Seymour Buying CopperMarket defeat is temporary
In this market meltdown, many of us have gone from a “Freedom 55 or 65” retirement strategy to the “Freedom 85” variety. But this will get fixed and here’s what one of Canada’s smartest investors, a friend of mine, said he did last week while the rest of us were rending our garments:
“I was a major buyer all last week of commodity stocks. For a two-year play, I’m buying aluminum, oil and gas and copper,” said Seymour Schulich of stock market fame. “On the equity market collapse? I love the smell of fear in the morning.”
Seymour, who is a hugely successful investor and philanthropist, is echoing the sentiments of Warren Buffett and others. But they have cash, or credit, with which to take advantage of what they believe is a two-year ordeal. Those without that luxury, who have sustained losses, are best to stay put and ride it out if they can.
The markets will continue to yo-yo for some time, certainly until Obama is elected President on Nov. 4, along with his team of backers which includes Buffett, Paul Volcker, Larry Summers and many other notables.
A tale of two sectors
Canadian markets will do much the same and here is my summary of the outlook for Canada’s two biggest sectors: financials and commodities.
The crisis has destroyed Wall Street's casinos, run by rogues, and led to a global bailout or nationalization of commercial banks. Canada’s banks are among the world’s strongest because there were well-regulated, along with their Bay Street
investment banking captives. However, they will require backstopping, said Brendan Caldwell, CEO of Caldwell Investment Management Ltd. in an interview following a briefing this week with clients like me.
Prime Minister Stephen Harper must backstop Canada’s chartered banks immediately because their newly subsidized European and American rivals now enjoy an advantage in terms of borrowing costs, he said.
“I’m not totally sold on the idea of governments taking equity positions in the banks, but it’s tougher for our banks to compete on what’s become an unlevel playing field due to the nationalizations and bailouts in the U.S. and Europe,” said Caldwell.
Here’s the problem: “If commercial banks with government backing can borrow at, effectively, government or sovereign rates and ours must borrow at commercial banking rates, then Canadian banks are at a disadvantage,” he said.
Put another way, a nationalized bank can borrow at 1% while the commercial bank rate borrowing cost could be 4%.
“This is a big competitive disadvantage,” he said.
Financials not ripe yet
The Canadian government and its central bank would not have to put money into Canada’s chartered banks, but merely guarantee their loans to match the “sovereign” rating 
and borrowing advantages now enjoyed by European and American bankers.
Interestingly, Ireland was first off the mark to provide banking loan guarantees after the global financial sector hit the wall due to fears of a flight from smaller banks to bigger British banks. That started a reverse flight and contributed toward the need to backstop and bail out British banks as a whole.
There will be a rash of consolidations in the financial sector area worldwide and Canada’s three giant life insurance companies (Sun Life, Manulife, Great West Life) are well-positioned to take advantage of that too. Sun Life recently sold its CI mutual fund holdings to Scotiabank in order to build an even bigger war chest for acquisitions of assets once held by AIG and others.
(The U.S. and European banks, however, pose a problem to investors because their bailouts or nationalizations include future dilution by the governments who will want to exit these entities once markets are restored.)
Resources a medium winner
Canada’s go-go commodities market is another case in point and its values have been left in tatters after reaching highs 
in May. Seymour’s comment and trading is pertinent to those who believe, as I do, that the supply-demand future scenario will continue to mean higher commodity prices.
Counter-argument is that a recession in the U.S., Europe and elsewhere will dampen demand, thus prices. But facts are that the economic growth rates this year of India and China – 40% of the world’s population – will only be marginally trimmed.
This is because of their internal economic activities. Both will continue to finance a Marshall Plan every year involving infrastructure build-out, financed with foreign exchange earnings and export activity worldwide.
Notably, China announced last week, as markets roiled, that it was undertaking massive land reform, or creating private property ownership throughout the country, which will turn everyone into a capitalist and consumer. It will also more than replace export activity with internally generated economic growth.