September 2010 Economic Outlook

A L L I A N C E I N V E S T M E N T S O LU T I O N S

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Mike LathigeeCHAIRMAN & CEOof Alliance Investment Solutions

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SEPTEMBER 2010$59.75 USD

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September 2010 Economy ReportMonday, September 13th, 2010

Cash flow. Cash flow. Cash flow. Cash flow, cash flow, cash flow. That is the central theme

of this month’s Economic Outlook and for the next several months.

It is very difficult right now to determine in which direction the overall economy is headed. One day we get a positive economic indicator that the market is moving up and the next day we get a negative economic indicator that the market is moving down. I have never seen analysts and commentators so divided on which way the economy is headed. With this kind of extreme uncertainty I can not be certain about which way the market will go. But I can be certain about the Real Estate market. It is certain, at least in the United States, that capital appreciation of Real Estate is not going to happen in the foreseeable future. Until such time as I can get a sense that the economy is in recovery and that we will not see a double dip recession, my focus is on conservative, low risk cash flow vehicles. That is why my focus for this month’s overview for investors is on cash flow vehicles that will give you a return and let you sleep at night.

I believe focusing on these types of cash flow instruments is the most prudent method of investing in the current economic climate. As always, I recommend that you discuss these ideas with your financial advisor to make sure that they suit your risk tolerance level and fit your financial goals. Before I get to my ideas, let me give you some general guidelines to follow when looking at cash flow investments:

Stay clear of managed mutual funds I want to be clear that investing in stocks and funds is just too risky at this time. I

definitely believe the buy and hold strategy in mutual funds will not work. I believe that this market could trade sideways for a long period of time, which would cause you to lose any returns you might make in a buy and hold strategy due to the fees charged by mutual fund companies.

Be wary of investing in Real Estate for appreciation onlyAlso, I would avoid any Real Estate

deals where the principle return is based on appreciation. Of course, there are a few exceptions to this general rule. Real Estate makes up a huge geographic marketplace and you’ll always find a few isolated micro-markets where some appreciation can be expected. Las Vegas is one example in particular.

This Editions issuePage

1 Cash Flow, Cash flow, Cash flow.

1 Stay clear of managed mutuals

1 Be wary of investing in Real Estate for apprciation only

2 Uncertainty in the martkes.

And much more...


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“Latest reports

show that Home

Sales plunged 27%

to a 15 year low”

credit stopped propping up sales, the market continued its previous downward spiral.

Uncertainty in the market is due to several factorsI already mentioned the uncertainty

in the stock market. I think it’s important that you understand why the market is experiencing so much uncertainty and why we cannot determine its direction. When I analyze the market I review several economic indicators both domestic and abroad. Currently I am seeing a very mixed bag of signals - positive and negative - with no clear trend in either direction.

Here’s what I’m seeing to the down side:

Unemployment. The U.S. unemployment numbers are one of the most important economic indicators that we have for a general economic recovery. While, we have seen some improvement here, it is not strong enough to say we are in a recovery. The best way to describe the latest job numbers is to say that they are “less worse” than last month with only 50,000 jobs lost in the month of August. It is clear that all the stimulus programs and government spending efforts are not creating jobs. With official unemployment at 9.5% we are still at recession levels, and that means we are far from a recovery.

In Las Vegas it is possible to buy many properties that are well below replacement cost. That is why it makes little sense to build and invest in development projects in that area at this time, and better sense to buy existing properties instead. Still, I want you to keep in mind that micro-markets with potential appreciation like Las Vegas are rare exceptions to the general rule. Within Las Vegas it is possible to get appreciation, but only in small pockets of the city. Most areas of Las Vegas are still falling. The general rule is: Avoid buying Real Estate when potential appreciation is the only basis for your investing return. While I’m on the topic of Real Estate, let me give you the most recent statistics on the general market.

Latest reports show that Home Sales plunged 27% to a 15 year low. This is due primarily to mounting foreclosures. There are simply too many houses on the market, which is driving prices down in many areas. In fact, New Home Sales hit its slowest month in nearly 50 years. It seems without homebuyer credits, the housing market hasn’t been able to pull itself out of its slump. As you know, the housing market was supported in large part over the past year by the housing stimulus tax credit for first time home buyers. When this tax


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levels in two years. Larger inventories mean slowing sales, which reflects a weaker consumer. Overall, the recovery that appeared to be shaping up over summer has lost steam. Evidently all the stimulus spending is slowing without having created all those promised jobs. As a result the economy is not able to run on its own and is in a stagnated state of minimal growth.

A few words about government bondsAll this uncertainty in the stock markets

has sent investors flocking into government bonds. Now, one year ago every economist I read was predicting that government bonds were going to collapse as the stock market improved. Well, it is amazing to note that every single one of these economists was wrong. Government bonds have done extremely well.

The masses were right in this rare instance.To give you an example of the current trend in government bonds, last week redemptions in mutual funds totaled $500 million and influxes into government bonds hit $2.4 billion.

We are dealing with a market of panicked investors. Investors are flocking out of the uncertain stock market and into government bonds.

Earnings. This week sees earnings season is in full force, but based on announcements so far, the season is not getting off to a very good start. We look at the earnings of large companies as indicators of a healthy or improving economy, because company earnings are one indicator that consumers are spending. Remember that consumer spending drives two-thirds of the U.S. economy and half of the Canadian economy. When consumers spend, companies have revenue. When companies have revenue they have earnings. When companies have earnings the stock markets do well. When stock markets do well then investors have profits. And when investors reap profits then they reinvest into capital projects. This is the logic behind the flow of money.

This week we have already seen some very large companies issue earnings warnings. Some of the more notable companies issuing these warnings include National Semi Conductor and Intel. Their warnings are of particular concern, because these are growth companies and the fact that they warned about earnings is not a positive indication that the economy is recovering. Another concern I am seeing in the U.S. economy is that wholesale inventories from manufacturers are growing to their highest

“The masses

were right in this

rare instance”


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“...many economists

and analysts

are skeptical if

these steps will

be sufficient,

especially if we are

in a deflationary

economic

environment”

However, for people who insist on remaining in the government bond market I sincerely suggest you discuss a hedge with your advisor. Okay. Now you know where I stand on government bonds. It’s time to move on.

Federal Reserve will do whatever it takesOne positive indicator for the U. S. markets comes out of the Federal Reserve.

Recently, the Feds have stated that they will do whatever is needed to boost the U.S. economy and keep it from slumping further. For example, the Fed recently began buying more U.S. government debt in the hope of keeping the economy stabilized. They also intend to continue to keep interest rates low. However, many economists and analysts are skeptical if these steps will be sufficient, especially if we are in a deflationary economic environment. We need to remember that Japan has been using this same strategy for more than a decade and it hasn’t solved its problems. In Japan the stock market and Real Estate prices are still well below what they were many years ago. On the other hand, I think the situation in the United States is much better, because we have much better demographics with a broader and younger population. Japan’s population is aging and shrinking, yet its immigration laws don’t allow Japan to accept new citizens

Government bonds are considered a safe haven for investors, because they are backed by the U.S. government. As interest rates dropped demand for government bond soared, which pushed government bond prices upward. What amazes me about this flight is the fact that the majority of government bonds are paying just a few percentage points. It is startling to me that investors are so nervous they are seeking returns in the 2% to 2.5% range, especially since the government bond market is a very dangerous place to invest at this time. That’s because any recovery in the stock market will see government bonds take a bath.

All this demand has pushed government bond prices up too quickly. I believe that government bonds are in a bubble and that this situation will end badly for most investors. Also, although I don’t see immediate threat of inflation, I still warn my subscribers that government bond funds will be killed with any sign of inflation. If you are currently invested in the government bond market, and want to stay invested there then I strongly recommend that you consult your financial advisor to discuss a hedge. For example, choose a hedge investment in something that will benefit if interest rates go up. Now, I don’t do this type of investing myself, because as I see it, profits from one investment just cancel out the profits of the other.


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“I strongly believe

that we should

let the market

correct itself and

pay the price

for past excesses

and move on”

faire attitude of letting the free market decide is no longer how we do things in America. We’ve lost one of our founding principles. Although this is the American situation things are much different abroad.

Positive indicators from abroad In China imports are up to their highest point in a year. This helps many

countries reduce their trade imbalance with China. In addition, many emerging nations are showing double-digit growth. So, while we are looking at the possibility of a double-dip recession in the United States, many emerging nations are seeing some spectacular growth. In particular, we are seeing growth in China, India, Brazil and many countries in Asia.

All this worldwide growth in emerging nations is good for Canada, which is benefiting from its export market in commodities and raw resources. This type of growth is also fantastic news for the United States since these emerging countries will require goods and services from the United States as their economies get stronger. This helps the American economy recover. Around the world nearly all of the world’s economies are outpacing the economy of the United States in growth. In the second quarter of 2010, Singapore’s growth is at 18%, China’s growth is at 10% and India’s growth is at 9%. Obviously, the outlook for world economics is

from other countries. This contraction in Japan’s population could continue to have a dampening effect on its economy Meanwhile, the Federal Reserve will continue with a policy of more debt, a weaker dollar to assist the export market, and more stimulus efforts. The reason they are pursuing this program is because they see no viable alternative.

We are coming up on a midterm election and whether it makes sense or not, much of the U.S. economy is run according to these short term election cycles. If the Fed doesn’t follow their current strategy, then politicians will be looking at more unemployment, a deeper recession, more housing problems and less patience from voters. I strongly believe that we should let the market correct itself and pay the price for past excesses and move on. Unfortunately, that is not how the government currently works. I fear we will continue to see even more government interference in the marketplace, especially with Obama as the President. Americans might maintain that we are not a Socialist country, but the reality is the public wants the government to fix things. Most people don’t have solutions and so they are willing to give up their power to whoever says they do have solutions. This is the way we do things in the United States. The laizzez


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“A lot of companies

have stockpiled

large sums of cash,

but they are not

hiring because

they are concerned

about the economy”

correlation between a dropping U.S. dollar and a stock market moving up. Conversely, we see a strong dollar on any given day will correlate in most cases with a declining market. The selling off of the U.S. dollar by China is good for the stock markets, because this makes stocks cheaper to international buyers. Also affecting the stock market is the activity in the Mergers and Acquisition quarter, which has recently heated up. Normally this is a sign of a strong market, but I am not convinced it is that simple. Let me explain. A lot of companies have stockpiled large sums of cash, but they are not hiring because they are concerned about the economy. Investors in general are penalizing these companies that have these large cash reserves and are not putting that money to work by selling these stocks off. Investors are demanding that the money be put to work or be distributed back to shareholders. Therefore, we are seeing a lot of activity in the Mergers and Acquisition arena as these firms are using their stockpiled cash to acquire new companies.

Just recently we saw a situation where 3PAR become the target of a bidding war between Hewitt Packard and Dell with the result that the stock was driven up from $9 a share to $32 a share before Hewitt Packard was the successful bidder.

much better than the outlook for the United States. This means that if we want higher returns on our investments, we must focus on markets outside of the United States.

Commodities up around the worldMore good news is coming out of Canada. The junior mining sector in

Canada has been on fire and experienced a massive run up over the last few weeks. In particular, we are seeing strong demand for uranium, copper and rare earth commodities with a lot of this interest coming from investors. This is due to the fact that these investors are speculating that China is selling off its U.S. dollar holdings and taking much larger stakes in natural resource companies around the world. With China leading the way in buying commodities the price of copper is rising. Copper is a widely followed barometer for world growth. Thus it follows that if the global economy is recovering, the demand for copper goes up and so does the price. This is a positive sign for the global recovery.

Positive factors affecting the U.S. stock market We are seeing U.S. dollar weakness

due to huge debt concerns and the sell off of China’s U.S. currency reserves. This is good for the U.S. stock market. When you study the last 3,000 trading days you will see a direct


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“What Americans

have to understand

is that over the

last 200 years any

major downturn

in the economy

has taken several

years to recover.

Presidential policy

can influence

that recovery...”

approaching and Obama is panicking. His government interference social policies are not working. He is desperate to make a last stand to win support. Otherwise, he will become a lame duck President for his last two years in office and lose control of the Senate and Congress.

What Americans have to understand is that over the last 200 years any major downturn in the economy has taken several years to recover. Presidential policy can influence that recovery, but not to the degree that the public perceive it can. It is simply going to take a very long time to see a recovery, particularly in the housing market.On top of that, one can make a strong argument that Obama’s interference in the housing market with his government assistance programs is only delaying the inevitable. This is evidenced by the fact that 60% of those approved for the Home Affordability Mortgage Program have defaulted again. Plus, banks are not lending as hoped. This is in large part due to the new government regulations, which place even more restrictions on banks. This leaves smaller banks caught between a rock and hard place; wanting to loan money, but unable to meet the new federal rules that require a higher ratio of cash reserves to balance the new assets created by these loans.

Normally, Merger and Acquisition activity is considered a sign of a recovering economy, but in the current climate this activity has some negative aspects. In the current climate, companies that are being acquired will be consolidated. This will lead to layoffs and an even worse unemployment rate.

Political fall out from the uncertain economyAll of this uncertainty and stagnation

in the economy is very bad for Obama. Many of you will recall that the day Obama was elected I stated in my newsletter that I didn’t believe he would be reelected. That was not because I am anti Obama, but rather because the economy was in such poor shape I felt that any recovery would take a very long time. The incoming President simply wasn’t going to be able to work miracles and the American people would not have patience with failure. Americans want government interference to repair the economy and get us on the road to recovery. But the truth is, and we must realize this truth, economic cycles take several years to complete and we are in a corrective cycle that will take a long time to recover.

Historically, studies of Presidential elections show that it is rare that a sitting President is re-elected during a bad economy. Now the November midterm elections are fast


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“Interest rates

are in an upward

pattern and

recently climbed

to 1%, which is up

25 basis points.”

cities like Calgary, Toronto and Vancouver. Many Canadians bought ahead of the new HST tax and as soon as the HST tax came in Canadians stopped buying. At this time housing prices are dropping because the affordability index for cities like Vancouver and Toronto is just too low. That means that the average person with an average income cannot afford to buy property in a city like Vancouver or Toronto. At the other end of that spectrum we have Las Vegas in the United States, which has the best affordability index in North America. That higher index means workers can actually afford to buy a home. Smaller cities in Canada will not feel the same collapse in housing prices that the larger cities will feel. This is because they did not participate in the Real Estate boom that drove prices up.

Also, the trend of rising interest rates in Canada is hindering the Real Estate market. Interest rates are in an upward pattern and recently climbed to 1%, which is up 25 basis points. In comparison, the U.S. interest rate is holding at 0.5%. This is a major reason the Canadian dollar is moving up in relation to the U.S. dollar; the return on Canadian treasury notes is higher than the return on U.S. notes. Frankly, many foreign investors believe that buying Canadian debt is much safer than

It seems the only entities that benefited from the government’s Home Affordability Mortgage Program were the handful of big banks that were able to meet these requirements and thus, suck more payments out of already distressed homeowners before many of these homeowners defaulted again.

One especially unfortunate aspect of this government interference evolved out of the tax credit for first time home buyers, which enticed new buyers into the marketplace while real estate prices were still falling. Now many of those new buyers are finding that the properties they purchased are worth less than what they paid even a year ago. Obviously, awarding tax credits, extending business breaks and continued reckless spending will only delay the fall of a market that has yet to hit bottom. Ultimately the housing market must be allowed to trend further downward. The sooner it can get its footing, the sooner it can stabilize. Allowing the housing market to bottom out and stabilize without government interference will create a buying binge and prices will finally start to move northward.

Canadian Real Estate also softIn Canada the Real Estate market is also softening and we are going

to see continued declines in the major


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“I agree completely

that this is the

best strategy for

investors at this

time, which is why

I’ve made cash flow

the central theme

of this month’s

Economic Outlook”

on these stocks. For example, Microsoft has moved very little in the last year, but if you bought the stock for $25 and then sold an option to agree to sell the stock in the future at an agreed upon price, then you would instantly get the extra cash flow from the sale of the option even though the stock had not moved. The person buying your Call Option is betting the stock price will move much higher. If it does, they have the option to buy your stocks at that higher price. This is a very safe strategy as long as you are basing your strategy on solid stocks that people want to buy. As always, discuss this idea with your financial advisor.

Global bond funds. These instruments are now popular and are much safer than in years past now that the currency issue has been solved in many nations. Many foreign bond funds have been hedged against a downturn in their respective currencies. In addition, as credit ratings improve on these currencies, these global bonds will move up. Natural gas. At this time natural gas is at a very low price and will very likely increase as we move into Fall and Winter. Buying a natural gas fund and selling Call Options against it is a very prudent strategy.

buying United States debt and this is another reason the Canadian dollar is strong.

Cash flow opportunities from several directionsThe other trend I have noticed is

the significant move investors are making toward investments that generate cash flow. I agree completely that this is the best strategy for investors at this time, which is why I’ve made cash flow the central theme of this month’s Economic Outlook. But you must seek out the right type of cash flow for your purposes. Here are just a few of the cash flow instruments you’ll want to discuss with your financial advisor:

Funds that focus on corporate bonds. The rate paid by most corporate bonds that are “A” Grade or better have a return in the 5% to 6% range, which has dropped dramatically over the last year.

Funds with growing dividends. These funds focus on buying companies that show a history of increasing their dividends. This is good news for Canadians, because Canada’s companies generally pay higher dividends.

Trading options. A very effective strategy for cash flow over the last year has been buying stocks and then selling Covered Call Options


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“...working with

investors who

are buying Las

Vegas condos for

$40,000 and then

renting them out

for $850 or more

each month”

and I have hundreds of happy subscribers who are clients of New World Lenders. If you would like to learn more about New World Lenders send an email to [email protected] and we will pass your name on to them. We understand that investors must be accredited and the investment is RRSP eligible, but not IRA eligible.

Cash flow Real Estate. In my opinion the best cash flow opportunity is buying cash flow Real Estate. Never in my lifetime have I seen such great cash flows as I’m seeing in Las Vegas. I am working with investors who are buying Las Vegas condos for $40,000 and then renting them out for $850 or more each month. That is more than a 2% rent in relation to the purchase price. Right now, you just aren’t going to find this kind of cash flow in very many Real Estate markets. Again, I just want to remind you that there is no guarantee of capital appreciation in most markets right now, so prudent investors should be investing in Real Estate solely for cash flow reasons.

Now I have been talking with many of my subscribers about the current situation in the Real Estate market. Because I’m getting so much interest, I’ve decided to hold a couple of boot camps so everyone’s questions can be answered.

Real Estate Investment Trusts. These are great for cash flow as long as the underlying asset is strong. For example, you want to avoid owning a REIT where the cash flow is good, but the underlying Real Estate is collapsing.

Royalties. This is a source of cash flow that is gaining in popularity. This is a situation where investors buy companies that sell franchises. The owners of these franchises are then forced to buy all their merchandize and supplies from the franchiser. Here are a few of the more popular ones and the rates they pay:Pizza Pizza 11%Tim Hortons 3%A&W 8%Boston Pizza 7%

New World Lenders. This company has been the cash flow homerun for many of my subscribers over the last decade. This company is a short term lending company, which lends on average $500 on 16 day cycles. They are one of the largest short term lending companies in the world lending almost $1 billion per year. Their loan capital comes from investors like you. New World Lenders has several hundred employees with branches in several countries. Their financial statements are audited by one of the largest accounting firms in the world each year. They have been consistently paying 12% to 15% for more than a decade


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“Many subscribers

are aware that

when I began

talking about

investing in gold

it was at $300

an ounce”

Precious metals are safe havens and good hedgesNow, in addition to cash flow, I’m also

still bullish on gold. Gold does very well during times of uncertainty and that definitely describes the current economic climate. Holding a position in gold is an important hedge if the economy should collapse. Now, let me just give you a little perspective on investing in gold. If you buy gold at $1,200 and it escalates to $5,000 that would be good for your portfolio for that portion of your holdings, but it would also mean that the U.S. banking system or the dollar has collapsed. That would be bad for the rest of your portfolio.

That is exactly the reason you want to hold gold now; it is a hedge against these kinds of extreme events. Rising gold prices represent a loss of confidence in the currency markets, and especially a loss of confidence in the reserve currency, which is the U.S. dollar.

Many subscribers are aware that when I began talking about investing in gold it was at $300 an ounce. I was strongly criticized for discussing with investors that they take a much larger position in that commodity than many financial professionals advised. But gold has been rising steadily for the past few years

I’ll be holding two economic boot camps. They will focus on world macro economics and use Las Vegas as a case study of what is happening in the economy and the North American Real Estate Market. Each boot camp will last one-day. The first will be on October 15th and the second will be held on December 10th, 2010.

I’ll be holding these events at my home and since I have limited room, I can only accommodate 30 people at each boot camp. The cost includes lunch. Individual subscribers can attend for $199 or $299 per married couple. The cost for non-subscribers is $699 per person and $999 per couple.

If you would like to attend one of these boot camps, please send an email to [email protected]. We will contact you directly and get you registered for your boot camp.That is the end of this month’s overview of cash flow opportunities. While I am an investor, I am not a registered financial advisor. Therefore, it is up to you to discuss any of these investment ideas with your own registered financial advisor before making any decisions.


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“Due to uncertainty

around further U.S.

economic weakness,

gold prices have

recently been

pushed higher.”

I also like silver and it is starting to move as well. It has recently approached its 2008 highs. It is likely to even outperform gold, which happens when the resource market and gold market are both strong at the same time. One final safe haven I want to discuss is the Swiss Franc. The Swiss Franc has been the strongest currency in recent months and its fundamentals are good, unlike the Euro. It also has a long history as a safe haven. This currency will likely stay high no matter what happens in Europe with its debt crisis.

The Canadian and Australian dollars should also continue to stay strong as commodity demand from China and India are driving these economies. Australia has grown at its fastest rate in three years and consumer confidence is strong. It really seems that the United States is lagging behind all the other economies, even the European markets. The Euro has stabilized and overall growth has hit its highest level in four years. Germany is also doing well.

Germany is the strongest economy in Europe, its unemployment is down and it has had its strongest growth since unification. We should see continued growth in the Euro zone. That wraps up my main update, but I have one more thing I want to tell you about before I finish.

and those subscribers who followed my early teachings obviously have done extremely well.

Gold started its bull run when I first started writing about it in 2005 and rose rapidly against most currencies. Gold was one of only a few investments that ended on a high note in the disaster we remember as 2008. After that positive showing, hedge fund managers started investing in gold mines and central banks bought more gold. Demand soared. Gold is still being bought by hedge funds, investors and central banks. Currently, Exchange Traded Funds are one of the largest holders of gold around the world. Due to uncertainty around further U.S. economic weakness, gold prices have recently been pushed higher. Whenever the U.S. government announces more spending and announces their intention to buy more debt, then gold rises. If the Feds kick in with more stimulus spending, causing even more debt and uncertainty, then we can expect gold to continue doing well. At this time gold is stronger than stocks, stronger than government bonds, stronger than the U.S. dollar, and stronger than most other currencies. You might also be interested in knowing that September is traditionally the strongest month for gold.


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“ Investfest is our

marquis event

of the year and

involves hundreds

of people and

thousands of hours

of planning”

New Economic Summit scheduled for March 2011Every year we have one large

economic summit. Many of you know this event as InvestFest. However, although we own that name in Canada we do not own that name internationally, so when we hold this event in the United States we give it a different name, which will be announced. For now I will refer to the event as Investfest.Investfest will be a four-day event held March 3rd through March 6th at the Mandalay Bay Resort in Las Vegas, Nevada. The focus of Investfest will be investment strategies that are making money in today’s marketplace.

As in the past, we have invited many successful economists, financial analysts and investors with proven track records to attend and give in-depth presentations at this event. Investfest is our marquis event of the year and involves hundreds of people and thousands of hours of planning. That is why we start selling our tickets early. We want to have plenty of time for planning as the event nears. To order your tickets go to www.investfest2010.com/tickets. Tickets are $197 per person until the end of September and then the price increases to $297. That’s it for September’s Economic Outlook. I will continue with the cash flow theme

over the next several months as I search out more opportunities for subscribers. The turbulent times ahead will see a lot of money change hands and some of that money could come your way if you make smart decisions in these early days. Please read all your newsletters and tune into all our Economic Outlook webcasts.Until next time, stay optimistic and keep your eyes and ears open.

Michael LathigeeChairman and CEO Alliance Investment Solutions Ltd.

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September 2010 Economic Outlook

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