Rational Advisor

- Finally has owned up to, it’s their fault - Alan Greenspan said he made a mistake - unfortunately, we can’t take him to Jail.

- The Finance Minister fo Canada Flaherty, plans to guarantee bank lending - The Canadian Lenders Assurance Facility. Now, if someone goes belly up, the banks don’t have to worry, as the Government will provide them the capital. A very sweet deal for the banks. However, there will be some costs attached

- We have all the workings of a selling climax going on. those people that were over-leveraged, those Hedge funds that were doing nutzo stuff are now forced to sell out, as they get a doubly whammy of margin call and investors asking for their investments back - A forced liquidation of a leveraged trade. We’ll probably see half of the hedge funds out there close their doors forever, never to come back again and do their dirty deeds.

- Once the forced sales are over, we get to set the new level for improvement. There is lots of liquidity credit out there, available to good businesses. The actions of the central bankers should be able to heal the credit and bond markets.

- what’s interesting is that we can now see some corporate bonds giving equity types of returns in their yields. This was similar to 1981/82 and in 1974. And these were very bullish signs.

HOW MUCH LONGER TO GO?

- What’s interesting is that last year, people were overly optimistic (and they were wrong), and now they are overly pessimistic…

- Dow Jones in its entire existence has fallen by 40% ten times, it has slid by 50% only once 1929 to 1932. Each time it has recovered.

- S&P 500 is trading 25% below its 50 day moving average, since 1928 that has happened only 5 times, including 1987, each was followed by a decent rally.

- since 1928, there have been four bear markets that have coincided with a US election, 1932, 1948, 1956 and 2000 - each was followed by a bull market.

- Hedge Funds have to unwind their leverage, they cannot sit tight, they have to pay their margin debts. Some 10,000 Hedge Funds currently exist around the world, and they have control over $2 Trillion. We could end up with only half of those Hedge funds remaining.

- We could see the unwinding slowing very soon. For many Hedge Funds Nov 15th is a critical day. Because that’s when their investors have to notify them for redemptions before the end of the year. Hedge Funds will have to sell to make sure they have that much liquidity. Because this has been a crappy year fro them (and many others), you can expect their unit holders to say “Uncle”. They will have to redeem. But once, that’s over, they don’t have too many assets or may be out of business so we can see a slowdown in selling due to these “Master of the Universe”! Remember they are not getting much buyers or investors of their funds - No capital, no hedge fund!

- Remember even a recession ends!

- Average US recession lasts about 10 months, and stocks hit a bottom about 3 months before the end of the recession/ According to many economists, the US entered a recession on July 1 (Canada hasn’t entered one yet). So according to the average, the end should be around April 2009, which means the bottom would be somewhere around March (RRSP season).

- The only two recessions that went beyond 10 months, lasted 16 months and they were 1973 (because of the Oil embargo), and 1981 (because of a sharp increase in interest rates to stave of inflation). Both the situations of Oil Embargo and high inflation are not here. Still, again the markets bottomed 3 months before the end of those recessions.

- Who thought Oil could drop by over 50% in three months - practically nobody! And yet that surprise did happen, even though the consensus was for it to go to $200 a barrel (some economists at a certain Canadian bank, starting with a C and ending with a C, is still convinced it will be $200 and above. Well, the drop was as surprise. The masses do not factor in surprises. the surprise now, would be, the opposite of what the consensus is - and the consensus is for a deep depression, a miserable market. The surprise is it could recover very quickly, all we need is some good consolidation news, mergers and acquisitions, Big guys taking out the small guys.

- Lastly, US election is coming, and Bush will be out! Probably one of the best things for a bull market - Just remember what it did after his Dad left!

WHERE SHOULD WE BE THINKING ABOUT INVESTING

- Canada looks pretty good, no federal deficit, no trade deficit, low inflation, low unemployment, low subprime exposure, strong banking system, strong (if unexciting) political system.

- Cash rich companies, the dividend giving type

- Takeover targets are good. Expect consolidation, there’s a lot of cash that needs to be spent to grow bottom lines in companies. - Barclays took over Lehman Bros investment arm, Warren Buffett spent money on GE and Goldman, Wells Fargo bought Wachovia - and none of them touched government funding. Watch for more to come

- Watch for companies buying back their own shares, because they are cheaper than buying a competitor.

- Be careful of REITS, Real Estate etc - in the last month US REITS have fallen about 45%. One of the top Global Real Estate Funds in canada is the United Global Real Esate Fund, it’s down 23% in 30 days! Real Estate recovery is still quite far away. in the Savings and Loan crisis, even though legislation went through to save teh banks and the real esate, US real Estate did not really recover until 10 year later, for 9 years it was basically flat. 1991 to 2000. we’re on the other side of the Real Esate curve, and it could take a while for sanity to return.

- Bonds are always good! especially Corporates.

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