The kids and I did a day trip yesterday to Casa Loma in Toronto. I had not been in years and now that they are almost 9 and 10 they were able to take in a good deal of the historic story. I was reminded again of the epic nature of human behaviour, cycles and money.

Sir Henry Pellatt, the dreamer behind the "castle", left his studies at Upper Canada College when he was seventeen to pursue a career in commerce in the family business. By the age of 23 he became a full partner in his father's stock brokerage firm, from that time on known as Pellatt and Pellatt.

In the same year that Thomas Edison developed steam-generated electricity, Sir Henry realized that supplying electricity could be extremely profitable. He founded the Toronto Electric Light Company in 1883. By the time he was thirty, the Toronto Electric Light Company enjoyed a monopoly on the supply of street lighting to the city. Copious amounts of easy money were now flowing to Sir Henry.

In 1892 we are told by his bio, Pellatt's father retired, "enabling Sir Henry to invest with more risk." Cue the red flags   more »

The Congressional Budget Office, a nonpartisan agency, says a temporary measure to back Fannie and Freddie could cost taxpayers as much as $25 billion."

This legislation is a war-time-like-measure showing desperation on the part of the US government in trying to shorten the housing depression and the worst economic recession in decades.

But many American tax payers are finally outraged and taking to the streets in protest of the intervention proposal.

Watch this clip for a good overview: **Red Alert**Rape by Congress Imminent.


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Ms. Park was the guest Portfolio Manager on BNN Market Lookahead, Thurs July 24, at 9:20 am. The clip will be available for a limited time afterwards on the BNN web site here.   more »

Free market forces are routinely given great credit as wise and omnipotent. That is, so long as asset prices are rising. Once the inevitable price corrections begin however, there is typically outrage and demands for government intervention to step in and save us. This common pattern was evidenced last week as the SEC announced vague new emergency restrictions against short-selling. This initially prompted a short-covering rally in stocks that is likely to fade out again over the coming days and weeks.

As Spencer Jakab points out for the Dow Jones Newswire today in The mother of all short squeezes may end badly:

"The fact that the initial results were spectacular, particularly for financial stocks, shouldn't be too encouraging. Consider what happened in April 1932, at the depth of the worst-ever bear market. Upon the announcement of a cumbersome new rule that required written permission from each shareholder before a broker lent out his stock, the Dow Jones Industrials rallied 3.51%. By the time the rules were instituted weeks later, the short covering was over and the slump had resumed...   more »

This story from the Pakistan Daily Times caught my eye this morning. Panic continues to build as this bear market grinds on around the world. I am reminded of the angry employees and investors who were storming Bear Stearns offices when I was in New York in May. Now investors in Pakistan are taking to the streets in frustration and anger to protest recent stock market losses:

"Thousands of angry investors, enraged by the persistent decline in share prices, protested on the floors of stock exchanges in Karachi, Lahore and Islamabad on Thursday, demanding a temporary closure of the markets.

A slump in investor confidence accelerated as stocks fell over four percent and the rupee dropped by 1.3 percent around midday due to fears of political uncertainty and dire economic challenges, including a double-digit inflation rate.

Small investors gathered at the trading hall of the Karachi Stock Exchange (KSE) around 11am and began shouting slogans, while some protestors broke windowpanes and furniture at the trading hall. Edhi sources said at least three people were injured in scuffles with the police officers deployed to handle the situation...

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Fear about soaring inflation and plunging growth are becoming increasingly palpable in world leaders both in business and politics.

Today the Bank of England's new chief economist Spencer Dale warned that the UK is facing its toughest economic prospects in over a decade, as unemployment increases at the fastest rate since 1992: See: Bank of England chief sees rocky ride ahead for the economy.

And Spain's finance minister Pedro Solbes stunned markets with an admission that his country faces the worst economic crisis in its history as the full effects of the property crash spread through the economy.

"This crisis is the most complex we have ever lived through given the plethora of factors on the table at the same time," he told Punto Radio in Madrid, breaking with past efforts to put a reassuring gloss on events.

Mr Solbes said the Madrid bourse [stock exchange] had suffered an "earthquake", crashing 27pc since the start of June. He blamed the toxic cocktail of high oil prices, the global credit crisis and the sharp slowdown in the key export markets of North America and Germany. See Spain drops reassuring gloss as crisis deepens.

This week the Bank of Canada and our minister of finance gave a fairly upbeat report on the Canadian economy, but both acknowledged that Canada cannot hope to be immune from the ongoing global slowdown and our risks to the downside include...   more »

Over the past 36 hours, equity markets have been staging yet another relief rally. Days and even weeks of counter-trend rally are typical within on-going bear markets such as the present cycle. Bear markets typically grind investors down in fits and starts of hope and fear a few times, before a final wave of desperation selling brings the ultimate capitulation and a lasting bottom.

This recent swing of hope has come on falling crude prices and some better than expected earnings reports from a couple of companies such as investment bank JP Morgan this morning. But even while JP Morgan executives reported on a better than anticipated second quarter, the company sounded strong warning bells over growing trouble in the US mortgage market. Soaring defaults on sub-prime mortgages have been a big problem over the past 18 months, but it seems the next and likely bigger default wave is now underway: defaulting prime mortgages.

CEO Jamie Dimon was trying to prepare analysts and investors for the next wave of losses: "“Prime looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say..."   more »

A colourful and honest rant on the Big Picture this morning is a refreshing read: Idiots Fiddle while Rome burns: " This is financial incompetence writ on a scale far grander than anything seen for centuries”.

It reminds me of something I have been asking my speaking audiences for several months now: why are regular people and investors not mad as hell at banks, brokers, regulators and our so called leaders? Capital markets have had plenty of dumb, wasteful and greed-fuelled disasters in our history, but recent years will go down as one of the more epic episodes. Ritholtz puts it very well:

"Books will be written about this period of time, and our descendants will wonder in awe as to how this was allowed to happen. Tulips got nothing on us! It’s not just the total dollar value of the losses that have exceeded all other global fits of financial madness combined, but rather, how so many warning signs were so blithely ignored by so many and for so long. What was wrong with these people, the authors and historians will wonder. Did the antibiotics in the food supply drive them mad? Did the High Fructose Corn Syrup compromise their ability to think? Some form of viral plague? Roid rage? What else could have created such a mass delusion amongst not just the populace, but their leadership and institutions? "

Two years ago I wrote that watching this insanity unfold around the world was like being the only sober one who points out that their family members are becoming drug addicts. While they are still in denial, others may shun you as judgmental and alarmist. But when the inevitable hell does break lose, others are shocked and want to know how you saw disaster looming...   more »

Recently I am repeatedly asked, "how much worse can things get from here?"

Firstly, no, the string of bad data does not surprise me. It has been a long time building. This downturn is long overdue. Anyone who is taken off guard by market losses to date was quite simply not paying attention over the past couple of years. Those that call themselves financial advisors and have left their clients' capital fully invested in this mess should be ashamed and fired.

As I have repeatedly said over the past year and a half, this is a very serious global slowdown. The worst that we have seen in decades. Where equity markets will ultimately bottom is impossible to predict for sure, but presently probabilities suggest that asset values may fall significantly further over the coming weeks and months. As we saw again today, Canada is now one of the more vulnerable markets to the next phase of this market decline. Having so far corrected only a scant 12% from the peak, the TSX could easily fall a further 20%. Possibly more. And the financials that have led this nasty slide down? Sorry, no signs of a bottom just yet.

Tonight the US Dow 30 Index closed below 11,000 for the first time in a couple of years. The next key level we are watching is for the Dow to have a daily close through 10,770. If it does close through that level in the weeks ahead, (and I think it likely will) then we must be prepared that over the coming months, the overall markets could potentially test their lows from the last market downturn in 2002...   more »

Ms. Park will be a guest on CBC Newsworld Business tonight at 630pm, talking about the present bear market and what she thinks likely over the next few weeks and months   more »

Several readers have been emailing me lately with the trillion dollar questions "are we through the worst of this bear market yet?" and "how will we know when to buy equities again?" Good questions.

My answer to the first is no I doubt we are through the worst of this bear market yet. Counting from the October 2007 peak, we are now into this bear about 9 months. And while the historical average duration of bear markets has been about 10 months, I suspect this bear will prove to be a bit longer than average. Reverting to the mean on various metrics this time will likely dictate a longer than average market contraction, perhaps of the 12 to 15 month variety. US markets are now down by 20% or so. The average bear market decline would be 26%, but in longer more protracted downturns or recessions (as I believe we are in presently) the average bear market is -35%+. So to be defensive of your equity capital, I would remain seated (in cash) with seatbelts firmly fastened for a while longer yet.

In Canada? Today the TSX is only off some 10% from its commodity driven peak. Canada's market corrections generally lag the US. But our losses have also traditionally been more severe thanks to our concentrated market exposure to energy, commodities and financial services. If you don't believe me on this point, please do have a look at any Andex market chart and note the almost perfect correlation between the down and up trends among the stock markets in Canada, the US and the international indices. While you are at it, do look closely at the 1973-74 downturn. This downturn came in the midst of the last great secular uptrend in commodities, and Canada did not follow the US into recession in 1974. We still lost half of our stock market value along with the US.

At our firm, we will buy equities again as various indices and sectors come up in our analysis as buys. We don't call these things on "gut". There are many indicators that help to give us an objective assessment on the probability of investment success through the various phases of this market cycle. The probability of success does not yet favour long investors.    more »

July 2 (Bloomberg) -- It must be a bear market because even billionaire Warren Buffett's Berkshire Hathaway Inc. has slumped almost 20 percent since December.

The decline exceeds the drop of the Standard & Poor's 500 Index and marks the worst first half for the Omaha, Nebraska- based investment and holding company since 1990. Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income." See: Buffett's Berkshire Has Worst First Half Since 1990.

I have long been a fan of Warren Buffett and his investment discipline. But the fact is that Berkshire is a publicly traded company. This means that Buffett is not actually in charge of Berkshire's share price. Like all publicly traded securities Berkshire shares are driven by the ebb and flow of mass psychology in the market auction. When assets in the world become wildly over-priced as they did from 2005-2007, Berkshire's shares are swept up in the over-optimism and over-pricing too. In market cycles, what goes up, must come down, and now Berkshire is losing value along with the overall markets. So much for it being a "quality" "defensive" holding.

All that we can control is our exposure to the market cycle. Doing that well is the source of all lasting value. This is why the “trick” is having a discipline to buy and sell market assets, not buy and hold.

Oh, but then as the talking heads on Kudlow Company were pointing out last night, if you have 30 years or more for your equity investments to prove profitable, then you can just passively hold 'em. No need to fret about timing your exposure. Always buy, never sell. Don't worry be happy.

As Barry Ritholtz points out this morning on his blog in Pervasive Pollyannas of Prosperity: "Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally -- or if they did, they lost most of their clients' money."

No truer words were ever spoken. Amen.
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