200,000 Visitors

Good day,

Just thought I'd shout out a quick thanks to everyone of my readers - you - for making the work of blogging quite enjoyable. We reached 200,000 visitors on Saturday last week after 13 months of activity here.

To summarize some observations about the traffic on the blog:

• We get a lot of traffic mid-day during most people's lunch break I assume.
• Most visitors (50%+) use the most common local ISPs - Shawcable and TELUS to visit the blog.
• We also get lots of traffic from financial institutions (RBC, Vancity, TD, etc)
• We also get lots of traffic from Government and school domains and (gc.ca, gov.bc.ca, ubc.ca, bcit.ca)
• Other corporate domains are common as well
• 650 visits per day
• Average visit length of 3 minutes
• It seems that the majority of visitors come direct to the blog without a referral
• Referrals from other local blogs is the next most common way people get here
• Google search results cause an increasing number of visits - especially in the last month or so

Cheers

Bill Miller's Comments

This commentary is from Legg-Mason's fund manager - Bill Miller who has the reputation of being the manager with the longest track record of beating the performance of the S&P 500 with the performance of the Legg-Mason Value Trust fund - sold in Canada through CI Investments as the CI Value Trust Fund.

This commentary will be short and to the point:

We had a bad 2007, which followed a bad 2006. Over this two-year span, we underperformed the S&P 500 by around 2000 basis points, our worst showing since the two-year period 1989 and 1990, where we underperformed by 2500 basis points.

In the 25 years since we started the Value Equity mandate in 1982, we have had six calendar years of underperformance. Despite that 19-6 record against the market, all the losses are painful. They are also unavoidable and unpredictable. It would be great if we could figure out how to never underperform.

- - -

About the only advantage of being old in this business is that you have seen a lot of markets, and sometimes market patterns recur that you believe you have seen before. It is not an accident that our last period of poor performance was 1989 and 1990. The past two years are a lot like 1989 and 1990, and I think there is a reasonable probability the next few years will look like what followed those years.

The late 1980s saw a merger boom similar to what we have experienced the past few years and a housing boom as well. In 1989, though, the merger boom came to a halt with the failure of the buyout of United Airlines to be completed. The buyout boom had been fueled by financial innovation. Then it was so-called junk bonds, which had been purchased by many savings and loans in an attempt to earn higher returns. Now it is subprime loans repackaged into structured financial products.

The Fed had been tightening credit to guard against rising inflation, which began to impact housing. By 1990, housing was in freefall, the savings and loans were going bankrupt (as the mortgage companies did in 2007), financial stocks were collapsing, oil prices were soaring in 1990 due to a war in the Middle East, the economy tipped over into recession, and the government had to create the Resolution Trust Corporation to stop the hemorrhaging in the real estate finance markets.

Eerily similar to today, the situation began to stabilize when Citibank got financing from investors from the Middle East. Although the overall market was down only 3% in 1990, we got trounced, falling almost 17%, the result of our large holdings in financials and other stocks dubbed “early cycle,” and which tend to perform poorly as the economy is slowing or when it sinks into recession.

If it were possible to forecast with any degree of accuracy, one might be able to descry a slowing economy from an examination of economic data and perhaps adjust portfolios accordingly. But unfortunately, as I have often remarked, if it’s in the newspapers, it’s in the price. The process works the other way: stocks are a leading indicator, so first they go down and then the data comes in.

In 2007, financial stocks began to decline in early February, before the market corrected in March. They then rallied into May, began a slow decline that culminated in an intermediate bottom in August when the Fed lowered the discount rate, rallied into early October, and then began the precipitous fall that appears to have made a bottom around the third week of January. The decline in financials reflected the freezing up of credit markets that began in August and which still persists, and was followed by a steep drop in consumer stocks in November that also may have seen their worst days now that the Fed has begun to aggressively cut rates. All of this was accompanied by the decline in the housing stocks, which fell almost continuously throughout 2007, ending with a loss of almost 60% on average.

The financial panic got going in earnest as we entered 2008; with global markets all dropping in the double digits or close to it as of this writing. The so-called decoupling thesis, which maintained that non-US and emerging markets and economies would be unaffected by a US slowdown, while not dead (yet), is severely wounded.

The monetary and fiscal authorities have now begun to move with alacrity, with the Fed cutting the funds rate to 3.0% (with likely more to come), and the administration and Congress coming up with a fiscal stimulus package estimated at around $150 billion dollars. Will it be successful? Yes. More precisely, if these measures aren’t enough to free up credit and stimulate spending sufficient to set the economy on a growth path, then additional measures will be taken until that is accomplished. The important point is that the monetary and fiscal policy makers are focused and engaged, and will do what is necessary to stabilize the markets and restore confidence.

This does not mean that the recovery will be swift, or seamless, or without additional trauma. But there will be a recovery, and I think the market abounds with good value. Those values may get even better if the markets get more gloomy, but they are good enough now for us to be fully invested.

I think the market is in for a period of what the Greeks refer to as enantiodromia, the tendency of things to swing to the other side. This is not a forecast, but rather a reflection on valuation.

All of the poorest performing parts of the market, housing, financials, and the consumer sector—with the exception of consumer staples—are at valuation levels last seen in late 1990 and early 1991, an exceptionally propitious time to have bought them. The rest of the market is not expensive, but valuations cannot compare to those in these depressed sectors.

Bonds, on the other hand, specifically government bonds, which have performed so wonderfully as the traditional safe haven during times of turmoil, are very expensive. (In bond land, the only values are in the so called spread product, and there are some quite good values there.) The 10-year Treasury trades at almost 30x earnings1, compared to about 14 times for the S&P 500. The two-year Treasury yields under 2%, and is thus valued at over 50x earnings!

The valuation disparity between Treasuries and stocks is as great today in favor of stocks as it was in favor of Treasuries 20 years ago. Just prior to the Crash of 1987, stocks yielded about 2% (same as today), but traded at over 20x earnings. The 10-year Treasury yielded over 10%, vs. 3.6% today. The two-year Treasury now has a lower yield than the S&P 500, and that is before share repurchases, meaning you can get a greater yield in an index fund than you can in the two-year, and a free long term call option on growth. Even more compelling are financials, where you can get dividend yields about double that of Treasuries, which only adds to their allure, with them trading at price-to-book value ratios last seen at the last big bottom in financials.

I think enantiodromia has already begun. What took us into this malaise will be what takes us out. Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year. They were among the best performing groups in 1991, and could repeat that this year. Financials appear to have bottomed, and the consumer space will get relief from lower interest rates.

Oil prices have come down, and oil and oil service stocks are underperforming in the early going. Investors seem to be obsessed just now over the question of whether we will go into recession or not, a particularly pointless inquiry. The stocks that perform poorly entering a recession are already trading at recession levels. If we go into recession, we will come out of it. In any case, we have had only two recessions in the past 25 years, and they totaled 17 months. As long-term investors, we position portfolios for the 95% of the time the economy is growing, not the un-forecastable 5% when it is not. I believe equity valuations in general are attractive now, and I believe they are compelling in those areas of the market that have performed poorly over the past few years. Traders and those with short attention spans may still be fearful, but long-term investors should be well rewarded by taking advantage of the opportunities in today’s stock market.

Can you afford to retire?

It's RRSP season and I'm really busy so I thought I'd post on retirement planning since it is the topic that is so popular this time of year.

How much do you need to save in order to afford the lifestyle you want in retirement?
What rate of return do you need from your investments in order to make your retirement goal?
What is a comfortable retirement for you?

Here are a couple places to start if you don't know the answers to these questions:

http://finance.sympatico.msn.ca/SavingsDebt/savings_calculator.aspx
http://www.fiscalagents.com/Yahoo/calcs/retplan.shtml

Negative Equity - Coming Soon to a Home Near You

Third of recent buyers owe more than home's value: report

Tue Feb 12, 9:48 AM ET

More than 30 percent of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, a housing market research company said on Tuesday.

The housing market peaked in most U.S. markets in the last two years. Of home buyers in 2006, 39 percent of those with a median 10 percent down payment now have negative home equity similar to 30 percent of those who purchased in 2007, said online company Zillow in its quarterly home value report.

Overall, only 3 percent of those who purchased in 2003, and less than 1 percent of all homes in the United States regardless of when they were purchased, have negative equity. At the same time, U.S. home prices fell 3 percent last year from 2006. Condos and single-family residence values dropped 7.4 percent and 5.5 percent, respectively, the report said.

Nationwide in last three months of 2007, all home types fell 3.3 percent from the third quarter and 3 percent year-over-year. "With consecutive declines over the past five quarters, we haven't seen the housing market bottom yet, and it may very well get worse before things get better," said Stan Humphries, Zillow vice president of data and analytics.

"Even many markets that have been largely insulated from recent declines, like some in the Pacific Northwest, reported notable value declines in the fourth quarter," he added. Home values overall fell in the fourth quarter of 2007, to around $224,890, while condominiums posted the largest year-over-year drop, down 7.4 percent to around $229,017.

The fourth-quarter Zillow report taps data for the nation and 125 metro markets, covering 67 million homes. (Reporting by Chris Sanders; Editing by Jonathan Oatis)

Forestry Sector News

Some facts (2005 data):

- Logging operations employ 21,600 people in BC
- Logging and silviculture accounts for 2.9% of GDP

- Wood Product manufacturing employs 43,600 people in BC
- Wood Product manufacturing accounts for 3.6% of GDP

- Pulp and Paper manufacturing employs 12,300 people in BC
- Pulp and Paper manufacturing accouts for 1.5% of GDP

TimberWest to permanently close Elk Falls sawmill

TimberWest Forest Corp. has announced that it will permanently close the Elk Falls sawmill in Campbell River, B.C. The last full operating shift will be May 9. - 2/8/2008

Interfor's Adams Lake mill taking downtime

Interfor's Adams Lake sawmill and planer in Chase, B.C., were down this week and are scheduled to remain down the week of January 28, due to market conditions. The downtime will be re-evaluated early next week, according to a company spokesman. - 1/25/2008

Canfor to indefinitely close OSB, plywood mills

Canfor has announced plans to close its Polarboard OSB mill and Tackama plywood mill, both in Fort Nelson, B.C., for an indefinite duration due to market conditions. The mills will be closed once existing log inventories are utilized and finished products are shipped. This is expected to occur in April for the Tackama mill and during the summer for the Polarboard operation. The Tackama mill has an annual capacity of 270 million square feet (3/8-inch basis) of plywood, and the Polarboard mill has an annual capacity of 640 million square feet of OSB. - 1/18/2008

Tolko schedules downtime

Tolko has announced plans to take a temporary, two-week curtailment at the Manitoba Solid Wood Division between January 28 and February 8. "High log costs, the continued weakening of market conditions, and difficulty managing within the Softwood Lumber Agreement's quota restrictions are the three main factors which led to this decision," said Dave Neufeld, plant manager. The downtime will reduce the mill's production by 6.5 million board feet. The division expects to return to production on February 11. - 1/16/2008

Two AbitibiBowater sawmills shut down indefinitely

Two AbitibiBowater sawmills and two planers, all in Mackenzie, B.C., went down for an indefinite duration beginning January 11. Market conditions were cited. The two mills have an annual production capacity of 475-500 million board feet. - 1/15/2008

Winton Global extends downtime to March

Winton Global Lumber Ltd., Prince George, B.C., has extended the Christmas shutdown of all operations until mid- to late March. Market conditions, and flooding due to an ice jam on the Nechako River, were cited. Upon resumption of operations in March, the sawmill and planer may only operate until the log deck has been utilized and rough lumber processed and shipped. At that time, the operations would be subject to another temporary shutdown. The inventory of logs at the sawmill will allow for about three months of operations. - 1/15/2008

Tembec to reduce production

Tembec has announced plans to cut production via a reduced work week at its sawmill and planer in Elko, B.C., beginning January 14. The company also will reduce production at its Canal Flats sawmill starting the week of January 21. Over the next three months, Tembec will take the equivalent of three weeks of production downtime, through reduced shifts at the mills. The curtailments will reduce production by about 24 million board feet. Market conditions and exchange rates were cited. - 1/14/2008

Well I sure am glad we have a NEW ECONOMY in British Columbia that isn't dependant on the messy forestry sector for a big part of our economic output. The retail sector and the darling real estate sector combined with the uplifting effects of hosting a two week long sporting event in two years will replace this antiquated business of cutting down trees and sawing them into usable lumber to build things with. In the past, the effects of a forestry industry in its death spiral would have had disastrous consequences on our provinces economy. I'm sure glad that those baristas at Starbucks, the framers building lousy overpriced houses, and the real estate agents who consume the coffee and buy the houses will keep our economy afloat. Clearly real estate agents are the most beneficial purveyors of wealth in our provincial economy.