Castlemoore Commentary

What does CastleMoore think its typical Canadian investors should be invested in NOW?

FOCUS MODERATE PORTFOLIO

Cash: 90% (including 20% $US) Long term US bonds: 10%

Don’t Bank on a Recovery.

We sold our last financial services stock about two years ago, and haven’t been a factor in that sector ever since. We readily admit that there has been temptation. After all, often times, sectors within the broader market act like springs: the more they are pushed into compression, the greater the force will that will be released when the compression is released.

The profits recently announced by Citibank have confirmed to many investors the “springing” to life of the financial sector. The sector had certainly been depressed—rather, compressed—more or less up until the time the Obama administration announced it would acquire bad debts from banks’ balance sheet.

We’ve read much commentary regarding the banking sector over the past several months—both positive and negative. A column from Newsmax made some salient points in our view:

- that Citibank’s surge in operating profit (which was instrumental in tripling its share price which had been under a buck) was largely due to the adaptation of an accounting standard that allows a company to book profits based on its ability to buy back its own debt at prices that is significantly lower those current reflected on their balance sheets. They don’t actually have to buy back their debt. They just have to be able to. [CM: is this a good reason to buy?]

- that Bank of America did essentially the same thing, only in it’s case its doubtful debt came over in the acquisition of Merrill Lynch. Separately, B of A booked at profit from its sale of a subsidiary, China Construction Bank.

All of these events are non-repetitive and hence are not indicative of any sustainable return-to-health of the banking sector, and, by extension, the economy. Have you read any reports lately predicting an earlier-than-anticipated end to this recession, or of any upward revisions of economic activity? (Contact us to acquire the Conference Board’s latest figures - one indicator ratio is 100% for calling the bottoms of recessions over the last 11 post WWII)

But if the banking sector isn’t so healthy after all, why are there analysts recommending them?

Well, truthfully, only half of them are, according to Thompson/First Call. So one group has to be wrong. Odds are they are mainly the ones that didn’t see the banking crisis coming in the first place.

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CastleMoore Inc. uses a proprietary Risk/Reward Matrix that places clients within one of 12 discretionary portfolios based on risk tolerance, investment objectives, income, net worth and past investing experience. For more information on our discipline and methodology please contact us.

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