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The Clover Asset Management Free Press

FORWARD THINKINGA N I ND EPEND ENT POINT OF VIEW BY: ER IC S T-C Y R C EO, C LOV E R AS S E T MA N A GEMEN T L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (345) 947 0005 FACSI M I L E(345) 949 0005

Where do we go
from here?

Is it time to slaughter the Bull for the Winter?


When I was young, I lived in the country, two hours from Montreal in Canada. Each spring my dad would buy a calf,
pay a farmer to raise it for the summer and slaughter the animal for its meat in the fall.
We  would  then  eat  like  kings  for  two  months,  5ilets,  T-­‐Bone  steaks,  and  tender  roasts  would  be  on  the  
table  regularly.  As  we  go  through  the  winter,  the  best  cuts  would  be  depleted  from  the  freezer  and  we  
would  end  up  with  hundreds  of  pounds  of  ground  beef.  “Good  bye  “  to  our  variety  of  fancy  meals,  and  
“Hello”  to  burgers  and  meat  loaf,  again  and  again  and  again…

On  July  07th  of  this  year,  I  wrote  an  article  where  I  recommended  to  everyone  to  increase  their  equity  
exposure  as  I  turned  more  bullish  toward  the  stock  market.  My  forecast  was  simple,  either  we  were  
moving  out  of  this  “everlasting”  
recession  and  stocks  will  out-­‐
perform  going  forward  or  the  fear  of  
a  “double-­‐dip  recession”  will  force  
the  Federal  Reserve  to  come  to  the  
market  with  new  liquidity.  Since  I  
made  this  recommendation,  the  
SP500,  the  most  followed  US  equity  
index  is  up  by  more  than  15%,  and  
most  emerging  markets  are  showing  
returns  in  excess  of  20%.    Most  of  
this  growth  in  stock  value  was  
created  on  the  expectation  of  
another  phase  of  quantitative  easing  
(QE)  from  the  Federal  Reserve  in  the  
USA  and  low  and  behold,  we  had  the  
Fed  last  week  promising  to  pump  an  
additional  USD  600  Billion  dollars  in  
new  liquidity  into  the  market  over  
the  next  eight  months.  

The  last  few  months  were  those  


where  our  freezer  was  full  of  all  of  
those  beautiful  cuts  of  beef;  the  
The Clover Asset Management Free Press

FORWARD THINKING
A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (34 5) 947 00 05 FACSI M I L E(345) 949 0005

“Obama  Stimulus”,  the  5irst  phase  of  


QE  and  the  introduction  of  QE2  
bringing  us  even  more  joy  and  
satisfaction.  However,  the  question  we  
now  have  to  ask  is:  “What  do  we  now  
have  left  for  the  months  to  come”?    
“Can  we  assume  that  the  conundrum  
of  rising  stock  values  in  all  scenarios  
will  continue”?  To  answer  this  
question,  let’s  review  some  of  the  
recent  events  and  their  future  impact  
on  the  capital  market.

QE2:  Like  all  American  movies,  if  the  


5irst  one  was  popular,  expect  a  sequel.  
It  was  the  case  with  QE  and  for  QE2;  
Mr.  Bernanke  actively  promoted  the  
Fed’s  future  intervention  and  then  
delivered  by  printing  USD  600  Billion  
of  fresh  new  US  dollars.  Like  anything  
in  this  world,  the  more  abundant  is  a  
good,  the  lowers  its  value.  By  printing  
Trillions  of  dollars  since  the  beginning  
of  the  crisis,  the  Federal  
Reserve  has  drastically  reduced  the  value  of  the  US  currency  when  compared  to  other  
currencies  and  especially  when  compared  to  gold.  That  was  then;  what  we  now  
need  to  focus  on  is  tomorrow.  The  5irst  round  of  quantitative  easing  did  
indeed  help,  along  with  a  myriad  of  other  government  
interventions  and  incursions,  to  allow  mortgage  and  credit  
spreads  to  collapse  from  depression-­‐era  levels.  The  
equity  markets  and  commodities  around  the  
world  rallied  as  the  U.S.  dollar  
weakened,  and  for  a  time,  the  
economy  improved  and  
assets  re5lated.  Will  
QE2  do  the  same  
and  put  the  economy  
on  a  stronger  footing?  
I  sincerely  doubt  this.

It is obvious today that


the goal of the Fed is to
continue to reflate the
value of the assets of the US

www.Clover.ky
The Clover Asset Management Free Press

FORWARD THINKING
A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (34 5) 947 00 05 FACSI M I L E(345) 949 0005

consumers. Remember, the average family in the USA is today worth $100,000 dollars less than
they did two years ago. If we want the economy to do better, we need the consumer to feel better
and start spending again and the easy (lazy?) way to do that is to increase their personal wealth by
sending all asset values higher. To do this, you must reduce the value of the currency thereby
increasing the value of almost everything else. Think about it, if tomorrow morning you need two
dollars to buy what one dollar was buying yesterday, you will be under the impression that the
price of the item you are buying has doubled when in fact it may be the value of your currency that
was cut in half… Depreciating currencies should create inflation, a necessary evil to combat
deflation and restart the economy. The strategy has worked so far for liquid assets such as bond
and equities; however the problem remains where it originated at the start of the crisis with Real
Estate value. This Real Estate bubble in the US was so disproportionate that even with a dropping
dollar and rapidly rising liquidity, house values remain depressed and may even roll over in the
near future. Of the estimated 15 million homeowners underwater, about 7.8 million owed at least
25% more than their properties were worth in the first quarter of this year ... More than 4 million
borrowers were underwater by more than 50%. Why not just bringing the keys back to the bank?
For each dollar the US citizen has in the stock market, he has another 3 dollars invested in his
house, if you don’t fix the real estate market, you don’t fix the economy…The following graph
clearly illustrates that QE had a limited impact on property value. I expect no impact on Real Estate
value from QE2.

www.Clover.ky
The Clover Asset Management Free Press

FORWARD THINKING A INDEPENDENT POINT OF VIEW BY: ERIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (34 5) 947 00 05 FACSI M I L E(345) 949 0005

Will  there  be  a  “QE3”  then?  Who  


knows,  maybe,  I  would  even  say  
probably  but  not  long  before  things  
get  worse.  There  is  a  growing  
dissension  brewing  between  the  
different  members  of  the  Federal  
Reserve  and  it  is  not  supportive  of  
future  intervention.  In  other  words,  
the  cat  is  “  out  of  the  hat”  and  fully  
priced  into  the  market.

US  Election  2010:  To  nobody’s  


surprise,  the  GOP  took  over  the  house  
in  the  November  election.  This  
political  change  was  well  perceived  by  
the  market  as  historically,  a  gridlock  
on  Capitol  Hill  translates  into  reduced  
governmental  market  intervention.  
While  I  understand  why,  in  normal  
circumstances,  the  market  
participants  see  no  government  
intervention  as  a  blessing,  in  times  of  
crisis,  it  is  a  different  story.  
Consequently,  the  absence  of  further  
stimulus  and  expected  increase  in  
taxation  levels  may  well  be  the  straw  
that  will  break  the  
back  of  a  nascent  
recovery.  The  US  
economy  is  
expected  to  grow  
by  2%  next  year  
and  the  elimination  
of  the  Bush  
administration  tax  
break  would  take  
more  than  1%  of  
this  growth  away,  
we  won’t  need  
much  from  here  to  
go  back  into  a  
recession.

www.Clover.ky
The Clover Asset Management Free Press

FORWARD THINKING
A N I ND EPEND ENT POINT OF VIEW BY: ER IC S T-C Y R C EO, C LOV E R AS S E T MA N A GEMEN T L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (345) 947 0005 FACSI M I L E(345) 949 0005

The  US  Dollar:  We  all  love  to  


hate  the  greenback.  The  US  
dollar  rapid  devaluation  is  
despised  by  emerging  countries  
that  see  their  exportation  being  
priced  out  of  the  market.  (Except  
for  China  who  cheats  and  pegs  
its  currency  to  the  USD).  Like  in  
October  2009,  the  world  pundits  
are  now  talking  about  replacing  
the  USD  by  a  basket  of  other  
currencies.  Is  it  the  end  of  the  
dollar  hegemony?    I  don’t  think  
so,  at  least  not  anytime  soon.  
The  reality  is  that  nobody  wants  
to  see  their  currency  appreciate,  
so  foreign  governments  would  
not  be  incline  to  replace  the  USD  
with  their  own  currency.    The  
USD  is  here  to  stay.

Expect  the  dollar  to  bounce  back  rapidly  when  we  see  either  a  new  sovereign  debt  crisis  in  Europe  
(and  we  will  see  one  again),  a  lack  of  buying  interest  in  treasuries  from  foreigners  who  want  to  be  
paid  more  for  the  increase  5inancial  risk;  another  crash  in  the  stock  market  or  positive  economic  
news.  Keep  your  eye  on  the  dollar,  it  is  the  best  indicator  of  things  to  come,  especially  as  it  gets  
stronger,  equity  will  give  
back  some  of  their  
recent  gains.  

As  you  can  see,  stocks  


will  not  rise  forever  
and  gravity  will  come  
back  to  haunt  them  
sooner  rather  than  
later.  Reduce  your  
equity  exposure  and  
raise  some  cash  in  
your  portfolio  but  
don’t  short  the  market  
as  yet  as  it  is  always  
dangerous  to  Iight  the  
Fed.  Better  to  be  safe  
than  sorry  from  here.

www.Clover.ky
The Clover Asset Management Free Press

FORWARD THINKING
A N I ND EPEND ENT POINT OF VIEW BY: ER IC S T-C Y R C EO, C LOV E R AS S E T MA N A GEMEN T L I MI T ED

Nov 09, 2010 forwardthinking@clover.ky TELEPHONE (345) 947 0005 FACSI M I L E(345) 949 0005

In  closing,  is  there  any  “Light  at  the  end  of  this  tunnel”?  The  answer  is  yes  as  we  are  now  seeing  
consumers  gradually  reducing  their  debts  (see  previous  graph).  This  crisis  was  originally  created  by  
excessive  debts,  and  if  and  when  the  sum  of  this  cumulative  debt  is  5inally  reduced  to  a  healthy  level,  
you  can  expect  the  economy  to  “SLOWLY  “show  signs  of  real  growth.  However  this  will  take  time,  as  
you  don’t  correct  twenty  years  of  excess  over  night.committed  excess  for  more  than  20  years;  it  will  
not  heal  itself  overnight.  

Eric St-Cyr
CEO
Clover Asset Management Limited
Tel: 345 947 0005
eric@Clover.ky

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