Welcome to Views from the Crow's Nest for February 2010.

We define "wealth" as "that which clients value" and this definition obviously extends far beyond investment portfolios. The volatility of the last few weeks is starting to raise questions like "Are we there yet?" in reference to the major downturn we've been anticipating. As such, this issue of our newsletter will deal primarily with the financial element of your wealth management, with broader wealth management information en route in the next edition.

 

RRSP reminder: The official RRSP deadline this year is Monday March 1st. To ensure sufficient time to courier cheques to their recipients, please ensure that your deposit arrives at our offices by Thursday February 25th.

 

TFSA's

We've had many clients ask about Tax Free Savings Accounts. Yes, we can set up a TFSA for you. Based on our Portfolio Managers' active management style, the minimum account size for TFSA's is $10,000. Just like RRSP contribution room, TFSA contribution room is cumulative, so if you didn't put $5,000 into a TFSA last year, you can use the contribution room for both 2009 and 2010. Please feel free to contact us to discuss your situation so we can determine if a TFSA makes sense for you right now.

 

Upcoming Event:

We are passionate believers in client education. Our 33rd Continuing Education Series event is An Evening with Garth Turner. Garth is a best-selling author of several books, financial commentator, former member of the mainstream media, and has served time as an MP in Parliament on several different occasions, including various Cabinet positions. His latest book Money Road is an excellent read...the kind you literally can't put down, and it just became a Canadian best seller - in only 20 days. Garth is entertaining, controversial, and very independently minded. Garth's insightful views and dynamic style fill conference rooms (with waiting lists) everywhere he speaks in Canada, and his presentation here in Calgary promises to be the same. Since we're 6 six weeks away from the event itself, we still have room for your invited guests, but when Garth starts promoting his presentation on his daily blog, the room will fill quickly. Register Free for Garth Turner

 

 

Are We There Yet?

In December, we painted the most honest and realistic picture we could of what we believe will happen in capital markets in 2010. It wasn't a pretty picture because there are global and local challenges that need to be dealt with, and sometimes the truth hurts. We were of the opinion that most of the major market volatility wouldn't start to happen until perhaps May or June based on the information available at the time. So, is the recent market volatility the beginning of the 15 to 35% peak to trough decline our research sources have been predicting?

 

The Short Answer is that we don't know yet, and we'll only have full certainly after the fact-after all, we never know exactly where the top or bottom is until we're past it. Our view is that we probably have a little more upside left before the macro-economic fundamentals cease to be ignored by the latecomers to this Bear Market Rally. Simply put, at these lower current levels, there is a somewhat better argument for "reasonable valuation" of broad market indices based on currently accepted assumptions, and this could allow equity markets to squeeze higher through early or mid-March. In our view, these currently accepted assumptions are not realistic going forward.

 

Is a major downturn inevitable? In our opinion it is inevitable. Here are some important points that support the argument for an eventual downturn some time relatively soon in 2010: 

 

The U.S. economy continues to be a basket case

Massive job losses continue and new job creation is stagnant at best.  Given current demographics and immigration, the American economy needs to create over 100k jobs per month just to maintain a steady employment rate, so how could continued job losses result in a falling unemployment rate - from 10% to 9.7%? The answer is threefold: 1) normal "seasonal" adjustments, 2) the unemployment rate quoted so frequently does not count discouraged workers or the "under-employed" and 3) the headline numbers are estimates only. The all-important estimate revisions will happen over months, and the biggest downward revisions in employment numbers happen in the months following the January estimates.

Increasing numbers of municipalities, counties and states are going public with their financial desperation, and their current "fiscal drug dealer" - the Federal Government - is running out of cheap supply.

The next wave of mortgage delinquencies, defaults and foreclosures -from "Option Adjustable Rate Mortgages" should start in about 2-3 months. And just wait until the Commercial Real Estate Market starts looking to re-finance maturing mortgages on the tens of thousands of residential, commercial and residential properties that now have negative equity. That will really get the party started.

And then there's U.S. Federal Government: a $1,400,000,000,000 ($1.4 TRILLION!) Deficit for 2010 and estimates (which usually turn out to be far too low) for similar Deficits for the following 8 to 10 years. This bleak reality should frighten everyone because it needs to be dealt with by Fiscal Restraint, not slick, vague euphemistic rhetoric from politicians of all descriptions and central bankers. The fact that the mainstream media outlets are full of stories quoting so many officials telling us that "everything will be fine now" should raise our doubts.

P.I.I.G.S. Roast.

The Fiscal woes of Greece are now part of the daily discourse. The other European countries on the brink of disaster (Portugal, Italy, Ireland and Spain) are just waiting to see how much this Greek Tragedy can suck  out of the European Union before presenting their own fiscal sob-stories in search of a bail-out. All these bail-outs - corporate and national - are made with newly created currency, which puts tax payers on the hook and serves to dilute the value of the previously created currency. It's no wonder the Euro has fallen by about 30% against the $US Dollar in recent months.

 

The Drunken Tiger. China is now the economy that the world counts on to bail the rest of the world's economies out of the current mess. Official Chinese GDP figures continue to post incredible growth rates, and I have more than a few doubts about the accuracy of data that a totalitarian regime publishes without outside scrutiny. The Chinese government had its own version of a massive economic stimulus package in 2008/9, and they're now starting to tighten lending policies because Chinese businesses of all sizes have recently borrowed massive amounts from the state-controlled Chinese banks that Beijing ordered to start lending aggressively. Independent reports from inside of China estimate that there is over 1 BILLION SQUARE FEET of completed residential and commercial real estate space on the mainland...plus what's currently under construction with all that cheap borrowed money. China's "fantastic growth" is supposedly the main reason we're supposed to believe that the rest of the world can spend its way out of debt. That's like saying that Tiger Woods can solve his marriage problems by having five more girlfriends. The Great Tiger known as China is more than a little tipsy from an excess of easy credit...and we're depending on them to drive the world's developed economies out of this mess? I think it's time for a little common sense.

 

What will it look like?

We believe the likelihood of a steep market drop is relatively low; we think it's more likely to be a series of moderate corrections throughout the last six to eight months of 2010 and possibly into 2011, with successive lower lows and lower highs. We believe this for two primary reasons: 1) the last 18 months were characterized by two major drops (Sept-Oct 2008 and Feb-early March 2009) and as a result there are more smart institutional and hedge fund managers whose "risk meters" remain on full alert, and 2) because there are a series of regional issues that will come to the public's attention, like a series of smaller bubbles bursting rather than one big one.

 

Active Management Tactics. One of the fundamentals of active portfolio management is to "ride the tide while it rises," but we always need to be ready to pull ashore to the safety of dry land. Our active managers have made significant changes to clients' portfolios, becoming more defensive by exiting and trimming various equity positions starting on January 22nd and holding up to 50% cash. Some

short-term technical up-trends have definitely been broken, but there appears to be some near-term support developing around current levels, and longer-term trend patterns remain intact, which bodes well for a possible rebound before we start the predicted declines. Portions of portfolio cash will only be deployed back into the markets if and when it makes sense from a risk-reward perspective, with Stops under every position.

 

When is a falling market good?

Just before the New Year I chatted with an upbeat friend who read our December 15th newsletter with its pessimistic prognostications. Through the course of our lively discussion something became very clear to both of us: a falling market is only a bad thing if you're invested in it while it's falling. Falling markets provide additional opportunities for growth when markets start to recover if you've "kept some powder dry". That's exactly why the excellent active managers we've entrusted to manage our clients' portfolios are willing to exit market positions and hold cash...cash doesn't make much these days, but it doesn't fall, and having cash available allows managers to nimbly scoop up bargains when most investors are panicking

 

What should investors be doing right now?

If you're already one of our clients, you don't need to do anything because your accounts are already being actively managed. If you have a group savings plan through an employer or other accounts managed by someone that doesn't believe in avoiding falling markets by raising cash, you should do these important things to actively protect your capital: 1) set specific exit points ("Stops") for each portfolio position, 2) communicate these specific exit points with the person who will execute the transactions, or with a spouse or friend if you have to execute the transactions yourself...sharing your plan increases the probability of following through, 3) raise these exit points if your investments start to rise again, and 4) exit each market position as your Stops are triggered. NEVER, EVER lower your stops, only raise them - lowering your Stops completely defeats the purpose of setting them in the first place!

 

That's all for this issue of Views from the Crow's Nest. Please forward this newsletter to anyone you think might benefit from the information. 

 

If you're not already a member of our Client Family and are curious about how we might be able to serve your family, please call us at 403-517-2234 or click here: andrew@integratedwealthmanagement.ca

 

Cheers,  

 

Andrew H. Ruhland, CFP, CSA

Wealth Management Advisor

President, Integrated Wealth Management Inc.