Checking Things Out, but Cautiously

I haven’t done this in a while, but I just couldn’t let Monday and Tuesday’s rallies on both sides of the border to go without some reflection at least. Not that I’m calling for the January bear to go back to hibernation, because that would be both irresponsible and unrealistic. But the fact remains that with most of the news out of the way in January (good and bad — mostly bad), the month of February appears at least somewhat favorable to investors not completely scared out of the markets.

What boosted stocks in North America on Tuesday? Warren Buffett was the first to start the ball rolling, after he offered about US eight hundred million dollars to certain ailing U.S. bond insurers (note that one rejected the offer, while the other two still have not responded). Then the U.S. government stepped in, with its Project Lifeline, aimed at helping those Americans who are facing foreclosures on their homes. Welcoming news came from Credit Suisse Group, too, which dramatically reduced its estimate concerning the company’s exposure to the subprime mortgage debacle.

And here is the quote from Tuesday’s “Toronto Star,” in which Gareth Watson, Associate Director and Canadian Equity Adviser at Scotiabank, said the following: “But, I must emphasize in no way, shape or form is today’s or yesterday’s strength any indication that we are through the difficulties we’ve been facing for the past eight months.”

So, how did individual sectors fare on Tuesday? The Toronto benchmark was mostly boosted by the financial sector, while investors took their time swallowing General Motors’ news concerning its biggest-ever annual loss.

The energy sector was quiet after surging on Venezuela’s President Hugo Chavez’s threat to stop all oil exports to the U.S. On the New York Mercantile Exchange, crude oil dipped only slightly to US$93.11. That did not stop most of the S&P/TSX-listed energy stocks from heading higher. In contrast, base metals and gold tumbled a little, closing 1.7% and 2.7% lower, respectively, on Tuesday. Finally, in Monday’s PROFIT CONFIDENTIAL, I talked in more detail about the reasons why natural gas producers and distributors are likely to appreciate in the coming months.

This all goes back to Lombardi Financial’s old motto that money can be made in any market. I am not recommending that any of our readers try to time the market or try to better it by applying highly speculative trading strategies, at least not without doing some serious homework. What I am saying, however, is to stop managing returns and to start managing risks because the latter is what drives the former, not the other way around.