November Newsletter Written by Alain Roy CEO LTI Long Term Investing Nov 10, 2011

November Investment Newsletter

THE SMELL OF Phyzzzzzz Most folks wake up on Saturday morning to the sweet aroma of coffee brewing, pet their dog or cat, open up a paper and start the day off nice and relaxing. My Saturdays are similar yet different. I wake up to the smile of my little guy, feed the pets and then take in the sweet smell of my Phyzzzz. By

In this issue:
The smell of Phyzzzz ECRIs Recession Call Canadian Economic Update Canadian Inflation and how your money in a savings account is DOA Stock Market Valuation Update Interesting Economic Data Key Takeaways LTI Book of the Month

Phyzzz I mean physical silver and gold. This is the smell of pure greatness. The smell that captures the belief that the world governments are creating a huge financial mess and devaluing our paper currencies. Each time central banks turn on those printing presses and lend more money to their governments or financial institutions the case to own physical silver and gold gets stronger and stronger.

When the next slowdown comes what is America going to do? We cannot quadruple our debt again; we cannot print staggering amounts of money again. So the next slowdown is going to be worse than 2008 that was worse than 2001/2002

Jim Rogers

Check out this hammer session that the silver cartel served up in October. Smashing the silver spot price from $42 to $30 in two days; two days!!! Then a beautiful huge hammer/doji formed and I said, Im in!!

Two weeks later some beautiful Silver Maple coins were delivered to my door by FedEx, 0.9999 fineness. Silver fundamentals do not deteriorate in two days causing this crash. This is 100% spot price manipulation. I have long been following the silver and gold market out of shear interest as it is fascinating and in the short term the spot price of physical silver and gold is highly pushed back down by silver cartel that have huge naked short positions.

Their assaults on physical silver and gold are timed and coordinated in a fashion that is considered by many to be corrupt, evil and seemingly illegal. In addition, exchanges around the world such as the CME and Shangai decide to hike the margins on trading accounts leading to many traders, who trade off leverage (borrowed money), having to sell their positions, which again drive prices down.

For mere mortals like us, this presents, at times, great buying opportunities. 2 or 5 or 10 years from now silver will be WAY higher than what it is today. I plan to have 10%-20% of my portfolio in physical silver and gold. With this recent opportunity I had to swoop down from the skies and nibble away. I see governments printing money like its going out of style and the International Monetary Fund (IMF) making loans in the amounts of billions of dollars to countries that dont deserve that money. This will all end up very very bad. Physical gold and silver in addition to key silver and gold stocks, in my opinion, will be one of the best asset classes to hold in the coming years as governments continue to kill our economy with their reckless policies. You can buy physical silver and gold in the following forms: coins, bars, wafers. The following companies are dealers of physical gold and silver: 1. Sprott Money: https://www.sprottmoney.com/ 2. Silver Gold Bull: http://silvergoldbull.com/s/ 3. Scotia Mocatta: https://www.scotiamocatta-estore.scotiabank.com 4. Kitco: https://online.kitco.com/

All of these dealers sell phyzz and will buy back your phyzz. I bought my Silver Maples from Silver Gold Bull. They had no administration fee unlike that of Scotia Mocatta. Silver Gold Bull guarantees that they will buy back my Silver Maples at $1.00 over the spot price.

Watch Eric Sprott, someone I highly respect, talk about silver and the potential of silver as an investment: http://www.youtube.com/watch?v=dN946M6gW2s&feature=player_embedded

ECRI USA RECESSION CALL On September 30, 2011, Economic Cycle Research Institute (ECRI) publicly announced that the US is slipping into a recession:
ECRIs recession call isnt based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down before the Arab Spring and Japanese earthquake to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not soft landings.

I have a lot of respect for the integrity of ECRIs indicators and their call here. I have performed some very exhaustive analysis on their leading indicators versus the S&P 500 and found that the Weekly Leading Indicator and Growth Indicator are highly correlated to the S&P 500. The chart below shows the WLI Growth and the S&P 500. For the last two US recessions the WLI growth has slightly led the S&P 500. The rate of decline is a concern of mine. The Weekly leading indicator is supposed to tell us how the economy will look six months from now. This says hard times ahead.

ECRI WLI Growth

30 1,800 1,600 20 1,400

WLI Growth (%)

10 1,200 0 1,000 800 -10 600 -20 400 -30 Aug94 Jan96 Jun97 Nov98 Apr00 Sep01 Feb03 Jul04 Dec05 May07 Oct08 Mar10 Aug11 200

Source: ECRI

WLI Growth S&P 500

The WLI Level on the other hand is more of a mirror of the S&P 500. It does not lead the S&P 500 like the WLI growth does. However a declining WLI at the rate we see today is not good.

ECRI WLI Level

150 145 140 135

1800 1600 1400 1200 1000

WLI Level

130 125

800
120 115 110 105 100 Aug-93 Aug-95 Aug-97 Aug-99 Aug-01 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11

600 400 200 0

Source: ECRI

WLI Level S&P 500

ECRI has been getting flack from the investing community that there are positive economic signs and the their call is wrong. I am on the ECRIs side. Those people arguing against their

recession call will get blind-sided if they do not act accordingly and still believe that everything in the world economy is rosy. mess with ECRI, they are 2 Legit to Quit. There is a possibility for a short to medium term up tick in the markets. We are going into a seasonably strong period for the markets, Buy November, sell May. Short-term movements are Dont

not relevant to the long term other than offering decent buying opportunities every now and then. If the markets run up over the next five months, the fundamentals still say it does not make any sense and one day the fundamentals will win. We cant kick the can down the road forever.

CANADIAN ECONOMIC UPDATE I recently performed a multiple correlation analysis on over 25 Canadian economic indicators versus the TSX. I found the top four variables that were correlated to the TSX were:

1. Leading Indicator: when the leading indicator rises so does the TSX and vice versa 2. Raw Material Prices: when the raw material prices rise up so does the TSX 3. Industrial Prices : when industrial prices rise the TSX goes down 4. M1 Money Flow: When M1 money flow rises at fast rate the TSX goes down

With this model I have the ability to see how far away the real TSX prices are from my model based on StatsCan economic indicators. The only problem I see with this is that

StatsCan is very slow to publish its data thus rendering my model almost useless because by the time I get a good TSX number we are one month down the road. However I can look at these four indicators and analyze the long term direction from a 30,000 foot view of what is occurring and determine how that may affect the economy and ultimately my money and investment.

Notice the Leading Indicator is flattening out and the year-over-year change is declining. This is a very similar trend to the last two recessions we had in Canada as shown in grey.

Canadian Leading Indicator

275 250 225 Leading Indicator 10% 200 175 150 125 -5% 100 75 -10% 5% 0% 20% 15%

50 -15% Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Source: StatsCan

Leading Indicator Year over Year Change

Year over Year Change (%)

The Raw Material Price Index seems like it has had an interim spike and is now on its way down.

Canadian Raw Material Price Index

250 225 Raw Matierlal Price Index 200 175 150 125 100 75 50 R ece ssions
Source: StatsCan

40% 30% 20% 10% 0% -10% -20% -30% -40% Year over Yea r Change (%)

Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 R aw Mate rial Price Inde x Year ove r Ye ar Change

The M1 Money Supply is now on a rate of ascent unseen in historylots of money in sitting in chequing accounts and bank reserves. Houston we have a problem here!

Canadian M1 Money Supply

700 30%

600

25% 20%

M1 ($ billion)

500 15% 400 10% 300 5% 200 0% 100 -5%

0 Apr76

-10% Sep78 Feb81 Jul83 Dec85 May88 Oct90 Mar93 Aug95 Jan98 Jun00 Nov02 Apr05 Sep07 Feb10

Source: StatsCan

Recessions M1 Money Supply Year over Year Change

Year over Year Change (%)

CANADIAN INFLATION The change in year-over-year Consumer Price Index (CPI) is used as a measure of inflation. Most recently we have been hovering around 3%.

Canadian Consumer Price Index

125 8% 7% 115 Year over Year Change (%) 6% 5% 105 CPI 4% 3% 95 2% 85 1% 0% 75 -1% -2% 65 Sep-88 -3% Sep-91 Sep-94 Sep-97 Sep-00 Sep-03 Sep-06 Sep-09 Recessions Consumer Price Index Year over Year Change

Source: StatsCan

This next section of this newsletter comes from the original LTI Champion Jon D. Jon sent me a great link to the Bank of Canada (BoC) website that calculates the value of your money after a certain amount of years, for a given inflation rate and interest rate. Inflation is the rise in price of goods and services over time. We all heard from our grandparents that when they were kids a can of coke was 5 cents and a loaf of bread was 10 cents. Now a can of coke will put you back $1.00 and a loaf of bread costs around $2.50 - $3.00 depending on the type you buy.that is inflation at work. Things getting more expensive as time goes on.

There are two factors, other than your gains, that have a negative impact on your investment returns: 1. Inflation 2. Taxes

Lets have a look at inflation more closely

The following link demonstrates how inflation affects your money over time. Hat Tip: Jon D. http://www.bankofcanada.ca/rates/related/investment-calculator/ Scenario: Results: After 3 years your $10,000 is only worth $9569, including interest. money! This does not even include taxes due to holding your money in a non-registered account. rate. Bottom Line Do not let your money sit in a savings account. Open up a TFSA trading account and buy xcb.to as close to a 52 low as possible. At least there you will get 4.5% interest per year, in the form of dividends, and you wont actual be losing money. Say your marginal tax rate is 40%. Your $10,000 is now only worth $9296. You lost $700 in three years. Inflation and taxes will erode your savings if you do not do things right Interest income is taxed at the HIGHEST bracket; your marginal tax You LOST Say you have $10,000 in a savings account as an emergency fund in ING Interest rate = 1.5% (this is the going rate right now) Inflation = 3%, based on the above chart You keep it in the bank savings account for 3 years

STOCK MARKET UPDATE

The P/E of the S&P 500 is at 20.84. Here is why I am totally baffled by the high P/E: Greece is about to be chopped up into Greek Salad: 1yr gov. Bond yield = 221% Italy is the next pig to squeal as their short-term bond yields are spiking: 10 yr bond yield went from 5% to 7.24% in two weeks. Huge issue here! The fifth largest investment firm in the USA, MF Global, is dead, due to European debt exposure. The are going through bankruptcy proceeding right now The USA is approaching 15 trillion dollars in national debt; $15,000,000,000,000 http://www.usdebtclock.org/ Chinas economy is slowing, which will decrease demand of goods they buy leading to more global downward pressure. Political global uncertainty is the highest Ive seen in 30 years, since I was born. Which Prime Minster is next to get the hook? Italys PM is toast, Papandreou Smurf is on a short string. Central Banks of developed nations are printing money like its a swingers money printing party and the IMF is making loans for billions to countries about to collapse just to prop them up for several more months, i.e. Greece

Yet, the S&P 500 P/E is on the high end of a 100 year P/E trend. Something has got to give here, seriously. This is not sustainable; we can no longer kick that can down the road. The more we kick the can the worse the fallout will be in the near future.

INTERESTING ECONOMIC DATA

Poverty in the USA is at a historical high. Thats not fixed without The

government help.

US gov. is already over their heads with financial

numerous issues. list.

Add this to the

USA real median income is at 1996 levels. lost 16 US families just of earning

years

power. Erosion of the middle class.

Reckless

US

spending.

Red line = government expenditures. Purple line = government revenues. Is it that hard? spend more than Dont you

bring in !!!

Look at that Words

huge difference.

escape me when I look at this graph.

This sheds some light on the above graph. in The the

largest

employer

ENTIRE world: The US Department of

Defence. Only time will tell if

spending trillions on wars and removing dictators will be beneficial to them.

Protect the Wall Street bull. Prop him up with more money printing !

US

Manufacturing

jobs:

Mostly due to US labour costs being higher than As become and

offshore these more

countries. countries developed

affluent we will see more pressure on them.

This graph is probably the doozie of all doozies. duration of USA

unemployment.

Nevereverin the history of the BLS recording this

information has it been this bad. fast. This wont get better We are talking serious

structural unemployment.

Physical silver purchases from India

Data Source: Gems and Jewellery Export Promotion Council

Physical gold purchased from India

Data Source: Gems and Jewellery Export Promotion Council

Demand for gold and silver will likely remain high in the coming years which will keep upward pressure on the price of these commodities.

US M1 Money flow goes all out parabolic.

Cost of labour: China vs. USA. Its basically 10x cheaper to make something in China.

European PMIs

US Food Stamps. of letting up.

No sign

Remember

the

poverty and medium household income

graphs of the US I showed above.

Scroll

back

up

and

look at them.

Then

look

at

the

circled category. From $50,000 in 2009 to $190,000 in 2010.

Way to bail out the financial industry US government. Looks

like they need more of it. This is legal?

KEY TAKEAWAYS

Time to bring this all together and summarize everything from this newsletter in a more concise format, I hope. Here are the key takeaways:

1. Gold and Silver In the long term you should take advantage of any large decreases in the price of silver and gold and buy some physical bullion in the form of coins and bars. Target to have 10% to 25% of your portfolio in physical bullion and gold and silver mining stocks. There is a good possibility gold and silver will get bamboozled in 2012-2013 due to a slowing demand in China and cartel attacks. These will be long term buying

opportunities. As world governments print more money and get in more and more debt the case for gold and silver long term gets stronger and stronger. Dont let the attacks and decreases shake you out of the trees. Be that monkey that hangs on.grab more gold and silver bananas while the prices drop. Also consider gold and silver mining stock when and if they get hammered. I will recommend a few in future newsletters. 2. ECRI Recession call ECRI has officially made a recession call for the United States, stating that they are slipping into a recession and it is inevitable. Start getting defensive in your portfolios We are heading into a historically strong period for markets. If we get a run-up in markets this opportunity and place tight Stop Limits on your stocks. If you have Buy

mutual funds, sell them because they are pure garbage with 2.25% MERs. xcb.to at the lows, then wait until equity prices drop and swoop in for a bargain. 3. Canadian Economic Update

Canadian economic indicators are showing very early signs of economic downward pressure. I am long term bearish right now for all the reasons mentioned above.

..not bearish in the short term (0-3 months) or bearish in the medium term (3-6 months). Who knows what will happen in the short to medium term. In the short to medium term the markets are impacted the most by High Frequency Trading (HFTs) and algorithms of large investment firms. You cant get caught up in any short to medium term movements. They are not a trend. Take a step back and it makes WAY more sense.

4. Inflation erodes your savings Dont leave any of your saving in a savings account earning simple interest. You are losing money when you include inflation and losing even more money when you include taxes. Put any savings or emergency funds in a TFSA and invest in Just dont buy at or

something liquid that pays a decent amount such as xcb.to. near a 52 week high. Buy under the 200 day moving average. 5. Stock Market Valuation

The S&P 500 P/E sits at 20.84 as of November 8, 2011. If you are bullish in this environment you are crazy. High P/E + really bad world economy + loads of debt is a recipe for bad times. Get defensive and get ready. Short to medium term we may get a run-up in markets and if we do I am even going to get more defensive and tighten my Stop Limits even more. Actually I hope we do get an up tick in the short to medium term so that I can convert my cash position into xcb.to.

6. General Lots of bad things in the global economy. In time it will all get better and our

problems will get addressed. This is just a hard patch in the longer term outlook. So dont panic and keep yourself up at night worrying. Time heals all. Just dont go crazy buying equities and other investments right now. Get defensive. My belief is that some VERY good buying opportunities will present themselves in the next two years in the following areas: i. Gold and Silver bullion and stock ii. Financials iii. Commodities such as oil, food and agriculture

LTI BOOK OF THE MONTH Fresh off the press by Harry Dent (September 2011). Take his views from a macro global long term view.

A perfect Christmas read.

The Great Crash Ahead: Down by Harry S. Dent, Jr. $16.00 at Amazon.com:
fkmr0

Strategies for a World Turned Upside

http://www.amazon.com/Great-Crash-Ahead-Strategies-

Turned/dp/1451641540/ref=sr_1_fkmr0_1?s=books&ie=UTF8&qid=1320871934&sr=1-1-

Be Smart!
Alain Roy, P.Eng, MBA Candidate CEO of LTI Long Term Investing almroy@gmail.com

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