is it time to slaugther the bull for the winter

8/8/2019 Is It Time to Slaugther the Bull for the Winter

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FORWARD THINKING AN INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I M I T E D

Nov 09, 2010 [email protected] TELEPHONE (345) 947 0005 FACSIMILE(345) 949 0005

The Clover Asset Management Free Press

We would then eat like kings for two months, 5ilets, T-Bone steaks, and tender roasts would be on thetable regularly. As we go through the winter, t he best cuts would be depleted from the freezer and wewoul d end up with hundreds of pounds of ground beef. Good bye to our variety of fancy meals, andHello to burgers and meat loaf, again and again and again

On July 07th of this year, I wrote an article where I recommended to everyone to increase their equityexpo sure as I turned more bullish toward the stock market. My forecast was simple, either we weremovi ng out of this everlastingrece ssion and stocks will out-perf orm going forward or the fear ofa double-dip recession will forcethe Federal Reserve to come to themark et with new liquidity. Since Imad e this recommendation, theSP 0 0, the most followed US equityinde x is up by more than 1 %, andmost emerging markets are showingretur ns in excess of 20%. Most ofthis growth in stock value wascreat ed on the expectation ofanot her phase of quantitative easing(QE) from the Federal Reserve in theUSA and low and behold, we had theFed last week promising to pump anaddi tional USD 600 Billion dollars innew liquidity into the market over

the next eight months.

The last few months were thosewhe re our freezer was full of all ofthos e beautiful cuts of beef; the

Is it time to slaughter the Bu ll for the Winter?When I was young, I lived in the country, two hours from Montreal in Canada. Each spring my dad would buy a calf,pay a farmer to raise it for the summer and slaug hter the animal for its meat in the fall.
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FORWAR D THINKING A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I M I T E D

TELEPH ONE (345) 947 0005 FACSIMIL E(345) 949 0005

The Clover Asset Mana gement Free Press

Obama Stimulus, the 5irst phase ofQE and the introduction of QE2bringing us even more joy andsatisfaction. However, the question wenow have to ask is: What do we nowhave left for the months to come?Can we assume that the conundrumof rising stock values in all scenarioswill continue? To answer thisquestion, lets review some of therecent events and their future impacton the capital market.

QE2: Like all American movies, if the5irst one was popular, expect a sequel.It was the case with QE and for QE2;Mr. Bernanke actively promoted theFeds future intervention and thendeliver ed by printing USD 600 Billionof fresh new US dollars. Like anythingin this world, the more abundant is agood, the lowers its value. ByprintingTrillions of dollars since the beginnin gof the crisis, the Federal

Reserve has drastically reduced the value of the US currency when com pared to othercurrencies and especially when compared to gold. That was then; what we nowneed to focus on is tomorrow. The 5irst round of quantitative easing di dindeed help, along with a myriad of other governmentinterventions and incursions, to allow mortgage and creditspreads to collapse from depression-era levels. The

equity markets and commodities around theworld rallied as the U.S. dollarweakened, and for a time, theeconomy improved andassets re5lated. WillQE2 do the sameand put the economyon a stronger footing?I sincerely doubt this.

It is obvious today thatthe goal of the Fed is tocontinue to reflate thevalue of the assets of the US

forwardthi [email protected] 09, 2010
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FOR WARD THINKING A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I M I T E D

TELEPHONE (345) 947 0005 FACSIMILE(345) 949 0005


consumers. Remember, the average family in the USA is toda y worth $100,000 dollars less thanthey did two years ago. If we want the economy to do better, we need the consumer to feel betterand start spending ag ain and the easy (lazy?) way to do that is to increase their personal wealth bysend ing all asset value s higher. To do this, you must reduce the value of the currency therebyincreasing the value of almost everything else. Think about it, if tomorrow morning you need twodollars to buy what on e dollar was buying yesterday, you will be under the impression that theprice of the item you a re buying has doubled when in fact it may be the value of your currency thatwas cut in half Depr eciating currencies should create inflation, a necessary evil to combatdeflation and re start t he economy. The strategy has worked so far for liquid assets such as bondand equities; however the problem remains where it originated at the start of the crisis with RealEstate value. This Real Estate bubble in the US was so disproportionate that even with a droppingdollar and rapidly rising liquidity, house values remain depressed and may even roll over in thenear future. Of the estimated 15 million homeowners underwater, about 7.8 million owed at least25% more than their properties were worth in the first quarter of this year ... More than 4 million borrowers were underwater by more than 50%. Why not just bringing the keys back to the bank?For each dollar the US citizen has in the stock market, he has another 3 dollars invested in hishouse, if you dont fix the real estate market, you dont fix the economyThe following graphclearly illustrates that QE had a limited impact on property value. I expect no impact on Real Estatevalue from QE2.

[email protected] 09, 2010
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FORWARD THINKIN G A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I M I T E D



Will there be a QE3 then? Whoknows, maybe, I would even sayprobably but not long before thingsget worse. There is a growingdissension brewing between thedifferent members of the FederalReserve and it is not supportive offuture intervention. In other words,the cat is out of the hat and fullypriced into the market.

US Election 2010: To nobodyssurprise, the GOP took over the housein the November election. Thispolitical change was well perceived bythe market as historically, a gridlockon Capitol Hill translates into reducedgovernmental market intervention.While I understand why, in normalcircumstances, the marketparticipants see no governmentinter vention as a blessing, in times ofcrisi s, it is a different story.Cons equently, the absence of furtherstim ulus and expected increase intaxa tion levels may well be the straw

that will break theback of a nascentrecovery. The USeconomy is

expected to growby 2% next yearand the eliminationof the Bushadministration taxbreak would takemore than 1% ofthis growth away,we wont needmuch from here togo back into arecession.

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FORWARD THINKING AN INDEPENDE NT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I M I T E D

TELEP HONE (345) 947 0005 FACSI MILE(345) 949 0005

The Clover Asset M anagement Free Press

The US Dollar: We all love tohate the greenback. The USdollar rapid devaluation isdespised by emerging countriesthat see their exportation beingpriced out of the market. (Exceptfor China who cheats and pegsits currency to the USD). Like inOctober 2009, the world punditsare now talking about replacingthe USD by a basket of othercurrencies. Is it the end of thedollar hegemony? I dont thinkso, at least not anytime soon.The reality is that nobody wantsto see their currency appreciate,so foreign governments wouldnot be incline to replace the USDwith their own currency. The

USD is here to stay.

Expect the dollar to bounce back rapidly when we see either a new sovereign debt crisis in Europe(and we will see one again), a lack of buying interest in treasuries from foreigners who want to bepaid more for the increase 5inancial risk; another crash in the stock market or positive economicnews. Keep your eye on the dollar, it is the best indicator of things to come, especially as it getsstronger, equity will giveback some of theirrecent gains.

As you can see, stockswill not rise foreverand gravity will comeback to haunt themsooner rather thanlater. Reduce yourequity exposure andraise some cash inyour portfolio butdont short the marketas yet as it is always

dangerous to Iight theFed. Better to be safethan sorry from here.

forward [email protected] 09, 2 010
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In closing, is there any Light at the end of this tunnel? The answer is yes as we are now seeingconsumers gradually reducing their debts (see previous graph). This crisis was originally created byexcessive debts, and if and when the sum of this cumulative debt is 5inally reduced to a healthy level,you can expect the economy to SLOWLY show signs of real growth. However this will take time, asyou dont correct twenty years of excess over night.committed excess for more than 20 years; it willnot heal itself overnight.

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Eric St-CyrCEOClover Asset Management LimitedTel: 345 947 [email protected]
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is it time to slaugther the bull for the winter

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