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September 2008 PDF Print E-mail

Welcome to the Pleasure Dome!

Ok, as we crash through one crises to another I wanted to send this out as both a summary of what has gone on and how management teams I respect are handling their investment responsibilities going forward. I have also stuck some quotable quotes from what I view as various useful media sources. (bolding is mine, btw)

CI Harbour Advisors conference call highlights

by Gerry Coleman (highlights by me)

The market is already discounting a U.S. recession and global slowdown - it's built into current prices.

A crisis of confidence is gripping the U.S.

·         There's lot's of finger pointing going on and most of the fingers are pointing at Wall St.

·         Wall St. was a big part of this, but it didn't create the housing mess on its own.

·         Brokerage firms were a big part of it, so were deposit-taking banks, insurance companies, stock brokers, real estate brokers and regulatory agencies, such as the SEC.

·         The regulatory agencies are overseen by government, so the government is also to blame.

·         That's changing, now there will be severe regulations put into place.

·         I think people will feel better after the House of Representatives passes the rescue package, but it shouldn't be viewed as a panacea because there are still other things that need to be done.

Crisis will end

·         We are in the midst of a full-fledged financial crisis in confidence.

·         Panics are temporary and usually end because:

o        prices become low enough that buyers move in and start to reverse the trend

o        government initiatives are introduced - and we're getting that now

o        central banks usually take action - so I wouldn't be surprised if the Fed cut the discount rate soon.

Two kinds of market losses

·         There are two ways to lose money in the stock market - permanent loss of capital and temporary loss of capital.

·         Permanent loss of capital takes place when you invest in low-quality, speculative securities because when they go down, they never come back.

·         When high-quality companies like well-capitalized banks, insurance companies, oil and gas companies like Suncor and EnCana, mineral companies like BHP Billiton and Rio Tinto, gold companies like Barrick and Goldcorp, and others like General Electric and Microsoft go down, it's a temporary loss of capital.

·         When I see prices of those companies coming down, I'm convinced it's a temporary loss of capital and an opportunity.


·         There are some good opportunities that haven't been seen in a very long time.

·         Liquidity is allowing us to take advantage of weakening prices.

·         Both portfolios have a lot of cash - I'm anxious to get those positions down and take advantage of the weakness we're seeing in stocks.

·         Our cash reserves will probably come down significantly in the next 30-60 days.

·         I've been buying selectively across all sectors because stocks have come down indiscriminately.

·         The way you profit is to take advantage of the irrationality and invest in high-quality companies when people are selling indiscriminately.

·         This is a great opportunity if you're a long term investor with a time horizon of three or four years; it's an opportunity to be picking up high-quality companies at very reasonable prices.

Mackenzie Financial Open Letter to Investors

By Fred Sturm


This is the most pressing problem.  There are two parts to this-who needs the cash, and is there any cash to be had?  Clearly the biggest need is in the Anglo-banking sector that financed physical property with not enough margin, so now the classic lending killer of borrowing short to lend long has caught them.  If you were told your house needed to be sold within 24 hours, you may not expect to receive a fair and reasonable price.  Under normal circumstances, depending on asset, given 1-5 years these assets are likely to cover the lending value, but it does take time.  This is what the TARP program was designed to achieve, time.  Over time a natural buyer may come in to the neighborhood.  Similarly in markets, gradual changes allow sellers to seek out buyers.  But it appears that hedge funds et al have been told to sell within 24 hours.  ...It seems only reasonable that holders of assets that are now selling under some real or perceived time pressure are not getting full and fair value, just as if the house needed to be sold within 24 hours.  Even without going into extensive discounted cash flow valuation, this is why we believe investors with time are being granted an above average opportunity...."

Financial crisis: Nightmare on Wall Street

By Rachel Pulfer from the October 13, 2008 issue of Canadian Business magazine

"...John Berlau, director of the Center for Entrepreneurship think-tank in Washington, D.C., similarly applauded Paulson's decision. "It's about time!" he wrote in a note released Sept. 15. "Business failure is not only a permissible outcome of capitalism, it's a necessary one. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure."

Buying in moments of panic can give your portfolio a head of steam

Globe and Mail, Oct 1st by Fabrice Taylor

"How is it possible that 30 of the biggest and most blue-chip companies are worth 7 per cent less from one day to the next? The answer is that they're not. Yet that's how much the Dow Jones industrial average shed two days ago before clawing back 5 per cent yesterday....

Blue-chip earnings are surprisingly consistent. Blue-chip dividends are even more so. What makes stock prices surge and swoon is the multiple investors are willing to pay for earnings. Although the stock market is usually reasonably accurate at pricing stocks, it gets irrational every once in a while. This week might have been one of those times. Investors who bought rather than sold on Monday look pretty smart - so far. And if history is any guide, buying in moments of panic is an excellent way to outperform.

...So if you're kicking yourself for not buying yesterday, you probably should. It wasn't earnings or dividends that were in freefall; it was emotions. Mr. Market sold his shares, took his money and went home to listen to sad songs on his iPod.

...from 1926 to 2003, according to Bernstein Global Asset Management, the volatility of stock prices was about 20 per cent. The volatility of dividends is less than 2 per cent. Stock prices are 10 times more volatile. This implies that if you can buy stock in a good company at a good yield during these fleeting panics, you'll do well.
(Incidentally, the Dow Jones industrial average doesn't include dividends. If it did, it would be above 250,000.)

Another statistic: $1 invested in U.S. large caps in 1926 would have grown to $2,282 by 2004 with dividends reinvested. Take out the dividends and the compounding effect thereof and you're left with $88."

The $700bn bail-out and the budget

By Lawrence Summers, Financial Times

..." First, note that there is a major difference between a $700bn (€479bn, £380bn) programme to support the financial sector and $700bn in new outlays. No one is contemplating that the $700bn will simply be given away. All of its proposed uses involve either purchasing assets, buying equity in financial institutions or making loans that earn interest. Just as a family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays, the impact of the $700bn programme on the fiscal position depends on how it is deployed and how the economy performs."

Setting Expectations

by Joe Jugovic, QV Investors
..."As far as money managers telling you stocks are cheap, please appreciate stocks can get cheaper. We are here to help you in understanding the businesses we own. We refuse to put out the one sided blather that comes from so many in the supposed know. A
ll we can say is we've been cautious to hold companies which we believe will be in business in five years and are priced to offer significant upside. We don't blame you if you are sceptical of that comment, in this environment you should be. But for what it's worth, we've been personally adding to our holdings in the past two weeks. If it goes down again we will do the same, the basic principle of dollar cost averaging is critical in this emotionally challenging period. Forget picking the bottom, it's easier to average it out over time."

Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call Kevin Cork to discuss your particular circumstances.