Chris Lau - Seeking Alpha

Saturday, November 01, 2008

October in Review

To summarize this past month, work stock markets sold off very sharply in October. This was the worst performance since October 1987. It is very important for investors to know what is most absolutely certain to occur next.

In the years ahead after 1987, a recession ensued in North America. In Canada, this was not fully felt until 1991 - 1995. Prior to the recession, the real estate market literally collapsed in 1989. World indexes did not perform well at that time either, most especially in Japan.

Today, it is eerie that the market is undergoing the same economic weaknesses, only it is a lot worse. News reports and analysts repeatedly describe the situation the market is in as "chartered territory." As an independent analyst who thrives on thinking otherwise, I have to agree.

The single word to describe the market problem is de-leveraging, but the problem is a two-step one. First, as we all know is the financial market de-leverage precipitated singularly by the collapse of the housing market in the U.S. and in Europe. Is Canada next? We'll see, but what has already happened (and what I have already written about) is that prices have fallen quite convincingly in Alberta and in Vancouver.

We are only now, today, facing the second problem: a recession. The word is an ugly one but simply describes two consecutive quarters of negative growth. That's just six months. So what's next?

Unfortunately, my analysis is no more positive from here. All leading indicators have suggested the recessionary forces are just beginning. Technology indexes have performed very poorly. See Semis.

The three horsemen of the economy who either led or dominated the economy over the past few years is sick. Housing, automobile, and financials. The cost two the economy will be job losses in this area. This will exasperate weakness in consumer spending.

Buy Stocks?

I am a consistent investor and I remain a value investor. The stock market has certainly become cheaper and the text book answer will be to buy stocks. The enemy, however, continues to be described by that one word: de-leveraging. Hedge funds will be selling into the rally, and only technical charts will indicate to investors when this "sell on the rally" phenomenon will end. A few stocks are becoming value plays, and I will provide an analysis in upcoming entries.

One stock I really like is Canon. I also foolishly like Sony because they have released a very nice digital SLR, but Canon is a more focused company in the photography and computer printing space. Both are consumer goods and might give a leading indicator as to the health of spending.

One more thing to note. I am/was featured as featured manager on the FSX Trader site this week. In addition, the two picks I made in the past two months performed very well. HED is a bear oil fund that I discussed when it was $13.19. It peaked at $45.46. HXD is a bear fund to the Toronto Stock Exchange. It was trending around $18.50 at the time of discussion and peaked at $38.25.