If there is any way to make a bad situation worse, politicians will find it. That's what happened today in Washington where the $700 billion bail-out that was supposed to prevent the U.S. financial system from hitting the rocks was defeated in the House of Representatives.
The collapse of the plan, which everyone thought was a done deal when the day began, triggered massive sell-offs in both New York and Toronto. The Dow ended up losing 778 points, the biggest one-day point drop in history (but not the greatest percentage drop). The TSX fared even worse, falling 841 points as the energy sector was rocked by plummeting oil prices. The Composite Index is now down more than 25% from its all-time high, which was reached on June 6. We live in a rapidly-changing world but this is ridiculous!
I can fully understand the anxiety that many of you are feeling right now. It is extremely difficult to stay positive in the face of what is happening in the U.S. But if at all possible, grit your teeth and avoid making panicky decisions that you may regret later.
It's important to remember that while we in Canada are being badly hurt by the mess in the U.S., our banking system is not on the brink of collapse. If you did not read Tom Slee's analysis of the banks in last weekend's issue of the Internet Wealth Builder, we have posted it on the BuildingWealth.ca website. His conclusion is especially relevant: "I think that all of our Canadian banks are exceptionally strong and safe. They have much better capital ratios than their U.S. counterparts even after all the new injections of capital on Wall Street. At the same time, because our banking system is concentrated (the six major players have 68% of all retail savings) regulators are able to exercise tight controls. In short, the banking sector remains a safe haven but capital gains will be hard to come by until long after it's clear that the international credit crunch is over."
Respected investment house Phillips, Hager & North posted a commentary on their website on Sunday that also spoke to this point. It said in part: "Although you wouldn't know it from the roller-coaster performance of the S&P/TSX Composite Index, the contrast between the Canadian and U.S. financial sectors is striking. Canadian banks have significantly less leverage than their U.S. counterparts and a more solid funding base than the spate of ill-fated Wall Street investment banking firms. Canadian institutions have also managed to avoid excessive exposure to mortgage-related minefields of the type that felled Washington Mutual. On the consumer level, significantly less mortgage-related leverage from households and a much smaller housing boom have allowed Canada's economy to hold up pretty well by comparison."
Ironically, I was having lunch with Nick Barisheff, who runs the BMG Bullion Fund, at exactly the time Congressional Republicans were defying President Bush and voting down the bail-out. As you might expect, he was extolling the virtues of investing in precious metals as a refuge against the storm (his fund holds gold, silver, and platinum bullion). And he certainly has a valid point in the circumstances; gold was up $5.90 on Monday.
What especially interested me, apart from his arguments in favour of bullion, was his comment when I asked his view of Canada's banks. Although he was gloomy about the economy generally, he acknowledged that our banking system is generally in good shape. Coming from a gold bug, that was a significant statement.
He also made a strong case for a rebound in oil prices, stressing that world production has peaked. Demand may drop temporarily because of the economic slowdown but it will recover, led back by countries such as China and India. The corollary is that oil stocks, which plummeted today, will also snap back.
The financial and energy sectors are the twin backbones of the TSX. The banks will survive and their share prices will eventually come back. The same is true of the big oil companies. It won't happen tomorrow, but it will happen.
There is one more point that I suggest you consider. The politicians in Washington are not fools, today's antics notwithstanding. The sober second thoughts were starting almost as soon as the House vote was tallied. There is going to be more horse-trading on Capitol Hill but I think a deal will still get done - hopefully by the end of this week (the House will reconvene in emergency session on Thursday). If and when that happens, the market rebound could be as dramatic as today's losses.
If you really want to scale back your equity exposure that will be the time to do it. In the meantime, hold your fire and try to get a good night's sleep.
The collapse of the plan, which everyone thought was a done deal when the day began, triggered massive sell-offs in both New York and Toronto. The Dow ended up losing 778 points, the biggest one-day point drop in history (but not the greatest percentage drop). The TSX fared even worse, falling 841 points as the energy sector was rocked by plummeting oil prices. The Composite Index is now down more than 25% from its all-time high, which was reached on June 6. We live in a rapidly-changing world but this is ridiculous!
I can fully understand the anxiety that many of you are feeling right now. It is extremely difficult to stay positive in the face of what is happening in the U.S. But if at all possible, grit your teeth and avoid making panicky decisions that you may regret later.
It's important to remember that while we in Canada are being badly hurt by the mess in the U.S., our banking system is not on the brink of collapse. If you did not read Tom Slee's analysis of the banks in last weekend's issue of the Internet Wealth Builder, we have posted it on the BuildingWealth.ca website. His conclusion is especially relevant: "I think that all of our Canadian banks are exceptionally strong and safe. They have much better capital ratios than their U.S. counterparts even after all the new injections of capital on Wall Street. At the same time, because our banking system is concentrated (the six major players have 68% of all retail savings) regulators are able to exercise tight controls. In short, the banking sector remains a safe haven but capital gains will be hard to come by until long after it's clear that the international credit crunch is over."
Respected investment house Phillips, Hager & North posted a commentary on their website on Sunday that also spoke to this point. It said in part: "Although you wouldn't know it from the roller-coaster performance of the S&P/TSX Composite Index, the contrast between the Canadian and U.S. financial sectors is striking. Canadian banks have significantly less leverage than their U.S. counterparts and a more solid funding base than the spate of ill-fated Wall Street investment banking firms. Canadian institutions have also managed to avoid excessive exposure to mortgage-related minefields of the type that felled Washington Mutual. On the consumer level, significantly less mortgage-related leverage from households and a much smaller housing boom have allowed Canada's economy to hold up pretty well by comparison."
Ironically, I was having lunch with Nick Barisheff, who runs the BMG Bullion Fund, at exactly the time Congressional Republicans were defying President Bush and voting down the bail-out. As you might expect, he was extolling the virtues of investing in precious metals as a refuge against the storm (his fund holds gold, silver, and platinum bullion). And he certainly has a valid point in the circumstances; gold was up $5.90 on Monday.
What especially interested me, apart from his arguments in favour of bullion, was his comment when I asked his view of Canada's banks. Although he was gloomy about the economy generally, he acknowledged that our banking system is generally in good shape. Coming from a gold bug, that was a significant statement.
He also made a strong case for a rebound in oil prices, stressing that world production has peaked. Demand may drop temporarily because of the economic slowdown but it will recover, led back by countries such as China and India. The corollary is that oil stocks, which plummeted today, will also snap back.
The financial and energy sectors are the twin backbones of the TSX. The banks will survive and their share prices will eventually come back. The same is true of the big oil companies. It won't happen tomorrow, but it will happen.
There is one more point that I suggest you consider. The politicians in Washington are not fools, today's antics notwithstanding. The sober second thoughts were starting almost as soon as the House vote was tallied. There is going to be more horse-trading on Capitol Hill but I think a deal will still get done - hopefully by the end of this week (the House will reconvene in emergency session on Thursday). If and when that happens, the market rebound could be as dramatic as today's losses.
If you really want to scale back your equity exposure that will be the time to do it. In the meantime, hold your fire and try to get a good night's sleep.
