LTI Investment Newsletter Written by Alain Roy CEO LTI Long Term Investing November 6, 2012 www.ltinvesting.

com

November Investment Newsletter

DO STOCK MARKETS INCREASE IN ELECTION YEARS Several weeks ago, a long-time friend of mine, Neil H., asked

In this issue:
me if past US elections have impacted the stock market and if so, Do Stock Markets increase in election years Germany Economic Update France Economic Update should the current US election impact our investment strategy. As shown in the table below, in the last 40 years, 80% of the time (8 out of the last 10 US elections) the S&P 500 has increased.

Italy Economic Update

Spain Economic Update Novartis On my A List Some Positivity in the US

US Election Years - S&P 500 Results Year 2012 2008 2004 2000 1996 1992 1988 1984 1980 1976 1972 01-Jan 31-Dec 1257 1468 890 1108 1186 1464 1320 615 740 417 435 247 277 164 167 107 135 90 105 102 119 Gain/loss -39.4% 7.0% -9.8% 20.3% 4.3% 12.1% 1.8% 26.2% 16.7% 16.7% S&P 500 Up or Down Down Up Down Up Up Up Up Up Up Up

Summary ..but the situation in Portugal, Greece, Spain, Italy and even France is actually unsustainable in the long run because of the unfunded liabilities. So a Euro break-up will probably happen sometime in future, but not for another three or five years. Marc Faber, Ph.D
Author of the Gloom, Boom and Doom Report

Of the Up years in the S&P 500 the average return in that given year was 13.1%. I was a bit surprised to see this trend as I We know spending in general is

thought it would be more random.

increased during election years due to campaign spending through print media, TV advertising revenues, hotel revenues, restaurant revenues, transportation, etc. Even though this finding was intriguing, I was more interested in the year following an election.

As shown below, in years following a recession, the results are more random and the S&P 500 only increased 60% of the time (6 out of 10 in the last 10 elections). The data tends to suggest that election years have a higher chance to see gains in stock markets. As of November 2, 2012, the S&P 500 is up 12.5% right in line with the historical average of 13% for up years.

Year after US Elections - S&P 500 Results 01-Jan 31-Dec 890 1144 1186 1285 1320 1145 740 975 435 469 277 358 167 210 135 122 105 94 119 70 Gain/loss 28.5% 8.3% -13.3% 31.8% 7.8% 29.2% 25.7% -9.6% -10.5% -41.2% S&P 500 Up or Down Up Up Down Up Up Up Up Down Down Down

2013 2009 2005 2001 1997 1993 1989 1985 1981 1977 1973

In the July 2012 issue of the LTI Investment Newsletter, I showed that based on historical averages and standard deviations, the next US recession (based on data alone) would be around September 2013. Whether this exact date is correct is irrelevant. The

point of the analysis was to show that on average since 1945, every 5.9 years a recession has occurred in the US. The year 2013 is the 5th year after the last recession. Therefore, we must be aware that the next recession is just around the corner and we should not be surprised to see a down year in the markets in 2013. Here is a link to the July

Newsletter: http://www.scribd.com/doc/102955050/LTI-Newsletter-July-2012

EUROPE ECONOMIC UPDATE If it wasnt for the major European economic contraction, I might not be so cautious and pessimistic with my global economic outlook. Europe (European Union) is the largest economy in the world based on GDP. The GDP of the European Union is 25% of the worlds GDP based on the lists provided in Wikipedia. The next largest economies in the world,

after Europe, are the USA, China and Japan. If Europe continues to contract and falls into a deep recession, the rest of the world will slow down with it. How is it possible for the US to be immune to this slowdown when a large part of its exports are going to Europe, a continent currently experiencing a significant slowdown? Germany - the worlds 4th largest economy and Europes largest economy by GDP

Germanys

Total

Production

index has stalled (blue line) and the year over year growth rate is now negative

US Exports to Germany have been flat for over a year now

As

reported PMI

by report

the by

latest Markit,

Manufacturing

Germany has just experienced the second fastest drop in exports since April 2009.

As reported on the LTI blog the ifo Business Climate Index report also showed weakness and contraction in the worlds 4th largest economy

GDP growth

annual rate is

nearing the 0% mark.

Debt

to

GDP to

is

starting near levels.

climb

uncomfortable

France the worlds 5th largest economy and Europes 2nd largest economy by GDP

The Markit Manufacturing PMI (blue line) shown to the right has been contracting for many months now and is consistent with a slowing French economy. My homeland is

experiencing some difficult times.

A substantial fall in purchasing activity was recorded in the latest survey period, in turn contributing to a similarly marked decrease in stocks of purchases. Lower demand for raw materials did not prevent a further lengthening of vendor delivery times, however. (Markit, November 2012)

French retail sales fell for the 7th consecutive month in November. The Retails sales PMI by Markit remains below the 50 level and

definitely looks like a contraction.

Frances Total Production Index has not fully recovered from the last recession levels. and remains at 1997

Imagine losing 15 years

worth of productivity in one fell swoop.

Annual GDP growth rate looks like a

recession doesnt it?

Business Confidence in France is the 2nd lowest its been in the last 20 years.

Italy the worlds 8th largest economy and Europes 3rd largest economy by GDP

Italys manufacturing sector is feeling the heat and the latest PMI numbers from Markit suggest that Italy may be experiencing

recessionary pressures.

Italys

Production

Index

is

contracting with ferocity and is back down to 1988 levels. The year over year change (green line) suggests they are either entering or are already in a recession.

The Markit PMI Retail Sales Index is at the same level as the 2009 recession and the consumer expenditure is actually lower than the 2009 recession.

Negative growth GDP. in

annual Italian

Very poor business confidence in Italy.

Of the Big 3 Euro players Italy is in the worst shape of them all.

Spain the worlds 13th largest economy and Europes 4th largest economy by GDP

New orders in Spain fell at the fastest pace in three months. The PMI data from Markit is FAR from encouraging and the current PMI levels look recessionary to me.

Negative growth

annual rate in

Spains GDP.

25% rate unemployment in Spainunbelievable isnt it?

Spain is also currently experiencing a housing bubble which is a major driver to the contracting economy.

Bankruptcies

in

Spain are at an alltime high.

Consumer Confidence is currently lower

than it was in 2009.

We are seeing the same story across the four largest European economies and a quick look at the data from Netherlands shows a contracting, weak and recessionary looking economy there as well. The weakness in Europe is very bad and is holding back any hope of a global recovery. I cannot fathom how the US and other countries can stay immune to this mega slowdown much longer. The next two years are going to be very interesting!

NOVARTIS On my A List Prior to performing a screening on every company listed on North American exchanges, I had not heard of Novartis. Novartis is a Swiss based multinational

pharmaceutical company and is ranked #2 in revenues in this industry as of 2010. (IMS Health Midas 2010)

As shown above, Novartis easily passed the MacroScreening step which is always the first thing I look at when interested in a company as an investment. Consistent growth in Earnings per Share Return on Equity above 12% and consistent Consistent Net Profit margins And most importantly, growing retained earnings

A Financial Statement Analysis further confirmed that this was a very solid company and in fact they made my A Watch List. When I had a look at their dividend growth rate, I was amazed to see that their dividend growth rate was 19% on average. In addition, the volatility in the dividend growth was fairly low, around 12%. With a dividend growth rate of 19% this means your dividend payments will roughly double in value every four years. The only downside is that they pay their dividend once per year. However, for long term investors this is no big deal. Look to add Novartis to your portfolio during major pullbacks in the health care sector.

SOME POSITIVITY IN THE US There has been a story in the US that is extremely positive. That is the oil and gas boom going on in North Dakota and Texas due to new fracking technologies giving companies abilities to tap into US reserves that were relatively untouched in the past. It is truly amazing to see the US capitalizing on the new technologies and the resources in these areas.

Daily oil production in North Dakota has surpassed Both

California and Alaska.

Texas and North Dakota are booming due to the oil and gas industry.

This has helped reverse the trend of declining crude oil

production.

These results are

one strong step in the right direction for the US. Lets hope these trends continue in the future.

SUMMARY Markets seemed to have topped out in the medium term and have started to decline. We are entering a strong period in the markets however there are many looming events that may trigger a sell off. The main events are the US fiscal cliff and the need to again raise the US debt ceiling. Politicians will need to act swiftly in order to keep fears at bay. The next few months will be interesting. newsletter In the last ten elections, 80% of the time, the S&P 500 has increased in election years at an average rate of 13%. 2012 YTD is showing similar results. Recessions have occurred every 5.9 years on average since 1945. 2013 will be the 5th year since the last recession. The next two years could be messy. The largest players in Europe are contracting. This contraction is the main cause of global economic fears. Germany and France are slowing significantly and Italy and Spain look like they are currently in a recession. I cant see the US and other large economies being immune to this slowdown. The weakness in the global economy poses investment opportunities in the future and you should be ready to act when one is presented. One company to watch is Novartis, one of the worlds largest pharmaceutical companies. continue to have strong demand in the years ahead. Health care will Here is a brief summary from this months

They also pay an excellent

dividend which has been growing at roughly 19% ever year. I plan to add Novartis to my portfolio on any major pullback in the health care sector. Novartis is on my A Watch list. I suggest you add it to your watch list as well. The US Presidential election is this week. It will be good to get this behind us and move on to solving problems. In the meantime, be patient and continue to monitor the markets and global economics. I am looking forward to the next good buying opportunity. Alain Roy, P.Eng, MBA Candidate CEO of LTI Long Term Investing www.ltinvesting.com www.ltinvesting.com/blog

Disclaimer: The content of this newsletter is to increase your financial intelligence and is intended as general information only. Any action that you take as a result of this

information and analysis is ultimately your responsibility. I will not be held responsible for any negative outcomes of any kind as a result of this information. information responsibly. decisions. Please use this

Consult your financial advisor before making any investment