Rising North Star

"The Canuck buck," suggests Apogee’s Andrew Kashdan, "is strengthening against the U.S. dollar, the Canadian current account is running a surplus (remember what that is?) and the government’s budget should be nicely in the black." All of which makes our neighbor to the north an increasingly attractive investment destination.

Where to look for diversification away from the (less) mighty U.S. dollar and the U.S. equity market?

Besides euro-denominated stocks and exposure to the won via Korea Electric Power…another strong possibility is our neighbor to the north. Economic growth in Canada is more robust than in the U.S., the Canuck buck is strengthening against the U.S. dollar, the Canadian current account is running a surplus (remember what that is?) and the government’s budget should be nicely in the black.

All of which suggests that Canada may be rapidly becoming one of the world’s most attractive investment destinations.

In fact, Canada is looking better and better as an investment destination for those fleeing the declining U.S. dollar. Economic growth is rebounding, interest rates are rising and both current account and budget surpluses are expected this year.

Gregory Weldon, of Weldon’s Money Monitor, notes that first-quarter GDP growth spurted ahead at a 6% annualized pace. The 1.5% rise from the fourth quarter gave the year-over-year rate a sharp boost, to 2.1% from 0.8% in the previous period. In addition, the fourth quarter’s annualized growth rate was revised upward to 2.9% from 2.0%. Weldon also makes note of the broad- based nature of the quarterly growth: gains of 3.4% in business fixed-capital formation, 1.3% in personal expenditures, 2.5% in machinery and equipment and a record-high 9.2% in residential housing investment.

Bridgewater Associates points out that Canada’s industrial production is growing faster than U.S. output, even though some of the recent Canadian data came in on the weak side. Manufacturing shipments dipped in March, for instance, but Canadian auto, retail and housing sales all showed year-over-year growth. Employment growth has been stronger, too, which may help Canada’s domestic demand outpace U.S. demand.

Accordingly, Bridgewater is bullish on the Canadian currency, as is BCA Research, which observes that economic growth has been exceeding expectations. In addition, the Bank of Canada raised interest rates another 25 basis points this week, putting its benchmark overnight lending rate at 2.50%, three-quarters of a point above the fed funds rate prevailing below the border. BCA also thinks that stronger commodity prices will continue to lift the loonie against the greenback.

From its January low, the Canadian dollar has risen nearly 5% against the U.S. dollar and may well have more to go, given that it’s still down 7% from its January 2000 high and more than 15% off its 1996 high.

Other good news includes the energy-export-induced increase of C$1.5 billion in Canada’s current account during the first quarter, boosting the total surplus to C$5.9 billion.

A poll by The Economist magazine puts Canada’s expected current account surplus this year at 2.1% of GDP, compared to a negative 4.2% in the U.S. Government budget comparisons for 2002. The OECD predicts a surplus of 1% of GDP for Canada vs. a U.S. deficit of the same size. To be sure, Canada’s economy is heavily dependent on commodity demand. But even if the global economy were to disappoint and commodity price rises were to stall, Canada could still hold its own against the U.S., which would certainly not be immune from the effects of a slower recovery or another downturn.

The Canadian government has been under fire of late over a series of conflict-of-interest charges, and Prime Minister Chretien has ousted his finance minister. But the political wrangling probably won’t have lasting implications for investors. If anything, the new finance minister, John Manley, will be keen to take the lead from his respected predecessor. Speaking to The Wall Street Journal this week, Manley promised to continue "balanced budgets, reduced debt, low and stable inflation, tax cuts and key investment." It sure sounds great.

If Manley can deliver even a fraction of this ambitious agenda, it would be good news for investors – and more reason to consider the loonie as a refuge from the U.S. dollar.


Andrew Kashdan, for The Daily Reckoning
June 12, 2002

Andrew Kashdan is a significant contributor, a veritable tour de force, at Apogee Research (formerly Grant’s Investor). At Apogee Kashdan has helped produce ground- breaking research and consistent gains of 166%, 154%, 134% over the past year and half – during some of the toughest market conditions we’ve seen in a decade.

"…jail time for Wall Street crooks," proposes an article in Businessweek Online. But author Amey Stone doesn’t seem to care which way the scales of justice are tilted; instead, she sees "an opportunity."

Nearly 18 months have passed since the Fed began its easy money rate cuts. Normally, stocks go up when rates are cut. But the recovery is proving as freakish as the recession that provoked it. The poor deformed beasts have ears where they ought to have legs…noses stuck in the wrong places like a Picasso…and no legs at all! In the recession, where there should have been cuts in consumer spending, raised savings rates, lowered debts, and reduced stock prices – none of those things could be found. And now that we are supposed to have a recovery, we search again for missing body parts: jobs, profits, and rising stock prices.

Stocks rose so conveniently, so handsomely, so obligingly during the Great Bull Market…what is wrong with them now? Why are so many nice people losing so much money?

No one seems to know. But they are darned sure that the losses aren’t their own fault. That’s why the 3 little words – "Wall Street crooks" – have become so popular and why "reform" has such an appealing sound to it. If it is not investors’ own fault, it must be someone else’s.

Investors have lost confidence in stocks, Ms. Stone opines. But there is an opportunity to win the patsies back…so the insiders will have someone to sell to! Maybe a few show trials and a little jail time will do the trick, she hopes:

"Many individual investors won’t believe things have really changed on Wall Street and Corporate America until they see some of the worst offenders hauled off in hand cuffs."

What else might bring the customers back? Oh yes, says Stone, it may take lower stock prices too.

Maybe. We’ll find out as the Great Bear Market of ’00 – ? continues…Over to you, Eric, for the latest installment…(and we hope you had a happy birthday.)


Eric Fry in New York…

– Well Bill, dead cats just don’t bounce like they used to…Why, I remember back in the bubble years when the Dow would bounce at least a couple of thousand points after every 100-point decline. But not these days.

– Despite tumbling nearly 14% in less than one month – and about 25% year-to-date – the Nasdaq still can’t manage a respectable bounce. It’s the kind of market that professional traders call "well offered." In yesterday’s action, the Dow fell 128 points to 9,517, while the Nasdaq dropped more than 2% to 1,497.

– Gold played yin to the stock market’s yang – falling as much as $3.00 in the morning, before recovering to finish the day with a $1.00 gain at $320.50 an ounce. Gold stocks also raced higher late in the day, with the XAU Index gaining more than 3.5%

– To judge from the recent stock market action, many folks have been trying to "catch the bottom," hopeful that stocks will quickly rebound. Corporate insiders, however, do not seem to number among the optimists.

– "There is one interesting group," notes Floyd Norris of the New York Times, "that has turned more bearish than at any time in years: corporate insiders…Over the last eight weeks, there [have] been 4.2 insider sales for every insider purchase reported…This ratio is higher than it ever was in the 1990s bull market."

– "There has been huge, huge insider selling," says Phil Roth, technical analyst at Miller Tabak. There are many reasons, of course, for insider selling. A bullish outlook is not one of them.

– Robert Barbera, the chief economist at Hoenig & Co., offers a cynical – though probably truthful – interpretation of the recent surge of insider selling. "If you believe people cooked the books, then right now the cooks should be selling." In fact, they appear to be fleeing the kitchen altogether.

– "Maybe," says the Times’ Norris, "a lot of insiders simply think that their stocks are expensive." Seems like a reasonable guess. Clearly, insiders understand the extent to which aggressive accounting practices have artificially inflated reported earnings. Accordingly, Norris theorizes, the insiders have a good inkling of how severely earnings might suffer over the next couple of years, as accounting gimmickry falls out of fashion.

– Then too, insiders might be selling simply to continue cashing in on the lavish option grants they received during the bubble years. Can you blame them for wanting to convert their Monopoly money into the real thing?

– "Executive pay has been soaring for two decades," observes Roger Lowenstein, "but over the last couple of years, as many big companies have seen their stocks pummeled, the pay-for-performance rationale that was supposedly driving these packages has been exposed as a fraud."

– Lowenstein wrote a splendid piece in the New York Times Magazine over the weekend entitled, "Heads I Win, Tails I Win." The story, as some readers may have already guessed, addresses CEO compensation. To make his point, Lowenstein chronicles the geometric trajectory of the take-home pay of SBC CEO, Edward E. Whitacre Jr., "a 60-year-old, 6-foot-4 lifer in the Bell system."

– "For the purpose of examining a single CEO’s compensation, I picked SBC for its unspectacular qualities. It is profitable and professionally managed, and its CEO is well-regarded in his industry…

"In the last three years," says Lowenstein, "his stock has fallen 27 percent – more than either the Standard & Poor’s 500 or the stocks of his Baby Bell peers. But the rate at which the boss was compensated kept growing… Over his 12 years as CEO, while Whitacre reaped a fortune, his stockholders have done precisely average. Their return from appreciation and dividends is 11.5 percent a year – a notch below the S&P 500, at 12.8 percent, and a sliver higher than its peer companies.

"Ed Whitacre’s cash take, at first, was relatively stable," Lowenstein remarks. "In 1992, he got $3.1 million; two years later, $4.4 million." But then came the options! In 1994 Whitacre received an initial option grant entitling him to buy 161,739 SBC shares. The following year, he received a fresh – and substantially larger – batch of options.

"Now that he was getting huge ANNUAL grants, the arithmetic subtly changed," says Lowenstein. "By turns, a system designed to motivate became one simply to enrich." In effect, says Lowenstein, SBC paid Whitacre "for treading water."

– Then came the special grants! In 1997, Whitacre – who by now should have felt like the luckiest man alive – received $8.7 million as a "special retention grant." "The most curious aspect of that work," says Lowenstein, "was that in 1998 Whitacre received another retention grant, this time of $12.5 million. He has received comparable awards in every year since."

– An option grant here, a special retention grant there, and pretty soon you’re talking real money.

– "Last year, the third year in a row in which SBC’s share price declined," says Lowenstein, "Whitacre received the largest pay package of his career – one with a present value of $82 million…At such levels, all attempts to rationalize pay become meaningless."

– Similarly, at 35 times overstated earnings, all attempts to rationalize buying S&P 500 stocks become meaningless.


Back in Paris…

*** Planning for retirement? You may want to adjust your assumptions, says my friend John Mauldin. "Many [professional] planners assume real returns on investment portfolios of 6-7% or more. By real returns, I mean returns after inflation. A dollar saved today, even in today’s low inflation environment, will only buy $.75 worth of bread in 10 years."

*** But…"real returns will probably only be about 3.5% (portfolio returns after inflation) in the future. Many boomers and those in the 40-50 age range are not going to retire comfortably on the portfolios they are likely to have."

*** Mauldin passes along an example provided by Rob Arnott of First Quadrant:

"If you are 40 today, and are just starting to save for your retirement, this is what you face: assume you now make $45,000 per year, that your salary will grow at 2% per year plus inflation, and that you save 9% of your salary per year in your 401K. If you get real, inflation adjusted returns of 3.5%, you will need to work until you are 76 in order to retire at 2/3rds of your pay."

*** Of course, John could turn out to be an optimist. What if investors lost 10% each year for the next 10 years? We only raise the possibility because it seems so unlikely to so many people.

*** The Nasdaq 100 fell below its September low yesterday. Gold was up a buck. Remember, sell stocks on rallies. Buy gold on dips. Will this approach make you rich? We don’t know, but at least you’ll be following an ancient tradition.

*** Besides…"America’s economic cup not only appears to be more than half empty…it’s draining fast!" says the inimitable Adam Lass of the trading service known as the Q-Wave. Following a complex and convoluted charting system – one that perhaps only he could understand – Mr. Lass suggests the next wave of the bear market on the Dow could knock us all the way back to October ’98 levels…

"Indeed," says Mr. Lass "the next step for the Dow Jones Industrial Average is very probably a move back to at least 8,500 by the end of summer, a reasonably probable dip to 7,399 by mid to late September, and possibly a six to eight-month plunge down to 6,800.

*** "Why do you stand out on the street everyday?," asked the barman at Le Paradis yesterday. "Everybody knows you haven’t had a customer since 1967."

*** Your correspondent overheard the conversation….or part of it. The big blonde whore who works the rue de la Verrerie had come into the Paradis for a drink. There she stood, in her shiny, black raincoat, joking with the young man with a tray in his hand and a mischievous look on his face. Your author couldn’t help but wonder what the working girl had on under her raincoat. But the thought made him shudder.

*** The whores of the rue de la Verrerie are living proof of something. But what? There are three of them. The blonde one is the ugliest. She has the face of a longshoreman…and legs like telephone poles, upon which sits a body that might be confused with a large zoo animal.

*** But it is a close contest, for the other two have been known to crack barroom mirrors from across the street. None of them is under 50…and whether it is the passage of years or the wear and tear of the trade…one looks as though she might be well past mandatory retirement age. All three are fat…and as repulsive to a normal man as non-alcoholic beer..

*** But that is the surpassing charm of the human condition, dear reader – for every sin there is a sinner…for every perversion there is a pervert…and for every bear market there is a patsy.

*** "Go f*** yourself," said the whore to the waiter. Both laughed.

*** My friend Adrian comments on the gallic view of law and order. Picnicking in the Bois de Boulogne, a guard came over to tell them that it was against the rules:

"In a few words, he explained that to picnic on the grass was "pas autorisundefined." Then he smiled and walked away, without actually making us leave.

"Mais Oui…Laws are just suggestions, not necessarily to be obeyed if they don’t fit the situation. He had done his job – told us we were breaking the rules – but he wasn’t about to disturb our good fun since we weren’t doing any harm to anyone or anything."

The Daily Reckoning