Random Thoughts on the Sh*ticane Market

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OK, before we get started, I have to be completely upfront about the content of today’s post. Does profane language leave you squeamish? Do you object to an expletive-filled tirade? If you answered yes to either of these questions, then this edition of the Market Guy is definitely not for you. Go away now. Here’s a link to the Disney homepage. For those of you who appreciate the occasional 4-letter word, then buckle up because we’re about to delve into what I call, The Sh*ticane Market (notice how I use “*” instead of “i.” Clever, eh? I have tenure).

Over the past few years, I have derived an inordinate amount of satisfaction from the Canadian reality TV sendup, Trailer Park Boys. It’s the story of Ricky, Julian, and Bubbles, three young inhabitants of a Nova Scotian trailer park. Each episode typically finds the boys scheming on how to achieve financial independence via a program entitled, Freedom 35. Simply, they want to hit the big score so they can retire while young. Their schemes have involved smuggling, pornography, trafficking, ATM theft, kidnapping, drinking, firearms, and lots of lots of dope.

Their efforts are always being thwarted by the frequently inebriated and typically malevolent park supervisor, Jim Lahey. But to be perfectly honest, I enjoy Lahey for one simple reason: I’m fond of the various ways in which he uses the word, “sh*t.” I find it immensely satisfying and I’m not going to apologize for it. Plus, it’s a word that best describes the current state of our financial markets. So with that, I now present several of Leahy’s quotes and some ideas on what we can learn about investing in tough times.

1. Lahey: “Boys this could get rough, we’re in the eye of a sh*ticane.”

It started as a tropical sh*tstorm, gained in strength, and was upgraded to a full-forced Sh*ticane. Yes, welcome to the Sh*ticane Market. Note that such a market can also be regarded as terrible, horrible, no good, and very bad (as described in a previous column). Although I have to admit that I’ve become surprisingly used to 700-800 point drops and 1000 point intra-day swings. The other day I was speaking with Bouch in Embrun and he asked, “what’s the market doing today?” I replied, “it’s down about 500.” He countered with, “only 500?” Meanwhile, Stephen Colbert over on Comedy Central offered, “The Dow dropped 500 points today. I didn’t know there were 500 points left.”

2. Lahey: “Ricky, you are climbing along a sh*t rope in a river of sh*t.”

These are fast markets. The other day, the Dow moved over 300 points during a BNN commercial break. Insane. This makes buy and sell executions treacherous, especially when using market orders. For example, last Tuesday I was watching the international markets put in a healthy advance and decided to follow the XINs, an exchange-traded fund that mirrors the MSCI Europe, Asia, Far East index. A closer look revealed the following chart:

Here’s what I think happened. An investor put in a market order at the open while the bid-ask spread was huge. The order was filled at $25, even though $25 was a super ridiculous price to pay for the stock. The next trades came in around $17 and the investor in question took a 30% haircut in a matter of minutes. Hey, if you’re dumb you sometimes have to pay the Dumb Tax. The lesson? In a fast market, be very careful when placing market orders, especially on relatively illiquid stocks. Sure, adding price conditions to your order may result in no-fill or a partial-fill. But with $9.99 trading commissions offered by most discount brokers, who cares if you need to place a second order? I spend that amount on double-cheeseburgers each week.

3. Lahey: “We’re sailing into a sh*t storm, Randy. Better haul in the jib before it gets covered in sh*t”.

Readers of this space know that over the past couple of years, I’ve been taking profits. In early August, I expressed concern over $150 oil and suggested that it could easily retreat to $85. Well, it’s now under $70. This concludes the “thanks for being a know-it-all, you arrogant twit” portion of the column. To balance the karma, I should mention that I deployed some of the profits into financials and international issues and these have been smacked hard. In any event, the important lesson is that it’s vital to remain diversified and if any sector comes to dominate the portfolio, then it’s time to rebalance. It’s also vital to recognize the importance of fixed income investments (bonds, GICs, high-interest-savings, etc.) in any sensible portfolio. I know so many investors who ignore this relatively boring asset class, preferring to go all-in with equities. Bad move.

The parings have resulted in a cash position of over 25%, which has helped to buffer the portfolio from the brutality of the current market. The S&P 500 is down 38%, the TSX is off 33% and my portfolio is off 15%. Yes, the situation leaves me nauseous, dyspeptic, and on the verge of plunging my head into a box of angry bees. It’s never pleasant when money is destroyed. But when faced with a good market, it never hurts to take a few profits along the way. This helps to buffer the portfolio from the dark times.

4. Lahey: “When you’re getting pelted with sh*tballs, you gotta get a sh*t bat.”

In a market such as this, it pays to have some cash available. Not only does the cash preserve capital and buffer the portfolio from market volatility, it also leaves an investor able to pick up bargains along the way. For example, with Rothmans being taken out, I’m looking for an investment to replace the steady stream of wonderful, glorious, life-giving, dividends. In other words, I’m experiencing withdrawal and I need a fix…real bad. What about Altria Group, the makers of Marlboro cigarettes, Miller beer, and my personal favourite, Kraft dinner? These guys specialize in addiction and have being doing so for several generations. As you know, I don’t consider the ethical angles of my portfolio. Sure, I find smoking to be repugnant and I rarely drink. However, the point of investing is to make money and Altria knows how to get it done. Plus, in an uncertain economy, people still drink beer, they still eat Kraft dinner, and they still smoke up. The stock is definitely on my watch list.

5. Lahey: “I’ll be watching you Julian, like a sh*thawk; like a sh*thawk!”

To the U.S. bank executives who might still be dreaming of golden parachutes and ridiculous compensation packages. Good luck with that. 

6. Randy: “Cops and dope don’t mix do they Mr. Lahey?”

    Lahey: “Like sh*t and strawberry shortcake, Randy.”

How about fear and greed? On occasion I bring out Warren Buffett’s famous quote that as investors, we need to be fearful when others are greedy and greedy when others are fearful. However, it takes real cajones to wade into this market. Market Dad has seen his energy investments get slammed, but he’s trying to make the best of it by trading several positions and capitalizing on the volatility. Meanwhile, I’m less likely to trade and more likely to start putting very small amounts of money to work here and there…baby steps. What’s interesting is that we’ve had 75 conversations about the markets this month alone, and not once has the word “sell” been mentioned.

Speaking of that, I have to comment on the recent drubbing being administered to Jim Cramer, CNBCs resident trader and hero for those with attentional issues. He recently appeared on The Today Show and recommended that investors get out of the stock market if they need the money in the next 5 years. He was immediately lampooned by the blogosphere and became the focus of a Fox Business News smear campaign. But Ali Velshi of CNN correctly noted that Cramer hadn’t succumbed to panic; rather, his advice was right out of financial planning 101. If you need the money soon, you shouldn’t be investing in stocks. Go ahead and slam him for his disastrous calls on Lehman, Wachovia and AIG; but on this latest issue, he’s bang on.

7. Lahey: “Ricky started out as a sh*t spark off the old sh*t flint and then turned into a sh*t bonfire and then fueled by the winds of his monumental ignorance turned into a raging sh*t-firestorm. If I get to be married to Barb I’ll have total control over Sunnyvale, and then I can unleash a sh*tnami tidal wave that’ll engulf Ricky and extinguish his sh*t flames forever. And with any luck he’ll get caught in the undersh*t of that wave, sh*t waves.”

Prior to the market collapse, many investors were pre-occupied with the hot stocks and weren’t paying attention to valuation and fundamentals. I have a buddy who over-weighted commodities and has been left wondering what happened to his potash stocks. He originally invested because he heard the sector was hot. By the time we hear about a hot stock, chances are most of the money has already been made. Now that just about everything is getting clocked, it’s a perfect time to reorient and consider the power of dividends, strong cash flows, low debt, and decent valuations.

8. Lahey: “You’ve loaded up a double barreled sh*t-machine gun and it’s pointed straight at your head.”

If I told you how much time I spent narrowing down the list of quotes, you’d be horrified. Anyway, as commodities markets were soaring, it’s important to remember that a trend exists only until it no longer exists. What goes up is not destined to keep going up forever. So basing investment decisions on short-term information is a mug’s game. Keep in mind that I’ve always wanted to use the phrase, “mug’s game.”

The Pilgrimage
Now that I’ve lost 50% of my subscribers and offended all sentient beings, let’s continue this festival of alienation with some photos from our pilgrimage to the financial capital of the world, New York City. It should be mentioned that during a tour of the Federal Reserve Bank and its $200 billion worth of gold, the Market Gal turned to me and said, “it looks as if you’re a little too excited.” Point taken. However, you have to love a place that offers the following words prominently displayed at the entrance:

Money makes the world go round. Money makes the man and money answers all things. Even time is money. We use it everyday, we talk about it everyday, but it remains hard to define what it is and how it works.

Even with the current market action, reading this left me feeling warm and fuzzy inside. Whenever I am plunged into dark times, these words will be part of my psychological safe place. I will bathe in these words and know that I am loved. Thank you Federal Reserve Bank of New York! The mirth continued over at the famous bull statue, the NYSE and the NASDAQ.

Meanwhile, over on Wall Street, the protesters were out in full force and the bailout of the big banks was in the cross-hairs. To be honest, I had complete sympathy for the protesters. As noted by Buzz Hargrove on Squeeze Play and Robert Reich earlier tonight on The Daily Show, the bailout reflects socialism for the rich and capitalism for everyone else. A small number of overly-greedy, self-interested, conscience-deprived people have screwed with my portfolio and threatened the net worth of a great many people. Of particular concern, are those who are close to retirement and have seen their hard-earned savings take a body slam. But I mean if you’re going to head down to Wall Street and spend the day challenging the status quo and balking at the capitalist system, can’t you at least put on a decent shirt?

Speaking of fast markets, there’s nothing like being in Times Square during a market sell-off. In the time it took me to buy a bottle of water, the Dow had plunged another 200 points.


The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). The Letterman taping was a blast, Spamalot (starring Clay Aiken) was a riot, and the Food Network was bang on with their recommendations. Fun follows the Market Guy around. Follow the fun over at mail@marketguy.ca


Top Ten Signs it’s a Terrible, Horrible, No-Good, Very Bad Market Day

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When I was a child, one of my favourite books was “Alexander’s Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst. Originally published in 1972, the story involves a young boy named Alexander, who is experiencing a heavy dose of Murphy’s Law. Simply, he survives a day in which absolutely everything goes wrong. For example, he wakes up with gum in his hair, trips on his skateboard, and drops his sweater in the sink. His brothers find cool toys in their breakfast cereal, while he finds only breakfast cereal. At school during a counting exercise, he leaves out 16. At lunch, he discovers that his mother has neglected to pack dessert. Shortly thereafter, he has a dental appointment and learns that he has a cavity; then he falls in some mud. Alexander proceeds to spill ink all over the place, miss out on the shoes he wants, and start a fight. As if these weren’t enough, Alexander’s bath was too hot and he loses his marbles down the drain. To cap off the day, he’s forced to wear the dreaded railroad-train pajamas, his pillow is missing, and his night-light burns out. With each indignity, Alexander wondered if life would be better in Australia. However, while lying in his bed, Alexander notes the following: “It has been a terrible, horrible, no good, very bad day. My mom says some days are like that. Even in Australia.”

Over the past several weeks, most investors have experienced these terrible, horrible, no good, very bad days, as market indices have plunged and commodity prices have collapsed. I have to admit that I find such days to be quite exciting. I’ve always been interested in crisis and my career is littered with attempts to understand how people react when the shit hits the fan. For example, my first conference presentation involved examining media accounts of the 1987 stock market crash. In another project, I looked at the influence of personality and cognitive variables in explaining how people respond to declines in their portfolios. Before becoming a faculty member, I worked at a 24-hour crisis hotline and trained their counselors how to respond to those who were suicidal and in crisis. You get the idea. I’m endlessly fascinated by terrible, horrible, no good, very bad days.

In terms of the market, I believe such corrections are healthy and necessary. They present an opportunity to remove speculative excess, bring valuations down to more reasonable levels, and often present a wonderful buying opportunity. I try to make the best of such days, even if my portfolio takes a bit of a hit. So as a public service (coupled with my need to drive this into the ground), I now present the top ten signs that you’re in the middle of a terrible, horrible, no good, very bad market day. Remember, I’m not just talking about bad markets days; they also have to be terrible, horrible, and no good…just trying to be clear. Now, on to the signs:

1. Central bank officials and politicians can be heard to utter the meaningless phrase, “the fundamentals of the economy are sound.” The judges will also accept “the economy is fundamentally sound.” I also really enjoy, “we’re monitoring the situation closely.” In other words, “this is bad, we have no idea what’s happening, and we have no idea what to do. When we decide how to proceed, we’ll probably overreact. Please don’t ask any more questions. Thank you.”

Quote of the week #1, from The Comedy Network’s Stephen Colbert: “The fundamentals of our economy are strong. We still exchange currency. We haven’t reverted to a barter system. Although I believe Bank of America bought Merrill Lynch for 2 goats and a bushel of oranges.”

Quote of the week #2, courtesy of PM Stephen Harper: “If a crash were coming, it would have already happened.” This logic would have caused Mr. Spock to cry like an infant before experiencing an aneurysm. Harper is the same man who recently promised tax incentives for new homebuyers. So the financial crisis began by making it too easy for people to obtain houses. How do we solve the problem? By making it easier for people to obtain houses. Got it. As Mark Twain suggested, “If stupidity got us into this mess, then why can’t it get us out?”

2. Everything is going down and I mean everything. The stock screens are a sea of red and have me thinking of that scene in The Shining when the elevators at the Overlook Hotel are spewing blood. Did I just write that? Let’s move on. The most fascinating days involve complete, total, unreserved capitulation. Stocks are blowing through their 52-week lows and are doing so with extreme vigor. It’s like the Terminator: It can’t be reasoned with, it can’t be bargained with, and it absolutely will not stop. Even the most bullish of analysts and market watchers are suddenly recommending that everyone stay on the sidelines until the dust settles. With apologies to Norm Peterson of Cheers, it’s a dog-eat-dog market and you’re wearing Milk Bone underwear. If you’re keeping score, this makes three 80s references in one paragraph. As an investor, the day will see you exhibiting a variety of bizarre behaviours, which include but are not limited to the following:

  • staring at the computer with your mouth open
  • refreshing your stock page like a hungry rat pressing the lever in a Skinner box
  • trying to comment on the day and the best you can come up with is, “Holy shit.” Yup…it’s a holy shit market.

3. High trading volumes. It has to be difficult to get on to your brokers website or achieve access by phone. We may even hear about technical glitches and that some systems are having trouble keeping up with the activity. And since I have nothing else to add, did I mention that we’re headed to New York and will be touring the Federal Reserve Bank? Market Gal is thrilled (he noted sarcastically). Thankfully we also have tickets to a Broadway show and Letterman, so that should keep the peace.

4. People you know who usually aren’t interested in the markets start talking with you about the markets. This happens with people at work, buddies on MSN, in emails, etc. For example, the other day, my buddy Ozner in Nepean mentioned the failing of Lehman Brothers. Twenty-four hours before, he wouldn’t have known a Lehman from a Lohan. Friends and family who are interested in the markets call as well, only they call earlier in the day. For me, it’s Bouch in Embrun, Lloyd and Pat in Ottawa, and of course, Market Dad. The phone call usually begins with “geez” or “wow” or something to that effect. Next up is an accounting of how the portfolio is doing and an identification of which stocks are faring the worst. Misery loves company.

5. The newspapers and business web pages are littered with photos of exhausted traders, concerned investors, and gawkers congregating outside the offices of failing firms. The Friday edition of BNNs Squeeze Play included Andrew Bell and Kim Parlee interviewing traders at a downtown Toronto watering hole. The patrons looked as though they’d just finished a 5-day enema.

6. The story of the markets migrates from the business pages to the front pages. It’s the lead story and we are treated to headlines such as “Markets Collapse,” which the editors present in a really big font. You know it’s a really big deal when they bring out the really big fonts. I also appreciate the words “contagion” and “panic” making their inevitable appearance. The Globe and Mail recently offered, “A Day of Reckoning,” which I thought was a nice touch.

My favourite part of the coverage involves placing the day in historical context. For example, “this represents the largest decline in index A since date B.” In order to qualify as a terrible, horrible, no good very bad day, it has to be the worst day in several years. Saying it’s the worst trading day since March doesn’t cut it (unless that day was terrible and horrible)….we have to be making history. We’ve been hearing a lot about American stocks being wiped out. However, did you know that Nortel recently had its worst trading day in 28 years? That’s what I’m talking about. Incidentally, Nortel is trading under $3 and this includes a fairly recent 10-for1 stock consolidation. In other words, if they hadn’t consolidated the stock, it would be trading under 30 cents. Let us mourn the money that has been destroyed.

7. Business television behaves like a dog with a bone. There’s one story and one story only: The market collapse. Networks often dispense with goofy programming features because the day is all about chronicling the crisis. Each guest is there to talk about the market action and each moment brings us wonderful quotes such as this offering from BNN anchor Pat Bolland: “This is a sick market.” Regular programming seems more important than usual and the day is littered with “special editions.” For example, “today on BNN, it’s a special edition of Squeeze Play.” This reminds me of watching TV during my childhood…”this week, on a very special edition of Family Ties, Steven, Elise and the kids rally around Uncle Ned who is coming to terms with alcoholism. Tom Hanks guest stars.”

8. At some point during the day, we are reminded of the losses that could trigger a halt in trading or a, gulp, market close. This is a tough nut to crack, as it takes a 10% decline in the Dow Jones Industrials to initiate a 30-minute to one-hour halt at the NYSE.  A 20% decline prompts a 1-2 hour halt, but if the decline is witnessed after 2pm, the whole place shuts down. A 30% decline closes the market for the day, irrespective of timing. Incidentally, the Russians shut down their exchange three times in the past week (twice for going too low, and once for going too high…perhaps one day it will be just right).

9. The business press starts interviewing the older brokers. Specifically, they are looking for brokers and analysts who traded through the ’87 crash. These archetypal wise old men are simply the best. They’ve seen it all, lived through some rough times, and always have great stories. Such figures provide a calming presence, and their reassuring voices remind us that, given time, the markets rebound. You can’t get this from a 22-year old just out of business school.

10. The attributional search runs into overdrive. When positive things happen in life, we tend not to reflect on what might have led to the good times. However, during bad times, we typically initiate what’s called the attributional search. That is, we attempt to determine the causal factors that led to the event. Basically, we’re asking “why did this happen?” The process is intensified if the event is unexpected. During a terrible, horrible, no good, very bad market day, we often hear that retail investors are driving the panic and that the smart money is staying put or being put in play. The last few days have elevated corporate greed, ignorance, and a lack of regulation to the top of the list of suggested causal factors (John McCain mentioned all three the other day). Given that we’re in the middle of a North American election bonanza, expect the list to grow. I’m still waiting for the religious right to somehow blame lesbianism.

In a related vein, it never ceases to amaze how many market participants claim they saw it coming and took measures to protect their assets. Sure, their top picks on BNN’s Market Call are down 72%, but they claim to have made it out just fine. Sure thing, guys.

So how am I positioning myself to deal with these volatile times? To be honest, I’m doing very little. Sure, my financial and international plays have been on a wild ride. But with a focus on high-quality, dividend-growing value stocks, my portfolio has been less volatile than the indices. So far I’m down 4% on the year and this compares very favourably to the TSX, S&P 500 and the Dow. Let’s just say I’m certainly not losing any sleep over it. Besides, it’s the down markets when my approach really earns its keep. I’m less interested in selecting big winners and more interested in avoiding big losers. There’s a huge difference. Meanwhile, my watch list is long and although the names are getting cheaper by the day I’m still not inclined to put a significant amount of money to work. And for the record, Friday’s 7% advance on the TSX feels about as shaky as Stephane Dion.

The past few days have been adventurous, but I can’t help but think we have more terrible, horrible, no good, very bad days in the near future. And as these days continue to come along, I expect to be a buyer. As Warren Buffett noted, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). In addition to the Federal Reserve Bank of New York, Spamalot at the Shubert, and Letterman, he’ll also be holding a pilgrimage to Wall Street. He may need to be sedated. Get high on life over at mail@marketguy.ca

Butting Out of Rothmans

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Last week it was announced that Philip Morris was acquiring Canadian cigarette-maker Rothmans for $30 a share. My relationship with the stock began 8 years ago at a split-adjusted price of $12. Since then it has satisfied my addiction to dividends and even inspired a column in 2003. The time to surrender the shares is approaching, so it seems entirely appropriate to reflect on the relationship that was.

Throughout my investing career, I’ve always been attracted to the safe bets. If this were dating, I’d go for the cute girl who made solid choices, held a decent job, and came from a stable family. For example, over the years I’ve experienced money crushes on Riocan CEO Ed Sonshine, the entire board of TransCanada, and the Reitman family, to name a few. Nice and nerdy. However, Rothmans was like the crazy girlfriend that everyone warned you about. Sure, she had a disturbing past and a lot of miles on the odometer. However, I too had skeletons in the closet, serving as Zeddy Bear through my first-year at university. Surely this balanced the ledger.

Despite her past, she brought a fair amount to the table. For instance, she was smart (dividends), committed (special dividends) and to be completely honest, was killer in the sack (rising dividends). Make up your own joke about the 2 for 1 stock split. All of this said, people warned you about her and several questioned your moral standards. Still, you defended her and tried to justify your choices in a column that, in retrospect, was 61% truth and 39% bullshit. In other words, you’d talked yourself into the relationship, even though you knew, one day, all hell could break loose. For example, you always had to worry about some angry people from her past showing up (class action lawsuits) or the cops smashing down your door (RCMP investigations of smuggling). But you considered the pros and the cons, calculated the inputs and the outputs, and decided to go with it and let the relationship run its course.  So what happened with the people from her past? They came without yelling; they came without nags; they came without packages, boxes or bags. Meanwhile, the great conversation and sex continued, month after month, quarter after quarter. But ultimately, you knew it wasn’t going to last forever. In the end, her parents came by offering a position in the family business down south (Philip Morris buying the shares they didn’t already own). Seeing that I was a good sport and helped their daughter over the years, they decided to send me some coin ($30 a share in beautiful, glorious, life-giving cash). So when the deal closes, we’ll say our goodbyes, exchange a mischievous grin, and go our separate ways. No apologies and certainly no regrets. Life is good. However, it’s going to be difficult finding someone to take her place. I don’t think Sun Life is up to the challenge.

Saxon takeover leads to more fist pumps
Shortly after the Rothmans announcement came word that IGM Financial had agreed to acquire Saxon Financial for $287 million or $21 a share. This represented a 65% premium over the previous day’s close and led to several fist pumps at the Market Shack. By several I mean 5. I’ve held Saxon since the IPO ($16.50) and while I’ve enjoyed the rising dividends and solid management team, the collapsing stock price was painful and the shares recently sunk to a low of $11.55. The fundamentals remained solid and so I never considered selling, although I was experiencing nausea, heartburn, and blurred vision. The takeover announcement cured all of that and allowed me to hear the birds singing, experience the sun rising, and enjoy the freshness of a recently harvested peach. Looking at the big picture, Rothmans and Saxon represent over 5% of my portfolio and that means a whack of cash is headed this way. As we know, cash wants to work 24 hours a day…so I have some decisions to make.

In other news, “It’s on sale…no it’s not…yes it is…oh let’s just go home.”
The Bay has always been one-stop shopping for those who enjoy confusing sales promotions and beleaguered employees. On a recent trip to Canada’s oldest department store, the Market Gal and I had to request price checks on several items because we couldn’t tell which products were on sale. In the middle of a price check, one customer at another cash was upset because the item she had selected and thought was on sale wasn’t on sale. She left the item at the cash and walked out of the store. How many times does this happen at the Bay each day? Per-store, I’d put the over/under at 50, with the smart money playing the over. Here’s a question: Why risk the disappointment? If you think an item is on-sale, grab the item, head to another department and tell the clerk that your item is on sale. If they’re in view of the sales sign, that’s even better. Given that so many of their sales require a manual adjustment at the cash (a la 1974) and no clerk can possibly keep track of the 562 exceptions, rules and promotions, this often works. Not that we’ve tried this strategy before…ummm…let’s just move on. After learning that one of the items directly under a “30% off” sign wasn’t on sale, the Market Gal said, “that’s why they’ve had 3 owners in 5 years.”

The Market Guy Mailbag
Robert P. asks:
“Could you elaborate on what you said about Scotiabank telling you that you are richer than you thought.”

Scotiabank’s current advertising slogan is “you’re richer than you think.” I’m guessing the message was co-opted by sub-prime lenders south of the border when pedaling the NINJA mortgages (No Income, No Job, No Assets). The outcome was as predictable as the Barenaked Ladies losing their Disney gig after singer Steven Page was busted for cocaine. The message from any responsible mortgage specialist should have been, “speak with a financial advisor and develop a plan so you can start saving for a down payment” or “consider finding a job first” or “actually, you’re poorer than you think.” Failing these, “get out of my office” would have done nicely.

Nicole Z. asks:
“I know you’re a fan of Kevin O’Leary and I was wondering if you’ve purchased shares in his new fund?”

Yes, I’m a fan of Kevin’s and enjoy his work on BNN’s Squeeze Play and CBC’s The Dragon’s Den. However, I haven’t had a chance to read the prospectus of the new O’Leary Global Equity Income Fund (OGE.UN on the TSX). I do know that it focuses on dividend-payers outside our borders and comes with an IPO yield of 5%. Given the departure of dividend payers such as Rothmans and Saxon, the global focus is intriguing. While we’re on the subject, I’m not sure how I feel about BNN affording Kevin so much broadcasting time to market his fund. On the one hand, this is what fund managers do everyday on Market Call. But on the other hand, these fund managers aren’t hosting BNN shows. I serve on a committee with a prof who teaches a class in business journalism. I’ll ask him to weigh in on the matter.

Dale N. writes:
“Glad you are back on the air – so to speak. I love your column. I disagree with almost everything you write. I believe strongly in the Warren Buffet philosophy of investing. Invest in what you know. Invest for the long term. I hold three stocks that I have had since shortly after they came on the market: CNQ, Talisman, and Niko Resources. Yes, the price of oil may dip a bit in the near future. Will it fall to $85? No. The trend is ever upward for oil and gas because of increasing demand and fears of a soon to be depleted resource. Gotta love it!”

Thanks for the kind words and for adding to the comments. Beyond the peak theory argument, I’ll always have oil in my portfolio because betting on energy represents a bet on crazy people and chaos…and both are plentiful. You can always count on religious fanatics stirring up trouble, nutbars blowing up pipelines, malevolent dictators making threats, hurricanes slamming into rigs, and the energy lobbyists getting what they want. And so it goes. In other words, we agree on the value of oil and gas in the portfolio. However, I’m not prepared to count on an “ever upward” trend. Can we count on China growing at a double-digit clip? What about the effects of a possible global recession? Will high prices change consumption patterns and consumer behaviour? How about technological advances in and out of the patch? Oil has moved from $150 to $118 in a month and natural gas has dropped from $13 to less than $9. Given my investing philosophy and risk tolerance, should I dramatically overweight such a volatile commodity? Full-marks if you can stomach the risk…but I can’t. And if his portfolio breakdown is any indication, neither can Warren Buffett.

Worth mentioning…
In 1999, I began my MA thesis with the following:

“The Dow Jones Industrial Average, arguably the world’s most identifiable and quoted statistic, recently celebrated 15 years of largely uninterrupted advances.  Having begun its ascent slightly below the 1000 level, this basket of prominent American companies recently traded above 11000.”

Fast-forward 9 years and where is the Dow trading? Just over 11400. Worth mentioning.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). Despite what he wrote a year ago, he recently purchased an Apple iPhone. The markets are always the apple of your eye over at mail@marketguy.ca

The Market Guy: Comeback Special ’08

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Welcome back. The site has undergone a major upgrade, owing much to the pestering and talents of my buddy Ozner. Each time he’d visit the old site, I’d get messages like,  “it looks HORRIBLE, you really should do something about it.” I could only take that for so long. The archives are posted to the right, there’s an updated FAQ, and we’ve included search capability. We’ve also added a new method of managing subscriptions. The column can be accessed free via a number of different methods.

If you’d like the column delivered to your inbox, click on the “Subscribe” button at the top of the page or just click here. Existing email subscribers will need to do this in order to maintain their notifications. Or you can be updated via an RSS feed. Just click the RSS button located on the top right of the page. Or you can simply visit the site periodically to see if there’s anything new. With these changes, you can decide for yourself how to access the content. I’ve also incorporated a comments feature so you can leave your suggestions, remarks, musings, counterarguments, or praise that I’ll lap up like a thirsty dog. My buddy Bouch In Embrun referred to the new site as, “a pulsing, throbbing, symbol of Canadian finance.” So it has that going for it…which is nice.

It was a year ago that I decided to watch 13 hours of business television and keep a running diary. Little did I know that I wouldn’t be posting again for over a year. I was about to start the busiest year of my professional life, clearly countering the popular notion that you can relax once you achieve tenure. Simply, my teaching overwhelmed all else and the column had to be put on hiatus. Some days I wasn’t even able to check my investments, demonstrating that I probably didn’t deserve to be called The Market Guy. And guess what happened? In the past year, my portfolio has essentially flat-lined. Money wants to thrive, grow, and spread happiness through your life. In fact, if you put a $20 bill under a high-powered microscope, you can observe its genetic code. You’ll see that money comes pre-programmed to go forth and multiply. If deprived of this opportunity, it fails to thrive and in fact, its very survival may be threatened. I was neglecting my money and it was acting up to get my attention. So if you don’t mind, I’d like to take a few moments to address my money:

I’m sorry money. For the past year I’ve been ignoring you and there’s no excuse. I could give you a song and dance and try to justify my behaviour, but I care too much about you and won’t play insulting games. I’ve made some bad choices, been a bad father and failed to give you what you deserve: a loving home. I appreciate the fact that you’ve been so mature about all of this, because you really could have been nasty and I would have deserved it. I know you don’t trust me right now and that’s OK. Over the past year I’ve done very little to earn that trust and so I have to make amends. I just want you to know that I’m going to try…because you’re worth it.

Thanks for indulging me. I know readers are skeptical as well, but there’s a change to my situation that will allow me to go all-out gaining back my money’s love. One of the greatest perks of academic life is that every seven years you have an opportunity to take a sabbatical. Essentially your employer outlines the following:

Go spend a year doing things that will make you better at your job. We don’t really care what you do, as long as we benefit. Make sure to travel, read, write, research, and plot the next few years. If it’s not too much trouble, we’d like a page outlining what you might do. It’s fine if you pop by the office, but if you do, everyone will ask, “what are you doing here?” When you return, we’d like a few pages summarizing what you did.

Does this sound like a good deal? Thank goodness faculty are generally high in achievement motivation and imposter syndrome or else the whole thing might degenerate into Joel’s parents going away in Risky Business. So what am I going to do? In keeping with the 80s movie references that you expect from this site, we must look to Ferris Bueller: “the question isn’t what are we going to do…It’s what aren’t we going to do?”  In amongst a series of teaching projects, I should be in a better position to keep up with the column. Note that I’m still calling this a column. A blog is updated every day or at least every few days. Nobody wants me to post every few days. I’m the peculiar guy you invite over for dinner and it’s great for a couple of hours, but for everyone’s sanity, you want me out of the house by 10:00. So I’ll maintain an irregular schedule, but promise to post more frequently. I’m also going to strive for shorter postings, today’s effort notwithstanding.

In a sense, all of this represents somewhat of a comeback. Will it be a Travoltaesque return a la Pulp Fiction? Or will it be more like Feldman and Haim in The Two Coreys? Only time will tell. In any event, what better way to come back than to address a number of investment issues that have popped up over the past year? So let’s examine the most pressing issues:

1.     CNBC and BNN

I’d be remiss if I didn’t recognize one of the most impressive milestones in the history of business television. A few days ago we were fortunate enough to witness the one-millionth utterance of the phrase, “going forward” on CNBC. This breaks the previous record set in 2001 by, “pounding the table” and “it’s different this time.” CNBC: Zeitgeisting since the late 90s. And while we’re here, I’d also like to thank the fine batch of financial journalists in the States who failed to sound an alarm on the US mortgage crisis. Way to keep your eye on the ball, people. We needed a Woodward and Bernstein. Nobody noticed this coming? From my seat, CNBC was too busy with two important projects: 1) wrapping itself in the flag, and 2) assuming its audience has the attention span of my wife in a shoe store (e.g., 6 guests on a 5-minute panel).

Speaking of the Market Gal, I really should thank BNN for providing us with an enjoyable moment. It occurred during an evening edition of Market Call. Usually she loathes the show, more so than the heavy contempt she displays for the rest of their programming. So needless to say, whenever I turn to BNN, I am signing up for a dandy dose of complaints, whines, and dirty looks. On this particular night, I’d been watching for several minutes and the shot clock on her first gripe was about to expire. Just then, one of the show’s callers ended his contribution with a series of expletives directed at fund manager Ross Healy. Clearly more than a Sternian “Baba Booey,” this was closer to the business television equivalent of Nipple Gate. Thanks to the magic of our PVR, Market Gal was able to rewind and review the clip multiple times. She thoroughly examined the host’s attempt to control his facial expressions and pretend that nothing happened. She thoughtfully considered Ross Healy’s claim that he didn’t hear the caller. She observed the unscheduled switch to break during which there must have been one heck of a scrum in the studio. It was like watching an episode of CSI, only my wife was playing the part of Gil Grissom, the caller was the perpetrator, and BNN was the dead hooker.

2.    Scotiabank

Let’s also thank one of Canada’s big six banks for telling me that I’m richer than I think. I thought my spreadsheet was providing a decent summation of my net worth, but apparently my actual wealth surpasses this number. Excellent!

3.    Market Dad

If it were statistically possible, Market Dad would place 115% of his portfolio in the energy sector. Ask him which oil and gas trusts he owns and he’s likely to reply, “all of them.” Suggest that oil could drift from $145 to $85 and he looks like a child being told the truth about Santa Claus and the Easter Bunny. Contrast this with my attempts to be a diversified investor with only a modest number of oil and gas names in the portfolio. Well, about a year ago Market Dad was faced with some decent gains in the patch, so I harassed him into paring back and deploying the profits into other sectors, including financials. He eventually gave in and added an element of diversification to his portfolio. Fast-forward a year and we all know how that worked out. Energy investments continued to be the belles of the ball, while financials became the proverbial turds in the punch bowl. If the past year had been an investing contest between the two of us, I would have finished third. Thanks to Market Dad for taking this so well. In reality, the paring back left his portfolio at 110% energy, so he didn’t miss all that much. Plus, wasn’t it the right thing to do? Anyone? Hello? Here’s how I look at it: Portfolio diversification is like a Feist song. At first you don’t really like it; maybe it even rubs you the wrong way. Then you listen a few more times, maybe even catch the video, and before you know it, you’re a fan.

4.    BCE and the Quebec courts

A year ago I made fun of BCE’s auction process and even compared its organization and pace to that of the Canadian government. Well, a year has passed and we’ve been treated to a sideshow of epic proportion. I’m not suggesting the delays, hearings, appeals, negotiations, renegotiations, and seemingly never-ending extravaganza is BCE’s fault. However, if a few years ago I told you that a big Canadian company was being taken over and through the process, regulators, lawyers, courts, pension funds, and bankers would give existing shareholders the equivalent of a 24-hour enema, which company would you think was involved? The list would include Nortel, Bombardier, and BCE. Few shareholder bases have been treated to more abuse, false hope and false starts than this group. And for the record, I have no issues with bondholders tossing up a Hail Mary pass and trying to scuttle the deal. When it comes to money, you have to defend your interests and use all available means. If others think you’re a Ferengi, that’s fine. On the plus side, the whole mess gave us a chance to experience the excitement and hilarity of the Quebec courts! If you like vague judgements, confusion, and saying, “how did this happen?” the Quebec courts are the place to be. I can’t help but wonder what’s on the list of things to do after the Supreme Court provided the obligatory 7-0 bitch slap. Stay tuned.

5.    Gold bugs

Yes, over the past year we’ve seen the price of gold shoot through the $900 level, approach $1000, and subsequently settle into a trading range. Oh, what delight must have been experienced by so many of the gold bugs, particularly the well-seasoned, crusty bugs who’ve spent the better part of the past few decades blaming the lack of price appreciation on everything from governmental conspiracies to the dark side of the force. What’s interesting about gold bugs is their unwavering, borderline dogmatic devotion to their metal most precious. If the price of gold is rising, it’s time to buy and if the price is going down, it’s also time to buy. If only the rest of life were so simple. So I’d like to thank the gold bugs for being so gosh-darn entertaining. Keep fighting the good fight, guys. And just to hedge my bets and avoid any bad karma, it’s worth mentioning that gold investors have kicked my butt this year.

6.    My portfolio

So what’s happened over the past year? Despite all of the volatility, the portfolio has essentially flat-lined since last summer. Thank goodness for diversification. However, my financials and international holdings have been shot. Both were promptly delivered to the trauma centre, where they continue to reside in intensive care. I maintain a vigil just outside the door, full in the knowledge that it’s only a matter of time before we are all released from the shackles of these dark, dark times.

In other news, I’ve added to my position in TransCanada, put some money to work in the battered REIT space, played the BCE saga for a few dollars, and added to my real-return bonds. However, most of these moves have been modest in scope and represent little more than tinkering. My largest holding continues to be cash, and although I’m seeing some compelling valuations (my watch list is huge), I’m reluctant to make any big moves.

However, what I’m buying is less important than what I’m not selling. I’m not selling financials such as TD, I’m not selling retail stocks such as Reitman’s and I’m not selling any of my other stocks that pay a solid, growing dividend. The goal is to continue focusing on high quality, cash-generating companies with low debt and decent valuations. This will never change and no matter what happens in the markets, I have a philosophy that adds to my confidence and allows me to sleep very well at night. Naturally I’ll keep you posted, but remember that I’m just a putz with a website. If the information presented here influences your investment decision-making, you’re hopelessly deranged.

Well, I promised shorter postings and still managed almost 2400 words. Ack. In any event, I’m still getting used to the upgrade, so there are going to be technical issues from time to time. Don’t hesitate to post comments (exhibiting civility and good web citizenship, of course) or drop me a line at mail@marketguy.ca. Thanks for your patience and for spending a few moments in this space.

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