Equity Strategy August 3, 2007:     

It seems that risk has become a four letter word again and investors are trying to avoid it like it’s the plague. The old strategy of looking for potential takeover candidates has gone by the wayside as investors come to the realization that most of those potential takeovers are not likely to happen now that low cost borrowing with few strings attached has ended.

Canadian investors are not all that convinced that the recently announced takeover of BCE will complete. There has been a cash offer tabled of $42.50 per share but the shares are trading in the market well below that at only $39.43 suggesting there is considerable uncertainty regarding whether the group led by the Ontario Teachers Pension Plan can borrow the required amount on terms that would make the deal profitable. As I said at the time take the money and run you never know if these deals are going to finalize.

It has been a bit of a surprise to many observers that the commodity markets have remained relatively stable over the past few weeks while the stock and bond markets have been all over the place. The reality is that the commodity markets have always been a little more volatile so it has been expected, while the equity and bond markets have not seen any real volatility for years. That is all going to change from now on, volatility as returned to the equity markets and it will likely be some be time before things calm down again.

A bit of a surprise this week when Telus announced disappointing quarterly earnings results after all the fuss about the possibility that Telus would take a run at BCE. Now it appears that all of the effort expended on the takeover took managements attention off the ball of running the business. Telus also announced that it will not be making an offer for BCE; it appears that the government was not willing to come out with a clear stance on what requirements would need to be met to satisfy the competition bureau.

Over the next few weeks investors should be concentrating on building a cash position in order to capitalize on the coming major decline in the North American equity markets. Sell in to any rallies in price going forward in to the fall, the situation has changed so do not buy the sell offs or dips, there is still a lot of down side left to go before it will be safe to buy.