The Market in Review
The Market in Review From Paul Siluch & Lisa Hill Raymond James Ltd. – Victoria BC
April 1st, 2011
This week’s articles and insights 1. Quarter End 2. Quarter Ahead 3. The Law of Opposites 4. Underground Values 5. Count Your Cookies!
“If you want God to laugh, tell him your plans.” - old saying
Your Index Report Dow Jones Ind. Avg…...12,377
+1.28% Last Week
+6.90% year-to-date.
S&P 500………………..... 1,332 date. (+2.41% in $CDN)
+1.42% Last Week
+5.95% year-to-
TSX………………….........14,130
+0.65% Last Week
+5.11% year-to-date.
April Fool‟s Day is one of those non-holiday calendar events that has a history veiled in fog. Early references trace April Fool‟s Day back to the change of the New Year from
March to January, but the likeliest source was Chaucer in 1392. His story about a vain rooster being tricked by a fox “since March began thirty days and two” (which meant April 1st to early readers) made the day infamous for tricks. Some of the more memorable stunts include one radio station discussing the upcoming change to Digital Time, when the 24-hour day would become a 10-metric-hour day. Listeners were incensed until the ruse was revealed. In New Zealand, the national radio station announced a looming ban on cell-phones. Irate citizens called in to protest…on their cell-phones. It is one of those days like Hallowe‟en that everyone loves to celebrate, just for the fun of it. We thought about writing something tricky for this week, but decided truth is better than fiction. Especially when it comes to us and the spreading use of acronyms. In the financial services business, it has become more common to use only initials or acronyms. BCE, for Bell Canada Enterprises, for example, or CIBC for Canadian Imperial Bank of Commerce. We have toyed with this idea, especially since we have just launched our website, but what new-age acronym should we give ourselves? We started with Siluch-Hill Asset Management, but SHAM is not a confidence-building term in our profession. Siluch and Hill‟s Official Brokerage? SLOB doesn‟t portray us in the best light either. Paul‟s Lending Operation (PLOP) and Lisa‟s Office of Superior Returns (LOSR) aren‟t much better. And try as we might, we cannot wish away the letters starting Siluch-Hill Investment Team, an acronym that cannot even be spelled in polite company, much less on letterhead. We concluded, in all fairness to April Fool‟s Day, that we are consigned to just being Paul Siluch and Lisa Hill of Raymond James…until someone points out an unspeakable acronym hidden inside those letters. Our new website can be found at: www.raymondjames.ca/siluchhill
Quarter-End In the investment world, March, June, September, and December are important months, for they mark the end of the calendar quarter. This quarter just ended was a positive one for stocks, although bonds suffered. Stocks shrugged off some pretty bad news, all things considered. We had an historic uprising across the Middle East sending oil prices to $106 per barrel today, ongoing European default worries, and the tsunami/nuclear disaster in Japan. If the economy truly is strong enough to shrug those threats off, it could well be stronger than we think. In fact, history shows that when the market is up in both January and February, the track record for positive returns for the next ten months is also very positive. Only in 1987 was the perfect record broken, even though the full year ended up in the green:
Another positive is the cash building on corporate balance sheets. We are beginning to see more dividend increases, more share buybacks, and even more company buyouts to address the excess cash companies are now holding.
At economic peaks, companies often return over 90% of their cash to shareholders via buybacks and dividends. Today? US companies are returning just 59%, so there is room for more. (source, UBS).
Quarter Ahead There is no sign yet that markets will do anything more than rest after any decline. Earnings are rising at most companies. People are saving more money, some of which ends up in stocks. Companies are buying their own shares back, as well. Employment growth is set to jump. More and more surveys show companies are set to start hiring again, in a big way (this just in: the US added 216,000 jobs in March versus expectations for an increase of 185,000 jobs – unemployment is coming down). China, which has „had the brakes on‟ to slow down housing prices, may be ready to hit the accelerator again. Japan will need rebuilding. Even if there are more delays, we have seen most of the impact on the markets already. However (there is always a however): US government “money-printing” (QE2) ends June 30th. The economy is strengthening, and T-Bill rates may rise sooner than people think. Is the market ready for this? Not likely. Consumer confidence is ebbing due to gasoline in the US reaching $4 per gallon (a gallon would be US $4.88 in Victoria). When does $106 oil start to really pinch consumers? Portugal and Greece continue to vibrate like hot corn kernels before they pop. Both need more bailouts. Will Spain become a problem again soon? April marks the end of the “Best 6 months for stocks” period, so we are on guard for the decline that has eluded us for months. Bonds do best from May to October.
The Law of Opposites As revenues shrink in the UK, thanks to crippling debt, over-priced housing, and lingering bank debts, the government there is reaching longer and harder for extra tax revenues. Unfortunately, companies often react like one of Newton‟s Laws – in an equal and opposite direction. Statoil, the large Norwegian oil company with acreage all over the North Sea, is taking a hard look at the new taxes being levied on North Sea oil production – one of the biggest “milk cows” Britain has in terms of tax revenues. Or at least it used to be. Britain is now a net oil importer because of declines in North Sea oil production – they are trying to
squeeze more and more juice out of and older and flatter orange. Taxes will rise by 60% with the new budget so that 62% of all oil profits will flow back to London. The problem is, Statoil has many other places in the world to look for oil and so it is postponing the development of two large new fields – Mariner and Bressay – because they are no longer very economic. Canada‟s Talisman and Nexen – both with North Sea production – declined on the news. Governments through the ages repeat the same mistake. The Laffer Curve shows the two points where governments get $0 in tax revenues: at 0% and 100% tax rates. The “sweet spot” is somewhere in the middle. The closer governments get to 100% tax rates (which is always an attraction), the lower their tax collections:
(source: Heritage Foundation website) The UK will “revisit” these new oil taxes in due course, just as Alberta had to several years ago. Money always goes where it is best-treated, and the North Sea is no longer a friendly place.
Underground Values One thing we have noticed recently is the disconnect between the price of various metals, and the prices of the companies that mine these metals. Gold is near its highest
price ever, and yet most gold stocks are well off their highs. Same for copper and coal. In fact, most mining stocks are discounting a drop of 35% in metals and ore prices…something we don‟t see happening. What we are seeing is more takeovers, both friendly and hostile, which is the natural response when companies perceive their rivals to be undervalued. Credit Suisse research sees this, as well:
Why are miners so cheap compared to the minerals they extract? Costs of production have risen. Miines are big users of diesel fuel. Taxes are up in many jurisdictions. Ore grades are declining, and mines are getting deeper. Also, China has purposefully slowed its economy down in order to quell rising house prices. Even while the US market has risen steadily for six months, China‟s market has been in decline…until now. Is China ready to start growing more quickly again?
The ores China imports most are copper, iron ore, and coal. Mining stocks concentrating on these shares would be the best place to look first. The Credit Suisse report is available upon request.
Referrals are the nicest way to grow any business. If you have friends or colleagues who could be helped by our commitment to prudent investing and world-class, personal service, we’ll be delighted to hear from you and to gently follow up with them. Just call Paul or Lisa at (250) 405-2417 and we’ll take it from there. Thanks!
Count Your Cookies! Anyone who works at a desk all day keeps a stash of food handy – your personal “desk trash” as it is known. Mine consists 99% of granola bars and I have eaten so many that when I die, they should just bury me in a foil wrapper. I noticed a couple of years ago that my Box of 6! had stealthily become my Box of 5! As it turns out, it isn‟t just granola bars.
The New York Times reports that companies aound the world, especially those selling consumer products, are facing big cost increases. Corn prices are near their highs, thanks to ethanol programs that divert food corn into fuel. Vegetables are more expensive to produce with rising oil prices, and even the metal in cans is pricier. Companies that have no choice are increasing prices, such as cotton t-shirt manufacturers (you would notice if they left off one sleeve) and appliance makers. Food packagers have options, though, and these include cheaper ingredients, more water, or smaller packaging with the same price. Here‟s a few to watch for: Chips are disappearing from bags, while more air is being added. Fewer candies in each box. Less vegetables in cans. Plastic jars with an indent in the bottom so it actually holds less. Environmentally-friendly packaging: greener, but smaller and more expensive. The article quotes a Lisa Stauber, who has nine children. “Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said. Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I‟ve ever seen an 11ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It‟s sneaky, because they figure people won‟t know.” Tuna is now packed in 5 oz. cans instead of 6 oz., and the price is higher. “Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.” Back in the 1970s, we used to routinely buy dented cans at Sun-Rype because of the discounted price. And coupon-clipping is back – they say the best coupons are the ones on the front page of the flyer. Unfortunately, food price inflation is a reality now, although not as bad in Canada with our strong dollar. The best defense? Buy fertilizer stocks, or other food-related equities that benefit from food price inflation. Stocks in general tend to do well in modest-inflation environments.
We welcome your comments on this bi-weekly Newsletter.
Note: We would only recommend a purchase of the above investments after a personal review of each individual's financial objectives How to Contact Us: [email protected] [email protected]
(250) 405-2417 The information contained in this report was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are those of the authors, Paul Siluch and Lisa Hill, and not necessarily those of Raymond James Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This newsletter is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Ltd. is a member of the Canadian Investor Protection Fund. Raymond James does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the Internet is not secure or confidential. Raymond James reserves the right to monitor all e-mail. Any information provided in this e-mail has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Raymond James and its employees may own options, rights or warrants to purchase any of the securities mentioned in e-mail. This e-mail is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer. Privacy legislation requires that anyone you are referring consents to having his/her information provided to us.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated.
Within the last 12 months, Nexen Inc. has paid for all or a material portion of the travel costs associated with a site visit by a Raymond James Canada Ltd. analyst or associate. Prices shown are as of close April 1st, 2011.
April 1st, 2011
This week’s articles and insights 1. Quarter End 2. Quarter Ahead 3. The Law of Opposites 4. Underground Values 5. Count Your Cookies!
“If you want God to laugh, tell him your plans.” - old saying
Your Index Report Dow Jones Ind. Avg…...12,377
+1.28% Last Week
+6.90% year-to-date.
S&P 500………………..... 1,332 date. (+2.41% in $CDN)
+1.42% Last Week
+5.95% year-to-
TSX………………….........14,130
+0.65% Last Week
+5.11% year-to-date.
April Fool‟s Day is one of those non-holiday calendar events that has a history veiled in fog. Early references trace April Fool‟s Day back to the change of the New Year from
March to January, but the likeliest source was Chaucer in 1392. His story about a vain rooster being tricked by a fox “since March began thirty days and two” (which meant April 1st to early readers) made the day infamous for tricks. Some of the more memorable stunts include one radio station discussing the upcoming change to Digital Time, when the 24-hour day would become a 10-metric-hour day. Listeners were incensed until the ruse was revealed. In New Zealand, the national radio station announced a looming ban on cell-phones. Irate citizens called in to protest…on their cell-phones. It is one of those days like Hallowe‟en that everyone loves to celebrate, just for the fun of it. We thought about writing something tricky for this week, but decided truth is better than fiction. Especially when it comes to us and the spreading use of acronyms. In the financial services business, it has become more common to use only initials or acronyms. BCE, for Bell Canada Enterprises, for example, or CIBC for Canadian Imperial Bank of Commerce. We have toyed with this idea, especially since we have just launched our website, but what new-age acronym should we give ourselves? We started with Siluch-Hill Asset Management, but SHAM is not a confidence-building term in our profession. Siluch and Hill‟s Official Brokerage? SLOB doesn‟t portray us in the best light either. Paul‟s Lending Operation (PLOP) and Lisa‟s Office of Superior Returns (LOSR) aren‟t much better. And try as we might, we cannot wish away the letters starting Siluch-Hill Investment Team, an acronym that cannot even be spelled in polite company, much less on letterhead. We concluded, in all fairness to April Fool‟s Day, that we are consigned to just being Paul Siluch and Lisa Hill of Raymond James…until someone points out an unspeakable acronym hidden inside those letters. Our new website can be found at: www.raymondjames.ca/siluchhill
Quarter-End In the investment world, March, June, September, and December are important months, for they mark the end of the calendar quarter. This quarter just ended was a positive one for stocks, although bonds suffered. Stocks shrugged off some pretty bad news, all things considered. We had an historic uprising across the Middle East sending oil prices to $106 per barrel today, ongoing European default worries, and the tsunami/nuclear disaster in Japan. If the economy truly is strong enough to shrug those threats off, it could well be stronger than we think. In fact, history shows that when the market is up in both January and February, the track record for positive returns for the next ten months is also very positive. Only in 1987 was the perfect record broken, even though the full year ended up in the green:
Another positive is the cash building on corporate balance sheets. We are beginning to see more dividend increases, more share buybacks, and even more company buyouts to address the excess cash companies are now holding.
At economic peaks, companies often return over 90% of their cash to shareholders via buybacks and dividends. Today? US companies are returning just 59%, so there is room for more. (source, UBS).
Quarter Ahead There is no sign yet that markets will do anything more than rest after any decline. Earnings are rising at most companies. People are saving more money, some of which ends up in stocks. Companies are buying their own shares back, as well. Employment growth is set to jump. More and more surveys show companies are set to start hiring again, in a big way (this just in: the US added 216,000 jobs in March versus expectations for an increase of 185,000 jobs – unemployment is coming down). China, which has „had the brakes on‟ to slow down housing prices, may be ready to hit the accelerator again. Japan will need rebuilding. Even if there are more delays, we have seen most of the impact on the markets already. However (there is always a however): US government “money-printing” (QE2) ends June 30th. The economy is strengthening, and T-Bill rates may rise sooner than people think. Is the market ready for this? Not likely. Consumer confidence is ebbing due to gasoline in the US reaching $4 per gallon (a gallon would be US $4.88 in Victoria). When does $106 oil start to really pinch consumers? Portugal and Greece continue to vibrate like hot corn kernels before they pop. Both need more bailouts. Will Spain become a problem again soon? April marks the end of the “Best 6 months for stocks” period, so we are on guard for the decline that has eluded us for months. Bonds do best from May to October.
The Law of Opposites As revenues shrink in the UK, thanks to crippling debt, over-priced housing, and lingering bank debts, the government there is reaching longer and harder for extra tax revenues. Unfortunately, companies often react like one of Newton‟s Laws – in an equal and opposite direction. Statoil, the large Norwegian oil company with acreage all over the North Sea, is taking a hard look at the new taxes being levied on North Sea oil production – one of the biggest “milk cows” Britain has in terms of tax revenues. Or at least it used to be. Britain is now a net oil importer because of declines in North Sea oil production – they are trying to
squeeze more and more juice out of and older and flatter orange. Taxes will rise by 60% with the new budget so that 62% of all oil profits will flow back to London. The problem is, Statoil has many other places in the world to look for oil and so it is postponing the development of two large new fields – Mariner and Bressay – because they are no longer very economic. Canada‟s Talisman and Nexen – both with North Sea production – declined on the news. Governments through the ages repeat the same mistake. The Laffer Curve shows the two points where governments get $0 in tax revenues: at 0% and 100% tax rates. The “sweet spot” is somewhere in the middle. The closer governments get to 100% tax rates (which is always an attraction), the lower their tax collections:
(source: Heritage Foundation website) The UK will “revisit” these new oil taxes in due course, just as Alberta had to several years ago. Money always goes where it is best-treated, and the North Sea is no longer a friendly place.
Underground Values One thing we have noticed recently is the disconnect between the price of various metals, and the prices of the companies that mine these metals. Gold is near its highest
price ever, and yet most gold stocks are well off their highs. Same for copper and coal. In fact, most mining stocks are discounting a drop of 35% in metals and ore prices…something we don‟t see happening. What we are seeing is more takeovers, both friendly and hostile, which is the natural response when companies perceive their rivals to be undervalued. Credit Suisse research sees this, as well:
Why are miners so cheap compared to the minerals they extract? Costs of production have risen. Miines are big users of diesel fuel. Taxes are up in many jurisdictions. Ore grades are declining, and mines are getting deeper. Also, China has purposefully slowed its economy down in order to quell rising house prices. Even while the US market has risen steadily for six months, China‟s market has been in decline…until now. Is China ready to start growing more quickly again?
The ores China imports most are copper, iron ore, and coal. Mining stocks concentrating on these shares would be the best place to look first. The Credit Suisse report is available upon request.
Referrals are the nicest way to grow any business. If you have friends or colleagues who could be helped by our commitment to prudent investing and world-class, personal service, we’ll be delighted to hear from you and to gently follow up with them. Just call Paul or Lisa at (250) 405-2417 and we’ll take it from there. Thanks!
Count Your Cookies! Anyone who works at a desk all day keeps a stash of food handy – your personal “desk trash” as it is known. Mine consists 99% of granola bars and I have eaten so many that when I die, they should just bury me in a foil wrapper. I noticed a couple of years ago that my Box of 6! had stealthily become my Box of 5! As it turns out, it isn‟t just granola bars.
The New York Times reports that companies aound the world, especially those selling consumer products, are facing big cost increases. Corn prices are near their highs, thanks to ethanol programs that divert food corn into fuel. Vegetables are more expensive to produce with rising oil prices, and even the metal in cans is pricier. Companies that have no choice are increasing prices, such as cotton t-shirt manufacturers (you would notice if they left off one sleeve) and appliance makers. Food packagers have options, though, and these include cheaper ingredients, more water, or smaller packaging with the same price. Here‟s a few to watch for: Chips are disappearing from bags, while more air is being added. Fewer candies in each box. Less vegetables in cans. Plastic jars with an indent in the bottom so it actually holds less. Environmentally-friendly packaging: greener, but smaller and more expensive. The article quotes a Lisa Stauber, who has nine children. “Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said. Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I‟ve ever seen an 11ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It‟s sneaky, because they figure people won‟t know.” Tuna is now packed in 5 oz. cans instead of 6 oz., and the price is higher. “Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.” Back in the 1970s, we used to routinely buy dented cans at Sun-Rype because of the discounted price. And coupon-clipping is back – they say the best coupons are the ones on the front page of the flyer. Unfortunately, food price inflation is a reality now, although not as bad in Canada with our strong dollar. The best defense? Buy fertilizer stocks, or other food-related equities that benefit from food price inflation. Stocks in general tend to do well in modest-inflation environments.
We welcome your comments on this bi-weekly Newsletter.
Note: We would only recommend a purchase of the above investments after a personal review of each individual's financial objectives How to Contact Us: [email protected] [email protected]
(250) 405-2417 The information contained in this report was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are those of the authors, Paul Siluch and Lisa Hill, and not necessarily those of Raymond James Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This newsletter is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Ltd. is a member of the Canadian Investor Protection Fund. Raymond James does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the Internet is not secure or confidential. Raymond James reserves the right to monitor all e-mail. Any information provided in this e-mail has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Raymond James and its employees may own options, rights or warrants to purchase any of the securities mentioned in e-mail. This e-mail is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer. Privacy legislation requires that anyone you are referring consents to having his/her information provided to us.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated.
Within the last 12 months, Nexen Inc. has paid for all or a material portion of the travel costs associated with a site visit by a Raymond James Canada Ltd. analyst or associate. Prices shown are as of close April 1st, 2011.
