How the market's crash has hit the wealthiest like Ivanhoe And Lundin And Connacher CEOs

JANET MCFARLAND

From Friday's Globe and Mail

October 16, 2008 at 8:11 PM EDT

The ranks of Canada's billionaires appear to be thinning in the painful bear market gripping global investors.

Since the market's peak on June 6, some of Canada's most famous business people have seen their stakes in public company holdings fall precipitously.

Robert Friedland, for example, who is best known for selling his Voisey's Bay nickel discovery to Inco Ltd. in 1996, has seen the value of his stakes in Ivanhoe Mines Ltd. and Ivanhoe Energy Inc. drop 66 per cent since the market peak in June.

Although his private holdings are not known, the value of Mr. Friedland's two major public investments have fallen far below the $1-billion level, totalling just $440-million as of Tuesday's close.

Two other hard-hit Canadian billionaires are Atco Ltd. owner Ronald Southern and Paramount Resources Ltd. chairman Clayton Riddell, who have both seen their public company holdings fall below the $1-billion mark since June.

In dollar terms, however, some of those hit hardest have been Canada's wealthiest billionaires because of the size of their company stakes.

The Thomson family, for example, has seen its stake in Thomson Reuters Corp. lose $3.2-billion in value since June, even though their majority ownership position is still worth $13-billion.

Grant Rasmussen of UBS Canada said ultra-high-net-worth individuals often have major investments beyond their public company shares, so it is difficult to estimate their true worth simply by looking at their companies' share prices.

“It would capture a large portion, because that is a big chunk of their wealth,” he says. “But the type of money they are rounding off, in terms of hundreds of millions of dollars, would still be a significant amount to most people.”

Older billionaires typically have the most diversified holdings: “With age comes wisdom,” Mr. Rasmussen says.

But even younger ones are often counselled to shape their portfolios to look like “barbells” to offset their risky holdings of one company's shares with large holdings in cash or equivalents, he said.

“So they would try to somewhat even out the risk profile of their two situations,” he said.

Some, he added, pledge some of their shares to borrow money, which they invest to hedge against the risk of so much exposure to one stock.

Most of Canada's wealthiest individuals are still rich by any standard, even if they have taken major hits since June.

Even Vancouver's Lundin family, which has been especially hurt by the market turmoil, still has $162-million of value in Lundin Mining Corp. and several other mining-related public companies. The estate of Adolf Lundin, who died in 2006, has seen its stake in Lundin Mining Corp. lose 70 per cent of its value since June and 97 per cent over the past year.

Lukas Lundin, chairman of Lundin Mining, said last week that he has never seen anything like the current commodities downturn.

“I'm very surprised. This is the worst correction we have had in the last 50 years,” he said in an earlier interview.

Some executives are feeling a pinch. Richard Gusella, chief executive officer of Calgary-based Connacher Oil and Gas Ltd., was required to sell almost half his shares in the company because of a margin call at his brokerage firm.

“Never in my wildest dreams did I expect, with the progress we've made as a company, that we'd have a market meltdown as we've seen,” he said earlier this week.

Amid the gloom, there are a small number of wealthy Canadians who have seen their wealth climb since June.

Prem Watsa, chairman and CEO of Fairfax Financial Holdings Ltd., has seen his stake in Fairfax climb in value by $128-million to $605-million as his company's share price grew by 27 per cent in the period. Similarly, Galen Weston, chairman of the George Weston Ltd. empire, has also seen his stake grow slightly to a total of $4.3-billion as investors move into safe staples such as grocery-store stocks.

Carrigan:three stages of a typical bear market

"Last week, I explained the three stages of a typical bear market. First, we go through the non-belief stage when investors buy declines on dips and ignore outside noise such as falling housing prices and the subtle money shift from small caps to large caps. This is the early stage of a flight to safety.

The second stage is worry as surprising disappointments in the financial sector cause investors to shift money from equities into Treasury bonds, marking the latter stage of a flight to safely.

The third stage is the recognition of a crisis. Normal sector rotation ends and global fundamentals are meaningless as a bearish stampede blows away assets at any price. Fears of another depression mount and eventually a global rescue plan unfolds.

Finally the crisis passes, and the dawn of a new bull market shines light on the debris left behind by the passing bear. The clean-up gets underway and the healing or basing process begins."


Stock mayhem takes cue from Pulp Fiction

October 17, 2008 Bill Carrigan

Last week, while visiting a branch of Union Securities at the height of the stock market selling spree, I was confronted by the branch manager who asked: "Are you scared yet?"
I paused and searched for an answer. I then recalled a line from the restaurant scene in the film Pulp Fiction when Jules (Samuel L. Jackson) was confronted by Pumpkin, a robber who points a gun at his face.

Without blinking, Jules replies: "Hate to shatter your ego, but this ain't the first time I've had a gun pointed at me."

Without blinking, I replied, "I am concerned, but this ain't the first time I've been mauled by a bear market."

Last week, I explained the three stages of a typical bear market. First, we go through the non-belief stage when investors buy declines on dips and ignore outside noise such as falling housing prices and the subtle money shift from small caps to large caps. This is the early stage of a flight to safety.

The second stage is worry as surprising disappointments in the financial sector cause investors to shift money from equities into Treasury bonds, marking the latter stage of a flight to safely.
The third stage is the recognition of a crisis. Normal sector rotation ends and global fundamentals are meaningless as a bearish stampede blows away assets at any price. Fears of another depression mount and eventually a global rescue plan unfolds.

Finally the crisis passes, and the dawn of a new bull market shines light on the debris left behind by the passing bear.

The clean-up gets underway and the healing or basing process begins.
This clean-up or basing period can last for several months – the 9/11 crisis took about nine months to repair. The bottom is first built by the market leaders – financial, technology and telecom, which bottomed in mid 2002. The market laggards – materials and energy – built bases through mid-2003.

We are now probably in that basing period. The broad indexes look to be forming a bottom, though commodity-related stocks could continue to deflate as commodities continue to weaken.
Two important tests loom.

The first test is for the major stock indexes and sub-indexes not to violate the panic lows posted last Friday.

The second test would be the return to natural market rotation – like the lows of 2002-2003 – a condition caused by investors moving in and out of various stock groups.

If over the next few weeks the lows of October 10 hold then a return to sector rotation is likely as investors focus on the economy.

You can see examples of sector rotation by looking at weekly or monthly charts of the various TSX sectors such as the financial, consumer, technology or materials sectors. In the normal course of the business cycle the financial and consumer sectors will lead the broader market indexes and the materials and commodity sensitive stocks will lag the broader market indexes.
Investors should incorporate sector rotation studies into their investment decision process by doing a quick scan of the TSX sub-groups or stock sectors.

One example is to compare the monthly closes of the TSX information technology index to the monthly closes of the TSX energy index in order to spot a lead and lag relationship.
Our two plots extend back to 2002 and clearly illustrate that the technology sector leads the energy sector to the upside and to the downside. Note the price peaks of the tech index in 2004 and again in 2007, well ahead of the energy price peaks of 2005 and 2008.

Note also the tech index is down to long-term support at the 2002-2003 base, giving us a compelling reason to own the TSX technology index and to avoid the TSX energy index.
Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Friday.