5 of 10 Investment Recommendations from Donald Coxe’s Bank of Montreal Basic Points Distributed by BMO Capital Markets contact them for a copy of the 53 page IBM@1 = Big Ben’s Big Blues Basic Points HERE

IBM@1 = Big Ben’s Big Blues

From the Overview: We return to the blues theme we used a year ago (Dem Blues). Since then, the number we’ve been using for our analysis has been Zero. This time it’s One: the 1% coupon on Big Blue’s recent $1.5 billion three-year bond issue, which came—oversubscribed—at par. IBM was AAA back when its System 360 dominated the industry, but today it doesn’t even make its own PCs and it is a mere Single A.

The coupon on that bond tolls trouble for “Big Ben” Bernanke and most investors—particularly pension funds. (IBM’s bond yield is slightly less than half its stock’s.) The only major economy of the past century that experienced bond yields in that range has been Japan, a demographic disaster whose future is modeled on the passenger pigeon.

Recommendations:

1. Investors should retain above-average liquidity levels. The US and European financial systems have solvency problems that have been papered-over. They could explode suddenly, creating severe liquidity problems.

3. Within commodity equity portfolios, use the four-sector approach. Its biggest overweight should be precious metals, emphasizing gold.

4. The second-most attractive sector is agriculture.  It is largely independent of the economic and fi nancial risks that affect most equity groups, for which the overweight in precious metals is appropriate. The prices of corn, soybeans and wheat are the most important indicators of agricultural stock performance, and they are continuing strong in response to weather problems in Europe and Western Asia.

9. Remain overweight Canada within North American and global portfolios.  The soft patch for the loonie and the Canadian economy should not become anything more serious.

10. In balanced portfolios, emphasize long-duration high-quality government bonds as the best asset class for a double dip. When—or if—the clouds start to roll by, reduce duration immediately.

5 of 10 Investment Recommendations from Donald Coxe’s Bank of Montreal Basic Points Distributed by BMO Capital Markets contact them for a copy of the 53 page IBM@1 = Big Ben’s Big Blues Basic Points HERE

I’ve copied this editorial from Bill Gary’s Sept 11, 2010 market letter. I’ve subscribed to his letter for years and have interviewed him several times for the Moneytalks radio show. He is in his seventies and has traded and written about Ag commodities since the 1960’s. He lives in Oklahoma. He sees a new era ahead for global Ag markets and explains why in this editorial.

Cheers – Victor Adair

DEMAND MARKET ERA…

Since the Seventies, I have written many editorials about Demand Driven Markets. I thought it might be of value to once again describe this type of market environment and the stages that typically occur as bullish forces unfold. We all know there are two sides to the price equation…supply and demand. However, economists and market analysts traditionally concentrate on only one side… the supply side.

The reason for one sided analysis is the fact that supply is easily seen and counted. The supply side is relatively easy to solve.We can see the acres planted and count bushels in storage. We can read about droughts in Russia and calculate the supply that will be lost.

However, demand is invisible and elusive. It is hard to measure and even more difficult to forecast. Demand is fickle… It can be spread out over the course of a season or it can come in compressed bursts of panic buying.

When grain supplies are excessive, as they have been the past two years, users pare inventories and pipeline supplies are reduced to avoid even lower prices in months to come. After all, in the new global marketplace, shortages in one nation can be offset by imports from another. The process of contracting inventories and pipeline supplies makes demand appear worse than it actually is.

Conversely, when supplies tighten and prices rise, users want to buy ahead before prices trade even higher in coming months. The process of buying ahead creates inventory building and refilling of pipelines, making demand appear better than it actually is.

Demand driven markets have the following characteristics…

• They begin when supplies are burdensome.
• Users have not bought ahead, expecting lower price in the future.
• Indications of expanding demand are ignored due to complacency toward supply.
• Trade sentiment remains negative, even as prices initially advance.
• Supply and demand estimates tighten only gradually because demand is based on recent experience, not future prospects.
• As supply and demand estimates tighten, top picking becomes a favored pastime, adding fuel to the eventual bullish fire.
• New sources of demand are uncovered as those waiting for a price setback finally succumb to the fact that prices are not going to fall substantially.
• As prices reach altitudes unimagined just a few months ago, demand continues from hoarders and those buying hand-to-mouth. This stimulates even more speculative buying and the market enters a “blow off” phase.
• Following the final accelerated advance and initial price collapse, supply becomes available from hoarders and the demand driven market cycle is completed for that commodity.

I began my commodity career during the Sixties when grain surpluses were chronic and a seasonal move from low to high in corn was ten cents per bushel. Nobody was prepared for, or anticipated, the demand driven markets that were to follow in the Seventies.

Demand markets of the Seventies came without warning,without precedent…

• Fundamental supply/demand balances were based on past experience and became of little value.
• Old standards of value no longer applied.
• Market perceptions changed. Commercial users were forced to buy ahead as risk exposure to higher prices was greater than benefits received when prices retreated.
• ·Exports became controlled and were not encouraged.
• Governments could print money, but they could not print food and other commodities.

For nearly ten years, demand driven markets shifted from one commodity market to another.

Some economists explain that developed nations contain about 15% of the world’s population, but consume about 65% of the world’s commodities. As incomes in China, India, Brazil and other densely populated nations grow in years ahead, demand for commodities, especially food, will grow by unprecedented margins.

The era of cheap food commodities is ending. A new“demand driven” era is unfolding. This year’s wheat crop failure in Russia demonstrated just how fast perceptions of surplus can shift to shortage. Demand markets offer traders the greatest profit potential because they hold the largest element of surprise and are the least understood. To successfully trade this type of market requires… Courage to go against conventional wisdom… Confidence in your market belief… And, Concentration on an individual market.

Bill Gary

seasonal 101

Market Buzz – Correcting Worldwide Mismatches Key to Sustained Recovery

For the first time in four sessions, Toronto’s main stock index ended higher Friday as oil prices rose following a shutdown of a big Enbridge Inc pipeline supplying Canadian oil to the United States. The TSX gained traction late in the session, closing higher on the strength of the gold sector and a soaring oil price.

While down on the week, the S&P/TSX composite inde6x added 63.56 points to 12,097.09, while the TSX Venture Exchange gained 14.5 points to 1,596.5 on Friday.

The holiday shortened week was a bit of a snooze as investors seemed to be trying to squeeze one more week out of the summer. Having said this, the Bank of Canada Governor Mark Carney did provide some reasonable food for thought when he stated that the economic recovery will remain restrained until governments implement the measures they set in place to address the global imbalances discussed at the Group of 20 summit in Toronto.

The reforms initiated in June were designed to narrow the mismatches in spending/saving that helped plunge the world economy into crisis two years ago. In other words, until China starts spending and the U.S. starts or at least continues to save and pay down debt, we are not nearly out of the woods yet. Before the imbalances are solved, an exporting nation such as Canada continues to have cause for concern. Look no further than our country’s biggest ever trade deficit reported this past week for a good idea of the current pickle.

From our Canadian Small-Cap Research Universe (www.keystocks.com), we take a quick look at a company that made our clients a great deal of “cash” over the past year. The company, Cash Store Australia Holdings Inc. (AUC:TSX-V), which was recently sold for a 200 per cent gain in less than one year, posted solid year end results.

The company, an emerging pay-day loan broker in Australia, reported that its revenues for its fiscal 2010 jumped 238.2 per cent to $11.5 million from $3.4 million for the same period last year. Branch operating income increased to $2.8 million from $387,000 for the same period last year.

During 2010, the addition of 33 branches grew the company’s branch network to a total of 61 branches. The company’s corporate infrastructure was also further developed to support its long-term growth strategy. After the costs associated with the rapid addition of 33 branches over the year, positive cash flows remained strong. Management has stated the company is on track to achieve 300 branches in operation by the end of calendar 2014.

Looniversity – The Price-to-Sales Approach

The price-to-sales (P/S) ratio is an under-used, yet valuable tool in your evaluation tool box. It is calculated as a stock’s current market price divided by its sales (revenue) per share over the last four quarters (one year).

We find that because sales are a more strictly defined figure than earnings, the P/S ratio tends to give more reliable incite into a company than the price-earnings (P/E) ratio. There are countless ways in which management may inflate or suppress earnings; yet it is much more difficult, and in fact borders on fraud, to artificially create or destroy revenues.

Although the average P/S is higher in some industries than others, the acknowledged “rule of thumb” is that a stock with a P/S ratio below 0.75 can be considered under-valued. It is also generally accepted that an investor should avoid most companies with a P/S ratio above 3.0.

Although we believe the P/S ratio can be a valuable addition to your toolbox, we suggest you interpret it cautiously in certain situations:

Situation 1: Companies on the verge of bankruptcy often emerge with very low P/S ratios. This can be due to the fact that initially their sales may experience only a slight drop-off, while their share prices plummet.

Situation 2: The ratio ignores a company’s capital structure. In other words, a highly leveraged or high debt-load company can show a low P/S ratio yet remain unprofitable because of its inability to cover its interest obligations with operating income.

Situation 3: Average P/S ratios can vary significantly from industry to industry. For example, companies in the computer software industry tend to show higher average P/S ratios, yet this does not necessarily mean they are not good buys. This is because these companies typically exhibit high margins or are able to convert a great deal of their sales dollars into profits.

Try calculating the P/S ratios for all stocks in your portfolio. If all of your companies are trading at or more than twice their sales per share (a ratio of two or above), it is a good indication you are carrying excess risk.

Short Sale

An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer.  Proceeds from the sale go into the shorter’s account.  He must buy those shares back (cover) at some point in time and return them to the lender.

Short Squeeze

While shorters sell short a stock on the hope that its price will plunge, there is always a chance that its price may begin to rise.  If it does so, more and more of these “shorters” will “cover” their investments.  That is, they’ll buy back the shares that they had shorted, and take a loss, since they’re now having to buy the shares at a higher price.  As more and more shorters do this, the price rises (since more people are buying than selling).  In investment parlance, this is a short squeeze.

Put it to Us?

Q. What is buying stock on margin and why do investors do it?

– Mary McDonald; Edmonton, Alberta.

A. To answer part one of your question, buying stock on margin is essentially borrowing coinage from your broker against the securities (stocks, bonds, etc.) you currently own and using that dough to purchase stock. Thus, investors who purchase on margin initially pay only a portion of the full transaction price. Margin requirements, or the amount you must deposit on a stock, vary based on the price of the individual security, but are generally 50 per cent of the market value of the stock if its price is $2.00 or greater. In other words, you can purchase $20,000 worth of marginable securities with only $10,000 of your own cash.

This last point is one of the major reasons investors choose to buy on margin – the concept of leverage. By putting up only half the market value of the stock, you are able to benefit from a future price rise on the full $20,000 invested. Thus, as a percentage of the money invested, your potential profit is greater than if you purchased the shares outright.

KeyStone’s Latest Reports Section

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• Healthcare/Hospitality Service Trust Posts Solid Q2 2010, Total Return 108%, Yield Remains Solid at 6.81%, Near-Term Organic Growth Challenging – Rating Maintained (Flash Update)
• Staple Consumer Service Company Posts Solid Q2 2010 Results, Significant Acquisition, Ups Distributions for 11th Consecutive Quarter, Yield 6.2% – Long-Term BUY (Flash Update)
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• Q2 2010 EPS & Revenues Surge for China-based Agricultural Manufacturer, Announced New Growth Initiative – Stock Added to Focus BUY List (Flash Update)