The Copp Comment - October 15th 2008 Edition

Good Morning All,

Our wish list for the week appears to have been fulfilled and its only Wednesday as New York and Toronto markets respectively gained 950 and 1700 at their best Monday,Tuesday levels, not quite matching our plus 1000 and 2000 predictions of Monday morning but close enough considering the fact that we were likely alone in the world in suggesting such an explosion. These rises were naturally met with serious profit taking as both markets gave up some of their gains as the day wore on, a condition that will predominate today's trading as well. Although we also won our political wish as the Canadian electorate in its infinite wisdom prevented a Harper majority, I was still left to wonder how a plurality of my fellow citizens could vote for a bunch of Bush apologists who have likely become converted "Palinistas".

Initial reaction aside, the market judgement of the restoration package will be withheld for the near term as major investors watch LIBOR and the TED spread in order to monitor its "on the ground" effect. You need not pay too close attention to such intricacies as the indexes will quickly explain any good or bad news. The numbers will speak.

An article appearing in yesterday's New York Times by Tommy McCall described the performance of stock markets under Republican and Democrat administrations beginning in 1929. If you do not include the crash incumbent Herbert Hoover the business friendly Republicans had a plus 4.7% record versus a positive 8.9% for the "socialist pinko" Dems. If Hoover's 4 years are included the free enterprising GOP slips to a marginally positive 0.4 %. Don't bother working out the compounding effect of the comparison just google the chart.

Tonight's debate will likely be as dull as the others, barring a crash and burn performance by either candidate. Maybe its just because I am so strongly pro Barack that I have such a melancholic foreboding of these final campaign weeks or maybe I am justifiably fearful of nasty Republican tactics and redneck Joe Six Packs armed to the teeth and smitten by Sarah.

If any of you wish to opt out of this letter please advise, I shall try to remain unhurt by your choice.

The Copp Comment - October 14 Edition

Good Morning All,

When it became evident over the weekend that the U.S. free marketers led by Hank Paulson were going to be dragged kicking and screaming into a quasi socialist solution to the banking crisis, stock markets in America joined their European counterparts in celebration of the revised plan. As discussed in yesterday's blog this Swedish inspired, U.K. generated solution is considered to be one that addresses the core of the problem rather than its excesses, the base of the inverted pyramid instead of its incomprehensible overhang. Gordon Brown, the British P.M. has been reborn.

We also predicted yesterday that a 1000 point up Dow day would evolve this week and that it would be accompanied by a 2000 point surge on the TSX. We got part one early and catch up in Toronto, after yesterday's Canadian holiday, may make this idea a morning "fait accompli". Japan also made history overnight as it too came off a market closure with a 14% rise. European indexes are up strongly for the second day in a row and New york futures are very powerful in the pre market. The natural rule here would be to sell into strength as the euphoria of the early going presumably turns back into malaise. We will have to watch how this plays out but I believe that a true bottom has been made and that our previous forecast of a 50% retracement of the one year losses is a minimum target by mid January. It could be somewhat greater as the ride back up will be led by banks and techs, sectors which have lately taken losses of huge magnitude. In Canada, the once overowned but now vastly oversold oil, gas and mining sectors should enjoy a major and immediate resurgence from recent lows but they will not be the lasting leaders of the "new" market, at least not until much later in 2009.

The choice for the Canadian electorate today is between tweedledum and tweedledee. It is our hope that the vote leaves us much the same as we were before this ridiculous election was called.In America the choice is of a far different nature and holds the promise for a renewed and better country.

The Copp Comment - October 13, 2008 Edition

Good Morning All,

In Friday morning's letter I promised a positive end to a day that would start out with a depressing tone। A casual observor, or one locked solely into Canadian Markets may have thought that the promise was left undelivered....it was not, as a late day rally in New York took the Dow Jones from minus 500 to plus 300 in less than a Sarah Palin blink। Admittedly it did give up much of its new found trading momentum just a couple of "betchas" later but by then the saving grace nature of the activity had been gratefully established.

Europe, led by a U।K. solution based on a 1990's Swedish model whereby the various governments would guarantee interbank lending as well as deposits in exchange for equity effectively brought an end to 1980's Thatcherism and quite possibly the present crisis. The Swedish experience, although obviously based on a much smaller model, employed four per cent of that country's GDP most of which was recovered within ten years. America is still working out the structure of its recovery package with the appointment of a Neel Kashkari and his team of experts. A tough job indeed for this self styled free market Republican but a good deal more encouraging than the lunatic fringe led by Lou Dobbs who don't want Wall Streeters involved; one would suppose that unemployed grocery clerks and retired autoworkers should take up the baton and solve both the economic and the hyped immigration problems at the same time. Either way it will be very difficult for American "free marketers" to consider serious government equity participation but guess what...they will. Preferred shares and warrants a la Warren Buffett are the recipe.

What a day for credit markets to be closed in the U.S., while open in Europe. Canadian and Japanese stock and bond markets are also closed. This could lead to a major catch up day tomorrow if present price gains in Europe hold and U.S. stock markets keep or expand on the huge gains that futures are indicating. I believe that a 1000 point up day on the Dow is possible this week and a 2000 point one day TSX advance automatic if this should occur. We may not be out of the woods yet but when the leaves fall you can always get a better look at the forest.

Sorry, I cannot get enthused about our Canadian election as too much important stuff is going on elsewhere but I am all for minority government at this stage. In America John McCain is facing an important personal dilemma; he can either lose or win with his honour intact or he can endanger the future of America by allowing if not encouraging his minions to indulge in the politics of division.

The Copp Comment‏ - October 9, 2008 Edition

Good Morning All,

Welcome to the Reagan legacy, you must remember now, how the free market would provide wealth and jobs for everyone if it could only be liberated from the bonds of REGULATION, how the eighties became known as the greed decade wherein business schools, then and since, placed their emphasis on courses about balance sheet alchemy in lieu of economic history and ethics. These are those years folks (as Sarah would say) but stop worrying about them because they will soon be over, the pendulum is swinging back toward a more sane world and we are truly headed toward positive change.We are also witnessing the end of the "oil Presidency" but even as we do oil stocks have overdiscounted the next week, let alone decade. I leave you one example; Petrocanada will trade at less than 3 times earnings this morning and that is a current balance sheet number that does not include its oil and gas reserves or any other assets. It is one among many. As someone said this morning , "if the market went down as it did yesterday for another 10 days it would be worth ZERO".Look for a two to five hundred down opening followed by a mid morning turnaround that runs to a positive close....hopefully on huge volume.

If any of you caught the McCain Wisconsin rally on CNN you might have thought you had been taken back to the 1950's, except in color. The tone and tenor of the right wing talk show hosts has long bordered on lunacy but when it is encouraged by a major party candidate it becomes scary as hell. The racist rant is rising and when combined with the McCarthyist "guilt by association" program that has typified recent Sarah speeches we must be truly frightened for Obama's safety. This campaign is fast becoming one in which the party of hope is fighting the party of hate.

Bobby Kennedy was fond of saying that "20% of the people will be against everything all of the time", the problem in America is that 20% is heavily armed. There will be an ugly start to a day that will end on a very positive note.

April

The Laurel Comment

“Logical consequences are the scarecrows of fools and the beacons of wise men.”
-Thomas Henry Huxley


Commentary

Although America has lost much of its military and economic influence during the Bush years it still remains the world’s most powerful nation in both regards; and because of this tragically incontrovertible fact, the coming November election is of greater importance to Canadians and other citizens of the world than are their own domestic political issues.

The month of March was supposed to signal the end of both primary campaigns but alas the Democrats rage on. During this latest period of silliness each of the three remaining candidates was confronted with an issue problem, two of which were directly related to what we now call “misspeak”.

It may not seem fair or even logical to define a candidate’s honesty, knowledge or intellectual depth on the basis of a “one off” comment or occurrence but what we do discover from these events is the meaning of the mistake and the capability of the candidate to respond meaningfully to the self created crisis.

In the case of Barack Obama, whom I incidentally support, the reaction to his pastor’s rather outlandish display was a measured and hopeful speech on the history and potential future of race relations in America. Oratory is one of Obama’s greatest strengths but more importantly for America it is not just the verbiage expounded by the man that gains purchase with his public but the tone of the subject matter and the hope it portends.

Hillary Clinton on the other hand misspoke about an event that never occurred, effectively creating a story that was intended to enhance her credentials as an experienced world diplomat. Worse still was the absurdity of repeating this easily fact checked fabrication on more than one occasion as part of an attack on Obama’s international capabilities. Not smart!

More egregious still was the thrice repeated gaffe by John McCain, the Republican candidate who prides himself as a military expert. McCain stated that Iran was training Al Qaeda terrorists and sending them to Iraq. It was not until he was corrected on a third occasion by one of his potential running mates, Joe Lieberman, also known in some circles as the Senator from Tel Aviv, that he revised his thinking.

John McCain, the military expert, has also adopted, as one of his main campaign themes, his belief that his Democrat opponents are weak on Iraq, that the surge is working and that America might maintain a troop commitment there for 10 more years or even 100. He also repeatedly states that a withdrawal will mean victory for Al Qaeda.

Let us grant the fact that Senator McCain is a great patriot and a war hero with terrific military genes who suffered sorely during his captivity by the Vietnamese. But let us also understand that anyone with a modicum of knowledge of Middle Eastern affairs is aware of a number of absolutes. The Shi’ite and the Sunni may be both Muslim but they are enemies in Iraq where the Shi’ite represent 60 percent of the population, the Sunni 35 percent and the Kurds 15 percent. Furthermore, Iran is 90% Shiite and Persian. The Al Qaeda movement is 100% Sunni and has no presence whatsoever in Iran. Worse still, McCain’s continued belief that America’s abandonment of Iraq will lead to an Al Qaeda victory belies all common sense as the majority Shi’ite would be busy vanquishing (a nice word), any remnants of Sunni power including Al Qaeda, in a post occupation Iraq.

This is a civil war being fought over oil and who owns it and this war will not end until one faction of the Shia is victorious.

McCain’s gaffe has deadly and costly overtones, Hillary’s was silly and self demeaning, Barack’s was countered with a positive spin, you judge.

Spending 5 years in a POW camps may make someone tough, the experience does not however make anyone a Clausewitz.

Markets

The last year has been a devastating one for many in America but for the most part Canadians and others have escaped the brunt of the housing collapse and the sub prime disaster. “Greed is good”, as Gordon Gekko said in the movie Wall Street, had become the creed of the financial engineers who created and sold fabricated products to many who should have known better. The fallout, which began last Spring among the knowledgeable, culminated recently in the collapse of Bear Stearns an 85 year old investment bank that had been worth billions only last year.

“How could this happen” many have wondered over the past few months “and when not if will another debacle reoccur?”

The answer to part one, at least in general terms is about regulation or the lack thereof; in more specific terms it may be about the Glass Steagall act which was created in 1933 to separate commercial and investment banking and replaced in November 1999 through the auspices of Republican Senator Phil Gramm, the encouragement of Alan Greenspan and the signature of Bill Clinton. The investment world that was then created may have been largely responsible for the mess that financial markets are now experiencing.

As many readers of this letter are aware our bearish position on markets that lasted throughout 2007 (save gold and oil) was repealed by our bullish stance adopted in mid-January when we stated that the lows had been made. The several tests of these lows over the past weeks have confirmed our belief in their validity. We have stated and continue to believe that financials lead markets both up and down, we now look forward to the former side of the equation.

Added to our recommendation to buy financial ETFs; XFN and HFU in Canada, XLF in the U.S. is a bullish scenario for technology. Semiconductors lead this area and there are many including Intel that will benefit. PMC Sierra and Micron are among the many.

Gold has taken a hit from the hedge funds but should settle in above 850 before it makes its next run to the upside. Inflation is a growing, not a declining factor.

Other themes continue to grow with infrastructure, agriculture and oil sands being predominant. The market should be profitable until next spring after which some new chickens may come home to roost.

Remarkably

The month of May should bring an end to the last hopes of Hillary Clinton after which the Democrats can get down to the serious business of trashing John McCain and the Republican greed machine.

The coming campaign will ostensibly be about two issues; the economy and Iraq, but in reality these two are interwoven and the Democrats must be adamant in their emphasis on this linkage.

Last month we mentioned the Stiglitz-Bilmes book entitled The Three Trillion Dollar War, a study that should become mandatory reading for every voting American.

Since its inception the war in Iraq has been an exercise in economic, moral and political suicide. The argument that America is obligated to see it through is both specious and stupid. It is the same argument that was used in Vietnam in years one through ten. In 1967 Alaskan Senator Ernest Gruening, who along with Wayne Morse of Oregon was one of two Senators who voted against the 1964 Golf of Tonkin resolution, answered a reporter’s question on how the United States could get out of Vietnam.

He responded simply by saying “in ships and in planes”. Tragically and fruitlessly that is exactly how they left 8 years and thousands of deaths later.

Barack Obama should propose a fix for Medicare, Social Security and the economy in general by proposing a massive infrastructure program. When asked how to fund it he may easily respond by saying that he will end the waste in Iraq and the tax cuts to the already wealthy. The side benefit will be a $30 per barrel drop in oil.

Geoff Ryan
March 5, 2008
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/

March

The Laurel Comment
“Nations are formed and kept alive by the fact that they have a program for tomorrow.”
-José Ortega y Gasset

Commentary

Unfortunately for America, the Democrats and most of the civilized world the primaries will continue to be of importance through to April 22 when the Pennsylvania votes are counted. The happiest souls to be found out and about the political spectrum this month are the Republicans, who now look forward to 6 weeks of mean campaigning from the Hillary camp who are deviously delighted with the late gains achieved from their attack ads in Texas and Ohio.

The math still largely favours Obama and we fervently hope that he remains a high roader rather than a gutter player…no matter what the cost.

This year’s election in the U.S. is far more important to Canadians and everyone else in the world than any political machinations that occur here in the sane sector of North America where high oil, wheat and base metal prices make governing an incredibly simple task that even some of our more challenged officials cannot screw up.

The issues before the American electorate should be simple this time around: the economy, the war, medicare and the deficit. The side issues will however be evident among some media types (read Lou Dobbs) and the Christian Right, these are the usual candidates: immigration, guns, gay marriage and the “right to life” movement.

John McCain, the Republican nominee has promised to campaign on more of the same, more war, more tax cuts, more deficits, and more pandering to the nutty extremes.

Hillary Clinton promises to end the war sometime, create a medicare plan and tax the rich.

Barack Obama promises to end the war more quickly, create medicare plan and rejig the tax system at the expense of the already wealthy.

Well we all know how the McCain plan works because it’s the one we have seen for 7 years. An outrageous and immoral war funded by deficits at no cost to its perpetrators (the wealthy) and at a great cost to the middle class in both treasure and lives. The McCain campaign will attack the Democrats for being weak on terrorism while the economic issues and medicare will remain largely ignored except for the usual conservative mantra of private health and low taxes.

Tragically it appears that Democrats response will be a gutless expression of “half a loaf” solutions that will include some mistaken diatribes against free trade, (Ontario did not steal jobs from Ohio and NAFTA has been a net positive for all so let’s drop the subject) when in reality they should be arguing the case for a massive infrastructure buildout rather than the puny Barack proposal of 60 billion over 10 years or roughly the cost of five months in Iraq.

Iraq, the Three Trillion Dollar war as Nobel economist Joseph Stiglitz and Linda Bilmes have called it in their fact filled book, must end immediately because it is the most easily identifiable source of America’s current problems. When George Bush took office, oil was $20 a barrel, the Euro was at $0.83 to the U.S. dollar and Canada’s Loonie was $0.65. The U.S. Federal government was in surplus and gold languished in the $250 per ounce range.

Yes, there was 9/11 and maybe it could not have been prevented, but Iraq had nothing to do with the attack and the Bush/Cheney reaction to the event has proven to be far worse then the attack itself. This idiocy must end and a new America must emerge from the ashes of the Bush Administration.

America does not just need a change in policy, it needs a bottom up change of spirit, one that Barack Obama has the best chance of providing.

Markets

As readers of this column are aware, our long held bearish views on U.S. and world markets changed following the mid-January lows. Our five year bullish opinion on gold has not as our short term $1000 target plays out and our one year level of $1500 comes into view.

Many bears have been calling for a retest of the January lows and some for a possible breakdown of the Dow Jones to the 8,000 level. The retest may have already occurred and the Dow 8,000 has already been achieved if one wishes to relate the index to Euros, Canadian dollars or gold, because the entire movement of U.S. markets is mistakenly seen by most in “greenbacks”. We have said it before and will now repeat it. The United States is on sale and now is the time to buy it. By the time we get to November and a Barack Obama Presidency the entire picture may have a new and positive look about it.

Democrat themes are infrastructure, technology and bio research which should bring the nanotech and stem cell stocks back into play. The constants of world growth will be agriculture (there is a small list of stocks) base metals, energy and the aforementioned precious metal play. Learn more about ETFs and special situations.

Remarkably

The total amount of gold in circulation is about 5 billion ounces.

The U.S. money supply as formerly measured by M3 has risen from 800 billion in 1971 to 12 trillion today.

The largest proportion of the rise has taken place since the late 1990’s.

Gold traded at 850 1980 dollars, it now trades at 990 2008 dollars. You do the math.

On the positive side 2 billion new consumers have been created since the early 1990’s in Asia, the sub continent of India and in Central Europe, Russia and South America. This new world is no longer solely driven by either the U.S. economy and its profligate consumption or by its foreign policy blunders.

The United States remains the world’s largest economy but it is no longer the world’s fastest growing economy. Last month we quoted the former Governor of Hong Kong Chris Patten who said that China had been the world’s largest economy for eighteen of the last 20 centuries and would be again in this one. Nothing has changed in the last 30 plus days to change that view.



Geoff Ryan
March 5, 2008
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/

February

The Laurel Comment
“China, for 18 of the past 20 centuries, has been the largest economy in the world and will be again this century”.
-Chris Patten (former Governor of Hong Kong)

Markets

January did not treat the world’s bourses very kindly and despite the continuous economic warnings of the last year, the downside momentum still came as quite a surprise to the unprepared and the “none so blind…”

Among the first 2007 warning shots was the February shakeout in China which transcended European and North American markets in quick succession. This potential for debacle however ended in an Asian minute as markets reversed course and soared to new highs, at least on the surface of things, for underneath the indexes the real story of what was to come had just begun to unfold.

The sub prime mess and the housing decline in the U.S. did not appear overnight, last Christmas or even last summer. They were both well known and well documented prior to both the August and November meltdowns, and were amply illustrated by the “financial” indexes which had peaked in the spring of 2007 dropping major bank stocks anywhere from 20 to 60 percent with Citigroup having led the way.

The Federal Reserve strongly intervened during the August crash awarding markets a three month respite, by January the Fed had exercised outright panic proving that their ability to follow far exceeded their talent for leadership.

So now it is February and many investors are wondering what is in store for 2008 and beyond. Will there be more panic, a deep recession, a global meltdown or will the world slog through its present difficulties and emerge solvent but chastened?

The answer to part one will be positive in this writer’s view as the actions of the Federal Reserve to liquefy the system in order to save it is always a short to medium term winning strategy. The answer to part two is even clearer, chastened capitalism is an oxymoron. There will always be excesses that lead to bubbles that end in troughs. This is a product of both a successful system and human nature.

As many readers are aware “The Comment” has been bearish on markets for many months now while it has remained bullish on gold and special energy situations for a somewhat longer period. This former position on markets has now changed. It is our belief that the financials lead markets both up and down and we now suggest that the bottom in this group was achieved in mid-January. In short the new market leadership will come from this sector, one best accessed through the purchase of specific exchange traded funds. The XLF in New York and either the HFU or XFN in Toronto will allow investors to buy the group rather than trying to choose a particular winner. Our position on gold remains not only unchanged but reinforced as our 1000 short term target fast approaches. We believe that $1500 in 2008 remains a distinct possibility as the massive financial infusions of the world’s central banks have further devalued most currencies. Buy precious metals, Japanese Yen and do the former through the aforementioned ETFs.

There will continue to be a great deal of talk during the coming year about the outcome a Democratic victory would have on stock markets. Don’t believe the talking heads on the business channels as they are, with few exceptions, reactionary Republicans whose idea of the common good rests with their own pay cheques. Markets have historically outperformed under Democratic administrations. The accompanying charts prove the point.

The most compelling argument in Democratic times is the one that small caps and tech stocks in general fare better than large caps and defence related companies. We wonder why.

Think too of the regulatory bodies which were put to sleep during the Bush and Reagan years enjoying a revival, a time to come when we hope that white collar crime has the same stigma as armed robbery. Try this metaphor on; think what would have happened on the streets of New York if all the policemen had been sent home for the past eight years.

Be bold in bad times and careful during the fourth, fifth and sixth boom years and you will likely do well.

Commentary

George Bush recently presented his government’s 2009 budget. The main points propose cuts for Medicaid, medicare and education while increasing the defense portion to its largest figure (adjusted for inflation) since World War II, a number that does not include the off budget spending on the Iraq/Afghanistan mess, another 200 billion.

The good news resides in the fact that this is the last Bush Budget, the bad news may be the continuation of his disastrous Middle East policy should Senator McCain win the Presidency now that the Super Tuesday primaries appear to have assured his nomination. This is not to say that any of the other Republican choices were or are better than McCain but more of the same is not what either America or the World needs at this juncture.

The momentum story of these 2008 primaries has obviously been that of Barrack Obama who despite his rather thin resumé is proving to be an inspirational public figure. This campaign has resonance for those of us who remember 1968 when an assassin stole the spirit of America and gave the world Richard Nixon in its place.

The Democrats in power are not like the Republicans because the people that surround and advise Democratic administrations are demonstrably more pragmatic and far less agendized. In short President Obama will not have a Vice president Cheney, he may instead have a team made up of the “best and the brightest”.

Remarkably

Writing a bullish market letter in the midst of a crash is not an easy task, particularly when one is aware of some very severe pitfalls in the underlying fiscal and monetary structure of the world’s largest economy. It is a time when faith, not in religion, but in history helps to restore the balance between what is and what is likely to be.

The banking systems of the world have been refinanced. The securitization of bank assets (conversion of existing assets into marketable securities) does not however necessarily solve the economic crisis that the bursting of the housing bubble has effected. The problem, as some more learned than I have begun to emphasize, is the slowing in the velocity of money from bullish multiples to deflationary negatives. This slowing of the economy may be attributable to a number of things many of which have ominous similarities to the mid to late 70s when money last moved en masse from consumers to the sovereign funds.

The OPEC led oil price rise at that time effectively moved circulating dollars that were better utilized buying fridges, stoves, cars and life’s necessities into the bank accounts of Arab Sheiks who bought planes, gold and collectibles in countries where trickle down economics was a literal experience.

This time around, the supply crisis for oil along with the political risk price due to Bush policies has added to the commodity price boom, thereby enriching the sovereign wealth funds who now seem to be more intent on buying existing assets than creating new ones. This and the Bush tax breaks to the already wealthy have combined to place money in the hands of those who don’t spend it, a phenomena that may also explain why the world market indexes stayed up over the last year while the underpinnings were crumbling.

In essence, it is possible to create enormous liquidity but if the banks don’t lend it and the people don’t spend it, the economy comes to a halt. To be crude, it is somewhat similar to someone with lots of Viagra but no partner.

Finally it is good to remember two things; the opening quote and the proven market adage “don’t fight the Federal Reserve”. After all during the 1920’s Germany under the Weimar Republic saw its stock market rise from 600 to 29,000; grant it they did print so much money that the entire Daimler Company was worth only 342 of its cars in then current US dollars. Daimler did survive.

Geoff Ryan
February 6, 2008
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/