September Financial Newsletter Written by Alain Roy CEO LTI Long Term Investing September 13, 2011

September Financial Newsletter

THE JUNIOR CRASH In last months newsletter issue I provided a 60 year analysis of the length of days of major stock market crashes. summary: Average days of market crashes: 33 days Here was the

In this issue:
The Junior Crash Volatility Index Weekly Leading Indicator Other Economic Indicators Headwinds Interesting Economic Data Key Takeaways LTI Book of the Month

Standard deviation of a crash, in days: 23 The August crash we just experienced was a baby crash by historical

standards; a mere 11 days of blood was shed. We had a few days where the major indices lost over 6% in one day. serious volatility here. VXX jumped up like crazy in August. The VXX doubled in a matter of days. Around 7-8 newsletters ago I suggested buying the VXX at some We are talking about some

point in the future to protect from major crashes as a hedge against long positions. This could have provided you a nice hedge if you timed it right, which is always difficult with this type of leveraged ETF. I prefer to go with

The time to refinance your mortgage is now. Youll save thousands. Alain Roy, LTI CEO
P.Eng, MBA Candidate

the xcb.to bond fund ETF as mentioned in the past two newsletters. However, I did have some VXX during this rocketing move upward along with the LTI CTO.

VOLATILITY INDEX A great crash indicator to watch is the CBOE OEX Implied Volatility. Lets have a look: This is a 6 month trend of the ^VXO. symbol o http://finance.yahoo.com/q?s=^VXO&ql=1 Go to Yahoo Finance and type in this ticker

Lets look at a longer term trend of this crash index that measures the amount of panic: The volatility index of the 2008 crash was way higher than our most recent baby crash.

One of the blogs I follow, Hays Advisory, claims that when this volatility indicator passes the 44 level, the panic is at a peak and the markets will calm down over the coming weeks. There is usually an echo style panic where the markets go up and down a bit

afterward. Look for the initial panic to push passed the 44 level to get a better feel for how things are going. When you combine this volatility indicator, with other indicators I have mentioned in my newsletters, such as ECRI Weekly Leading Indicator, P/E of the S&P 500, 52 week range, 200 day moving average, Rydex Ratio, Put/Call Ratio, US Yield Curve, Canadian Leading indicator, Canadian Raw Material Prices, etc. you start to see a clearer picture which helps give you confidence when making large purchases when everyone else is selling. You may not find the exact bottom but if you are buying in and around a bottom you have to be happy with that. Here is how the CBOE OEX Volatility looks versus the S&P 500: S&P 500 = red CBOE OEX Volatility Index = blue Once you get near or over 44 on the volatility index you know that the panic is extreme and will likely subside. This is exactly what occurred in the last panic. There will be more panicsI promise. Next time watch the ^VXO: http://finance.yahoo.com/q?s=^VXO&ql=1

ECRI USA WEEKLY LEADING INDICATOR This indicator is one of my favourite indicators out there, one I watch on a weekly basis. Devout LTI Newsletter readers will recall an analysis I performed on the WLI and the S&P 500 and found them to be around 90% correlated. This is another indicator I use to confirm whether a good buying opportunity is present and what we can expect for economic conditions. This indicator is showing some downward pressure on the US economy:

ECRI WLI Level

140 135 130 WLI Level 125 120 115 110 105 100 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11

Source: ECRI

WLI Level

The WLI level has been dropping fairly fast in the past month. I have also seen the rapid deceleration of many other economic indicators which is starting to concern me. It is the rate of decrease that has me concerned. In addition, as shown on the following page the WLI growth has pushed into the negative territory.

The WLI growth has now breached past the 0% mark which is a bad sign of the US economy. On the flip side this is a good sign that there may be some buying opportunities coming our way in the near future.

When the WLI growth drops below 0% this is a bad sign for the US economy and for stock markets.

ECRI WLI Growth

30

20

WLI Growth (%)

10

-10

-20

-30 May-99 Oct-00 Mar-02 Aug-03 Jan-05 Jun-06 Nov-07 Apr-09 Sep-10

Source: ECRI

WLI Growth

I am especially concerned about how quick it turned negative. Huge slope. Black diamond in skiing slope terms. Keeps your eyes peeled as the headwinds are mounting. The graph below shows the S&P 500 in green and the WLI growth in blue. The WLI growth every so slightly leads the S&P 500. Without a reversal in the coming weeks, markets will go lower.

ECRI WLI Growth

30 1,800

20

1,600

WLI Growth (%)

1,400 10 1,200 0 1,000 -10 800 -20

600

-30 May-99 Oct-00 Mar-02 Aug-03 Jan-05 Jun-06 Nov-07 Apr-09 Sep-10

400

Source: ECRI

WLI Growth S&P 500

OTHER ECONOMIC INDICATORS

Tracking the Yield curve of a country is supposed to be one of the strongest predictors of future economic growth. I have recently calculated and graphed the yield

curve for the USA; Canada is next. This is performed by taking the 30 Year Treasury Bond yield and subtracting the 3 Month Treasury Bill yield. An inverted yield curve usually signals a potential upcoming recession.

As you can see below we definitely have an inverted yield curve as of late.

It is

interesting to see how early the yield curve inverted prior to the 2008-2009 recession. The only positive here is that the yield is still at 2.0%. I will continue to watch this over time and will update you accordingly. Unfortunately (or fortunately for long term investors) this indicates downward pressure on the US economy and the markets.

Enough about the USA right? What about Canada? Lucky for you guys I have just recently downloaded and graphed all of the Canadian economic indicators from StatsCan. I am now entering the Guru status of Individual Investing. Statscan tracks a Leading Indicator. It is comprised of items such as: money

supply, new manufacturing orders, US leading indicator, housing index, average work week, retail trade, durable goods sales, shipment to inventory ratio, employment and TSX 300 price. Notice that the leading indicator has tapered off (blue line). In addition the year

over year change is decreasing (green line). The big drops in the green line correspond to Canadian recessions. I will continue to keep a close eye on this indicator. The worry here is that each plateau in the leading indicator was followed by a recessionary period. Lets wait and see what happens in the next few months.

Canadian Leading Indicator

275 250 225 Leading Indicator 10% 200 175 150 125 -5% 100 75 50 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Source: StatsCan

20% 15%

5% 0%

-10% -15%

Leading Indicator Year over Year Change

Year over Year Change (%)

The Canadian GDP is also struggling. downwards.

Year over year change is starting to turn

Canadian GDP at base Prices

1300 1250 1200 7% 6%

4% 3% 2% ` 1% 0% -1% -2% -3% -4% -5% Feb99 Apr00 Jun01 Aug02 Oct03 Dec04 Feb06 Apr07 Jun08 GPD Year over Year Change Aug09 Oct10 Dec11

1150 1100 1050 1000 950 900 Dec97

Source: StatsCan

The Put to Call ratio is a gauge of investor sentiment. A high P/C ratio indicates bearish sentiment in the market. Below is the latest P/C data. It is at one of the higher levels since 2003. I wouldnt read too much into this. This is more of a coincident indicator.

Year over Year Change (%)

5%

GDP (SA, $billion)

HEADWINDS

There are many headwinds out there right now. It feels like we are standing in front of a big wall of bad economic headwinds. This picture shows me flying

around like a shit hawk waiting for the wave to either dissipate or crash down. Here is a quick list of the

headwinds that I see right now in the global economy that could impact the markets.

1. European Debt Crisis: PIGS I left out Ireland here because they seem to be doing the right things.

Greece

10 year Greece government bond yields are spiking. This is a sign that the investment

community has no face in Greece.

55% interest rate anyone???? Only risk is that you will lose your principal.. No biggie.

2 year Greece government bond yields: 55% interest rate. Just crazy.

1 year Greece government bond yield. 100% interest. Some serious shit is about to go down.

Italy Greece is not alone. We are starting to see some volatility in the Italian government bonds as well. This is the 10 yr Italian government bond yield. Starting to crank up again. The only reason it went down was because the European Union bought up a bunch of government bonds to tame the crisis.

Portugal

Portugal government 2 year bond yield is way up there as well. %. Their 10 year bond yield is at 11

Spain

The Spanish government 10 year bond yield is also up there. Albeit lower than countries like Greece

and Portugal but the worry amongst the investment community is there. Confidence is wavering in one of Europes biggest economies.

Any one of these PIGS poses a risk to the global financial system. Well know their fate in due time.

2. The US Federal Debt

This

is

major

issue

for

confidence in the global economy. They have already exceeded the raised debt limit from last month. Now Obama is

about to unveil a Jobs Plan which will undoubtedly call for more government spending. What a mess.

3. 10 Yr Treasury Yields

US 10 year treasuring yields are the lowest they have ever been. This is a bad sign for expectations on growth and inflation.

4. Consumer Confidence

Consumer

confidence

is

plummeting in many parts of the world. Germany is shown here.

University of Michigans Survey of Consumer Confidence Sentiment is at an all time low since they started tracking this indicator. This tracks

the US consumer confidence.

INTERESTING ECONOMIC DATA

Euro

orders

are

slowing

down.

Again the rate of decrease is the concern.

Some good news is that at least job openings are improving in the US.

US exports are still pretty strong. Their low dollar relative to all other currencies is definitely helping. I

have a graph of Canadas exports which I will include in the next

newsletter when I write a section on Canadian Economic Data.

Mortgage rates are at an all time low thanks to low yields on

government bonds.

We are seeing

the same trend in Canada. YOU SHOULD ALL RECONSIDER REFINANCING YOUR MORTGAGE TO A PRIME 0.75% (MINIMUM) MORTGAGE. You will save

thousands of dollars. time.

Now is the

The US Financial Conditions as tracked by Bloomberg has passed the 0% and gone into negative territory. This is generally a bad sign.

US ISM new orders. Look at current

levels versus past levels. Yikes!

This here is just funny. Obama is not a popular guy. I cant say he is actually doing a good job of

steering the ship through turbulent waters. All he is doing is approving the spending of money he doesnt have. He should play Cash Flow

101 by Robert Kiyosaki.

Canadian Housing Prices vs. USA. Will our fate be similar? Many think so.

Frances

stagnant for years. be

unemployment almost Will the 20

USA

similar? likely.

More than

US consumer spending is pretty strong. How much of this is due to low interest rates? I have the same graph for Canada which I will include in the next

newsletter.

US corporate profits are super high these days. same People are doing more for the pay as companies or to lay off is

employees. helping

That

technology become

companies

more

efficient (or a combination of both).

Delinquency consumer overall.

rates loans

on

US good

seem

Golds

accent

has

been

phenomenal.

Imagine though

for 20 years it did nothing. Now with the global economic worries gold is seen as the # 1 safe haven out there.

US commercial loans are on a steady rise. This is good. Just not fast enough for small businesses.

US

variable

mortgage

rates.

Similar trend here in Canada.

This is the time to break and get one of the best mortgage rates of your entire life. Email me if you want help determining if it is worth if.

Fixed or variable. ultra low.

They are both

My friend Jon just got a new mortgage from a Big 6 bank in Canada for Prime 0.8%. IS REDONCULOUS!! So THAT frigin

good. I am proud of him.

The VIX Index to 10-yr treasury yield is very high. This is also due to Bernakes and not money just the world

printing current

investing

volatility. This has been driving treasury yields down.

KEY TAKEWAYS

1. There are some major economic headwinds in front of us that could impact our portfolios in a negative way: a. Europe: Greece, Italy, Portugal, Spain b. USA debt and general economic slowdown 2. Key economic indicators are showing signs of weakness ahead of us. This may

present a good buying opportunity in the coming weeks and/or months. (The FOMC meeting on Sept 20-21 may change things as they may announce a QE package) a. Keep an eye out for Financial Stocks as they may get hit the most due to the European crisis. I recommend you watch the following. I only invest in these banks. No others. Ill explain why in a future newsletter (Fundamental

Analysis). This is by order of priority. i. Royal Bank ii. Bank of Nova Scotia iii. Santander Bank 3. Mortgage fixed rates havent been this low in generations. I am recommending Find out what Use Yahoo

that all of you LTIites look into refinancing your mortgage.

your breaking costs are and then determine how much you will save.

Real Estate Mortgage Calculator to help you find out this info. Make sure to ask your broker for the break fee and if you pay just three months interest OR the interest differential. I got screwed once with this. GET YOUR BREAK FEE IN WRITING! If you have a 3.5% mortgage or higher and switch to a prime 0.75% mortgage you will save thousands of dollars on your mortgage in the five year term. Thousands!!

Only government stimulus via money printing will impact this downward spiral. But even then, that is just like kicking the can down the road and will actually make things worse. These are extremely interesting times we live in right now. buying opportunity ahead of us. There could be a very good

LTI BOOK OF THE MONTH

I am going to deviate this month from investing books and recommend a book that is WAY more important than money, your wife or husband!!! This was seriously one of the best books I read. This book is in my Top Ten List of all time, and I have read hundreds of books. Buy it and re-read it once every two years or every year. If you are a husband this will help you understand your wife on such a level that you have never imagined. Also, to the men on this newsletter you now have the information to show your wife why a man cave is critical to a guy. Seriously, you must have this on your book shelf. Why this book recommendation out of the blue? Well its our 3rd year wedding anniversary on the 13th and I am thinking its about time I re-read this book and maintain my champion-like husband qualities.

Men are from Mars, Women are from Venus by John Gray, Ph.D $16.50 at Amazon.com: http://www.amazon.com/Mars-Women-Venus-CommunicationRelationships/dp/006016848X $16.50 to make you a relationship mini-expert. I mean come on. Order it now!!! Dont be cheap. Your spouse deserves it. It will pay you relationship dividends. Trust me !

Be Smart!
Alain Roy, P.Eng, MBA Candidate CEO of LTI Long Term Investing almroy@gmail.com

Disclaimer: The content of this newsletter is to increase your financial intelligence and is intended as general information only. Any action that you take as a result of this

information and analysis is ultimately your responsibility. I will not be held responsible for any negative outcomes of any kind as a result of this information. information responsibly. decisions. Please use this

Consult your financial advisor before making any investment