Ottawa Investment Advisor John Bruce

Client Letter October 2011

October 10, 2011

“You will come to a place where the streets are not marked. Some windows are lighted. But mostly they’re darked. A place you could sprain both your elbow and chin! Do you dare to stay out? Do you dare to go in? How much can you lose? How much can you win?

And if you go in, should you turn left or right…or right-and-three-quarters? Or, maybe, not quite? Or go around back and sneak in from behind? Simple it’s not, I’m afraid you will find, for a mind-maker-upper to make up his mind.

You can get so confused that you’ll start in to race down long wiggled roads at a break-necking pace and grind on for miles across weirdish wild space, headed, I fear, toward a most useless place.

The Waiting Place…for people just waiting.” Dr. Seuss

I have received many calls in the last month from worried clients, wondering if their investments are doomed, whether they should sell and get out, and wanting to know what they can do. This is what I have done in response to the European credit crisis.

Any exposure to European or Emerging Market equities was sold at the end of July, before the recent sell off started.
We have taken profits in August and September where possible.
We have built up some cash to deploy when the volatility ends and an uptrend gets started.
I will review what market conditions should make you sell your holdings:

If you believe that the investment you have is going lower, and will NEVER rise above -its current price – Then sell it!
If your investment has become overvalued- Sell it!
If your investment goes higher than you expected, sooner than you were prepared for – Sell at least half (You can never go wrong taking a profit)
You do not sell because everyone else has. You do not sell at a loss because the market has gone down. All of these reasons will destroy your wealth building plan. You do not sell at a lower price and crystallize a loss, if none of the above reasons to sell are present.

Here is my perspective on the recent volatility in financial markets. Following a gradual decline from May to July, global stock prices dropped sharply at the start of August. The Canadian stock market, for example, was down 8% from August 2-9, and to date it has fallen 18%.

The decline was blamed on a number of factors, with concerns about massive government debts in Europe and the United States taking centre stage. The decision by Standard & Poor’s to downgrade its credit rating on U.S. government debt certainly helped to emphasize the issue. Fears that the U.S. and other developed economies could be going into recession also helped to heighten the market volatility.

It certainly appears that fear became the main driver of this recent sell-off, given the lack of substantive developments ahead of the decline and the speed of the drop. Consider U.S. government bonds. Despite the credit rating downgrade, investors have been buying Treasuries and the U.S. dollar has been rising.

Although the recent decline is reminiscent of the financial crisis of 2008, today’s conditions are vastly better than three years ago. You will recall that in 2008, a number of financial institutions collapsed and the credit markets froze entirely, which contributed significantly to a recession, as many companies were unable to borrow to invest and conduct business.

Today, in contrast, credit is available and corporations are flush with cash. Many banks and other companies have taken the last three years to strengthen their balance sheets. Tellingly, corporate bonds have held their value well in comparison to share prices. In fact, corporate revenues and profits continue to grow. For the second quarter, 77% of the companies listed on the S&P 500 Index have reported earnings that were higher than expected, and their sales grew by an average of 12.5% over a year ago.

There are other positives to keep in mind. Interest rates remain low and energy prices have fallen, both of which will support businesses and consumers. Employment levels continue to grow in Canada and the United States. Though the pace of economic expansion in developed countries is slowing, forecasters are still calling for positive growth this year. Relatively strong growth is also expected to continue in Asia and Latin America.

What does this means for us as investors? It is very difficult to sit through a downturn, especially with the financial crisis of 2008 still fresh in our minds. However, as I have said before, volatility is a normal part of investing. Historically, equity markets have benefited investors who stayed the course. We saw this three years ago, when the financial crisis was followed by a powerful rally in stocks in 2009. However, many chose NOT to buy when the market was on sale and did not participate in the rally.

No one can say for certain when this latest period of volatility will end. However, history shows that markets eventually recover and that long-term investors have been rewarded. If you have any questions or concerns about your investments, please contact me.

Sincerely,

John S. Bruce
Ottawa Investment Advisor
Also licensed in ON, BC, AB, QC, NS
Mackie Research Capital
Direct Line- 613-425-3732
Toll Free- 866-860-4190

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