The document summarizes an article by Jeffrey Saut discussing the behavior of retail investors over the course of bull markets. It notes that retail investors tend to sell stocks too early after price increases, repurchase the same stocks at even higher prices, and hold on too long during market declines. The article cites a 1917 book that documented this behavior and concludes it still persists today. It warns that with the current bull market in its mature stage, retail investors following these typical patterns could see their stocks continue rising in the short term but face losses if the market declines.

1. Posts Tagged ‗Retail Investors‘
―Street Smarts‖ (Saut)
Tuesday, March 6th, 2012
―Street Smarts‖
by Jeffrey Saut, Chief Investment Strategist, Raymond James
March 5, 2012
Some people can have a lot of experience and still have good judgment. Others can pull a great
deal of value out of much less experience. That’s why some people have street smarts and others
don’t. A person with street smarts is someone able to take strong action based on good judgment
drawn from hard experience. For example, a novice trader once asked an old Wall Street pro
why he had such good judgment. ―Well,‖ said the pro, ―Good judgment comes from experi-
ence.‖ ―Then where does experience come from?‖ asked the novice. ―Experience comes from
bad judgment,‖ was the pro’s answer. So you can say that good judgment comes from experi-
ence that comes from bad judgment!
. . . Adapted from ―Confessions of a Street Smart Manager‖ by David Mahoney
Years ago I read a book that a Wall Street professional told me would give me good stock market
judgment by benefitting from the bad experience of others who had suffered various hard hits.
The name of the book was ―One Way Pockets.‖ It was first published in 1917. The author used
the non de plume ―Don Guyon‖ because he was associated with a brokerage firm having sizable
business with wealthy retail investors and he had conducted analytical studies of orders executed
for those investors. The results were illuminating enough to afford corroborative evidence of
general investing faults that persist to this day. The study detected ―bad buying‖ and ―bad sell-
ing,‖ especially among the active and speculative public. It documented that the public tends to
―sell too soon,‖ and subsequently repurchase stocks at higher prices by buying more stocks after
the stock market has turned down, and finally liquidate all positions near the bottom; a sequence
true in ALL similar periods.
For instance, the book shows that when a bull market started the accounts under analysis would
buy for value reasons; and buy well, albeit small. The stocks were originally bought for the long-
term, rather than for trading purposes, but as prices moved higher on the first bull-leg of the rally
investors were so scared by memories of the previous bear market, and so worried they would
lose their profits, they sold their stocks. At this stage the accounts showed multiple completed
transactions yielding small profits liberally interspersed with big losses.
In the second phase of the rally, when accounts were convinced the bull market was for real, and
a higher market level was established, stocks were repurchased at higher prices than they had

2. previously been sold. At this stage larger profits were the rule. At this point the advance had
become so extensive that attempts were being made to find the ―top‖ of the market move such
that the public was executing short-sales, which almost always ended badly.
Finally, in the mature stage of the bull market, the recently active and speculative accounts
would tend not to over-trade or try to pick ―tops‖ using short-sales, but would resolve to buy and
hold. So many times previously they had sold only to see their stocks dance higher, leaving them
frustrated and angry. The customer who months ago had been eager to take a few points profit on
100 shares of stock would, at this stage, not take a 30-point profit on 1,000 shares of the same
stock now that it had doubled in price. In fact, when the stock market finally broke down, even
below where the accounts bought their original stock positions, they would actually buy more
shares. They would not sell;, rather the tendency at this mature stage of the bull market and the
public‘s mindset was to buy the breakdowns and look for bargains in stocks.
The book‘s author concluded that the public‘s investing methods had undergone a pronounced,
and obvious, unintentional change with the progression of the bull market from one stage to
another; a psychological phenomena that causes the great majority of investors to do the exact
opposite of what they should do! As stated in the book, ―The collective operations of the active
speculative accounts must be wrong in principal [such that] the method that would prove prof-
itable in the long run must be reversed of that followed by the consistently unsuccessful.‖
Not much has changed from 1917 and 2012, just the players, not the emotions of fear, hope, and
greed; or, supply versus demand, as we potentially near the maturing stage of this current bull
market. Of course stocks can still travel higher in a maturing bull market, but at this stage we
should keep Don Guyon‘s insight about maturing ―bulls‖ in mind. Verily, this week celebrates
the third year of the Bull Run, which began on March 9, 2009 and we were bullish. With the
S&P 500 (SPX/1369.63) up more than 100% since the March 2009 ―lows‖ it makes this one of
the longest bull markets ever. As the invaluable Bespoke Investment Group writes:
―Going all the way back to 1928, the current bull market ranks as the ninth longest ever. Even
more impressive is the fact that of the nine bull markets that lasted longer, none saw a gain of
100% during their first three years. Based on the history of prior bulls that have hit the three-year
mark, year four has also been positive.‖
Now, recall those negative nabobs that told us late last year the first half of 2012 would be really
bad? W-R-O-N-G, for the SPX is off to its ninth best start of the year, while the NASDAQ
(COMPQ/2976.19) is off to its best start ever! In seven out of the past ten ―best starts,‖ the SPX
was higher at year-end, which is why I keep chanting, ―You can be cautious, but don‘t get bear-
ish.‖ Accompanying the rally has been improving economic statistics and last week was no
exception. Indeed, of the 20 economic reports released last week, 15 were better than estimated.
Meanwhile, earnings reports for 4Q11 have come in better than expected, causing the ratio of net
earnings revisions for the S&P 1500 to improve. Then too, the employment situation reports con-
tinued to improve. Of course, such an environment has led to increased consumer confidence
punctuated by the February‘s Consumer Confidence report that was reported ahead of estimates
at 70.8, versus 63.0, for its best reading in a year. And that optimism makes me nervous.

3. Nervous indeed, because the SPX has now had 42 trading sessions year-to-date without so much
as a 1% Downside Day. Since 1928 the SPX has only had six other occasions where the SPX
started the year with 42, or more, trading sessions without a 1% Downside Day. Worth noting,
however, is that in every one of those skeins the index closed higher by year‘s end. Still, in addi-
tion to the often mentioned upside non-confirmations from the D-J Transportation Average
(TRAN/5160.13) and the Russell 2000 (RUT/802.42), seven of the SPX‘s ten macro sectors are
currently overbought but the NYSE McClellan Oscillator is now oversold, Lowry‘s Short Term
trading Index has fallen 12 points since peaking on January 25th (which interestingly is the day
before the Buying Stampede ended), the Operating Company Only Advance/Decline Index
(OCO) has nearly 1,000 fewer issues than where it was on February 1st, suggesting the rally is
narrowing, the number of New Highs confirms the OCO (last April the index had similar read-
ings right before a correction), and sticking with the April 2011 comparison shows a striking
similarity to the December 2010 – February 2011 trading pattern for the SPX and we all remem-
ber how that ended (see chart on page 3). And then there‘s this from my friend Jim Kennedy of
Atlanta-based Divergence Analysis, whose proprietary algorithms I use on a daily basis:
―The currently developing negative divergence pattern by our Risk Indicator is a model event
that historically leads to a correction phase. This correction ‗is not in play‘ now, as the Risk indi-
cator (historically) turns up again to show the final surge of the rally. Once Risk reverts down
after that, the correction phase is ‗in play‘. For your review a picture of the 2007 Risk negative
divergence pattern and resulting correction.In 2007 this negative development led first into a
smaller, trading range correction, a new higher top (with Risk diverging), and then the larger
price correction of approximately 150 S&P points.This one may play out differently, but we
have a nice guide to show the way.‖
The call for this week: I am at the Raymond James 33rd Annual Institutional Conference this
week and suggest you exercise ―street smarts‖ in my absence. While I remain cautious (not bear-
ish) there are still things to do. For example, I continue to like the strategy of looking at compa-
nies whose share price has collapsed for a one-off event. Recall, this was the case with Acme
Packet (APKT/$30.26/Strong Buy) back in January, where in our analyst‘s view the stock swoon
had taken a lot of the price risk out of the equation. A similar sequence occurred last week with
Vocus (VOCS/$13.52/Strong Buy), where our fundamental analyst maintains his positive view.
For further information on either of these companies please see our fundamental analysts‘ recent
reports. I will speak with everyone next week.
Déjà vu?

4. Click here to enlarge
Print-Or-Panic: TrimTabs On The Market's
Meltup
Friday, January 20th, 2012
As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn
from US equity mutual funds in w/e January 4th — the largest since the meltdown in early
August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, 'who is
pumping up stock prices?' His answer is noteworthy as a large number of indicators suggest
institutional investors are more optimistic than at any time since the 'waterfall' decline in
the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global
asset allocator sentiment surveys, and the huge variation between intraday 'cash' and overnight
'futures market' gains (the latter responsible for far more of the gains), the bespectacled Bay-Area
believer strongly suggests the institutional bias is based on huge expectations that the Fed will
announce another round of money printing (to stave off the panic possibilities in an election
year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-
for-trash short squeeze that has been so evident) must be questioned given his concluding
remarks.
While we fully expect QE to come, we can't help but question the willingness to meet market
expectations so head on (remember when the Fed used to like to surprise) but with ever blunter
(and seemingly weaker) tools, what more can they do — leaving a market (and note here we did

5. not say economy as that is clearly not benefiting) that needs exponentially more 'juice' (EUR10tn
LTRO?) just to keep from the post-medicinal crash.
Jeffrey Saut: "Terminator 3: Rise of the
Machines"
Tuesday, August 16th, 2011
Terminator 3: Rise of the Machines
by Jeffrey Saut, Chief Investment Strategist, Raymond James
August 15, 2011
I was in Chicago last week seeing portfolio managers (PMs), doing media ―hits,‖ and presenting
at seminars for our retail investors. The most ubiquitous question I received was, ―Who is selling
all this stock?‖ Clearly that‘s a valid question since the parade of PMs on CNBC insisted they are
not selling stocks, statistics show hedge fund managers are already pretty ―light‖ on stocks, the
international institutions I talk to are so underweight U.S. equities it is doubtful they are selling,
and order flows show retail investors aren‘t really selling individual stocks either (they are, how-
ever, liquidating mutual funds). So who‘s selling? I think it is the ―machines,‖ driven by high-
frequency trading (HFT) and Exchange Traded Funds (ETFs). As defined by Wikipedia:
―In high-frequency trading, programs analyze market data to capture trading opportunities that
may open up for only a fraction of a second to several hours. High-frequency trading uses com-
puter programs and sometimes specialized hardware to hold short-term positions in equities,
options, futures, ETFs, currencies, and other financial instruments that possess electronic trading
capability.‖
Exacerbating the situation are ETFs that are leveraged 2:1, or even 3:1, which if bought on mar-
gin implies 4 to 6 times leverage. Moreover, when ETFs buy or sell, they do so across the spec-
trum of stocks within their universe with NO regard for the fundamentals of any individual stock.
So yeah, I think it is the ―Rise of the Machines‖ that has compounded the ―selling stampede‖ that
began on July 8th, and hopefully ended on August 9th with what a technical analyst would term
a long-tailed ―bullish hammer‖ candlestick chart formation. If correct, that would make the stam-
pede 23 sessions long. Recall, stampedes typically last 17 – 25 sessions, with only 1 – 3 session
pauses/corrections, before they exhaust themselves. It just seems to be the rhythm of the ―thing‖
in that it takes that long to get participants either bullish, or bearish, enough to act. Obviously, in
this case, it would be bearish enough. Consistent with this thought, it is worth noting that in July
retail investors liquidated $23 billion worth of U.S. stock mutual funds for the largest liquidation
since October 2008‘s $27 billion. My sense is even more liquidation is taking place this month.

6. Yet, it is not just mutual fund liquidation indicating the selling skein is over. Corporate insiders
are buying shares at the highest rate since the March 2009 bottom; at last week‘s lows the divi-
dend yield on the S&P 500 (SPX/1178.81) exceeded the 10-year T‘note‘s yield (read: historically
bullish for stocks); and if you believe 2012‘s consensus earnings estimates, last Monday the SPX
was trading at a PE under 10x with an Earnings Yield of ~10%, leaving the Equity Risk Premium
around 8%. Ladies and gentlemen, those are valuation metrics not seen in years. To that value
point, since the first Dow Theory ―sell signal‖ of September 1999, I have opined the equity mar-
kets were likely going into a wide-swinging trading range akin to the 1966 – 1982 affair where
an index fund made you no money for 16 years. In December 1974 the D-J Industrial Average
(INDU/11269.02) made its ―nominal‖ price low of 577.60, but its ―valuation‖ low (the cheapest
the INDU would get on a PE, book value and dividend basis) didn‘t occur until the summer of
1982. Fast forward, I have argued the ―nominal‖ price low for this 11-year range-bound market
took place in March 2009 and have added, ―I don‘t know when the ‗valuation‘ low will come.‖
But maybe, just maybe, if next year‘s estimates are right, and we don‘t go into a recession, we
may have made the ―valuation‖ low over the past few weeks.
Whether that ―valuation low‖ thought is correct or not, I am fairly confident the selling squall
has compressed stocks so much a short-/intermediate-term bottom has been, or is being, made.
To wit, over the past week I have repeatedly stated the equity markets were epically ―oversold.‖
To be sure, finding a session as bad as last Monday‘s, when less than 2% of all the stocks traded
closed ―up‖ on the day, one has to go back to May 1940. At that time, the markets believed the
world was ending when the Germans punched a ~60 mile wide hole in the Maginot Line and
poured into France. Another way to look at last Monday is to measure how far the SPX is below
its 50-day moving average. While not as massively compressed as in the 1987 Crash‘s 5.5 stan-
dard deviation, at 4.3 the SPX is very oversold as can be seen in Figure 2 on page 3 from our
brainy friends at Bespoke Investment Group. Additionally, the astute Lowry‘s organization
writes:
―This week will go down in the record book as one of the most manic of all time, with four alter-
nating negative and positive 90% Days, each generating changes in the DJIA of more than 400 to
600 points. There is nothing even close to this frenzy in the 78 year history of the Lowry Analy-
sis. The causes of the week‘s mass confusion will be debated for years to come, but the immedi-
ate question is, what should investors do now?‖
Lowry‘s concludes:
―As of Friday‘s market close, all of the requirements of Buying Control No. 1 were completed,
calling for a 25% invested position. The 2nd stage of the buying program will be completed if
Buying Power rises ten points to 391 or higher, confirmed with a ten point drop in Selling Pres-
sure to 358 or lower.‖
While we agree with Lowry‘s, and have recommended the cash raised last February/March grad-
ually be recommitted to stocks, we think there will be a bottoming process over the coming
weeks. In all my talks last week, I likened the current decline to those of October 1978 and Octo-
ber 1979 (Figure 1 on page 3). Both of those ―stampedes‖ came out of the blue with no funda-
mental reasons. Following the initial selling-climax low, there was a sharp rally that peaked with

7. a subsequent retest of those ―climax lows.‖ The 1978 bottoming process took seven weeks to
complete, while in 1979 it took only four weeks. Still, while the stock market‘s bottoming
process should take weeks, many individual stocks have probably already bottomed. That sense
was reinforced last week with our fundamental analysts‘ comments on names like: Linn Energy
(LINE/37.86/Strong Buy), EV Energy Partners (EVEP/$66.21/Strong Buy), Healthcare REIT
(HCN/$45.88/Outperform), First Potomac Realty (FPO/$12.99/Strong Buy), CenturyLink
(CTL/$34.61/Strong Buy) to name but a few.
What a (Cash) Drag: Institutional Investors
and ETF Cash Equitization
Thursday, July 28th, 2011
By Kevin Feldman, CFP, iShares
How institutional investors handle “cash drag”- and how you
can, too.
I recently blogged about a report from Greenwich Associates that showed institutional ETF usage
is on the rise. One of the primary ETF strategies in that space? Cash equitization, an approach
that‘s little-used (and perhaps even little-known) in the individual investor realm. Reading
through the report and all the subsequent media coverage got me thinking – why aren‘t more
retail investors using ETFs to equitize their cash?
At first glance, cash equitization using an ETF is pretty straightforward. As opposed to carrying
a significant cash position, an investor simply selects an ETF that closely approximates their tar-
get risk and asset class exposure to remain invested in the market. Typically institutional
investors will implement a cash equitization strategy when cash is on the sidelines and waiting to
be put to work. For example, at times large institutional clients are transitioning between man-
agers or doing a search for a new manager in a particular asset class. Rather than risking under-
performance through ―cash drag‖ (deviation of returns from a benchmark‘s returns due to cash

8. holdings), the institution will invest in an ETF with similar asset class exposure as an interim
solution.
Institutions have been using ETFs for cash equitization since, well, the beginning. In fact, when
ETFs first came on the scene, they were mostly perceived as institutional products – and some of
those institutions were getting their feet wet with the products by using them for cash equitiza-
tion. The largest and most liquid ETFs lend themselves to this practice because there‘s now a
wide variety to choose from, total costs are generally very low for short holding periods, and typ-
ically they‘re easily traded throughout the day.
So why do institutions want to avoid cash drag, and how does their reasoning apply to individual
investors? Likely one of the biggest reasons an institution would choose equitization over hold-
ing cash is that they believe market returns will be positive over time (that‘s why we invest,
right?). Both equities and bonds have experienced strong performance as of late (the S&P 500
Index was up 30% over the past year as of 6/30/2011). Conversely, interest rates on many cash
vehicles are near 0% at the moment, so portfolio cash may actually be earning negative real
returns after inflation is taken into account. And although cash holdings can reduce risk in the
form of portfolio volatility, they can ―drag‖ on returns in up markets.
In addition, the case for cash equitization can be even stronger in an institutional bond portfolio
than in its equity counterpart. For one thing, income from bond holdings naturally increases cash
levels more than in an equity portfolio, making the portfolio more susceptible to cash drag. And
since a key component of a fixed income portfolio is often to invest in income-generating securi-
ties, the low yields on cash can work against that strategy. When an institutional bond fund
wishes to reduce its cash holdings and employ a cash equitization strategy, ETFs offer a com-
pelling solution with an assortment of criteria to choose from such as yield, maturity, credit qual-
ity, and sector in order to match specific investment objectives and risk tolerance levels.
How does this apply to individual investors? Well, they might have a certain amount in cash that
they already know is eventually destined for the market, but that they just haven‘t gotten around
to investing yet (this is obviously much different than cash that‘s been earmarked for savings or
expenditures). The ―institutional approach‖ might be to consider using an ETF to get that cash
off the sidelines and out of its zero– or near-zero-yielding account and into the market (if that‘s
where it‘s headed eventually) to manage your own personal cash drag. Keep in mind that invest-
ing in an ETF has much higher risks associated with it than investing in cash, so investors should
consider their own risk tolerance and return objectives before entering the market. Additionally,
investors should work with their financial advisor and tax planner to determine if the costs of
moving in and out of an ETF position and possible tax consequences outweigh the overall cash
drag on their portfolio.
Past performance does not guarantee future results.
Buying and selling shares of ETFs will result in brokerage commissions. There can be no assur-
ance that an active trading market for shares of an ETF will develop or be maintained.
Bonds and bond funds will decrease in value as interest rates rise.

9. Commodities in Portfolio Construction (Lee)
Tuesday, March 29th, 2011
Commodities in Portfolio Construction
by Alfred Lee, CFA, DMS
Vice President & Investment Strategist
BMO ETFs & Global Structured Investments
BMO Asset Management Inc.
alfred.lee[at]bmo.com
Monthly Strategy Report March 2011
Over the last decade, commodity and commodity-related investments have gained significant
popularity with both institutional and retail investors. Given their sizable returns over the last ten
years, historical low correlation to traditional asset classes and emerging markets soaking up
much of the supply, it should not come as much of a surprise. Coming out of the credit crisis,
major central banks around the globe, most notably the U.S. Federal Reserve (Fed), were focused
on reflating the global economy.
The co-ordinated easy monetary policies, government stimulus measures along with quantitative
easing were largely a positive for broad commodities which tend to be used as a hedge against
declining currency values and particularly a falling U.S. dollar. Essentially, investors benefited
from merely having exposure to a broad basket of commodity and commodity related
investments.
With global stimulus and the second instalment of quantitative easing1 (QE2) moving further
into the rear-view, the reflation trade should be less of a driver in global commodity prices going
forward, especially considering the Fed is anticipated by some to remove QE2 stimulus this sum-
mer. Independent supply and demand fundamentals as a result should play a more important role
in driving commodity prices going forward. In addition, with political turmoil in the Middle East
and now the unfortunate tsunami in Japan, these issues will have different macro factors on the
varying commodity sub-groups.
Commodity Differentiation
With that in mind, investors may want to consider commodity differentiation at this point in their
portfolio construction process. As global economic fundamentals slowly improve, correlation
between assets and within assets such as commodities should naturally decrease (as detailed in
the correlation matrices on the following page) in an economic thawing process. Moreover, as
previously mentioned, the negative headlines will have varying impacts and ramifications on
each of the commodity groups. Investors should therefore focus on commodities that have the
best risk-adjusted returns and those which will further optimize their overall portfolio.

10. As many investors are aware, the proliferation of exchange traded funds (ETFs) and exchange
traded products (ETPs)2 have allowed investors to efficiently implement commodity exposure to
their portfolios in a number of different ways. Through ETFs and ETPs, investors can access
commodity futures, commodity related companies and in some cases, spot prices. Investors
should however first be cognisant that different commodity sub-groups react differently to
macro-economic events and each also has its own fundamental and technical trading patterns.
Secondly, how each ETF or ETP structure reacts to these same macro-events can also be different
based on how it is accessing the specific underlying commodity (ie through spot, futures or
equities).

11. For further information on the advantages and disadvantages of each commodity ETF/ETP struc-
ture, please see the ―Gaining Commodity Exposure Through ETFs‖ on our website. In the fol-
lowing pages, we will outline our fundamental and technical outlook on four major commodity
subgroups: agriculture, base metals, energy and precious metals.

12. • Agriculture. As we mentioned at the beginning of the year in our BMO ETF 2011 Outlook
Report, food price inflation will be a topic du jour this year, with global population anticipated to
hit seven billion and the rising wealth in the emerging nations continuing to place upward pres-
sure on soft commodity prices. Furthermore, extreme weather patterns over the last year in Aus-
tralia and Latin America will lead to tighter supplies. Already this year, we have seen the
future contracts of a number of soft commodities such as wheat hit its limit up3 in trading.
Now with a number of agriculture commodity contracts such as wheat, corn and soybeans cur-
rently trading in backwardation4 or in mild contango5, we prefer attaining soft-commodity expo-
sure through futures based ETFs/ETPs. Some agriculture related companies may experience
expansion at the middle portion of their income statements should they not be able to pass full
grain cost appreciation to consumers. As a result, futures may provide a more pure exposure to
higher agriculture prices considering the current characteristics of the commodity curve. We
would caution however, that with the strong run up in many of the agriculture contracts, we
would look at technical indicators such as RSI6 and MACD7 for entry points.
Potential Investment Opportunities:
• BMO Agriculture Commodity Index ETF (ZCA)
– on pullbacks.

13. • Base metals. Base metals as a group saw very sizable returns in 2009 with the S&P/GSCI
Industrial Metals Spot Index gaining 91.2%. As copper, zinc and nickel are largely tied to indus-
trial production, prices in these metals are rather sensitive to economic expansion. In addition
base metal prices are highly correlated to stock market sentiment, given equity values on a whole
are also a leading macro-economic indicator. In 2010, volatility in equity market sentiment with
investors switching frequently between the ―risk-on‖ and ―risk-off‖ trade, led base metals as a
group to lag other commodity groups. We are the least favourable on base metals when looking
for assets to best optimize a portfolio‘s risk/return characteristics because of the high correlation
between copper, zinc and other industrial metals to equity prices.
Moreover, as we see equity market volatility shocks to be a common theme this year, base metal
future trades should be utilized more for higher-beta momentum trades based on timing than
portfolio construction building blocks. For investors looking for base metal exposure, we do
however currently favour futures based ETPs over equity-based ETFs as base-metal related com-
panies have run significantly against the S&P/GSCI Industrial Metals Spot Index. The futures
curve characteristics for base metals are mixed with a number of contracts recently moving to a
steeper backwardation. Nevertheless, products incorporating a ―smart-roll‖ feature that look to
reduce roll effects should be considered by those desiring exposure in this area.

14. Potential Investment Opportunities:
• BMO Base-Metals Commodity Index ETF (ZCA)
– for momentum based trades.
• Energy. Energy prices remain one of the wildcards in the revival of the global economy.
Should Brent crude prices and, to a lesser extent, West Texas Intermediate (WTI) defy gravity for
a sustained period of time, it could potentially put the brakes on the global recovery as higher oil
prices would increase everything from costs of production inputs to transportation. However,
much of the recent rise in crude prices is also a result of the markets pricing in a risk premium
and an emotional element, seen through a widening gap between implied and realized volatility
on crude.
Investors with an extremely short-term horizon may want to consider futures-based energy ETPs.
Though we wouldn‘t be surprised to see the price of Brent crude and WTI rise further, it comes at

15. a higher risk/reward trade-off given the sizable amount of emotion that is currently priced into
oil. Last month, when rumours that Libyan leader Muammar Gaddafi was shot broke out, the
emotional premium in oil prices quickly dissipated before rapidly recovering after the news was
declared
false. This demonstrated the excessive level of political premium currently built into crude
prices. An investment in crude through futures is therefore an indirect bet that turmoil in the
Middle East will continue. Additionally as we had forecasted back in January, higher crude
prices would come at higher volatility levels this year. As such, we believe oil related companies
have a better risk/reward trade-off at this point, even if they have lagged crude prices as they
show a more stable trend and have exhibited lower volatility levels.
Potential Investment Opportunities:
• BMO Energy Commodity Index ETF (ZCE)
– Shorter-term investors
• BMO Junior Oil Index ETF (ZJO)
– Longer-term investors
• Precious Metals. Of the four commodity groups mentioned, precious metals have shown to be
the least correlated to broad based equities. The non-correlation to both the S&P 500 Composite
Index and the S&P/TSX Composite Index is largely the affect of the market‘s utilization of pre-
cious metals, such as gold, as a multi-purpose hedge. Last year, the sovereign debt crisis and
concerns of a global currency war led to the use of precious metals as a hedge against fiat curren-
cies. This year, with food and commodity prices rising, money is slowly transitioning out of the
former trade as an alternative currency and into a hedge against inflation concerns.
On a technical level, gold prices have recently shown strength particularly against the equity
market and base metals. Within the precious metals sector, small-cap gold companies, which we
were extremely bullish on throughout 2010, have recently been gaining relative strength against

16. large-cap gold companies. Investors looking for portfolio diversification may want to consider
bullion or ETPs that track gold through bullion or futures, whereas investors looking for ways to
generate portfolio alpha should consider junior gold companies.
Potential Investment Opportunities:
• BMO Precious Metals Commodity Index ETF (ZCP)
– Investors looking for portfolio diversification
• BMO Junior Gold Index ETF (ZJO) – Investors looking
to generate portfolio alpha
In conclusion, we believe commodity exposure will remain an instrumental building block for
both institutional and retail portfolios. However, with correlations between commodity sub-
groups on the decline, investors should first consider the sub-group of commodities that will best
optimize their investment strategy and then determine the investment structure that is best suited
to execute their objectives. With the possibility of the removal of QE2 stimulus by the Fed
quickly approaching, investors will also need to consider individual supply and demand funda-
mentals of each commodity since the reflation trade will be less prevalent in keeping all com-
modities afloat.
Footnotes
1 Quantitative easing: An unconventional monetary policy used by some central banks when tra-
ditional measures have not produced the desired effect. Money supply is typically increased in an
effort to promote increased lending and liquidity.

17. 2 Exchange-traded products (ETPs): A broader categorization of exchange-traded funds that also
include products that hold commodities, futures and other asset types.
3 Limit up: The maximum amount by which the price of a commodity futures contract may
advance in one trading day. Some markets close trading of these contracts when the limit up is
reached; whereas others allow trading to resume if the price moves away from the day‘s limit. If
there is a major event affecting the market‘s sentiment toward a particular commodity, it may
take several trading days before the contract price fully reflects this change. On each trading day,
the trading limit will be reached before the market‘s equilibrium contract price is met.
4 Backwardation: When the futures price is below the expected future spot price. Consequently,
the price will rise to the spot price before the delivery date.
5 Contango: When the futures price is above the expected future spot price. Consequently, the
price will decline to the spot price before the delivery date.
6 RSI: Relative Strength Index is a technical momentum indicator that compares the magnitude
of recent gains to recent losses in an attempt to determine overbought and oversold conditions of
an asset. A reading of 30 or less is generally considered oversold, whereas a reading of 70 or
more will be considered overbought.
7 MACD: Moving Average Convergence Divergence: A trend-following momentum indicator
that shows the relationship between two moving averages of prices. The MACD is calculated by
subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day
EMA of the MACD, called the ―signal line‖, is then plotted on top of the MACD, functioning as a
trigger for buy and sell signals.
For more information on BMO ETFs, please visit our website bmo.com/etfs or contact your
financial advisor.
To be added to the distribution list for our Monthly Strategy Report and Trade Opportunities
Report, please visit our homepage at bmo.com/etfs to subscribe or email alfred.lee@bmo.com
with title: ―Add to distribution list.‖
Standard & Poor‘s®, S&P® and S&P GSCI® are registered trademarks of Standard & Poor‘s
Financial Services LLC (―S&P‖) and have been licensed for use by BMO Asset Management Inc.
BMO Agriculture Commodity Index ETF, BMO Base Metals Commodity Index ETF, BMO
Energy Commodity Index ETF, BMO Precious Metals Commodity Index ETF are not sponsored,
endorsed, sold or promoted by S&P or its Affiliates and S&P and its Affiliates make no repre-
sentation, warranty or condition regarding the advisability of buying, selling or holding units of
the ETFs.
Commissions, management fees and expenses all may be associated with investments in
exchange traded funds. Please read the prospectus before investing. The funds are not guaran-
teed, their values change frequently and past performance may not be repeated.

18. This communication is intended for informational purposes only and is not, and should not be
construed as, investment and/or tax advice to any individual. Particular investments and/or trad-
ing strategies should be evaluated relative to each individual‘s circumstances. Individuals should
seek the advice of professionals, as appropriate, regarding any particular investment.
BMO ETFs are administered and managed by BMO Asset Management Inc., a portfolio manager
and a separate legal entity from the Bank of Montréal.
® Registered trade-marks of Bank of Montréal.
The Big Secret Behind Gold's $100 Collapse
Thursday, January 27th, 2011
by Adam Hewison, CEO, Seasoned Trader, MarketClub/INO.com
The question many investors are asking themselves today is, just what happened to the price
of gold?
Did the world change? Did the problems in Europe go away? Did all the states manage to find
funding to cover their deficits?
No, none of that happened, but gold still dropped $100.
It's all about market perception and timing, two things we've talked about many times before on
the Trader's Blog. I don't know about you, but I remember when gold was over $1,400 an ounce
and all I could see on TV where ads from gold companies extolling the virtues of buying gold as
it is real money. Since the fall, I expect we'll see fewer of these advertisements on TV and
in print.
So what did happen to gold?
Well, for starters there were some key technical levels broken. If you're a gold trader, but not a
technical trader, you really need to learn how to read charts and see what other traders are doing.
Secondly, there did not appear to be any other news to drive this market higher. When that hap-
pens, markets tend to fall under their own weight, and as many retail investors purchased gold,
there was nobody on the other side of the market to support gold.So the question is, is the move
over in gold? That's a tricky one. I want to show you in today's video exactly how we're looking
at this very emotional market. Every time we have created a video indicating that there would be
some pullback in gold, we were bombarded by the gold bugs saying that we're crazy. When you
see a market pullback as much as gold has, you have to have some respect for the market itself.

19. If we look at the price of gold today at approximately $1,330, it pretty much equates to what hap-
pened in the last 30 years when gold was trading at a high of $850 an ounce. If you factor in
inflation over the last 30 years, gold is probably lower now than it was 30 years ago. So how
good an investment is gold? I think gold is more of a barometer of fear than anything else.
Clearly there are other investments in the marketplace that have better returns.
Let's get back to gold and what we think will happen. In this short video we analyze the market
using our "Trade Triangles," the Williams%R, and the MACD indicator.
Adam Hewison
President of INO.com
Co-founder of MarketClub
Gold's Mania Phase Still Ahead
Wednesday, January 5th, 2011
After a $325 rise in 2010, gold bullion yesterday suffered its steepest one-day loss since July –
down by $34 at the U.S. close after an intra-day low of -$40. The chart below shows the sell-off
plunging the gold price down to right on top of its 50-day moving average. Also, the ―triple top‖
could point to more downside in the short term.
Source: StockCharts.com
Does gold‘s decline mark the end of the ten-year bull market? Or was it just a question of heavy
profit-taking after performance gaming at the end of December?

20. BCA Research commented as follows: ―The gold bull market has been driven by the potential
inflationary implications of current large fiscal deficits and central banks that are prepared to
stop at nothing to prevent deflation. It may be several years before developed-world real interest
rates return to the norms of earlier decades, especially in the U.S. In this environment, gold will
continue to be an excellent insurance policy and should continue to fare well when measured
against the major currencies.
―In addition, it is hard to make the case that gold is currently a crowded trade. Many institutional
and retail investors agree with the gold bull case but have been slow to act, even as their faith in
conventional stocks and bonds has ebbed. Indeed, based on investor meetings and anecdotal evi-
dence, we estimate that the average portfolio allocation to gold is around 1%. This suggests that
there is plenty of pent-up demand which could still flow into gold and related shares.
―True, the gold bull market will proceed in instalments, not a straight line. It would not be a sur-
prise to see gold suffer occasional selloffs of perhaps a few hundred dollars at a time during
2011. We would broadly view these selloffs as opportunities to boost core holdings. The bottom
line is that gold is a potential mania candidate and expect good returns in this metal in 2011.‖
I couldn‘t have said it better myself.
Source: BCA Research, January 4, 2011.
Largest High Grade Bond Outflow On
Record
Monday, December 20th, 2010
While it was no surprise to readers that equity mutual funds saw the 32nd consecutive outflow
from domestic stock funds (for a total of $95 billion YTD), what was far more surprising is that
flows out of credit, and particularly high grade, surged. As Bank of America notes, "high grade
mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth
occurrence this year so far, according to data from EPFR." The question then becomes where did,
and will, all this cash go: if now following such a massive outflow from the traditional flow safe-
haven, no money still goes to equities, then it will be fairly simple to conclude that no matter
what happens, that equities are now thoroughly embargoed by the vast majority of retail
investors: those that, incidentally, account for just under 40% of market capitalization (a number
which curiously is almost comparable to the amount of stimulus notional, both fiscal and mone-
tary, since the Lehman crash).
From BofA:

21. High grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and
just the fourth occurrence this year so far, according to data from EPFR. As we highlighted yes-
terday, negative net flows in high grade funds tend to follow large sell offs in rates, which has
occurred since the beginning of this month. In other asset classes, high yield mutual funds saw
$222 million in net flows, the second consecutive weekly inflow, but lower than last week‘s fig-
ure of $533 million. Factors pointed to a mild but positive number, as daily flow figures were
inconsistent, with two positive and two negative readings. CDX indices performed well early in
the week, but softened towards the end, also providing an inconclusive signal. Net flows from
institutional and retail investors were largely split, with institutional investors reporting inflows
of $153 million or 0.2% of assets, and $120 million or 0.2% of assets from retail. Importantly,
non-US domiciled funds saw their third consecutive weekly outflow, $28 million this week,
compared to an inflow of $233 million from US domiciled funds. Finally, inflows to loans
reached a record by dollar amount, according to AMG/Lipper data.

22. China Imports Five Times More Gold
Saturday, December 4th, 2010
Just last week we highlighted how India and
China are driving global gold demand (Read: India and China Continue to Drive Global Gold
Demand) but it appears demand from China is even stronger than we thought.

23. Statistics released today by the Shanghai Gold Exchange show that China‘s gold imports have
jumped over 460 percent in just the first ten months of this year. Through October, China‘s gold
imports totaled 209 tons of gold, up from just 45 tons in 2009.
And they‘re not done yet. Historically, the fourth quarter is when China imports the largest
amount of gold so we could see much higher figures when all is said and done.
The import figures were released as a part of a presentation from Shanghai Gold Exchange
Chairman Shen Xiangrong. Chinese inflation worries have picked up steam as the year has pro-
gressed and Shen said ―uncertainties in domestic and global economies, and increasing anticipa-
tion of inflation [in China], have made gold as a hedging tool very popular‖ as investors look for
a store of value, according to several news reports.
Shen added that 70–80 percent of the imported gold has been transformed into mini gold bars
which the Financial Times describes as a ―classic product for retail investors.‖
While the figures are astounding, we‘ve been discussing this developing trend for several years.
Since 2000, the gross national income (GNI) per capita on a purchasing power parity basis has
jumped nearly 200 percent in China.
Without a social safety net, efficient retirement savings vehicles and a limited number of invest-
ment options, these wealthier citizens are turning to the metal that they began using as a currency
more than 4,000 years ago.
We believe the figures released today reflect long-term gold demand and are not short-term in
nature.
Horizons AlphaPro Launches Canada‘s First
Actively Managed Preferred Share ETF
Monday, November 22nd, 2010
Horizons AlphaPro Launches Canada's First Actively Managed Preferred Share ETF

24. Toronto, November 23, 2010 — AlphaPro Management Inc. ("AlphaPro"), manager of the
Horizons AlphaPro exchange traded funds ("ETFs"), has launched Canada's first actively man-
aged preferred share ETF, the Horizons AlphaPro Preferred Share ETF (the "Preferred Share
ETF").
The Preferred Share ETF will begin trading today on the Toronto Stock Exchange under the sym-
bol HPR. The sub-advisor to the Preferred Share ETF is Natcan Investment Management Inc.
("Natcan"), which currently manages more than $1 billion dollars in preferred share assets.
"We're very happy to be working with Natcan once again. Their fixed income team has done a
great job in managing the recently launched Horizons AlphaPro Corporate Bond ETF, Canada's
largest actively managed ETF. We expect more of the same with the Preferred Share ETF based
on our belief that an active strategy can overcome many of the limitations found in trying to
replicate a preferred share index," said Ken McCord, President of AlphaPro.
The investment objective of the Preferred Share ETF is to provide dividend income while pre-
serving capital by investing primarily in preferred shares of Canadian companies. The Preferred
Share ETF may also invest in preferred shares of companies located in the United States, fixed
income securities of Canadian and U.S. issuers, including other income generating securities, as
well as Canadian equity securities and exchange traded funds that issue index participation units.
The Preferred Share ETF will, to the best of its ability, seek to hedge its non– Canadian dollar
currency exposure to the Canadian dollar at all times.
Natcan anticipates yields on investment grade preferred shares will stay strong over the next two
years and that the asset class will likely continue to see a growth in interest from income seeking
retail investors, many of whom are looking to increase their income in retirement. This process
could be accelerated by the phase-out of many income trusts in 2011 and beyond.
"Preferred shares really hit a sweet spot for many Canadian investors," Mr. McCord said. "They
offer attractive, tax-efficient yields and are generally less volatile than common shares. For
investors with a need for income and an appropriate risk tolerance, preferred shares can be a
very effective investment solution."
Commissions, management fees and expenses all may be associated with an investment in the
Preferred Share ETF. The Preferred Share ETF is not guaranteed, its value changes frequently
and past performance may not be repeated. Please read the prospectus before investing.
About Natcan Investment Management (www.natcan.com)
Founded in 1990, Natcan Investment Management Inc. is a subsidiary of the National Bank of
Canada. Since the firm's founding, Natcan has privileged shared ownership between the parent
company and its key professionals. Recognized as a leading portfolio management firm in
Canada, Natcan provides investment solutions to institutional clients, and acts as sub-advisor for
mutual funds and private wealth portfolios. With approximately $25 billion in assets under man-
agement as of September 30, 2010, the firm has about 45 investment professionals across its
Montréal and Toronto offices.

25. About AlphaPro Management Inc. (www.HAPETFs.com)
AlphaPro is an innovative financial services company specializing in actively managed exchange
traded funds with assets under management of approximately $435 million as of October 29,
2010. AlphaPro is a subsidiary of BetaPro Management Inc. ("BetaPro"). BetaPro is Canada's
largest provider of leveraged, inverse leveraged and inverse ETFs. BetaPro manages approxi-
mately $2.6 billion in assets as of October 29, 2010. BetaPro is a subsidiary of Jovian Capital
Corporation (JOV:TSX).
For more information:
Ken McCord, President, AlphaPro Management Inc., (416) 933-5746 or 1–866-641-5739
Getco Churns Nearly Entire GM Float As
Stock Closes At Lows Of Day, And $1 Below
Break Price
Thursday, November 18th, 2010
The only clear winner from today's GM IPO? All those who got IPO shares and flipped them to
the sheep. And of course GETCO, which churned 452 million of GM's 478 million share
float: in other words 95% of the entire float was traded by computers! As for everyone else,
you lost: with the stock closing at the lows of the day, all retail investors who bought in post the
break, and on the way down ended up with losing positions.We eagerly await the teleprompter's
appearance at 4:15 pm eastern to spin this in the right way and convince people that a loss is
really a gain.

26. Tags: Appearance, Break, Computers, Getco, Gm, Ipo Shares, Lost, Lows, People, Retail
Investors, S 478, Sheep, Stock, Teleprompter
Posted in Markets | Comments Off
Don't Believe The Rally?
Tuesday, October 26th, 2010
by Leo Kolivakis, via Pension Pulse

27. I wanted to follow-up on my pre-
vious post where Leo de Bever articulated his fears on what will happen when the music stops.
Joe Saluzzi, co-founder of Themis Trading, was interviewed on Yahoo Tech Ticker on Monday
(see video below):
Major averages are hovering near their highest levels since September 2008, but retail investors
continue to flee the market.
Domestic equity funds have suffered outflows for 24 consecutive weeks through Friday, and
over $81 billion has come out of domestic equity mutual funds year to date, according to
Morningstar.
At the risk of stating the obvious, several factors explain why investors simply don't trust
the rally.
Twice bitten, thrice shy: Having been burned by the bursting of the tech stock bubble in 2000,
the housing bubble and the financial crisis of 2008, investors are understandably wary of getting
sucked in again. A "lost decade" for index investors hasn't helped either.
It's the Economy Stupid: With the "real" unemployment rate near 17%, millions of Americans
simply have no money to put into the market; many are cashing out their 401(k) plans and other-
wise raiding their nest eggs in an effort to stay afloat.
Given the economic backdrop, it's no surprise many investors see the rally as being detached
from reality and due only to the Fed's easy money policies...and the promise of more!

28. "We're not seeing any sort of growth other than stimulus," says Joseph Saluzzi, co-founder of
Themis Trading. "That is a very disturbing thing — the constant stimulus that keeps on coming
that really does nothing other than barely keep you above [breakeven] on the GDP print."
In addition, Saluzzi says investors are rightfully worried about a market dominated by "high-
speed guys just chasing each other up and down the price ladder."
Unsafe at High Speeds
As has been widely reported, high-frequency trading routinely accounts for more than 50% of
daily U.S. equity trading volume and regularly approaches 70%.
Saluzzi isn't opposed to high-frequency trading per se, calling it a "byproduct of the market
structure," as detailed in the accompanying video. But he believes that structure is broken, thanks
to rules promoting computer-driven trading, most notably Reg NMS.
As a result of regulatory changes and new technology, events like the May 6 ‗flash crash' "will
happen again," he says. "There's not a doubt in my mind."
Many retail investors feel the same way, another reason for the mistrust of the rally and why
about $65 billion of the equity fund outflows this year have occurred in the five months since the
"flash crash".
So are high frequency trading (HFT) platforms accounting for 70% of the daily trading volume?
I'm not sure if it's that high but I have no doubt that today's stock market is primarily driven by
multi-million dollar computers developed by large hedge funds and big banks' prop desks.
But what's the best way to beat high frequency trading? Take a long-run view on a stock, a sec-
tor, or an asset class. You're never going to beat the computers day trading but you can make
money in these markets by understanding the weakness of these HFT platforms. For example, if
you hold shares of a solid company and the price plunges on high volume for no real valid rea-
son, chances are some HFT is going on in that company. My advice is to add to your positions on
those dips and just hold on. If you get cute, placing tight stop losses, you're going get burned.
Just like anything else, computers have advantages and disadvantages.
[Note: Keep an eye on Citigroup ©, a favorite target of HFTs, and Research in Motion (RIMM).
Both stocks are primed to break out from these levels. I prefer RIMM.]
What worries me more is what Saluzzi says on how volatility is impacting the IPO market. But
the facts don't back up his claims. In fact, according to Renaissance Capital, $23 billion was
raised in the global IPO market last week, making it the biggest week this year and signaling a
revival in investor interest for this class of equities:
The Hong Kong offering of AIA, a carveout of AIG's Asia Pacific life-insurance business, raised
$17.8 billion, making it the fifth-largest IPO on record. Also Taiwan's TPK Holdings has a $200
million IPO; the firm is the supplier of the touch-screen technology behind Apple's iPad.

29. In early November, Coal India IPO is set to raise more than $3 billion in what may be the
country's largest-ever initial public offering.
In the U.S., handbag-maker Vera Bradley (VRA), Chinese education provider TAL Education
(XRS) and Italian restaurant chain Bravo Brio (BBRG) raised a combined $440 million, while in
South America, oil and gas provider HRT Participações sold $1.4 billion in new stock on
Thursday.
Norway‘s Statoil Fuel & Retail raised $800 million after pricing at the top of the range Thurs-
day. Andthe world's largest online betting exchange, London-based Betfair, made its public
debut by raising $540 million.
The average 2010 IPO has returned 6.3% from its first day close to date, outpacing the 4.8%
year-to-date return of the MSCI World Index (IWRD), says Renaissance.
―Heavy, deal flow, positive returns and a swelling IPO pipeline suggest an active close to an
already active year, and an IPO market that has finally returned to more normalized issuance lev-
els,‖ the company said in an online blog.
As for the economy, don't just focus on the US. CPB Netherlands Bureau for Economic Policy
Analysis released its world trade report on Monday, showing world trade up 1.5% month-on-
month in August and world industrial production up 0.2%:
Compared to its long run average, production momentum remains high in July, particularly in the
United States, the Euro Area, and emerging Asia.
There is a lot of slack in the US economy, but things are slowly shifting. As for the rally, there is
plenty of liquidity to propel shares much higher. While I understand asset managers who are
skeptical, I fear they will be left in the dust when the markets start going parabolic. And whether
or not you believe in the rally, it's irrelevant. What is relevant is how long can you afford to
underperform the markets before you lose your job?
Emerging Markets Diary (August 30, 2010)
Friday, August 27th, 2010
Emerging Markets Diary (August 30, 2010)
Strengths
Thailand‘s GDP expanded by a higher-than-expected 9.1 percent in the second quarter
from a year earlier, as surging exports helped offset the impact of political turmoil.
Second-quarter GDP rose 7.9 percent year over year in The Philippines, exceeding con-
sensus estimates. Growth was driven by higher fixed-asset investment, especially in con-
struction, and government spending.

30. GDP and consumption levels in dollar
terms place Russia on par with Brazil and India, according to Troika Dialog research.
Data from the Brookings Institution imply that Russia actually has the largest middle-
class consumption among the BRIC nations, which supports the consumer sector invest-
ment theme.
The Brazilian corporate and retail investors still continue to borrow—the data from July
show 18 percent growth of outstanding loans year over year.
•The unemployment rate in Brazil in July declined to 6.9 percent from 7 percent in June.
With the latest inflation data at 4.4 percent, below the official target of 4.5 percent, the
market expectations are that the current interest rates of 10.75 percent are unlikely to
change by year-end
Investors continue to be attracted by the prospects of Brazil. Shell and Cosan set up a
joint venture to produce sugar and ethanol and to consolidate the fuel distribution in the
country. The combined entity will have an 18 percent market share in the fuel distribu-
tion, behind Petrobras (34 percent) and Ultrapar (21 percent)
Retail sales in the greater Santiago area in July increased by 25 percent year over year.
The Central Bank of Chile updated a previously forecast GDP growth of 4 percent to 5
percent, saying it is more likely to reach 6.5 percent
Weaknesses
Hong Kong‘s July exports increased by a slower-than-expected 23.3 percent year over
year, while imports grew a less-than-estimated 24.9 percent year over year, reflecting a
slowdown in China.
According to WINDS database, out of 90 Chinese property developers listed in Shanghai
and Shenzhen that have reported first-half results, close to two-thirds show negative oper-
ating cash flows. A similar ratio was last seen in the middle of 2008.
Russia‘s ministry of economy estimated that the drought will shave off at least 0.4 per-
cent to 0.5 percent from GDP growth this year. According to Reuters, potential total
effect on the economy could be 0.7 percent to 0.8 percent being slashed from GDP
growth.
An appreciating Chilean peso (up 3.3 percent against the U.S. dollar last month) is caus-
ing strain for many Chilean exporters. The Central Bank rejected an intervention call at
this stage, saying the currency strength is a reflection of the strength of the Chilean
economy

31. Opportunities
The 60-mile traffic jam in Northern China since August 14 is attributable to coal trans-
portation to meet higher demand for power generation because of unusually hot weather.
The provinces of Inner Mongolia, Shanxi and Shaanxi account for half of China‘s coal
production. Truck transportation to coastal regions has added tremendous pressure on
highway infrastructure. These bottlenecks highlight the longer-term need for more infra-
structure construction in the hinterlands and shorter-term opportunity for higher coal
prices.
Russian car deliveries increased 9 percent in the first seven months of the year and
jumped 48 percent in July, compared to first-half year sales growth of 0.6 percent in the
rest of Europe.
The Venezuelan government will cancel $200 million in outstanding debt of Colombian
exporters. Although the two countries represent very divergent political systems, their
trade relations remain strong
HSBC is reported to be bidding for a controlling stake in Nedbank, the fourth-largest bank
in South Africa. It remains to be seen whether the South African authorities will autho-
rize such a transaction after holding ICBC (of China) to a 20-percent stake in Stan-
dard Bank

32. Time Warner bought a stake in Chilevision, the local free-to-air TV network, for around
$150 million. It remains to be seen how Time Warner, which already operates in Chile
through CNN, will reposition its strategy in the country
Threats
Deteriorating U.S. economic data, including housing sales and unemployment, might
weigh on investor sentiment toward Asian countries that have largely relied on exports
for the current recovery.
The constitutional referendum on September 12 could limit potential upside in Turkish
equities until the outcome is known. Historically, market performance was hindered by
the prospect of a coalition government.
Mexico continues to battle to restore stability while conducting its war on drugs.
India to Open Equity Markets to Foreign
Retail Investors
Tuesday, August 24th, 2010
This article is a guest contribution by American Century Investments.
Over the past few years, India has moved forward with market-oriented economic reforms such
as reductions in tariffs and other trade barriers, the modernization of its financial sector, major
adjustments in government monetary and fiscal policies, and more safeguards for intellectual
property rights. In a move to reform its economy and boost double-digit growth, India—Asia‘s
third largest economy—is now planning to open equity markets to foreign retail investors.
The Financial Times reported last week (―India Eyes Foreign Retail Share Investors,‖ August 9,
2010) that a panel set up by the government to explore ways of bolstering foreign capital inflows
had recommended making it easier for foreigners—particularly wealthy foreign nationals of
Indian origin—to buy shares on the Indian exchanges.
In the article, Ashvin Parekh, a partner at Ernst & Young in Mumbai, who has also been working
with the finance ministry on the project, said that ―the finance ministry has accepted the recom-
mendations in principle as it wants to capitalize on India‘s incredible growth by attracting more
foreign investors.‖ The move to open up the country‘s equity market to retail investors abroad
had been passed on to India‘s market regulator and central bank, which would have to create a
framework to protect investors‘ interests.
About 18 years ago, foreign institutional investors were first allowed to invest in India. Now,
foreign-owned brokers are common and trade directly on the country‘s exchanges, while individ-
ual investors are prohibited from such practices. The plan to open up equity markets to foreign

33. markets comes as India‘s exchanges are upgrading technology in a bid to lure high-speed,
computer-driven trading that accounts for a large proportion of activity on U.S. and European
stock exchanges.
India‘s government is also reportedly seeking to raise about $5 billion by selling minority stakes
in state-owned groups, including Oil India and Coal India, and as investors eye India for higher
financial returns. Over the past six months, India‘s equity market has drawn much foreign insti-
tutional investor cash. In addition, the economy has grown 8.5% on the back of strong domestic
demand and abundant liquidity, thus outperforming large emerging market rivals.
In the first seven months of 2010, foreign institutional investors have poured approximately $11
billion into Indian equities (see chart below), compared with about $7.5 billion during the same
period last year. Analysts expect inflows for this year to top the $17 billion record hit in 2007.
Source: The Financial Times
More Growth Potential for Investors
While opening up its equity market to foreign retail investors will likely benefit India and
increase capital inflows in that country, there is also more growth potential for investors who are
prepared to accept the risks and invest for the long term.
Over the past decade, the economies of emerging market countries like India have been more
dynamic and faster growing than the developed world. Maintaining growth and stability is cer-
tainly a top priority for emerging market countries like India. Compared to when emerging mar-
kets funds were first listed some 20 years ago, the asset class is also better regulated and offers
more transparency due to improvements in the legal and financial systems. Many economies
such as India have also built up their foreign exchange reserves, which allows them withstand
market turbulence from developed economies. Moreover, sound macro fundamentals and stimu-
lus measures helped the country weather the recent global financial crisis.

34. Over the next five years, we also believe that India and emerging market economies will be dri-
ven not only by export demand from the rest of the world, but by growth in domestic consump-
tion, including health care, technology, infrastructure, and finance, among others. Accordingly,
we think that this will create huge opportunities for investors and companies doing business in
these sectors.
Investment return and principal value will fluctuate, and it is possible to lose money by investing.
International investing involves special risks, such as political instability and currency fluctuations. Investing in
emerging markets may accentuate these risks.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance
of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is
for educational purposes only.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The
fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read
carefully before investing. Investments are subject to market risk.
The Art of Outperformance (Jensen)
Sunday, July 4th, 2010
This article is a guest contribution of Neils Jensen, Absolute Return Partners.

35. ―When data contradicts theory in a discipline like physics, there is excitement amongst scientists
[…]. When data contradicts theory in finance, there is dismissal.‖
Robert Arnott
Active management in the equity field is a notoriously difficult art. In fact so difficult that more
and more investors give up and go passive instead. If you can‘t beat them, join them. In the US
alone, retail investors have withdrawn about $350 billion from active equity managers in the past
two years and instead pumped $500 billion into passive investment vehicles (mostly ETFs).
Retail investors are not alone. Sovereign wealth funds, endowments and pension funds are all
allocating ever larger amounts to passive instruments. By one estimate, some $4 trillion worth of
actively managed assets will switch to passive management over the next 5 years(1).
Behind this flight to armchair investing lies a growing realisation that the majority of active man-
agers will never consistently beat the index. Newly published research from Standard & Poors(2)
suggests that for the five year period ending 31 December, 2009, only 39% of active large cap
managers outperformed the S&P500. In mid– and small-cap, the problem was even more pro-
nounced with only 23% and 33% outperforming the respective benchmarks.
It all began with Harry Markowitz, Eugene Fama and the efficient market hypothesis, developed
back in the 1950s. A decade later, when William Sharpe published his work on the capital asset
pricing model (CAPM) on the basis of Markowitz‘s and Fama‘s earlier work, it gradually became
accepted that it is near impossible for most mortals to outperform the market (Warren Buffett is
obviously not a mere mortal). Hence the foundation for passive investing, index funds and ETFs
was laid.
The irony of all of this of course is that ultimately the growth of passive investments will create
anomalies and inefficiencies. Stock prices will be driven more by inclusion/exclusion in the
indices than by the intrinsic value. For stock pickers, such an environment is likely to create
enormous opportunities. But we are not there yet. For the time being, in the equity arena, index
products are likely to continue to outperform the majority of active managers.
So why do most active equity managers underperform? Many a research paper has been written
on this subject, and I am not particularly keen to add to an already long list. I think it is far more
interesting to look for solutions, so I shall answer the question only superficially. The most obvi-
ous reason is cost. Between management fees, performance fees (sometimes), trading costs, cus-
tody and admin fees, active managers often start the year being behind by 2% or more. Not easy.
However, cost alone does not explain the difference between active and passive managers; if it
did, active managers would consistently underperform and that is not the case. ‗Herding‘ is
another reason. We are all prone to it. Herding manifests itself in a number of different ways. For
example, investors tend to fall in love with the same investment ideas, which can drive valua-
tions up in the short to medium term but cause over-crowding longer term and ultimately lead to
a collapse in valuations (think dotcom). In the survey conducted by CREATE Research, asset
managers from all over the world were asked which markets would be expected to grow the
fastest and which would offer the best opportunities for alpha going forward.

36. Chart 1: CREATE Research Survey on Market Opportunities
The response, which is shown in chart 1 above, speaks for itself. Not surprisingly, most of us
have fallen in love with Asia. It is hard to disagree that Asia looks likely to deliver higher growth
than both Europe and North America in the years to come; however, to conclude on that basis
that Asia will also offer the best opportunities for alpha may be a step too far. This is an example
where unrestricted affection for a particular market may have clouded the minds of investors – a
classic example of herding.

37. The Fear Premium of Gold
Friday, May 14th, 2010
Email this article | Print this article
Gold prices were hitting record highs as gold's appeal as a safe haven asset exploded. June gold
was down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250
in previous session.
The metal‘s surge was driven primarily by concern that an almost $1 trillion loan package in
Europe will slow the region‘s growth and debase its currency. Adjusted for inflation, gold is near
its highest since April 1981, based on data at Bloomberg.
Record Investment Boosted by ETFs
Global investors, led by the US, last year bought a record 228.5 tons of gold in the form of bul-
lion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metals
consultancy.
Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold.
Holdings in physically backed gold exchange traded funds are at record highs after some ETFs
last week experienced their biggest inflows in over a year.
The largest gold ETF–the SPDR Gold Trust (GLD)–recorded its highest daily inflow since early
2009 last week with total holdings hitting a record 1,185.78 tons.
Pattern Change – Gold & Stocks
Gold tends to rise when investors are uneasy about risky investments, so gold often gains as
stocks fall. However, stocks continued to recover from last week's big drop, while gold also
broke new highs. (Chart 1)
Meanwhile, the euro broke through the 14-month low reached against the dollar last week touch-
ing $1.2516. Some analysts say a test of the euro's 2008 low of $1.2330 looks likely in coming
sessions. These are clear signals that investors' anxiety is with the euro.

38. Pattern Change – Gold, Dollar & Euro
Furthermore, gold prices usually go down when the dollar strengthens. But that inverse relation-
ship gold previously has with the dollar has now been switched to the euro since late last year
due to the sovereign debt crisis in Greece and Europe (Chart 1).
The lack of faith in the sustainability of the euro has been driving investors to flee the euro and
go into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamental
strength in the U.S. currency. Rather, it's ―relatively stronger‖ against the embattled euro.
Similar to Crude — Gold Has a High ―P/E Ratio‖
Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or
twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic
fundamentals for gold are "completely upside down." Demand from jewelry has been weak, and
that much of gold's recent strength has been speculative in nature.
However, similar to crude oil, gold also has become an asset class in itself and trades beyond
market fundamentals. Gold has long been a safe haven when world markets are gripped by fear.
Those fear factors—outlined below–if prolonged, will most likely drive investors to gold and
send gold‘s P/E ratio soaring far beyond the demand/supply fundamentals.
Fear Factor #1 – Inflation
Analysts say there‘s a lot of fear on the part of the Europeans that moves to mitigate debt crisis
will only lead to more problems. FT.com reported that traders and coin dealers said buying was
exceptionally strong from German and Swiss investors.
The spike appears to reflect concerns in Germany about the potential inflationary impact of the
European Central Bank‘s decision to buy up euro zone government bonds in the wake of the
Greek debt crisis. Outside the euro zone, dealers said that demand was also strong in North
America.
Fear Factor #2 — Fiat Currencies Debase

39. The potential for other countries to be overwhelmed by debt also has investors rethinking paper
currencies in general. Gold is vastly appealing as it has become the only reserve currency not
backed by debt.
It is this fear that has fueled the price of gold rising against every major currency, not just the
thrashed euro. (Chart 2)
Fear Factor #3 – Mountainous Sovereign Debt
The European Monetary Union (EMU) collectively is facing €965 billion of debt redemption this
year. Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81
billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)
The Greek contagion may seem to be partially contained at the moment, but investors are still
concerned widespread fiscal tightening could derail the already weak European economic recov-
ery. Continued fears over the stability of the euro zone should further depress the euro and buoy
gold prices.
The sheer scale of fiscal deficits facing numerous countries, including the United States, will
likely prompt further diversification from fiat currencies and could ultimately propel gold to
fresh highs.

40. Dissimilar to Crude – Not a Real Commodity
As noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors.
However, unlike crude oil, which is an essential energy source that the world cannot function
without, gold has no real fundamental demand except for the use in jewelry.
Indeed, much of gold's recent run-up has been driven by speculators, which means the
correction(s) could be just as ferocious as the climb-up once investors' fear subsides.
Short to Medium Term — Hinges on The Euro
Gold has risen 40% since the beginning of 2009, which suggests the market could be due for a
correction. A dip in gold prices within the next 10 to 20 months is certainly possible as European
and U.S. markets stabilize.
For now, the general trend over short term basis is still to the upside. But at this juncture, gold
looks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest in
gold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart
4)
In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation,
is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos and
fear, and gold certainly has a proven record of thriving on both.
Off

41. A Magic Bullet for Inflation and Deflation?
Wednesday, February 3rd, 2010
During the better part of the last 18 months, since the financial crisis erupted, the debate over
whether we are in store for inflation or deflation has dominated the investment decision making
thoughts of all market participants, from retail investors to hedge fund managers.
The burning question – "Are we heading for inflation or deflation?" – is the toughest one to hur-
dle. Since there is no way of knowing, you have to make a decision based on what you know
about each, then, make a decision about how to invest, based on your decision. Its precarious at
best. Many investors, however, unable to settle on an outlook, will choose the option that
requires the least amount of thought – cash, GICs, and short term bonds – and wait for things to
be clarified.
That's why something hedge fund manager David Einhorn, of Greenlight Capital wrote last year
has got my attention again.
Which Way Now? Hard Assets or
Government Bonds?
Sunday, January 31st, 2010
The debate in the market between inflationists (majority) and deflationists (minority) continues
to complicate investors' ability to make decisions about where to deploy funds.
During the course of the year, inflationists benefited from the tailwind provided by the declining
value of the dollar. The rally in risk assets came thanks to Bernanke's deflation-busting policy,
and, ironically, therefore, as long as the news remained dire on GDP growth and unemployment,
we could count on interest rates to remain around zero percent, and the dollar to continue lower
as faithless investors ditched it.
For nine months, the dollar declined as the market put risk back "on." At the very beginning of
the rally, in March 2009, the market's mood was very dark. The genesis of the rally was the short
covering of bank stocks and financials, and the full scale launch of the dollar funded carry trade,
mostly taking place in institutional and hedge fund trading rooms. Except for the wiliest, it most
certainly was not driven by retail investors. The retail investor is usually late to the party once
fear of missing opportunities sets in.

42. The rally in the dollar as of late November has confused the inflationist view as the tailwinds
appear to have reversed. This has been, and remains a difficult time to make risk-based invest-
ment decisions.
Bill Gross Investing in Long-Dated
Treasuries
Tuesday, September 29th, 2009
Bloomberg reports that PIMCO's Bill Gross is exchanging his corporate bonds for longer-dated
government securities out of concern for deflation. This is a theme that we have written exten-
sively about during the course of the year.
Bill Gross, who runs the world‘s biggest bond fund at Pacific Investment Management Co., said
he‘s been buying longer maturity Treasuries in recent weeks amid a re-emergence of deflation
concern.
―We‘ve exchanged our mortgages for the government‘s check‖ as the Federal Reserve winds
down purchases of agency debt, Gross said in an interview from Newport Beach, California,
with Bloomberg Radio.
Gross boosted the $177.5 billion Total Return Fund‘s investment in government-related bonds to
44 percent of assets, the most since August 2004, from 25 percent in July, according data
released earlier this month on Pimco‘s Web site. The fund cut mortgage debt to 38 percent from
47 percent.
This is very interesting if you've been following Bill Gross' calls during the course of the year.
Late last year and early this year, Gross was a huge investor in corporate debt, particular the debt
of financials that received support from the government in the form of guarantees. Gross' main
thesis was and continues to be "Shake hands with the Government." By the way, corporate debt
has outperformed its equity peers during the course of the year, and was considered by many
large investors as the superior bet given the option to invest in equities. The strategy of buying
corporate debt (which was regarded as a lower risk than equities earlier this year) is one that
eluded most retail investors because the credit market is generally perceived as out of reach or
sophisticated.
Much of the "easy" money has already been made in corporate debt, and its likely now that
investors, who are still for the most part sitting in record levels of cash, may stay there, or be
lured into the equity market by the powerful rally seen the last two quarters.
If, on the other hand if you're in the same camp as Gross, that deflation is still something to
worry about, then longer dated governments may be the way to go. In Gross' "New Normal" de-

43. leveraging, de-globalization, and re-regulation are three dominant themes that flatten out the
yield curve, which remains steep, and a flattening yield curve means short term rates rise while
long term rates fall. The short term rates will be a little while in rising as it may be a little prema-
ture for the Fed to touch them, but the long term rates will come down as the market continues
down the deleveraging path Gross and a few others are counting on, as assets get substituted for
cash on institutional balance sheets. For the large institutions who continue to target their balance
sheets, this 'recovered' equity market is a perfect opportunity to sell some reflated assets, and that
means that a large amount of cash will be used to retire debt and/or refinance Option ARM mort-
gages for that matter.
Long term rates are likely to fall on this development.
Boom and Burst: Don't be fooled by false
signs of economic recovery. It's just the lull
before the storm
Monday, August 24th, 2009
Andy Xie is a former Morgan Stanley economist now living in China; The following is from the
South China Morning Post:
The A-share market is collapsing again, like many times before. It takes numerous government
policies and ―expert‖ opinions to entice ignorant retail investors into the market but just a few
days to send them packing. As greed has the upper hand in Chinese society, the same story
repeats itself time and again.
A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and,
hence, net losses. The redistribution of the remainder, moreover, isn‘t entirely random. The gov-
ernment, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public
offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.
The truly random part for the redistribution among speculators is probably 50 cents on the dollar.
The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chi-
nese people poorer. The system takes advantage of their opportunism and credulity to collect
money for the government and to enrich the few.
I am not sure this bubble that began six months ago is truly over. The trigger for the current sell-
ing was the tightening of lending policy. Bank lending grew marginally in July. On the ground,

44. loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, gov-
ernment officials will speak to boost market sentiment. They might influence government-related
funds to buy. ―Experts‖ will offer opinions to fool the people again. Their actions might revive
the market temporarily next month, but the rebound won‘t reclaim the high of August 4.
This bubble will truly burst in the fourth quarter when the economy shows signs of slowing
again. Land prices will start to decline, which is of more concern than the collapse of the stock
market, as local governments depend on land sales for revenue. The present economic ―recov-
ery‖ began in February as inventories were restocked and was pushed up by the spillover from
the asset market revival. These two factors cannot be sustained beyond the third quarter. When
the market sees the second dip looming, panic will be more intense and thorough.
The US will enter this second dip in the first quarter of next year. Its economic recovery in the
second half of this year is being driven by inventory restocking and fiscal stimulus.
However, US households have lost their love for borrow-and-spend for good. American house-
hold demand won‘t pick up when the temporary growth factors run out of steam. By the middle
of the second quarter next year, most of the world will have entered the second dip. But, by then,
financial markets will have collapsed.
China‘s A-share market leads all the other markets in this cycle. Even though central banks
around the world have kept interest rates low, the financial crisis has kept most banks from lend-
ing. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market
first, then commodity markets and property market last. Stock markets around the world are now
following the A-share market down.
By next spring, another stimulus story, involving even bigger sums, will surface. ―Experts‖ will
offer opinions again on its potency. After a month or two, people will be at it again. Such market
movements are bear-market bounces. Every bounce will peak lower than the previous one. The
reason that such bear-market bounces repeat is the US Federal Reserve‘s low interest rate.
The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think
that when the Fed does this, the global economy will be strong and, hence, exports would do well
and bring in money to keep up asset markets. Unfortunately, this is not how our story will end
this time. The growth model of the past two decades — Americans borrow and spend; Chinese
lend and export — is broken for good. Policymakers have been busy stimulating, rather than
reforming, in desperate attempts to bring growth back. The massive increase in money supplies
around the world will spur inflation through commodity-market speculation and inflation expec-
tations in wage setting. We are not in the midst of a new boom. We are at the last stage of the
Greenspan bubble. It ends with stagflation.
Hong Kong‘s asset markets are most sensitive to the Fed‘s policy due to the currency peg to the
US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of
cash. Today, Hong Kong‘s property agents are known to spirit mainland-looking men, with small
leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of
mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the

45. northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I
think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force
for Hong Kong‘s property market is the Fed‘s interest rate policy.
Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close
to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this envi-
ronment, asset prices are about story-telling. This is why, even though Hong Kong‘s economy
has contracted substantially, its property prices have surged. Of course, the short-term interest
rate isn‘t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a
futile ground for speculation, where asset prices increase more on the way up and decrease more
on the way down.
When the Fed raises the interest rate, probably next year, Hong Kong‘s property market will col-
lapse. When the Fed‘s policy rate reaches 5 per cent, probably in 2011, Hong Kong‘s property
prices will be 50 per cent lower.
Andy Xie is an independent economist.
Wise Words
A man who won‘t die for something is not fit to live. — Martin Luther King Jr.
View our
PAST ISSUES
Podcast: WSJ What's News Twice Daily
Updated Twice Daily - Click to Listen
Stay on top of the latest headlines from the Wall Street Journal Online.
WSJs What's News Late Edition Fri, March 23, 2012 by The Wall Street Journal
23 Mar 2012 at 10:03pm
SEC probes whether rapid-fire trading firms are getting an unfair advantage over the average
trading Joe; President Obama nominates an expert on health issues to head up the World Bank;
Fresh evidence that the housing...
Jeff Saut‘s Daily Audio Comment is recorded every weekday, except Wednesday, at 9 a.m. ET.
It is made available to the public on this Web page at approximately 1 p.m. ET.

46. Crude Oil
WTI Crude Oil
$106.75 ▼0.12 0.11%
7:41 AM EDT - 2012.03.25
Feedback
Close
Read more: http://advisoranalyst.com/glablog/tag/retail-investors/#ixzz1q83Fq1Hd