Rangebound

by Zubin Driver
May 28, 2009

With Victoria Day in Canada last week, and Memorial Day in America this week, the first phase of markets' summer period has begun. Thus far, fears of the frequently discussed 'sell in May and go away' decline have proven unfounded, as US markets are flat for the month and the TSX is up 500 points. However, the true summer doldrums period doesn't begin until July, when school is out and most vacationers take their trips.

After the vehement rally from the lows of March through the end of April, markets have become rangebound. The number of voices who believe the worst is behind us versus those who expect a retest of, or break through, the bottom seem to be coming into balance. Are equity markets stabilising, consolidating recent gains at the highest levels seen since early November? Or is the bear rubbing sleep from his eyes, ready to resume optimist-hunting after a short nap?

Downgrade

It's not as if there's a shortage of reasons for investors' continuing concern. Take for instance the downgrading of the UK's credit outlook from 'stable' to 'negative' last week. This downgrade in the outlook means a higher likelihood that the nation's actual credit rating could be lowered from the triple A it currently holds. Such a rating slash would mean the country having to pay higher rates on future borrowing, adding extra weight to an already debilitating debt burden.

Immediately after the news of S & P's downgrade of Britain, anxious speculation of course turned to the United States whose debt level, at 70.4 % of GDP, is even bigger than the UK's 66.9%. Due to the Fed's massive spending effort to combat the recession, structural deficits will overhang the world's superpower for the foreseeable future.

Thus the historic shakeup of the world order in the 21st century continues to unfold. The Anglo-American ascendancy that has led the modern world for two centuries is showing signs of strain. While the American military is still the world's strongest and the economy remains innovative, resilient, and critical to global well-being, the country is a debtor rather than creditor, forced to divert increasing resources to the unproductive servicing of its borrowings.

Parallels

Especially in difficult times, one never has to look far to find contempt for the venture market, with its typical storyline in which the carriage reverts to pumpkin before dinnertime, never mind waiting for the clock to strike midnight. Yet watching this last week, as AIG announced its plans to roll back its shares 20 for 1, the venture investor can't help shaking his/her head at the irony of it all. Just 3 weeks ago, this space, in reference not to the world's biggest insurance companies but to smallcap venture equities, was headed 'take the flack, then roll it back!'

Ahh, but the list of parallels goes on, enabling one to see that often the smallcap equity world provides a picture in miniature of how equity markets more generally operate. Take recent bank financings in the U.S. at multi-month highs. Banks such as Wells Fargo and Goldman Sachs made surprise earnings guidance announcements ahead of schedule, boosting sentiment just before raising funds on the positive news. Sort of like a venture mining company announcing a big drill hole, watching the stock fly, then raising a pile at the new inflated price.

Or this process can be accomplished in reverse, as Warren Buffett did in the fall, and many venture companies have been attempting more recently (but the venture companies timing is better). The reverse version involves taking a financing near the perceived bottom in pricing for a stock (Goldman and GE for Buffett, although both still fell more than 40% from his entry), often involving 'key players,' and then promoting it once those key investors have bought their position. Can anyone remember an article from the fall by Mr. Buffett entitled "Buy American. I am"?

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).