The view from above

Peter Gibson combines a deep love of history with an (almost) incomprehensible portfolio program that gauges where the market is going next

By Dawn Calleja
Globe Investor Magazine,
November 18, 2008
Photograph by Christopher Wahl

Trying to navigate Desjardins Securities' automated portfolio system is a bit like being strapped into the cockpit of a 747 and being told to get 'er off the ground. It's a vast database that allows you to screen 8,400 companies in 54 countries using 110 financial metrics. For its creator, Desjardins vice-chairman Peter Gibson-a strategist, quantitative analyst and licensed airline pilot-it's second nature. In just a few minutes, he can throw together a portfolio of stocks it would traditionally take days to number-crunch.

The "fun" in fundamental research

Gibson has been working with fellow quantative anaylst Ed Sollbach since 1997, while at Scotia Capital (they moved to Desjardins in 2004). The team consists of two others: Jeff Evans, a.k.a. "the boy genius," who came on board in 2000 as a 19-year-old math student at the University of Waterloo; and Liz Leung, a computer whiz who built Gibson's home PC from scratch. Each year, Desjardins publishes roughly 1,000 pages of primary research. "We try to be scientists first and foremost," says the 51-year-old Gibson. "You can never do too much research."

Still, he and his team manage to have some fun with their reports. One leads off with an essay on The Princess Bride as an allegory for the battle between goldbacked currency and fiat money (its title, "Au-Inconceivable!" is a takeoff on a classic line from the 1987 film). Report covers are filled with secret codes, double entendres and inside jokes. One makes an obscure reference to the Matthew Broderick movie War Games. The title of another, "Are We Not Drawn Onward to New Era," about GDP and P/E levels, is a palindrome. "Don't do what you do without having fun doing it," says Gibson. "That's always a real motivator."

History repeats itself

Devouring economic history has led to some of Gibson's biggest "breakthroughs" (such as his team's 2001 call that the greenback would be massively devalued over the following few years, at the same time as interest rates fell-a prediction that bucks economic theory)."It's amazing how many parallels we've found historically that have helped us to gain insight into the present," he says. "It's like having 200 years of experience." His latest prediction: that the Chinese banking system will collapse in 2011-12. Think the current financial crisis has been scary for Wall Street? Just wait until China goes haywire.

To spot the looming crisis, Gibson says you just need to look at the historical relationship between the established superpower and the up-and-coming one. In the 1930s, for instance, Britain was the economy to beat; the pound sterling was the world's reserve currency. The U.S., meanwhile, was an emerging economy, shipping cheap goods overseas. As long as the U.S. dollar was low, countries like Britain were willing to binge on U.S. goods. But, in 1931, the Brits effectively devalued the pound by 60%. The greenback soared. U.S. exports bottomed out. And the U.S. banking system-after a decade of highly speculative growth throughout the Roaring Twenties-went into crisis. Within a year, 10,000 U.S. banks collapsed.

Why Japan crashed

The pattern reappeared in 1985. This time, the United States was the superpower and Japan the emerging one, growing by leaps and bounds on the back of its exports. That was, until the G7 devalued the U.S. dollar by 51%. The yen soared, and Japan's exports tanked. To keep the yen in check, the Bank of Japan cut interest rates to near 0%, and began buying up U.S. debt (today, Japan holds 28% of the U.S. treasury market). Stock markets and real estate prices went wild. At one point, it was said that the land on which the Imperial Palace sat was worth more than the entire state of California. Then it all came falling down. The markets crashed. So did real estate. Major Japanese banks and brokerages went bankrupt. "When the Americans came out of the Depression, they were the next superpower," says Gibson. "You may not say the same thing about Japan today, but they have $25 trillion of savings. They're bankrolling the global economy."

"I believe the Americans are trying to do the same thing to the Chinese," he says. In 2005, the U.S. began to devalue its currency against the yuan, hurting Chinese exports. According to Gibson's theory, that will lead to deep interest rate cuts (China cut rates in mid-September for the first time in six years). "The Chinese may end up being pushed into the same speculative mania," he says, "and the land on which the Forbidden City sits will eventually become worth more than all of the state of California. And, ultimately, they'll have a banking crisis."

The Gibson Top Five

In today's out-of-control market, most investors are more concerned with finding solid stocks than a possible Chinese meltdown. Though Gibson has scores of financial metrics at his fingertips, he says retail investors can put together a solid portfolio based on just five. The first is price momentum-whether a stock's price is trending up or down. "It's the single greatest source of returns," he says-if you understand what's underpinning the trend. Next is interest rates, "the most important fundamental factor driving stock returns." Then come rate of profit growth and return on equity (a measure of how well a company uses investment dollars to earn profits). Last- and least, according to Gibson-are value ratios like price-to-earnings and priceto- book. "The truth is that if I only looked at value, I would slightly underperform the TSX on average."

Avoiding the killers

Wait a sec-what about wildly successful value investors like Buffett, who focus on low-P/E stocks? Gibson contends that they're really looking for "low P/E with rising E." And how do you spot portfolio sinkers-torpedo stocks-that will drop 50% to 70%? Look for companies with ahigh P/E and declining return on equity.

TO INFINITY.AND BEYOND!

It's no wonder Peter Gibson approaches the financial markets more like a scientist than a bean-counter. He's had an obsession with the cosmos since he was a kid in Port Credit, Ontario. At 6, he scraped together 50 cents to buy a book called Stars. Ever since, he's regularly kicked himself for choosing business over his first love. In 1980, he even applied to NASA's astronaut selection program. He still has the rejection notice. "I made the decision then and there that, one day, I would buy a seat into space," says Gibson. When Richard Branson unveiled Virgin Galactic-the first "spaceline" to sell seats on a private, suborbital ship-in 2007, he got his chance. Gibson immediately slapped down $175,000 to book one of the first rides on SpaceShipTwo (based on Burt Rutan's X Prize-winning SpaceShipOne) and cement his place as one of the first 600 people to travel to the stars. Virgin Galactic is set to blast off in 2009-reaching three times the speed of sound-from the company's spaceport in the Mojave Desert. To prepare for the flight, Gibson, along with a Discovery Channel film crew that's documenting his journey, travelled to Philadelphia's National AeroSpace Training and Research Center for centrifuge training, and prepped for zero Gs on a Boeing 727. He still has to complete a few days of medical tests and training before his launch. But he's ready to go. "This is my lifelong dream," says Gibson. "The view of the Earth from space is what I'm most looking forward to."