• We provide a list of concerns — a dozen of them — for the outlook for the global economy in the next 12 months

A LIST OF CONCERNS — A DOZEN OF THEM

1. China is overheating and more policy tightening will likely be needed.
When government officials begin discussing price controls, you know the
situation is serious.

2. The European debt crisis. If the contagion reaches Spain, it would likely
be game over for the euro.  The Spanish bond market is behaving similar
to the Irish market around the time of the Greece bailout.

3. QE2. It is too early to judge whether it is a success or a failure.  If the aim
was to kick-start the equity market, then all we can say is that so far all
QE2 has done is help bring the S&P 500 to the high end of a broad 1,000-
1,200 band, which has been prevailing for 14 months now.

4. We remain concerned that Canada experienced some sort of housing
bubble in 2009 and into 2010.

5. Renewed housing deflation in the United States. The problem of excess
supply has improved enough to forestall another down-leg in national
home prices.  Median new home prices have collapsed at nearly a 30%
annual rate over the past four months and resale values in the existing
home market are down almost 20%.  Nowhere was this fact cited in the
press, which instead focuses myopically on Black Friday shopping, and
possibly missing a very big story here.

6. Canadian household leverage — debt ratios are as high as they were in
the U.S.A. at the peak in relation to income.

7. Lack of productivity growth in Canada. This is a key source of debate —
but we contend that the U.S. data are overstated and the Canadian data
are understated.

8. The Canadian dollar. In our view, it is still overvalued by a nickel even with
the recent firming in the commodity complex, though strong international
capital inflows are providing a very firm floor under the loonie.

9. The dramatic retrenchment at the state/local government sector south
of the border and the negative feedback effects on domestic demand.
This is the one critical source of downside risk for the U.S. economy in
2011, which could easily result in 1.5-2.0 percentage points of withdrawal
from GDP growth.

10. Currency wars.

11. Military skirmishes. The two Koreas as an example but the situation will
also test China-U.S. foreign relations as Beijing tells America to butt out.  In
recent months, China has been making strides to deepen its economic and
strategic relationship with North Korea despite American objections.

12. Downside risk to the consensus view of global growth of 4.2% next year.
It does not seem to me that economists have fully taken into account the
drag from the fiscal side of things in the U.S. and in the Euro region. 
Global GDP consensus has been at 4.2% for several months.  Interestingly,
the BoC took down their 4% view to 3.5% last month — so they could be
ahead of the pack.

Gluskin Sheff’s Economic Reports Featuring
David Rosenberg

David Rosenberg’s economic commentary and views on a free trial basis click HERE

With investors hurdling toward gold as the governments prints more money, we are reminded of a story that many gold enthusiasts may already know.

With our strong focus on the junior resource sector, in particular precious metal stocks, it’s only fitting that we revisit this incredible story one more time.

It’s a story about a real life gold super hero whose deviance of conventional wisdom turned a failing corporation into one of the world’s largest gold producers.

The Gold Super Hero Tradition

Just before December last year, gold was climbing to yet another all time high. Now one year later, gold is still climbing and many fund managers and analysts are calling for $1500 gold in the near term.

With investors hurdling toward gold as the governments prints more money, we are reminded of a story that many gold enthusiasts may already know.

Our long time Equedia Weekly subscribers will have already heard this story before. It has become so popular amongst our readers that it is now a tradition here at Equedia for us to publish this story before the last month of the year begins.

With our strong focus on the junior resource sector, in particular precious metal stocks, it’s only fitting that we revisit this incredible story one more time.

It’s a story about a real life gold super hero whose deviance of conventional wisdom turned a failing corporation into one of the world’s largest gold producers.

Rob McEwen wasn’t a miner. He was a young man following his father’s footsteps into the business world. Like his dad, he had a fascination for gold.

After years of growing up hearing stories around the dinner table of miners and prospectors, he finally got his shot.

One day, he stepped into a takeover battle as a white knight and emerged triumphantly as majority owner of a mine in Red Lake, Ontario. Here he stood at the head of the boardroom table filled with a room full of experienced senior geologists, all of whom doubted his ability to lead this company. Who could blame them? He was a mutual fund manager turned CEO of a gold corporation overnight.

But it was hardly a dream come true. The company he had taken over was plagued with negative news and on the brink of failure. The miners were on strike and they were overwhelmed by lingering debts. The gold market was contracting and the mine’s operating costs were exceedingly high, forcing them to cease mining operations. Unless they found evidence of new gold deposits, the fifty-year old mine was about to be shut down along with the company.

McEwen knew that the mine had potential. “The Red Lake gold district had 2 operating gold mines and 13 former mines that had produced more than 18 million ounces combined,” he says. “The mine next door had produced about 10 million ounces. Ours had produced only 3 million.” So he sent his geologists packing with $10 million dollars and a plan to drill in the most remote and deepest parts of the mine.

A few weeks later the geologists returned. With smiles on their faces, they broke the news to McEwen that would save the failing company – at least for another few years. They had found results signalling new deposits of gold as much as thirty times the amount they had been mining at the company. But that wasn’t enough.

The senior staff continued years of further exploration in attempts to find a more accurate depiction of the gold’s value and location. Despite the expertise and experience among the staff of senior geologists, their efforts proved stagnant. It had become obvious that something critical needed to change if they were to secure a future for their company. They needed to act faster.

Exhausted and uncertain about his company’s future, McEwen decided to take a break for some personal development. He attended a MIT conference in 1999, where corporate presidents from around the world had come to learn about advances in information technology. Perched up in his chair, he listened as the lecturer talked about how Linus Torvalds built a masterpiece computer operating system by revealing his code to anonymous programmers all around the world on the internet.

Without the help of thousands of anonymous participants, the Linux system would have cost millions of dollars to produce and would have taken years. But it didn’t.

Then it hit him. If his senior geologists couldn’t find the gold in Red Lake, maybe someone else could.

McEwen wasn’t a miner. He didn’t think like one either. But that was his strength. So he rushed back to his corporate head office in Toronto to share his idea of “open sourced” mining.

McEwen wanted to take all of the data the company has spent creating in the last fifty years and he wanted to share it openly with the world by posting it on the internet: “Then we’ll ask the world to tell us where we’re going to find the next six million ounces of gold.”

At first, the Company’s geologists were appalled at the idea of exposing their fifty years of secret data to the world. And they had good reasons to be. The mining industry is an intensely guarded business and geological data is to miners what treasure is to pirates. Giving this sort of data away could not only subject you to takeover risks, but can also imply that your company no longer has the ability to move forward on its own.

Despite the inherent risks, McEwen decided to push forward and in March 2000, he launched a new “Challenge.” They posted every bit of information they could on their 55,000-acre property through their website and setup a contest offering $575,000 worth of prize money to the participants that could show his Company the best methods and estimates on their property.

McEwen knew this strategy entailed big risks. But the risks of continuing to do things the old way were even greater.

“Mining is one of humanity’s oldest industrial pursuits,” McEwen says. “This is old economy. But a mineral discovery is like a technological discovery. There’s the same rapid creation of wealth as rising expectations improve profitability. If we could find gold faster, we could really improve the value of the company.”

And improve the value they did. Within weeks, submissions from over one thousand virtual prospectors in over fifty countries crunched the data. But geologists weren’t the only participants.

Mathematicians, graduate students, consultants, and military officers all submitted entries. They had, “applied math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems.”

Not only had the contestants identified new targets on the Red Lake property, they introduced the Company to state-of-the-art technologies and exploration methodologies, including new drilling techniques and data-collection procedures, and more advance approaches to geological modeling.

McEwen had harnessed a technological trend that most in the industry would have shunned. As a result, he turned his destined-for-failure $100 million company into Goldcorp – one of the world’s largest gold producers and a company today worth close to $34 billion. 

McEwen’s courage to challenge the mining industry’s safe-keeping of geological data reveals to us that change can lead to astonishing results.

Last year, we mentioned that with today’s change in technology and commodities price rally, this may be the opportunity of a lifetime for many investors and mining and resource juniors. New technologies and high prices are allowing historically great projects to resurrect themselves from the grave, giving investors another stab at making a boat load of money.

The junior resource stocks give us ample opportunity to beat both the markets and the returns that mutual funds and bonds can offer. We have already seen a major run in many of the mid-tier and junior precious metals stocks including all three of this year’s featured silver companies in our Special Report Editions.

With the continued high prices in commodities and precious metals, the funds are beginning to invest again (see Doubling Down for the Big Bang). Even the major resource Companies, such as Rio Tinto (RTP), are expanding with billion dollar investments.

Remember, the best way for us to leverage this run is in the juniors. Don’t miss it.

Until next time,

Equedia is a strong performing investment newsletter network and a social network aimed at the financial community, with many advanced social networking features. The equedia platform caters to companies who want to communicate with stakeholders via video content, as well as through blogs, shared calendars, and other features.

Equedia is pronounced: (eck –  qwid – ee – ah)
1-888-EQUEDIA (378-3342)

I hope you had a wonderful Thanksgiving holiday and weekend! But now I want to turn our attention back to the markets. Judging by the positive response to last Monday’s column, I want to give you more year-end signals to watch for key markets.

Remember, this is the first time ever that I’ve released such signals. They are based on a proprietary trading model I developed in the early 1980s, and are a unique combination of cyclical and technical analysis.

Market Buzz – Cash Store Delivers in Tepid Broader Week for Global Markets

World markets appeared to have their eyes squarely on the risk aversion trade this past week (particularly on Friday), as the U.S. dollar strengthened and the European debt crisis continued to give reason to pause the rally.

Toronto’s main index fell half a percent on the week, closing at 12,892.71, a decline of 53.10 points. Seven of its ten sub-indexes fell, led by materials and energy.

While it is true that Ireland will receive financial assistance from the EU and IMF, aggressive austerity measures and a downgraded credit rating left the market feeling a bit queasy and looking in the direction of who could be next — naming Portugal then, the more alarming possibility of Spain.

But not all was gloomy this past week. In fact, a long-time favourite from our Canadian Small-Cap Universe (www.keystocks.com) reported record quarterly numbers this past week.

The company, Cash Store Financial (CSF:TSX), operates more than 550 branches across Canada under the banners The Cash Store and Instaloans. The Cash Store and Instaloans act primarily as brokers to facilitate short-term advances and provide other financial services to income-earning consumers who may not be able to obtain them from traditional banks. Cash Store Financial also provides a private-label debit card (the Freedom card) and a prepaid credit card (the Freedom MasterCard) as well as other financial services, including bank accounts.

This past week, the company announced that for the three months ended September 30, 2010, revenues grew 19.7 per cent to $49.8 million from $41.6 million in the same period last year. Net income jumped 37.5 per cent to $7.7 million from $5.6 million in the same period last year. Diluted earnings per share rose 27.3 per cent to $0.42 per share from $0.33 per share in the same period last year.

Same branch revenues for the locations opened since the beginning of the first quarter of fiscal 2010 increased 4.1 per cent to $101,000 from $97,000 for the same quarter last year. Branch count was 544, up 120 net new branches from 424 at June 30, 2009; 19 new branches were added in the quarter.

Looniversity – Four Top Tax Strategies

Protecting your income from the taxman is like protecting your favorite pie from your big brother – you gotta slice it, hide it, and gobble it up before Big Bro gets his hands on it.

To help you keep more of your income pie away from Big Bro Government, here are our top three tax strategies for young Canadians:

Income Splitting – Splitting your taxable income with your spouse or children can shift income from a high tax bracket to a low one. Some of the ways you can do this include spousal RRSPs, living trusts, asset freezing, incorporating, investing through the low earner, and paying deductible expenses through the high earner.

Deferring Income – Not realizing taxable income until you’re in a lower bracket will also reduce your tax. Ways to defer your income include: RRSPs, Registered Pension Plans, certain types of annuities, Life Income Funds (LIFs), Provincial Stock Savings Plans, and Community Small Business Investment Funds.

Incorporating – With ever increasing incentives, starting your own corporation is becoming more and more attractive. We’re not saying everyone should start a corporation, but if your employment situation resembles an independent business, you might consider incorporating. Incorporating saves taxes by lowering your tax rate, increasing your eligible deductions and income splitting.

TFSA – Canadians have a new Tax-Free Savings Account (TFSA) at their disposal. The TFSA is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income. Specifically, Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA. For further details visit: (http://www.tfsa.gc.ca/)

Put it to Us?

Q. I enjoy your weekly column and would like you to provide me with the broad strokes on the strategy of “value investing.”

– P. Ferguson; Calgary, Alberta

A. First off, thanks for your kind words. Value investing is one of the best known stock picking methods. Dating back to the 1930s, finance professors at Columbia University, Benjamin Graham and David Dodd, laid out what many consider to be the framework for value investing. The concept is actually very simple: find companies trading below their inherent worth or “true value.”

The value investor looks for stocks with excellent fundamentals – including strong earnings, dividends, book value, and cash flow – that are selling at a bargain price, given their quality. The value investor seeks companies that seem to be incorrectly valued (undervalued) by the market and therefore have the potential to increase in share price when the market corrects its error in valuation.

KeyStone’s Latest Reports Section

Hardware & Software Communications Micro-Cap With Strong Balance Sheet Posts Solid Unexpectedly Weak Q1 Results – Rating Downgraded (Flash Update)
China-Based Athletic Apparel Manufacturer Posts Solid Q1 2011 Results, Strong Cash Flow, $1.47 per share or Over Half its Market-Cap in Cash, No Debt – Reiterate BUY (Focus BUY) (Flash Update)
Healthcare/Hospitality Service Trust Posts Strong Q3 2010, Total Return 133%, Yield Remains Solid at 6. 1%, Announces Conversion to Dividend Paying Corporation – Rating Adjusted (Flash Update)
China-based Forestry Company Beats Q3 2010 Estimates, Stock Surges 42% in Four Months Since Upgrade – Near-Term Rating Lowered (Flash Update)
Q3 Results Disappoint from Medical Equipment Provider, Yield Remains Strong, but Balance Sheet Weakened – Rating Downgraded to SELL (Flash Update)

The long road to a housing recovery – 279,000 California homes in shadow inventory. 2.1 million versus 4.85 million homes nationwide in the shadow inventory pipeline. Only 8,000 bank owned homes show up on the SoCal MLS yet statewide banks own 90,000 homes.