TORON: Toron in the Media

Toron

IN THE MEDIA

TORON ON TV

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Wednesday, April 23, 2008
12:30pm EST
Day Time Market Call

Stay tuned for details on further appearances!

Recent Appearances:
David Driscoll was on Evening Market Call on March 17, 2008.
David Driscoll was on Daytime Market Call on December 6, 2007.
David Driscoll was on Evening Market Call on October 25, 2007.
Karl Berger was on Market Lookahead on September 11, 2007.
Charles Lannon was on Market Call on June 7, 2007.
David Driscoll was on Market Call on June 22, 2007.
Karl Berger was on Market Morning on July 3, 2007.
Karl Berger was on Market Lookahead on July 20, 2007.
David Driscoll was on Evening Market Call on August 16, 2007.

TORON IN THE NEWSPAPER

When storm clouds gather, know where to find shelter
- Globe and Mail, June 23, 2007

Wheeling and dealing in tech land, with nary a bubble in sight
- Globe and Mail, May 5, 2007

When storm clouds gather, know where to find shelter
BRIAN MILNER -- Globe and Mail

June 23, 2007 -- Like biblical famines, the financial world can expect to be visited by a major calamity every seven years or so. A look at the calendar, as well as at warnings from banking watchdogs, shows that the next bad thing is just about due.

Yet few people are boarding up the windows to wait out the coming storm.

The reason is a case of collective amnesia of the sort that takes hold after years of robust profits, healthy economic growth, tame inflation and buoyant markets swimming in liquidity.

Fuelled by a dangerous combination of greed and complacency, bankers, traders and other financial players have become more aggressive in their risk-taking. Which is what lies behind the cheap financing for the massive global boom in leveraged buyouts and also explains how the subprime mortgage fiasco in the United States could inflict so much damage.

This week, we saw the latest fallout from the mortgage meltdown, as major Wall Street banks seized collateral from two Bear Stearns hedge funds that took a bath on their subprime bets. Merrill Lynch initially intended to dump all of its $850-million (U.S.) in seized assets on the market, before deciding that the shock of that move would be too severe to the overall market.

But the hedge fund debacle has already shaken investors in other risky areas, such as junk bonds and emerging-market debt. This week, Thomson Learning had to restructure a planned junk bond deal because investors made it plain that they found it much too risky, an indication that the days of easy money to finance costly buyouts may be coming to an end.

And the fallout will soon hit pension funds, banks and other institutional investors, because most of them also have a stake in the risky investments. They all have money tied up in what is known as collateralized debt obligations, or CDOs, and similar structured investment vehicles that look safer than they may actually be. If you don't know what these are, you will.

Plenty of these products carry strong credit ratings. What institutional investor wouldn't be tempted by a fixed-income product with a good credit rating offering, say, 6-per-cent interest, when 10-year government of Canada bonds are paying only 4.7 per cent? But what people don't fully realize is that they are essentially buying a basket of mortgages or other debt and if any part of that basket goes into default it reduces how much money you recover. These aren't like a normal government or corporate bonds at all and people aren't accounting for their risk.

"The big question is whether people are being properly compensated for the risks they're taking," says Arthur Heinmaa, managing partner with Toron Capital Markets in Toronto. He is one of those wily veterans who has lived through the best and worst of times in the markets.

The market could be in for some nasty surprises, particularly if there is a sudden stampede for the exits.

"The last time we really saw a good old-fashioned run to liquidity was in the bond market in 1995," says Mr. Heinmaa, who worries that it's about to happen again because risk has been so badly underestimated.

"What if a small minority decides to liquidate and it starts a potentially dangerous move? All of a sudden, volatility rises and all the participants reduce the size of their positions," because they all rely on the same data. At the end of the day, central banks, a handful of major commercial banks and some traditional money managers with cash will be left to pick up the pieces.

Those who insist that this is a different financial world, because risk is now spread so widely and global pools of capital have grown so large, have short memories.

Long forgotten are earlier bets that went horribly wrong, such as global real estate investments in the 1980s and tech and telecom financings in the 1990s.

"After the event, everybody takes the pledge not to do it again," Mr. Heinmaa says. "And then they take a little sip and find that's it's not that bad. So they say, 'We can trust these guys' and they taste a little more." Soon, there's an enormous concentration of capital in one part of the market.

So what is an ordinary person to do as the dark clouds gather? "When liquidity dries up," Mr. Heinmaa says, "you have to know how you're going to get out."

Wheeling and dealing in tech land, with nary a bubble in sight

BRIAN MILNER -- Globe and Mail

May 5, 2007 --Tech land is rife with enough stock-goosing developments these days to recall the heady days of the dot-com stock bubble. This is welcome news for those of us who look back fondly at the era of excess that ended abruptly with the market collapse of 2000 as a time when great fortunes were made and lost, and greed and ego trumped common sense.

First there has been a wave of positive earnings news, with forecasts of more to come. The tech component of the S&P 500 posted aggregate profit growth of 14 per cent in the latest quarter, nearly double the estimate of analysts surveyed by Thomson Financial. And it is likely to exceed next quarter's prediction of 9 per cent.

We also learned that Google, one of those big profit-makers, has surpassed the likes of Coca-Cola, General Electric, Microsoft and IBM to become the world's most valuable brand. Not bad for a 10-year-old company that is essentially an Internet search engine and advertising vehicle.

And now the wheeling and dealing is back on a grand scale, and so are the clashing egos. Yesterday, it was reported that Microsoft is pursuing Yahoo in a deal that could be worth up to $50-billion (U.S.). This follows Yahoo's own acquisition of an advertising exchange for a mere $680-million. Talks between the two appear to be on hold.

The logic behind a partnership of some sort between the two companies, which has been mooted before, is unassailable: Google is eating both companies' lunch when it comes to online growth. The company accounted for 43 per cent of all U.S. Internet search activity in April, compared with Yahoo's stable share of less than 30 per cent and Microsoft's declining 13 per cent. Moreover, Google has outbid Microsoft for a lucrative deal with AOL and spent $3.1-billion for privately held online advertising heavyweight DoubleClick.

One sticking point is that Yahoo co-founder Jerry Yang isn't a big fan of Bill Gates, which is where the clashing egos come into the picture. That's also said to be the reason why another intriguing marriage, that of Amazon.com and eBay, is unlikely. Their respective bosses simply can't stand each other.

All of this has a frothy feel to it, but that's simply not the case. The bursting of the dot-com bubble in 2000 was so devastating for money managers and investors overexposed to technology that it should have acted as a deterrent to overblown expectations. And this has largely proved to be the case. Gone are the days when companies could peddle shares based on promises and dreams, aided and abetted by a handful of well-placed analysts who played fast and loose with the truth to help their firms peddle shares.

Even now, the strongest players in tech land still have trouble getting the respect their performance should merit (overpriced Google excepted). As a result, Microsoft, Cisco and other heavyweights still trade at relatively low multiples, considering their genuine earnings power, strong balance sheets and large hoards of cash. A monster acquisition would barely make a dent in Microsoft's coffers.

“Broadly speaking, the valuations today actually make some sense,” says Robert Spafford, an investment analyst with Toron Capital Markets in Toronto. “The sector is growing faster than the economy, but the stocks have done almost nothing.” Cisco, for example, trades at just above 20 times earnings, yet it commands a market share of up to 80 per cent in its key product categories and generates as much as $2.5-billion in cash a quarter.

Moreover, it's easy to evaluate. The days when companies concocted all sorts of measures to impress gullible investors are long gone.

“We can evaluate a company on traditional metrics such as cash flow,” says Mr. Spafford. “We're no longer looking at things like the [stock] price per number of engineers [employed].”

Laura Wallace, managing director with Coleford Investment Management in Toronto agrees. “We're not even close to another bubble, at least on technology.” But it will be a long time before tech comes back as a market leader, even as the profits roll in and the deal-makers do their stuff.