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A View From Here December 2011

December 14, 2011 • Print This Article

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." - John Templeton

History as a Guide

With so much economic anxiety in the air, we glance backwards for a little history lesson using one of my favorite strategists: David Dreman. For those who believe that investments are doomed, history shows that they might be mistaken.

To understand why, we look to psychology - or more specifically, the human tendency to overreact. Winnipeg-born investment strategist (and Forbes Columnist) David Dreman has shown that investors tend to be far too eager to sell in times of crisis. In his 1998 book Contrarian Investment Strategies, Mr. Dreman looked at how the market performed following 11 major crises in the post-Second World War era, including the Korean War, Kennedy assassination, and the first Persian Gulf War. He found that a year after all but one of these crises (the Berlin Blockade being the exception), the market had actually gained ground. The average gain was 25.8 per cent. Two years after the crisis began; the average gain was 37.5 per cent.

For Mr. Dreman, the message was clear: "A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest," he wrote. "People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower." His advice: "Buy during a panic, don't sell."

Since Mr. Dreman's book was published, the world has hit repeatedly with bouts of bad news. On Aug. 13, 1998, for example, the ruble collapsed and the Russian stock market lost more than a quarter of its value in a single day. A year later, the S&P 500 was up 22.5 per cent. Two years later, it was up nearly 38 per cent.

Then came the Sept. 11 terrorist attacks. In just five trading days after the attacks, the S&P tumbled 11.6 per cent. Just one month after the attacks, however, the market had gained all of that back.

The next major crisis erupted on Sept. 15, 2008 - the day Lehman Brothers collapsed and triggered the global financial crisis. In this case, the S&P was down about 16 per cent a year later; two years later, it was down about 10 per cent. Not good numbers, to be sure. But remember, following Lehman's collapse, many pundits were predicting a complete collapse of the global financial system. A 10 per cent drop over two years is a far cry from that.

And that brings us to the euro zone, or more specifically Greece, Spain and Italy. The debt crisis boiled over on April 22, 2010 when Moody's downgraded Greek government debt. Just two trading days later we entered a market correction that was believed by many to be the beginning of another recession. A year after the downgrade, however, the S&P was up about 10.6 per cent; more than a year-and-a-half later, there's still no recession to be found.

In most or all of these instances, it wasn't the complete resolution of the crisis that led to the market rebounding. All it took was a bit of light at the end of the tunnel. We've seen that recently as the market has jumped on news of plans to deal with the euro zone mess. So, does this mean that when a crisis hits, you should pour all the cash you have into the stock market? No - such all-in bets come with too much risk for most investors. But I think what it does mean is that when a crisis hits, you shouldn't ditch your long-term strategy and head for the hills.

The U.S., Canada, and the developed world have been through one crisis after another. Each time, in the face of the most dire predictions, investors who stayed the course did fine.

Bust, Bounce - Echo

"History doest repeat itself, but it rhymes a lot" - Mark Twain

Trying to pick the direction of the economy and the stock markets over the short term is like picking the direction that a bird will fly of a wire, so we don't. Rather, we focus on the individual merits of the companies we own and we still maintain that there is excellent value in these investments and we are finding incredible value in others as well. But, we do have an opinion for what its worth.

I maintain that this is a similar a situation as he period following the crash of 1987 through to the end of 1990. Following the 20% drop on October 19, 1987, many pundits and popular authors at the time, pointed out that the market was signaling the new economic depression. As pointed in last month's note, it didn't happen and by 1991, all was pretty much neutralized if not, mostly forgotten.

Following the end of 1987, worldwide stock markets bounced back strongly throughout 1988 and 1989, until new circumstances revealed an echo, to the impact that the events of 1987 might have signaled.

Now look at the catastrophic events in 2008-2009, and the following bounce from the March 2009 lows to the April 2011 highs that are now echoing through the markets. While it would be foolish to discount all possibilities that the European debt crises manifested, markets have had ample time to factor these things into the valuations of share prices. Put simply; if it were going to be that bad, then the markets would be a lot lower. Perhaps, as I believe, these events have held prices stoic despite positive corporate and economic developments, which seem to be tossed aside by the Echo felt by European nations, banking and debt crisis.

It is my belief that that this crisis, like its immediate predecessors will also pass...and hopefully soon!

Wishing you a very happy holiday season, and as always,

All Good Things,

Adam

P.S. What happens when you cross the Mafia with a philosopher? An offer you can't understand

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.

 

A View From Here November 2011

December 7, 2011 • Print This Article

"Never let a crisis go to waste" - John Brock CEO Coca Cola

It Has Not Happened Yet...

From the time that I entered the financial services industry, we have seemingly been on the cusp of the next great depression. In fact, on my first day in the men's room, a trader asked if I had a $1000 to invest because I had to go short US treasuries and then spouted things about the jobs and the economy. I had no idea what he was talking about, but winced at the misfortune of entering into the working world just as we were about to go into free fall. It didn't happen.

Looking back twenty-four years later, I have to say that if there is one thing that has remained a constant: it is the fear that we are at the precipice of total collapse. All the data, charts and dooms-day authors provide an array of statistics that compare our modern economy to the fall of Rome or the Great Depression. It turns out that life goes on and the pending economic collapse as predicted by the best selling books at the time (does anyone remember the best seller -The Coming Depression of 1990 by Dr Ravi Batra?) doesn't come to pass.

Then in the fall of 1992, I was walking to my apartment on St George Street when I ran into another trader I hadn't seen in a few years. He greeted me with, "You have three days to sell your stocks before the collapse" and then gave me a whole bunch of moving averages and statistical reasoning. They were pretty convincing and I went home and worried... It didn't happen then either.

Many investors view the 1990's as a great growth period for the stock market. It is interesting to note however that it wasn't free of rhetoric either, as weak markets based on fear unfolded for brief periods in 1994, 1997 and 1998. During each of these intervals, the pundits scared us to the pit of our stomachs, but the markets moved forward. The collapse of the technology bubble in March of 2000 led to a rise to housing, growth of China and the need for more natural resources. We had to live with war, 9-11 and a severe downturn in 2002-2003 and again, the top selling business publications called for collapse and the top selling business book of 2002-2003 was "Conquer the Crash" by Robert Prechter. It didn't happen.

Looking at the world today, how can this not be the worst of times? The stakes seem to be larger than ever and a quick scan of the headlines speak of European woes, North American depression, failing financial institutions and a continuing Middle East crisis that is mixed in a bucket with the 2008-2009 crisis so fresh in the rear view mirror.

It is almost as if we haven't seen such a calamity of negative economic forces as we see now. But memory is short and it's difficult to feel how bad it was when we were faced with it last time. Even the worst panic of only a few years ago, is now feared to be tame by comparison to what's coming. But life will go on this time too. I believe the valuations of businesses have had an enormous amount of time to digest these concerns. It may get worse before it gets better, but we are value investors and own investments which we believe will have better valuations in the future.

So many of my peers now point to just 5 years ago, when things seemed easier. The problem is that they were not easy at the time and I certainly do not remember the view that things were stellar. I do remember the very real concern that at any time, we are on the verge of economic collapse.

But that was 5 years ago, and the one constant remains...Are we going into financial armeggedan?

It hasn't happened yet.

A Short 25 Year Market History

If you had to pick a moment when things begin to look shaky, you couldn't do much worse than the 1987 stock market crash. Black Monday was the 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, 9-11 and its aftermath and of course, the banking and housing collapse of 2008 - all of these extreme situations larger in scale to the preceding panics and in the heat of the moment, the power and capacity to change the world as we know it. None of them, it turned out has collapsed the economy, but each one looked like it could as we went through them.

What Are the Smart Investors Doing?

Something worthy of consideration is what are smart and successful people doing? Warren Buffet's Berkshire Hathaway has committed more money to investments in 2011 then any time in the past 15 years:

I have included a link to this story here: (http://moneyland.time.com/2011/11/09/warren-buffett-is-buying-is-it-time-to-celebrate/).

Last month I spent four days attending a Value Investing conference in New York City with some of the worlds leading investors. Outside of Mr. Buffet, there couldn't have been a better gathering of the minds available. The days included special workshops with some of the speakers. Some interesting insights that pertain to this theme are:

Joel Greenblatt - using extensive data, markets are attractive and always are during periods of crisis. He argues that they are poised to produce significant returns over the next year, but even better, value-based investments should increase twice-fold (that's what we focus on...yay!).

Leon Cooperman: Cooperman argued that the U.S. economy is unlikely to decline as it did in late 2008 and early 2009. European leaders will stem their current predicament and hence, stocks are very attractive.

Our Investments

October and early November have seen a number of our company's report earnings and despite two misses, most reported excellent numbers exceeding expectations. The most important impression however, is that despite fear of global recession and even depression, none of our reported companies seem to be experiencing these signs in their businesses...even those who operate in Europe. Perhaps the real opportunity in this environment is that the fear has already been built into valuations, and as such, a compelling recovery may be at hand.

Time will tell, but in the meantime we will focus on adding value to the portfolios.

All Good Things,

Adam

P.S. Joel Greenblatt just released another excellent publication called "The Big Secret for the Small Investor" and I cannot think of a better introduction into what we look to achieve on your behalf. If you are interested in a copy, please let us know and we will forward it to you.

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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