Kelly-Anne Maddox and David Wise, 25 July 2008, at King's Cove, Newfoundland

The crabapples are ripe on the trees in our backyard, and the leaves are beginning to turn yellow. Every year it seems as if summer is getting shorter and shorter. I guess we have to be like the squirrels, and start gathering acorns before winter's onslaught.

The pain got much worse after her 2007 tour of Prague with the Kitchener-Waterloo Orchestra, and her physician signed her up for an MRI - merely a 7-month wait! In the meantime she had to give up most of her performance schedule, reduce her teaching load, and take stronger and stronger medications.

The MRI showed a partial tendon tear and some arthritis, so her GP booked her for an appointment with a Calgary orthopedic specialist. The wait just to see the specialist - an estimated 18 months!

Alberta Health Care keeps a registry of wait times. You should know that this is from the time of consultation with the surgeon to the time of treatment; it does NOT include the wait time to see the specialist. The AHC site said that Carmen could expect another 8-month wait after seeing the specialist before getting treatment.

We were looking at 2 years or more before treatment. This was not acceptable, so we had to look for alternatives. We canvassed other Alberta specialists and facilities. No luck. We looked at private facilities in Vancouver: an estimated $12,000 just for the surgery, plus pre-consultation, medications and travel.

We felt forced to look at out-of-country options. We ultimately chose to use an organization called Med Journeys. Med Journeys arranged for Carmen to travel to Costa Rica for surgery by Dr. Oscar Oeding at Clinica Biblica in San Jose, and recovery at a specialist recovery facility called CheTica Ranch. I went along for moral support.

To say that Dr. Oeding and Clinica Biblica were first-rate is to understate the service that we received. Starlene, Rogelio and Bill of the hospital's International Department led us by the hand to all appointments: to the pre-surgery consultation with Dr. Carlos Wu Chin and the pre-op tests; to hospital admission on the day of the surgery; to the recovery room (a private room more akin to a nice hotel suite) and the surgical floor; to the post-surgery consultation, and to three sessions with Nazaret, the best physiotherapist that Carmen has ever encountered.

Dr. Oscar Oeding Bermudez

To be specific, Carmen had arthroscopic surgery on her shoulder. Dr. Oeding found that her source of pain was a nerve that had been pinched between an arthritic bone spur and her shoulder bone. He shaved off the spur. He also tied up the partial tendon tear. Carmen went into surgery very uncomfortable; she came out virtually pain-free.

Our total experience was superb. I would strongly recommend that anyone stuck with poor service in Canada immediately contact an organization such as Med Journeys. There are alternatives out there.

Our next step is to recover some of our expenses from Alberta Health Care. Even if we don't collect a nickel, the cost was worth it. Carmen is now pain and medication-free. She has been able to resume her full musical life.

Trinity Bay, Newfoundland
Fin Whales		The Last Iceberg of Summer

Where We Are

Last night, the world's largest insurer, American Insurance Group, was taken over by the US government. Uncle Sam now owns 80% of the firm. They did this because AIG was deeply involved in guarantees of various arcane financial products (for example insuring that a holder of a mortgage-backed security wouldn't lose money if the value of the MBS fell - and we know what has happened to US mortgages!). Virtually every bank and financial institution around the world holds AIG-issued credit default insurance.

Prior to that, 2 large investment banks (i.e. stockbrokers) in the US went bust. To be fair, Merrill Lynch didn't go bankrupt. It avoided that fate through a shotgun marriage to Bank of America.

So far this year, 3 of the 5 largest brokerage firms have either gone belly-up or been bought at fire sale prices. The market is saying that Morgan Stanley and Goldman Sachs are also on shaky ground. It is possible that by yearend all of the large independent brokers in the US will be subsidiaries of retail banks. The same thing happened in Canada over a decade ago, except that the Canadian brokers sold out to the banks at peak prices, while the US ones are doing it from necessity.

The corporate turmoil means little to those who have brokerage accounts with Lehman Brothers, Merrill Lynch, or Bear Stearns since client accounts are segregated from the firm's capital. It has a huge impact on the ability of large corporations around the world to issue new debt or equity to finance their businesses. Three major underwriters have gone out of business.

For a Canadian analogy, imagine the impact in Canada if Dominion Securities, Wood Gundy, and Nesbitt Burns were all to shut their doors.

Why did they go broke? In a nutshell, management was trading on the firms' capital in "sure things" like US residential mortgages. Not only were they using the firm's money, but they borrowed up to 30x their capital and put that on the table as well.

In the US as in Canada, retail banks have limits to the amount of leverage that they can use. That limit is between 10 and 12 times the bank's capital. US investment banks are unregulated; the limits to leverage depended upon the firm's management. During good times, it was in management's interest to bump the leverage as high as possible. It was good for the firm's profitability, and good for management's bonus packages.

Alas, we all know what has happened to the US mortgage market. When you are levered 30x, it doesn't take much in the way of adverse developments to wipe you out!

The brokerage failures come on the heels of the government takeover of the two largest mortgage guarantors in the US. Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are roughly similar to Canada's CMHC. They own or guarantee roughly half of all US residential mortgages. Those mortgages - a mere $5,000 billion - have now become direct obligations of the US government.

Unfortunately, it is unlikely that this has cleared up the financial mess in the US. Washington Mutual, Wachovia Bank and National City Capital are 3 large retail banks whose past lending practices may force them into bankruptcy. There are likely to be more failures that we don't know about.

The US bank problems are essentially absent in Canada. The Canadian banking system is regulated in a different manner from the US. The big Canadian brokers are already owned by the Big Banks.

We have our own financial challenges resulting from the recent commodities madness. I think that we can thank the US financial system for both the huge run-up of commodities and the unprecedented collapse since mid-July. This time we have to look at the specialized commodity funds that gathered huge assets during the bull run. For whatever reason, the mood changed in mid-July, and the stampede into commodities became a stampede out.

Canada's resource-dependent stock market and currency have been trampled underfoot.

Table 1 indicates how we were doing up to the end of July. Even before September's woes, the US and foreign stock markets were having a rough year. Canada was still holding its own on the back of strong Natural Resources performance early in the year. The numbers in the table look like ancient history. August and September have clobbered all stock markets.

Bonds are holding up. The fall in commodity prices has relieved any possible inflation worries, and interest rates are on their way down. The fall in the looney has really helped the returns from foreign bonds.

Where We're Heading

Chart 1

You'll note from Chart 1 that the resource speculative boom lifted the CRB Index into uncharted territory. All that has happened so far is returning the Index to within the upward-sloping channel that it has been in since 2000. Gold had a record 1-day price jump today in response to the financial crises in the US.

Currency
The looney is a petro-currency. At oil prices above $100/bbl there's a very strong bias towards a strong looney. However, that relationship has broken down in 2008.

The federal government and the Bank of Canada worked hard to contain the currency's rise and hold it at around par while the oil price rose to the stratosphere early this year. Unfortunately, their gloomy talk has caused the looney to weaken as the oil price slides back below the $100/bbl level. See Chart 2.

Chart 2

An interesting conundrum is that the Canadian economy is much stronger than the US economy. Canada is not in the worst banking crisis since the Great Depression. Yet on a day that saw the collapse of not one but two(!) banking giants, the greenback rose against the looney and most other currencies!

Interest Rates
Interest rates have stabilized at more normal levels from their extreme lows early in the year (see the red and green lines in Chart 3).

Chart 3

Nevertheless, there is a trend towards lower rates. That trend may well accelerate in the coming weeks as central bankers around the world try to cope with the US financial mess.

I think that is safe to say that the central bankers are no longer worried about inflation. There is little or no chance of rates going up in the next while. On the contrary, bankers will be worrying about keeping the global economic system functioning, and are likely to drop administered rates, perhaps substantially.

Stock Market
Chart 4 gives a longer view of the Toronto stock index (blue line). The scale is logarithmic.

Chart 4

Several things are apparent from this chart.

• The stock market rises over time.
• Markets fluctuate.
• The best returns occur after a market downturn.
• Market downturns are buying opportunities.
• The "event" that we are currently in hardly registers as a blip.

Chart 5

With strong earnings and a weak stock market, the earnings yield from stocks (blue line on Chart 3) has risen to above 6%, versus barely over 4% for bond yields (red line on Chart 3). Stocks remain a better buy than bonds.

The record earnings have been achieved without help from the banks. While we can't expect the resource component of the TSX to continue earnings record profits, we can expect the financials to pick up the slack and keep Canadian corporate earnings strong.

Chart 5 also shows that Canadian companies are increasing their dividend payouts (orange line). Companies have to be confident that they can continue to generate earnings before they raise dividends. This is an extremely bullish signal.

If we refer to Chart 3 again, we see that the dividend yield (brown line) is above 3%, and is substantially higher than the rates offered by T-bills (green line). The Canadian stock market is paying us to wait for stock prices to rebound.

Chart 4 gives a longer-term view of the US stock market (red line). The pattern of growth is similar to that of Canada. However, the most recent history is quite different.

The US market had a huge bubble in the late 1990s. Both were similarly impacted by the Grizzly Bear Market of 2000-2002, but while the Canadian market had a great recovery from 2003-2007 because of the commodities boom, the US stock market recovery was muted. The S&P500 Index is still below the 1999 highs!

In addition, corporate earnings in the US are in freefall (green line in Chart 5). The blue line in Chart 5 also shows that there has been no dividend growth from US companies for the better part of a year. US companies are hoarding their cash in preparation for hard times.

The chaos that has engulfed stock markets around the world this week brings to mind another quotation from Sir John Templeton:

God favours the people who try to do good. So, when you find the crowd is desperately trying to sell, help them and buy. When you find that the crowd is desperately trying to buy, help them and sell. It usually works out.

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