Investment warning — things may be worse than they appear
This Canadian analyst thinks things will get much worse in the years ahead, although he sees a few bright spots and one promising stock.
If you start looking forward through a rear view mirror these days, you aren’t going to like what you see.
That’s the word we get from one Canadian expert who is not letting the spirit of Christmas brighten his mood.
“The future really looks bleak,” says Mr. Louis Paquette, the editor of Emerging Growth Stocks.
In the rear view mirror, he sees the “tremendous upward move” the markets have made in the last eight months. That alone is enough to make a prudent investor cautious.
Looking forward, he can see the many financial pitfalls that are liable to make the ride a whole lot rougher on the road ahead.
We can expect a few smooth stretches — including one source of seasonal cheer and the prospects of better days for poor beaten-down natural gas. He has one stock in that industry he particularly likes.
But let’s start with the gloomier side of the picture.
A balance sheet recession
“Okay – it’s not completely negative going forward,” says Mr. Paquette, pulling his punches just a little. The demographic trend is still favourable for the next couple of years as the numbers of 45 to 54-year-old adults continues to rise. These are the biggest spenders in society.
Also, a total financial panic was averted, and some kind of “recovery” is under way, the editor admits. But what kind of recovery, he wonders. And that’s where things begin to go sour.
This isn’t a typical recovery because this hasn’t been your “run-of-the-mill” recession in which inventories and interest rates got a little high and the economy contracted for a few quarters.
No, this is a balance sheet recession — “one created by the largest debt bubble in history.” It will take years to clean this up, he insists, not just a calendar quarter or two.
Time bomb ticking away
There’s another time bomb ticking away. Real estate started this thing and it could still prolong it. A second wave of mortgage resets looms in the U.S. in 2011.
If interest rates remain low, this might not be the disaster it would be if abruptly raised payments pushed homeowners over the edge. But even then banks may refuse to renew mortgages for those who are hopelessly behind on their payments, Mr. Paquette says.
That could deal another blow to prices and to homeowner equity.
What’s more, stocks are looking mighty weary just now.
Signs of weakness
The trend for stocks “still remains north, but signs of weakness are mounting,” says Mr. Paquette. Looking at the charts for the TSX, he observes that the “upward sloping trend is broken and the Index appears to be rolling over.”
The Index has retraced about 50 per cent of its bear market decline, he adds, and that’s a typical reversal point for those who chart such trends. On the other hand, stocks are in what is usually a cheerful season, having passed their traditional low point in October.
If the short-term outlook is murky, the long-term prospects are downright scary, says this editor. There’s a big demographic bust awaiting us in a few years.
Not a pretty picture
After 2012, the numbers of big spenders aged 45 to 54 begin to fall off, and keep falling until at least 2025. “And with them, so will the economy,” Mr. Paquette tell us.
“I know it’s not a pretty picture,” he adds. “But you may as well get used to it, and there’s not a damn thing that’s going to change it.” No amount of government spending will get us out of that hole, he says.
So you should expect stocks to remain in a secular bear market. The overall direction is likely to remain sideways at best. For this reason, the editor is reluctant to buy or recommend many stocks just now.
The secret is to be very selective and look for opportunities like those that arose in March, when stocks had been driven down to bargain levels.
Two opportunities
Mr. Paquette can see such two promising opportunities at the moment. First, the season of tax loss selling is upon us. As investors sell off losing stocks to set against their capital gains, it is bound to create some bargains that will spread good cheer among alert investors.
The second is natural gas. It may take longer to profit from natural gas than it does to take advantage of tax loss selling, the editor says. Storage levels for gas are at or near full capacity.
But natural gas is now selling at a price that is below what it costs to find and produce it, he points out. A sustained reduction in demand combined with a cold winter may lead to a dramatic price rebound in 2010.
Mr. Paquette tells the readers of Emerging Growth Stocks that his top choice in this sector is Daylight Resources Trust (TSX-DAY.UN). This trust “actually maintained its upward trend during a terrible bear market in the underlying commodity price. Imagine how it will perform when gas prices turn bullish.”
The trust yields a hefty 10.6 per cent on a distribution of $0.96. It is trading at $9.06, not far below its 52-week high.
In short, there are a few things that may actually look better up ahead than they do in the rear view mirror.
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