A bull among the bears

By Mark Noble | January 12, 2009 | Last updated on January 12, 2009
6 min read

Investors looking for a clear vision of where the markets are headed in 2009 were sorely disappointed at The Empire Club of Canada’s 15th Annual Investment Outlook 2009 Luncheon. Three forecasts differed in their opinion, from the optimistic to the extremely bearish.

Thomas Caldwell, chairman of Caldwell Securities, represented the brighter side of things. A 45-year veteran of the capital markets, Caldwell was a little hesitant to make any short-term predictions, but he believes investors who practise long-term buy-and-hold investment strategies will be rewarded for buying into the current market.

“If you were really smart, at the beginning of 2007, you would have positioned 100% of your portfolio in [government] bonds. I recently had a friend who said he’s really pessimistic about the stock markets, and I said ‘you’re late, ‘” Caldwell told the audience in Toronto. “In my opinion every portfolio right now should have some equities in them.”

Caldwell says part of the reason markets are suffering is due to the fact that risk was underpriced. The pessimism in the market has completely reversed those circumstances so that investors are paying an extremely high premium to hold safe investments.

Instead, he suggests investors need to be looking at equities with a strong dividend yield that will be able to capitalize on an inevitable rebound, he is personally expecting to begin sometime later this year.

“Short-term markets are a guess. Long-term markets are not a guess. One to two years from now we will look at this time as one of great opportunity,” he said. “If you want to look at past crises, there’s only one thing you need to look at with the Savings & Loan crisis of the early 1990s. That’s all of the money that was made coming out of it.”

Caldwell’s personal sector picks are Canada’s Big Five banks and major stock exchange operators like the NYSE, Euronext and the TMX Group.

He argues that Canadian banks are the best capitalized in the world and all banks are going to get a boost from the efforts of government to make credit more easily available.

“Banks make money from money and there is lots of money out there right now,” he said.

He believes that there will be a greater push for transparency from regulators which will increase the appeal of trading on major exchanges — which in turn will make more money as trading volumes increase. He equates buying stock exchanges to an index ETF, albeit one with steady and predictable dividend yields.

“My view is that equity markets should increase between 10 and 15% in 2009. If you add that to dividend yields, I believe this will be a positive year,” he said.

In fact, Caldwell’s only bearish sentiment centred on the amount of money being printed. He believes this will ultimately put downward pressure on the U.S. dollar and increase inflation.

This was the central pillar of the forecast of Nick Barisheff, president of Bullion Management Group. Barisheff’s advice was simple — and it was the same as it was last year — investors should increase their allocation to precious metals, particularly physical gold bullion.

Barisheff noted investors who followed his advice last year would have been rewarded. In general, gold has been one of the best performing assets, next to government bonds, in the last year.

“Throughout the financial turmoil of the past year, gold preserved investor wealth and outperformed all other asset classes except bonds. Over the past five years, gold has been the best-performing asset,” he said. “To understand why this is the case, it is crucial to realize that gold is primarily a monetary asset, and not simply a commodity like copper or zinc.”

With money printers going overtime, Barisheff expects gold to see an even more rapid rise as investors begin to question the real value of government currencies.

“The U.S. government and the Federal Reserve spent $3.2 trillion in 2008 bailing out institutions that were too big to fail, and committed another $5 trillion. That’s over $8 trillion,” he said. “Eight trillion dollars is nearly twice the cost of the space program, the Vietnam War, the invasion of Iraq, the Korean War and the Savings & Loan crisis combined.”

Barisheff believes that markets could be entering a prolonged downturn or range-bound bear market like the one that lasted 17 years from the end of 1964 to the end of 1981. This market would be characterized by hyperinflation from the mass-influx of money being pumped into what are fundamentally stagnant economies.

“During the past 25 years we have experienced the longest equity bull market in history. However, markets move in long cycles, and the next 20 years are unlikely to be a continuation of the past,” he said. “Until consumers feel confident about their jobs, the value of their houses and the safety of their savings, they will curtail spending and the economy will not improve.”

C. Ross Healy, the chairman and CEO of Strategic Analysis Corporation, a research firm that performs deep balance sheet analysis, had a similar long-term view of the markets. He believes the U.S. government is following the perilous path the Japanese took to get out of their financial crisis — a recovery which has yet to materialize.

“Over the long-term I think the overall growth rate of the U.S. market will slow down. Both U.S. corporate and household balance sheets have to be rebuilt and that will take a lot of speed out of the U.S. economy,” Healy said.

He believes government intervention meant to alleviate this is “forestalling” the process. There is no incentive to rebuild balance sheets with more and more debt being incurred to bail out corporate and Main Street America.

“While the road to hell is paved with good intentions, it’s also paved with too much debt — just ask Japan. If the U.S. continues to pursue the course set out by Fed Chairman Ben Bernanke, the U.S. stock market is likely to continue to move slowly downward overtime,” he said. “Bernanke says he understands what the Japanese did wrong, but he seems to be following their example, which is taking over the financing of American activities.”

Interestingly, Healy expects a rebound to occur soon in the new year, before Americans realize that the bailout programs of the federal government are not working.

“For the overall market, we should have a decent rally in the early part of the year. The market is suffering from what I call bear market weariness. It wants to go up. As the market digests what’s happened already in the past, we could have a healthy rebound,” he says. “I would be willing to give all of the 15% growth Tom (Caldwell) predicts and maybe even more. As people see that things are not working, the market is likely to sink into a pit of some despondence.”

Over the long term, as the markets become ones of diminished returns and shorter volatile cycles like those that characterized 1964-1981, investors will have to employ a more active management style. He believes buy-and-hold investing will not work, instead a steady flow of dividend income and eschewing mutual funds will become a means of survival for investors.

“Dividend income will become a very important part of your total return. I suspect that the average mutual fund will lose its appeal over the next few years. Investors will look back, see that the markets have not advanced very far from a cycle-to-cycle basis and those returns will be constantly hampered by the fees that are charged,” he says. “Between 1965 and 1981, we saw a bear market, defined as a decline of 20% or more every two years. Investors that adjust their tactics to this new reality I think will do well. Those who don’t should probably invest in GICs right now and get the pain over with.”


Mark Noble