November 6, 2010
Market Updates by Mimi C. Tang, CFP CLU CHFC
Advisor
September is normally the worst months in terms of historical returns since the beginning of World War II; however, this September was one of the best Septembers ever.
October is usually one of the lousiest months in the past, the Wall Street Crash of 1929 (happened in October, 1929);
it was the most devastating stock market crash in the history of the United States.
Even worse than the crash of 1929, was the one-day crash of Black Monday, October 19, 1987,
when the Dow Jones Industrial Average fell 22.6%.
For more detailed information, please click on the link below entitled Wall Street Crash of 1929 from Wikipedia:
Wall Street Crash of 1929
Let me recapture the market news for the first week of November 2010. What a week!
Below a must link to read entitled
Potash: The Deal that didn't have to die
from Jacquie McNish, Brenda Bouw and Eric Reguly of the Globe and Mail:
Potash: The Deal that didn't have to die
What is Quantitative Easing (QE)? Wikipedia defines; Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, i.e. the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero. It has been termed the electronic equivalent of simply printing legal tender. In simple and plain language, Quantitative Easing (QE) is the printing of money.
Will this QE2 stimulus work? Too soon to know, but at least since Bernanke announced it on Nov. 3, the US dollar has continued to fall against major currencies, like for example, against the yen to a 15-year low. Our Canadian Dollar is now at par as of
November 5, 2010 with the US dollar per Bank of Canada exchange rate below:
Other commodities like gold and silver have gone up from its all-time high as the US dollar falls. Why? Unlike currencies, you cannot print gold, it cannot be devaluated. Gold is a universal currency with no specific economy to protect; it is an alternative investment against the US dollar trade. As gold does not earn any interest, when interest rates are high, investors tend to invest in fixed income yielding instruments like term deposits, guaranteed investment certificates and bonds. Now that interest rates are closed to all time low, gold appears to be an attractive investment, at least for now.
How about silver? It's also been going up recently as it's been lagging the price of gold.
So what would account for the sudden increase in the price of silver recently?
Silver is the alternative investment for a poor man's gold.
The recent news on October 28, 2010 that the US government through the Commodity Future Trading Commission (CFTC)
is accusing HSBC Holdings PLC and JP Morgan Chase & Co of placing "spoof" trading orders to manipulate silver futures and options prices
in violation of the US antitrust law might have spur the recent surge in the price of silver.
Please read the link below from Business Week for more information:
http://www.businessweek.com/news/2010-10-28/hsbc-jpmorgan-accused-in-suit-of-placing-spoof-silver-orders.html
The US has time and time again indicate their dissatisfaction with the pace of the Yuan gains and has urge China to let the currency rise faster. Treasury Secretary Timothy F. Geithner said on Sept. 15, 2010, "The pace of appreciation has been too slow and the extent of appreciation too limited," Geithner said in a testimony prepared for a congressional hearing. "We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly."
China will only do what is best for China and will so far not succumb to pressure especially from the US by devaluating their Yuan. The QE2 in essence is a means of devaluating the US dollar against the Canadian dollar, the Yuan, the Yen and the Currencies of other US trading partners by means of economic growth and job creation as unemployment rate in the US are still at 9.6% stubbornly record high.
U.S. companies are taking advantage of the very cheap borrowing cost by issuing bonds even though their balance sheets are already loaded with cash and obviously do not need the cash. They are taking advantage of the very low interest rate by buying back their shares and/or buying some companies to create synergy and value to their shareholders. Let's look at some of the recent announcements:
Why are companies buying back their shares? It is a signal to shareholders that their stocks are cheap and to increase the value of their shares or eliminate any shareholder(s) who might be planning for a controlling stake as they see their share price cheap. American companies are sitting on $1.1 trillion in cash, according to Atlanta investment advisory firm Balentine. This figure is the highest in 40 years.
Warren Buffett likes companies that buy back their shares if they do so for the right reasons, and if they pay less than the intrinsic value of the share. A share buyback that is designed simply to inflate or support the value of the shares is not a good reason. In 1999, Warren Buffet, the greatest investor of our times said this about share buyback: "Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around." Therefore, according to Warren Buffett, a company can add value to its shares by buying them back only when it has surplus funds and when it can buy them back at a price below intrinsic value.
I will end this market update by quoting another favourite saying of Warren Buffet that keeps me on ground during these very volatile times: Be greedy when others are fearful and fearful when others are greedy.
Mimi C. Tang, CFP CLU CHFC, Investment Advisor
Peak Securities Inc.
www.mimitang.ca
Disclosure: Stocks/commodities mentioned are not a recommendation to buy/sell the stock(s)/commodities. Clients, family and I may or may not have the stock(s) in our portfolios. Please seek the advice of a qualified investment advisor before buying/selling.
Please note: Ms. Mimi Tang, offers financial planning and insurance services as an independent representative, under Mimi Tang Wealth Management and Consulting LTD. and these services are offered independently of PEAK Securities.
PEAK Securities inc., an IIROC registered, full service investment broker, limits its responsibility to investment products such as stocks, bonds, and mutual funds. PEAK Securities inc. is a member of the Canadian Investor Protection Fund.
Call Mimi Tang at 604-566-9998 or email mtang@peakgroup.com
for financial planning in Vancouver, British Columbia, Canada.
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