Chris Kuflik - ScotiaMcLeod Montreal

After a difficult August, many global markets moved higher in September. This surge caught many investors and market watchers by surprise as a great deal of the global economic headwinds remain. A further round of quantitative easing (QE2) by the Fed in the US is being openly discussed and the conclusion of one large hedge fund manager on this topic is that it will be a win-win for investors in equities.

David Tepper, the hedge fund manager in question, in an interview on CNBC last Friday, argued that stocks would rise because one of two things: Either the economy would get better, fuelling a positive outlook for stocks, or the Federal Reserve would step in with another round of QE2 causing stock increases regardless of the economic headwinds. It is interesting to note that the first proposed round of quantitative easing (QE1) in December 2008 caused an initial surge in markets but that rally quickly faded. QE1 helped both the large banks and corporations borrow at extremely low interest rates. But it did NOT help the real US economy in a sustainable way.

When hundreds of billions to trillions were pumped into the system last year, that money shored up balance sheets. Consider the following:

            • QE1 did not help US unemployment.

            • It did not help stabilize the housing market.

            • It did not help individual consumers or small businesses.

            • It did not help the 41 million Americans on food stamps.

Equity markets this month have largely ignored or dismissed negative news while focusing on the fact that the economic numbers reported have not been as bad as forecast. What we find very interesting is that asset classes which are typically inversely correlated are all rising at the same time. Recall that falling interest rates and rising gold prices are typically worrisome for future economic and profit growth and would normally suggest heightened fear. Gold continues to set new record high prices. Treasury bonds across the yield curve continue to remain at low rate levels. In addition an auction of US 2 year notes generated huge interest even at rates below 0.50%. We will eventually find out whether the bond and gold markets or the equity markets are correct in their views. 

The Canadian economy has witnessed a dramatic slowdown as well. The Bank of Canada has recently suggested that further interest rate increases will be put on hold. This change in outlook is due to their concern with the rising debt levels of Canadians and both domestic and international economic uncertainty.

Despite the negative economic news, we increased our equity weightings during the month of September. Our equity / fixed income / cash indicators, which force us to do what sometimes seems unnatural, turned positive for equities suggesting the accumulation of equities in certain sectors. We will continue to invest in the strongest relative strength equities and sectors while maintaining tight trailing stop losses to protect capital and gains. Can this rally continue? Only time will tell. In the meantime, we will follow our indicators.

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Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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