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A View From Here July 2010

July 14, 2010 • Print This Article

"History does not repeat itself, but it rhymes a lot" - Mark Twain

Angst Rules!

Another month has gone by without providing investors any major reasons to feel more encouraged about the economic and financial outlook. Troubled European Countries, US housing and money and credit trends remain a concern in most major economies. Further, stock markets have continued to weaken since mid-April with only a small amount of relief. However, we must look at this from a larger perspective which is to say that the North American stock markets had advanced over 70% from the lows in March 2009 to its most recent peak in April 2010. I have often written here that if it weren't for the epic fall of the markets during the 2007-2009, we would be marveling at the advance which followed. As such, a correction from that move of 10% - 20% does not seem unreasonable to expect and we are between those parameters now. History suggests we might even be close to the end of this malaise, but who really knows?

With all the economic grandstanding of double-dip recessions and the re-emergence of doomsayers with predictions of the Dow reaching 1000 and the collapse of western capitalism plaguing newspapers and on-line publications, it's hard to not live in fear. There just doesn't seem to be a reason to be optimistic, but as we have said before, pessimism is not a luxury one can afford. I strongly believe that every transaction anyone has made in the stock markets contains some level of fear of a relapse of 2008 built into it. It reminds me of when I started as an advisor and people spoke continuously about the stock market crash of 1987 and its potential to relapse.

Further, when reviewing the valuations of our holdings, most are in excellent financial shape and the sheer amount of share purchases by company officers and directors ("Insiders") is as an encouraging sign as one can find. "Insiders" are senior executives and directors of the corporation who must report all purchases and sales of the shares of the company they work for. This sends an encouraging message that individuals who run the day- to-day operations of the business are expressing a level of optimism I have not seen at this level in my 22-year career. These are good signs, as have been the recent earnings releases from our holdings. We are investors with a long-term horizon and look for the sign posts on the road in each investment as indicators of what to do. Insider buying is often a strong indication, especially in the face of improving earnings and valuations that are still well below what we believe to be obtainable.

The Value of Doing Nothing

I have to admit, this business is not fun when there is nothing to do. I call those periods; "Taking the hit for the team." It is not often when an advisor advocates this stance, but as Winnie the Pooh once said; "Never underestimate the value of doing nothing." It might seem like unusual advice, particularly at a time when the global economy is threatening to go for a double-dip and stock markets are weaker on disappointing headlines. The truth is, patience is a hugely underrated asset. We tend to hold our positions for a least an average of 3 - 5 years, sometimes adding to them and sometimes selling part of the position as things change. However, we seem to be in a period where we spent a great deal of time augmenting existing investments over the past 18 months (mostly at lower prices from where they currently trade), where as just adding more at present for the sake of doing so, doesn't make a whole lot of sense.

Historical Data

Mark Twain said that "History doesn't repeat itself, but it rhymes alot." With that in mind, I took some of the down time created by the G20 shutdown of the downtown and went back and looked up the average period of market corrections and found some interesting data. Firstly, most corrections retrace anywhere from 25% - 35% of the advance from when the market last bottomed. The correction itself has been running for almost 2 months which is a common length of time for a pullback. The major US market indices had retraced almost one-third of the 2009-2010 bull markets entire advance, another normal occurrence, and several market indices have skirted their moving averages. In sum, after what could be a normal correction phase, a window of opportunity for a market advance may occur. But don't seek solace on TV or in publications as it is awfully hard to find any encouraging signs. Pessimism is really at a high.

Speaking of Historical Data

If I were to define our investment mantra, I would say that we are value investors who seek out of favor companies that have the ability for an increased valuation. These are not wild speculations as all of our investments are ones with stable businesses and long-term track records of success. We are also invested in companies where management holds large stakes in their business whose business fortunes are improving. Because our investments are focused on Canadian companies, they tend to be considered "small cap" by stock market standards. In an interesting article in the Globe & Mail (http://www.theglobeandmail.com/globe-investor/investment-ideas/john-reese/) using data from 1927 through to 2009, small-cap value investments have averaged a 14.17% annual return. This might give us some comfort in terms of our long-term annual returns. I believe that we are lucky that there are many of these companies in Canada for us to invest in. The hard part is finding the right mix of growing earnings, management holdings, an overlooked view from a valuation standpoint and a potential trigger event that could unlock that value. I believe at least two of our current investments have that potential over the next 12 - 18 months for a trigger event that could unlock its value. I hope its sooner!

I hope that you are having a great summer and if you have any comments or questions, please feel free to contact us!

All Good Things,

Adam

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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