I have considered myself a “disgruntled optimist” because the credit crisis was never supposed to happen and wouldn’t have if the central banks and governments around the world had properly regulated a free market, although clearly this did not happen.

I am an optimist because I know that these very same central banks and governments will do whatever it takes to get things working again. Although, it will never be the same, Mark Twain once said that history does not repeat itself but it does have a tendency to rhyme.

Lingering uncertainty about the U.S. government actions to fix the banking crisis “rattled” equities in the United States and in Canada. Opportunity can be found in chaos and based on these valuations economic conditions could get worse. Stocks would still be considered a bargain based on current and historic valuations – they just need a catalyst to go up since nobody is buying based on current sentiment.

The S&P/TSX Composite Index, Canada’s main stock index, fell 3.8% to its lowest closing level in more than 5 years and came dangerously close with the November 2008 low. The index was dragged down by lower commodity prices, weak economic data and nagging concerns about U.S. banks.

All of the index’s 10 sectors finished lower, led by a decline in the energy sector as persistent fears of a prolonged global economic slowdown continued to weigh on oil prices (even as the exploration for new oil fields comes to a grinding halt i.e. a reduction in supply).

The slide in oil prices followed weak Canadian retail sales data for December (down 5.3% - the biggest drop in 15 years) that puts pressure on the Bank of Canada to cut interest rates at its next policy announcement date on March 3rd.

Wall Street slumped to a 12-year low on Monday as investors lost faith that the U.S. government will be able to stabilize the financial system. The S&P 500 and the Dow both posted their lowest closes since the spring of 1997 as reports surfaced that the government may convert its stake in Citigroup into a big common stock. Many feel that it is more necessary to fix big banks. In short, expect Trouble Asset Relief Program (TARP) round 3 to be announced soon (although, it seems like each time the government signs into law a ‘quick fix’ program stocks respond by dropping).

Adding to the bleak picture, CNBC reported that insurer American International Group could be forced into bankruptcy if new rescue talks with the government fail to secure it more funding – they are asking for an additional $60 billion in funds.

The Dow Jones industrial average dropped 3.40% to 7,114.94, the Standard & Poor’s 500 Index dropped 3.47% to 743.34 and the Nasdaq Composite Index dropped 3.71%.

The Dow index is down nearly 50% from its record high close in October 2007, with about $10 trillion of value wiped out since then ($35 trillion globally). So far this year, the Dow has fallen 18.9%, while the S&P 500 has shed 17.7%, the Nasdaq has dropped 12% and the TSX slightly more.

Stocks in Europe and Asia retreated this morning (catching up with North America from yesterday), extending the MSCI World Index worst start to a year, as corporate earnings disappoint and a German business confidence index has fallen to a 26-year low. The MSCI World slid 0.6% this morning, falling for a 11th straight day. The index of 23 developed countries retreated 18% in 2009. The MSCI World has retreated 53% since the start of last year as credit related losses at financial firms worldwide climbed to $1.1 trillion.

This is one of the worst bear markets in the past 100 years making stocks their cheapest since 1985 (when interest rates were significantly higher).

In short, the economy is still contracting at a substantial pace! The US economy is expected to contract by 2% this year, the biggest drop in the postwar era, according to projections by Bloomberg News. The unemployment rate may climb to 8.8% in the U.S.

Currently stocks are trading at below book value and sometimes below their cash value. At some point buyers will come back to the stock market and drive prices higher, however, investors will wait for a catalyst before buying aggressively. We will need to be patient until the stimulus takes hold, the banks are fixed and there is more clarity for the auto industry.

U.S. stock futures are pointing up this morning but yesterday morning they also started almost 1% higher before ending the day deep in the red.

Hold the faith, diversify, think and act long-term – we will collectively get through this. Tonight the President of the United States will speak to Congress via national television.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner