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Charles Lannon
Tuesday, August 10
at 1.00pm EDT
Daytime Market Call

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Recent Appearances:
David Driscoll was on Daytime Market Call on June 24, 2010.
Karl Berger was on Daytime Market Call on May 6th 2010.
David Driscoll was on Evening Market Call on April 7th, 2010.
Charles Lannon was on Evening Market Call on January, 26, 2010.
David Driscoll was on Daytime Market Call on December 29, 2009.
David Driscoll was on Daytime Market Call on November 6, 2009.
Charles Lannon was on Daytime Market Call on September, 30, 2009.
Karl Berger was on Evening Market Call on August, 25 2009.
Charles Lannon was on Evening Market Call on June 12, 2009.
Karl Berger was on Evening Market Call on June 20, 2009.
David Driscoll was on Daytime Market Call on May 8, 2009.
Charles Lannon was on Daytime Market Call on April 23, 2009.
David Driscoll was on Daytime Market Call on March 20, 2009.
Karl Berger was on Evening Market Call on March 3, 2009.
Charles Lannon was on Evening Market Call on February 17, 2009.
David Driscoll was on Daytime Market Call on January 30, 2009.
David Driscoll was on Daytime Market Call on December 12, 2008.
David Driscoll was on Evening Market Call on November 13, 2008.
David Driscoll was on Daytime Market Call on September 16, 2008.
David Driscoll was on Tonight Market Call on November 13, 2008.
David Driscoll was on Evening Market Call on August 11, 2008.
David Driscoll was on Evening Market Call on July 4, 2008.
David Driscoll was on Daytime Market Call on June 9, 2008.
David Driscoll was on Daytime Market Call on April 23, 2008.
David Driscoll was on Evening Market Call on March 17, 2008.

TORON IN THE NEWSPAPER

Celebrity bears all the rage – but we've seen fads before

- Globe and Mail, April 11, 2009

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

Celebrity bears all the rage – but we've seen fads before

Celebrity bears all the rage – but we've seen fads before

BRIAN MILNER -- Globe and Mail

April 11, 2009 - It has been aptly dubbed recession porn, and it was on full display earlier this week when more than 1,500 people crowded into a Toronto theatre on a chilly evening to watch four famously bearish market watchers strut their stuff.

As recently as 2006, the grizzly four – U.S. economist Nouriel Roubini and Wall Street bank analyst Meredith Whitney, along with long-time Canadian market pessimists Eric Sprott and Ian Gordon – would have been hard-pressed to fill a small conference room with their gloom-and-doom act. But that was before the U.S. subprime meltdown, the global credit crisis, the collapse of major U.S. and European banks, and the ensuing economic crash turned out to be even worse than they had imagined.

Now they are the stars of the recession, titillating us with the darkest of spins on all manner of economic and market events and plainly enjoying the celebrity status that comes from going against the consensus and making the right call at precisely the right time.

This lust for gloom is just human nature at work in hard times. We seem to love having our worst fears laid out for us by plain-speaking peddlers of pessimism whose copious research unsurprisingly confirms their deep-seated faith that the worst is yet to come.

“In every period of market extremes, the former soothsayers are taken out back and beaten,” says Arthur Heinmaa, an avid student of market history who has weathered his share of good and bad markets. “You always get a whole new crop that rises to soothsayer status. And they parlay it for everything it's worth.”

Leaving aside some of the wackier prognostications (a Dow index of 1,000 seems as ludicrous as a Dow 30,000 did when its deluded proponents presented it in the late 1990s with all the seriousness of a great medical breakthrough), lots of what the professional negativists have to say make sense.

The U.S. banking system is plainly a disaster, with huge black holes yet to be revealed. American consumers have neither the will nor the credit capacity to resume spending at anything remotely close to their former levels. Which means more trouble for exporting nations like China and Japan that depend so heavily on those same exhausted American shoppers. Housing, the key to any U.S. economic recovery, has not yet bottomed.

What sets the grim gurus apart and keeps them in the headlines is their unshakeable belief that none of this is going to be fixed any time soon. But for those of us who vividly recall the ridiculous bullishness of the boom years, it's as if we have suddenly been transported to some sort of reverse universe. Instead of expanding toward infinity, everything is suddenly shrinking.

That just doesn't work for someone like Mr. Heinmaa, managing partner with Toron Capital Markets. “It's just as easy to believe all the darkness now as it was to believe the sunshine and optimism in 2000. The truth is always in between. It's never going to be that dark or quite that optimistic.”

So what does a practical, pragmatic investor like Mr. Heinmaa seek? “The best thing you can get, from a money manager's perspective, is somebody who's sort of neutral but is usually depressed. Then, they don't get caught up [in any euphoria].”

That doesn't mean dismissing the star bears out of hand. “As an investor, you have to listen to both sides. You can't be blindly bearish or bullish. That's foolish. What we do with that negative sentiment is use it to try to figure out what the worst case could look like for many of our investments.”

Meanwhile, here's an unsolicited tip for the celebrity recession pornsters. You may want to take to lunch some of those former superstar Internet analysts of the late 1990s, to find out just how brief your brush with fame could be. But please pick up the cheque. Your guests may not be able to afford the tab.

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.