The Mcgann Wealth Management Team

March 9th, 2010

There a number of very smart market techicians and John Hussman (Ph.D) is one of them. I follow his columns very closely and this week’s article titled ” The Rubber Hits the Road” is a very good one. The article outlines that the US stock market is characterized by “unfavourable valuations, overbought conditions, overbullish sentiment, and upward yield pressures”. He goes to explain that in these conditions, stock markets tend to “make continued marginal highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere.”

Best regards,

Mike
P.S. I recommend you read his article:

The Rubber Hits the Road

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Are you ready for another LOST DECADE ?

February 10th, 2010

Last year, I wrote a blog piece on “secular markets”, outlining the macro view of the stock market for the next 10 years. Martin Pring, a very successful and longtime market technician, has just updated his work on secular markets and its titled ” Are you ready for another lost decade” ?

Its an excellent update and review. You can get the pdf here:

Are you ready for another lost decade?

Best regards,

Mike

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ALL INDICATORS point to lower markets

February 8th, 2010

When assessing the direction and health of the stock markets, its important to analyze several variables and not just one or two. Currently, the S&P 500 stock index is approximately 27 times earnings. When looking at the long-term average (dating back over 100 years), the average P/E mulitple was 15 times earnings. Should the market trade to this level, the S&P 500 would be valued at approximately 600 points….OUCH ! I don’t believe we will see this level, but I wouldn’t be suprised to see 850.

Most of the “technical indicators” point to lower markets: the S&P 500 has cleanly broken its upward sloping trendline, since March 2009. Price oscillators, such as the MACD, have broken down, indicating that stocks are headed lower.

The Global debt problem is getting worse, with countries such as Greece, Portugal, Spain, Italy and the UK with very high sovereign debt. As a result, interest rates are on the rise. 10 year interest rates have risen by almost 4% in the last few weeks on Greek bonds. This has put very serious downward pressure on the Euro and thus, upward pressure on the US $.

A rising US$ is putting downward pressure on commodity prices with copper down 18%, aluminum down 14%, lead down 14% and oil down over 7.5% in the last week. Commodity inventories are very high and mostly likely will add to the pressure for lower prices in the coming weeks.

Higher interest rates are inevitable in the US and then in Canada. It won’t be from the usual inflationary pressures, but rather from the increase debt risk.

Stocks have had a good run from the March 2009 lows. Its time to protect profit and await the great opportunities that are coming.

Regards

Mike

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Earnings Recovery …..where ?

January 19th, 2010

David Rosenberg did an exceptional job in his article in Monday’s Globe and Mail :
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/can-both-the-economists-and-strategists-be-right/article1434137/
Essentially, he pinpoints how blatently the S&P 500 missed its aggregate earnings “estimate”, yet the market continues to make new highs:

“Forget all the calculations off the “artificial” March lows. Forget the 25 per-cent market slide in the first 10 weeks of the year to that awful trough. Here is the reality: The S&P 500, from point to point, rallied 23 per cent in 2009 even though earnings per share for the year as a whole cam in at a whopping $21 less than first estimated.
Now that is remarkable. It almost wants to make you believe in the tooth fairy. ”

The operating earnings estimate for the S&P 500 coming into 2009 was $77. For the actual earnings to come in at $56, is a 27% decline in earnings ! Now you tell me…….if you were invested in a good company stock, say Royal Bank, and they released earnings down 27% from the estimate, do you really think a rally of 23% in the stock would occur, or be justified ?

The S&P 500 is highly overvalued. The masses can feel good that the US has avoided a more severe recession, than might otherwise have happened, without a Fed throwing trillions of dollars at the economy. US economic reality will set in , sometime in 2010. Rest assured, the serious problems of very high unemployment, growing mortgage defaults and foreclosures, high and growing government deficits, will have to be addressed (when it comes to calculating any “real” recovery). The great news is that those investors that have taken measures to protect their portfolios, will have another great selection of investment opportunities (no diffferent than last year at this time, when you could have bought Oil, Gold, the S&P 500, TSX, China …….etc.)

For the next series of “blogs”, I will be discussing exactly where to invest , once this overdue correction is upon us.

Best regards,

Mike McGann
Director, Wealth Advisor

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PIMCO reduces its exposure to US, UK debt

January 4th, 2010

PIMCO, the largest bond manager in the world, is reducing its exposure to US and UK bonds:

“Managing Director Paul McCulley said the supply/demand balance for U.S. and British government debt was likely to suffer as governments stepped up borrowing, and as buying by central banks eventually declined. “We’re probably going to have a $1.4 trillion deficit this year without the Fed on the buy side of the market for duration,” he said of U.S. Treasuries, in a report on Pimco’s website. “There is major uncertainty about how the supply/demand equation for duration will resolve itself when the Fed is out of the picture.” (cnbc.com Jan 4, 2010).

When the largest bond manager in the world is selling US bonds, its telling us, indirectly, that they believe the US fiscal mismanagement will lead to higher interest rates. Higher interest rates are bad for bonds (and stocks as well).

John Hussman, who I follow closely, puts out a weekly comment, and this week he is discussing the US Treasury’s decision to provide “unlimited financial support for the next three years”. (up to $300 Billion ) Essentially, the US Treasury continues to effectively buy dilinquent or bad mortgages from Fannie Mae and Freddie Mac, as a way to absorb these bad debts. John explains:

“This policy is likely to lead to far more delinquencies. ……. What is likely in my view, is that we will observe far greater issuance of government liabilities, which will predictably create a near doubling of the consumer price index in the coming decade. It is notable that he massive expansion of government liabilities beginning in the late-1960’s eventually exploded into uncontrollable inflation by the late 1970’s. There are lags between the creation of government liabilities and their inflationary effects. But to expand these liabilities as recklessly as the Fed and Treasury are now doing, is to undermine the long-term foundations of the economy”.

Implications for the financial markets

“What we do know is that stocks are overvalued even on the basis of normalized earnings, to an extent that exceeds nearly every pre-1995 level except 1929. Intermediate term conditions are strenuously overbought, investors (with advisory sentiment now down to 15.6% bearishness) are clearly overbullish, and interest rate trends are pushing higher. This situation does not always resolve itself into market declines, and indeed, given that market internals remain reasonably firm, we may continue to observe marginal new highs for some amount of time. But the statistical regularity from overvalued, overbought, overbullish, rising yield environments is one of steep, abrupt market losses generally within a period of about 10-12 weeks. ”

2010 will provide some excellent investment opportunities for the patient investor. Stay tuned.

Happy New Year !

Mike

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Dow Theory – Very effective at predicting the longer-term trends

December 23rd, 2009

“The Dow theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of Dow theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, the Dow theory addresses not only technical analysis and price action, but also market philosophy.
Even though Charles Dow is credited with developing the Dow theory, it was S.A. Nelson and William Hamilton who later refined the theory into what it is today. Nelson wrote The ABC of Stock Speculation and was the first to actually use the term “Dow theory.” Hamilton further refined the theory through a series of articles in The Wall Street Journal from 1902 to 1929. Hamilton also wrote The Stock Market Barometer in 1922, which sought to explain the theory in detail.

In 1932, Robert Rhea further refined the analysis of Dow and Hamilton in The Dow Theory. Rhea read, studied and deciphered some 252 editorials through which Dow (1900-1902) and Hamilton (1902-1929) conveyed their thoughts on the market. Rhea also referred to Hamilton’s The Stock Market Barometer. The Dow Theory presents the Dow theory as a set of assumptions and theorems.
Even though the theory is not meant for short-term trading, it can still add value for traders. No matter what your time frame, it always helps to be able to identify the primary trend. According to Hamilton (writing in the early part of the 20th century), those who successfully applied the Dow theory rarely traded more than four or five times a year. Remember that intraday, day-to-day and possibly even secondary movements can be prone to manipulation, but the primary trend is immune from manipulation. Hamilton and Dow sought a means to filter out the noise associated with daily fluctuations. They were not worried about a couple of points, or getting the exact top or bottom. Their main concern was catching the large moves. Both Hamilton and Dow recommended close study of the markets on a daily basis, but they also sought to minimize the effects of random movements and concentrate on the primary trend. It is easy to get caught up in the madness of the moment and forget the primary trend. After the October low, the primary trend for Coca-Cola remained bearish. Even though there were some sharp advances, the stock never forged a higher high.” ( explanation courtesy of Stockcharts.com).

The main assumptions of the Dow Theory are that:
1. The PRIMARY TREND cannot be manipulated
2. The MARKET AVERAGES reflect all known information
Secondary movements, these short movements from a few hours to a few weeks, could be subject to manipulation by large institutions, speculators, breaking news or rumors, but the primary trend, could not be manipulated.

FOR EXAMPLE: The current PRIMARY TREND is a SECULAR BEAR MARKET, whereas the secondary trend is a
BEAR market rally. Understanding this distinction is vital to protecting your capital …..otherwise, you will continue to be bullish, in the face of a significant correction.
THUS, this current rally is shorter term in nature, and is likely coming to the end of its run. Similarly to the high tech correction of 2001, and the credit bubble correction of 2008, another correction is on the horizon. CAUTION is the key word here.

Dow Theory, outlines 5 different phases of a market cycle . One analyst that has been very accurate with Dow Theory is Tim Wood. He stipulates that we are about to enter “PHASE II”, which will be even more devastating that Phase I. I have added the URL below to his current article, updating his analysis:

http://www.financialsense.com/Market/wood/2009/1218.html

2010 has the potential to produce some exceptional investing opportunities for those that are prepared. Otherwise, it could be a very difficult and painful one, for those investors that get caught in the wrong trend.

Best wishes of the season !!

Mike McGann

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US dollar: A trade unwinding !

December 17th, 2009

As I have mentioned in detail , with my blog titled ” A lopsided Trade”, the US dollar has been the new “carry trade”. Institutional investors have been borrowing billions of US dollars (at 50 year low interest rates) and re-investing these dollars into foreign currencies at higher rates of return.

This “carry trade” works very well, as long as the US$ is declining in value (or at least staying the same). Since early March 2009, the US dollar has been on a steady decline (from a high of approx. 89, on the US dollar index) to a recent low of 74.5 (on Dec 2, 2009). In the last week, we have seen the US$ strengthen to 77.3, effectively breaking this significand downward trend .

Dennis Gartman, in his daily newsletter, stated ” The US$ is very strong indeed and we hold to the notion that the dollar has gone through what we have called a WATERSHED shift in its trend, moving away from a protracted and universally embraced bear market, to what is now a protracted, but almost wholly unexpected, bull market instead. ”

The stock market has been almost perfect with its negative correlation to the decline in the US dollar, since March 2009…….the dollar has been in a steady decline, whereas the market has enjoyed a steady rise. With this significant change in the trend, look for the market to continue to decline, in the face of a strengthening US dollar .

The effects of this change could be significant……stay tuned.

Mike

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Are you ready for higher interest rates?

December 9th, 2009

I know, deflation is currently king, whereby we are experiencing downward pressure on pricing (particularly in the USA, with unemployment higher than 10%) with the exception of energy prices. However, when looking into the near future, it is important to follow the developments in the bond market, which is the REAL driver behind interest rates.

As Governments around the world (Federal, State, Municipal) issue massive amounts of debt (bond issues) to cover up their financial “messes”, bond rating agencies are starting to take notice. Bond rates range from AAA (or A1) which is the highest rating, then AA, A, BBB, BB , B, down to “junk” status. Bonds get downgraded because they are viewed by the bond rating agency as having more risk associated with the ability of the issuer to repay the bond (at maturity) and the ongoing bond interest. Logically, this makes sense……….the more risk associated with a bond, then the more the bond investor should get compensated (in the form of a higher interest rate). This is how interest rates will be going up. As Bond Rating Agencies lower the bond ratings on Government debt, the bond holders will demand (immediately) a higher rate of interest. (this is accomplished immediately by a drop in the bond price, when the downgrade is given).

Today, we witnessed several downgrades: The State of Illinois, The Government of Greece, and the Government of Spain. “Moody’s downgraded Illinois’ obligation bond rating from A1 to A2 and cited their problems stemmed from the US recession……Moody’s said that the state has not yet taken action of any sort to deal with the budget gap that it is facing…..a gap that Moody’s says shall be on the order of $11 Billion. The problem here is not just in Illinois. This problem in California, now in Illinois, is going to spread to other states, very, very quickly, for once Moody’s has the courage to make the credit change there, it will be swift to make the same changes to the credit ratings of these other states too. It is but a matter of time. ” (Dennis Gartman, TGL Dec 9, 2009)

The bottom line. Further downgrades in bonds, leads to higher and higher interest rates. It may take several months to materialize, but higher rates are coming. Higher interest rates are not just restricted to the bond market. As Governments and Municipalities are forced to pay higher rates of interest, this cost gets passed on to the taxpayer and other bond investors. Debt across the board gets more expensive…….INCLUDING MORTGAGES, LINES OF CREDIT and PERSONAL loans.

Most new homeowners have never paid high mortgage rates, but that is about to change. Note, that if mortgage rates go from 3% to 6%, your mortgage payments DOUBLE. We don’t have to invision double digit interest rates, before serious money problems arise for consumers.

Get to know your mortgage broker. They can ensure that your mortgage has the provision whereby you can lock into a longer-term mortgage, so that you are protected from higher interest rates. For those of you in Ottawa, and are looking for a mortgage professional, contact my good friend LEO MAIORINO at Ottawa Mortgage Brokers 613 – 371 – 6975.

Mike

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Gold – an update

November 24th, 2009

As most of our clients know, The McGann Team has been recommending the purchase of gold bullion and gold shares since January 2006 (see Client Update letter titled “An Investors Dilemna- A comment on the future risks to the US dollar- Mike McGann “).
We still continue to recommend that investors own gold, and specifically GOLD BULLION……and hence, the update today. Prior to 2009, Canadian Investors could not own gold bullion within their RRSP. As a result, in order to gain exposure to gold, we had to buy gold company shares. Now, however, you can own gold bullion in your RRSP.

What’s the “best” way to own gold ? Bullion or shares? In a perfect world, you should own both, but they trade very differently:

Bullion – It trades everyday on the commodities markets, where you can see the spot price (where it is trading now) or the futures price (where it is expected to trade over the next 30 days). With gold viewed as a great hedge on the decline of the US dollar, typically, gold bullion will rise in value as the dollar declines.

Gold shares – Owning gold shares is a good proxy for gold, since increases in the bullion price drive higher profitability for the gold company and thus, making their shares worth more. The difficulty with gold shares is the volatility of the stock market itself. As we saw last year, gold bullion was volatile (trading range between $970 and $710) but nowhere near as volatile as the gold stocks (keeping in mind it was a significant stock market correction) with some declining by 50% or more (ie. Barrick Gold declined from $53.77 to a low of $22.51).

Given that the stock market has had a significant rebound, I think it is timely for investors to switch out of their gold shares (Precious metals fund) and into a gold bullion fund. This will maintain the exposure to gold, yet reduce the underlying investment volatility (risk) …..by my measure it will cut the volatility in half. For our clients that own the Sprott Precious Metals fund, we recommend switching to the Sprott Bullion Fund.

As my earlier blogs have pointed out, the stock market will continue to very volatile as the US government (and the economy) comes to grips with Trillion dollar deficits. As long as it is politically correct to continue to print money, monetize government debt, and run trilliion dollar deficits, it will be very important for investors to have a significant position in gold.

Best regards,

Mike

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“The Carry Trade”

November 12th, 2009

As I have discussed in previous blogs, “The Carry Trade” is alive and well. Today’s Globe and Mail has a very good article , giving some added detail to the discussion. I hope you find it useful.

Here is the link:

Regards,

Mike

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