Rational Advisor

With the 2008 US presidential campaign now in full swing,

How does the stock market (using the Dow Jones index) perform during the average election year?

Since 1900, the first five months of the election year have tended to be choppy. That choppiness was then followed with a rally right up to the November election.

One theory to support this election year stock market behavior is that the first five months of choppiness is due in part to the uncertainty of the outcome of the presidential election (the market hates uncertainty) with the market beginning to rally as the outcome of the election becomes increasingly evident.

Rational

And it came to pass that God visited the earth, and He did behold a series of billboard ads attributing to Him utterances of such banality that they would never pass His lips in a billion years. And it came to pass that God in His wrath considered a libel suit, but in the end opted simply to mount a cantankerous, self-contradictory ad campaign of His own. . . .

I never said, “Thou shalt not think.”
—God

Okay, you’ve got multiplying down. Now let’s try replenishing for a while.
—God

I don’t care who started it. Just stop it.
—God

You’d better have stopped fighting by the time I get back, or you’re all grounded.
—God

You’re not tracking those bloody footprints in here.
—God

E=mc². Yeah, that’s one of mine.
—God

You can have another kid when you learn to take care of the first one.
—God

Just look at this planet! Do you expect me to clean this up?
—God

Here’s a clue—if they say they’re doing it in my name, they’re lying.
—God

I gave you a bigger brain for a reason. Start using it.
—God

If you don’t clean this place up, you won’t get another millennium.
—God

All this will someday be your children’s.
—God

There is no such thing as killing in my name.
—God

Rational

Globally the Canadian index, looks like it could do no wrong. It has been one of the strongest investments aroudn the world.

But historically, we go through these ebbs and flows in which people are investing in Canada, then running away from Canada. Likewise we go through periods when the index is good and then miserable.

In 1993 BCE Inc was the largest stock on the TSX representing 5.74% of the TSX total market capitalization. Royal Bank of Canada came in second at 3.54%, the Seagram Co. Ltd came in third at 3.4% and Barrick Gold Corp was fourth at 2.9%. Fast forward to the fall of 2000. Nortel Networks Corp was 28% of the TSX and Seagram was the next largest at 2.97%

That is amazing that one stock made up 28%, and the seocnd largest was so far back at 2.97%!!, and Seagram and Nortel have virtually disappeared of the index now.

Skip ahead another seven years. These days the TSX is led by either Royal Bank with about 4.5% of the market, followed by Manulife, trailing right behind Research in Motion. These three are flip-flopping on 1st place.

We should be concerned about diversification if we invest in Canada. The TSX’s heavy concentration in the financial sector, at 30% of the index, along with energy at 27% and materials such as mining at 18% means Canadians who stick just to the TSX are missing on many sectors that will become increasingly important especially as the baby boom generation ages.

A simple concept in diversifying your assets comes back to basic economic principles: those things that we deem essential to life will be supplied at a profit by somebody or else the companies disappear and we no longer get access to them.

Think about how you spend your own net income, and invest accordingly. Where do your dollars actually go?

In Canada 45% of the equity market is in natural resources, copper and oil and gas. But 45% of my personal life is not in resources. There is clearly a fundamental mismatch in the Canadian index between what is essential and meaningful to our own lives versus the way the index is composed.

And this is why, I am not a fan of index investing - the hot and cold moments are too much, and it does not reflect reality of our living.

Each time, we have seen a big love fest with the indexes, the indexes have come back and made us regret the love-in

Rational

It is a sad day, that Benazir Bhutto was killed.

My own thoughts are that it was an event that had a very high probability. After all, on the day she arrived there was a bombing - the eventual was in plain view.

You have a country run by a person who has had so much control of power, and did not want to relinquish it. As a normal citizen he would not have been able to milk the system as he had as a politician. Power is a strange thing - very hard to give up. I do not know who did this and nor do I really want to speculate. I don’t think we’ll ever really know the truth.

Bush and his propoganda team will blame the terrorists - remember there is an election year, and the Republicans need to show that they are the strongest party to fight terrorism.

So, you see this unfortunate event will be manipulated.

I was never a fan of Bhutto or any of the other leaders in that region. She had run a very corrupt regime when she was in power. Her husband was known as the 5% man, in that all trade in pakistan, had to have 5% forwarded to him.

See links below on corruption and Bhutto
http://en.wikipedia.org/wiki/Benazir_Bhutto
http://news.bbc.co.uk/1/hi/world/south_asia/337983.stm
http://matthewyglesias.theatlantic.com/archives/2007/11/bhutto_and_corruption.php
http://www.youtube.com/watch?v=iL0MGl15QNk&feature=related (This is in Urdu)

None of the leaders that followed her were any better.

But, this event has led to some further misplaced uncertainty in the world and the markets. In reality, Pakistan does not produce a lot what the world needs - there is no Oil to really speak of. And anything that is produced there can also be produced in other places. So, this event in of itself, has no real economic effect.

Bhutto was not running the government. The government and economy will continue to run as it was before, after a short pause. Life will return to normality.

it is sad, but this really is a non-event when it comes to the markets. The news media needs something to pump out and magnify. Gold and Oil supply did not all of a sudden drop because of this death.

She was no great leader, she had not left the country any richer for her being there. This was an event that almost everybody I had talked to in the country had said was obvious.

What I am saddened by is the turmoil that will happen in the short term, that will affect many innocent lives in Pakistan. You will see riots, as those who have lost their lottery ticket to power see it disappar, and want to cause as much wrath as possible to destablize the population.

We seem to want democracy to rule, and think that is the solution - democracy only works where there is a higher level of prosperity and mass Education. Countries such as in the Middle East do not run successfully in a democracy! Democracy is not the solution - gainful employment, wealth, commerce and education is!

You may even hear of an audio (note: not video) from the terrorists. My own personnel view is that Osama died a long time ago, remember he had a weak kidney, and was on dialysis. He had many opportunities to show a video tape of himself, but none has been around. What also amazes me is that the US with the “best” military and “intelligence” in the world has not been able to capture this one individual - not even with the assistance of the Israeli army. If he is terrorist #1, you would have thought they would have sent over - James Bond, Rambo, Steven Seagal, Jean Claude Van Damme, Bruce Willis, Arnold Schwarzenegger, or any of the other Hollywood superheros. Unfortunately they may as well of sent Mr. Bean! The reason, it is in the current regimes best interest to keep the boogeyman alive. I am very cynical of political events. I am not saying that these terorists are not something to worry about - they are, because of their fanaticism and zeal. Personally, what is the solution - to cut of the problem at the route, get the leaders and the problem goes away - much like what has been done with Bhutto. They need to eliminate the fanatical leaders who stir up people’s emotions - imagine, if Hitler had been assassinated early on, would you have had WW2? What concerns me more is the innocent lives that are lost to such games, our soilders, our friends, our families, and our fellow beings.

I apologize if this rant upsets anyone, these are just my thoughts

Peace to all - and remain rational

While studying Exxon Mobils last quarterly report, I came to the conclusion that we may have seen the peaks from these companies - the Exxon Mobil report was surprisingly weak in their earnings numbers.

The reasons include aggressive governments that are grabbing a bigger slice of the oil pie, as well market dynamics.

Exxon said its profits fell 10% in the third quarter. Exxon, the largest nonstate-controlled oil company in the world, is hardly poor: It made $9.41 billion in just three months, still one of the most profitable quarters in U.S. corporate history. This was the second consecutive quarter that Exxon’s results fell below expectations, following a string of record profits in the fourth quarter of 2005 and throughout 2006.

Other oil companies, such as BP and ConocoPhillips, also reported falling profits. Until recently, these companies were able to achieve significant profit margins when they turned crude oil into gasoline and other products for the end user. Outages earlier this year reduced supplies and sent fuel prices up at a faster rate than oil. But the world’s refineries now are running closer to their full capacity, adding more supplies of fuels like gasoline to the market.

The secret ingredient of record profits for these firms was refining, and that’s gone away. We’ve entered a more mature phase where the higher the crude price, the lower the refining margin. And this is not good for the Oil companies

Oil-field costs have also risen as rigs, steel and skilled personnel are in high demand. Producing countries are demanding a bigger cut of profits, sometimes by jacking up taxes and other times by using political pressure to expand the state’s ownership of projects.

Russia recently raised its already large oil-export duty, which combined with other levies boosted the state’s marginal tax take to almost 90 cents on the dollar! This has particularly affected BP, which has more exposure than its peers to Russia and to other countries where tax rates are so high it derives limited benefit from red-hot crude prices.

What’s more, Exxon and its peers are finding it hard to boost production in response to higher prices. Exxon said its production of oil and gas fell 2% from a year earlier. That is partly because Exxon was booted out of Venezuela after refusing to modify its contract so the government could take a majority stake. Could we see the same thign happening with BP and Russia?

Exxon was also affected by oil-production contracts in western Africa. The contracts contain provisions that as oil prices rise, the companies can claim fewer barrels. Exxon is getting 14% less oil there this quarter versus the year-ago period.

So high Oil prices does not mean even higher profits from Oil for the companies, and instead it’s in their interests to keep the prices lower

Lower Oil, is NOT good for Canada

Rational

Couple, next to the main escalators in a shopping mall,

“O.K., we’ll meet back here in about five hundred dollars.”

As we step into 2008, I’ll be posting some of my thoughts based. Much of these are through discussions with various investment specialists, and some are my own thoughts

One of the things that can adversely affect our financial well being is a market crash. they seem to come out of no where, and when least expected. Since there has been no one that has proven to me the ability to predict when a crash will happen, I prefer to think that it can happen anytime, and be in preparation for it.

There are two approaches to the future, 1) Prediction and 2) Protection.

I don’t think anyone including the Oracles, tarot card readers, palmists, astrologers -r Financial analysts have demonstrated any long lived track record fo predicting the future. So, i will refrain from really doing that. Later on, I will share ideas of others and what they think will happen.

But, personally, I tend to believe in #2 - Protection, ie thinking of the worst possible events and building a portfolio that will be offer the most protection from these events (note: you cannot eliminate the possiblity of all events - no matter what the newspapers tell you).

As such, we need to study past market crashes, particularly the more recent ones’ to determine what would have been decent protection, instead of indecent greed!

The two periods 1987 and 1998 - bear some resembelence to the present. Both were periods when the markets did well.

The 1987 crash took place during the original buyout boom (we saw a similar thing in late 2006 and early 2007 as Private Equity, and now Sovereign investments are doing their purchases).

The 1998 crash was due to the first big hedge-fund implosion, which forced the fed to step in to calm credit markets (similar to what they are doing today with Banks that were led to a credit crunch by the Bear Stearns Hedge funds collapse due to sub-prime)

In 1998, the Feds would up intervening three times, becasue its first intervention was insufficient. In 1987, the Feds did not intervene till it was too late, although in both cases their actions did stop the bleeding.

This time, we are seeing hedge funds using mathematical models - contributing to huge market swings and massive trasing volumes. Emember the hedge funds are more focussed on shorter term returns, and are more leveraged, so are very reactionasry to market events. These hedge funds are doing the same thing that programmed traders were doing in 1987, and Long Term Capital Management were doing in 1998. Although we’ve seen some fall out, we haven’t seen the pen-ultimate event yet, that will scare fo these hedge funds, much like the scaring off of programmed traders, and the collapse of Long Term Capital. In 1987 the models were known as portfolio insurance (LOL!!). More like Insurance for the brokerage firms and not for their clients - Margin calls were the after effect that led to the ruin of many
previously sophisticated genius irrational investors (the Public!)

In all previous crashes, it’s been investors over-confidence and the use of borrowed money into “hot” sectors that has led to the problems.

Another big lesson of all market crashes is that the debt markets often posed the biggest threats to stability. In 1987, investors borrowed to invest in the markets and over-borrowed, then the rising interest rates to slow the growth led to the 1987 crash (much like the belief in China, and their need to increase interest rates to slow down their economy). Also, in 1987 it was huge investment funds that used junk bonds to takeover companies. In 1998, it was the risk of the amount borrowed by firms such as Long Term Capital. Lately it’s securities backed by mortgages.

Booms in markets generate laxity in standards for loans because there is a general sense of optimism. That is what we saw in the 1980’s, 1990’s and now.

Also in 1987, like now there was a strong world economy and healthy corporate profits, which investors like today with China and India think will last for years. In the previous market crashes the stock market declines shook these hopes back to reality.

In all previous market crashes, the markets became increasingly volatile towards their end. Sharp drops proved to be temporary affairs as the recovery from them created a false sense of optimism. Many times the hottest investments had the greatest recovery from these downturns, and investors incorrectly surmised that they were the better investments, and piled more heavily into them. We are seeing similar things now, as the volatility makes certain funds recover from a downtick faster, investors are jumping on those funds, instead of those that have NOT recovered as well (which in fact are the better ones to be in).

What are the differences between now and the past market crashes - valuations (although when you do an analysis, you’ll realize once you normalize the earnings, they are still high).

The real excess this time has been in the lending markets, where investors bid up mortgage related securities and junk bonds to unheard of levels (apparently Canadian’s think there real estate is immune from global events - we have this invisible force field around us! I think not!).

A good sign is that in 1987 and 1998 the markets woes were severe but brief. They fell 36% and 20% respectively. But both years the markets finished positively.

Also concerning was that the receovery from these falls - the following boom lasted about two years 1987 - followed by the buyout boom and real estate bust in 1989, and for 1998 it was followed by the tech wreck in 2000.

So, what did get through all these crashes without having being impacted much - simply Bonds and Large Cap companies that offer dividends - everytime, even though the year (years) before the corrections they seemed like the dumbest investments, because their returns were “too low”

Wake up, and smell the coffee/Roses

Rational

As we think about the boxing day sales

A man is walking down the street when he meets a friend who happens to have only one arm.

“What are you up to today?” he asks his friend.

“I’m going to change a light bulb.”

“Won’t that be difficult with just one arm?”

“Shouldn’t think so. I’ve got the receipt.”

Why do I bring so much focus to concerns around China and India? I do it because they’re is just so much attention being paid to how well it is doing and influenceing world economics. And when almost everyone buys into that this thing is a good thing, then I get worried. My biggest fear, is that similar to other times in histroy, when the mass public believes something cannot fail, it fails and everyone suffers. We saw this with Japan, Latin America, Technology, US real estate and ow the next one seems to be these emerging economies.

Political scientist Minxin Pei is a senior associate and director of the China Program at the Carnegie Endowment for International Peace. Ands extremely knowledgeable on the inner workings of China. Has has warned that the corruption in Chinese government will bring the country’s rapid expansion to an abrupt halt. See below on this document.

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=19628&prog=zch

Albert Keidel also of the Carnegie Endowment, also served as acting director and deputy director for the Office of East Asian Nations at the U.S. Department of the Treasury. And the senior economist for the World Bank.

Albert contends that China remains poorer - far poorer than the world thinks. China’s economy will turn out to be 40% smaller than present statistics suggest. Official survey results indicate that the number of Chinesewho live on less than $1US a day probabaly exceeds 300 million (about the population of the US), in other words 1 chinese in four still lives in abject poverty.

He contends that China is not that big and it will not get htat big any time soon when it comes to economics.

Chinas per capita GDP varies significantly depending on which authority you use - The IMF puts it as $7,722, CIA puts it at $7,800. At this level CHina ranks 86th in the world. The University of Pennsylvania analysis puts it at $5,772 pushinf China down to 94th - none of these is telling us that CHina is the BIG machien thats driving the world!

The US’s GDP per person is $40,000 and growing!

Here’s his piece

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=19709&prog=zch

Rational

When Fund companies close their funds, its because they want to maintain and grow returns for the exiting unitholders.

However, when these same funds, especially managed by great managers re-open their funds, I consider it a sign that they think there is a lot of opportunity and need to gather more cash to make even better returns for their existing unitholders. This is especially true when the mangers have a good track record of doing this, and are not doing this for a cash grab.It’s even better when they are doing it not because they are having redemptions and need to boost up their Assets under administration.

Well some well-regarded mutual funds are reopening to investors.

These include Third Avenue International Value fund, reopened to investors Dec. 20, and the Longleaf fund

The funds are well-regarded for various reasons: FPA and Longleaf funds are top performers over a 10-year period.

Typically, a fund closes to new investors when managers feel they aren’t finding enough decent investments to deploy the new cash. Or else they worry that too much money will make them less nimble.

But just because a fund reopens doesn’t make it a “buy.” The trick is to figure out why it is suddenly shopping around for new money.

At the Longleaf and the Third Avenue funds, managers say they see buying opportunities and want new cash to put to work. Neither fund has dwindled in size significantly amid the turmoil. Both have underperformed their benchmarks this year, according to research firm Morningstar Inc. Which to me is meaningless.

For now, the Longleaf fund is accepting new money only from investors in other Longleaf funds. But it may temporarily open fully later, its managers wrote recently.

It isn’t the first time: The fund had also reopened to investors in 2000, thinking it could spot bargains in the tech-stock wreckage. Since then, it has outshone the competition and is up an average 10.5% annually over 10 years, according to Morningstar.

Third Avenue International Value fund also thinks it sees some bargains and wants new cash to chase them.

These funds are well-regarded by advisers for their “value” investing approach, meaning buying high-quality stocks cheaply.

What these managers are saying is that htye need more cash to buy the opportunities that are out there. Their track record speaks to their ability to look for opportunities. Bothe these funds ar eNOT available to Canadians.

Rational

US Financial stocks are officially in a bear market. The financial issues in Standard & Poor’s 500-stock index were down 21.3% on the year putting the index squarely into bear territory.

The index has been helped along this year by E*Trade Financial, which had given up around 84% on the year, and mortgage lender Countrywide Financial, down 79%y. Dow component Citigroup, one of the largest stocks in the index based on market capitalization, was down 46% for 2007.

Part of the problem is that this is the so-called silly season, and moves are getting exacerbated by thin trading and a desire to bet on winners for “window dressing” purposes, and sell losers. Until the new year, it makes valuing the index difficult.

The steady spate of warnings and surprises that have frightened investors in recent days could be a positive, says Larry Adam, chief investment strategist at Deutsche Bank. He says it could create value for these stocks in the coming year, pointing out that “I think they’re tryng to get all that bad news into next year and that’ll help open up opportunities for next year.”

However, whether its a good timne to buy or not depends on one’s time horizon — with an eight-year horizon, that should be one of the prime considerations for looking at these stocks.

Some of the smartest investors I know of are buying the financials. Now, they’re blessed with job security and long time horizons, but Warren Buffett, Wilbur Ross, the Abu Dhabi Investment Authority – they’re all very sharp, and they’re buying the financials.

Rational