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Is it 2011 all over again?

Why one market watcher thinks we're headed for a fall. Also, could Direct Cash Payments be a casualty of Cash Store Financial's banishment from Ontario?

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Feb 26, 2014

by Max Fawcett

Feeling bearish? James Hodgins, the chief investment officer at Curvature Hedge Strategies, thinks you should be. During his appearance on BNN’s Market Call yesterday, he outlined why the markets today look an awful lot like they did before the plunge in the spring and summer of 2011 – and why investors might want to reduce their risk levels. “When you look at sentiment, when you look at margin debt, when you look at the Schiller P/E, it would suggest that there’s a lot of downside here.”

Now, he is running a hedge fund, so this isn’t an entirely unexpected opinion – hedge funds exist to hedge – but his argument is an interesting one all the same. He says that those three key signals – sentiment, margin debt and long-term valuations – are at extreme, top-decile levels, and they’re all pointing in the same direction. “It’s never been a good time to be a long-only investor when those three pieces of the market construct are flashing those kinds of signals.”

More broadly, he thinks that with the Federal Reserve withdrawing the monetary stimulus it’s been providing the market, the broader de-leveraging cycle that’s been taking place since the crisis of 2008 may begin to reassert itself. And Hodgins, a self-described “Fed watcher,” doesn’t think it’s likely to step in if that knocks the markets down a few thousand points, either. “Whenever you have a new Federal Reserve chairperson, in the first year or two of their term they want to make sure they’re establishing credibility with the markets. So I think it would be very unlikely to see a new Federal Reserve chairperson react to any kind of a sell-off in the markets and give a signal that maybe they’re panicking.” Both Alan Greenspan and Ben Bernanke tightened monetary policy at the beginning of their terms, and he thinks the same will happen with Janet Yellen. “They want to establish their credibility early, and then they can kind of loosen the strings later.”

In terms of specific calls on Alberta companies, one of his top picks was a short on Direct Cash Payments (TSE:DCI). He thinks it could get sideswiped by Cash Store Financial’s banishment from Ontario, given that its ATMs do a lot of business with the pre-loaded debit cards CSF gives its customers. “We think that business is effectively going to zero. Now, this isn’t completely new to the market – Veritas Research did a negative report in the fall looking for a scenario like this, but now it’s happening.” Veritas estimated that those debit cards amount to nearly 20 per cent of Direct Cash’s EBITDA. “We’d definitely stay away.”


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