Cab drivers usually get the tips, not give them. But here was this driver last week lecturing us on how to be successful in the stock market. Buy distressed stocks at low, low prices, he said, looking sagely in the rearview mirror. "You can't go wrong."
He had used his line of credit to buy Ford and Citigroup when they were looking ready to go into history's corporate dustbin. He was up about 150% on his modest "investment" and ready to share his expertise with the world.
But wasn't there a good chance those companies could fail and the share price basically go to nothing, like Nortel, for instance. "There's no way that could happen," he said. "No way. It's not possible."
We observed as the ride came to an end that borrowing money to speculate on stocks might not be the best strategy for an immigrant cab driver who said he didn't otherwise have any money and was struggling to support a family. "It's not speculation," he said. "Impossible to lose."
Partly on such views is the stock market built. Of course, some professional traders/ investors who regarded the market with similar levels of hubris are now driving cabs or are otherwise out of the business, having made some "impossible-to-lose" bets.
They, too, will now be looking in the rearview mirror, hopefully somewhat more sagely than previously, to learn where they've been so as to know where they might be going.
Nick Majendie of Canaccord Adams in Vancouver is about as far as you can get in the investment business from our "can't-lose" cab driver. Hubris is nowhere to be found in his portfolio, just confidence born of decades of experience.
But Majendie, who is chief portfolio manager of Canaccord's Independence Accounts, has been looking in the rearview mirror to help calculate the value of stocks going forward and where the major indexes might be in 2010.
Such questions are paramount right now as traders and investors review their options following the impressive spring rally. The major indexes gave up some ground this week, looking on Wednesday that they might be ready to crack and correct before righting themselves Thursday and wilting yesterday.
In a recent report, Majendie and his research team looked back at the history of Canadian and U. S. corporate profits as a percentage of GDP and how those numbers tied into stock index levels. The methodology is too complex and too lengthy to outline here, but the conclusions are instructive.
Majendie believes U. S. corporate profits as a percentage of GDP will fall to 4% or below from the recent 6.6% level. In Canada, that number will be more likely 6.3%, which would be similar to that experienced coming out of the 1973-74 recession.
The use of similar valuation methodologies for both countries indicates to Majendie that Canada's stock market will outperform its U. S. counterpart over the next year.
But he doesn't expect the indexes to be very much changed from where they're sitting now. He sees the S&P/ TSX composite at 10,476 in 2010 from 9,763 now. The benchmark S&P 500 in the United States could retreat to about 840 from the 883 close yesterday.
"While this is in no way meant to be an absolute forecast of where the two equity markets will be in a year's time, it does indicate much relative value in Canada," Majendie wrote in a note to clients. "This buttresses our long-held view that Canadian equity market returns should be much superior to those in the U. S."
This also buttresses the Market Eye view -- based on no such complex methodology -- that the uncertainties of the recovery will begin to exert a drag on stocks and will likely lead to a substantial pullback for the indexes and a choppy market over the next year.
The debate over whether the shoots are really green and ready to bloom into a full-blown recovery by the fall will rule and roil market sentiment going into the summer. There now appears to be a balance of sentiment between cautious optimism and cautious pessimism, which is reflected in the market's nervy performance this week.
To us, all this means some people might want to take some profits off the table, especially on any further market strength.
Meantime, you might want to find our cabbie and get a tip on the next "can't-lose" stock.
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