share club meeting notes from September

[selkirk]

have belong to a shareclub for around 14 years (time does fly) anyways in september I was to make a presentation or going over a couple of article in cdn. moneysaver.

the two in sept that caught my attention were Preparing for the Bear by Wynn Quon and Investment Products to Avoid by Gail Bebee.

the first one by Wynee Quon is scary and should point out that he called the tech collapse though it happened slighly later than he thought, he also a recovery would be quicker. however the call was very good, and the downside was predicted.

(I thought tech had to correct, like a party you just would have to leave when it was over, however went lower than I imagined.)

should note: I presented two ways options could help take out risk in the market a point that the author of the second article said should be avoided. believe options can be used to hedge and protect a portfolio.

the sad news is only took part of my own advice, the CNQ puts for example would have returned over 500%, I did purchase put options but only on half of my remaining energy / resource portfolio . reduce the portfolio by half at the end of August and had covered calls and some uncovered however should have had puts against most if not all of my positions, instead of half.

live and learn. this is from the second friday in September...will provide highlights of the Preparing for the Bear Article later in this thread.

also you should use options in this climate, there are some stocks that offer 10-20% return for just October. incredible. would not buy to many puts as insurance has become very expensive.. (of coarse would have told you that in September).... would look at selling some puts, once the market settles....not that brave yet....

thanks
selkirk


Bear Market Investing September 2008

Will be going over two articles in the Canadian Moneysaver, agree with most of these facts, items, however question a few:

Preparing for the Bear by Wynn Quon

He predictated the collapse of the Nasdaq in the Moneysaver magazine, though his timing was off around six months, for the most part is bearish.

Article is on page 5-7, sept. cdn. moneysaver.

Investment Products to Avoid by Gail Bebee

Article is on page 31-32

She mentions Labour sponsored funds, Collectibles, Currency Hedging Products, Guarantted Minimum withdrawal benefit products, Options and Hedge funds.

These products are complicated and have high costs for the investors, and should be avoided.

She makes a good argument on most of these topic except for options, which can be used by the average investor, or twelve year old. In fact use of options in a bearish market will help investors, do far better than just buy and hold.

Examples
1.) Maria and the Prince hold 500 shares in CIBC. CM $63.77. They have a large amount, though would be willing to sell them for 10% more.
So they sell 5 Jan Calls $72 for 1.75 = 1.75X 500 = $875

In English 5 (mean 5 contracts= 1 contract is 100 shares), Call (means you have to sell the stock at 72, if it goes to that price or higher), Jan (the third Friday in January this expires or is excercised). The price they got to sell the calls was 1.75 each for a total of $875.
If they write another option during the year like this and counting the div they will make a return of 10.94%.
The worse case is that the stock goes zooming past 72, because that is their top price until Jan. Maybe it is that they will still hold CIBC?

2.) Winston Smith has made a great deal off of oil stocks and has a large gain, he is worried that the continued sell off will wipe out his large gains?. Does not want to sell them for tax reasons, at least this year.

3 Puts Nov 74 $6 = $1800


So Winston Smith pays 1800 dollars so he has a floor under the price. He can sell CNQ cdn. natural resources for 74 dollars until the third Friday of November.

Though this may seem like expensive insurance CNQ and oils are very volatile.
As many stock in 2008 sometimes paying 5-10% insurance may not be such a poor idea, or selling a covered call and lowering the adjusted cost base for the stock.

Sym-X Bid - Ask Last Chg % Vol $Vol #tr Open-Hi-Lo Year Hi-Lo last trade News Delay
CNQ - 77.35 -2.65 -3.3
ECA - T 67.80 -3.16 -4.5
CM - T 63.76 -0.66 -1.0
TD - T 61.99 -0.38 -0.6
BMO - T 48.21 -0.29 -0.6
BNS - T 46.94 -0.16 -0.3
CM - T 63.76 -0.66 -1.0
NXY - T 26.70 -1.15 -4.1
SU - T 47.05 -2.11 -4.3
TLM 16.17 -0.68 -4.0

 

[selkirk]

this is the article from Wynn Quon, he does not write often, but when he does it is for the most part a good read. He was correct; I thought there could be a correction but was surprised by the size of the drop. at the end some good advice about your portfolio ran into many people that never had stops in place, or were leveraged, ect... and were stressed and felt panic set in....happy reading...
thanks
selkirk


Preparing for the Bear
By Wynn Quon
September 2008, Canadian MoneySaver.

It was in our October 2006 column that we first warned of the impending collapse of the real-estate market in the U.S. By now the woes south of the border are depressingly familiar. We can sum up the real estate bubble and the subsequent bust in two sentences:

1. A large number of people thought they could levitate. 2. They were wrong.

For five years the U.S. real estate market was a farcical circus of self-delusion and deception based on the belief that house prices would keep rising indefinitely. In the history of finance, farce is always a prelude to tragedy and the tragedy has now begun in earnest. Over the past twelve months thousands of subprime mortgage borrowers walked away from their obligations triggering the biggest flameout in real-estate history. In the first quarter of 2008, 1 in 78 households in California received a foreclosure filing. In Nevada, the rate is even higher at 1 in every 54 households (Source: RealtyTrac). We?ve seen the implosion of mortgage brokers (including Countrywide Financial, which we warned readers of in our October ?06 column). We?ve seen the collapse of brokerage house Bear Stearns, the bankruptcy of Indy-Mac-- the second biggest bank failure in U.S. history and the emergency government bailout of mortgage giants Fannie Mae and Freddie Mac.

Real estate prices in the U.S. have fallen faster than in the Great Depression. Prices are down thirty-five percent from their peak in Las Vegas, fifty percent in the worst-hit areas of California and Florida. And the troubles are likely to get worse because the subprime mortgage crisis is yesterday?s news. The next dominos of debt that will fall are:

- So-called Alt-A mortgages, loans that are just slightly above subprime in quality. Foreclosure rates on Alt-A mortgages have doubled in Southern California. Over twenty percent of Alt-A borrowers are already behind in their payments.

- Prime rate mortgages: During the first quarter of 2008, 195,000 subprime mortgages and 117,000 prime-rate mortgages were foreclosed in the U.S. But the rate of increase of prime-rate foreclosures was 32 percent compared to an 11 percent annual increase for subprime mortgages.

- Home equity loans. When prices were skyrocketing a few years ago, homeowners borrowed over US $1.1 trillion against the value of their houses. The money was used for everything from new cars to vacations. Now with prices plummeting and refinancing scarce, these loans are in jeopardy.

- Consumer credit card loans. Default rates are creeping up: 6.4 percent of consumer credit card accounts are in default up from 4.51 percent in February 2007.

On top of these dire statistics comes the worst indicator of them all - the U.S. unemployment rate has risen to 5.7 percent, a four year high. Rising unemployment means the U.S. is entering a negative decline spiral. As people lose their jobs, they cut back on spending, putting even further pressure on the economy.

What?s does this mean for us in Canada? Canadian investors can be forgiven for being complacent. The TSE is still almost 15 percent above the level it was two years ago. We?ve benefited from skyrocketing commodity prices. Oil prices soared to record levels. (The prediction I made a year ago for lower oil prices proved badly wrong or at least premature). But complacency isn?t wise. The storm south of the border will eventually make itself felt here. Canadian bank stocks have already been pummeled and it won?t be long before the rest of our economy feels the pain.

The question that readers may be asking: Won?t the U.S. economy bounce back quickly as it has in the past? Why is this downturn any different? The answer is that credit crises are fundamentally different from typical recessions. When banks suffer huge losses and write down billions of dollars in capital there is a huge ripple effect. Banks make their profit through leveraged lending. For every dollar of capital they have on hand, U.S. banks are allowed by law to lend out ten dollars. Think now about the US$400 billion that U.S. banks have lost so far in the crisis. That translates roughly into $4 trillion dollars of liquidity that the banks are no longer supplying to the economy. Even consumers and businesses with good credit will have trouble getting loans. No wonder the $100 billion tax rebate that was implemented by the Bush administration in April had little effect. The stimulus program sounds like a lot of money but it?s completely dwarfed by the trillion-dollar credit tightening by the banks. And as banks lose more money, this situation will get worse.

As we discussed in my September 2007 column, the damage from a financial credit crisis can be devastating. The analogy I drew then was with the Japanese economy in the 1990s. Let?s take a look at what happened to their stock market:



Japan?s financial credit crisis began in 1990 when their real-estate market collapsed after a decade-long bubble. Their primary stock market index, the Nikkei 225, plummeted from about 40,000 to 15,900 in two years. And then it went sideways for another ten years before plunging to a new low of 7900 in 2003. The critical point is that the Japanese investor who invested at the peak is down 67 percent after almost two decades. So much for the triumph of the long-term investor.

We cannot say that the U.S. will repeat this dismal experience because each crisis has its own particular dynamic. We simply don?t know the answer to the key questions. How much bad debt will need to be written off? What policies will the Federal Reserve and the new incoming president implement? At what point will unemployment peak?

On the other hand, we can?t rule out worse scenarios either. Note that Japan?s crisis happened while the rest of the world had strong economic growth. It?s hard to imagine, but Japan would have had an even rougher time if the global economy hadn?t buoyed them up. The bad news is that if we look at today?s credit crisis, there are signs that the slowdown is global in scope. Shanghai?s stock market is already down more than fifty percent from its peak last October while India?s Bombay Sensex index is down twenty-five percent from January. If we fall, there will be no one to catch us.

What?s the bottom line?

First, there will be bargains galore as the stock market falls. I believe that a fifty percent decline (or more) is quite possible. The Dow and the TSE could easily dip to the 6000-7000 level. But bargain hunting must be done with great discipline. The temptation is to buy on every dip because this has worked well in the past. Taking the same approach now could be disastrous. The Japanese investors who happily bought in 1991-92 expecting a market rally ended up in a world of pain. The proper way to bargain hunt is to set pre-defined limits for your stock market investment, identify points ahead of time for entry and then steadfastly stick to your plan. The key though is to make these plans now, rather than amidst the fear and anxiety when the bear market strikes in full force. Your plan should be specific. How much in additional funds will you commit to the stock market when the TSX index falls to 9000? 6000? 3000? If you are a conservative investor like me, you can take a pyramid approach. For example, assume you are willing to invest a maximum of $14,000 during the bear market. Your plan could then be to invest $2000 when the TSX falls to 9000, another $4000 when the TSX hits 6000 and a final $8000 if the index hits 3000. The numbers you choose will be different depending on your individual situation but this basic pyramid strategy ensures that you a) cap your risk exposure and b) buy more at cheaper prices. Note that most investors during deep bear markets end up hurting themselves by unconsciously adopting an inverse pyramid strategy. They buy too much on the early dips and when the market plunges lower they stop buying altogether. We saw this happen in the dot-com bust of 2000-01. Plenty of people stepped in to buy tech stocks after they had fallen by thirty percent. But when prices continued their nosedive, buyers became as scarce as squirrels on Hwy 401. Tremendous bargains were missed when great companies like Corning went into deep discount territory. (Corning went to $1.60 and is today a $20 stock.)

Does all this talk of plummeting markets scare you? If it does, then it is likely you have too much money invested in the stock market. Most people overestimate their risk tolerance because they don?t think about the downside during a bull market. Very few people (I certainly don?t know any) can calmly steer a portfolio that is 100 percent invested in stocks through a severe bear market.

The right way to address the discomfort is to adjust your stock market exposure. The wrong way is to panic and sell everything (unless you really need the money). If your portfolio is thirty percent stocks, even a bear market drop of fifty per cent will only impact your net worth by fifteen percent. The other mistake is denial - believing that a stock market crash will never happen. That would be like living in New Orleans and ruling out the possibility of a Katrina.

 

[DOGS THAT BARK]

Super read Kirk--

I can relate to his--

They buy too much on the early dips and when the market plunges lower they stop buying altogether. We saw this happen in the dot-com bust of 2000-01. Plenty of people stepped in to buy tech stocks after they had fallen by thirty percent. But when prices continued their nosedive, buyers became as scarce as squirrels on Hwy 401. Tremendous bargains were missed when great companies like Corning went into deep discount territory. (Corning went to $1.60 and is today a $20 stock.)

---got caught on a couple that never recovered Cisco for one off the top of my head.

 

[selkirk]

agree, that is often the case, when a sector is on a run most investors miss the move, however pile in near the end.

saw this many times with gold/mining, there would be a couple of companies that actually found something in an area, then all the others would come in....most went to zero.

tech was a great run, did not play it that badly however wish I sold earlier, sold only half near highs, and kept the other half longer than I should.
also when the sector was wiped out, looked at Corning and especially Apple at $8-10 (almost cash value, well half cash), however did not want any tech.

Resources were the play, in the future maybe should wait 6-1 year after the blow up to see if it is worth buying a few stocks.

the writer though bearish does not stay there all the time, in fact thoght tech would recover faster than it did, so many of the bears you hear quoted always have been, leaving large amount of money on the table during rallies.

thanks
selkirk