"We’re not convinced. Yet. And certainly not for the “Class Portfolios”, one of the more conservative methodologies we run.
On Tuesday, the TSX rallied by more than 4% and many investors took that as sign that the worst was behind us. Notwithstanding, the fact is that just the day before the market touched lows not seen in almost a decade.
This can be a tough place to invest in. We prefer to seek out securities in bull markets
Truthfully, for the sake of all investors, we certainly hope that the worst is behind us, although that doesn’t preclude further pain from this point onward, nor impact our bullish views on many other asset classes such as bonds, selected convertibles, corporates and preferreds, as well as currencies.
One of the most overlooked aspects of market capitulations—and we certainly too hope that we have had one, but think likely not —is the impact they have on corporate profitability as it pertains to pension plan obligations. The magnitude of these liabilities are a function of the expected growth in the assets of these plans; to the extent that this expected growth is underachieved, pensions become more underfunded. Deficits need to be paid out of future income, so that surprise liabilities lead to surprise earnings shortfalls. No stimulus package need be applied to our collective imagination to realize what the effect of a zero-return for a decade of equity investing might do to future corporate profits, and this at the time when the boomer generation is about to enter retirement. Look to General Motors for an example of how pension obligations can wreak havoc on corporate profitability. (For more on our views on baby boomers and retirement written several years ago please contact us by phone or e-mail).
One of the next shoes to drop (the beast must be an octopus) and the humungous elephant in the room is defined benefit pension plans….this may dwarf any headlines that the car makers have been garnering.
What it suggests is that the future may belong to those companies that are young enough not to have built up massive pension obligations, or those that converted to defined contribution plans - in other words, not constituent members of the more recognizable stock indexes."
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Analysis and Comments:
It is good to have a 'pick me up' day when the market rallies with such impressive percentage returns. The dollar gains, however is far smaller than the amount already lost. The thing to watch in the next few days and weeks will be the follow-through. My guess is that follow-through will be limited due to the already mentioned issues. There are many more to be mindful of but let's keep the observations simple and focus monitoring follow-through.