Today the Toronto Stock Exchange Index (TSX) hit 15,000 points, its highest number ever.

Even though 15,000 is purely a nominal number, skewed heavily by a small number of companies granted heavy weightings by the indexing formula, now is as good a time as any to reflect on the past 10 years.  

Why 10 years? Well, firstly that is as far back as my graph will go. More importantly, it is a period that encompasses two market cycles (the second is yet to be completed).

Looking at the far left In the above image, we can observe the effect of the tech bubble on the TSX index. A very quick boom was following by an equally quick bust. During the boom, the hot stock in the index was Nortel Networks. At one point, Nortel represented over 32%of the entire index. It was the market darling. It didn’t last. Today, Nortel trades at about 8 dollars, but it is really worth 80 cents after you account for the marketing wonders of stock splits (Nortel had a 1-for-10 reverse split).

Moving on over to the right, we can see that the current bull run does not appear to be too similar to previous bubble. Here we have a much slower and paced increase. There are however, some similarities.

Three companies: RIM, Encana & Potash Corp. account for over 20% of gains in the index over the past 5 years. The good news is that currently we have three firms leading the way, not one. There are also two sectors involved: Tech & Energy.  The last positive note is that the banking sector appears to be regaining steam. The big five Canadian banks haven’t been contributing much to the index the past few months as they struggled with write-offs from the credit collapse. If they continue to perform, it will provide a good hedge against a slowdown in Energy, assuming commodity prices begin to come back down to earth.

It is important to remember that the past will not reflect the future. Do not think that there is anything in the above chart that will hold the magic key to unlocking where the market will go next. Charts are only useful for giving us the ability to take a minute and reflect on how we got to where we are, so that our minds are a bit more focused as we decipher where it will go next.

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills). 

T-Bills are government issued short term investing products (less than 1 year) that are virtually riskless as they are backed by the taxation power of the government. There is also a limited supply available to investors. So when everyone wanted these products, the price skyrocketted and the rate of return dropped like a rock.

Now lets look at what happened to a lower credit investments. Lets use GICs or CDs (Cdn/US equivalents). Banks love to sell GICs and CDs. They provide great liquidity for loans and they are easy to sell to investors as they usually have some form of insurance. However, when less people want to invest in the product because they prefer T-Bills, banks have to compensate by offering higher rates, increasing the difference between the rate of return of a treasury bill and GIC/CD. Since they are offering a higher rate of return to investors, the bank will also have to demand a higher rate of interest from lenders.

But wait! You might be asking yourself: “If this is true, then why the heck are my GIC/CD rates been so crappy!

You have to understand that everything is relative. Look at the following sets of rates:

• Set A: T-Bill Yield 2.2%  - GIC/CD Yield 3.00%    
• Set B: T-Bill Yield 0.5% – GIC/CD Yield 1.7%

Normally the market should function with Set A’s rates. During a credit crisis, we find the market spread, or the yield difference between T-Bills & GIC/CDs has widened to almost double the prior amount. So even though your GIC/CD rate of return in Set B is lower than Set A, the premium interest you receive compared to a T-Bill has increased.

Did I make it simple enough for you?

If the world financial system is “over-inflating” prices as he put it, then we’re in a bubble. As bubbles don’t last forever, TD Bank is wise to begin planning for lower prices in order to protect itself from future losses.

His remarks are in stark contrast to the bullish predictions by market analysts who see prices going nowhere but up. If the head of a major international bank is weary of current prices, then maybe it’s time for you to review your portfolios…. Or maybe the analysts are right….What do you think? 

Year over year, new home prices are up 6.1%, a healthy number, although the market is appearing to slow down a bit as the increase this year is slightly lower than last year’s.

Overall this is good news. Continued strong sales in new homes will encourage developers to begin new projects, employing laborers and strengthening the economy. Eventually we’ll meet a point where we’d expect to see a decrease in sale prices as inventories of new homes pass the number of people looking to purchase them. This is normal in a market economy and there is no evidence to suggest the type of collapse that happened south of the border.

Contrarians are not the ones shouting from atop desks, playing silly sounds and acting like crazed lunatics when discussing the stock of the day. In fact, one could argue that a contrarian is the exact opposite of Jim Cramer.

That shouldn’t really surprise anyone. After all, Jim Cramer is the most popular investment personality on the most popular investment television station. A contrarian prefers to act in the opposite from the conventional norm, and as weird as it sounds, Mr. Cramer is as norm as you get.

I myself have fallen victim to the same trap of ignoring the contrarian. A perfect example of this was my recent discovery of iTulp.com, a website dedicated to the contrarian view of investing. This website has been around since 1998, an eternity by web standards. It has been written up by very credible news agencies, varying from Barron’s to CNBC. Impressive. I am, however, not alone in my ignorance in knowledge of this website. Alexa ranks iTulip outside its top 100,000 sites. I have seen many sites in existence for less than a year easily crack the top 100k.  Therefore, many people appear to be ignoring the Contrarian, hence my post.

Perhaps the most famous, if not the simplest contrarian strategy is the Dogs of the Dow. It is also the first investing strategy that I read about, so I will always hold a special place for it. The premise couldn’t be simpler. At the end of the calendar year purchase equal dollar amounts of the 10 Dow Industrial Average stocks that have the highest dividend yield (the dogs). Hold for a full year and re-balance annually. The theory is that your returns will outperform the full 30 stock Dow Index. It didn’t work the year I tried (on paper).

Even though my first experience with contrarian strategy was a failure, I still believe in reading up on what contrairans are currently talking about. They are often very smart people who make astute arguments on where the market has been, currently is, and will be heading. I encourage you all to do a bit of research and study this methodology. You might not agree with their outcomes, but there are definitely some nuggets of knowledge that will benefit you in future investments.

Translation from EconoSpeak™ to regular English: The US economy had fewer layoffs for jobs that don’t involve working on a farm, the government or a private house, for the month of April than those in the towers of Wall Street expected. The data represents 80% of the workforce involved in the economy.

This is different from the job numbers from yesterday, where a private firm announced its research on announced layoffs. Yesterday’s data was far less broad, and focused on only announced cuts and primarily in the financial sector.

What does this all mean?

Well, it’s good that the numbers beat expectations, although this is the longest string of consecutive declines since Feb-June 2003. So there are pluses and minuses. The data will definitely add fuel to the camp who believe that we are near the end of the downturn, and that recovery is on the way. (via U.S. Bureau of Labor Statistics)

Firing announcements rose to 90,015 last month, the most since September 2006, from 70,672 in April 2007, Chicago-based Challenger, Gray & Christmas Inc. said in a statement today.” (Via Bloomberg)

There is no real surprise here. Financial firms are the hardest hit by the “Credit Crunch™” and have been announcing layoffs for the past few weeks. These jobs are very cyclical and workers are usually aware of the risk as the downside to the high salary.

If we begin seeing big increases in layoffs in core industies like manufacturing and retail, then there will be cause for alarm.

All is not lost. This data reflects the state of the economy a couple of months ago, and the Bank of Canada has made a couple of big cuts since then. We’ll be keeping a close eye on Canada’s GDP to see if the trend continues, or if February was just a blip.

Breaking News Via Reuters:

-RTRS-U.S. FED CUTS BENCHMARK FED FUNDS RATE 1/4 POINT TO 2 PCT, DISCOUNT RATE 1/4 TO 2.25 PCT
-RTRS-FED SAYS UNCERTAINTY ABOUT INFLATION OUTLOOK REMAINS HIGH
-RTRS-FED SAYS READINGS ON CORE INFLATION SOMEWHAT IMPROVED, BUT ENERGY, COMMODITY PRICES UP
-RTRS-FED SAYS SOME INDICATORS OF INFLATION EXPECTATIONS HAVE RISEN RECENTLY
-RTRS-FED SAYS EXPECTS INFLATION TO MODERATE IN COMING QUARTERS
-RTRS-FED SAYS ENERGY, COMMODITY PRICES TO LEVEL OUT, PRESSURES ON RESOURCE UTILIZATION TO EASE
-RTRS-FED SAYS SUBSTANTIAL EASING OF POLICY, LIQUIDITY MEASURES SHOULD HELP PROMOTE GROWTH, MITIGATE RISKS
-RTRS-FED SAYS RECENT ECONOMIC ACTIVITY REMAINS WEAK, HOUSEHOLD, BUSINESS SPENDING SOFTENED FURTHER
-RTRS-FED SAYS FINANCIAL MARKETS REMAIN UNDER STRESS, TIGHT CREDIT, HOUSING DOWNTURN TO WEIGH ON GROWTH

 The news will do little to sway any decisions at today’s Federal Reserve policy meeting, where it is widely expected that a 25 basis point rate cut will arrive at the 2:15pm announcement.

There is much talk about what qualifies as a recession and whether you can technically have one if growth remains positive. All that is irrelevant. A recession is something that is felt. It is an atmosphere of uncertainty and worry. It is also very personable. You can feel in recession while your neighbor is in boom. Who cares if the GDP is positive/negative or if housing is up or down. All that matters is whether or not you’re stressed about your economic future when you’re laying in bed at night.