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A View From Here August 2010

August 1, 2010 • Print This Article

"The market does not beat them. They beat themselves, because though they have brains, they cannot sit tight." Jesse Livermore (famous Wall Street trader in the 1920's)

Are We Out of the Woods Yet?

Ever since the middle of April, there has been an unusually large amount of pessimism about the world's economy. It is almost as if the pundits have been quietly waiting for the market to abate its powerful recovery before pouncing on the doom and gloom parade... and there hasn't been a shortage of participants. I find it almost funny how many people try to predict what we all know is unpredictable. If my experience has taught me anything about the outlook for the economy, it is that surprise, not consensus is going to hand that guides us. It always has. As the world becomes interconnected with complicated financial instruments, more volatility exists due to the size and scope of these 'hedges'. The crash of 1987, the collapse of Long Term Capital Management in 1998 and the fallout of the sub-prime credit markets are prime examples. There fallouts have led to panics. I believe (hope?) that we have put the last one behind us.

The hope that we are in economic recovery is going to be challenged by the fragile nature of every investor who fears that we head back into a weak environment. I remember this fear well following the 87 crash as most investors spoke of it in the proceeding years, until the markets ultimately shrugged its devastating effect off as the economy never really went into recession and market indices continued their long term upward trend.

In the very latest 'panic', Governments around the world have done whatever they can to ensure the best possible living standards of their citizens during this time. Yet, continuous news of possible defaults has magnified the corrective phase in the stock markets we have witnessed. From the perspective of pure fear, this should make a whole lot of sense. We saw a market sell-off from proportions that few if any had ever witnessed and watched the collapse of large organizations who were major players in the field of credit. I recently finished the Rise and Fall of Bear Stearns, by its former chairman, Alan 'Ace' Greenberg. The book relives the history of a 90-year old investment bank's history and how in a relatively short period of time, was brought down by a series of complicated debt investments on their books that were ultimately impossible to sell. The bankruptcy of Lehman brothers was just months away and was followed by a series investment frauds and scandals which emerged as the tide went out. Who ever heard of Bernard Madoff before 2008? Nobody I know.

With Governments responding with stimulus packages geared to whatever it takes to rejuvenate their economies, one must wonder what happens if these measures don't take hold. Further, traditional safe havens such as gold have become desirable destinations for some investors who believe that in the event that that the future is indeed bleak, the value of these 'hard assets' will increase dramatically in value...even though they already have. The pile up of potential problems that comes out of this scenario is so high that you need wings to stay above it. As such, I believe that these concerns are widely known have been deeply valued all asset classes. How can't they be?

With scenarios such as these in mind, we must focus on our investments and how they are valued relative to their ability to generate profits in such an environment. At its basic level, a company that is able to increase the value of its enterprise should become more valuable. July's release of earnings from our holdings such as FirstService, Methanex, and Second Cup points to higher future profits despite their current valuations, which are still significantly below pre-credit crisis highs. This, in my humble opinion, warrants our continued commitment as the increase in earnings should point to higher share prices. Ultimately, I believe that we must look at our holdings on an individual basis, which should help us make the right decisions.

Interestingly, all of our investments have continued to report improving financials results over the past year and have the strongest balance sheets I have seen since we began purchasing them. We are not alone in our enthusiasm for our holdings as I pointed out in last months, A View From Here, there has been an unprecedented amount of insider buying of our holdings by the senior officers and directors. Insider buying is a powerful indication of faith in a company's future and something we monitor very closely.

Our Investment Performance May Have Suddenly Re-Awoke

When I survey the performance of our investment accounts throughout the year, I would point out that we witnessed excellent growth on a month-to-month basis from March 2009 until the end of April of this year, when the markets started to correct. We have also augmented this performance with additional purchases of existing holdings and the liquidation of owthers which turned out to be timely. The world-wide stock market correction which began in mid-April has allowed the major averages to pullback the better part of 15% from their peak. Given the fact that we have seen almost 70% growth in these averages since the markets bottomed in March of 2009, a cooling off period doesn't seem at all unusual or unreasonable. As the July drew to a close, the market has begun to suddenly reawaken and we have been seeing a much stronger month in terms of performance. As I finalize this note, August has started on a strong note as well. This should hopefully transform into a better month-end statement for us in July.

This hardly surprises me as we have witnessed excellent earnings and as mentioned earlier, deep valuation discounts to what we believe our holdings are worth. Special mention goes out to three of our holdings; Softchoice which is approaching the release of a very important earnings quarter to be released on August 10th; Sherritt which continues to trade a substantial discount to their peers, has seen tremendous insider buying and seems to be focused on narrowing that gap of how its valued; and Evertz Technology which reported better than expected earnings and is so has announced larger contracts in recent weeks. I would not be surprised to see some continued strength in these names.

As July now gives way to August, we hope that you have having an excellent summer and continue to enjoy this fantastic weather.

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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