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Its hard to be a bear!

And getting harder everyday especially a Canadian bear, because the hard data just doesn’t support my position.  Certain days it gets very depressing, like many investors I missed the stock market rally of 2009, could have caught it on the way up, but I never believed in it!  I was always waiting for the other shoe do drop, so far I’m still waiting.

Up here (in Canada) the economy is humming, there is no doubt about it, growth appears solid, and although the Federal and Provincial governments “open the spigot” they’ve now firmly closed them.  The Liberal administration which runs the Quebec government was courageous in the face of impossible circumstances; namely that health care costs are out of control, and now absorb 40% of government spending (Vs. 31% in 1980), furthermore the trend is worrying, health care costs are growing by 5.8% per annum vs. 2.8% for the rest of government expenses.  It doesn’t take a PhD in mathematics to figure out that is an unsustainable trend line.

So up here in Canada the various levels of governments are taking the bull by the horns, and if Canadians are able to live with the short term pain, the long term gain is obvious – a healthy liberal (in the greater sense of the term) economy.

This healthy attitude, is obviously the result of very aggressive debt growth control at the federal level in the mid 90s (why is it always “leftwing” governments which tackle the debt burden, and rarely the “conservative” ones).  But it is also driven by Canada’s export orientated economic activity, first and foremost because being next door to the American giant forces competitive pricing on Canadian manufacturers.  It helps that we have more energy available than we can consume (Nuclear, Oil & Gas, and electricity), we have raw materials in quantities – although we are not the largest producers in many commodity, we are a serious player in many.

Our biggest failing is our productivity, which lags our American counterparts (several reasons have been postulated for this lag) first and foremost is that the investment environment is not as attractive in Canada than in the U.S.  Others blame the higher rate of unionized labor (probably a bit of everything).  I also suspect that some of this has something to do with our economic make-up which is less service orientated than in the U.S.  


However, what we are seeing in the funds flow is a big Thumbs Up sign from the international investment community.  Until recently, investing in Canada meant buying Canadian Treasury bonds.  Provinces raised some money in NY and London but this was largely limited to Quebec and Ontario (the largest two).  Foreigners are discovering Canada as an investment destination, the strength of the Canadian dollar is a testament to this trend. 

Back to our title: It’s hard being a bear!

The S&P/TSX is priced to perfection; strong economic growth here and with our trading partners is essential, a continued strong dollar will not impact this, as long as it stays in the 0.95 ~1.05 range.  The strength of the Canadian dollar seems to be directly linked to oil prices, but it probably has to do with the weakness of the U.S. dollar. 

The problem is when a market is priced to perfection, any slight imperfection can have a drastic impact on multiples and yields…  

I could still be right...then again


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