Bill Carrigan Says... North America Bull Starts To Run

Times have changed since my first appearance in this space about 15 years ago.

Back then we were investors. Now we are traders. An investor used to be an owner of a business with long-term growth prospects. Now an investor is simply a trader who has held a declining stock too long.

Back in the late 1990s investors were enjoying the late stages of a powerful 20-year linear advance in the major global equity markets. The dominant theme or prime driver of growth was the “new economy” technology boom of 1980 to 2000.

The other dominant theme was the emergence of the financial services and financial planning industry stimulated by the big banks’ entry into the investment dealer space.

Buy and hold worked from 1980 through 2000. The Dow ran from 800 to over 10,000 and all you had to do was to find a way to get on board.

Investors stampeded into the mutual funds which at the time had no competition from the little-known exchange traded fund (ETFs) industry. “Buy, Hold and Prosper”, became the business mantra of the former AIC mutual fund boss Michael Lee Chin who embraced the emerging financial services industry.

The technology bubble burst in 2000 and the “buy-and-hold is dead” movement got underway. Now the fashionable mantra is the cynical “buy, hold, and lose” and “buy, hold and suffer.”

The unfortunate fallout of the technology bubble of 2000 and the subsequent financial crisis of 2008 is that we don’t invest anymore. We trade.

If you do a Google on “online trading” you get 68 million results.

Recently, I got a question from an industry professional wishing to know my one-and-only investment pick. He said his clients were long-term investors. When I asked for a time horizon he replied, “Oh, at least two months.”

How sad and what a waste. What is the point of putting in hours of analysis and then tossing a solid investment away just because you made a few fast bucks?

The root of the problem seems to be that investors and analysts are hyper-focusing on the fiscal and monetary problems in the U.S. along with the noise of the European Monetary Union, wars and the threat of another recession. This in turn has investors jumping in and out of equities in reaction to good and bad news days.

If I had to select my one-and-only investment pick today for at least a 2-year hold I would want a skilled management team who can guide the company through the noise of the global economy.

At this time the Dow Industrial Average is the obvious choice because most of the 30 components are global multinationals, all with skilled management teams.

When you own the Dow you gain direct exposure to names like was McDonald’s Corporation, International Business Machines, Hewlett-Packard Co., Caterpillar Inc., Walt Disney Co., Coca-Cola Company, United Technologies Corp. and Chevron Corp. — all multinational businesses. The dominant theme among the group is their activities in globalizing and expanding their operations overseas.

Our chart this week is the monthly closes of the Dow Jones industrial average plotted above the monthly closes of the iShares MSCI EAFE Index (NYSE-EFA). The EFA is an ETF that seeks to replicate the MSCI EAFE index. The index has been developed by MSCI as an equity benchmark for its international stock performance (Europe, Australia and Southeast Asia).

We can see that, from the 2007 price peaks of both plots, the Dow is the stronger investment product beginning with the financial crisis collapse of 2007 — 2009. The Dow on a peak-to-peak monthly closing basis lost about 50 per cent compared to the 60 per cent loss of the EFA.

More important is the recovery period of 2009 through 2011 with the Dow retracing 83 per cent of the financial crisis collapse compared to the EFA retracement of only 60 per cent of the financial crisis collapse.

Currently the Dow is still out performing the EFA with the recent August lows, well above the July 2010 lows. Over the same period the EFA gave back all of the same period gains.

Canadian dollar accounts can own the Dow via the TSX listed BMO Dow Jones industrial average Hedged to CAD Index ETF (ZDJ) and U.S. dollar accounts can own the Dow via the NYSE listed SPDR Dow Jones industrial average ETF (DIA).

Keep your investment close to home and buy, hold and enjoy.

Bill Carrigan, CIM is an independent stock market analyst

Last August I attended a buddy’s annual rib fest. He wore a T-shirt with a bold statement, “I love vegetarians: more meat for me!”

My next T-shirt will read, “I love the euro crisis: more cheap stocks for me!”

Last Wednesday was a bit of a wake-up call for the bulls when the Dow Jones industrial average dived 3.2 per cent or 389 points as the Europe’s debt crisis focused on Italy’s borrowing costs. That was the Dow’s largest points and percentage drop in seven weeks, and the sixth largest points and percentage drop this year.

Even before Friday’s stock market gains, when you look at the bigger picture, the Dow was only down 8 per cent this week from its 2011 closing high of 12,810 on April 29 and had rebounded more than 10 per cent from its 2011 closing low of 10,655 on Oct. 3.

To regain my confidence as a bull, I need to confirm the nasty April through October mini-bear in the equity markets is over. Technically a bull market will post a long series of higher highs and higher lows. A bear market will post a series of lower highs and lower lows.

The turning points, such as bull market peaks and bear market troughs, are called junctures. Was the early October low in the Dow a juncture?

Our chart this week shows about five months of daily closes of the Dow Jones industrials plotted above the daily closes of the 10-year U.S. Treasury bonds. In this example, I am comparing the level of the Dow to investor fear as illustrated by the flight into U.S. Treasuries. Note the recent prices relative to their August lows. In mid-September, the 10-year bond yield broke below the 2 per cent level of the August lows and the Dow industrials held firm just at the August low. This price divergence has created a bull set-up because while investor fear was greater (lower bond yields), the Dow held firm. This is called bullish divergence.

This week, the price divergence was even greater, with the 10-year Treasuries still at the fearful 2 per cent level and the Dow well above the early October low. Internally the Dow is very healthy. All 30 Dow components are now sitting well above their relative early October lows. A very bullish scenario!

The bottom line here is that, from a technical perspective, the August through October lows are an important juncture that will likely become the origin of a major bull market.

We need to participate. We need to focus more on the earnings and guidance from companies such as Cisco Systems Inc. and less of the names of the Greek and Italian prime ministers.

First you need to know what kind of an investor you are. If you lack experience and are not being advised, keep it simple and just buy the Canadian and U.S. equity markets in two baskets.

For Canadian exposure, you can buy the iShares S&P/TSX 60 Index Fund, which trades under the symbol XIU on the Toronto Stock Exchange. The XIU gives us direct ownership of 60 Canadian large-capitalization companies.

For U.S. exposure, you can buy the SPDR S&P 500 fund, which trades as SPY on the New York Stock Exchange. If you wish to operate only in Canadian dollars, another exchange-traded fund choice is the TSX-listed BMO Dow Jones Industrial Average Hedged to CAD Index ETF, symbol ZDJ.

These products contain the shares of large domestic and multinational corporations, which allow you to participate in both the Canadian and the global economy.

If you are an experienced investor or have an adviser, you may seek to enhance the returns of the above broad and diverse products and drill down a bit into the stock sectors such as the financial, technology or industrial groups of stocks.

In Canada, the three prime price drivers are the energy, materials and financial groups of stocks. Related ETF investment products are the TSX-listed iShares S&P/TSX Capped Energy Index Fund (XEG), the iShares S&P/TSX Capped Materials Index Fund (XMA) and the iShares S&P/TSX Capped Financials Index Fund (XFN).

Another important but lesser profile stock group is the TSX industrials, rich in domestic and global corporations. Unfortunately for Canadian investors, no ETF covers just that sector.

In the U.S., the three prime price drivers are the industrial, technology and financial groups of stocks. For related investment products, try the NYSE-listed Industrial Select Sector SPDR (XLI), the Technology Select Sector SPDR (XLK) and the Financial Select Sector SPDR (XLF).

Again if you only wish to operate in Canadian dollars, BMO Financial Group has a series of ETFs that cover most of the major global asset classes.

Bill Carrigan, CIM, is an independent stock-market analyst.

Central banks provide liquidity

The chase by Marty Cej:

European stocks added to their gains and U.S. stock index futures surged after central banks around the world moved a few moments ago to provide additional liquidity to a financial system that is beginning to seize up. The Bank of Canada, U.S. Federal Reserve, Bank of England, European Central Bank, Bank of Japan and Swiss National Bank agreed to reduce the interest rate on U.S. dollar liquidity swap lines by 50 basis points and extend their authorization through Feb. 1, 2013. In short, that means the banks are providing cheaper money for longer. In its accompanying statement, the Bank of Canada said that the coordinated actions are meant to "provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity."

The action comes after China's central bank cut for the first time since 2008 the amount of cash that banks are required to set aside as reserves. In an unambiguous nod to slumping export demand from Europe, the People's Bank of China said reserve ratios will drop by 50 basis points to 21 percent for the country's biggest lenders on Dec. 5. An adviser to the central bank, Xia Bin, said at a forum this morning in Beijing that the PBOC would maintain a "prudent policy" in 2012. The fact is, prudence now demands lower interest rates in China and elsewhere in the world to revive flagging growth. Yesterday, the talk in the market was about QE3 ? not the "if" of it, but the "when." Earlier this week, the OECD warned that even Canada ? yes, even Canada ? may have to cut rates if things in Europe worsen any further. In other words, central banks are being compelled to stimulate growth whether they want to or not, which is a position none of them appreciate much. This morning, let's talk about the specifics of the coordinated central bank action and the PBOC decision but we'll need to broaden the conversation quickly to include new expectations for quantitative easing in the U.S. and rate cuts in Canada. Will Canadians see lower borrowing costs before year-end?

Finance Minister Jim Flaherty is giving a speech this morning in New York City. We've sent a camera. We'll hear from him shortly.

Meanwhile, in Europe, finance ministers wrapped up a crucial meeting in which they agreed on detailed plans to leverage the European Financial Stability Fund (EFSF or bailing bucket) but could not say by how much because of rapidly deteriorating credit markets. In short, they agree that a lot more money needs to be thrown at the problem by the EFSF but they can't say where they'll get the dough, though the letters I, M and F have been heard in the carpeted halls of Brussels, whispered as if in prayer. Christian Noyer, France's central bank governor and a governing council member of the European Central Bank, presaged the global central bank actions today to an audience in Singapore, saying that "We are now looking at a true financial crisis ? that is a broad-based disruption in financial markets." European leaders get together for a summit on Dec. 9. That means 10 more days of rising funding costs for euro-zone economies and falling confidence in European banks.

Canada's main competition regulator says it has "serious concerns" about Maple Group's $3.7-billion acquisition of the TMX Group. It seems the proposed takeover of Canada's financial markets by Canada's biggest trading firms ? as well as the takeover of the primary clearing house as part of the deal ? has raised the antennae of someone in Ottawa. The TMX and Maple Group have responded by saying they will work with the regulator to address those concerns and perhaps identify possible "remedial measures," which, if I recall my own youth correctly, can range from standing in the hall to getting the strap from Ms. Murphy, the ex-nun with forearms like tree trunks. The announcement comes a day before hearings in Toronto before the OSC. Paul Bagnell has the file.

U.S. outplacement firm Challenger, Gray and Christmas said this morning that planned layoffs in the U.S. were virtually unchanged in November from the preceding month but were down 13 percent from a year earlier. This could provide a little more bullishness to expectations that this Friday's nonfarm payrolls report could exceed the average forecast of 120,000. Canadian jobs are due out Friday as well.

Industry Minister Christian Paradis didn't so much as drop the ball on issue of foreign investment in the Canadian telecom industry yesterday so much as take the European Gambit, or what's known as Kick the Can Down the Road. Admitting that the issue is very serious and of great importance to Canadian consumers and companies, he concluded that it is so important he won't make a decision on it anytime soon. Incumbents, investors, would-be entrants, consumers? they're all asking "what gives?" We need to provide some better answers.

Busy day for economics at home and abroad. We're watching Canadian GDP and home prices as well as the Chicago PMI, U.S. pending home sales, productivity and the ADP employment report.