Intoxicated markets 2011
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  • This disclosure must be included in all reports given to clients. It CANNOT be DELETED or OMITED.
  • So with all this doom and gloom – what do we do with a client’s money?We still diversify globally and use asset allocation as our guide
  • The Canadian market is heavily dominated by 3 main sectors which makes us more susceptible to the volatility of commodity pricing. That’s why people say: Buy Canada, as it’s a play on China and global growth, yet you get less political risk.
  • You are able to participate in opportunities abroad for risk minimization ANDto increase potential return are boosted by diversifying internationally.
  • In the chart above, the blue line represents initial yield on long term US Gov’t bonds. (This means at purchase time, if the bond was yielding 4%, this is the expected return from holding the bond to maturity). The Green line is the actual compounded annual return for the bond holder for next 10 yearsThis is the total return that includes capital gains and interestReally from the late 70’s, there has been great returns for bond holders and capital gains were received from falling rates. Remember, bonds have an inverse relationship between rates and prices. If rates fall, bond prices rise and vice versa. For the last 10 years, bond holders have seen returns roughly in the 6 to 6.5% range. However, going forward the future returns for bond holders are pretty slim. With bonds currently yielding approximately 2%-3% we are starting off the next decade with low opportunities for bond returns. Rates can only fall to zero (capital gain opportunity), making the total return achievable by bond investors low. If inflation is 3%, bond holders will receive near zero real returns.
  • In the chart above, the blue line represents S&P500 Companies and their Operating Earnings. The other two lines represent those same companies earnings distribution to share holders in the form of Share Buybacks (Purple line), and dividends (Green Line).Operating earnings rebounded, and have been strong since 2009.Dividends took a dip in 2008/09 but has since seen growth as well. (think that this is due to US Financials…)The purple line indicates a similar pattern between the growth in share buybacks and the growth operating earnings.A sure sign that shares are undervalued and firms are in a good financial position is share buy backs. When the owners of the company purchase their shares on the open market
  • Valuations of the past decade between bonds and stock has changed drastically, and the next decade is shaping up quite differently.In 1999, the cost to buy $1 of stock market earnings was $40. while $1 of 10 Yr US Gov’t Bond, cost $15. This means was that stock valuation was much higher a decade ago than Bond valuations. At the time investors scoffed if you held a bond. Stocks were overvalued, while bonds were undervalued.In 2011, the situation has flipped. It now only costs $16 to buy every $1 of stock market earnings, where it now costs $50 to buy $1 of Gov’t interest.
  • My final slideCanadian Bull and Bear MarketsThe Canadian stock market has had its fair share of bull and bear markets since 1950. In this analysis, a bear market is defined as the index closing at least 20% down from its previous high close. Its duration is the period from the previous high to the lowest close reached after it has fallen 20% or more. A bull market is measured from the lowest close reached after the market has fallen 20% or more to the next high. Recessions are defined as two or more consecutive quarters of negative GDP.The nine bear markets illustrated have had varying levels of severity and different lengths of recovery. The worst downturn took place from June 2008 to February 2009, when the market fell 43.3% in nine months. This happened when the Canadian stock market was severely affected by the global banking and credit crisis.However, after each bear market in the past, the market has been able to recover. Of course, stocks are a volatile investment and recoveries are never guaranteed, but in general periods of gain followed periods of decline. “This is why you need to work with a financial professional regarding your wealth. Someone to help you temper your emotions and make sound financial decisions. Make sure you work with someone who can independently help you reach your goals.”{A word of caution, though: a loss of 30% (for example), followed by a gain of 30% doesn’t mean that the investor has recovered the full initial value of the investment. If an investor has, let’s say, $100 in the stock market, a 30% decline will leave the investment at $70. A subsequent 30% gain will bring the value up to $91, not $100. This means that higher relative returns are needed after each bear market in order to compensate for the lost value.}

Transcript

  • 1. All returns are total returns in CAD Canada Government Yield Curve – 2010 vs. 2011 4 3Rate (%) 2 1 0 Source: Bloomberg 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y Sep 2010 - Canada Sov Strips Sep 2011 - Canada Sov Strips
  • 2. •• All returns are total returns in CAD• Source: Bloomberg TSX S&P 500 EAFE
  • 3. All returns are total Returns are in CADTSX TSX Sm Cap
  • 4. All returns are total Returns are in USDS&P 500 S&P 400 S&P 600
  • 5. All returns are total returns in USD1,6001,4001,2001,000 800 600 Source: MSCI 400 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 EAFE Net Large Cap EAFE Net Mid Cap EAFE Net Sm Cap
  • 6. Energy, 25.18% Materials, 22.67% Utilities, 2.09% Industrials, Telecom 5.23% Services, 4.98% Consumer Information Discretionary, Technology, 4.20% 1.59% Consumer Staples, 2.87% Health Care, Financials, 1.22%Source: TD Newscrest 29.98%
  • 7. Industrials, Consumer 10.27% Discretionary, Materials, 3.36% 10.65% Energy, 11.63% Consumer Staples 11.68% Utilities, 3.97% Telecom Health Care, Services, 3.29% 12.14% Information Technology, Financials,Source: TD Newscrest 19.44% 13.59%
  • 8. Telecom Utilities, 3.87% Energy, 26.22% Services, 4.17% Energy, 10.99% Materials, 24.06% Information Materials, 9.22% Technology , 11.79% Utilities, 1.85% Telecom Industrials, Services, 4.70% Industrials, 5.29% 11.45% Information Consumer Financials , Technology, Discretionary, 19.55% 1.81% 3.88% Consumer Staples, 2.58% Consumer Financials, Health Care, Discretionary,Source: TD Newscrest 1.17% 28.44% Health Care, 10.78% Consumer 8.76% Staples, 9.42% Source: S&P
  • 9. Global Equity Capitalization August 31, 2011 Hong Kong, 1% Taiwan, 2% Brazil, 2% Korea, 2% United States China, 2% 43% Germany, 3%Switzerland , 3% Australia, 3% France, 3% Canada, 5% United Kingdom, 8% Japan, 8% Source: S&P
  • 10. 10% 12% 14% 16% 0% 2% 4% 6% 8%Dec-25Feb-30Apr-34Jun-38 Initial YldAug-42Oct-46Dec-50Feb-55Apr-59Jun-63 Comp. Ann. Return, Next 10 YrsAug-67Oct-71Dec-75Feb-80Apr-84Jun-88Aug-92Oct-96Dec-00 The future starts hereFeb-05Apr-09 Source: Ibbotson, BofA
  • 11. $100 Operating Earnings$80 Share Buybacks Dividends$60$40$20 Source: S&P $0 Dec-99
  • 12. The cost to buy $1 ofCompany Earnings or Bond Interest, then and now $50 $40 $15 $16 Stocks Bonds Stocks Bonds
  • 13. $1,800 $15,000 $375$40 $1,600 Greed $250$30 Greed $12,000 $1,400 $125$20 $1,200 $9,000 $0$10 $1,000 $6,000 -$125 Fear $800 $0 Source: S&P, ICI Fear -$250 $600-$10 $3,000 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09