Market Spotlight

Turbulent Markets Continue Into 2008

January 15, 2008

2007 turned out to be a very difficult year for investors globally. The first half of 2007 was positive, followed by some dark clouds in the summer, and poor markets, which remained throughout the end of 2007. Although the Toronto Stock Exchange (S&P/TSX) showed a modest 7% rise for the year, this positive return was very misleading. Three-quarters of this return could be attributed to just three stocks. A very weak U.S. dollar, rising commodity prices, an economic slowdown and very soft real estate markets in the United States, and the fallout from the sub-prime mortgage defaults that severely damaged liquidity in financial markets around the world, shook confidence in all markets over the last half of 2007 and into 2008.

The 2007 financial markets exhibited the highest level of volatility in recent years. Please refer to our January 2008 Investment News for analysis of last year’s turbulent markets, which brought into focus our concern, voiced early in 2007, as to whether the longest Bull Run in 50 years could be sustained (see below).

The Kelland Group’s view, looking into 2008, is one of caution. One of the lingering problems is the massive personal and government debt in the U.S., magnified by the sub-prime mortgage and credit liquidity issues. We do not have to understand the “nuts and bolts” of these problems to appreciate that Canada would be hard pressed not to feel the pain of a significant economic slowdown in the U.S., our largest trading partner. Other global economies are likely to feel the pain as well – we do not subscribe to the “decoupling theme” that maintains that emerging world economies can escape the consequences of a U.S. slowdown. Remember that economic data measures the past. The markets look to the present, and more so, to the future.

Equity and bond markets are “leading indicators” of the economy, and that is why our view is not more negative. We feel that some of the negative news is already priced into the markets. With a tired American consumer (which normally “drives” the U.S. economy and indeed represents 18% of the world’s economic output), it remains our advice to invest in only high quality securities, and in a diversified manner, and in keeping with clients’ individual comfort zones for risk.

Even the slightest bit of bad news can rock the markets on a daily basis. The current market doldrums are not likely to subside until we see some relief from the global “credit crunch” issues.

We believe the long-term investment climate ultimately will turn around. However, it will take time (perhaps up to 18 months) to work through these turbulent issues. It is our job as investment advisors to look through today’s dismal weather to the longer-term outlook. As we begin 2008, our view is cautious, but pragmatically optimistic. We will invest in good companies we deem undervalued as compared with long-term expectations. Market prices today are, for the most part, reasonable. We can buy good companies at attractive prices for good potential long-term growth. But patience and persistence is required. As recommended to all our clients in January 2008: Stay the course - stick with your long-term plan.

Current Bull Run - The Longest in Half a Century! But, Is It Over?

October 31, 2007

Subsequent to the events of September 11, 2001 and the mild economic recession in 2002, global equity markets in general, and the Toronto Stock Exchange in particular, have enjoyed a phenomenal "Bull Run". As pictured in the chart below, the rising TSX bull market of the past 60 months is approaching a duration almost twice that of the average bull of 32 months. The peak, at the 57 month mark, was reached in July. This cycle is now the longest running bull since the mid-1950's. The rise of the index of about 150% was the second strongest in fifty years, and approached the strongest bull run made 30 years ago in the late 1970s. [Note: To open a new window with a larger version of the chart, click here.]

What does this tell us? As advisors who attempt to manage risk as well as performance, we are cautious. Yes, interest rates are still low. Yes, the Canadian economy is still strong. Yes, there is still considerable interest in Canadian stocks. (In fact, takeover spikes have accounted for about 40% of the rise of the TSX so far in 2007. Canadian corporate takeover announcements in the first half of 2007 represented 10% of global takeover offers in that time period).

The summer of 2007, however, is a strong reminder that bulls do not run forever and that strong markets inevitably suffer setbacks. The recent volatility is indication the bull may be on its last legs.

We are not "market timers". We cannot predict highs and lows any better than anyone else. Simply stated, history is the best teacher. Setbacks do and will occur. We have experienced them in the past, and will do so again. Our patient and value-based approach has served our clients well in both strong and weak market environments. Both hands are on the wheel.

Source: Scotia Capital