Happy Holidays to You and Yours!!

From all of us at Luft Financial :

Robert, Aaron, Jon, Oliver, Christina and Kyla

Many know of my love of food…well it has become competitive..

I will be a finalist on recipes to riches, airing next Wednesday, November 30th, on the food channel. 

Be sure and watch to chear me on!!

I have submitted my recipe for Pulled Pork to the show, and was chosen as a finalist.

http://www.foodnetwork.ca/ontv/shows/recipe-to-riches/episode.html?titleid=267963&episodeid=267963&type=specialshow

The North Shore Outlook ran a story today about it:

http://www.northshoreoutlook.com/community/134416848.html

click on the link above for the whole story! 

In light of recent global and market events I thought it necessary and timely for an overall update.

As I write this               Quarter to date

S&P500 (cdn$)                -3.677%

S&P TSX                              -8.996%

Gold                                     +7.56%

Bond index                        2.514%

MSCI EAFE (cdn$)          -4.472%

Markets are obviously quite volatile, and the above demonstrates the importance of a portfolio well balanced between cash, income producing investments, and ownership of good companies for the long term.

What it also leads to is thoughts about investor behaviour.

More so the “predictable irrationality” of investors.

consider the picture below:

 
 
 In the past these cycles of emotion played themselves out over longer periods of time. 

Today, with the ability to transact and “act” instantly, we see knee jerk short term reaction (both positive and negative) in much shorter time spans.  This can lead to inappropriate action on behalf of an investor.

We are in the midst of one of these short term “nauseous” moments.

Pick your reason:

Greek Debt

Political instability in the middle east

Housing crisis in the US

Chinese inflation leading to reduction of monetary stimulus and demand for commodities falling

Canucks losing the cup

OK, perhaps the last is stretching it, but you understand my point.

These macro issues will pass. 

Many corporate balance sheets, however, are stronger than they have been in years.  In fact, in light of recent share price declines, and the persistence of some investors to “throw the baby out with the bathwater”, there are opportunities to own these companies at a discount.

The key is sticking to your investment policy statement and YOUR longer term portfolio goals.

This is NOT a sell opportunity.  It may be a BUY opportunity.

Remember:  humans persistently over react on the upside and the downside.

Our domestic market, for example, is very correlated to the price of oil.

consider the following charts:

The first shows the positive correlation to our overall market and the price of oil over the last 6 months.

This reminds investors who simplyown the entire index how strongly influenced by energy our overall stock market is.   

The second chart overlays the bond index with the S&P TSX. 

This highlights the importance of an overall asset allocation strategy.  Notice the lack of correlation between equities and bonds.

Your overall asset allocation will determine the majority of the volatility you experience in the value of your portfolio on a monthly/annually/longer term basis.

For example, if you are 80-100% equities, expect to drop in equal measure to the markets during short term sell offs.

Through my analysis going back to 1970 of asset class combinations, by holding 45-60% equities in a portfolio you will greatly reduce short term volatility without a major reduction in longer term portfolio performance.

Therefore you need to focus on the amount of :

cash

income producing investments

good quality companies and/or managers

in your overall portfolio and adjust your asset mix regularly.

Do not, however, reduce your exposure to asset classes in your portfolio that have reacted negatively in the short term. 

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

Our first annual picnic was a huge success!

A big thank you to clients who raised close to $600 through draws on the day of the event.

In addition, we were able to raise a total of $6000 from the local investment community!

All of the proceeds were split between the Fire Fighters Burn Fund  (www.burnfund.org) and the Vancouver Police Charitable foundation for victims of child abuse.

Thank you to all who attended and we will do it again next year!  (we will pick a day that doesn’t rain

With tensions in Korea, the threat of contagion in the European debt crisis, fears of Asia dampening worldwide growth through monetary tightening, and a US consumer still heavily in debt, it is easy to become overwhelmed with the short term economic “noise”.

Indeed, investors are listening.

All major equity markets are trading lower, and through their all important technical averages to the downside.  In most cases this means they are trading below their 200 day moving averages:  a very “bearish” sign.

Currently, the S&P/TSX is at 11,342, down 1.55% on the day, while the 200 day moving average sits at 11420.

Without any major signal to the upside, we could see more downside volatility to the market.

With Friday being the last trading day of this month, a close below the 200 day moving average would be a very bearish signal indeed.

With energy prices under downward pressure, and the US dollar soaring due to a flight to safety, the C$ is under duress, trading at .9276 per US$ or 1.078 US dollars per C$.

What does all of this mean for us as investors?

I cannot help but think of the words of the ever wise Warren Buffet: “Be fearful when others are greedy and be greedy when others are fearful”.

This is a “healthy” correction.  Markets have enjoyed an almost unimpeded run since the bottom in March of 2009.

The S&P/TSX now trades at the same level it did in September of 2009, which is up 52% from those lows.  Taking a longer term view, however, our major market now trades at the same level it did in DECEMBER 2005!

with this level of volatility, it is no wonder investors feel slightly whipsawed. And FEAR has taken over.

what to do?

This is where the importance of your strategic asset allocation come into play first and foremost:

In other words, your overall plan for the funds since inception:  the mix you implemented between cash/bonds/stocks that determines 90% of the volatility of your portfolio.

if you have chosen aggressive growth as your mandate, you know you will experience all of the ups and downs of the short term market:  by the same token if you have only a 30% allocation to equities, your volatility will be lower.

This is NOT the time to change your overall strategic mix:  IE:  make a timing decision to overweight one asset class or the other.

That being said, this could be seen as a time to increase your tactical trading strategy:  by adding to areas that are down.

Call this: my Peter Mansbridge theory

When major media outlets lead with how bad things are, it may be time for us all to be “greedy when others are fearful”.

Today, in response to questions and concerns by certain Bear Market pundits, it is essential for clarity of thought

Something bad can always happen: Terrorist attacks, pandemic flu, acts of god

It appears, however, that the odds are in favour of this economic recovery taking hold.

There has been significant financial easing:  monetary and fiscal.

Short term interest rates are almost zero, and the yield on the ten  year treasury is 3.73%

the yield curve is sloping in the right direction:  up:  banks can fund at the short end, lend at the long end and profit from the spreads.   Investors will seek higher yielding securities than cash as a result, to increase their investment returns.

While the markets have rallied significantly from their March 2009 bottoms, good companies will continue to thrive.

Earnings will have to come now from a better economic environment, however, and not just cost cutting.

It will be even more prudent going forward to seek out such companies and avoid the tendency to simply “buy the market”.  While an indexing strategy works in a raging bull, it is much more in question in a sideways market.

Active security selection will rule the day, and portfolio construction must take this into consideration.

I will continue to seek out managers adding value, and invest in companies that will thrive in what may prove a difficult environment to some.

A passive strategy of buy and hold will simply not do.

feel free, as always, to contact me with questions or concerns.

Over the past week I have attended three seperate financial forums:

Dr. Martin Murenbeeld, Chief Economist, Dundee Wealth

TD Financial:  five member symposium (economist and four portfolio managers)

Mackenzie Financial:  Full day financial forum, (economic and financial updates)

I thought it would be prudent to pass on a summary of the information presented

All three economists were in agreement that the root of the current financial problems was the overinflated price of real assets, namely US real estate.   Foreign exchange reserves reaching in excess of 5 trillion dollars created excess liquidity, leading financial institutions to lend those reserves and inflate prices.   At the same time, the US consumer decreased savings.

As housing prices fell (collapsed) we have experienced a massive de-leveraging, causing further price depression of all asset classes, equities included.

This depression of asset prices, caused by excess supply, could have turned into a depression spiral. 

BUT IT WILL NOT

Why?

Monetary and Fiscal Policy.

1) Massive increases in fiscal deficits (governments spend more)

this did not occur until too late in the last depression.  1.8 trillion dollar deficit (US)  14% of GDP

2)  Massive increases to the money supply

federal reserve pumps money into the system by buying treasuries, and banks have excess reserves to go out and lend.  Fed will also be buying corporate paper to add to the reserves.  When the banks start to lend the money supply will decrease.

3) Currency devaluation

Massive Chinese FX reserves (1,750 TRILLION) keep raising US dollar, but chinese currency has been rising, making chinese imports more expensive.  This is good for US domestic manufacturers

US recession

unemployment will rise to 10%

confidence is down sharply due to housing price declines.

When household wealth grows, consumer spending will rise.

End of recession:

forecasting Q3, 2009

15 trillion in government spending programs/guarantees will create activity

House prices will eventually stop falling as they are at 2004 levels.

Canadian Recession:

will be longer than the US recession.  Unemployment is at 8%, but reached 13% in 1982.  Canadian housing starts are down 5-7%.  Expect a further 10-15% decline in house prices from current levels.   It is still cheaper to rent vs. own, but suggest making “sucker bids” by low balling any offers.

Canadian dollar:

80-83 is comfort level.  If commodities rally so will the dollar.

US dollar:

major controllers are Chinese/Russia/Europe Foreign exchange reserves

EQUITIES:
S&P 500 is down close to 40% and is currently undervalued.  Peak to trough down 56%!  Biggest decline ever except for the great depression..remember: depression is over 20% GDP contraction.  Thought is we have panicked too much and equities are cheap.

TSX:  70% chance that March was the bottom of the market.

Bonds

Corporate and High yield bonds offer the best opportunities. Default rates will rise, but not in higher credit rated bonds

Commodities:

weak demand and weak world growth will affect the rebound.  China continues to stockpile copper.  Suggest dollar cost averaging back into commodities

marginal cost for producing oil is approximately $80/bbl, so prices will rise.   Canada/us consume 23/bbl per capita, china only 1/bbl .  this will definitely increase demand curve going forward.

Gold:  monetary stimulus is good for gold.   International deficits are good for gold, as all countries are trying to devalue their currencies and thus increase exports.   Near term cautious on Gold prices.  5% weighting

Interest rates:

will remain low into 2010.

Impact on long term investment accounts:  (rrsp/RRIF/long term cash/tfsa)

Cash is yielding next to nothing.  Fixed income needs to be increased and corporate and high yield bonds added.  slight overweight to canadian equities, especially dividend paying companies.  US and international exposure should be currency hedged.  Consider 5% of a portfolio to gold.

Asset allocation:

cash 10-30%  (the upper end only for clients close to retirement or regularly withdrawing now)

Bonds:  40-50%

Equity:    50%-60%

The Long/Short fund that Barry Allan manages has several distinct characteristics:

1)       As a true discretionary fund (currently in a neutral position) Barry Allan will make the decision as to when the fund will go long.

2)       The fund is currency hedged

3)       In addition to going long high yield debt, the fund can also go short treasuries