david rosenberg 07-28-10
TRANSCRIPT
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David A. Rosenberg July 28, 2010 Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with DaveWHILE YOU WERE SLEEPING
We are writing this in the wee hours of the morning and thus far it is a pretty
mixed picture. European bourses are flat-ish but Asia posting some nice gains
(up 0.9% to a 10-week high, no less), especially the Nikkei, which rallied 256
points or 2.7% to 9,753 on the back of some positive earnings reports and a
positive response to the loose capital standards recommended by Basel III. For
a perspective on this, the Nikkei was 9,846 back on December 26th, 1983, so
it’s truly encouraging to see the Japanese market climbing back to levels
prevailing 27 years ago. The Shanghai index is breaking out and registered a
2.3% advance today, cutting its losses for the year to less than 20%. Creditdefault swaps overseas continue to improve.
Even with all these flashy gains in the Asian risk trade and a slightly softer tone
to the dollar, bond yields are down a tad in the early going (outside of Japan,
that is, as the JGB yield popped nearly 4bps today to stand at the lofty level of
1.075%). This is a big story – despite the 9% in the S&P 500 since early July,
the yield on the 10-year note has not budged at 3%. (It would seem that Mr.
Bond is either looking at the economy through a different lens or is focussed on
the incoming data while Mr. Dow and Mrs. Jones are salivating over the earnings
reports.)
The commodity currencies are starting to sputter a bit here too. The Aussie
dollar succumbed to lower-than-expected inflation data (consumer prices were+0.6% in Q2 versus +1% in Q1 and below consensus views of +0.9%), the Kiwi
was hit by a report showing lower business confidence and the loonie dipped on
a release indicating that consumer confidence is down now for two months
running.
On the commodity front, gold is about to face a critical test of the 200-day
moving average while copper has gone the other way and has broken out to the
upside. Oil is trapped in a range between the 50-day and 100-day moving
averages. If you strain your eye, you may be able to detect an uptick in the
Baltic Dry Index … until recently, as maligned an economic indicator by the
growth bulls as the ECRI index.
Please see important disclosures at the end of this document.
Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports,
visit www.gluskinsheff.com
IN THIS ISSUE
• The risk trade is intact
• Comments on the market
• Home prices get anartificial lift
• Poor in Richmond
• The corner of Wall and
Main
• Chain store sales stillbelow target
• Thoughts on the long-termoutlook for inflation
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July 28, 2010 – BREAKFAST WITH DAVE
MARKET COMMENT
A whole 1 point decline in the S&P 500 and for the bears it was like winning in
extra innings after a three-week losing streak (and in contrast to the rally days,
volume on the NYSE expanded 10% yesterday). We received all sorts of emails
yesterday that Barton Biggs had reloaded the gun and moved from 50% to a
75% weighting in equities. Maybe that was the kiss of death. Maybe we have
again stalled out around the 200-day moving average. Or maybe the market is
simply the most overbought it has been in nearly three months, according to
some oscillators.
We recall a survey that we
saw over the weekend that
PM’s are now 68% weighted
in equities in their balanced
funds
Perhaps, like Barton, everyone has gone long the market again and we recall a
survey that we saw over the weekend that PM’s are now 68% weighted in
equities in their balanced funds. We can also see from the CFTC data that the
net speculative position (futures and options) at the Merc has swung from a net
short position of 40,000 contracts in mid-June to a net long position of 3,300
contracts currently. That sort of move will certainly move the needle. Ditto for
the 1.2% decline in NYSE short interest over the past month. In the past two
weeks, Market Vane bullish sentiment on equities has moved up 5 points. It’s
all good. Meanwhile, consumer confidence has rolled back to a five-month low
(what does Main Street know, anyway?).
Earnings on the surface seem to be doing just fine but at the same time, we can
see that the economy slowed visibly as Q2 came to a close and the July data are
telling us to expect a slightly different tone to Q3 guidance. There was a nifty
article on Market News yesterday showing how 82% of the corporate universe
beating EPS estimates is standard fare and that only 68% are doing so in terms
of revenues (a figure lower than we saw in the second quarter of 2008 when the
economy was knee-deep in recession). Sales are up the grand total of 9% YoY and this being compounded off a -14% trend this time last year – so margins
continue to stretch out to the limits and one has to wonder how long that is
going to last. Who knows? Maybe profits end up going to 100% of national
income and labour’s share totally vanishes.
I was asked yesterday in an interview how I respond to criticism for missing the
surge in the equity market. Well, for one thing, those that were long in 2009 got
their clients killed in 2008 and it’s still not even a wash. Second, I was
recommending credit and commodities last year, not cash, and these strategies
played out well. There are always ways to make money without having to go
whole hog into the stock market (if you think I’m bearish, there are others who
make me look like Jim Carrey – have a read of “Doomsday Shelters Making a
Comeback ” on page 3A of the USA Today).
More to the point – we can get 80% rallies in a secular bear phase, and to be
totally honest, I have never billed myself as a market timer. There are others
here at GS+A that do that much better than me. The Nikkei has enjoyed
260,000 rally points in the past twenty years and the market is still down
70%. If you partake of these bear market rallies, know when to get out – or at
least sell call options and collect the premium. It is amazing how people are still
Page 2 of 12
Earnings on the surface
seem to be doing just finebut at the same time we can
see that the economy
slowed visibly as Q2 came to
a close
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July 28, 2010 – BREAKFAST WITH DAVE
stuck in this belief that the 80% rally off the lows is still somehow a prevailing
market condition – the S&P 500 peaked on April 26 th and even with the
recovery of the past few weeks, the S&P 500 at 1113, with all due respect, is no
higher now than it was on November 16 th of last year.
Through all the zigs and zags, this market has done diddly squat now for over
eight months. You were better off clipping coupons, even at these low bond
yield levels. And as for that 80% rally from March/09 to April/10, we wonder
aloud how many are going to remember it once we retest the lows – the market
rallied 50% in the opening months of 1930, as an example. Do you ever hear
anyone today talking about the great rally of 1930? Does anyone today ever
have much to say about 1930, or if they do, is it a fond memory? Well, the
market rallied 50% at one point that year. There’s not much left to say on this
one.
9% of American households
rate business conditions as
being “good”
For the time being, it probably pays to treat the market as a 1040-1220 decision
box as far as the S&P 500 is concerned. Even after the 9% rally of the past two
weeks, it is still at the halfway-point of this well-defined range of the past ten
months. What is amazing is how Main Street and Wall Street have diverged in
recent weeks. The market has rebounded nicely and all we see now is optimistic
prognostications about the outlook because of an earnings season that seemed
to contain most of its growth in April which was three months ago – meanwhile,
what did we see in the July consumer confidence report? That 9% of American
households rate business conditions as being “good”.
Are you kidding me? That’s all we get with a 0% funds rate, a near 10%
deficit/GDP ratio and a $2.3 trillion Fed balance sheet? By way of comparison,
back when Lehman failed in September 2008, 13% believed business
conditions were “good”, and when Bear Stearns failed in March of that year, the
ranking was at 16%. In the wake of the 9-11 tragedy, it was 19%.
Meanwhile, 44% give the business background a “bad” rating, so the ratio of
growth bears to growth bulls in the survey is nearly five-to-one; we doubt you will
ever see that sort of ratio among surveyed economists or strategists. Now
maybe these people polled by the Conference Board don’t know the first thing
about the economy, but last we saw, it is consumers that command a 71% share
of GDP so their opinions will count if they translate into (in)action.
Those that do not see how abnormal this so-called recovery has been, consider
that in expansions, consumer confidence averages 102; in recessions, it
averages 71; and we are at 50.4 as of July. So basically, the level of consumerconfidence is 20 points below what the average level is during a recession and
yet virtually everyone dismisses double-dip risks out of hand. Maybe there is no
double-dip because we never really fully emerged from the recession that we
know officially began in December 2007 – that was certainly the message out of
yesterday’s confidence report.
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44% give the business
background a “bad” rating,
so the ratio of growth bears
to growth bulls in the survey
is nearly five to one
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HOME PRICES GET AN ARTIFICIAL LIFT … BUT GOOD NEWS FOR RENTS
The Case-Shiller home price index managed to come in a better-than-expected
print of +0.47% in May on top of a 0.6% lift in April. This is not the start of a new
uptrend since the inventory backlog is still massive and instead reflects the
effects of the last gasp of demand during the spring as the government tax
credits were about to expire (the index is based off a three-month average). No
reason to get excited – especially knowing that average new home prices
collapsed almost 10% in June.
Meanwhile, housing demand continues to weaken and we saw that in the Q2
Census data, which showed the homeownership rate dropping to a decade-low
66.9% from 67.2% in Q1 and 67.4% a year ago. It will take years to mean revert
to the traditional 64% rate and during that time, one would have to believe that
the direction of the demand and supply curves will lead to deflation in
residential real estate as opposed to any sustained price appreciation. The level
of vacant homeownership units for sale is stuck just below 2 million and units
that are empty and being held off market for “unspecified” reasons (the shadow
inventory) jumped 3.2% to a record 3.74 million units.
This puts the total vacant supply at 5.7 million units or nearly 8% of the stock if
ownership units are compared to a pre-bubble norm of just above 5%. That is
an excess of around 2-1/2 million units, which is a huge overhang. On the bright
side, rental demand rose 0.9% and occupancy here is up three quarters in a row
to 37.1 million units. The apartment vacancy rate, which peaked at 11.1% in
last year’s third quarter, has stabilized near 10.6%. Other data from MFP
Research show the vacancy rate now down to 6.6% form 8.2% at the end of
2009 – perhaps this is why the Bloomberg apartment REIT index is up 23% YoY,
double the trend for the entire REIT space.
POOR IN RICHMOND?
The Richmond Fed manufacturing index has followed in the footsteps of the
other regional industrial readings in the direction of weakness, not strength. The
diffusion index slipped to a four-month low of 16 in July, from 23 in June, 26 in
May and the nearby 30 peak in April – the month when the equity market
peaked.
Prices paid slowed to 1.59% annual rate from 2.31% in June, the low-water mark
of the year and even in the face of the recovery in raw material costs; and prices
received index also softened to a 1.45% annual rate from 2.39% -- again,
suggesting as was the case with the Dallas Fed Index that we are kicking off the
third quarter with margin compression.
As an aside, new order volume sank to 12 from 25 in June and well off the 41
nearby high in April. And the Richmond Fed survey index for services showed 0
for retail sector revenues and the employment index swung from 2 to -6 –
contraction in other words, for the first time since March. These numbers, sorry
to say, are not conducive to a prolonged stretch of beta/risk/cyclical
outperformance. These data are consistent with a 3-point decline in the July
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For all the talk of how great
the transports are doing, we
couldn’t help but notice thattraffic is starting to slow
The Q2 Census data showed
the homeownership ratedropping to a decade-low
66.9% from 67.2% in Q1 and
67.4% a year ago
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July 28, 2010 – BREAKFAST WITH DAVE
ISM index (Richmond Fed has a historical 77% correlation with it) – so stay
tuned for the data release on August 2nd.
For all the talk of how great the transports are doing, we couldn’t help but notice
that traffic is starting to slow – according to the ATA, the truck tonnage index fell
1.5% in June after a 0.2% dip in May As we said earlier, a lot of this great Q2
earnings news was frontloaded into April – but at least the bulls have another
three months to fret over the Q3 profit reporting season.
THE CORNER OF WALL AND MAIN
Main Street is not feeling the love that Wall Street is, that is for sure. Consumer
confidence as measured by the Conference Board slipped to 50.4 in July from
54.3 in June – the lowest since last February and about half the level that is
typical of an economy out of recession. The “expectations” component, that
leads consumer spending growth, was the real link, having slipped to 66.6 from
72.7; the “present situation” component dipped to 26.1 from 26.8.
The details of the report were very soft. Plans to buy a home slipped to 1.9 from
2.0., the lowest since December 2009, and before that, it was in the 1982
recession. Everyone seems to be of the view that employment is going to be key
but out of the confidence data we see that the “jobs hard to get” subindex rose
to 45.8 from 43.5 to stand at a four-month high.
As an aside, Canadian consumers are feeling a little downbeat too with
confidence down 3.7 points in June to 80.0 – the second monthly decline in a
row.
CHAIN STORE SALES STILL BELOW TARGET
The weekly sales data just came out and showed a 0.7% decline and so far into
July the YoY trend is running at +2.7%, which is fractionally below the +2.9%
gain that was planned at the start of the month by the retailers.
Discount stores are doing fine, especially food. The Redbook survey cited
“sluggish business” for the rest of the sector and that consumers seem
“unmotivated” even with back-to-school items already “arriving in stores in
recent weeks”. In a sign of these frugal times, many retailers are offering
“Christmas in July” promotions, hoping to attract shoppers to get their holiday
purchases done early. Who knows? Maybe it will start snowing too.
Page 5 of 12
In a sign of these frugal
times, many retailers are
offering Christmas in July
promotions
Main Street is not feeling
the love that Wall Street is,
that is for sure
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July 28, 2010 – BREAKFAST WITH DAVE
THOUGHTS ON THE LONG-TERM OUTLOOK FOR INFLATION
Let me start out by saying that I do not believe that bonds are any “better" an
investment than stocks, at least in principle. They both have their advantages.
It is safe to say that the bull
market in bonds will end
reasonably close to the point
in time that inflation (or
deflation) bottoms
For bonds, the advantages are that they provide an income stream – the
principal and the interest payments are guaranteed in the case of most
government securities; and in the case of the corporate sector, it inevitably
comes down to the quality of the credit and the longevity of the company in
question. In addition, the yield at the time of purchase is almost always at some
significant positive spread over CPI inflation.
Stocks represent ownership in corporations that have assets and strive to make
a profit, often paying out a portion of the profit in the form of dividends and
retaining earnings to grow the business and increase the dividends in the
future.
But the primary purpose of this comment is to suggest what things may look like
when the Great Bull Market in Bonds, which began in 1981 with 30-year
Treasury Bonds yielding 15.25%, finally comes to its glorious end.
For starters, I think it is safe to say that the bull market in bonds will end
reasonably close to the point in time that inflation (or deflation) bottoms. This is
because we have determined that by far the major economic factor that
correlates consistently with the direction of market-determined interest rates, at
least for long term Treasury Bonds, is CPI Inflation (headline and core).
The bond market, like politics, is an emotional issue and not well-liked in general
by Wall Street because it has a negative correlation to the stock market most of
the time. For a growth bull, the bond is the "enemy". The economic environment
that most favours the long end of the bond market tends to be low or no growth
and bonds have traditionally been an asset allocation decision that is bearish on
the stock market.
As a result, fear mongering often takes the place of thoughtful and objective
analysis when it comes to bond market commentary. One way or another, the
long end of the bond market has continually been characterized as high risk for
the last 30 years that it has been outperforming the S&P 500. That’s a little
unfair – after all, it is the benchmark risk free asset for funding actuarial liability
when taken to the extreme of a 0% Coupon Treasury Strip.
Let’s move on and make a sensible and objective effort at making a long-termforecast for core CPI Inflation. Based on our analysis, we could well see core
inflation receding from around 1% now to near 0% in the next 12-to-24 months,
which would imply an ultimate bottom in the long bond yield of 2.5% and 2% for
the 10-year T-note. We should add that as long as the Fed funds rate remains at
zero, reverting to a normal shaped Treasury curve would generate similar results
for the long bond and 10-year note at the point at which the inevitable "bull
Page 6 of 12
We could well see core
inflation receding from
around 1% now to near 0% in
the next 12-to-24 months,which would imply an
ultimate bottom in the long
bond yield of 2.5% and 2%
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July 28, 2010 – BREAKFAST WITH DAVE
flattener" reaches its climax. As we saw in Japan, this will take time, but yields
at these projected levels will very likely come to fruition in coming years.
So what will be the cause of the next secular uptrend in inflation or
hyperinflationary shock? It pays to look back at history. Prior to the inflation of
the 1970s-early 1980s, periods of very high inflation were primarily associated
with war. Increased credit demands to fund the war effort combined with the
drop in productivity that goes along with blowing everything up is an inflationary
stew.
What is perhaps most
important to recognize is
that whether it is war, OPEC
or rampaging Baby Boomers,
history supports the notion
that high inflation, at least at
the core CPI level, tends to
occur in brief bouts
Wars were typically followed by brief periods of deflation followed by stable
prices until the next war. In the 1970s several factors other than war led to the
brief bouts of hyperinflation and they are much debated. What is perhaps most
important to recognize is that whether it is war, OPEC or rampaging Baby
Boomers, history supports the notion that high inflation, at least at the core CPI
level, tends to occur in brief bouts.
A quick look at the core CPI chart shows that for all but a brief period since
WWII, inflation has been well below 5%. But it was the period from 1970 to
1980 that contained all readings above 5%. Coincidentally, this was the period
in which the Baby Boomers were buying their first refrigerators to go along with a
bungalow as they formed their households.
By 1983, core CPI was back down to 5% and never looked back, but the
psychological damage was already done. Inflationary expectations were
indelibly etched into the mindset of the Baby Boom cohort. So everyone
positioned themselves for inflation by leveraging up their asset purchases.
Inflationary expectations were the rationale for overconsumption and depleted
savings rates.
What resulted was an interesting dichotomy. Asset prices inflated during the
1980s, 1990s and into the 2000s. Although the secular bull market in equities
ran out of steam early in the last decade, most other asset prices (particularly
residential real estate) went parabolic into the peak of the secular credit cycle in
2007.
Core CPI on the other hand, has been continually slowing since the peak of
13.6% in 1980 and even at the peak in the ratio of household debt to
disposable income in 2007, was running no higher than 3%. Unlike geopolitical
disruption or demographic shocks, asset bubbles and the credit cycle tend to
have an important secular behavioral impact on society and therefore, theeconomy.
The credit collapse of the 1930s around the globe dramatically altered social
norms related to consumption, speculation and saving. Those who were adults
with families in the 1930s shunned debt and believed in “pay as you go” for the
rest of their lives. By way of comparison, the inflationary shock of the 1970s
enticed the Baby Boomers into a spending and speculative binge. Rather than
Page 7 of 12
Core CPI on the other hand,
has been continually slowing
since the peak of 13.6% in
1980
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July 28, 2010 – BREAKFAST WITH DAVE
save, they executed a failed strategy of speculating their way to a dignified
retirement.
Now the clock has run out and household behavior is poised for a dramatic
change. If the 55 year-old Boomer resolves to work longer and harder, cut the
budget to save more and liquidate debt, can we really expect the politics to
maintain the status quo? This type of behavior from the developed world will
exert enormous deflationary pressure. In addition, the huge amount of debt and
entitlement expansion that has occurred at the government level, particularly in
response to the financial crisis, will be an enormous drain on economic growth
as taxes are raised to service the debt and budgets are dramatically cut.
Now the clock has run out
and household behavior is
poised for a dramatic
change
For this reason, it is appropriate to consider the possibility that the next secular
uptrend in inflation must await the rebuilding of the household and government
balance sheets to levels that launched the last uptrend. That, by the way was
about 30% debt to disposable income in 1950, 60% in 1970, and realistically, it
could take a generation to get back to that range from current levels of around
125%.
The outlook is not entirely dependent on the behavior of the developed world’s
consumers and governments, however, if we are really trying to envision the next
20 years, the emerging market consumers (in places like China and India) have
extremely low debt levels and high savings rates. Changes in emerging market
consumer behavior should be, on balance, a source of counteracting inflationary
pressure. Then again, the forces that most contributed to disinflation in the
last three decades were globalization and technological innovation that lead to
dramatic improvement in productivity and lower unit costs.
There is no reason to doubt that these forces will continue to be moderately
supportive in the near future, even if higher marginal tax rates and reduced
labour mobility (due to the fact that one-in-four Americans with a mortgage have
negative net equity in their home and are thus "stationary") end up constraining
the noninflationary growth potential in the United States (and Europe).
While the disinflation from 1980 to 2007 was mostly supply-side related, the
deflation pressure now is coming from the demand side – a deficiency of
aggregate demand caused principally by the contraction in credit (40% of the
private market for securitized consumer and mortgage loans has vanished over
the course of the past two years).
So, putting it all together, it is reasonable to conclude that prices are most likely
to be stable for a generation. By stable, I mean flat and perhaps oscillating
around plus or minus 2% (look at Japan, where there has been no such
downward price spiral – the CPI sits right where it was 18 years ago).
Because the economy is still gripped with overcapacity in several sectors, real
estate and labour in particular, we may be headed towards an outright
deflationary backdrop over the near- to intermediate-term, but a deflationary
spiral seems overly pessimistic considering all the good things in the mix,
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Changes in emerging market
consumer behavior should
be, on balance, a source
of counteracting inflationary
pressure
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July 28, 2010 – BREAKFAST WITH DAVE
including a reflationary policy backdrop which certainly helped establish a price
floor in Japan in recent years.
That said, a “V” shaped recovery has always been off the table from our
perspective because we still have so far to go in the secular credit collapse, so
all the balance sheet expansion that the Fed has done and will do in the future
should continue to offer up little more than an antidote. In turn, a reversal
of CPI or core CPI trend to the upside for the next couple of years seems like a
low- probability event, particularly given the demographic and retirement
pressures that increasingly favor savings over spending in the broad consumer
sector.
A “V” shaped recovery has
always been off the table
from our perspective
And what about the end of the Great Bull Market in Bonds? It could come pretty
soon. You heard right. Long-term Treasury Bond yields could reach a secular
bottom in the next couple of years. And what will it look like?
Well, rates will likely be much lower than anyone expects and, as typically occurs
at secular market peaks, the public will probably swear by long bonds at the
primary lows in yields. After all, what other safe investment has delivered
inflation plus 2% or much better, guaranteed, in the past 30 years? But in order
for the public to adore 2.5% yielding long Treasury Bonds, it will first have to
believe in stable or modestly deflating core CPI as a long-term forecast. At last
count, households still have a near-3% long-run inflation expectation according
to the most recent University of Michigan survey.
The public will also need to be fed up with risk and, judging by the performance
of stocks and real estate in recent years, who could blame them? And for the
Baby Boomer at 55 or 60, “Gambler’s Ruin” isn’t an option. We can see that
they are already voting with their feet as the mutual fund flows clearly indicate –
increasingly towards income and away from capital appreciation strategies.
Finally, the public will probably need to be afraid to be out (of the bond market,
that is). That will most likely be due to a “flight to quality” as we continue suffer
the secular bear market in stocks and real estate and suffer the economic
setbacks of renewed recession sooner than many pundits think.
One last thought on stocks: Like I said before, bonds are not better than
equities. They are different. Every asset class has its time to be the leader. It
goes without saying that the best time to allocate to equities is at the point of
maximum pessimism and when the market is trading very inexpensively as it
was at previous post-war secular bear market bottoms.
We know that historically, that “moment” has coincided with valuations below
10x on trailing “reported” earnings and dividend yields above 5% as measured
by the S&P 500 Index. Note that while many a pundit cites the consensus as
being $96 EPS for “operating” earnings for 2011, it is closer to $76 on a true
“reported” basis (so apply a 10x or even a 12x multiple on that estimate!).
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And what about the end of
the Great Bull Market in
Bonds? It could come prettysoon
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July 28, 2010 – BREAKFAST WITH DAVE
Page 10 of 12
We also know that the conventional wisdom is oh, so wrongly linear at inflection
points, so not only is the market cheap at these secular lows, but the future is
much brighter than generally perceived. Pulling the trigger at that magic moment
when bonds have peaked (yields have bottomed) and stocks can’t hurt you
anymore, with dividend yields secure at twice the Treasury rate, would be nice.
But you never know for sure at the right time, or you think you know for sure but
are too early.
For now, we are not even close. Sentiment toward long bonds and inflation are
still extreme and recent survey data show the typical balanced institutional
portfolio manager with a 68% allocation towards equities. As for bonds, the
yield on 30 year Treasury was recently core CPI plus 3%; 4% for a BBB corporate
bond; and a 6% real yield in the BB space. The S&P 500, meanwhile, sports a
P/E multiple of close to 15x and the dividend yield is barely over 2%.
In this light, it would seem highly appropriate to maintain a SIRP – Safety &
Income at a Reasonable Price – strategy for the near- and intermediate-term,
while keeping a close eye on the exit plan from this recommendation, though
that could still be a few years down the road.
Sentiment toward long
bonds and inflation are still
extreme and recent survey
data show the typical
balanced institutional
portfolio manager with a
68% allocation towards
equities
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Gluskin Sheff at a Glance
Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients’ wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service. OVERVIEW
As of June 30, 2010, the Firm managedassets of $5.5 billion.
1
Gluskin Sheff became a publicly tradedcorporation on the Toronto Stock Exchange (symbol: GS) in May 2006 andremains 54% owned by its senior
management and employees. We havepublic company accountability andgovernance with a private company commitment to innovation and service.
Our investment interests are directly aligned with those of our clients, asGluskin Sheff’s management andemployees are collectively the largestclient of the Firm’s investment portfolios.
We offer a diverse platform of investmentstrategies (Canadian and U.S. equities,Alternative and Fixed Income) andinvestment styles (Value, Growth and
Income).2
The minimum investment required toestablish a client relationship with theFirm is $3 million for Canadian investors and $5 million for U.S. & Internationalinvestors.
PERFORMANCE
$1 million invested in our Canadian ValuePortfolio in 1991 (its inception date)
would have grown to $11.7 million2
onMarch 31, 2010 versus $5.7 million for theS&P/TSX Total Return Index over the
same period.$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $8.7 millionusd
3on March 31, 2010 versus $6.9
million usd for the S&P 500 TotalReturn Index over the same period.
INVESTMENT STRATEGY & TEAM
We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted “best in class” talent at all
levels. Our performance results are thoseof the team in place.
Our investment interests are directlyaligned with those of our clients, as Gluskin
She ff ’s management and employees are collectively the largest client of the Firm’sinvestment portfolios.
$1 million invested in our
Canadian Value Portfolio
in 1991 (its inception
date) would have grown to
$11.7 million2 on March
31, 2010 versus $5.7
million for the S&P/TSX
Total Return Index over
the same period.
We have a strong history of insightfulbottom-up security selection based onfundamental analysis.
For long equities, we look for companies with a history of long-term growth andstability, a proven track record,shareholder-minded management and ashare price below our estimate of intrinsic
value. We look for the opposite inequities that we sell short.
For corporate bonds, we look for issuers
with a margin of safety for the paymentof interest and principal, and yields whichare attractive relative to the assessedcredit risks involved.
We assemble concentrated portfolios —our top ten holdings typically representbetween 25% to 45% of a portfolio. In this
way, clients benefit from the ideas in which we have the highest conviction.
Our success has often been linked to ourlong history of investing in under-followedand under-appreciated small and mid capcompanies both in Canada and the U.S.
PORTFOLIO CONSTRUCTION
For further information,
please contact
questions@gluskinshe ff .com
In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view.
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Notes:Unless otherwise noted, all values are in Canadian dollars.
1. Preliminary unaudited estimate.
2. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.
3. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.
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July 28, 2010 – BREAKFAST WITH DAVE
IMPORTANT DISCLOSURES
Copyright 2010 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights
reserved. This report is prepared for the use of Gluskin Sheff clients andsubscribers to this report and may not be redistributed, retransmitted ordisclosed, in whole or in part, or in any form or manner, without the expresswritten consent of Gluskin Sheff. Gluskin Sheff reports are distributedsimultaneously to internal and client websites and other portals by GluskinSheff and are not publicly available materials. Any unauthorized use ordisclosure is prohibited.
Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities of issuers that may be discussed in or impacted by this report. As a result,readers should be aware that Gluskin Sheff may have a conflict of interest
that could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.
Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.
under the rules of the Financial Services Authority.
Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.
Securities and other financial instruments discussed in this report, orrecommended by Gluskin Sheff, are not insured by the Federal DepositInsurance Corporation and are not deposits or other obligations of anyinsured depository institution. Investments in general and, derivatives, inparticular, involve numerous risks, including, among others, market risk,counterparty default risk and liquidity risk. No security, financial instrumentor derivative is suitable for all investors. In some cases, securities andother financial instruments may be difficult to value or sell and reliableinformation about the value or r isks related to the security or financialinstrument may be difficult to obtain. Investors should note that incomefrom such securities and other financial instruments, if any, may fluctuateand that price or value of such securities and instruments may rise or fall
and, in some cases, investors may lose their entire principal investment.
Past performance is not necessarily a guide to future performance. Levelsand basis for taxation may change.
Foreign currency rates of exchange may adversely affect the value, price orincome of any security or financial instrument mentioned in this report.Investors in such securities and instruments effectively assume currencyrisk.
Materials prepared by Gluskin Sheff research personnel are based on publicinformation. Facts and views presented in this material have not beenreviewed by, and may not reflect information known to, professionals inother business areas of Gluskin Sheff. To the extent this report discussesany legal proceeding or issues, it has not been prepared as nor is itintended to express any legal conclusion, opinion or advice. Investorsshould consult their own legal advisers as to issues of law relating to thesubject matter of this report. Gluskin Sheff research personnel’s knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based onpublic information. Facts and views presented in this material that relate to
any such proceedings have not been reviewed by, discussed with, and maynot reflect information known to, professionals in other business areas of Gluskin Sheff in connection with the legal proceedings or matters relevant
to such proceedings.
Any information relating to the tax status of financial instruments discussedherein is not intended to provide tax advice or to be used by anyone toprovide tax advice. Investors are urged to seek tax advice based on theirparticular circumstances from an independent tax professional.
The information herein (other than disclosure information relating to GluskinSheff and its affiliates) was obtained from various sources and GluskinSheff does not guarantee its accuracy. This report may contain links to
third-party websites. Gluskin Sheff is not responsible for the content of any third-party website or any linked content contained in a third-party website.Content contained on such third-party websites is not part of this report andis not incorporated by reference into this report. The inclusion of a link in
this report does not imply any endorsement by or any affiliation with GluskinSheff.
All opinions, projections and estimates constitute the judgment of theauthor as of the date of the report and are subject to change without notice.Prices also are subject to change without notice. Gluskin Sheff is under noobligation to update this report and readers should therefore assume thatGluskin Sheff will not update any fact, circumstance or opinion contained in
this report.
Neither Gluskin Sheff nor any director, officer or employee of Gluskin Sheff accepts any liability whatsoever for any direct, indirect or consequentialdamages or losses arising from any use of this report or its contents.
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