We identify with Linus van Pelt, brother to Lucy, and best friend to Charlie Brown, all of whom characters from the innovative mind of Charles Schultz. Schultz didn’t work for peanuts, but Peanuts sure worked for him. But back to Linus:
Linus had several quirks, the most famous of which was the security blanket he used to walk around with. But each Halloween night, while the rest of the neighborhood kids were out trick-or-treating, Linus would plant himself in his pumpkin patch, awaiting the appearance of the “Great Pumpkin” who would distribute toys to all the kids present. Meaning, usually, just him. Of course, all of his friends tried to talking him out of it, and indeed the Great Pumpkin never did actually appear.
We are not waiting for the Great Pumpkin, but rather for the market to turn into it. It’s not that we don’t think the market can rise from here; we are wondering whether or not any additional upside the market may offer is worth the additional risk the investor is taking on in order to attain it. Indeed equity market have been trading sideways for most of the year, but with increased volatility, so that by definition risk-adjusted returns have declined.
We are, in a sense, looking for our own security blanket.
The dominant theme over the first half of 2015, at least from the perspective of Canadian investors, is the fact that this country, if not already in a recession, is teetering on the brink. We have witnessed decline in real estate values in areas that are leveraged to oil, while in the rest of the country prices continue that ascent unabatedly.
We note with interest the fact that U.S. hedge funds that did well when real estate values crashed in the wake of that country’s financial crisis are now betting on a decline in real estate here. They cite increasing levels of household debt to levels that likely cannot be sustained.
At any rate, Canada’s economics vicissitudes has force the Central Bank to lower interest rates, causes a selloff in the Canadian dollar to levels not seen in almost a decade. We have kept most of our equity exposure outside of Canada, and so have been helped by the Looney’s decline.
Bob Prechter, the noted Elliott Wave theorist once remarked that “There is nothing wrong with cash. It gives you time to think.” Financial markets have provided us with much to think about lately: the possibility of a recession in Canada, the Greek bailout, rising interest rates in the US, and precipitous drop in the Chinese Stock Market, following a meteoric rise. We are looking to apply our cash reserves towards the inevitable opportunities that these issues will present.
