Rational Advisor

THis week there’s been a lot of talk about US recessions and when it will be here etc. Just to let you know, recessions do not happen every day. Since 1950, the U.S. has been in a recession only about 13% of the time. And in the last 20 years, it was even less (more like 6%). The two most recent circumstances were so mild they barely registered on the “Recession Richter Scale” .

In addition to the economy turning negative, recessions are also characterized by some combination of (amongst other things) rising unemployment, declining stock prices and usually an inverting of the yield curve (bond techno-speak for longer-term rates being lower than short-term rates).

The 2001 U.S. recession showed nothing insofar as a slowdown in housing or consumer spending. It was suffered almost entirely in the corporate sector. To be sure, those factors have now reversed. American companies are flush with cash (corporate profits, cash flow, cash on hand, cash in the bank, cash not accounted for, cash in a big brown…boxes, etc. etc. are strong, if not downright impressive) whilst the US housing sector and American consumer is tapped.

So what is the likelihood that the U.S. will be showing consecutive months of negative growth in the near future?

According to Credit Suisse analysts running three models trying to statistically predict the chance of a U.S. recession, the probability is not as high as one might think or fear.

Using August economic data, the probability of a recession varied from a 3% chance in the next ninety days to a 33% chance in the next twelve months. Keep in mind none of this includes any data from September when the Federal Reserves cut interest rates by 50 basis points.

Interestingly the August 2007 panic wasn’t even the highest reading of the year. That came in March when the jobless claims south of the boarder jumped and the likelihood of recession hit 36%.

So the chances are slim that we may have one. But even if we do go through one, some of the best investments will be in Bonds, Dividends, and Global large cap companies.

Rational - My hero as a kid was Lassie. That dog knew everything, and always provided concise, one-bark answers.

New York Post reports: Hedge-fund executives say the next blow to hammer their industry will probably come from a wave of hedge-fund redemptions driven by highly-leveraged funds that invest in other hedge funds. (Hedge Fund-of-funds)

One bellwether of how this may play out in coming months can be seen in the performance of two key European-hedge funds that have had sharp losses because of their exposure to some of the most problematic investment strategies in this summer’s hedge-fund sell-off. Fix Asset Management’s Canary Fund Ltd. and Fairfax Fund Ltd. - each of which have $3.5 billion under management - have suffered a brutal three months.

Their fund-of-fund portfolios have dropped between 16 percent and 18 percent between June and August. While it could not be determined which hedge funds had investments from Canary and Fairfax, given the size and timing of their monthly losses, it appears likely that the two funds had significant exposure to funds employing statistical arbitrage, credit arbitrage and merger arbitrage strategies.

The problemo for the hedge-fund biz, according to a vet hedge-fund capital provider, is that Fix’s Canary and Fairfax funds are likely not the only fund-of-funds that used borrowings to enhance their performance. Several hedge-fund executives told The Post that a next wave of hedge-fund redemptions would likely be fueled by highly-levered fund-of-funds needing to redeem their investments to meet margin calls.

So, could this be the trigger for the next down movement. In fact, it’s more rational than people think. There was a lot of leverage into these “hot” products, and a lot of it chased the sub-prime markets.

As these hedge funds have to come up with the cash, they have to sell their good stocks. That means more sells than buys, and therefore a possible drop in the markets. Rational investors will understand this and be able to find good bargains.

Rational - Word to the wise: If a recipe calls for allspice, Old Spice is not an effective substitute.

Believe it or not, I didn’t make up the below Dubya quotes.

Apparently the leader of the worlds #1 economy forgot the date one of the most important events in their history

“September 4, 2001, I stood in the ruins of the Twin Towers. It’s a day I’ll never forget.”
George W. Bush 10/18/2004 Marlton, New Jersey

“Border relations between Canada and Mexico have never been better.”
George W. Bush 9/24/2001 Washington DC

“Security is the essential roadblock to achieving the road map to peace.”
George W. Bush 7/25/03 Washington, D.C.

I strongly believe we’re doing the right thing. If I didn’t believe it, I’d pull the troops out, nor if I believed we could win, I’d pull the troops out.”—-George W.Bush on 4/6/06 in Charlotte, N.C.

“We ended the rule of one of history’s worst tyrants, and in so doing, we not only freed the American people, we made our own people more secure.”
George W. Bush 5/3/2003 Crawford, Texas

I think the tide is turning… see, as I remember… I was raised in the desert, but the tides kind of… it’s easy to see a tide turn… Did I say those words?”
George W. Bush on 6/14/06 in Washington, D.C.

“You can fool some of the people all the time, and those are the ones you want to concentrate on.”
—George W. Bush

A survey shows that per acre land values in Las Vegas have topped $40 million. Which makes it the most expensive pile of sand in the world—-not counting Iraq.

“Sometimes when I sleep at night, I think of Dr.Seuss’s ‘Hop on Pop’.”
George W. Bush 4/2/2002 Washington, DC

White House Cheif-of-Staff Joshua Bolten:
“There have been unexpected developments on the negative side in Iraq.”
Well, sure, if you want to call no success after five years and 4,000 deaths “negative.”!

Vladimir Putin has indicated that he may appoint himself Prime Minister of Russia before his term as president runs out, which could keep him in power until 2024. For God’s sake, don’t tell Bush about this.

Apparently George Bush will not invade Myanmar

Reasons given
Can’t spell it
Doesn’t have any Oil

only countries with less four letters in them and with Oil are to be invaded - Iraq, Iran. Afghanistan was an error - they thought there was Oil there! That’s why they sent our Canadian soilders there and backed out of it.

And now to be equally fair to Clinton

Are you folks excited about the 2008 presidential campaign?
Hillary Clinton says that if she’s elected, she will name her husband Bill Clinton a roving ambassador to the world. Hmmm. Let me think about this. Bill Clinton traveling around the world without his wife? No, I can’t see anything going wrong there. Duh!

Okay and now for Mitt Romney

Presidential candidate Mitt Romney was asked to explain why none of his five sons are in the military and he said that his sons demonstrate their patriotism by going on the road and campaigning for him. Now there’s a tough choice: Iraq, or Iowa?? “Fallujah or Cedar Rapids?

Rational

THE GLOBAL INVESTMENT OUTLOOK – CAPITAL MARKETS UPDATE (October 3rd, 2007)
From RBC Capital Management

Credit crunch a significant challenge to economic cycle, but robust policy responses are available and are being deployed. Threat should pass, allowing expansion to continue with mild growth/low inflation.

Long period of unusual calm for economy and markets suddenly ended by credit crunch. Forecasts lack prior clarity and markets return to more “normal” levels of volatility.

Believe that current policy responses targeting crunch in markets are appropriate, and that more robust tools are available when and if needed. Crunch will dampen near-term growth, but not throw economy into reverse unless policies fail to unclog markets/restore confidence.

Inflation expectations – until recently the greatest threat to the expansion – continue to moderate as credit crunch represents a drag on near-term potential for growth.

50 bp cut in fed funds rate shows Fed’s resolve to battle crisis, but does not commit it to further reductions unless necessary. Around the world, whatever plans had existed for incremental rate hikes are now suspended. Cycle of rising rates that began 3 years ago is now complete.

Valuations in fixed income markets near equilibrium, but central bank rate cuts typically cause yields to rise. Window for additional gains in long bonds is closing as monetary policy is eased.

Attractive valuations limit downside potential for equities as long as recession is avoided. As credit crunch passes, attention should return to attractive fundamentals. Most major equity markets trade below valuations consistent with durable economic growth, mild interest rates and low inflation. A cut in the fed funds rate has, in the past, been a catalyst for sustained stock market rallies following financial shocks.

Rationals views - basically they are saying that equities are still good, with fed rates lowering and potentital for Bank of Canada to stop increasing rates - bonds also look good. THe governments are doing the correct thing to get through the sub-prime fiasco. However we are not out of it yet

Other points from discussions I have ahd with them, at 62 cents the Candian dollar was about 20% undervalued,, now it is about 20% overvalued on a purchasing parity basis. Theya re sayign that the Candian dollar is overvalued and can stay that way for about 6 months.

Enjoy

Rational