4th Quarter Investment Thoughts Thursday, Oct 1 2009 

I would like to start by making a comment on my last article. Globally, there are values in financial stocks in countries not hit as hard as the US and Europe. My bearish stance is US based, not global.

If one takes the time to look they can find good values, especially in Asia and Canada where banks are lending and making solid profits.

Recent home sales numbers were positive. Inventories are being cleared from the system; which given the new wave of resets is a very good sign. There is a question of what will happen in 2010 when the tax credits expire. I have a pretty good idea on how this plays out in the coming year but would like to see more data before my thesis gets solidified. In the meantime, if sales and inventories continue to fall, properties in the grey market will likely come online. The faster this glut of grey market properties work their way through the system the quicker we can return to normal.

The scenario is similar to how tech companies had to wait for equipment purchased by dot.coms who went bust to work their way through the system in 2001 and 2002 before they started to see any growth.

The recent pullback in gold and silver is a pause that refreshes. Gold seems to be tracking the dollar which is headed for a retest of the lows made in 2008 which retested lows made in the 1980’s. The key is what happens next year during the period of time when we retest. Do we dare look back to what happened more than 25 years ago? I have a pretty good idea how this scenario plays out through 2010 but once again need to see more data before my thesis become solidified.

Neutral to bearish in hard commodities. There are some seasonal factors at play here and the technical charts do not look strong at all. An upside breakout would turn me into a bull but I believe each metal, with the exception of gold and silver, needs to take a break and reassess its fundamentals vis-a-vis stockpiles and supply-demand fundamentals.

Agriculture stocks continue to provided fantastic value and returns if you are willing to do your homework.

Sugar should underperform relative to other soft commodities.

The broader market is likely headed higher after a correction but there are better returns elsewhere outside the major indexes. The next group has yet to emerge and assume leadership in the market so what we are seeing is not the beginning of a bull market but rather a correction in a long-term (decadinal) sideways movement.

The Fed statement spoke about extending the mortgage securities purchase program into the first quarter of next year. This is an admission that they will not be able to wind down this program as fast as programs like TALF.

Rates will end up staying low in the Unites States much longer than people expect. I believe that those looking for a rate hike in 2010 will be disappointed.

The real question going forward in monetary policy is ‘Who globally will lead the charge to raise rates?’

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Cirque du Soleil OVO review Sunday, Sep 6 2009 

Having seen 15 out of the 20 current shows I believe it is safe to call myself a Cirque veteran. What I enjoy the most out of each show is seeing how they can push themselves with each new show in terms of acts, costumes, characters, etc.

OVO, the newest touring show from Cirque du Soleil, succeeds in each area. The premise of the show is simple. A day in the life of a group of bugs with all their frenzied excitement until a new bug arrives carrying a mysterious egg. The bug takes a liking to a certain member of the group and the feeling is mutual.

The costumes were amazing works of art once again. Sitting up close I was able to notice less of the traditional tight fabric and more of what seemed to be a shell or skin reflecting the insect characters. Some parts of the costumes were removable so the performers could perform their required acts but they all looked like exotic bugs in a field somewhere.

The acts themselves were a wild mixture of old and new with something for everyone in attendance. For the adults there was a subtle eroticism in the pole balancing and flying ropes. The children were enthralled by the costumed characters, the antics of the ants during the foot juggling, and the blossoming love interwoven with the antics of the clowns.

Traditional acts such as the loose wire and the flying act had their envelopes pushed into new realms. Balancing and contortion had changes as well with the addition of an all female balancing group and a spider web addition to the stage which set the backdrop for contortion.

But the best was saved for last when the massive rock wall which served as the backdrop for the stage came into play. It is safe to say that you will not look at a rock climbing wall in the same way again.

One of the biggest changes was the addition of more dancing, taking the place of traditional clowning after a particularly intense act in order to lighten the mood and prepare the audience for the next act.

Aromas were also used to enhance the overall experience. Damp earth to start (a morning dew?) and flowers later on.

The music took on a new approach as well with the musicians themselves taking a more active role in the performance on a couple of occasions stepping out from their traditional area.

There were a number of acts which generated a complete ‘wow’ factor leaving you wondering how much practice, care, trust, and lack of fear went into the creation of the show.

OVO is an excellent addition to Cirque du Soleil’s touring group in which they reinvent themselves once again and push the envelope of their shows on all fronts.

It is what it Is Wednesday, May 13 2009 

When one looks at the stress tests recently completed by the US government one has to properly filter the noise. The government has released the results and metrics used in the ‘stress tests’ which have been picked apart by many people. You can crunch the numbers and manipulate the statistics all you want but in the end it comes down to loss recognition on bad assets.

Right now there is a tug of war going on between the private sector and the government. On one hand, we have the government looking for greater oversight of the financial sector. On the other hand, we have a banking industry looking to get out from underneath the government’s umbrella believing that they can fix the problems on their own. In this case, both sides are wrong.

The financial sector can be self-policing with a greater emphasis on risk management as is the case in Canada. But the participants in the sector must accept a greater responsibility for their actions and that includes the potential for failure. Capitalism is not about bailouts it is about letting market forces dictate winners and losers.

The government cannot expect to go the route of pay regulation as it will contribute to a brain drain in the financial sector. Just ask anyone working for a Big 4 auditing firm if they are having problems recruiting talent after the Arthur Andersen debacle. This should be a warning to those who seek to regulate items like executive pay.

Sarbanes-Oxley did more harm to the US financial markets by forcing small to medium sized businesses to go private and chased away IPO dollars to markets such as Toronto, London, and Hong Kong.

For those who wish to pursue further regulation in the financial markets, it should be done in a way similar to the regulations which came into effect after the 1987 market crash. In other words, capital formation should not be inhibited in any manner.

Everything is Getting Better Tuesday, May 12 2009 

Back in the middle of the financial meltdown last October I penned a quick article entitled [url=”http://www.financialsense.com/fsu/editorials/urban/2008/1016.html“]Everything will be All Right in the End[/url]. At the time the world seemed to be falling apart but it is important to understand that although the skies seemed dark at the time, there is a light on the horizon.

Since then the banking industry has undergone stress tests, the creation of various governmental funding mechanisms, and the thinning of the herd in terms of smaller weaker banks being acquired by larger organizations. A sense of normalcy is slowly returning to the industry and as banks spend the appropriate time in recovery.

We are currently at the point where lending standards have tightened and banks feel that the risk/reward ratio is tilted in favor of holding government and corporate bonds rather than making loans. Good people with good credit can get loans in this environment however people who have no income and no job will have no access to credit as it should have been over the past five years. This has been lost in the noise about banks writing off mortgage balances and foreclosures.

We are in the same position today in terms of lending standards as we were at the bottom of every credit cycle going back as long as records are kept. What makes this cycle different from the rest was the movement of mortgages on the edge of the lending bell curve to the mean. Because these mortgages were securitized into illiquid MBS and then chopped and diced into even more illiquid securities the healing process in the banking system will take longer than normal.

So where do we go from here? The healing process will take a number of years as banks continue to deal with problem loans and rebuild their capital structures. The key is loss recognition. The quicker losses are recognized and put behind the bank the quicker they can move forward in terms of rebuilding the capital structures.

Once the capital structures are rebuilt, banks will continue to choose to hold bonds over making loans to less than creditworthy clients until the risk/reward ratio favors making loans to those clients. Any efforts by the government or private sector to return to the lending practices in the middle of this decade should be looked at as a worrisome sign. Even more worrisome would be a return to these lending practices by banks of their own accord.

One recommendation would be to allow Canadian banks, who have very strong capital bases, to acquire weaker banks in the United States. TD Bank made a sizable acquisition in acquiring Commerce Bank but other Canadian banks should be allowed to make acquisitions as well. After speaking with a number of professionals in Canada, they are showing a keen interest in expansion south of the border. Given the strong capital base and risk management practices employed in Canada, where the banking sector was recently rated the strongest in the world, the US government should be opening doors for our neighbors to the north. This would only strengthen the US banking system as a whole and strengthen any economic recovery.

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