Rational Advisor

This was a crazy week, but pretty much all of our ducks are in a row here.

I blame much of the recent volatility on regulators who removed the “up tick” rule for short selling. This meant that you could not short sell a stock till you had an up tick in its price. Because of the elimination of this rule, people can put a lot of momentum and drive down otherwise sound companies, and not give them space to breathe. The SEC has bee remiss in their responsibilities - right now the risks have been higher and the returns static - this is not the norm!

In 1999, The Glass-Seagal rule was removed. And banks were allowed to become less regulated and engage in higher risk businesses. So, yes I do blame the regulators for allowing the current problems. Imagine what would happen if all of a sudden you relaxed the rules on your children. Now, they can have all the drugs they want, they can shoot whoever they want, they can get into all the trouble they want.

Some good news, on Thursday Sept 18th, the Bank of Canada held crisis talks with the CEOs of Canada’s largest banks. They discussed the ongoing stress levels in inter-bank lending and contingency measures. This happened as major central banks injected some $180 Billion of additional liquidity into financial markets worldwide.

There’s some belief that there is more relief to come from the US Feds and that the smoke is finally clearing. We may be getting better visibility but we are still in the midst of this wreck. Yes, the US Fed is attempting to resurrect confidence. However, regaining confidence takes time. The largest brokerage and investment banking firms in the words business models are being questioned.

What we have is a lack of confidence, a lack of cheap funding to a leveraged balance sheet. In reality this wills till take some time.

The US Federal reserve even took the extraordinary step of providing the Bank of Canada and other countries with billions of dollars each. The money is meant for domestic commercial banks desperately seeking short term loans of dollars. The Bank of Canada made some $10 Billion liquidity available to Canadian banks

Short sellers that were blamed for the recent market meltdown are now under fire.

The US congressional aids have been saying that the SEC approached law makers last night about a plan to temporarily halt short selling. Earlier the UK Financial Services authority banned new short selling of Financial services stocks effective Friday Sept 19.

New York Attorney Andrew General Cuomo has called on Financial Regulators to freeze short selling of financial stocks in the US too.

This will hurt hedge funds even more. But will provide some level of sport to the markets. It will also impact commodities negatively, as the US dollar begins to appreciate.

Most commercial banks still have strong franchises and good businesses, especially the Canadian banks. The problem is that the collapse of share prices reinforced by short selling particularly by hedge funds is only leading to more and more concern and a lack of reality to more of a fear factor than the reality of strength of these banks. I just hope the fear factor disappears because these banks that exist today are good franchises and are generally quite strong businesses and should still be in existence a year from now, a decade from now. I can see the banks taking advantage of this government liquidity and use the proceeds to buy back their own debt, shoring up their balance sheets and investor confidence in their survivability.

The markets hate uncertainty. But one thing that is a quick certainty is that the current US president is talking about wanting to do everything to help and both US presidential candidates are asking for better regulation. We can expect something to happen within the first 100 days of the new administration.

The future means a repair to the global economy and markets rebounding, but you will have to still have some patience.

Some of the positive trends that need to be considered are
- We are seeing a fall in inflation globally
- We are seeing interest rates falling globally
- We can expect global governments to cut taxes and increase spending

All these are supportative of growth.

So, yes, we’ve got a lot of bad news at the moment, but I think the next few months we could also see in a sense the medicine for this sick patient, which is provided s with a low point for the markets.

I encourage you to not get too emotional, not get too panicky of what you are seeing. I do think the prices are right, I just don’t know if there is any perfect timing.

If someone were to say to me, “where will we be in five years?” I believe you’d see a substantial return from current levels, but we could see lower targets for the markets over the next 3 months. In my mind we may be at the end of the bear market for common stocks and the even severe bear market for financials. To me this may be the equivalent to buying stocks after the crash of 1987.

Sadly, it’s always the case that the best opportunities are at times when you see commentators talking up the negative stories - that’s the environment we are in currently. You have to be brave, and you’ll typically be right.

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