Interview with Kim Husebye of Lakeshore Securities

A short conversation with Kim Husebye, VP & Portfolio Manager at Lakeshore Securities

Bio: Kim Husebye, CFA, CMT is licensed as an Investment Advisor and Portfolio Manager in the province of Ontario, and has more than twenty years’ experience in brokerage and investment management.

Kim graduated from the University of Toronto with a Bachelor of Science and double majors in Commerce and Applied Mathematics.

In 1994 he earned the Chartered Financial Analyst designation (CFA), and in 2006 he earned the Chartered Market Technician designation (CMT).

In 2006 Kim attended Investor’s Business Daily Masters Program in Los Angeles, which was taught by Bill O’Neil and six of his top portfolio managers. In 2007 he successfully passed the associated exam.

Q: Mr. Husebye, in the face of the recent volatility in the stock market, a number of Elliot wave practitioners are calling the recent rally from the lows a bear market rally and that we are now in a secular downtrend, does your fundamental and technical analysis concur with this view?

A: We are in the final stages of a bear market rally which began in March 2009. In Elliott Wave terms, this is Primary Wave 2, which is a counter-trend move. A 50% retracement of the initial bear market decline would place the S&P 500 at 1121, which is only about 10 points away, as of this writing. We may or may not reach that target – in any event, the rally is very close to being finished, if it isn’t already.

Further evidence that we have indeed been in a bear market rally includes the following:

• Volume and breadth have been waning.
• The action during the rally has been “corrective” in nature, meaning that the wave structures have been overlapping and in groups of three.
• Bullish sentiment has reached high levels – a contrarian indicator.
• Sales and earnings growth outlooks remain soft, while valuations remain high
• Dividend yields never increased to the levels associated with typical bear market bottoms.

My 12-month target for the S&P 500 is below 500 (S&P 500 at 1090.60 at the time this was posted)

Q: What is your near and long term outlook for the Canadian Dollar with respect to the US Dollar? While the general viewpoint of most market commentators calls for a decline in the US Dollar, I have heard a few technical analysts (primarily the Elliot wave practitioners again) call for an uptrend in the US Dollar, once again, does your analysis concur with this view or not and why?

A: The Canadian dollar likely peaked out at 97.69 on October 14th. The Loonie will depreciate significantly from current levels, particularly when commodity prices start sagging, which probably will coincide with a major rally in the US dollar.

My intermediate target for the Canadian dollar is well below 80 cents (Canadian dollar at 93.40 at time of posting)

It is important not to confuse the US/CAD dollar relationship with that of the US Dollar Index. The USD Index measures the value of the US dollar against a basket of foreign currencies, of which the Canadian dollar is a small part. The USD Index is in the process of bottoming, after which I expect a powerful rally that will take most market participants by surprise.

The USD Index is in many respects the linchpin which, after reversing, will throw most stocks and commodities into a tailspin. In fact, the USD Index has shown an exceptional inverse correlation with the stock market in recent times. The last peak occurred within two days of the stock market’s bottom on March 6th.

For additional charts on the major indexes and gold, you can visit Mr. Husebye's website at: http://www.kimhusebye.com/charts.html

Conversely, the US dollar’s imminent bottom should coincide closely with a top in the stock market.

Further evidence that the US Dollar Index is bottoming includes the following:

• Bearish sentiment has reach extraordinarily high levels – a contrarian indicator.
• Talk of eliminating the greenback as the world’s reserve currency is a strong testament to the widespread disdain for the dollar – a contrarian indicator.
• From an Elliott Wave perspective, the USD Index has traced out five-waves to the downside, indicating we are in the final stages of an ending pattern.
• US dollars are still considered a safe haven in times of crisis. When the next panic in assets occurs, there is no reason to expect people to change that belief.
• As is now widely known, a major short position currently exists in the US dollar, whereby speculators have borrowed the buck at almost zero cost to finance securities purchases. A rush to buy back those borrowed dollars will accelerate an expected dollar rally, as the short-sellers get squeezed.
• Finally, when magazine covers show pictures of the US dollar in tatters, you know it’s probably a safe bet to take the opposite side of that trade.
• An upside reversal will be confirmed with a break above 76.82.

My 12-month target for the USD Index is near 100 (Dollar Index at 75.48 at time of posting)

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: All Canadian stocks will decline as the bear market enters the next leg down; consequently, there are no buy recommendations at this time. When the selling kicks in more strongly, the better stocks to sell short will include those that rallied the most during the uptrend, such as commodity and financial stocks.

My 12-month target for the TSX Composite is below 5,000 (TSX at 11,503.43 at time of posting)

Q: With gold hitting new highs, what is your outlook on gold - is it a good time to get in or get out? Also, why do you think the gold stocks are underperforming when compared to gold bullion?

A: Gold’s rally has been corrective in nature, and is in an ending pattern. Now is the time to sell gold, especially while investor sentiment is at wildly optimistic levels. An exception applies to long term investors who wish to own gold bullion as a hedge against a potential future crisis in fiat (paper) money. For that purpose it is recommended to own actual gold bars or coins, not shares in gold companies.

Gold stocks often lead the price of bullion, so from time to time gold stocks will advance before the price of bullion increases, and vice versa. It may be that today’s relative weakness in gold shares is portending weakness in bullion.

My intermediate target price for gold is below US$700/oz (Gold at US$ 1,134.80/oz at time of posting)

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: Aside from selling stocks short, or putting on a synthetic short through inverse ETF’s, an excellent speculation at this time would be 30-year US Treasury Bonds. Each percentage point decline in yields from current levels would give a capital gain of 19%. On top of that you get a decent coupon of 3½ % to 4 %, as well as potential currency appreciation from owning the US dollar as investors look for safety.

My target for US long term bond yields is near 2% (30-year treasury yields at 4.375% at time of posting)

Thank you Mr. Husebye!

Interview with Craig Stanford of Trivest Wealth Counsel

A short conversation with Craig Stanford of TriVest Wealth Counsel

Bio: Craig has 20 years of senior-level experience in the investment and finance sector. His prior Portfolio Manager and Investment Counsellor positions include the following: Partner / Director of Private Client Portfolio Management Mawer Investment Management; Managing Director / Portfolio Manager Cypress Capital Management; and, Managing Director / Portfolio Manager at Brickburn Asset Management. Craig also worked for Royal Bank Financial Group as a Senior Account Manager, Global Private Banking, providing offshore and domestic solutions to high net worth clients, trusts, foundations, and not-for-profits. In addition, he worked as a Trust and Investment Advisor for Royal Trust providing offshore and domestic portfolio management, custody, estate, and IBC formation services.

Craig is a Chartered Financial Analyst (CFA) Charterholder. He obtained a Master of Business Administration degree and a Bachelor of Science (Agriculture) degree from the University of Alberta. In addition, he holds and maintains Trust and Estate Practitioner (TEP) and Professional Agrologist (P.Ag.) designations and is a Certified Financial Planner (PFP).

Q: Mr. Stanford, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market (Canada and U.S) right now?

A: At TriVest, we see the equity markets starting to look a bit stretched and are finding it more challenging to find opportunities that are not fully valued. Overall, there are still a few individual securities that appear attractive from a bottom up basis, but as a whole the markets currently look fairly valued. The U.S. market, for example, is up 60% from its March lows and trading at approximately 16X forward earnings. This is not only above historical norms of nearly 15X, but is also predicated on a more than 30% growth incorporate earnings in 2010. We consider this to be tad optimistic considering the overall health of the US economy and the double digit (and climbing) unemployment.

Q: What is your near and long term outlook for the Canadian Dollar with respect to its fundamental value and its impact on the earnings of Canadian companies?

A: We believe the current strength of the CDN dollar is a more of a function of a weakening US dollar. In the short term, we think the CDN dollar could easily go to par. The U.S. government needs a low U.S. dollar to stimulate its economy and deal with its massive debt load. It was fairly clear from the recent OECD meeting that the U.S. intends to keep interest rates low and is (not so secretly) supporting a low dollar policy. This clearly hurts all of their trading partners and especially Canada. China is avoiding this pain by keeping its currency pegged, but is currently under a lot of pressure by the U.S. to allow its currency to appreciate. In regards to CDN corporate earnings, obviously the manufacturing business is hurting as the industry can no longer rely on a weaker dollar to offset poorer efficiency. It also doesn’t fair well for the energy business given cost structures are in CDN dollars and revenue in USD.

Longer term, it is always difficult to predict currency movements. We’ve never found anyone or any institution that can do it consistently or accurately. Ultimately, we think the U.S. dollar will appreciate when the current U.S. dollar carry-trade unwinds. There are currently huge net short positions in zero-cost U.S. Treasuries right now with offsetting long positions in higher yielding equities and commodities.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can befinancials, energy stocks, technology, resources etc.) that you believe to be overboughtand due for a correction and one sector that you believe to be oversold and due for abounce and why?

A: We believe that the financial sector is fully valued, especially in the U.S. The next shoe to drop is likely defaults in the commercial mortgage area with U.S. $2 trillion of maturities over the next 15 months. A few large cracks are just starting to appear in the U.S. commercial property sector already, and it would not be prudent to believe Canada wouldn’t be impacted in some fashion. For example, despite the stronger positioning of the Canadian banks, many are trading near record levels reached in 2007.

When we screen for relative value, Utilities and Telecommunications are trading below historical valuations and have not participated to the same extent as some of the other sectors in the recent run up. On a bottom up basis, there are still some attractive stocks in the energy sector trading at reasonable cash flow multiples but it is very selective. As for example, we believe many of the gas-levered stocks to be trading at multiples greater than what is being implied by the forward curve for natural gas.

Q: With regard to risk management, which I see is one of your founding principles, how do you recommend investors approach managing their risk? Can you please elaborate on one or two methods utilised by TriVest in current times to 'protect and grow' assets?

A: At TriVest we utilize a three step process for stock selection. A formalized approach to risk management is included in each step. From a 30,000 foot view, we begin with a quantitative model that we have developed to screen the market for relative valuation and risk metrics that we deem important. We then follow this up with intensive fundamental research further screening our target opportunities by ranking of their management track record, the quality of their assets and/or business with a subsequent outlook for growth or sustainability of dividends, and lastly their overall relative value. To supplement our own research we also have considerable access to institutional equity research.

As a last and important step, we then take our equity model portfolio and apply an option overlay. This is our final level of risk control and can be tilted to match our views of an individual stock or the market in general. Options are a very powerful risk management tool that aren’t traditionally utilized by the Investment Counsellor community. As an example, you can buy a Put to hedge a particular exposure or implement a costless collar strategy (buy a Put and sell a Call) to set a floor and a ceiling on an investment.

We would not recommend that the individual investor utilize options unless they have some education in that area. There are publically traded ETFs that can be utilized to hedge a sector or market exposure. However, we would caution against the average investor utilizing double or triple leveraged ETFs as they can lose market tracking over a relatively short period of time.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: Two very different themes that we would recommend looking into further would be Telecoms and Energy. Telecoms are currently trading at low valuations and we do see good future growth prospects in the cellular area in Canada (the U.S. market would be a different story given a more competitive landscape). Long term, oil prices should rise as cheap conventional reserves continue to decline and demand from countries such as China and India continue to rise. Short term, oil prices could be quite volatile in both directions with issues such as the large U.S. carry-trade, fear of future inflation etc.

Thank You Mr. Stanford!

Interview with Travis Dowle of Vistra Capital

With the S&P 500 and the Dow currently attempting to remain above key levels (Dow – 10,345 and S&P 500 – 1100), the widespread US Dollar weakness has caused Gold to surge to 1135/oz. While weakness in the US Dollar could have something to do with the news coming out of APEC indicating China’s failure to agree with U.S. demands of revaluing the Chinese Yuan, on the economic front, U.S. retail sales numbers from October came in at +1.4% versus expectations of +1.0%. These retail sales numbers seem to have failed to dampen the risk appetite of investors as stocks rose and the greenback fell.


For further clarity on the markets, I turned to Mr. Travis Dowle of Vistra Capital Management in Vancouver, BC, Canada.

Bio: Travis Dowle is the founder and President of Vistra Capital Management, an independent investment management firm located in Vancouver, Canada and the fund manager for the Vistra Fund. Mr. Dowle has also served as the Vice President, Portfolio Investments with Gibralt Capital Corporation and Second City Capital Partners – both Vancouver-based private equity groups – since July 2007.

Prior founding Vistra, and to joining Gibralt Capital and Second City Capital, Mr. Dowle was a portfolio manager for one of the world’s largest investment managers, HSBC Global Asset Management. While with HSBC he was the lead manager for the firm’s global equity strategy offered to Canadian high-net worth investors. Prior to that, Mr. Dowle held various investment management and research positions with HSBC and M.K. Wong & Associates.

Mr. Dowle has more than 13 years of experience in the investment industry, is a graduate of the University of Western Ontario and holds the professional designation of Chartered Financial Analyst (CFA). Mr. Dowle is also a past instructor for Stalla’s CFA exam preparation program covering equity valuation techniques and capital markets theory.

Vistra Capital Management is an investment management firm founded with the philosophy that an active, flexible and opportunistic approach to investing provides the best opportunity for generating positive investment returns across a variety of market environments. The Vistra Fund is a long/short fund focused on event-driven opportunities and special situations.

Q: Mr. Dowle, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market (U.S. and Canada) right now?

A: Looking at the broad market indices in North America, I think that we are in for a bumpy ride over the next few months. Since early March, three factors have spurred this rally: first, realization that all companies were not going bankrupt; second, a dramatic injection of liquidity and other stimulus measures; third, corporate earnings results surpassing low expectations due in large part to severe cost-cutting. Underpinning and related to all of this, has been a huge increase in investor risk-appetite, albeit off of very low levels. In order for the markets to continue an uninterrupted climb, many companies need to grow into their current valuations, and for that they need revenue growth – costs can only be cut so far. Broadly speaking, I think we are bound to see some disappointment. But, having said all of that, volatility creates opportunity and I’ll be on the hunt for opportunities as volatility increases.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction (i.e apt to short) and one sector that you believe to be oversold and due for a bounce and why?

A: Looking at things from a short-term perspective, I’d have to say financials looks to be somewhat overbought here. The TSX Financials sector is up almost 90% since early March and the big banks in the index are trading at about 13x forward earnings – not inexpensive for a bank. While Canadian banks are healthier than their global peers and the credit environment has improved dramatically, I believe we’re going to see a slower growth economy coming out of this recession and financials will be challenged in such an environment.

It’s tougher to single out a sector that looks oversold right now with most being markedly higher over the year. I tend to look at things from a bottom-up perspective while being cognizant of the sector specific and macro risks. I’m still seeing interesting opportunities in the technology , energy and basic materials sectors, however based on recent performance, I certainly can’t say they are oversold. I really think you have to pick your spots with individual companies in this market.

Q: Given the tremendous rebound in Asian (particularly China and India) economies, what are your views on investing in stocks or themes related to these economies? Do you have any particular trades/themes you could elaborate on?

A: Asia is giant economic force that will undoubtedly continue to become more dominant over the next few decades. Like any economy it’s going to get ahead of itself at times and be subject to business cycles. There are a few different ways investors can take advantage of the growth in China, India and other Asian countries and emerging markets. Energy and basic materials are the obvious themes. I also like the agriculture theme. As huge populations in these emerging economies urbanize and per capita income rises, they will consume more of everything – from basic materials, to energy, to food and to water. Sprott Resource Corp (SCP) is an interesting way to play all of these themes in a single security – it invests directly and indirectly in natural resources, minerals, oil and gas, water, forestry and agriculture.

Q: Can you please highlight 1 stock/option or pairs trade that you think offers the best risk/reward potential moving forward and your reasons for liking it?

A: I think GLV Inc. (GLV/A:TSX) has attractive upside. GLV Inc. is a global provider of engineered processes and technologies designed for industrial, municipal and environmental applications. Said in English, they design and produce equipment used to treat municipal and industrial wastewater, and water used in industrial processes, and pulp preparation and sheet formation. Water scarcity and quality is going to be a big issue. By some reports almost half of water use for irrigation is lost to evaporation and waste – this is a serious problem with an exploding global population. As emerging market diets become more meat/protein-based, agricultural use for water increases. Over half of cities in China suffer from water shortages. Major developed cities lose water through leaking pipes due to old and aging infrastructure. GLV won’t solve all these issues itself, but it has strong growth prospects, trades at a reasonable valuation and it’s one of many companies that should benefit from the ‘water’ theme.

Q: Lastly, how about we play a game where you're only responses can be Buy, Sell or Hold to the things mentioned below:

A: Sure, but I’ll have to specify whether it’s a short-term call or a long-term one by specifying ‘S/T’ and ‘L/T’ respectively:

Gold: Buy (S/T)

Base Metals: Hold

Canadian Dollar: Hold

Agricultural Commodities: Buy (L/T)

Oil: Hold

Natural Gas: Buy

TSX 60 (XIU): Sell (S/T)

S&P 500: Sell (S/T)

Clean/Alternative Energy: Sell (S/T)

Canadian Real Estate: Buy (L/T)

For real estate it, of course, depends on location, location, location. For the rest of the asset classes it’s all about price, price, price. The price you pay eventually determines your return. Happy investing!

Thank You Mr. Dowle!

Interview with Gordon Currie of Blackmont Capital

A conversation with Gordon Currie of Blackmont Capital

The most recent U.S. Department of Energy’s weekly report paints a sorry state of U.S petroleum demand, with primary weakness coming from the diesel category. The increase in heating oil inventories in the all important PADD I complex is a further drag on the entire oil sector. Crude oil futures were down on Friday, November 13 as NYMEX light sweet crude for December delivery fell $0.59 to $76.35 per barrel. What is most probably a result of the higher than anticipated U.S. inventory levels, Canadian natural gas spot prices fell dramatically by $0.85 to $2.42 per Mcf. However, U.S. natural gas futures were slightly higher Friday, despite statistics revealing a build of 25 Bcf in inventories, which was ahead of median expectations for 20 Bcf, and brought overall storage levels to 3,813 Bcf. Cash prices at the Henry Hub in Louisiana fell $0.79 to $2.44 per Mmbtu while NYMEX Henry Hub for December delivery actually increased, by $0.022 to $4.392 per Mmbtu.

To paint a clearer picture of the energy sector, I had the opportunity to interview oil and gas analyst Gordon Currie of Blackmont Capital. The following is a transcript of our interview.

Bio: Mr. Currie is a 29-year veteran of the petroleum and securities industries. He has worked both sides of the oil and gas industry: as an analyst and an executive. He joins us most recently from his work as an Oil & Gas Analyst with Wolverton Securities. His research insights are infused by his experience as IR Manager of NAL Oil & Gas Trust and President of Easton Drilling Fund. Mr. Currie holds the Chartered Financial Analyst (CFA) designation.

Q: Given the widespread pessimism regarding natural gas and the glut in inventory, what are your thoughts going forward for this commodity?

A: I am in the camp that believes that natural gas supplies will be ample for several years to come although there is an argument to be made that natural declines in production combined with a low level of drilling activity will bring supply and demand back into balance quickly. Most of the gas producers subscribe to the latter theory. Investors also seem to be expecting gas prices to improve next year, judging by the rally in stock prices after Labour Day. Now it is only November but spot prices here in Alberta are still mired in the $3.50/mcf range and forward prices on NYMEX are below $5/mcf thru the first quarter of next year. The initial euphoria about a rebound in gas prices seems to be waning.

Q: With crude oil hovering at approximately $80/barrel, do you think these price levels are sustainable for the next 1-2 years, especially in light of the IEA saying that they only expect a marginal increases of 1.5% per annum in oil demand between 2007 and 2030 in their most recent world energy outlook, why or why not?

A: Actually I think 1.5% annual growth in demand is pretty good, and I do think prices can stay in the $80/bbl range. However I don't see prices rising to $100/bbl any time soon, as OPEC still has sufficient spare capacity to supply several years worth of growth in demand, and countries like Iraq and Iran are opening up huge fields to development by foreign multi-nationals.

Q: With the oil/gas ratio sitting at approximately 20 and the average over the last 2 years being around the 12 to 13 mark, would you short oil at the moment or go long natural gas?

A: No, I concur with the International Energy Agency view that prices have become de-linked. Until natural gas can be widely substituted for oil as a transportation fuel, as Boone Pickens is advocating, that ratio will continue to fluctuate.

Q: What is your outlook for M&A activity in the energy sector? Do you have any plays (as in the bakken, montney, cardium etc.) or particular stocks that may be particularly susceptible to M&A activity?

A: It is difficult to do deals in periods of really low commodity prices and really high commodity prices, because buyers and sellers have different expectations about takeover values. And in periods of low prices there are added 'social' issues - some people are going to be put out or work. Crescent Point will continue to hoover up Bakken producers (if there are any left) but I don't really see play types driving M&A.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

The stocks that I cover are intermediate sized companies and mainly gas-weighted, so given my view on natural gas supply, it is difficult to recommend any of them. My favourite is NuVista Energy because it is typically the lowest cost producer and therefore best able to withstand a downturn in gas prices. It is also and acquire-and-exploit company so when gas prices are down they can buy assets cheap, and when gas prices are high they generate lots of cash flow.

Thank you Mr. Currie!

Don Coxe Basic Points November 2009

Don Coxe Basic Points November 2009 - The Power of Zero

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BMO CM Basic Points Nov 2009

Interview with Allan Ross of Ross Smith Energy Group (RSEG)

A short conversation with Allan Ross, Chief Executive Officer of Ross Smith Energy Group (RSEG)

Bio: Allan graduated from the University of Western Ontario with an MBA in 1979 and obtained his CMA designation in 1981. After moving to Calgary , Allan spent two years with Gulf in their economics and planning department before joining Burns Fry in the Corporate Finance group. After two years in this capacity, Allan moved to retail sales with Burns Fry in 1985 and then moved to Peters & Co. Limited a year later where he spent twelve years working in institutional sales, covering Toronto and Asia. Allan is one of the founding partners of the Ross Smith Energy Group.

Q: Mr. Ross, Given the widespread pessimism regarding natural gas and the glut in inventory, what are your thoughts going forward for this commodity?

A: Investors should remember that natural gas is a commodity and the best cure for low prices is low prices. The natural gas sector is currently experiencing cap-ex cutbacks, production shut-ins and even the service stocks are suffering. Natural gas has a shorter reserve life than oil and the supply/demand scenario can change very quickly. Right now, there is a great amount of pessimism that has already been discounted into the price and in my opinion, it makes economic sense for natural gas prices to be in the $6-9/mcf range. With regards to M&A activity in the natural gas sector, if prices continue to remain at current levels for the next year or so, natural gas producers will be forced to engage in some deal making at the corporate level.

Q: With crude oil hovering at approximately $80/barrel, do you think these price levels are sustainable for the next 1-2 years, especially in light of the IEA saying that they only expect a marginal increases of 1.5% per annum in oil demand between 2007 and 2030 in their most recent world energy outlook, why or why not?

A: I have a tough time agreeing with the International Energy Agency’s long term forecast for global oil demand (which concludes that Global oil demand is expected to advance 1 percent a year to 105 million barrels a day by 2030 from 85 million barrels a day in 2008). We are not discovering any massive new oil fields and the ones being discovered offshore Brazil will take a very long time to come on-stream as currently there is no technology that is able to accomplish this feat. If I was a trader, I would probably be selling oil right now as oil is probably overvalued here (the world is awash in oil at these prices); however, I expect the price of oil to be higher this time next year With regards to what might happen to oil prices if governments around the world were to withdraw their stimulus packages by this time next year, I don’t believe that the stimulus packages are having much impact on oil prices, perhaps later when people feel more comfortable and start spending again you might see a lift in demand.. The big demand driver is Chinese activity.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?


A: In terms of themes, in the energy space, I have been keeping an eye on the Marcellus shale plays for close to three years. The Marcellus is prolific because it has 199 TCF of remaining recoverable reserves, covers 5,000,000 acres, has 62,000 locations, and is close to market (US NE).


Another theme playing out right now is that the world hates the oil sands. However, the world needs the oil sands. If someone were to throw a monkey wrench into this equation and some new technology were to be discovered that makes the extraction of oil sands less intrusive, this could change the perception of the sector which in turn could be a boon for companies involved in the oil sands. I am not aware of anyone who is specifically working on technology for cleaner oil sands extraction process but given the prize there have to be lots!

Thank you Mr. Ross!

Interview with Robert Cooper, Oil and Gas Analyst at Acumen Capital

A short conversation with Robert Cooper, CFA - Oil and Gas Analyst at Acumen Capital

Bio: Robert Cooper joined Acumen in August 2008 as an Oil & Gas Analyst. Acumen Capital Finance Partners (http://www.acumencapital.com/) Limited is an independent, full service investment dealer based in Calgary, Alberta, Canada.Prior to joining Acumen Capital , Robert spent several years in equity research with two other investment banking firms covering the junior oil and gas industry in addition to several years with a leading mid-market merchant banking firm. Prior to that, Mr. Cooper spent two years with a leading commodity trading organization as a commodity trader. Robert has a finance degree from the University of Regina, is a CFA charterholder and is Vice President of the Calgary CFA Society.

Q: Given the widespread pessimism regarding natural gas and the glut in inventory, what are your thoughts going forward for this commodity?

A: The night is always darkest before dawn and I think in early September we reached dawn with gas bottoming out at cyclical lows. I tend to be a contrarian by nature so when everyone is stampeding for the exit I take note of it but try to find out what is driving the group-think. Low prices for natural gas have been driven by two main reasons. First, the rapid deterioration in U.S. industrial demand and second, supply increases primarily driven by the U.S. shale plays (i.e. Haynesville, Marcellus, et al). With the massive stimulus percolating through the U.S. economy, I think there is a chance that industrial demand will perk up as the U.S. economy gathers steam. Second, generally the best cure for low prices are low prices. Drilling levels have been way down and this will inevitably lead to a supply response. So overall, I think we could see upside from here although in the short term gas will be highly correlated to the amount of cold weather that hits the major consuming regions in the U.S. Longer term, policy makers are eventually going to realize that natural gas should be the preferred fuel type going forward - it is plentiful, cheap, clean and doesn't involve sending billions of dollars overseas to questionable regimes who produce oil.

Q: With crude oil hovering at approximately $80/barrel, do you think these price levels are sustainable for the next 1-2 years, especially in light of the IEA saying that they only expect a marginal increases of 1.5% per annum in oil demand between 2007 and 2030 in their most recent world energy outlook, why or why not?

A: Generally, yes I agree. Oil appears to be trading at or about the marginal cost of new supply. We have seen comments coming from some of the supermajors, for instance, that for new oil sands projects to proceed an oil price of around $80/bbl is required in order to earn an appropriate rate of return. What folks fail to appreciate sometimes is that the world is awash in expensive sources of oil. The easy to produce oil has been produced. Therefore, in order to stimulate new supply, prices have to be strong and remain strong. Extreme volatility doesn't do anybody any good - it adds risk to major projects on the corporate side and wreaks havoc on the demand side (consumers). What I will say, however, is that oil is now much more dependent on emerging market economic growth than OECD growth and that is a big shift from years past.

Q: With the oil/gas ratio sitting at approximately 20 and the average over the last 2 years being around the 12 to 13 mark, would you short oil at the moment or go long natural gas?

A: I like the risk reward profile of natural gas better at the moment but that doesn't mean i would short oil. It takes a brave soul to short oil when you are one terrorist attack or geopolitical event away from a steep change in price. Some smarter folks than I may do that but I prefer to sleep at night.

Q: What is your outlook for M&A activity in the energy sector? Do you have any plays (as in the bakken, montney, cardium etc.) or particular stocks that may be particularly susceptible to M&A activity?

A: The short answer to that question is that I want to own energy stocks that larger energy companies want to own. And in my opinion, larger companies want to own assets in which they have a high degree of working interest, have low operating costs through controlled infrastructure/facilities, operate, and assets that have scale and scope (through increased capital intensity, improvements in technology, etc.) Finding names with those attributes can often lead to potential M&A targets. I try to find these companies and own them because they are good investments that may get merged out, not solely because they are M&A targets.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

[Note: Mr. Cooper is restricted from providing non-clients specific stock picks but he was kind enough to provide us with the following insight]

A: I don't have a specific stock pick but I like resource plays. That speaks to the scale and scope point i made earlier. Repeatability of a specific play type is very important and is worth more to investors because it is predictable. As a general rule, predictability is usually worth more than unpredictable results.

Thank You Mr. Cooper!

Interview with Ken Norquay, CMT of CastleMoore

A short conversation with Ken Norquay, CMT of CastleMoore Inc., a portfolio management company.

Bio: Ken is an officer and director and chief investment strategist of CastleMoore Inc., a portfolio management company.

Ken is a graduate of McMaster University in Hamilton Ontario and has qualified as a Chartered Market Technician as well as attaining a number of industry specific qualifications in the trading of Futures and Options.

After serving three years in the Canadian Armed Forces, he entered the financial services industry as a mortgage officer with a large Canadian trust company. Ken entered the investment business and became the manager of the Hamilton and St. Catherines offices of Merrill Lynch Canada before becoming a founding partner and major shareholder of Market Street Investment House, a retail investment dealer. He sold his firm in the first quarter of 2000, realizing his life goal of selling at the top. Ken then became a director of Quest Capital Group, a day trading investment dealer. He subsequently established The Glen Nova Division of The Glen Ardith Company Ltd., an investment counseling firm.

Ken served as the chairman of the Hamilton Investment Dealer's Association and member of the IDA's Ontario District Council, in the late 1970's. He also served on the Board of Directors of the Canadian Society of Technical Analysts and as its President in the early 1990's.

Q: Mr. Norquay, in the face of the recent volatility in the stock market, a number of elliot wave practitioners are calling the recent rally from the lows a bear market rally and that we are now in a secular downtrend, does your analysis concur with this view?

A. Almost. My heart tells me the Elliott Wavers are right. But my best technical model has not yet given a sell signal for the stock market.

Q: What is your near and long term outlook for the Canadian Dollar and the US Dollar? While the general viewpoint of most market commentators calls for a decline in the US Dollar, I have heard a few technical analysts (primarily the elliot wave practitioners again) call for a secular uptrend in the UD Dollar, once again is do you or do you not concur with this view and why?

A: Our view is: CD$ down, US$ up. This time our models agree with the Elliot Wavers.

Q: What are your thoughts on the energy sector that is crude oil and natural gas in the next few months?

A: I have no opinion. Since the big wash out in crude from July 08 to Feb 09, this year’s action looks like a base and a break out. Oil looks higher. But I don’t trust it. Gas is crazy. Wild and volatile. I do not feel confident in the energy sector.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: Overbought = Financials, Oversold =  Nil

Q: Lastly, can you please highlight 1 stock that you think offers the best technicals moving forward and your reasons for liking it?

A: Deere & Company, usually known by its brand name John Deere (NYSE: DE) looks like a massive head and shoulders bottom.

Thank You Mr. Norquay!

Interview with Constantine Lycos of Lycos Asset Management

An interview with Constantine Lycos, President of Lycos Asset Management, a registered investment management firm based in Vancouver, Canada

Bio: Prior to founding Lycos Asset Management , Constantine Lycos was a partner, portfolio manager, investment advisor, compliance officer and head of the investment committee at Chartwell Asset Management, where he was the lead manager of the Magna hedge funds and also managed portfolios of high net worth individuals. Before Chartwell he was employed by CIBC World Markets as a Research Associate. Attached to the Private Client Division of CIBC World Markets, he conducted research focused on individual investors' needs and constraints. That research was primarily on equity investments but included asset allocation, hedging and other more sophisticated strategies. Mr. Lycos graduated top of his class in Mathematics from the University of London (B.Sc.), and earned a master's degree in Mathematical Finance from Oxford University. At Oxford he conducted research under world-renowned derivatives specialists Drs. S. Howison and P. Willmott on stock market volatility. Mr. Lycos has completed most courses offered by the Canadian Securities Institute, including the Options Licensing, Futures Licensing, Technical Analysis, Options Strategies and Financial Markets Risk Management courses. He holds the Canadian Investment Manager (CIM) and Derivatives Market Specialist (DMS) designations as well as that of the Chartered Financial Analyst (CFA), the highest designation for investment professionals. Mr. Lycos is a fully registered portfolio manager (meaning he is licensed to advise on any kind of investment (stocks, bonds, GICs, commodities, futures, options, etc), unlike some "advisors" or financial planners that can only advise on mutual funds or insurance products). He is also the fund manager of the Lycos Canadian Hedge Funds. He is a member of the CFA Institute (formerly the Association for Investment Management and Research), CFA Vancouver (formerly the Vancouver Society of Financial Analysts.) and the Social Investment Organization, the Canadian association for socially responsible investment.

Q: Mr. Lycos, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market right now?

A: Since you started your question with talking about volatility, let’s start by asking ourselves, does stock market volatility (a rather technical term) have anything to do with concepts such as fair value, over-valued stocks and under-valued stocks? The answer is not necessarily an obvious one, but yes, stock market volatility can have an impact on the fair value of stocks: the higher the volatility, the higher the rate of return investors require to own stocks, i.e. the higher the discount rate, and the lower the fair value for stocks. Is volatility the most important determinant of fair value? Obviously not. Stocks are all about profits or earnings, future earnings to be precise. Let’s examine the S&P 500 Index. It is a good proxy for the world stock market as it is made up of large global corporations. On 2nd November 2009, I calculated the book value of the S&P 500 to be approximately 486 index points and trailing 2 quarter plus estimated next 2 quarter earnings to be about 61 points, implying a return on equity (ROE) of about 12.5%. (The index was at 1042 when I performed the calculation.) It’s very tempting to apply a something like a 15x PE multiple on these earnings to come up with a fair value number of 915, but that would be wrong. We seem to be coming out of a cyclical bottom so the earnings are likely to improve a bit faster than normal, so we must rely on the concept of “normalized earnings”, meaning using a projected average ROE number over several years out, rather than just a couple of quarters, of let’s say 15%. 15% of 500 is 73, which is a reasonable “normalized earnings” number to use. Again, an average P/E multiple of about 15 could be used to come up with a fair value estimate for the index of about 1100. At 1042 the market doesn’t look overvalued. However, there are a number of things that bother me with this analysis. I am not convinced that the economic recovery will as strong as one might expect given the magnitude of the decline primarily due to the decreased leverage in the economy, when compared to levels prior to the financial crisis. So if appetite for borrowing doesn’t come back for a number of years perhaps the projected average ROE is lower in the future making the market too expensive or over-valued. Another thing that bothers me is that about half of the book value of the S&P 500 is made up of intangible assets such as goodwill. Goodwill doesn’t deserve a multiple.

Q: What is your near and long term outlook for the Canadian Dollar with respect to its fundamental value and its impact on the Canadian economy?

A: CAD is a currency used by speculators (as well as some other currencies such as AUD and NZD) as a vehicle of choice on betting on the global growth, reflation story. CAD almost never trades on fundamentals, i.e. things such as Purchasing Power Parity (PPP), meaning fair value based on what a basket of goods should cost in Canada versus in other countries, so it almost a waste of time even bothering to calculate the fair value for CAD. As far as making a call on CAD, the call would be pretty much the same as the call for oil and commodities in general, a “game” which I don’t play. Speculating on commodities and currencies is zero-sum game, better left to fools and “sharks”. I am neither.

Q: With the US GDP data coming in better than expected last week and today’s ISM Index rising more than expected in addition to positive construction spending and pending home sales data, what is your read on the US economy going forward and its place in the global economic landscape?

A: I tend to be a bottom up stock investor, not paying too much attention to the economy as a whole. A great bottom up investor, Peter Lynch, said something like “If all the economists in the world were laid end to end, it wouldn't be a bad thing.” The US economy is in trouble now but long term it’s probably about the best place in the world to bet on. Why? It possesses the basic necessary ingredients that are required for optimal wealth creation, first identified by Adam Smith: economic and political freedom for its citizens, respect for property rights and the rule of low. Unfortunately since 9/11 some of the freedoms have disappeared and also the respect for civil rights by governments has gone down a bit, so things could be better, but on a relative basis it is still about the best place in the world. Canada is also pretty good. By the way, all other factors, such as availability of resources (be it human like in China, or natural, like in Russia, Brazil and Canada) are secondary in the quest for wealth creation. Innovation, new ideas, new technologies create wealth and the economies that foster the right conditions to promote innovation will do the best in the long run.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: Yes, cyclicals outperform when markets go up, they underperform when they go down, etc. Deep cyclicals are too hard to value – you can’t predict their earnings, can’t put a multiple on them, can’t analyze them. I do not take positions in things I can’t value, neither short nor long. But tied to question number one, if the market is overvalued and corrects, then the cyclicals will correct more. The market is not overvalued and it is not undervalued either. So large moves in either direction are not likely to happen based on fundamentals.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: The world needs energy and ideally clean energy. We have been talking about hybrid cars and now plug in electric cars for a while. If we all switched to driving plug in electric cars tomorrow all we’ll be doing is substituting burning refined oil (gasoline and diesel) with burning coal to produce electricity. Yes, electric cars are more efficient but burning more coal is not a good idea. Hydro, wind and solar are good but we don’t have anywhere near enough capacity from these sources. As much as I don’t like the only viable alternative is nuclear. A good pure play nuclear electric utility is Exelon (EXC). Stable earnings, a safe bet on growth, a good undervalued stock. It’s fair value is about $68 and will probably get there in 12 to 18 months and it’s only trading at about $47 now. Go long the stock, sell the $65 calls and buy the $35 puts, to have protection in case the unthinkable happens.

Thank You Mr. Lycos!

Interview with Murray Leith, VP and Director of Research at Odlum Brown

An interview with Murray Leith, Vice President and Director of Investment Research at Odlum Brown

Bio: Murray Leith (BComm, CFA), has over 20 years of experience as an Investment Analyst. He is a Vice President and Director of the Firm, as well as a member of Odlum Brown's Executive and Management Committees. He joined Odlum Brown in June 1994 and has managed the Odlum Brown Research Department since that time.

Mr. Leith formulates the Firm's economic outlook and equity investment strategy, in addition to covering individual companies, primarily in the Financial Services sector. Moreover, Mr. Leith and his team of Analysts established the Odlum Brown Model Portfolio over 14 years ago. This all-equity portfolio showcases how we believe individual investment recommendations should be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Since inception, the Model's returns have outperformed the benchmark S&P/TSX Total Return Index by a considerable margin.

Q: Mr. Leith, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market right now?

A: It's the market of stocks that matters and not the stock market. From a bottom up fundamental perspective there are a lot of attractively priced stocks.

Q: What is your near and long term outlook for the Canadian Dollar with respect to its fundamental value and its impact on the Canadian economy?

A: The "fundamental" value of the dollar is purchasing power parity, which is around 85 cents. The dollar can stay out of over or undervalued for extended periods of time. Conditions are ripe for our dollar to remain overvalued. The long term implications are negative for the Canadian economy. Recently, the Canadian economy is doing poorly, in large part due to the exchange rate.

Q: With the US GDP data coming in better than expected last week and today’s ISM Index rising more than expected in addition to positive construction spending and pending home sales data, what is your read on the US economy going forward and its place in the global economic landscape?

A: I believe the US and global economy is in the very early stages of recovery. The US recovery will like surprise on the upside over the next few quarters, as there is a ton of stimulus in the system.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: The resource stocks were over bought and are therefore experiencing a correction. The Utility stocks have been neglected and are due for a bounce.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: The best value is in large US stocks, particularly in the Consumer Staples and Health Care sectors. JNJ, KO and WMT are a few examples. A decade ago Canadians fell over themselves getting money out of the country. The results were horrible. Today, they do the opposite and will likely be disappointed again. The lesson from history is to swim against the consensus, because conventional wisdom is often wrong.

Thank You Mr. Leith!

Canadian Market Timer - November 1, 2009

The embedded report is one I compiled over the weekend to give myself some clarity on the current state of the Canadian equity market.

Canada Market Timer1