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A View From Here April 2010

April 6, 2010 • Print This Article

"I'm not panicking, and I'm not scared, I've been through the Gulf War, the Asia crisis, and the Russian crisis." Prince Alwaleed Bin Tatal Alsaud

It's Been A Long Time Coming

March 9, 2010 marked the one-year anniversary of one of the longest bull market moves in the recorded history. Interestingly, the rally has been so powerful, that in our case many of our accounts are now within 5% of their

all time highs and some have now exceeded previous peaks made just 16 months earlier. More importantly however, the performance in our accounts has well exceeded the stock market increase, which is something I am very proud of.

Our Memory is Short, but not that Short

One of the things that kept me somewhat comfortable about the general state of the stock market is our recent memory. Many have commented that the stellar move in the past year could be a 'dead cat bounce' on our way to the financial collapse. They point to rallies in the stock market during the 1930's as examples. Surely, there are better examples in over 2000 years of recorded financial history than what was called the depression. While it is true that this can occur, our memories of the pain of the events over the past 18 months are still fresh in everybody's collective investing minds. Just like it was following the crash of 1987. I believe that the valuations of securities and bonds at this point are coming off of the most honest valuations we might have seen in a generation. As such I think it will take some time before we lose sight of the potential of collapse.

Crashes Happened Before and Will Again

Black Monday 1987 was a first of a breed: a crash that suggested disastrous economic and social consequences but in the end had no serious effects at all. The bursting of the Internet bubble, the Asian currency crisis, the Russian government bond default that triggered the failure of the hedge

Fund Long-Term Capital Management-all of these extreme events have been compressed into a fantastically short space of financial history. And all seemed, in the heat of the moment, to have the power to change the world, as we know it. None of them, it turned out, was that big a deal for the economy or for the ordinary citizens.

I entered the financial services in January 1988 and remember newspaper and magazine articles similar to one during the past year and a half. A lot of people assumed something big had changed: the end of capitalism, or at the very least, the death of yuppie. The day after the crash New York Times reported that "these yuppies are unprepared and unconditioned for the hard times to come". But as it turned out, those yuppies were so well prepared that they survived to create many more crashes that followed.

If we use the past 23 years as an example, so much fear is placed into the market environment and that caution only intensifies following a potentially catastrophic event, such as the one that took place between 2007-2009. In other words...it's still priced in to the valuations.

March has been our Strongest Performance Month Yet

As the increase in the valuations of our accounts has been on a steady uptrend for over a year, most of you will see a dramatic increase in your March statement as positions such as Softchoice, FirstService, Sherritt, Brick Brewing and Second Cup Income Fund all hit 52-week highs during this period. This has been augmented by dividends and distributions, which have occurred during this period.

Second Cup Income Fund is investment holding which we have been holding for over a year. The investment stemmed from a review of specialty coffee industry in North America following McDonalds entry into the market. When compared to both Tim Horton's and Starbucks, 2nd Cup looked like an outright bargain. As such after some due diligence we took a position in the company and the shares have performed quite strongly since. Coupled with the monthly distributions the company has paid, this investment has achieved an excellent return to date. Fourth quarter and full year earnings reported in March point to potentially higher returns going forward. Further, management announced that they would maintain their monthly distribution of $0.0767/per share until year-end whereby they will convert back to a corporation and pay a $0.60 /annual dividend rate. I believe there is still upside in the existing shares.

Tax Free Savings Accounts

If you haven't yet thought about this special tax-exempt account, now is an excellent time to do so. It is my view that this account can become as important or more important to an RRSP in time. The concept behind it is quite simple; every Canadian 18 years old or over is allowed to contribute up to $5000 annually (which you are allowed to put in retroactively if you;ve missed pervious years contributions). Although you do not receive a tax credit for contributions like you receive from an RRSP, the funds grow tax-free and withdrawls can be made at anytime without any tax consequences as well. This is an excellent long-term investment account and would urge you to have one for each member of a family who is 18 years or older.

If you have any questions or comments, please feel free to contact us.

All Good Things,

Adam Hennick

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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