January 21, 2014 Newsletter

Dear Friends,

Tangents:

One of my favorite writers (a frequent contributor to The New Yorker magazine) is Adam Gopnik.  This past weekend I read a recent article he wrote about the new year.

TWO SHIPS

We make the turn toward the new year this January with trepidation.  Well, we make the turn toward every new year with trepidation, but added to the anticipatory jumps this year are what might be called the retrospective willies.  You don’t have to  have a very enlarged sense of history to remember what happened last time Western Civilization sped around the corner from ’13 to ’14.  Not so good.  The year 1913 had been full of rumbling energy and matchless artistic accomplishment – Proust kicking off, the Cubists kicking back, Stravinsky kicking out – and then, within a few months, the Archduke was assassinated in Sarajevo and the troop trains were running and, pretty soon, the whole positive and optimistic and  progressive culture was on its way to committing suicide.  The Great War left more than ten million Europeans dead and a civilization in ruins (and presaged a still worse war to come).  Naturally, a lot of people, staring at this year’s tea leaves – at rising new powers and frightened old ones – are searching for parallels between that ’14 and this one, and finding them.  In the Times recently, the historian Margaret MacMillan pointed out a few, clustering around the folly of “toxic nationalisms” that draw big powers into smaller local disputes, with the Russians trying to play a better hand today in Syria than they played in Serbia a century ago.

Lodged somewhere in our collective memory of that catastrophe is an image, a  metaphor of hubris, from just  a year or so before:  a great four-funnelled ocean liner, the biggest and most luxurious ever built, whose passengers, rich and poor, crowd on board, the whole watched over by a bearded man named Edward John Smith, with the chief designer, Thomas Andrews, along for the maiden voyage, too.  Then the ship sets off from Southampton, sure of itself, unsinkable, until it comes to the ice fields of the North Atlantic, off the coast of Newfoundland – and speeds right on through them to its anchorage, here in New York.  Because this ship isn’t the Titanic but its nearly identical twin sister, the Olympic, made at the same time, by the same people, to do the same job in the same way.  (A single memorable image exists of the two ships in dock together.)  The Olympic not only successfully completed its maiden voyage but became known as Old Reliable, serving as a troop carrier in the First World War, and sailing on for twenty years more. (A third, , late-released liner in the same class, the Britannic, hit a mine in the Aegean, in 1916, while serving as a hospital ship, and sank, a true casualty of war.)

The story of the two ships is one to keep in mind as we peer ahead into the new year.  It reminds us that our imagination of disaster is dangerously more fertile than our imagination of the ordinary.  You have certainly heard of the Titanic; you probably never heard of the Olympic.  We have a fatal attraction to fatality….If our history leads us to the First World War, then we imagine that we were always bound on that collision course, and we cannot imagine that, with a bit of luck and another set of contingencies, we might have been on the Olympic, not the Titanic.  We search for parallels of disaster, and miss parallels of hope.  False positives are the great curs of diagnostic, in historical parallels and prostate screenings alike.

Is it all chance and contingency though?   Do we not know what boat we’re on until the iceberg informs us?  Leafing through recent books on the last encounter with ’14, you find one thing that does seem to have the chill of ice about it.  Even open societies, so to speak, on the open seas of history, are not immune to the appeal to honor and the fear of humiliation.  The relentless emphasis on shame and face, on position and credibility, on the dread of being perceived as weak sounds an icy note through the rhetoric of 1914 – from the moment Franz Ferdinand is shot to the moment the troops are sent to the Western Front.  The prospect of being discredited, “reduced to a second-rate power,” was what drove the war forward.  The German Kaiser kept saying that he would never again allow himself to be embarrassed by the British.  Lloyd George, in London, felt that Britain had to go to war or it would never “be taken seriously” in the councils of Europe.  Needless wars are rushed alone, it seems, by an overcharge of the language of honor and credibility, when the language of common sense and compromise would be a lot more helpful.   When someone says, “Ram the iceberg!  We can’t afford to let it make us look weak,”  it’s time to run for the deck.  Sanity lurks in sailing around the ice.

But then, sanity doesn’t necessarily guarantee safe passage.  Two boats set sail in those prewar years a century ago: the boat that sailed on the boat that sank.  Olympic or Titanic?  Which is ours?  It is, perhaps, essential to life to think that we know where we’re going when we set out –our politics and plans alike depend on the illusion that someone knows where we’re going.  The cold-water truth that the past provides, though, may be that we can’t.  To be a passenger in history is to be unsure until we get to port – or the life boats – and, looking back at the prow of our ship, discover the name, invisible to our deck-bound eyes, that it possessed all alone.  –Adam Gopnik.

Photos of the day

People make use of good weather conditions as they kite surf at Scarborough, on the outskirts of Cape Town, South Africa. Thousands of kite surfers visit the Western Cape each year to practice their sport on pristine beaches. Schalk van Zuydam/AP

People walk and ride on ‘La Promenade des Anglais’, in Nice, southeastern France. Temperatures on the French Riviera reached 14 degrees Celsius (57 Fahrenheit). Lionel Cironneau/AP

Market Closes for January 21^st, 2014

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Callie Bost

Jan. 21 (Bloomberg) — Canadian stocks fell, after closing yesterday at a more than two-year high, as a drop in gold prices dragged mining companies lower while energy and consumer discretionary shares advanced.

Gold miners slid 0.8 percent as a group with Detour Gold Corp. and NovaGold Resources Inc. decreasing at least 2.6 percent as the metal fell the most in three weeks. Talisman Energy Inc. declined 1.1 percent on reports GDF Suez SA hadn’t placed a bid for the company. Raging River Exploration Inc. rose 3.7 percent after it raised its outlook for fourth-quarter oil production.

The Standard & Poor’s/TSX Composite Index decreased 38.52 points, or 0.3 percent, to 13,951.77 at 4 p.m. in Toronto. The gauge is 2 percent lower than in April 2011, when it climbed to the highest level since 2008. Trading in S&P/TSX stocks was 29 percent higher than the 30-day average at the close.

“There was some good news out of recent earnings reports, especially financials, and that’s given the index a relief rally,” Paul Gardner, portfolio manager at Avenue Investment Management, said by phone from Toronto. He helps manage C$300 million ($290 million). ’’That being said, Canada is under pressure because gold as an underlying commodity is selling out on speculation the Fed may taper sooner rather than later, which will affect gold rates.’’

Gold for immediate delivery fell 1 percent to $1,241.90 an ounce, the biggest loss for the precious metal in three weeks.  Bullion slid 28 percent last year, the most since 1981, as some investors lost faith in the metal as a store of value.

The Canadian dollar weakened to C$1.10 for the first time in more than four years amid speculation the U.S. Federal Reserve will slow its monetary stimulus as the Bank of Canada signals more may be on its way. The Canadian central bank will release a policy statement on rates tomorrow, while the Federal Open Market Committee is scheduled to meet Jan. 28-29.

Canadian factory sales rose to a two-year high in November, while domestic wholesale sales held steady at a record high in the same period, Statistics Canada said today in Ottawa.

Eight of the 10 main industries in the S&P/TSX declined as producers of raw materials slid 0.9 percent. Energy and consumer discretionary companies in the index gained less than 0.1 percent.

The S&P/TSX Gold Index retreated 0.8 percent. Detour dropped 4.7 percent to C$6.30 and NovaGold slipped 2.6 percent to C$3.43.

Argonaut plunged 8.9 percent, the biggest drop since June, to C$5.31. Macquarie Capital Markets analyst Michael Siperco cut the gold producer to neutral from outperform, citing a weaker- than-expected outlook for 2014 and concerns regarding ongoing development projects.

Talisman decreased 1.1 percent to C$12.69. GDF Chief Executive Officer Gerard Mestrallet said at a press conference in Paris that GDF hadn’t bid to buy the Canadian oil and gas producer.

GDF has “no plans” for large acquisitions and development plans outside Europe will be achieved mostly through organic growth, Mestrallet said.

Raging River increased 3.7 percent to C$7.39, an all-time high. The oil explorer reported a 148 percent increase in year- end reserves for 2013 and said fourth-quarter production will be higher than previously forecast.

Capital Power Corp. jumped 3.3 percent to C$22.41, the highest level since May. Scotia Capital Inc. analyst Matthew Akman raised the company to sector outperform from outperform yesterday with a target price of $26 a share.

USA

By Lu Wang and Nick Taborek

Jan. 21 (Bloomberg) — Most U.S. stocks rose as optimism about global economic growth was overshadowed by disappointing results from Johnson & Johnson and Verizon Communications Inc.

J&J declined 1.1 percent, the most in a month, after its earnings forecast trailed analysts’ estimates. Verizon slipped 1.3 percent as subscriber growth slowed from a record. Dow Chemical Co. rallied 6.6 percent after Daniel Loeb’s hedge fund Third Point LLC took a stake. Alcoa Inc. jumped 6.8 percent after JPMorgan Chase & Co. recommended buying the stock.

The S&P 500 gained 0.3 percent to 1,843.80 at 4 p.m. in New York. Three stocks rose for every two that fell in the gauge.

The Dow Jones Industrial Average lost 44.12 points, or 0.3 percent, to 16,414.44. The Russell 2000 Index of small-cap stocks increased 0.6 percent to a record 1,175.72. About 6.8 billion shares changed hands on U.S. exchanges, 12 percent above the three-month average.

“In the short term, continued earnings growth is particularly important,” James W. Gaul, a portfolio manager at Boston Advisors LLC, which oversees about $2.5 billion from Boston, said by phone. “We are no longer cheap, perhaps not even fairly valued at this point. Investor sentiment is quite optimistic. We need some positive news to get us going.”

Stocks pared early gains today after the S&P 500 approached 1,850, a level that has halted the index’s advance three times in the past month. The benchmark gauge reached an intraday record of 1,850.84 on Jan. 15.

The International Monetary Fund raised its forecast for global growth this year as expansions in the U.S. and U.K. accelerate. The global economy will grow 3.7 percent this year, compared with an October estimate of 3.6 percent, according to the report.

European stocks rose to a six-year high today and Chinese shares led gains in Asia after the country’s money-market rates fell the most in four weeks. The U.S. equities benchmark fell 0.2 percent last week, after touching an all-time high, as weaker-than-estimated earnings at companies from Citigroup Inc. to CSX Corp. offset an improving outlook for the global economy.

For every U.S. company predicting in January that earnings will beat analyst estimates, 2.5 are projecting results that fall short, matching the worst ratio since the rally began in March 2009, according to data compiled by Bloomberg. While analysts say S&P 500 profits will rise 8.8 percent in 2014, that’s almost the same estimate they generated a year ago for 2013, when earnings ended up increasing at about half that rate, the data show.

A five-year rally that lifted the S&P 500 up more than 170 percent from a bear-market low has boosted equity valuations to near the highest level since 2009. The S&P 500 trades at 15.6 times the estimated earnings of its members, more than the five- year average multiple of 14.1, data compiled by Bloomberg show.

Fourteen companies in the S&P 500 including Texas Instruments Inc. and Travelers Cos. report financial results today. Per-share profit for companies in the benchmark probably climbed 6 percent in the fourth quarter, while sales increased 2.2 percent, according to analysts surveyed by Bloomberg.

Of the 62 S&P 500 members that have reported results so far this season, 68 percent have beaten estimates for profit and 66 percent have exceeded sales projections, according to data compiled by Bloomberg.

The Chicago Board Options Exchange Volatility Index rose 3.5 percent today to 12.87. The gauge of S&P 500 options known as the VIX is down 6.2 percent this year.

Eight of 10 industries in the S&P 500 gained as utility companies climbed 1.2 percent for the biggest gain. Telephone shares dropped 0.7 percent for the worst performance.

J&J slipped 1.1 percent to $94.03. The world’s biggest maker of health-care products forecast 2014 profit of $5.75 to $5.85 a share, excluding one-time items. The outlook was below the $5.86 average of analysts’ estimates compiled by Bloomberg.

Verizon lost 1.3 percent to $47.70. The second-largest U.S. phone company added 1.6 million monthly subscribers during the fourth quarter, fewer than the record 2.1 million gained a year earlier. The average estimate was for 1.3 million new subscribers, based on a Bloomberg survey of nine analysts.

Travelers Cos. lost 1.7 percent to $85 after the insurer said rates charged to customers renewing their policies increased at a slower pace.

“The larger focus for investors today may be the clear headline pricing deceleration,” Randy Binner, an analyst at FBR Capital Markets, said in a research note. “The declining pricing trend has been a tough one for investors.”

Halliburton Co. slid 1.7 percent to $49.78. The energy services company said North American revenue will rise at a “mid-single digit” growth rate this year. The company in November predicted the expansion at a “high-single digit” pace.

Dow Chemical rallied 6.6 percent to $45.93. Third Point, the hedge fund led by billionaire Loeb, took a stake in the firm, calling for a share buyback and a spinoff of its petrochemicals business to improve profitability.

Third Point’s stake in Dow is the hedge fund’s largest current investment, Third Point said in a letter to investors, a copy of which was obtained by Bloomberg News. Dow should hire external advisers to review its strategy and the potential benefits of a spinoff, Third Point said.

Alcoa advanced 6.8 percent to $12.13. JPMorgan raised its rating on the largest U.S. aluminum producer to overweight, a recommendation similar to buy, from neutral. The brokerage boosted its 12-month price estimate for the stock to $15 from $9 and said increasing premiums and tightening supply will support the company’s earnings growth.

Delta Air Lines Inc. climbed 3.3 percent to a record $32.08 as earnings beat analysts’ estimates, helped by increased holiday travel, higher fares and lower fuel costs.

Chesapeake Energy Corp. advanced 3.9 percent to $26.45. The oil and gas company was raised to buy from neutral at SunTrust Robinson Humphrey Inc., which said Chesapeake has leading positions in three of the best U.S. gas fields and may sell lower-return assets such as its oilfield services unit.

Investors are the most upbeat about the global economy in almost five years, encouraged by the U.S.-led revival of industrialized nations, according to a Bloomberg Global Poll.  Seventy-two percent in the survey of Bloomberg subscribers said the U.S. economy is improving, up from 53 percent a year ago.

Jeff Altman and John Paulson, two of last year’s best- performing hedge-fund managers, are predicting that stocks will continue their rally in 2014 even as the bull market approaches its sixth year. They’re among a number of top money managers betting markets are robust enough to weather a gradual reduction in the pace of the Federal Reserve’s asset purchases as the central bank signaled it will keep interest rates at their current low for the foreseeable future, according to interviews with more than half a dozen investors.

“The wind will continue to be at the markets’ backs with the Fed,” said Altman, head of the $3.2 billion Owl Creek Asset Management LP. He’s betting on telecommunications and aerospace companies, the same industries that helped him gain 49 percent last year, putting him in the top 10 of Bloomberg’s annual hedge fund ranking.

Have a wonderful evening everyone.

Be magnificent!

The purity of life is the highest and most authentic art to follow.

Mahatma Gandhi, 1869-1948

As ever,

Carolann

A bird doesn’t sing because it has an answer,

it sings because it has a song.

-Maya Angelou, 1928-

Carolann Steinhoff, B.Sc., CFP®, CIM, FCSI

Senior Vice-President &

Senior Investment Advisor

Queensbury Securities Inc.,

St. Andrew’s Square

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7