Action Alert

Posted by Jamie Switzer and Marc Latta of Raymond James

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From: Jamie Switzer []
Sent: Tuesday, May 04, 2010 12:42 PM
To: undisclosed-recipients:
Subject: *** Portfolio Recommendation: Buy Portfolio Protection through the iPath S&P 500 Short Term Volatility Index ***

Action: Buy iPath S&P 500 Short Term Volatility Index (VXX-US)
Price on May 4th: $22.60

Update May 7th:

We are enjoying extremely quick paper profits after three days of extreme volatility to finish the week. We would not recommend buying this position at this time as the market has run too hard, too fast to the downside and should see a bounce early next week. While the VXX is not directly correlated to market performance, is does reflect overall market sentiment and usually rises and falls inversely to the performance of the S&P 500 in the US. Given all the headwinds we are facing, we would strongly recommend adding this as a line of insurance or defense in your portfolio if we see a relief rally early next week. A buy in the mid $20 level should be a decent entry level with much more upside potential than downside in the short term.

Volatility is a clear sign of a market top. The triple digit up and down moves on the TSX and the Dow in the last few days has caused us to turn cautious on the markets. The 15-month rally is arguably quite stretched and the headline events of the past few weeks – Goldman Sachs, Greece and now the Gulf of Mexico oil disaster – are doing damage to investor confidence. 

Investors need to realize that the rally in stocks has to a large degree been created on a wave of liquidity even though the mainstream media has continually cited an improving economy and good corporate earnings as the basis for the ongoing rise in stocks. Careful examination of U.S. economic statistics indicates a very mixed picture and that the economy is very dependant government spending, stimulus and easy money. Although corporate earnings should remain strong for the 2nd and possibly 3rd quarter, we believe that economic headwinds in the second half of 2010 could prove very challenging for the markets.

Most investors tend to become uncomfortable when they see a significant decline in the value of the portfolio. Therefore, in order to limit losses when equity markets pullback, investors can either a) sell the majority of their equity positions or b) build in a layer of portfolio protection – commonly referred to as hedging. For a number of reasons, including the difficult nature of trying to time the markets, it is much wiser to add a layer of portfolio protection, so that you can continue to collect dividends from your high quality stocks.

The iPath S&P 500 Short Term Volatility Index (VXX) is an excellent way to add a layer of portfolio protection. Simply put, when markets drop, volatility increases. And because VXX tracks volatility, then it will increase in price when the S&P 500 declines.   

Please contact us by phone to discuss this recommendation and how it fits with your overall investment strategy.

Marc and Jamie

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This recommendation may not be suitable for all individuals. As each situation is different, please arrange to contact us to discuss and determine the suitability of this security to your own individual circumstances. This message is only to be read by the addressee and is not for public distribution.  The sender is not responsible for distribution of this message beyond the addressee intended.  All information in this message is confidential to the addressee and should be treated as such. Raymond James Ltd. is a member CIPF. This expresses the opinions of the authors, Marc Latta and Jamie Switzer, and not necessarily reflects those of Raymond James.

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JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376

MARC LATTA | Raymond James Ltd.
Senior Vice President, Financial Advisor
PH:604-981-3366 | FAX: 604.981.3376

Suite 480, 171 West Esplanade
North Vancouver, British Columbia

This newsletter expresses the opinions of the writers, Marc Latta and Jamie Switzer, and not necessarily those of Raymond James Ltd. (RJL)  Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities.  It is not meant to provide legal, taxation, or account advice; as each situation is different, please seek advice based on your specific circumstance. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Within the last 12 months, Raymond James Ltd. has undertaken an underwriting liability or has provided advice for a fee with respect to the securities of the Royal Bank of Canada. Raymond James Ltd is a member of the Canadian Investor Protection Fund.