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A View From Here - June 2010

June 4, 2010 • Print This Article

What a Difference a Month Makes

Like phoenix rising, the stock markets have staged a remarkable 14-month recovery from March 9, 2009 of which time both the TSX and Dow Jones have risen 56% while the S&P 500 index rose 62 %. (As of the close June 3rd). During this period I have often wrote here that if it weren't for the events of 2007-2009, then we would be marveling at this unabated rise in the market averages and that many of our accounts are now within mere percentage points of their all-time highs. The markets continued their uptrend throughout March and April, however the markets corrected over 11% in the month of May making it the worst May on record since 1940.

But let's face it, on some level we knew that this had to happen. It always does, but it is impossible to time and I have learned to live with this type of adversity over the past 22 years. The markets are rarely complacent, but when a sell-off occurs, it often drudges up all kinds of panic and fear that we are again entering the arena of the unwell. The problem is, we have just seen a horror movie, and the memory is quite fresh in our minds. As such, it remains my opinion that the events of the past few years will be valued into every transaction... much like the crash of 1987did for the next couple of years until it was clear that we are not terminal.

This Time it's Different

These are immortal words from Sir John Templeton who once said, that an investor's worst enemy is to follow that mantra. Ever since I have been helping clients manage their money, there has always been an underlying wave of fear that we are on the verge of the next Great Depression and it has never gone away. So putting in perspective is to tell you that on December 31, 1987, the TSX (called the TSE then) closed at 3160, the Dow Jones was 1,938 and the S & P was 247. As of yesterday's close the TSX was 11,811 (+274%), The Dow Jones was 10,255 (+429%), and the S&P was 1,102 (+346%). At their peak in 2007-2008, The Dow Jones was 14,164, the TSX was 14,666 and the S&P was 1,530. Since its peak, the averages as of yesterday's close are still down almost or in excess of 30%.

Michael Steinhardt once said (and I quote him often) that "time and time again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors". Among these people have been some well-known or well-respected investors who have warned of a pending collapse of the western capitalism, most notably Richard Russell who has been publishing The Dow Theory Letter since the early 1960's, called for a major market collapse as May's malaise took hold. I don't want to discredit Mr. Russell and have enjoyed reading his publication on and off for years, however, I couldn't help thinking of Michael Steinhardt's comment when reading it.

No sell off ever feels orderly and tame and does so with a vengeance. We can take some solace in the fact that very few if any, ever call the direction of the stock market, but sell a lot of newsletters by attempting to do so. Where are all the hero's who called the crash of 1987, the sell off's that followed and the increases we have witnessed? Its and ever changing field of play, because there are too many factors that go into each event. This very real fact suggests that it is unwise to focus our investment decisions on what nobody has a successful track record predicting.

It's About the Investments

I have had a client joke with me (I think he's joking) that we should have sold everything over the past two months so that we could buy it back. Why stop there? Surely, the value of all other assets inclusive of his business, car, cell phone, computer...you name it, have fallen in value. But we are in investments that are valued based on their ability to grow their revenue, cash flow, earnings and ultimately their valuation. Interestingly, all of our company's who have reported their earnings over the past 2 months have reported better than expected numbers and increased their outlook. Further, none of them are close to the peaks they had seen in previous years and the insider buying activity for these companies is the highest I have seen in years. As such, they still show excellent value relative to their individual merits and believe that we stay in investments for that reason and not look to sell because the market is weak.

We don't know what the market will do, but as long as our investments are giving us the right signposts, we should continue our commitment and look for new opportunities. Over the past two months, I have spent a lot to time speaking and meeting with the management teams of our investment holdings and continue to feel quite strongly about them.

Our Investments Are Liquid

This means that they can be sold daily during market hours. As a portfolio of equities and fixed income we have crafted what we believe will add value with the lever of time. In the case of Firstservice, we have held a position since 1992 and over the years have added to and sold down part of our investment holding in that name. We can do this because there is always a buyer and seller listed on a daily basis on the Toronto Stock Exchange. The investment merit of each company warrants an additional purchase or at times sale as we did in 2007 with the above- mentioned security.

I believe at this time that we hold an excellent portfolio of securities, which will hopefully add incremental value for our accounts. However, because they are liquid, it seems foolhardy to sell the entire portfolio in anticipation of a market sell-off. We must try to ignore the short-term fluctuations and take a page out of Warren Buffets playbook and think of these investments as ones we would own in the absence of the stock market.

At the end of the day, it is an improving earnings picture that is going to create increased value on each of our investments and while the earnings releases and outlook continue to advocate better earnings ahead, matched with their relative valuation among its peers and general viewpoints, I will continue to advocate our existing investment stance and make no adjustments because the market has sold off 11% since reaching another in a series of interim peaks.

Let the Companies give us direction, not fear and greed.

I hope you are not too focused on the volatility of the stock market and are enjoying the wonderful weather this spring. Leave the worrying to me. That's part of what I get paid for!

Lastly, on June 9th, I am hosting a luncheon with Softchoice at our offices at 12:30 and would welcome anyone who would like to come and learn more about this company we feel a great deal of passion for.

All Good Things,


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.

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