nov. 20, spurred by U.S. president-elect Barack Obama's economic stimulus plan. Topping the 50-day MA is "a positive point, and short-term-trading people will use it as a buy signal," Mary Ann Bartels, chief market analyst at Merrill Lynch, told Bloomberg.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Spare the rod, spoil the change
Posted by Michael Kane on December 16, 2008
I knew it was over for Illinois Governor Rod Blagojevich when he brought in clergy to help him pray. The day after he was arrested and charged with intending to "sell" the Senate seat that is being vacated by Barack Obama, Blagojevich was out on bail and back at work. Undoubtedly, his people scuttled in all day with newspapers from around the country ... his face on every front page. The Wall Street Journal laid out a remarkable indictment, accompanying the picture of the now-famous pompadour with the pompous transcript of the now-famous wiretaps, showing several deleted expletives, echoing the notorious Nixon tapes. But here's the thing: Blagojevich -- like Nixon -- genuinely believed he did nothing wrong. That should tell us something. I can think of at least three or four former corporate rock stars who are now doing time as a guest of the state or in federal institutions because they ran their publicly-traded companies as though they were their own personal piggy banks, feeling they were doing nothing wrong. We see this in the business world. It's a different species of animal in government. There is supposed to be no quid pro quo. And if you buy that, I have an Egress I'd like to sell you. Four of the past eight governors of the state of Illinois have been publicly denounced as corrupt. As Sean Connery's character said in the movie The Untouchables ... that's The Chicago Way. How sweet, the realization that this need for "Change" in the ugly elegance of American politics starts for Obama in the quagmire he is vacating.
Ben Cheng explains his Yellow Pages numbers
Posted by Michael Hainsworth on December 9, 2008
The Market Call mailbox has been flooded with requests for clarification on Ben Cheng's Dec. 8 Play of the Day. I've asked Ben to join us here on the BNN Blog to explain how the Yellow Pages preferred shares could yield 20% when it appears the yield is closer to 6%. Here's his response:
On Dec 8/08 I was on the BNN Market Call show with Michael Hainsworth and made reference to YPG Holdings Series 1 preferred shares. At the time they were trading around $15.60 per share. They are retractable on Dec 31/2012 for $25 cash and redeemable on March 31/2012. I also made reference to a substantial yield. According to our calculations on Bloomberg – at a price of $15.60 and assuming the redemption and/or retraction is paid in cash: Below is a clip from the prospectus which can be found on SEDAR: "On and after December 31, 2012, upon at least 30 days notice, a holder of Series 1 Shares may require YPG Holdings to redeem such Series 1 Shares for a cash price of $25.00 per Series 1 Share, together with any accrued and unpaid dividends to but excluding the date fixed for redemption. See 'Details of the Offering'." I hope that helps clarify what I was talking about. You can catch Ben’s opinion on Yellow Pages preferreds here: http://watch.bnn.ca/market-call/december-2008/market-call-december-8-2008/#clip119652 Michael
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Detroit 3 want $$$
Posted by Viewer Comment on December 8, 2008
Re: Michael Hainsworth's Detroit high-flyers land in Washington It is sickening to see the squandered past, present and future billions poured into overpriced labour and products. Stop the insanity ... please! There are too many people with a lot of clever ideas for the future progress of our society -- and the money to implement them if the market wants their products. Stop thinking the present car enterprises are the end all and be all. H. Byrne
The (Big) 3 now do make good fuel efficient cars! In Canada and the U.S. we should make most of the cars we drive!
It could be that political and business leaders are attempting to put the genie back in the lamp but our collective deep-rooted instincts are telling too many of us that this is simply not in our best interests. The same leaders that defend the theories that created and expanded the WTO, sub-prime loans, moving and concentrating manufacturing in foreign countries while transferring huge amounts of funds to oil producing countries are also telling us that we need to go back to how things were. They predictably refuse different visions. We have been using the same economic model and the same energy source for many generations and yet now that things are crashing around us we simply want to tweak this economic model while investing huge funds that will not be available to other visions. We may have reached a tipping point. It may be that any attempt to fix the existing economic model simply will not work. It may be that we need a broader more universal approach based on more regional and national diversity, with the well-being of our citizens as the main objective as opposed to the well-being of big business. M. A. Moricey
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit.
More » Loblaw's technical move may bear fruit
Posted by Mark Bunting on December 1, 2008
Loblaw's stock has teased investors before, but its recent move may be the real deal. The grocery company’s woes are well-documented. It went from being a seemingly unassailable peddler of food and drink and other sundries to a self-sabotaging mess. Its move, a few years ago, to a new distribution system was poorly executed. At the same time, Loblaw was pressured by intense competition from Wal-Mart. However, a recent earnings report that was more solid than expected combined with a stock price that is breaking through significant barriers has some investors thinking brighter days are ahead for the company. Also helping the Loblaw story is that it’s a defensive stock in a very difficult market. But, it’s the technical move of Loblaw’s stock that’s caught my eye. In late November, the shares broke through both the 50- and 200-day moving averages. Technical analysts say that’s often a good indicator of future upside especially, as in the case with Loblaw, when it’s accompanied by higher-than-average volume. Loblaw’s shares made similar moves in early 2007 but they were followed by another profit warning and a further trend lower. But, this move may be different for a few reasons. Unlike the false signals given previously by Loblaw’s stock, the 50- and 200-day moving averages have flattened out and are giving signs of turning upward in tandem which can be positive for a stock’s prospects. And, after hitting a multi-year low on October 27 of $26.26, the stock held well above the $29 mark at the next market low on November 20. Like a rotten fruit with a shiny surface, Loblaw’s shares have been deceiving before. But, this time, biting into Loblaw may leave a good aftertaste. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More » |
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