Stocks & Equities

Dow will repeat 2007-2008 peak-crash cycle Commentary: It’s deja vu as lessons of meltdown go unheeded

Dow skyrockets near 20,000 by 2014? In two years? Then crashes near 10,000 by 2016 presidential elections? Possible? You bet. Déjà vu 2007-2008.

So what’s your biggest risk as an investor? Listening and acting on the relentless manipulative B.S. from Wall Street’s media bulls in the next few years.

MW-AS252 tokyo  20120619075406 ME

Last week USA Today suggested the stock market will soon set a new record high, “How high? How about an all-time high in six months, 16% higher in 12 months, almost 40% higher two years from now.” Yes, 40% said one bullish technician with a mega-bullhorn sounding the rally call for all bulls: “Now is the time to finally break out” of today’s secular bear market.

New secular bull market driving stocks up 40% in just two years, by 2014? Yes, halfway through the next presidential term the DJIA would have to rocket past the 2007 peak of 14,164 to a record close just under 20,000, ignoring GOP leaders warnings that gridlock of all tax, jobs and economic programs will continue if Obama is reelected.

Now compare that with my recent report that says the Dow would drop 20% by 2016,down near 10,000. But it’s not really an impossible scenario: The U.S. stock market could rise near 20,000 in the first two years of the next presidential term. Then by 2014, a global crisis could sink the Dow to 10,000 by the 2016 presidential elections, like 2008.

Wall Street never learned lessons of 2008, so we’re doomed to repeat

Repeating? Yes. Here’s why today’s stock market parallels the 2007-2008 run-up to Wall Street’s disastrous subprime credit meltdown. Remember, the Dow hit 14,164 in October 2007. Then lost more than 50% of market value, crashing to around 6,600 in March 2009. Get it? Lots can happen in two years. And unfortunately technicians can’t fit this kind of macro-volatility into their myopic equations.

How do I know? Earlier when I was publishing my own financial newsletter I developed a healthy skepticism of predictions made by technicians. One day with a commodities trader, after watching his two-minute ticker moves, I asked him about predicting the market two weeks down the road: No can do. Besides, they don’t want to. Like today’s high-frequency traders, they think short-term, in minutes, micro-seconds, not weeks.

Besides, too many variables. It’s tough enough just focusing on short-term technical numbers. In the process, they have to minimize other key analytical tools — fundamental analysis, MPT and macroeconomic trends — and speculate on Fed policies, fiscal cliffs, internecine partisan political wars, jobs, terrorist attacks, China’s exports, and so many other technically less-quantifiable big-picture factors for long-term predictions.

Warning: 93% of Wall Street’s message intentionally misleading B.S.

So if you remember nothing else today, here’s your big take-away: You can never trust Wall Street bulls, they’re lying to you 93% of the time. Studies tell us analysts signal “buys” vastly more than “sells.” And behavioral-science research tells us that bankers, traders and other market insiders are misleading us, manipulating us 93% of the time in their securities reports, PR, ads, speeches, sales material, in their predictions on television, cable shows and when quoted in newspapers and magazines.

Get it? It’s 13-times more likely that Wall Street’s telling you a lie than the truth. Yes, they’re manipulating you 93% of the time. They know your brain’s easy to manipulate. That’s just what they do. They can’t help themselves in today’s highly competitive world. And they’ll never change. So they always win, you always lose.

17 stupid statements bulls make to deny a bear recession

You have to “tune your B.S. detector to high,” as the great financial adviser Jane Bryant Quinn says in her classic “Making the Most Out of Your Money.” Quinn’s warning was reinforced with the publication of “Bull! 144 Stupid Statements from the Market’s Fallen Prophets,” which hit the book stores near the end of the 30-month recession a decade ago, after $8 trillion of the retirement money for 95 million Americans was wiped out.

We picked 17 of the stupidest statements made by Wall Street’s leading minds to illustrate their tendency 93% of the time to mislead and manipulate investors using hype, happy talk and pure biased B.S.

….read page 2 HERE

Global Insights – Sept 25th

Kevin Konar

»» Most equity markets consolidated their recent gains, although China lagged. QE3 continues to dominate market participants’ bandwidth, but Spain should come into focus soon.

»» Intentionally or not, the Fed and ECB have firmly embraced “financial repression” with their recent announcements.

»» Whether financial repression occurs in extreme or benign forms, it can cost investors who worked hard, lived frugally, and saved for years. (page 2)

»» Global Roundup: Updates from the U.S., Canada, Europe, and Asia Pacific. Asian investors have an eye on China’s upcoming leadership transition. (page 4)

Click Here to read the complete analysis

Cutting-Edge Technologies Will ‘Green’ Fracking

Fracking in the U.S. is here to stay, affirms Keith Schaefer, editor of the Oil & Gas Investments Bulletin. North American business is dependent on cheap energy, and even energy utilities are switching from coal to natural gas. Although environmental concerns remain, the industry has incentive to do the right thing, says Schaefer. In this exclusive interview with The Energy Report, Schaefer profiles service companies that are using cutting-edge technology to make fracking safer, greener and cheaper.

 COMPANIES MENTIONED : GASFRAC ENERGY SERVICES INC. : GREENHUNTER ENERGY : POSEIDON CONCEPTS CORP. : RAGING RIVER EXPLORATION INC. : RENEGADE PETROLEUM LTD. : RIDGELINE ENERGY SERVICES INC. : ROYAL DUTCH SHELL PLC : ZAZA ENERGY CORP.
 

The Energy Report: Keith, considering that natural gas prices are still near all-time lows, can you still argue that fracking has improved North American energy markets?

Keith Schaefer: In just a few short years, fracking grew the supply of natural gas way ahead of demand. The price of natural gas fell from $8–9/thousand cubic feet (Mcf) to $2/Mcf! Natural gas is the low-hanging fruit for the energy sector and for consumers. Cheapened feedstock provides a huge boom for American business.

TER: Have fracked oil prices kept pace with falling natural gas prices?

KS: It has not declined by the same degree, but it has lowered the cost of North American oil. West Texas Intermediate (WTI) used to be the major benchmark for oil around the world. Now, WTI is only a benchmark for a small area of the United States and Canada. In addition, the flood of supply coming out of new shale oil wells in North Dakota and Texas is overwhelming the refinery complex in the Gulf Coast, which is about 50% of North America’s refinery capacity.

TER: Is there a glut of gasoline? Prices for consumers are certainly high.

KS: That’s a great question. The short answer is no. But the long-term answer is yes. People are saying, OK, how come gas prices at the pump are so high when we’ve got all this oil? What’s going on? Here is how the game works: the refineries are moving their production flows to produce the least amount of driving gasoline possible, and the most amount of other refined products, like home heating oil fuel, diesel, kerosene and jet fuel. These are products they can export, in which case they get to use the Brent prices, which are 15% higher than WTI prices. These refineries generally operate on skinny-to-average margins, so 15 points is huge for them. That is why the price of retail gasoline for driving is 50% higher than it was in 2008.

Let me give you an example. I’m in Vancouver. We sell gas by the liter, not the gallon. Back in 2008, we had an uncanny relationship where if oil was $100 a barrel (bbl), gasoline was $1 a liter (L) at the pump. If it was $110/bbl, it was $1.10/L. If it was $1.35/L in Vancouver, oil was $135/bbl. Now, gasoline is $1.35/L, but oil is only $96/bbl. Why? Because the refineries are producing the least amount of gasoline, and the most amount of other refined products.

TER: Does fracking lower oil production costs?

KS: As a rule of thumb, the cost of production for most shale plays in North America is $40–45/bbl, which is not that much different from costs using conventional methods. It is above-ground logistics that cause lower prices for fracked oil. We don’t have enough pipelines to efficiently transport the fracked oil to the refineries. Consequently, supply backs up at the hubs, creating big discounts. For example, in late June, Canadian oil and Bakken oil were at huge discounts, almost $20/bbl to WTI. Because of pipeline disruptions and refinery downtime, Canadian producers were receiving under $70/bbl for their oil. But only 2½ months later, the logistics are running smoothly and Bakken oil is now selling at only a $3/bbl discount to WTI.

TER: Why do we see regional price differentials at the pump?

KS: Logistics. Here is an example. Recently, BP Plc’s (BP:NYSE; BP:LSE) Cherry Point refinery, which is just south of the Canadian border, went down. The next day, gas prices jumped $0.30 per gallon from Seattle to San Diego.

It’s not like we have no new refining capacity. Even though no new refineries have been built since ’76 in the U.S., refineries have been expanding. Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE)and Saudi Aramco have spent $10 billion during the last few years, doubling the size of their Motiva refinery in Texas from 300,000/bbl per day (bblpd) to 600,000/bblpd. It immediately ran at full capacity. But, then, an industrial accident took the new expansion offline for nearly a year, which boosted the retail price.

TER: Why is fracking politically controversial?

KS: Scientific studies have shown that fracking is not an environmental issue. It does not contaminate the ground water. There is usually more than a mile of granite between where the fracking takes place and the water table. On the other hand, the government of British Columbia has released a study finding that fracking causes earthquakes. And there is seismic activity associated with fracking and saltwater disposal wells, but that takes place in the formation where the fracking is occurring. The quakes are no different than any of the millions of micro seismic events that happen around the world every day. Of course, there is an impact. Blasting for mining creates seismic events. Building a dam creates seismic events. Filling a large manmade lake creates seismic events, because water is heavy. Fracking is no different.

It is the fierceness of emotion that is the big issue here. People get nervous about the safety of their water supplies and say, “Hey, prove to me that fracking is really safe!” Industry has responded by saying, “Look, here’s the science. We’ve been doing this for 50 years. No need to worry, it’s all good.” But that’s not what people need to hear. People need to hear, “Hey, we hear that you’re really concerned about this, that it’s a big issue for you. Let us come together at a community hall and talk about it.” That would be more effective than just taking out ads that say, (a) we bring so many jobs to the area, why are you bugging us? and (b) we’ve done this for decades, why are you bugging us? That kind of attitude is not going to win any arguments.

TER: Are drought conditions in the Southwest and Midwest affecting the availability of water for fracking?

KS: Due to drought, the price of water for oil and gas companies has more than doubled in the Midwest and Texas. Some of the oil and gas companies are not drilling as much as they said they would this year because they need to figure out where to get the water and how much they want to pay for it. Even though the amount of water used by the industry isn’t huge compared to irrigation, there are areas where the oil industry is bidding for water rights against farmers. The industry needs to be very careful about public relations. Otherwise it becomes a case of the big guy against the little guy.

TER: Are there any technological fixes to that issue?

KS: Yes. Firms involved in the fracking supply chain are figuring out how to source, treat, recycle and dispose of water efficiently. One company that comes to mind is Ridgeline Energy Services Inc. (RLE:TSX.V). It has a proprietary water recycling technology. EOG Resources Inc. (NYSE: EOG) is a Ridgeline client, as is Pure Energy Services Ltd. (TSX:PSV). These companies are starting to recycle their fracking water, which is great.

Other companies doing water management include GreenHunter Energy (GRH:NYSE:MKT). That’s Mark Evans’ deal from Magnum Hunter (MHR: NYSE.A). This company is determined to use saltwater disposal wells as its entrée into the water management sector. Another company is Poseidon Concepts Corp. (PSN:TSX). It has a water storage product and is branching out into more vertically integrated work in the water sector. There are lots of companies experimenting with this, and for good reason—there are very big margins, 50–85% gross margin. That’s fantastic. It beats the pants off any other service in the oil patch. Investors should be taking a strong look at fluid and water service companies.

TER: Aside from the Bakken shale, what are the most exciting international sources of shale oil and gas?

KS: The only other notable proven deposit of size is the Vaca Muerta shale in Argentina. There are a few Canadian juniors down there, but the Argentine government has started to nationalize part of YPF SA (NYSE: YPF). Plus, some permits were pulled from juniors by provincial regulators. That put a huge chill in the market for these stocks. They are well funded and cashed up, but the market’s just not going to care about them until there’s real production growth.

European shales have been fairly slow to take off. Poland’s been on the hot list for a while, but nothing’s happened. During the next two to three quarters, we could see a few wells get plunked down in New Zealand. That looks like a fairly thick formation. If it gets going, it could be a big win for investors next year.

TER: What about the oil and gas shale near Paris, France?

KS: Fracking is still banned in France. ZaZa Energy Corp. (ZAZA:NASDAQ) dropped its French play and is now focused on the Eagle Ford shale and the Eaglebine in Texas.

TER: Could fracking be banned in the U.S., either in certain areas or in its entirety?

KS: Fracking will never be banned in the U.S. But if it did happen, businesses would go bankrupt left, right and center. Many companies are hooked on cheap gas. There would be widespread bankruptcies and unemployment. Power companies are using cheap gas instead of coal. The U.S. reduced its greenhouse gas emissions more than any other country in the world over the last two to three years because of shale gas.

TER: What technological changes will keep fracking profitable, while reducing its environmental footprint?

KS: A company called GasFrac Energy Services Inc. (GFS:TSX) has been trying to get the industry to start using liquid petroleum gas (LPG) for fracking, instead of injecting water into the ground. LPG is propane, which is a naturally occurring substance in the formation, so it doesn’t damage the formation, as water can. Unfortunately, the company is not having very much success. But the industry is doing a lot of research into food-grade fracking fluid. The idea is to make fracking fluid as green and environmentally friendly as possible. That’s a couple of years away, but it’s only a matter of time.

TER: Any other names on the cutting edge of fracking technology?

KS: Raging River Exploration Inc. (RRX:TSX) has a big play in the Viking formation in Saskatchewan that is very profitable. Its water flood technique is returning incredibly cheap oil. It got the first half million barrels of oil out at about $30–35/bbl, and the last half million barrels at $5–10/bbl. It is at the forefront of recovery technology. Normally, a firm is lucky if fracking returns 10–15% oil. But with the water floods, the recovery factor can go way up. That is great news for Raging River stockholders.

Renegade Petroleum Ltd. (RPL:TSX.V) is also working in the Viking formation, and it has two other upcoming plays worth watching. One is the Slave Point play in Red Earth, which is north of Edmonton. Pinecrest Energy Inc. (PRY:TSX.V) has been involved. Renegade will drill the first well later this year. If it can prove up one or two wells, it has a big enough land package to allow a lot of new locations to open up. Renegade also has a really interesting conventional play in southern Saskatchewan called Souris Valley. It’s turning out to be a lot more profitable than the company had originally thought it would be.

TER: What is your bottom-line message on the future of fracking?

KS: Mainstream public attention on water management isn’t a bad thing. It makes the industry do things that should get done. Fracking water should be food grade. The market rewards stocks for doing the right thing. There’s nothing that the market hates more than uncertainty. If the industry starts to lose what I call its “social license” in the United States, that loss will have a very big impact on valuations. Companies are incentivized to do the right thing, to do it well—and to do it fast. That’s why we will soon see a resolution to the fracking issue.

TER: Thank you for chatting with us today.

KS: A pleasure as always.

Keith Schaefer of the Oil & Gas Investments Bulletin writes on oil and natural gas markets. His newsletter outlines which TSX-listed energy companies have the ability to grow and bring shareholders prosperity. Keith has a degree in journalism and has worked for several dailies in Canada but has spent the last 15 years assisting public resource companies in raising exploration and expansion capital.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE: 
1) Peter Byrne of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Royal Dutch Shell Plc.
3) Keith Schaefer: I personally and/or my family own shares of the following companies mentioned in this interview: GasFrac Energy Services Inc., Poseidon Concepts Corp., Raging River Exploration Inc., Renegade Petroleum Ltd., Ridgeline Energy Services Inc. and ZaZa Energy Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

The Cure for Baldness

rarely0925

American society is becoming increasingly politically polarized. Indeed, a June Pew Research Center survey found that while philosophical divisions between groups based on race, education, income, religion and gender have remained largely flat since 1987, the division based on political differences has almost doubled during that same time and has ramped dramatically since 2009.

EquityFocus BaldnesSept2012 Fig1

This trend is happening at the same time that people increasingly turn to online sources for their news. In particular, as Figure 2 indicates, non-traditional media outlets are gaining share at the expense of mainstream media, especially print newspapers. Barriers to entry for individuals creating and publishing content online are low – in effect democratizing content creation. This opens societies to a more diverse and free-ranging marketplace of ideas and opinions.

EquityFocus BaldnesSept2012 Fig2

But it also creates challenges for individual publishers: Getting noticed among the thousands of others competing for mindshare is becoming harder. This is complicated further by the use of text messages and social media services such as Twitter to disseminate information, which limit the articulation of viewpoints to very brief messages. It is difficult to distill complex ideas into a 140-character tweet.

What should an author, eager to gain attention, do in an increasingly crowded, noisy and contentious world of opinions where the most popular delivery mechanisms constrain the ability to fully articulate an idea? Simple: offer an increasingly extreme view – with a hyperbolic headline. Make as big a splash as possible by exploiting society’s increasingly insatiable demand for byte-sized information. As a result, balanced, centrist views are rarely offered and often drowned out by the shrillest voices. Traditional news organizations have recognized and are responding to this trend as well, so that they are not themselves lost in this crowded cacophony. Indeed, there is an amplifying feedback loop between our increasingly polarized society and the media.
 
Just one look at the news aggregator website Realclearpolitics.com illustrates this trend. After a Presidential candidate gives a major speech, one will inevitably find opinion editorials lumped into one of two categories: “Why the candidate was brilliant” or “Why the candidate was terrible.” Important and complex concepts are reduced to punchy (and often trite) headlines. Nuance and well-reasoned analysis are lost. Pundits, even Nobel Prize winners, can be counted on to parrot political talking points. Somehow they don’t seem to be embarrassed for reliably playing the part of mindless partisan drone. They are getting noticed – and perhaps that is all that matters to them.
 
Unfortunately, this lurch to extremes isn’t confined to the political arena. Clicking on sister website Realclearmarkets.com often reveals a similar dynamic. Rarely does one find market commentators offering moderate, balanced investment advice. More likely one will find extreme headlines designed to capture maximum attention: Stocks are dead. Bonds are dead. Gold is dead. Buy and hold is dead. Oil is dead. We are all dead.
 
In his August Investment Outlook, titled “Cult Figures,” Bill Gross explained why we at PIMCO believe that returns across asset classes will be lower in the future than they have been in the past. Some media outlets reported that Bill declared that stocks are dead, when in fact he said stocks will likely outperform bonds over the long term, but in a New Normal environment, returns across asset classes (including bonds!) will be lower than the returns to which we’ve been accustomed. “Stocks are dead” makes for a much more exciting headline than “stock and bond returns will be more moderate in the future.” And in our 140-character world, this became the sound byte of Bill’s well-reasoned and empirically substantiated argument.
 
It would be convenient if we could simply declare one asset class or one investment strategy as the solution to all investors’ objectives, but, as I’ve discussed in prior commentaries, with a future that still could be deflationary, moderately inflationary or even highly inflationary, no one asset class or investment strategy will do well in all scenarios or is appropriate for all investors. Investors need to create portfolios designed to withstand the probabilities of those various outcomes. While hyperbolic headlines may draw the most “clicks,” “likes” and “retweets” – it usually makes for poor investment advice, and if investors don’t have the time to study the nuances underlying sophisticated investment strategies, they may be taking risks they don’t understand. Fortunately, most responsible investors know that describing the optimal portfolio to balance various global economic scenarios takes more than 140 characters.
 
At the risk of exceeding my allocation of mindshare (and, if you have read this far, thank you) – let’s take a look at the three sources of stock market returns to consider what the future may hold.

  1. Earnings may grow
  2. Valuations may increase
  3. Companies may pay dividends

Considering each of these individually:

1. Earnings growth – more specifically earnings per share growth. If earnings don’t grow, but just stay flat, then this term of the equity return equation would be zero. Where do corporate earnings come from? They come from economic activity. Earnings growth for the market as a whole ultimately comes from economic growth. If an economy stops growing, corporate earnings also might not grow, but they could still be positive.

Some market commentators have remarked that there is no correlation between stock returns and GDP growth, and they therefore conclude that they are unrelated. Figure 3 illustrates the low apparent correlation between global equity returns and GDP growth.

 

EquityFocus BaldnesSept2012 Fig3

Remember, however, that our professors in statistics classes usually went out of their way to teach us that “correlation does not equal causation.” In other words: Just because two things look related does not mean one necessarily caused the other. Similarly, a lack of apparent correlation does not necessarily mean a lack of causation. Many other factors could also be at play that cause direct correlations to appear to break down.

 
So how do corporate profits relate to the growth of an economy? The income approach to measuring economic activity helps demonstrate the important linkage between economic activity and corporate profits (note: I use National Income here rather than GDP because it more directly illustrates the fundamental linkage between corporate profits and economic activity):
 
National Income = Labor Income + Corporate Profits + Rental Income + Interest Income
 
Obviously in a global economy this relationship is more complex. For example, large U.S. multinationals have been growing their earnings faster than the U.S. economy by selling products and services globally and tapping into higher growth markets. And indeed some industries are countercyclical. But the basic relationship between economic activity and corporate profits has to be correct. There is a linkage even if not strongly correlated in the short term.
 
The denominator of earnings-per-share (EPS), or share count, complicates the issue. Share issuances hurt EPS growth by diluting earnings. Conversely, share buybacks help. Some commentators have noted that increased share issuance has been a key driver that has broken down the correlation between economic growth and equity returns. Unfortunately those breakdowns usually mean equity returns have been lower than economic growth would have suggested because firms have issued shares more quickly, diluting existing stockholders. Exports and share issuance and buybacks may complicate the direct relationship between economic activity and corporate profits, but the fundamental linkage between the two is irrefutable.
 
Note that corporate profits have increased over the past several decades in part because corporate taxes as a share of GDP have fallen over time and the share of National Income that has accrued to labor has also fallen. Going back to the equation that defines National Income: If National Income grows modestly and Labor Income grows even more slowly, it is likely that Corporate Income will grow more quickly to balance the equation. We believe that there will be an easing of these tailwinds that have helped drive corporate profit growth so quickly over the past few decades. There are limits to how low corporate taxes and labor’s share of National Income can go. If we are right, that suggests future equity returns, driven by corporate profit growth, are unlikely to be as strong as in the past.
 
EquityFocus BaldnesSept2012 Fig4
 
EquityFocus BaldnesSept2012 Fig5

 

2. Valuations – P/E multiples can expand. As fear decreases and confidence increases investors are often willing to pay more for the same dollar of earnings. Hence even if earnings are flat stocks still have the potential to generate positive returns by people paying more for the same earnings. There are many measurements of earnings – last twelve months, forward twelve months, cyclically adjusted. Each has advantages and disadvantages. Overall valuations of stocks seem reasonable at today’s level in a historical context with a developed market P/E of 14 times and emerging markets at 12 times (measured by the S&P 500 and the MSCI Emerging Market index, respectively). We aren’t forecasting strong P/E expansion from here, though if left tail risks are reduced, it is certainly possible.

3. Dividends. Even if an economy were to stop growing, corporate profits were to stop growing and P/Es were to remain flat, stocks still have the potential to generate a positive return by paying dividends. Hence economic growth is not a hard ceiling on stock returns, but again the overall linkage between economic activity and corporate profits and dividends is clear. Economies that grow more quickly fuel corporate earnings that can then grow more quickly. Corporations that experience sustained growth and strong cash generation are more likely to pay and increase their dividends. In past decades when economic growth has been slower, dividends have been a larger share of equity returns than capital appreciation. Figure 6 shows equity returns by decade, broken out by capital appreciation and dividends. One can see in the slow growth 1970s dividends were a larger share of total equity returns. Given our New Normal outlook of continued sluggish economic growth, we believe investors should focus on companies with a strong ability to pay and grow their dividends.

EquityFocus BaldnesSept2012 Fig6

If the stock market as a whole has historically generated 6.6% real returns annually (per Jeremy Siegel’s “Stocks for the Long Run”) and we believe it is going to generate more modest returns going forward, in the 3%–4% range, what can equity investors do now?
  1. Active management becomes increasingly important. If we believed the equity market would provide very strong growth, then we’d believe the cheapest passive exposure to stocks would likely be enough. Unfortunately we don’t think that’s the case, so alpha generation or selecting stocks that can outperform the market as a whole, is essential to meeting overall return objectives.
  2. Look to companies that can grow faster than the market as a whole. Where a company is headquartered is not nearly as important as where it does business. The best way for a company to overcome the constraints of a slow domestic economy is to sell into higher growth economies. Sometimes companies headquartered in higher growth economies are best positioned to capitalize on them. Sometimes large multinationals are better equipped to take advantage of those growing markets. We believe investors should consider an unconstrained approach that allows investors to concentrate in the best companies, wherever they may be domiciled. In addition, some companies are able to out-compete entrenched players and take market share.
  3. Don’t overpay for companies. Look to well-run companies that sell into higher growth markets, but of course it doesn’t make sense to pay too high a price for them. We believe focusing on quality is a smart investment strategy, especially in a low growth environment with ever-present macro risks. But we believe a prudent investment approach should be anchored in a rigorous valuation framework. Sometimes buying a somewhat lower quality company at a steep discount makes more sense than overpaying for the highest quality company. 
  4. Actively manage downside risk. This is a constant refrain of my colleagues and me at PIMCO. In the next six months there are several major policy drivers that each individually could overwhelm market fundamentals: the ECB’s actions to stabilize the eurozone, the U.S. Presidential election and the U.S. Fiscal Cliff. While we believe policymakers are well-intentioned and our base case scenario avoids left tails in the near future, political factors could constrain policymakers. We believe hedging against extreme downside risks is prudent, even if it means giving up a little on the upside.

So, as you can see, the story of stocks is more nuanced than one tweet, one headline or even one discussion. It is a story of assessing risks and balancing potential outcomes – one that presents real opportunities for investors even in a lower return environment utilizing a process grounded in both solid, bottom-up analysis and top-down, macro insights. 

And yet the same hyperbolic polarization that we are seeing in our politics continues to extend to other subjects important to our lives. You may be wondering what the title of this piece, “The Cure for Baldness” has to do with equity investing. I must confess: nothing at all. I wanted a headline that would capture attention, and I know I have a lot of company among the fellow follically challenged in the investment industry.

Hyperbolic polarization during a Presidential election cycle shouldn’t be unexpected, and since we each only get one vote, for one candidate or the other, it really is all or nothing. Fortunately investing isn’t all or nothing. We can allocate to individual companies that we believe are positioned to grow faster than the market and those that we believe will be more resilient against market shocks. Given how hard people work over many years to save for their future and for their families, we believe it is worthwhile to take time to craft an investment strategy that can withstand a range of market outcomes. Reports of the death of smart investing have been greatly exaggerated (and the cure for baldness is right around the corner).

 

Past performance is not a guarantee or a reliable indicator of future results. All investmentscontain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their financial advisor prior to making an investment decision.

The correlation of various indices or securities against one another or against inflation is based upon data over a certain time period.  These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

This material contains the opinions of the author but not necessarily PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. ©2012, PIMCO.

Canada New Home Sales Plunge 64 Percent; Lowest August on Record

New home sales in Canada plunged 64% in the wake of government’s changes to insured mortgages (30yr to 25yr) and home equity line of credit restrictions (80% max to 65% max) which took effect in July.

Lowest August on Record

Reader Corey emailed the above comments and a news link from the Canada BILD Association: New Home Sales Slip in August.

According to RealNet Canada Inc., BILD’s official source of new home market intelligence, the 1,242 homes sold in August 2012 add up to the lowest monthly sales since 2009 and the lowest August on record. Year-to-date sales have remained on par with 2010 but below its record-breaking 2011 predecessor.

“The federal government has been working on reducing household debt levels and recently adjusted mortgage lending rules. August was the first full month with the new rules in place and it appears these regulations have affected consumer confidence, resulting in significantly reduced sales of new homes,” explained BILD President and CEO Bryan Tuckey. “BILD will be carefully monitoring new home sales during the next three months to see if this decline becomes a trend.”
 
Newhomesales
 

Slip” hardly seems the operative word. Crash is more like it.

Also consider Bernanke Declares War on Canadian Economy (Rest of the World Too) 

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com


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