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By Gregory Thomas
Special to The Vancouver Sun
Saturday, September 23, 2006
Stock markets ended the week in negative territory as fears of a slowing economy were compounded by spectacular losses at a U.S. hedge fund incurred by a Calgary-based natural-gas trader.
Adrian Mastracci, Portfolio Manager at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Leverage works quite nicely on the upside. Everybody loves the upside. But boy, it’s painful on the downside.”
Amaranth Advisors founder Nicholas Maounis told investors the firm has "every intention" of staying in business after losing $6 billion US on the trades. But he also told a conference call that the firm, with $3.5 billion US in remaining assets, has not yet decided how to handle investor requests for their money. The trades were highly levered, involving a considerable amount of debt.
"Leverage works quite nicely on the upside. Everybody loves the upside. But boy, it's painful on the downside," observed Adrian Mastracci, president of Vancouver-based KCM Wealth Management, fee-only portfolio managers. "In view of what has happened, that lesson is one that we as investors can take to heart. Leverage can bite quickly, hard, and fast, and with very little notice."
"The lesson for everybody is to make sure that your borrowing level is within your comfort zone," said Mastracci. "The comfort zone is a level where you can take care of your debt, without relying in any way on the investment. The other lesson it brings back to mind is the one about diversification: it's your best medicine. It will save the day when the unthinkable happens."
The S&P/TSX Composite recorded its third-straight weekly loss, dropping for a fourth day, as it gave up 46.13 points, or 0.4 per cent, to 11.581.61, and 0.6 per cent for the week. The energy group gave up 1.3 per cent, taking losses this month to 12 per cent, as November crude dropped to $60.55 US a barrel. The TSX Venture composite added 6.65, or 0.27 per cent to 2,482.10, ending the week lower by three per cent.
In New York, December gold jumped $7.10 an ounce, or 1.2 per cent, to $595.40 US, helping the gold-heavy Venture board. Gold gained $12.40 this week, its best week since July, as a deadline loomed for governments to sell gold from their reserves, and jewelry buyers became active in the market.
In New York, the Dow Jones Industrial Average lost 25.13 points, or 0.22 per cent, to 11,508.10; the S&P 500 fell 3.25 or 0.25 per cent to 1,314.78; and the Nasdaq dropped 18.82, or 0.84 per cent, to 2,218.93. The Dow ended the week 0.5-per-cent lower, the S&P 500 dropped 0.4 per cent, and Nasdaq gave up 0.7 per cent.
Bond yields in the U.S. moved lower as markets priced in the possibility of a cut in short-term interest rates for the first time in more than two years. The Canadian dollar gained 0.11 cents to 89.48 cents US.
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