Market Lessons from Europe
in Troubled Times
By Rick Peterson November 20, 2008

These are interesting times, to say the least, in the financial and political capitals of the world.

I was in Europe in early November meeting with fund managers, private clients and investment bankers in Paris, Zurich, Geneva and Monaco. I spoke to them about the markets in Canada, and presented three companies that I’ve invested in personally and am working with as Peterson Capital clients: Columbia Yukon Explorations (CYU-V), NovaDX Ventures Corp (NDX-V), and Med BioGene Corp. (MBI-V). CYU is developing a major molybdenum deposit in northern BC; NDX is a merchant banking company in the junior resource sector; and MBI has developed three prognostic tests using gene expression technology for lung cancer, lymphoma and cardio-vascular disease.

For the week I was there, the European and North American markets continued their downward spiral, a new US president was elected, and the news coming from the European banking sector and economy continued to worsen. Back here at home, sellers continued to punish even good companies, as liquidity dried up and any good news coming into the markets was used as a reason for some investors to sell shares at virtually any price.

Against this backdrop, I learned some interesting things from my colleagues in Europe that I wanted to pass along to you. It’s interesting how they see things, and I think it’s useful to see their perspective in these troubled times.

Three Lessons from Europe
There were three main points that I heard over and again:

1. The damage to the balance sheets of European banks and businesses because of the widespread acceptance of “toxic” financial products engineered by US investment banks is deeper in Europe than most North Americans think.

2. However, the savings rate of most Europeans is significantly higher than that of most North Americans, and as a result, many bank accounts and investment fund managers are sitting on large amounts of cash that, one day – but not today – will find their way back in the market.

3. Europeans still believe in the long-term fundamentals of commodities, and believe that it will be a long time before financial institutions such as banks will ever trade at multiples that they did before things began unwinding last summer. And, they are strong believers of biotech, given the tradition of support of biotech in Switzerland and France.

In the end, Europeans are probably more optimistic about resource and biotech markets over the medium and longer term than we tend to be here in North America. Maybe it comes from a longer history of investing, or a greater distance from the hubris on Wall Street. Whatever the reason, it’s refreshing, especially at this time.

These points are all interesting – and even more-so when a recent edition of Donald Coxe’s “Basic Points” market overview landed on my desk shortly after I got back home. Coxe, as you know, is the well-respected global portfolio strategist for the BMO Financial Group. He writes with a great historical perspective, with wit and humour, and is able to zero in on salient investment themes. He’s been right far more than he’s been wrong in the 30 years of managing money and giving advice. I very much like reading his material.

Donald Coxe’s Views on the Market
Sure enough, in reading Coxe’s November 14th “Basic Points” edition, I found in it a number of the same themes I heard in Europe. Here are five major elements I took from Coxe’s piece that I think you might find of interest, and, with the exception of the fourth one, which I found echoed in Europe:

1. The recent market meltdown is the work of “a relatively few bankers and their co-conspirator politicians who have plunged the entire world into a needless financial crisis and inflicted serious damage on the wealth and savings of most of the world’s population.” As a result, deflation is now the big fear of central bankers.

2. The British-led rescue initiative that injects new equity in the banking system “is a shrewd strategy that should work.”

3. He believes that pension funds “will be major buyers of equities next year” as they unwind their exposure to alternative investments and sit in cash. Coxe believes that “this buildup of cash will ultimately be the source of funding for the next equity bull market.” Pension funds will have to move to equities from cash and Treasurys, because they’ve committed to earning 7% or more on their portfolios on their FASB statements. The worst of this bear market is over, believes Coxe.

4. Coxe has four indicators that he believes will signal the next upswing in the equity markets: The TED Spread; The Bank Stock Index continues to outperform the S&P; The VIX Index Retreats; The Yen and US Dollar Decline (see pages 26 and 27 of his report if you have it for details.) “When all four indicators have confirmed, it will be time to start buying stocks.”

5. “When the economic recovery arrives, gold will be in a major bull market” says Coxe. “By late January, the stock market should have stabilized and there should be more than a few signs of recovery.”