Investment Risk- October 2011


I’m sure you’re all feeling as frustrated with the markets as we are, but decades of excessive spending by governments and individuals alike have come at a cost and we’re now having to pay for it one way or another. What’s worse is the inability for governments to agree on meaningful solutions, which do more than provide short-term solutions.

We’re all looking for answers to the global economic woes, but there do not appear to be any, certainly no solutions that instill confidence and this suggests that the volatility and debates will continue.

The ‘Occupy Wall Street’ and ‘My fat Greek default’ rumblings are a symptom of the enduring market drubbings and may well grow in the years to come as an icon of multi-year global excess and greed.

We Canadians are under the belief that we’re ok and have miraculously avoided the brunt of global issues. I certainly hope so, but will point out that our debt to disposable income ratio is now at a record 147% and our housing market has not corrected, but rather advanced further from the bubble peaks of 2008. The Economist magazine estimated in June 2011 that Canadian real estate is currently a whopping 23% overvalued.

Click here for an excellent article that critically reviews our (Canadian) housing and consumer debt in the global context and highlights very valid reasons for concern.

Europe needs to reach an agreement to protect its banks, put Greece to rest, and become unified. They seem to be heading that way, but there have been no decisions yet so the risks are still high.

“…there is no question that Greece is going to default….” Dr. Martin Feldstein, Harvard University economics professor.

Click here to listen to his short yet insightful interview on CNBC.

The United States Government needs to get on the same page and devise meaningful solutions to unemployment and ongoing housing concerns as well.

It is against this backdrop of dysfunctional markets that the TriDelta Investment Committee continue to focus on delivering meaningful and proactive investment strategies to grow your assets. Our first priority remains capital protection followed by appropriate growth based on individual situations.

At TriDelta Financial we’ve always been proactive in managing risk, which we have done by:

  • – Avoiding the US and Euro markets for over 6 years now and remain 95% invested in Canada.
  • – Hedging portfolio risk a number of times over the past few years.
  • – Benefiting over the years from significant gold and silver investments.
  • – Successfully raising cash on numerous occasions, but particularly through mid 2011 as global economies continue to deteriorate.

The ongoing deterioration of global economies and growth is being reflected in lower and more realistic company valuations (stock price). As this unfolds we will maintain our defensive portfolios to preserve your capital and wait patiently for the dust to settle as we scour the market for opportunities that present themselves in times of turmoil.

There is also simply no compelling evidence that the serious risks that we face have abated.

Written by Anton Tucker, Vice President

Global Economic Outlook and Review- September, 2011


Global equity markets remain under extreme pressure amidst a perfect storm of collapsing global economic indicators. The news is pretty grim and will likely be for awhile, but remember that “it’s darkest before dawn”, which suggests things will improve in time. We agree, particularly given the coordinated efforts of governments, business leaders and consumers.

A deceleration in western economic growth to a mere 0.2% in the second quarter and fears of debt crisis contagion across the Eurozone has rattled confidence. The Head of the International Monetary Fund (IMF) also warned on the risks posed by an inadequately capitalised European banking sector. This added to the prevailing gloom. The European Central Bank (ECB) decided to support Italian and Spanish government bond markets, but only in return for an acceleration in local austerity programmes.

In the US, Mr. Bernanke delivered a speech Sept 8th stating; “The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability”. He went on to warn that overzealous belt-tightening by the U.S. government in the near term could also slow down the “erratic” recovery, but dashed any hopes of immediate assistance to boost the flagging US economy.

We see the ‘de-risking’ process playing out as stock and bond prices adjust to a very low and slowing global growth scenario in the developed world, if not a recession.

Currency volatility also reflects the changing environment as countries jostle for a competitive edge. The euro dropped like a stone after the ECB left its benchmark rate unchanged at 1.5% and lowered its 2011 Eurozone Growth Domestic Product (GDP) forecast.


Looking ahead through September and October all eyes will be on the economic data announcements as investors seek further confirmation of continued deceleration or stability. Ultimately an enduring and credible resolution to the European and US debt crisis is necessary if we are to see the markets move higher and this will unfortunately take time.

There are however a number of good news indicators that include:

  • Stocks are relatively cheap. The S&P 500 is trading at only 11.2 times 2012 earnings.
  • Falling oil prices are their own “stimulus package” to global consumers.
  • The dividend yield of the market is above long term interest rates — which is also a bullish sign for stocks.
  • U.S. corporate profits are very strong. Almost 75% of companies beat analysts’ second-quarter estimates.

Recall the words of Sir John Templeton: “Bull markets are born in pessimism, grow on scepticism, mature on optimism and die on euphoria.” If anything, we’re at the ‘pessimism’ phase of this cycle and not ‘euphoria’.

July: Canadian Investment Review


Many strategists are calling for a bullish trend in the second half of this year once we get through a few more tough economic reports in the weeks to come. Our “Silver lining” comes in the form of expected incoming data to begin surprising to the upside through July as we ‘climb the wall of worry’ and hope to see good stock market returns once again.

From a technical perspective, the immediate environment however continues to suggest caution until present uncertainties are resolved. The markets also remain in the seasonally volatile summer period that often leads to lower-lows in August through September, implying that equity benchmarks may remain below the year-to-date highs charted in April.

The June trading month proved to be a volatile end to the second quarter. Year-to-date the TSX is down only 142pts (1.1%) or flat if you incorporate dividends – the volatility makes it seem like the market is down more.

This year is characterized by a number of uncertain events both globally and in the U.S. They have contributed to the volatility, but one by one they are finally getting resolved. Global issues include:

  • – The Japan quake and the associated disruption. There was an all time record 15% drop in Japanese exports following the quake, which had a large effect on the entire global economy. Since then exports and demand are rebounding, which supports the argument for a second half (2011) rebound.
  • – The Greece situation needed a resolution, which has been achieved and the Greek Parliament recently survived a vote of no confidence and then passed a five-year austerity package.
  • – The debt crisis in Europe seems to be spreading with sudden concerns about Italy’s creditworthiness. The government debt of Europe’s 3rd largest economy (Italy) equals 120% of it’s GDP dwarfing the debt burdens of Greece, Portugal and Ireland. It seems that much will depend on these countries to grow more rapidly than they have in the past. The outlook remains bleak.
  • – The much anticipated Euro-zone banking stress tests revealed that 8 of 90 European banks failed. This news failed to provide much relief and considerable pessimism reigns and will do so at least until policy makers establish credibility and agree on a long-term strategy.
  • – New IMF head. France’s Finance Minister Christine Lagarde has been named the first woman to head the International Monetary Fund (IMF) after the abrupt resignation of Mr Strauss-Kahn after being arrested in New York for an alleged sexual assault. The process of unifying staff, economists and the restoring of confidence in the organisation is underway.
  • – The unresolved US Debt Ceiling. Negotiations continue in Washington with Obama now getting more actively involved. It will be politics as usual before a likely resolution prior to the drop-dead date of August 2nd.
  • – The end of the Federal Reserve’s second round of money-printing, or quantitative easing (QE2), with the Fed ending its $600 billion bond-buying program. It is likely that there will be a QE3 but it will be disguised as a different name … ‘Tax Repatriation Holiday’ would be as good a name as any.
  • – Monetary policy. We see the Fed leaving rates unchanged for the foreseeable future. The ongoing weakness in US employment growth rule out tightening of any form.
  • Canadian-Invesments-July-2011

So net net, we remain cautiously optimistic and expect positive economic news to gradually dominate as we move into the second half of the year. Should this trend emerge we will look to reinstate equity exposure to target weights. If not, we will implement further capital protection measures.

The second quarter earnings season is just beginning and we expect most of the softness has already been built in to equity prices. So far earnings have been reasonable; Alcoa profit more than doubled, Google net income surged 37% and J.P. Morgan Chase continues to deliver strong results although challenges in mortgage costs continue to weigh on the company. The next two weeks will be crucial.

Normally, the Bank of Canada would be tightening now, but if they did it would likely push the CAD even higher, putting pressure on an already weak manufacturing sector. As long as inflation data remain benign, we think the BoC will not increase interest rates in the short term.

Global Equity Markets: With growth in developed economies tracking below typical recoveries, China holds the key to stronger global growth. We believe the Chinese tightening cycle is coming to a close, growth is moderating, and inflation is peaking. Watch for improving loan growth as a signal of policy easing in China. This too should drive a second half rally in global emerging markets, led by Asia, and commodities.


June: Canadian Investment Outlook


Barron’s June 4th 2011 investment newspaper ran a great article by Michael Santoli who described the US quantitative easing situation as follows:

In typical fashion, stock investors are dreaming of more candy, while bondholders fret over the cavities and calories that more stimulus could cause. Harris (Chief Economist at Bank Of America) says that equity types are asking when QE3 will come, fixed-income investors when the Fed will tighten monetary policy. His answer to both: “Not this year.”

Corporate profits remain strong, macroeconomic numbers are softening, stocks remain not far off a multi-year high and stubborn fears of a recession relapse in the air. What will happen after the second round of US stimulus, known as QE2?

We asked one of our investment managers, Bruce Campbell, for his comments on the market overall and the issue of further stimulus:

The mild market correction of the past few weeks has deepened as global growth worries abound. The end of QE2 has investors worried. We are keeping our gold holdings high, will consider raising our cash levels, reducing energy and technology weights. Having a bit of cash to invest during dips through the summer makes sense.

The month of May resembled the month of April in terms of its trading pattern. Both months started up, dipped in the middle and recovered over the last two weeks. There was a significant magnitude to the swings but both months finished down modestly relative to the volatility. In fact, May probably would have finished flat with slightly stronger banking results in the last week – more on those shortly. The TSX closed the month at 13,803 which is up 360pts from the start of the year which is 2.6% or 3%+ when you incorporate dividends.

We started the month with the end of Bin Laden, the start of a Harper majority government, new COMEX leverage rules and better than expected job numbers. This was followed by the arrest and subsequent resignation of Dominique Strauss-Kahn, head of the International Monetary Fund. Unfortunately this occurred at a time when Greece is struggling with austerity plans, Italy was warned that its credit rating could be downgraded and Spain’s ruling party suffered a major hit in elections. It now appears that French Finance Minister Christine Lagarde is a lock as Strauss-Kahn’s replacement. In addition, it appears a Greek bailout plan is to be finalized by the end of June apparently without a restructure.

Closer to home, the Big 5 Banks reported weaker than expected quarterly numbers over the past month. All of the banks were hit by weakness in their domestic retail banking segments. This suggests that consumers are making a renewed effort to manage down debt levels. A softer housing market further pressured residential secured lending. Commercial lending was generally strong but not sufficient to compensate for the margin pressure from the retail. As a reminder, all five banks have important domestic operations but they also have an international strategy. The international strategy of TD, Royal Bank and Bank of Montreal is the U.S. – only TD has managed this strategy well and the Royal Bank is in retreat mode. The international strategy for CIBC has been the Caribbean while Scotia Bank has been very successful throughout Central and South America. A balanced portfolio of assets won the day as Scotia’s second quarter far exceeded those of the other four. A ranking of the five based on the second quarter would be: Scotia, BMO, TD, CIBC and Royal.


The Bank of Canada did not raise rates this month and despite stating that rates will have to increase ‘eventually’, any rate rises will be ‘carefully considered’. The BoC statement in general was very balanced. Inflation is expected to be above 3% ‘in the short term’ but only 2% by middle of 2012.

Hawkish comments that are consistent with a raise sooner rather than later:

  • Commodity prices expected to remain high
  • Canada’s economic recovery is ‘largely as expected’

Dovish comments that are consistent with no imminent raise:

  • Increased risks from ‘peripheral’ Europe … see above
  • Canadian economy still has ‘material excess supply’
  • ‘Greater headwinds’ from strong dollar

The consensus view is still two raises prior to year end with the first occurring in the third quarter – however, moved from July to September. It is our view that we probably will only see one raise before year end and if we were to assign probabilities it would be 30% September, 60% October and 10% Other.

The US economy is showing signs of relative weakness compared to expectations. Job numbers were very weak in the first week of June. Our very large weighting in gold is helping and feels like we should hold it for awhile longer.

We are at an inflection point where the economy will either re-accelerate with possible QE3 help or will stay soft. We are in the camp of this being temporary and the economy will get back on its weak but positive track starting in the third quarter. We may have front-loaded the correction and we could well climb the wall of worry in the back half of the year.

May: Canadian Investment Review


The recent increased volatility, which shook commodity prices this week has slowed Canadian stock market growth to the point that we’re now slightly negative on the year. Our outlook however remains positive and we continue to expect low double digit returns by year end.

JP Morgan also maintain a positive outlook on the US market and see the S&P 500 reaching 1475 by year end, a 10% increase.

April had a 730pt swing on the TSX during the month but only finished down 170pts. It was an interesting month but pales with the first week of May:

May 1st – Obama gets Osama. Economists are split on whether this is a negative or a positive. The negative position worries about the backlash of terror attacks adding an aspect of risk to the economy. They further point out that this event does not impact earnings, unemployment or economic expansion. The positive position believes that the death of Osama bin Laden is a devastating blow to Al-Qaeda especially as it appears he was still playing a major leadership role, increased Arab democracy, a “Post Al-Qaeda era” and lower oil prices as a result of increased long-term Middle Eastern stability.

May Investment Review

May 2nd – the Canadian markets were quiet post the Osama news and prior to the election. We witnessed a ‘Conservative Majority Government’ with the NDP as the official opposition. Regardless of how you voted, a majority government is viewed as stable to international observers. It is also the most market-friendly result with a government focused on controlling the deficit and able to enact measures without the inevitable compromises associated with a minority status. Read More