Monday, January 4, 2016

Janet Yellen: The Grinch Who Stole Christmas

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Janet Yellen:  The Grinch Who Stole Christmas
If you were thinking about a Santa Claus Rally, I am telling you that Santa won’t be visiting your door this Christmas season.  The previous week’s rally has taken the sting out of an ugly December for North American markets with the INDU paring half its losses for the month.  Just as Santa has been mysteriously absent this Christmas, so has the typical rally in stocks.

And there is one person you can thank for messing up markets this year… Janet Yellen.

She missed the expected rate hike in September which everyone was prepared for and instead choose to hike in December.  Hands down, she got spooked by the drop in markets in August and September and dropped the ball letting the markets and largely the talking heads on the business channels control her behavior.  If she had chosen to hike in September markets would have been oversold by December and we would have seen our typical counter cyclical rally in December.

So for the last 3 months the markets rallied on relief of continued QE with the same asset classes leading the rally which benefit most from a low rate environment.  Oil rallied.  Materials rallied.  Tech and bio tech all came back.  All the risk adjusted high growth assets shot back to life with an unexpected reprieve from Yellen.

This year has been counter cyclical in many ways because of the external forces of a weak kneed Yellen gyrating markets with weak kneed wishy washy comments about being data dependent and then changing the goal posts on data well within the statistical margin of error for revision.

Data dependent on a point or two from an estimate?

Are you seriously going to tell me the data between September and December is that much different?   I call bullshit. The US is well into their economic recovery for which many think is getting long in the tooth for diverging global markets.  

The biggest fundamental change for North American markets is the imminent rate hike.  So here we are in December battling another counter cyclical trend because Yellen had no choice but to follow through with a rate hike.  The writing is on the wall.  QE is over. We are entering into a new era of raising interest rates and you can bet that this major fundamental change will have an effect on all markets going forward. 

Yellens ineptness at managing the markets is showing when in fact Greenspan raised rates with little much as a slight correction until the sub-prime started showing its ugly head.  So it is proof markets will adjust and if there is something ugly underneath the sheets, the raising rates will help flush it out and markets will adjust to whatever that new normal is.  I think the problem in 2008 was no one understood the extent of subprime.  I don’t think there is anything remotely in the USA which could trigger the collapse of the financial markets like in 2008, but with changing conditions you can expect a bear to takeover which is necessary for markets to be able to adjust and resume a new bull.

What is key is as much as these folks think they move markets, they affect daily gyrations and that is about it.  The macro conditions are the macro conditions and raising rates in a high growth environment ultimately has only a short term effect and help smooth out problems building up in the system.   Raising rates in a low growth environment will have again, little effect.  The economy adjusts to whatever the conditions are and is just a cost of doing business.   The trucking industry didn’t collapse when gas prices tripled in a decade and adjusted.  So will the entire economy.  Raising rates will do little to affect a global slowdown or depression.  The conditions are already set for that.  The biggest thing North American financial engineers need to do is to get on a track of normalization and stop worrying about daily or even weekly gyrations in the markets.  The point is that without the conditions of subprime like in 2007 in the US.  The effects of the rate hikes are extremely over blown in the USA and in fact most would benefit from normalization.  Certainly the entire financial industry.    One asset class that looks extremely enticing over the next year is the US banks.  
  1. Bank of America  @ $17.33
  2. JP Morgan JPM    @ $66.84
  3. Wells Fargo WFC @ $55.04

The bond market bull is at an end

So now that we have got that over, every buy fixed income!!!

Well is it over?  We got one quarter point hike.  Hell no it aint over.  It’s just the beginning…

With a series of rate hikes imminent you are entering into a new environment for investing.  What precipitated the 30 bullrun in bonds?  A trend of declining interest rates over the last 30 years to zero.   What has keep the bond market going while rates are at zero?  Seekers of yield.   The problem is that the bond market is hugely overvalued because rates are artificially low.   Prices of many bonds are a function of an equation, and are directly affected by rates.  Clearly this is a fear the FED has, engineering a collapse of wealth in the bond market.  Clearly what has been engineered for an entire generation is the run up in principle in the bond market well beyond anything reasonable.

Ask yourself this?  Should you fear the collapse of something that was artificial and unsustainable in the first place?   The bottom line is rates shouldn’t have trended in one direction for 30 years.  Certainly Keynes would be rolling over in his grave at the twisting of his economic theory into the government manufacturing perma bulls instead of smoothing out economic cycles.  And if the government wasn’t so concerned about smoothing out economic cycles, rates would have naturally bounced between 3% and 6% and not gone on a trend of dropping to zero from their peak above 10% in 1980.   Rates have been largely inconsistent over the last 40 years creating huge paradoxes on financial markets.  That is the major problem.

Irresponsible economic policy over the last 30 years.

The bottom line is we are entering into a new investing environment with a whole new set of rules and until we can figure out what those rules are and how they are going to affect global finances it is going to be a rocky ride.   You are going to see a rollover of investing themes.  One of those themes which has been imminently at risk for the last 5 years is the massive bull market in bonds.  How is it going to unfold?  Who knows, but these rates hikes will imminently hurt the bond market, it is simply a function of an equation.   Unless someone decides to manipulate with the equation to smooth out principle valuations, you will see significant loss of principle as rates rise.   We are entering into a period of normalization, rates have to raise and purchasing the appropriate insurance should help protect from a material loss in principle of fixed income without selling it.

We have a series of quarter point hikes on the way where we will eventually see a normalization of FED FUNDS rate of about 2%.  This is still artificially low, but we are in a low growth environment created in part by low rates.   I believe the trend for the next decade is increasing interest rates to a target of 3% to 4% at the end of normalization by 2025.   Clearly the world has adjusted to low rates for growth, but as boomers age and become increasingly risk adjusted, there will be increasingly more pressure from this group to create less risk adjusted income streams and we should return to a more normal investment portfolio of 60% bonds and 40% equities at the end of the normalization period. 

China, a Depression in Store?

The biggest risk for global markets isn’t Yellen raising rates.  Nope.  The biggest risks for global markets are the headwinds which continue to blow up impending storm clouds on the horizon.   The biggest threat to the global economy is the collapse of the Chinese economy.  Brazil has fallen into a depression because of loss of trade with China and China’s pains are being felt throughout the global economy.  From direct purchasing to the economic activity in Canada related to elevated commodities prices.

If you thought they manufactured data on the way up, I am telling you right now if they will do the same thing down.  There is no way China is growing at 6%.  In fact I have my doubts that China is growing at all right now with the depressed commodities prices and the trickledown effect the slowdown in China is having on direct trading partners like Brazil.  

There are not too many models to fit China in to compare its current situation because China is unique in the fact a billion person population has never experienced such growth.  One model in history does provide an example of what could be in store for China over the next decade.   USA model of the “Roaring Twenties” turning into the “Great Depression” plays to mind of a major economic power who experienced major expansion and then contraction.  China’s expansion and the growth of China’s domestic economy when matched to other periods with similar expansions, no economic unit has ever avoided similarly proportionate contraction to that expansion.  I have my doubts that China will not be able to engineer themselves out of this contraction.  They will however be able to lessen the effects with given economic policies.   The last 5 years in China has been a sputter stop start economic momentum similar with a top in any economy and declining growth indicating a cyclical top in the expansion of the economy.

How can you tell China is in a depression?  You really can’t and have to look at sum of China’s parts and certainly one of those is fuel and parts for that engine.  Commodities.  With depressed prices in just about everything including iron ore of which steel production is China’s bread and butter, and you have to figure these headwinds are ominous at best.   With iron ore dipping below $40 per tonne, prices are back to 2005 levels and could go lower as iron ore entered the millennium priced at less than $20 per tonne.   If iron ore prices aren’t any indication of the extent of China’s slowdown, I don’t know what else to show you without getting boots on the ground.

 I also see another major conflict China will have to overcome to continue to mature and expand.   There are also robotics and 3D printing trends in China which may see its workers turned obsolete over the next decade.  One of China’s main goals is to transition to a consumer oriented economy but if they can’t transition manufacturing workers into service workers fast enough, robots and 3D printers could eat up huge swaths of the labor force compounding an employment problem which could emerge as a result.  Clearly education and training workers into new areas of the economy, but if technology revolutionizes manufacturing before retraining can take hold en masse you could have compounded social problems in China with a largely out of work labor force.   If these robotics and 3D printing trends continue in Chinese industry, you may see another huge mitigating factor in China’s impending depression.  The unemployed worker.  Manufacturing has been the life source of the Chinese economy and soon you may see the Chinese worker marginalized by technology.

2016… The Year of the Short? 

Certainly in Canada, 2015 was the year of the short and it looks to continue into 2016 with the economy on the verge of dipping back into a technical recession. 

The big question everyone wants to have answered is will the US markets follow suit?

Right now Brazil is in a severe recession due to the China slowdown.  China is pretending they are avoiding one.  The trickledown effect of what is happening in Brazil is going on in Australia and Canada but is less severe than in Brazil because both nations have more developed economies which provide a base making the economies more stable and resilient and dynamic to withstand a severe downturn.   The problem with Canada is the country is seeing two key area of growth decline at once.  Our oil boom which is considered much more significant than the materials boom was only partially due to Chinese demand and not solely ala the materials sector.   Canada theoretically should get hit harder concerning where most of our growth came from over the last 10 to 15 years.  It is a good thing that we have a distinct advantage here in Canada of being a key trading partner to the US where we still generate most of our economic activity and will continue to do so just because of geographical location.

Neither energy nor materials may ever come back into prominence as they have been over the last 10 years.  The only thing that may start another commodities boom is the urbanization of India which currently has an urban population of about 35%.  It was the same trend to urbanization of rates from 30% to 50% which was largely responsible for the China boom and the same type of urbanization plan in India could potentially start another commodities bull sometime down the road.   The trend is still not in place and estimating when India may decide to urbanize its population is a guessing game at best and not an investment theme for anyone to be waiting to unfold.

The TSX closed below 13,000 last week is significantly over valued and is having a problem moving above the 50MA.  It looks like a great index to continue to short in anticipation of lower lows and lower highs in 2016.  The American markets are also showing signs of a technical breakdown similar to the washout in August.   With a break in a multiyear trend back in August, it is safe to say there is much less chance the markets will continue higher in 2016.  What makes this an even safer bet is we have begun a period of normalization of interest rates in the US.  The US markets have certainly become a stock pickers market in my mind’s eye until the indexes have gone through this initial period of normalization.  There will be a period of adjustment and markets will need to correct in order to adjust properly.

The headwinds are different since the least bear market and economic slowdown triggered by subprime.  I doubt we see similar price action in 2016.

With oil at multi-decade lows, emerging markets in a protracted slump, a material change in trend to raising rates; macro conditions have set the stage for a concerted global slowdown of which no economy will be immune.  A tightening of monetary policy affects everyone.  The free money period for everyone is over and nations which continue to follow a QE policy could become extremely exposed to downgrades once the USA has fully changed course.

Zimbabwe’s and Greece’s could be the name of the game for many nations who don’t follow suit and adjust to USA monetary policy.   You don’t raise your rates… your currency will drop.  Your currency drops and it becomes much harder to pay your debt and it becomes much more unserviceable and then you enter the debt death spiral where the creditors vie to financially enslave your country. 

Or you choose the route Zimbabwe did and print money and impoverish everyone.   Fun choices ahead.

Certainly the bond vigilantes are starting to corner the high yield market which could be a signal of potential implosion.   If a lot of this high yield paper is tied to the shale gas industry then it could be just an isolated event.  The problem is yields have been compressed for so long that they have been pushed out on to the risk curve into the stock market and other places most would not normally go.  The high yield instruments could consistent of anything and like subprime re-packaged and re-sold several times.

If the global economy is truly extended, there could be significant risks throughout this sector similar to the sub-prime market when housing was over extended.   It doesn’t mean markets will implode and shut down like in March of 2009, but we are clearly entering a phase which rhymes and could send markets reeling over the next few months and maybe even years.   This economic slowdown looks like it will be much more protracted, but less volatile than in 2009; when the financial world actually stopped.
  1. Risk of extended and protracted slowdowns in China
  2. Australia, Brazil, and Canada showing signs of Chinese slowdown ‘trickledown effect’.
  3. Europe continuing in a slow growth environment
  4. A collapse of the commodities sector across the board wiping out trillions in capital and growth.
  5. Entering a period of interest rate ‘normalization’.
  6. The continued deflation of the price of oil.
  7. US retail bellweathers significant earning misses associated with lower and mid-range spending including Walmart.

Beat the Market Top Stocks

I can’t write a year end letter without making some stock picks.  Since we are biased towards a major correction in 2016 picking stocks making new highs is a dangerous activity at this point in the cycle unless it’s a day trade.  Generally I like momentum because its easy fast money playing on investors’ emotions but the market is dictating a different type of strategy. 


If you think the market will tank in 2016 then the easiest way to deal with your 40% equities allocation is to look for value.   Look for names that have been beaten up for 18 to 24 months and you will find a name that is completely oversold in an overbought market.
3D Systems Corp - $10.50
Market Cap - 1.18B
Shares Outstanding - 112,077,951
I started talking about 3d Printing 2 years ago at the height of the initial run-up.  I mentioned at the time that valuations were extremely generous and it was a time to do research and trade the sector at best. After 2 years of declining prices and volumes, this stock is looking extremely oversold and due for a huge bounce in 2016.  3D printing is the wave of the future for manufacturing and will revolutionize manufacturing as well as consumerism. How the landscape will change is still up for debate, but the Chinese are 3D printing entire houses, so the changes are real and significant and already in the works and indicate that this revolutionary manufacturing technique will change human life more than anything else to date.   3D Systems Corp is the preeminent company in the space in North America and is our top pick going forward.  

By no means is it the only 3D printing company.  We have mentioned many in the past, but 3D Systems Corp is a screaming buy trading off close to 70% its 52 week high and why not just buy the cream of the crop when it is trading at such a discount from its multiyear highs.  It may take a while for the 3D printing theme to gain real traction and several year to make new highs, but the trading range DDD has created for itself and the current value for one of the preeminent growth themes in investing cannot be ignored.

Stratasys Corp SSYS at $26.79 also gets an honorable mention as an excellent place to park money in 2016.   I love 3D printing and this developing theme because there is nothing more revolutionary for the 21st century than this new production technique.  The valuations have come to a point where everything is a screaming buy and I hold 3D printing as the number 1 growth theme over the next decade.  Better than Biotech, better than tech… 3D printing is where you will want to be. 

In a short side to Biotech.  The industry has some huge overhanging issues and until they collectively fix its business model of price gouging or government fixes it for them.  The bloom has come off this rose for the next little while.  What bothers me about bio techs, is you don’t need to price gouge to make billions in what is a maturing industry where prices should be coming down and not going up.  Especially with potentially volumes of sales with gaining baby boomers.  Gouging insurance companies and taxpayers for the essential medicines will only last so long until you get legislative intervention like we are starting to see in the states with their out of control health care system and associated costs.  Now that the government is paying large portion of the bill, you are going to see even greater scrutiny of costs going forward in all aspects of this industry.   Until the biotech industry is fixed, 3D printing offers lucrative potential capital gains with most stocks sitting at 5 year lows with a human element of liberating people unlike biotech which likes to feed off of people, sick people. 

Blackberry - $12.61
Market Cap - $6.63B
Shares Outstanding – 525,700,706
Blackberry was a victim of the last of a tech cycle in which it couldn’t adapt and keep up.  The company used to dominate the business world communication platform and practically invented text messaging by making it mainstream with BBM messenger more than a decade ago.  While Apple was still making iPod’s, Blackberry was the dominant player in the mobile communications industry.

Then someone came along with the idea to turn an ipod into a phone and viola…!!! You have the iphone and the dominant tech piece for the next decade. 

Will Blackberry ever be at the forefront of mobile communications?  I doubt it.  Samsung and Apple’s market share in this space will only be chipped away at over the next few years unless Blackberry comes out with disruptive technology. It doesn’t mean there isn’t room for another solid phone franchise like the Galaxy or the iPhone, but to truly disrupt this space you will have to change it.  Which their current phone offering of a slide out keyboard is not.  Although it is a nice phone and maybe next year after a generation or two of upgrades I might switch to the Android based PRIV of Blackberry, considering the only thing ever holding me back from buying a Blackberry was their refusal to use Android and push to market a third mobile operating system the market did not want or need.

What killed blackberry wasn’t inferior devices, but their stubbornness to not use Android as the ecosystem.  5 years ago Android and Apple won the mobile operating system race.  As a result of no one wanting the BBM ecosystem sales of Blackberry devices artificially lagged as a device maker.   If you make an inferior device, you can always find a price point to sell your product.   But if you are making a device with a system no one wants to use, you want won’t sell it at any price point simply because you can’t compete on the ecosystem.  They couldn’t attract developers, they couldn’t develop a niche that the business community needed, and before long the company saw itself entirely marginalized as device marker.

Blackberry as a device maker is coming back and I predict in 5 years Blackberry will be a top 5 mobile device maker globally again.   It took a lot of eating crow, but management finally figured out what was wrong with the device making division, its refusal to adopt the Android ecosystem.  Now Blackberry is using Android and adapting its own software to the android ecosystem so  Blackberry’s extra security features and messaging ecosystem now make it a plus instead of a “but have this instead of” which was a tough sell to anyone when all we wanted was apple or android apps and games. 

In addition to BB finally turning around its device making division with key strategic decisions, the software division continues to show strong revenue growth with a 120% quarter over quarter increase in software and services revenue which now consists of 29% of the company’s $550M quarterly revenue.

When looking at a turnaround in Blackberry and a move back to profitability you cannot discount the hardware division.  It consists of 40% of Blackberry’s current revenues and potentially solid launch of a franchise of phones like the PRIV could dramatically increase BB’s revenues. Key to launching Blackberry’s stock to $20 or $30 is the development of a successful mobile phone franchise and right now BB’s hopes are pinned on the PRIV.  A solid phone from initial reviews.  The development of a successful franchise even a quarter to half the success of iPhone could mean an additional $20B to $30B in enterprise valuation.   That is the cherry on everything in Blackberry’s turnaround if they launched a phone with as much demand as a Galaxy or an iPhone.

I always thought becoming a second tier phone company and sliding into the $100 to $300 range could be an option like ACER and others have quietly done, but the lucrative revenues of a successful franchise launch like Samsung’s Galaxy or Apple’s iPhone are too much to pass up to more cut and slash pricing.  I do believe that if John Chen cannot develop that franchise within the next 24 months he will most likely retreat to a lower pricing and lower margin phones. 

What looks to me is happening at Blackberry is the perfect storm for a turnaround. 
  1. Expert turnaround management in place continue to deliver on vision for the company.
  2. They finally got the handset right (not with the keyboard but with adopting Android).
  3. They are experiencing exponential growth in the enterprise software division at over half a billion in revenue looking forward growing 120% Q over Q.
At $12, this stock has broken out and is indicating an excellent year looking into 2016.

Newalta Inc. - $3.75
Market Cap - $210.9M
Shares Outstanding – 56,236,548
Newalta Inc. is a mess.  It is a flyer on the O and G sector at least finding a bottom the next 6 months and was only picked because it technically looks ripe for a bounce early in 2016 on seasonal strength for O and G stocks.  Fundamentally it is hard to look at this company with high debt and high production costs, but technically the company looks like it has found a bottom with a volume reversal.   So Newalta is a recommendation on trading this stock only.

Stocks rarely go to zero, yeah, sometimes they do or get refinanced at such low prices previous investors get diluted out, but generally stocks do make it out of the panic zone.  Currently Newalta is in the panic zone.  Teck Resources hit $3.50 in 2009 and then raced back to $50 and Newalta could be a similar type dog in the oil panic.  High debt loads tend to worry investors.

In Newalta’s case we have a $14 stock in July which now trades at 25% the price less than 6 months ago.   Oil may not make it much back up above $40 and Newalta looks to be impaired to the point of fundamental stock damage, but any rise in oil price or even signs of stability will benefit many names including a debt ridden junior like NAL. 

At any rate, this company looks ripe for a trade back up to $5 to $6 area given oil doesn’t collapse to $20 in January. 

Some key technical trading indicators here is the gap down in NOV.  Gaps generally will fill back up and if this is the case you can expect the gap from $7.50 to $6 in November to get filled back this spring which represents a double from current levels. Of course it doesn’t have to.  NAL could continue a downward trend but gaps are key patterns in swing trading that many successful traders use.  Another key indicator is the increasing volume in the stock as it dipped below $5.  This generally shows high interest in the stock when interest would normally be decreasing below $5 because of the stock losing criteria for many portfolios.   Similarly the Teck experienced a similar trading patterns back in 2009 and could really be a bottom fishing winner in 2016.  If oil bottoms.   Newalta is the most technically damaged but at the same time the most potentially rewarding of the 3 picks over the next 3 months. 

Christopher Pattison

Beat the Market Stock Picks

Friday, August 21, 2015

Early Warning Report: Welcome to the Great Canadian Depression

Early Warning Report: August 21, 2015

....Welcome to the Great Canadian Depression 

OMFG!  I SPEAK!!!  WELL… ERRRR….. I mean write.

NO I AM NOT DEAD!  Not yet anyway.   Although, I am sure after the last year and the family ordeal I have been through, some would wish I would die and are still making their best efforts to put me in my grave earlier than expected.  It just will not happen, no matter how many twists and turns my story takes.  Death is a hard activity for this individual spirit and I will not go that easy.

Kind of like these markets, paralleling my own battle… they have been on a bullish run ever since I can remember.

But just like that last spoonful of chocolate ice cream in your bowl, it seems that all good things must come to an end.  There is no more ice cream left.  The bowl is empty.  The tub the ice cream was in only has a few streaks of freezer burnt ice cream left which only increase your chocolate craving.  Until the grocery store opens in the morning..  the chocolate ice cream party  is over.

When I say the party is over… it is certainly over for many.  It’s over for the mining industry which was supported solely by the parabolic growth of Chinese cities which has now subsided.  Alberta is well on its way to a depression with the price of oil sliding to 10 year record lows.  The single focus of conservatives ramming through energy initiative after energy initiative has left the Canada perilously unbalanced and over-weight on energy which is putting a frosty chill on Canada and its economy.  To make matters worse, our import dependent economy has gone into sticker shock with the loonie further losing its shine as a petro dollar.  The Chinese stock market bubble has heard a resounding pop turning billionaire’s into millionaires overnight.  Around the world there is continued debt woes along with sluggish growth across developed economies.

The only bright spot is the USA economy which may itself be rolling over. The signs are everywhere folks, we are well on our way into a global recession, one much more severe than the 'trip up' we experienced in the financial crisis in 2008.  In places like Canada, without a complete overhaul and reinvention of industry, we could be close to tipping the scales from a recession into a mini depression over the next 3 to 5 years depending on how fast and dynamic our industries can adapt to the changing global landscape.

The Bull Market Never Stops

But it does pause….

Are we at a bull market cycle top?   

No, because we still have yet to see monetary deflation which should come with the enormous debt load built up by western nations.  This monetary deflation in itself will push up nominal stock market prices well into trillion dollar valuations by the shear fact the operating company valued in a given currency does not change value.  If the USD could reduce in value 50% to 75% in a debt crisis… the corresponding companies valued in that currency would increase in value and would most likely benefit in outlook considering a lucrative export market would open up at that time.

In January of 2012 I wrote an article for Wall Street for Mainstreet which indicated that markets would rocket to the moon in an record bull run.   100,000 for the INDU is a possibility.  The most recent run came from a sub 7,000 point index.  Triple the original starting price in 6 years.    The DOW could easily triple from its next base of 12,000 to 13,000 during the next economic cycle and then triple again from that base.  In 15 to 20 years... you could easily see 100,000 INDU.  Maybe more.  If America gets beaten into oblivion by a military alliance.  Germany style  1920's inflation could be in the cards.

The stock market bull never stops.   The fact of the matter is… for the current financial system to work on its current model… growth has to always be there and the easiest way to create growth is to inflate away.  As false as that growth may be.

Certainly this market cycle looks to push well past 3,000 on the S&P 500.  The bottom line is you can never lose money over the long run in equities as long as financial markets use inflation as a primary economic tool.   Just ask Warren Buffet.

That is the number one rule for investing…. you have to always be invested.

That being said.  If you want to avoid short term pain of margin calls, investor psychology selling stocks at bottoms and buying at tops; you can’t buy and hold like Warren Buffet.  None of us have his pocket book thus could never attain his wealth following his great investment strategy.    Not many of us have that ability to take advantage of economies of a portfolio like Buffet and thus cannot invest like Buffet.  Not if we want to catch up to Buffet anyway.

So when is it a good time to sell?  Each company will give you its own signals when to sell which is usually a mix of fundamentals and /or technical but an easy time to pick a time to sell down the portfolio is usually when you find a general market down turn.  I would say when a multi-year trend in the market is broken... that is as good a time to do some general selling as any.

Like the one that is slowly appearing on the financial markets horizons.

What is definitive is that the bull rally is getting old and the markets are definitively turning over and going negative for the fall.   The US market and Chinese markets may rally in early 2016 dependent on economic data, or we could continue into a concerted global recession and in Canada, with an absolute collapse of its major industry oil… a depression.  

Clearly one thing that could make or break the US … interest rates and their free money policy.    If you see rates go up in September through December.  Brace for major pain, everywhere.

The Crash in Oil Prices Could Trigger a Canadian Depression

Like it or not, Canada was great before oil.  Canada balanced its budget without oil.   The current government made a huge error in judgement developing its single focused oil sands energy policy.   This was a huge mistake.  It drove up the loonie and drove out manufacturing.  It made us dependent on a single industry, and after 20 years of development, most Canadians clearly don’t like what they see from space with large parts of Canada’s north destroyed for centuries to come. 

Possibly altered forever.

It’s not just oil for Canada, oil is just the tip of the iceberg.  We are seeing the great commodity deleveraging in every materials sector.  Copper could fall back to $1.  Oil could fall well below $30.  Gold will spike for the traders during uncertainty like it always does, but its a short every single time and will continue its trend under $1000.

It’s over folks.

For energy and materials... when they lose their shine... they lose their shine and nobody wants them.  It's like a hot potato and nobody wants to be holding it when the music stops.

There is no rebound.

Globally we are returning to world where China doesn’t need materials and eventually, China won’t need our oil either.   So you know what Einstein said? About it being insanity hitting your head against a wall over and over and over.  So why bother when remaining in this industry is, like that, hitting your head against the wall. The song "The Gambler" keeps playing in my head.... "and know when to run..."

And if you over extended yourself at the wrong time thinking there might be a way out, here in Canada, some of us have literally chosen to blow our brains out like the stock brokers in 1929 crash, jumping out windows.   Sometimes you just gotta know when to walk away, and not double down and hold em.  Hell, I ran as fast as a could as soon as the checks dried up.  The writing was on the wall in 2012 when 50 exploration companies changed their stripes to graphite miners.

It was that bad then and it is that much worse today.

It is not just Canada.

Believe it or not record low oil prices are killing global spending from some pretty big spenders like the Saudi’s Russians, Qataris, and Canadians.  This could be a good thing.  The Saudi’s have way too much money and with that, came a military program which is creating a humanitarian crisis in Yemen and supports ISIS in Syria and Iraq.

The winds of war are in the air and a lower oil price will certainly impede growing hegemony in the Middle East.   You are going to see a price war between the Iranian and the Saudi’s… and guess who is going to win?  The Iranians of course who have had to sell discounted black market oil for 40 years.   The arrogance of the Saudi’s trying to maintain market share could kill the price well below $30.  The middle east is goign to get worse, much worse.  The Iranians are the only force capable of stopping the Saudi's.  Yemen is the first one.  UAE could be next.  I am sure the new Saudi king would love to move his new palace to Dubai.

Unlike the Middle East, a lower oil price won’t stop the Russian military complex.  Russia has an entire internal economy which supports the nation even if the entire world stops trading with Russia.  You can't beat Russia.  It is impossible so why even bother and with NATO entering the Ukraine you have undeniably awoken the Russian bear and poked it in its eye. They will still build their military might because they have the technology and more importantly, the infrastructure.

Here is the bad news.... unfortunately for Canada, we are affected the most by a crashing oil price.  Hit with a double whammy event with the oil sands producers being the highest cost producers in the entire industry.  Some companies will go under and many projects in Alberta will be the first to be put on care and maintenance.

Projects like the oil sands may never see their potential as alternative energy continues to achieve new efficiency.

Consumers continue to demand alternatives to fossil fuels.   Undoubtedly oil is a 20th century technology and the world is slowly moving away from its thirst for this dirty form of energy.  How fast will demand move away and how long will it take, are questions none of us know and many are just hoping the time lag is enough to suck more oil out of the tar sands.  Personally I think the best days for the Tar Sands are behind her.  There is a lot of money invested in backward thinking.

A lot of money to be lost up north.  The bottom line is Keystone is dead, Northern Gateway is dead, and Energy East is going nowhere.   Alberta has done it all wrong and sold itself down the river to foreign governments and corporations on promises it could never keep.

It's time to pay the piper.

The way out for Alberta and its energy crisis is easy.   Energy will always be a huge part of Alberta’s economy and abandoning it is not the way out.   Investing into turning bitumen into value added products and using our low dollar to be competitive against other nations exporting those value added energy products is the answer. 

Investing into technology is the answer.

Whether it is creating new regulations for a hemp industry just waiting to flourish, or investing in education to develop entirely new industries, now is the time to plant the seeds that will take us into the future for the next generation.  Whether it’s in Alberta or the rest of Canada, just like the politicians keep chiming for change.  Canada needs a reset button.  This should include an entire overhaul of our industries to take us forward to  help employ our younger generations who continually get shut out of jobs kept by aging baby boomers who refuse to retire.

It is what we should have done in the first place instead of touting Canada as the new Saudi Arabia.   Develop a broad Canadian economy which included more than energy, mining, and banking to financing the energy and mining.  Canada was never meant to replace Saudi Arabia, as investors are starting to realize.  Now is not the time to focus on pipelines and raw resource extraction for a few extra WTI dollars on the spread.  Now is the time to focus on broad change across the country.

Not when consumers are ready for an all-electric alternative.  Not when abundant natural gas resources are much cleaner alternative for industry.  Not when nuclear continues to expand and thorium reactors are being planned and hotly debated.   Not when solar technology and other renewable resources are on the verge of becoming commercial including Tesla’s simple solar powered house battery.

Now is not the time to keep hitting our heads against the wall... not with the oil sands.  Its time to turn to new industries.

One thing is for sure, the over-weight nature of our industries to materials, energy and banking… you are going to see a corresponding effect on the Toronto Stock Exchange with values continuing to plunge.  You will see a huge pullbacks in industry nationwide. 

I say.....  "Welcome to the great Canadian Depression".

The list of stocks to short in the Canadian Markets is a long one. 

US markets look to top out

Not only has Canada taken it on the chin in the last 8 months with it really yet to show in the stock market.  The US recovery from the financial crisis in 2008 and 2009 is complete and is also showing signs of a top in this economic cycle.  The US market looks to correct this fall either way.    During the summer, a flat and directionless market has suddenly become much more bearish.

Even though we are in a perpetual low rate environment, you just can’t go up forever...

 And when you look to leading indicators like the transports breaking down... 

The INDU is struggling.  The Russell 200 just hit 6 month lows and the S & P 500 is starting to break its multiyear uptrend.  The technical signs keep flashing everywhere.   The bull run in US equities is looking like it is at an end.   When you combine the US charts with what is going on in China and the continuing debt woes in Western Europe.  You add in oil prices taking the steam out of some pretty big spenders... we now have conditions which are almost ripe for a concerted global recession.

How severe remains to be seen.  There are always so many variables at work.  One thing is for sure, the markets in the US and in Canada are at a crossroads and if Canada is a leading indicator of what is to come in the US because of huge shale oil expansion which is no longer profitable.  You could see a similar type decline in the Midwest and a similar effect on America's 6 year recovery.

You don’t even need to look at economic stats to tell you which way the market is going.  The market tells you that in advance of the stats.  Cheap money continues to fuel the market and the market will respond to continued quantitative easing, but there is so much negative undertones globally that is looks to me like the cycle is now over.

What could really make the recession into a doozy is when and how hard rates go up.  Normalization will happen and you will see a US market reaction during normalization of interest rates.

How hard and how severe... is everyone's question.  Some think a Greek like situation in the US, others predict a slow and steady raise over the next 10 to 15 years.

At any rate...  now might be the time to buy some calls on the VXX and short the major indices in North America.

Christopher Skidmore

Beat the Market Stock Picks 

Tuesday, December 30, 2014

The Journey is the Prize

What were you doing when you were 22?    Most likely graduating university and preparing for the big bad world of finance I bet. 

I spent most of mine homeless, jobless, and having mixed success and failure with my first business venture.   I remember that summer well because I never had so much fun being homeless and jobless.  I had finished selling my last ‘Impact Knife’ (an autoglass removal tool invention) for gas money and cash.  People loved my invention, I sold every last one I made, but when my standing order for 500 Impact Knives was cancelled at Autostock (the family autoglass warehouse) because of family politics, it put me in a bind having spent all my investment on moulds anticipating production.   At 22 I had planned taking on the world with my better-mouse-trap combining two proven autoglass tools into one, but someone else had other plans. 

So after realizing my business was all but dead and what little money I had from it was draining fast, I drove my little Nissan pick-up across Southern Alberta until I ended in the Crow’s Nest Pass somewhere deep into the logging roads until I couldn’t drive anymore.   I parked, grabbed my pack and a sleeping bag, and started hiking from there.  I had no destination, I needed none.  And pretty much the entire summer, I would rewind, press play, and repeat… I always ended up at the end of another high country road and would camp and hike.  I didn’t even know much about backpacking or the backcountry.  I didn’t care.  It’s not like I had a care in the world at 22 after having my dreams dashed by family and little hope of any further investment with the death of my business partner and grandfather Herbert Skidmore.

That summer I never had a destination.  It was a tough year and with little to look out for, I wound my way around the Rockies taking one winding road after another and one cragged trail to another.  No destination ever, my only home was my soul which would eventually return me to my truck, most nights nestled in the bed of the Nissan under a canopy of stars falling asleep to the sounds of a crackling fire.  

That summer made who I am today.   Some summers I don’t even remember anymore.  But that one stands out as vivid as it was 6 months ago.  It set off a passion in me for several things like hiking which I still do today, albeit not as much.  I used to love doing day hikes and overnight marathon type hikes covering 20km to 50km.  I love the gruelling tests these hikes put on your body and mind.  It not only tests your body, but puts your spirit and core through the ringer.  And what doesn’t break you, kill you, or beat you back mentally into a thumb sucking baby… just makes you that much stronger.

I don’t hike so much these days because it’s an all-day activity you have to set aside the time for and I have kids, but I still very much enjoy burning up the Grouse Grind, BCMC, 5 Vistas, or any one of the numerous trails that populate our North Shore Mountains.   Name a trail or peak from The Lions to Golden Ears and I have hiked it.   And in any condition too, from winter trails to summer runs… there really isn’t anything I personally enjoy more.  

Hypothermia on 'The Camel'

Once my hiking partner and I got caught in terrible conditions fording a swollen Lynn Headwaters and hiking up past the snowline to ‘The Camel’ in October.  To make matters worse I had fallen on shale scrambling up scree and was bloodied, but we still pressed on. By the time we reach the lodge on Grouse Mountain, my partner and I both had hypothermia, we had to strip down to our underwear to warm up and dry out by the fire in the lobby at the lodge.  You would think we might call it a day at the lodge?  Nope. Down the BCMC to the Baden Powel and over to the Lynn Headwaters to complete one of the most gruesome day hikes ever endured in just over 12 hours.

All I can say about hikes like that and what keeps me going in spite of 100% rottenness for 100% of the time… aside from the fact that stopping in the middle of nowhere would be certain embarrassment for a North Shore rescue.

What keeps me going at the worst point when all I want to do is give up?  Over and over and over I repeat this phrase in my head…

“The Journey is the Prize”

I may not be having fun right now this moment fearing I may never find civilization and die of hypothermia behind Grouse Mountain in a snowbank, but when I look back and know I fought the fight all the way and didn’t quit.  That I preserved during the worst conditions just to exist that day means more than just a summit of a peak.  I won more than just a day’s worth of exercise.   In a sense, each hike was like a ‘Right of Passage’ pushing body, mind, and spirit past what you should normally be able to endure.  Each hike adds up to a collection of trials each with a different set of tests that eerily parallels life.  

It is so much more than making a summit.  You look back and you can see the history of your life.

It wasn’t attaining the Camel in a rainy, snowy late October day through Hanes Valley; or any other peak that I may have hiked.  It isn’t even the magnificent 360 degree view giving you the feeling you are indeed on top of the world.  Ruler of all.  After all the summits and peaks and views.  It wasn’t any of it.

It was all of it and more. 

It was the journey that was the prize. 

Saved by a Branch

One of the hikes of have done quite a few times and still love to do every so often is “The Lions”.  It is not a hike for the faint of heart and I find whenever I go up I am free climbing areas others are roped into.  At any rate, we used to drive out to Lions Bay to ascend from sea level instead of driving up Cypress and then hiking across for a photo shoot.  Obviously for myself, the tougher the journey, the more satisfying the prize.

At one point we had made it to the first peak on the Lions back and were dropping down to climb the Lion’s head when I caught a rock on my toe and hurtled forward off the ledge I was standing on to the ledge directly below.  I landed on my feet, but landed on loose, dry dirt and my feet started sliding off the ledge as I tried to brace myself from the fall.  What seemed like hours, but must have only been seconds; my foot stuck to a pine branch not more than 18 inches long growing out of the side of the ledge which stopped my foot and my momentum from going over the second ledge I had fallen on to. 

I peered over what I had almost fallen off.  It was a 1,000 foot drop to the reservoir below.

It is times like those when you realize that it could all end just like that and really, if it wasn’t for a freak of nature, would have.  It shouldn’t take near death experiences to ‘wake you up’ (or in my case several) and realize you were meant for more than a drop off a cliff.  But I knew from that day on, after almost becoming another stat on The Lions  that I could never live life in fear death knowing I am already living on some else’s clock.  I should not be here.  So I relish in the struggle that is placed before me because without it, it would not make me into the person who I am or who I am going to become.  Since these three life altering experiences I have always viewed the world a bit differently, not in cherishing the conquest of victory, but in fighting the good fight until there is no fight left.  That is ultimately where I want to derive life’s riches and lessons from, from struggle each one of us endures each day to make ourselves before our death.  The struggle to ultimately make as much an impact and difference on others while living yours.

That is the real prize.