Welcome back to Views from the Crows Nest for January 15, 2011.

Our 2011 Annual Forecast Issue of December 28, 2010 sparked some interesting feedback.

Apparently your author touched on certain sensitive subjects that were a little challenging for

some to digest. The purpose of this monthly publication is to communicate honestly and

insightfully about important subjects that affect the wealth, health and happiness of its

readers even if they're not widely reported in the mainstream media or inherently pleasant

to contemplate.

 

Your author sifts through the complexity of daily global events to understand the patterns and cycles that are unfolding, though they may appear to be purely random. Each of us views events through our own unique filter; your author is devoted to keeping the lens of this publication as clean and un-tinted as humanly possible.

  

Market Action

Equity markets continue to play out as anticipated in our 2011 Annual Forecast. A much-needed minor correction has recently begun as we entered earnings season stateside. Our current upside target for the S&P 500 continues to be the 1350-1380 range. Broad market sentiment continues to get more Bullish, which raises the danger. Your author and our portfolio managers subscribe to many different research sources, several of which have proprietary timing models, including Bob Hoye of Institutional Advisors. On Friday January 14, 2011 his Momentum Peak Forecaster stopped rising, which indicates that upside buying in equity markets should exhaust in 4 to 8 weeks. This is only slightly ahead of our 2011 Annual Forecast prediction of "a final top that loses momentum between the end of March and mid-April 2011." No single forecasting model is correct 100% of the time, but Mr. Hoye's warnings will  definitely receive full consideration within the context of all the other market indicators employed by our dedicated team.

 

It's also possible we don't get to the 1350-1380 level until much later in 2011. How far we fall from the near-term peak expected soon is another matter. As time passes and markets grind upward new technical support levels develop. Initial support is now at about 1225, next support is the 1130-1150 area, then 1050.  Of course we never know where markets stop dropping until we actually get there, but a 23% drop (1365 to 1050) is significant.

 

Could it get worse than dropping to 1050? Anything is possible, but the question is how probable is it? While we firmly believe we are in the early stages of The Second Great Depression, we don't think the equity markets will fall all the way to their ultimate bottom in a straight line. Our current perception is that the final major drop won't take place until 2012, but only foolish pride would deny the possibility of equity markets declining further this year than we think. In our view, the support levels are likely to hold in 2011 unless our fragile system is hit by more than one of the major risks discussed in our 2011 Annual Forecast and reviewed below. Our most respected sources have long held that markets must correct back to much lower than present levels, and that this current Bear Market will not fully play out until the year 2015 or 2016. Your author was surprised to find Technical Analyst Walter Zimmerman with an articulate Bearish view that echoes these forecasts, and even more surprised that he actually got significant airtime, albeit on December 23 when few people watch business news. This two-part interview is definitely worth watching. Click Here To View and simply wait for the second part to load automatically after the first segment.

 

Walter Zimmerman's predictions are not without merit, nor is he alone. Students of Kondratieff Waves have been predicting several additional levels downward for years, including forecasts similar to this one.Only a few years ago, Kondratieff types were issuing predictions of the Dow Jones and Gold reaching the same level. Almost everyone dismissed these predictions as pure fantasy with absolutely no possibility of ever occurring, but seeing Gold go to $5,000 would not be a stretch...neither would seeing the Dow Jones fall to that level.

 

Some Risks Re-visited

Our 2011 Annual Forecast Issue included a "Dirty Dozen" Laundry List of significant risks to the global economy. None of these risks have been resolved and all continue to build:

  

1. •Europe is still a basket-case, with the next significant scheduled event being the Irish election. China has recently been buying Portuguese bonds; possible reasons include dumping more of their excessive US Dollar Foreign Exchange Reserves in favour of different coloured paper, trying to protect their largest export market from imploding, and buying back some goodwill in an effort to end the embargo on exports of European military technology that was imposed immediately following the brutal Tiananmen Square crackdown. Your author takes the view that this is too little too late.
   

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3. •China continues to experience rising prices (8% for food, 5% overall) and is finally starting to raise interest rates. There is increasing evidence that they are stock-piling commodities for future use, while their US Dollar Reserves are still being accepted to settle these transactions.
   

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5. •The U.S. fiscal situation continues to worsen at every level, unless you're one of the Wall Street folks who received a share of the record $144 billion of bonuses that were recently awarded; Bank of America and Wells Fargo are trying to fend off bankruptcy while The Money Club scrambles behind the scenes to indirectly bail them out. 
   

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7. •U.S. retail sales appear to be rising, but mostly because of price increases...this could be the first indicators of rising prices with a stagnant economy. The mainstream calls this "stagflation" while James Dines refers to this as an "Infression," i.e. an inflationary depression.
   

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9. •U.S. real estate is (overall) starting its double dip, and this could turn into a cascade downturn if any of the banks panic and start dumping more of their foreclosure inventory onto the market. The "Sand States" might not fall as far. Watch out below!
   

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11. •Canada's real estate market continues to soften in nearly every region, and will be increasingly vulnerable in the next economic downturn. Your author went on the record October 25, 2007, publicly advising Clients and guests at our Continuing Education Series event with Dr. Art Hister. I strongly urged attendees to move quickly to sell their investment real estate and capture any capital gains accrued. Attendees were shocked by the advice because real estate had been such a strong asset class in the previous years; hardly anyone followed my advice because of how improbable a decline in real estate seemed at the time. Clearly, the Calgary property market has been over-built and has massive excesses that need to be wrung from the system, similar to a dietary cleansing process to remove harmful waste and bacteria. Anecdotally, yesterday your author heard repeated radio ads flogging a quasi-industrial office condo project west of Calgary; they were advertising medium-sized bays for $275,000 each as either a "man cave" or a trophy case to display your collectibles such as exotic cars! Your author's view is that our local market will fall another 15 to 25% and won't see a bottom for 24 to 36 months.
    

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13. • Pride cometh before the fall. Many Canadians still have an air of invincibility about the "safety" of our banks. In Canada, CMHC allows banks to offload mortgage risk similar to Fannie and Freddie in the US; these two institutions went bankrupt and had to be nationalized. This is part of the recurring theme of "Privatize the Profits and Socialize the Losses”. If you or anyone you know still has a mortgage on any property that you cannot sell, your author strongly urges you to immediately lock in your mortgage to longer term rates. If you have a floating rate mortgage, lock into the longest possible term you can find, about 7 to 10 years. If you have a fixed rate mortgage with less than five years left, immediately ask your lender to "blend and extend" your current rate with the longest possible terms they offer. This may increase your current mortgage payment, but it will protect your family from rapidly rising rates when we finally arrive at the precipice of our current global economic crisis some time in 2011 or 2012. This warning may be slightly early but it's better to be too early than slightly  late because rates can take off to the upside faster than most people realize.This is about managing risk in your personal finances. If your lender is unco-operative, please contact your author for a referral to one of several very competent mortgage brokers that we associate with.
    

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15. •Our 2011 Annual Forecast listed the following as risk #9: "A major terrorist attack or other military action that creates the 'justification' (read: political saleability) of yet another major war to spur manufacturing of the American military-industrial complex and "job creation" for young Americans." The tragic shooting rampage in Tucson last week has prompted your author to re-visit this concept, though the actions of this un-well young man may appear on the surface to be completely separate and random from the risk noted above. Please read on.
    

 

The Rising Tide of Violence

We are optimists by nature and have no interest in frightening readers. We merely present alternative views to warn of the possible worst case scenarios, and act as a counter-balance to the prevailing views being promulgated daily in the mainstream. And perhaps there is a reason your author is listening to an internal voice that urges him to address this issue...only time will tell. If some of the more dire economic and financial market predictions do come to fruition, they could trigger political and social consequences that we shudder to think about and hesitate to mention: rampant unemployment, increases in violent civil disobedience, and spreading dependence on state hand-outs for food and personal security. Most people associate the imposition of Martial Law with equatorial despots and other distant political dictatorships; not with the outwardly "free and democratic" US of A.

 

As we have recently witnessed in Tunisia, hungry people (caused indirectly by Quantitative Easing in the U.S., which your author will explain in future issues) without jobs or hope do desperate and previously unthinkable things when they get angry at the lavish lifestyles of the ruling elite, regardless of where they live...imagine if they have access to firearms. Just this morning there are reports that the Mayor of Cancun, Mexico is facing criminal charges following revelations of close connections to the most brutally violent Mexican drug cartel! Your author and wife will keep their heads down when visiting there next week, as well as Toronto immediately thereafter...at least the G-20 is over now!Immediately following the Tucson shootings, weekly sales of guns there reportedly rose by 60%. Your author believes that violence begets violence, but that guns don't kill people; people kill people and guns are merely the tool. There is indeed a rising tide of violence, and the U.S. is a keg of gun powder, literally. We're not certain how much longer foreign travel will be safe, so perhaps consider taking that long-awaited dream trip soon, while you still have your health.

 

Your author spent four years studying in the US Midwest. Many people are familiar with the 2nd Amendment of the U.S. Constitution - the right to "keep and bear arms"- but few are aware of the original intent of this Amendment. The intention was not to protect family or property from other citizens; it was to allow American citizens to protect family and property from an oppressive government, which they had just finished fighting to gain independence from. Mark Twain once said that "history doesn't repeat itself, but it sure does rhyme."

 

For over 30 years Gerald Celente has been publishing The Trends Research Journal and has been vilified by the mainstream as an anti-Establishment alarmist with a bad attitude toward our good friends from Wall Street and Washington D.C....and his track record of predictions has been frighteningly accurate. When viewing this clip, we suggest you ignore his obvious (justified) disdain for Elitists, listen to his content and decide for yourself what you think of his views. Click Here for Gerald Celente. 

 

Your author will explore the connection between rising violence and The Money Club in future issues of Views from the Crows Nest, perhaps even such "untouchable" subjects as the Council on Foreign Relations, the Tri-Lateral Commission and the Bilderberg group.

 

Is a falling market always bad? 

Even if the worst case scenarios do play out, it's essential to remember that a falling market is only bad for you if you choose to hold investments that fall with the market. Any risk understood becomes a manageable risk; with some hard work and a little luck it can also be turned into an opportunity. Understanding the range of possible scenarios helps our portfolio managers protect client capital and potentially even profit during equity market downturns through temporarily higher allocations to fixed income and prudent slices of inverse equity ETFs. Ample amounts of cash and equivalents will help preserve account values and keeps powder dry to buy back in more effectively when markets approach near-term bottoms. It's a challenging job, but one which our managers embrace.

 

Opportunities within the Crisis 

Within every cloud there is reputedly a silver lining and our optimistic nature helps us sniff out such secular opportunities. Without minimizing the negative impact of broader equity and fixed income market declines, we see very significant growth opportunities in several areas: Precious Metals, Energy (Oil, Uranium), Base Metals, Agricultural Commodities, Rare Earth Elements and Emerging Markets. While we have clearly been in a secular Bull Market for many Commodities and Emerging Markets for at least a decade, our view is that these specific areas will represent the greatest overall growth opportunities over the next decade. But how do you invest for profit in these areas and still sleep at night?

 

The Best is yet to Come:

Your author shares a passion for excellence with our dedicated portfolio managers in Toronto. When faced with the reality of being under-invested in rising equity markets in September and October, our lead managers figuratively dismantled their entire portfolio management system, spread the parts out on the table and looked at each one individually and within the context of the integrated whole. They also noticed a couple "missing parts." Brutally honest evaluation by self and others can lead to significant learning; when mixed with a genuine willingness to improve this creates tremendous new opportunities. We are very excited to announce three enhancements to our investment management offerings:

1. •The option to include select individual stocks within certain client portfolios which previously held ETF's exclusively.
   

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3. •The addition of a suite of discretionary investment specialists, bringing our menu of managers to 15, and
   

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5. •A new separate Commodity Alpha Module that expands our clients' ability to participate in the tremendous opportunities that abound within Precious Metals and select other asset classes of intrinsic value. Combining our managers' unique active risk management style and extensive experience in the Commodities space with this secular Bull Market creates an opportunity for greater overall growth...while allowing clients to sleep at night.
   

 

We'll be discussing details of these exciting new opportunities with Clients during upcoming review meetings and in separate communications.

 

Our Most Important Public Event to Date  

As readers know, we are deeply committed to spreading key knowledge about personal financial issues, especially during these times of significant political upheaval, economic uncertainty and financial market volatility. We are very pleased to pre-announce to readers our  36th Continuing Education Series event, "Profiting from the Global Economic Crisis" at 7 PM on Thursday February 24th at the MacEwan Conference Centre on the University of Calgary campus. This event will feature two of Canada's best known financial Truth-tellers: Larry Berman and Michael Campbell.

 

Many readers may be familiar with Larry Berman, our lead portfolio manager and the brains behind Berman's Call, the top-rated show on BNN. Michael Campbell is the host of Canada's longest-running and top-rated financial radio show, Money Talks, which airs at 9:30 AM Mountain time on the Corus radio network. Your author will also be attending his World Outlook Financial Conference in mid-February. Both Larry and Michael will deliver fast-paced and insightful presentations with their most direct and un-varnished views of what they see happening in politics, economics and financial markets. "Profiting from the Global Economic Crisis" will be promoted on BNN, Money Talks, and on QR77 radio starting in early February so we expect registrations to be brisk. We'll send out invitations with a link to a registration page in early February, giving readers of Views from the Crows Nest the first opportunity to register. We suggest that you start thinking now about who you might like to invite to attend this event with you. We look forward to seeing you there!

 

Fear and Greed are destructive to your wealth; patience and discipline are accretive to wealth, health and happiness.

 

That's all for this issue of Views from the Crows Nest. We look forward to seeing our Clients over the next couple months for the first review of 2011.

 

If you are already a member of our Client Family, rest easy...we have you covered for points 1 to 5 above. Points 6 and 7 we all need to do for ourselves.

If you are curious how our firm may be able to serve your family, please call us at 403-517-2234 or Click Here to Request an Appointment. Our offices re-open on Tuesday Jan 4th 2011.

Happy New Year!

 

Cheers, 
Andrew H. Ruhland, CFP, CPCA
President, Integrated Wealth Management Inc.