Q4 2008 Commentary

The current lousy equity markets are absolutely nothing to be taken lightly.  If you doubt things have changed, just make a call to your personal banker and ask to have your personal line of credit increased.  The awkward silence on the other end of the line will confirm for you first hand how the ability to borrow money is becoming much more difficult in this economic environment.  It is this reduced access to capital that will have a slowing effect on the immediate prospects for economic growth. If you run a business and your banker won’t lend you money, well perhaps your investment banker can raise money for you.  Against this lousy stock market backdrop I would expect few investment bankers would have any success raising money for their corporate clients at this time.

I mention this because I am trying to formulate a response and provide some meaningful direction on how you may wish to react to this market selloff.  If you own securities in companies that do not need to borrow money or raise money in the stock market at this time, the short term selloff will not have a strong impact on how they run their business.  I would be steadfast in my advice to hold good quality investments during these times.  Eventually the market reverts back to fair values and those companies, in my opinion, are the ones most likely to bounce back quicker than others.  Conversely I am less optimistic on theme or speculative stories or those companies who have heavily leveraged balance sheets and may be forced to sell assets or scale back business during this period. 

I’ve been reading a lot of market information about investor behavior and a lot of it sounds very trite to me.  Much of it follows along the lines that you should be buying at this time because stocks are “on sale”.  This is not a good enough reason for me. I would advocate taking a good hard look at those good quality firms you feel you’d like to own over the longer term and watch price movements with a view to enter when there is more certainty in the marketplace.  As you know, I am OK carrying cash in your investment portfolios.  I believe it is important to be in a position to be proactive during market selloffs rather than simply wait for things to get better. Holding some cash gives you that opportunity.  Perhaps this is the period when a proactive approach could provide good long term rewards.

US Equity Returns, when volatility is:

                                                Over 15%                               Under 15%

Since 1990                             13.7%                                      6.0%

Since 1946                             15.6%                                      7.1%

Since 1966                             16.4%                                      4.2%

Source: Research Affiliates

The above chart illustrates the value of selling during quiet (optimistic) markets and buying during times of turbulence.

Also let’s not forget corporate bonds.  I do not believe it is the intention of the Federal Reserve Board or the Bank of Canada to trick us.  If they say interest rates are likely to stay low you should expect rates to stay low until the bank says otherwise.  Another phenomenon we are currently experiencing is a rush to government bonds and T Bills.  This is pushing the secondary market price of good quality corporate bonds down so that the rate of return (yield) is greater than it has been in recent past compared to government bonds (spread is wider).  This may be another way to capitalize on the current market upheaval in a lower risk way.  Personally I would advocate keeping the term to maturity on these bonds under 5 years.  I would treat them as a diversifier to your overall portfolio and as a source of stable income – good quality bonds like BNS, HSBC, Manulife etc.

As always, please feel free to call me at (403) 543-0612. 

Brian McKenzie MBA, FCSI
Director, Private Client