The market is now baited - dont get hooked yet

On Thanks Giving day the NYSE was open and the DOW was up around 900 points for the day. Then on Tuesday the TSE opened and we were up around 900 point for the day. There was a growing optimism on the streets of Summerside. But not me. I was just a bit shocked how people could get wacked so hard and then change their attitudes so fast. This type of mental recovery should be extensively researched to possibly prevent future wars or even divorce! Well all joking aside, what should the average investor be thinking about the market these days? Here are some ideas floating around in investor world.

- its a deal, time to buy
- get out, before it gets worse
- hang on, we own good stuff

so there it is, three options. buy, sell or hold.

There was a successful 70 yr old gent in my office the other day. His account is not with me yet and his broker has advised him to hold. He was losing $1000 per hour according to his math. I dont know much about him but I sense that he is a very intelligent fellow. He believes that "only the stupid money is still in the market". He is struggling with the options. Take the loss, hang on, use the capital loss against a capital gain and so on. I am certain about 1 thing, he would be having a lot more fun right now if he would have moved out of the market. My clients moved out in August 2007 and have not lost 1 cent. In fact they have made 3 per cent. I have a few principals for managing money, here they are:

1. you dont need to be a genius to make money in a good market. Everyone does.
2. you need to be a smart investor, or have a smart advisor to limit losses in a bad market.
3. you need to remember that panic and people drive the markets. Not scientific forces.

What you are seeing the last few days is nothing but the temptation of the baited markets. The economy is still bad and needs time to recover. I call this a devils market. If you know the lords prayer, its a good time to burn the 2nd last verse into your brain.

Lead us not into temptation,
but deliver us from evil.

The most important financial strategy right now, is to have a healthy relationship with your broker. While good news and optimism makes people feel good, a properly risk managed portfolio can prevent the condition.

I leave you with this quote:

Bull Market:

Is a random market movement causing an investor to mistake himself for a financial genius.

Jeff McLellan, President of MN Investments

$700 BILLION - what does the number really mean?

Well the bail out passed yesterday, 700 billion dollars. So how much is 700 billion dollars anyway? Well I was thinking about some things we spend money on here on PEI and I decided to see how far $700 billion would go... here is what I came up with. With 700 billion dollars we could.......

- stop collecting all government revenue and fees ( think about it NO PROVINCIAL TAX of any kind) and run the entire government and all programs for 530 YEARS. We would even have a free bridge to the mainland.

- build 17,500 more wellness centers like we have in Summerside. Then there would be 2 for every resident of the greater Summerside area.

- pay Islanders $8400 for every dollar they bet on VLTs over the next 12 months

- build 14000 new hospitals

- give every islander 700 new corvettes.

Ok I will stop here, you get the point that its a ridiculously large amount of money. BUT IS IT ENOUGH TO STRAIGHTEN OUT THE US FINANCIAL SYSTEM?

considering the fact that there are $13 trillion in mortgages in the US, $700 billion allows for a 5% default. So the answer is most likely no. Last month 70,000 people were losing their homes every week! So what will fix the problem?

Well the $700 billion will allow participating banks to remove distressed loans off of their balance sheets which will allow them borrow and lend freely to each other. That gets the money supply moving and is very good for the economy. When money moves, the economic system starts back up. But at a much slower pace then we have become accustomed to. The fix will come from consumer debt reduction, increased savings and less dependence on consumer credit. Their may also new rules allowing increased foreign ownership of our public companies. These companies may be forced to raise capital by cash for equity swaps, as opposed to leverage borrowing. Keep a close eye on the finance divisions of the car companies and other companies who finance large consumer purchases. I think you will see these divisions get scooped up in the near future.

Since we are talking about the $700 billion and the revival of the banks, one has to wonder if US bank stocks might be a good buy any time soon. Without trying to sound continually negative, the answer is NO. The reason? Its the accounting. It needs to be changed and quickly. Heres why.

say you are looking at a US bank. You notice a huge loss 3 months ago and 3 months latter you notice a huge recovery. Seems like an improvement? Thats the problem, what seems to be, may actually not be.

When a bank decides to foreclose they move the loan off the books at $0 value. So they take a paper loss for the value of the loan. Lets say that they move 1000 home loans of $100,000 each off of the books or $100 million dollars in loans. For the reporting quarter they report a $100 million dollar loan loss. They then move the files to the recovery department and lets say that during the next quarter they sell all the homes at half price. Now for the next quarter they are showing a $50 million dollar profit. You as an investor are looking at the improvement and thinking it might be a good time to buy. Well nothing really changed. The bank has just turned some wood into cash. No profit.

So dont jump into stocks because the US passed the $700 billion package. You are going to need some serious professional help to get value in the next bull market. Your hunches and friendly neighbor tips could cost you big time. On the upside, as long as you are not losing money right now and dont get locked into a GIC, you stand to make huge gains when the market turns.


Jeff McLellan, President MN Investments

Thinking about buying GOLD? consider this.....

Gold has always been a safe haven in a bumpy stock market. People have several reasons for buying gold when the market gets rough, the most common reason is "you will actually own something real". Gold can be traded like a currency world wide and its value is undisputed. So when the equity markets turn south, there is usually a gold buying rush. When the equity markets recover, gold usually drops as people sell it to raise cash to invest in equities. While gold has many uses world wide, no demand seems strong enough to support a long term position in the metal. Yes METAL. When you really think about it, thats all that its is, a metal. The demands for other metals like steel are much greater, as steel is a utilized product used to develop our lifestyles.

Warren Buffett, the worlds most successful investor was quoted on GOLD:

"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."


SHOULD YOU BE BUYING GOLD RIGHT NOW IN THIS BUMPY MARKET?

I believe the answer is no. The market has changed. Traditional moves wont work because the market is simply not there. Consider this... The #1 challenge for stock brokers right now is where to invest their clients money. As I type this information the TSX composite is down around 500 points on the day and gold has dropped significantly. The brokers are not selling equities and buying gold as they did in the past. In fact they are selling gold. So where is the money going?

There are 2 things apparent. First off investors are lining up to by T-Bills. This will give them short term comfort and no losses. Bonds have also been on the rise, but corporate debt is under severe scrutiny, so people are being extra careful when lending money to companies, as thats what happens when you buy a bond. Bond performance is also correlated with interest rates. Bonds do better when rates are dropping, but rates have been holding mainly due to the increased risk of inflation from high energy costs.

Secondly, we are in a world of NOW. People want things now, including investment gains. Short selling is racking up huge profits in this dropping market. The concept is simple. You have a credit arrangement with the broker where you borrow say 100,000 shares of GM at $10 for a total loan on $1 million. You immediately instruct the broker to sell the shares at $10 and he does. Now you have $1 million cash in your account. You are required to pay about 9% interest and within a short period of time pay off the loan by returning the 100,000 shares of GM to the broker. So you simply buy them back. Heres the deal - your betting that the share price will continue to drop, when you borrowed and sold the shares they were at $10, when you bought them and returned them lets say they were going for $5 per share. In this example you just made $500,000 because after the deal is complete you still have $500,000 cash in your account. ( less interest charges of course which are minimal in a short period). These kinds of transactions give people money NOW. While this type of investing is highly speculative and not recommended for most of us, individual investors are participating indirectly in short selling through hedge funds. These hedge funds have become market movers over the last few years as they control huge amounts of the money flowing through the system. I will be getting into more detail about hedge funds at a latter date, but most people need not worry about them. They are restricted to people who have a net worth of at least $1 million and an income of $250,000 annually.

So there you have it, the gold rush may finally end with this market. So what do you do?

follow the 2 rules of investing.

1. dont lose money

2. never forget rule #1

I know the picture is a bit like a dog chasing its tail, but a good investment advisor can guide you through this market without losing money. So thats what you really need.

Jeff McLellan, President MN Investments Private Client

The credit CRUNCH - What you need to know

I get asked every day about the "markets". For the most part people would like me to agree with what they are doing, so I guess you could say that they are using me for reinforcement. I get embarrassed sometimes when I see the their hopes deflate when I tell them the truth.

Personal investing these days is similar to internet medicine. People search around for a web page that agrees with what they believe at the moment, and stick with that belief until they finally visit the doctor for the truth. Sometimes the delay getting to the doctor compounds the problem. To further complicate the situation, some people have actually been given rate of return or buy and hold advice from a licensed mutual fund person working at a bank. Not to pick on all of these people, but I have not met 1 yet that knows how to do anything but complete basic paperwork and recite investment returns from a publication. Think about this, if these people were actually good at what they do, they would be making twice the income of the branch manager - not 40%. There are plenty of jobs available within the bank for good investment advisors, unfortunately these jobs are not in the branches giving advice to you.

THE CRUNCH- WAVE 1.

How we got here is not really important at the moment. Its a long story about the American dream being exploited by greed for corporate profit and the resulting race to lend money by banks and the need for insurance to be put into play in the event that the bank cant pay the companies they borrowed from. The whole thing came down like a house of cards. The risk calculators didnt plan for it all to happen at once and there is not enough cash in the system to straighten it all out. Lets call this WAVE 1.

WAVE 2.

after WAVE 1 we are left with hundreds of US banks who normally lend money to each other, not lending. They have stopped lending because they are unsure of the financial position of the bank looking for money. How many bad assets are still on the books? Now what we are left with is an environment where the money movement has slowed or in some cases stopped. Lets call this WAVE 2.

WAVE 3.

At this juncture, it becomes obvious what people do with borrowed money. It also becomes obvious what people dont do when they cant borrow or have a harder time borrowing. People do less - vacations, home buying, appliance and furniture buying, home renovations, toy buying (RV, motorcycles, boats, and so on), vehicle buying, and on and on - I think you get the picture. Lets call this reduced spending WAVE 3.

WAVE 4.

This is where we are right now on Sept 30 2008. With the bad assets, banks not lending and people not spending we have arrived at a critical time where businesses have to make tough decisions. They have fewer customers and in some cases no access to money. So therefore people start losing their jobs. While a few jobs here and a few there goes unnoticed, 2000 job loses at GM does grab headlines. The fact of the matter is job losses will affect people who work for companies of all sizes. A few here and a few there multiplied by tens of thousands of companies has a huge effect on people. Since the US and Canada are so closely connected by business relationships, we are affected. Wave 4 is all about job losses.

So there you have it, the credit CRUNCH as its referred to by the media. Its really a series of events and resulting effects. NOW THE MILLION DOLLAR QUESTION, WHAT SHOULD YOU DO?

1. Stop losing money! Get an advisor who understands the economics at play here and accept nothing less than $0 of losses. My clients are not losing money, nor should you.

2. Get your credit under control. Its going to be harder to get credit especially if you have high balances on cards and have been late in the past. To ensure that you will be able to get the credit you need in the future you must get your current credit under control.

3. Prepare for emergencies and opportunities. This means getting your life and disability insurance equal to your needs and having cash available to invest when the market turns. There will be significant investment gains when things turn. For those of you who think buy and hold is the answer, I will point out to you that when the market turns your investments will be soaking up gains to bring them back to even while people with cash to invest will be making money right away.

Jeff McLellan President MN Investments Private Client