September 30th, 2015

Although this stock market correction may feel like the end of the world, it is not.

We all know and understand stock markets do not go up in a straight line.  I appreciate it is hard to stomach looking at your Investment Portfolio Statement when it has a value lower than last month, or for that matter, the beginning of the year.

As of today, YTD 2015 the TSX is down -10.9%, S&P 500 down -8.5% while the DJIA is down -10.01%.

Most of our portfolios are down in the range of -3.5% to -6.5% in this same period.  The majority of this pain has occurred in the last 2 months.  Granted I do not have a crystal ball, but my opinion is we are in an extended correction within an Upcycle/Bull Market.Normally Bear Markets are caused by a strong and improving economy, inflation ramping up, interest rates going up to counteract inflation, and the tightening cycle begins.

Over the last 20 plus years, we have been through several very serious market corrections and crises, and in my opinion this correction is merely a correction and not a crisis.  Here are a few reasons why:

- There has not been a terrorist attack that threatens world stability such as 9/11.
- There is no Global Liquidity Crisis where Banks stopped lending to each other such as in 2008.
- Major corporations such as GM, Chrysler and AIG Insurance are not at risk of going bankrupt.
- Banks in the U.S. and Europe do not need bailout money from the Government to prop up their balance sheets.

There are many reasons to be optimistic about potential appreciation in value of our investments, and they include:

- Record low interest rates (almost free money) makes it very attractive for companies to invest in their businesses, and acquire other businesses.  The accretive benefits of combining businesses is normally increased profitability. 
- Low interest rates are a great incentive to not sit on cash.
- Cost to service debt is low.
- Long term bond yields are below 3% so there is little incentive to be a fixed income investor.
- Oil and Gas prices are down 50% or more.  Energy is often 1/3 of the input costs of domestic manufacturers, and this lower cost makes them more profitable.

A few weeks ago the major Canadian Banks announced their quarterly earnings and they were excellent. More dividend increases.  Yet, their stock prices declined!  Curious?

Last week it was reported that Warren Buffett plans to invest $32 Billion by the end of 2015.  This is the same investor who bought GE shares below $6 per share in 2008 and they are now approximately $25, and Goldman Sachs below $80 per share and they are now over $170.

I am most impressed and appreciative of the clients who have called during this period and invested more money.  Congratulations and well done.  Funny how the rich get richer! If I were more aggressive I would be calling everyone and telling you to invest now. Now, Now, Now.  But I’m not, and suffice a message in this letter to make a point.  If you are sitting on cash, send it to me.  It is like buying the best quality furniture, jewelry cars, etc. at your favourite stores on Boxing Day!

In 2008 we had a major crisis and in 2011 we had a significant correction.  We remember, but mostly forget the pain.  This period is not as serious, and my prediction is you will barely remember this correction 1 to 2 years from now, and won’t recall it at all in 3 years.

This may be an excellent time for you to add to your portfolio.  If you have questions or wish to discuss any topics raised in this newsletter or anything relating to your portfolio please give me a call.


Best Regards,


Fred Banwell