With all that has been in the press lately about aggressive selling tactics by Canadian banks, Scott found this CBC article posted on their website this morning at 5am.(yes, he gets up very early to read). And it is obviously not just bank tellers who are under the gun - it is rampant through the Investment Advisor channel too.
I present with little comment, other than to say, "we have been talking about this for 6 years":
And, even more recently when I wrote the following blog:
Don't be embarrassed - 99% of the people out there have no idea who is actually managing their money (usually a Portfolio Manager, like High Rock) or what they are actually paying for investment management services. If you want to learn more and desire:
Hats off to Stan Buell (Small Investor Protection Association) for bringing some of this to light, Mike Black for having the courage to go public with his experience and ordeal and the CBC too.
There is an alternative...you just need to email or call.
Too often I come across folks who think the only way to make money is in the stock market. Well the fact of the matter is, that is just wrong.
Here is an example of the value-added by High Rock and our constant search for stronger risk-adjusted returns. And the reason why I am writing this today is because we just received notification yesterday that one of our positions (a high yield energy bond) was being called by the issuer. Time to take profits!
Sure we own stocks and even some energy stocks (in fact, energy stocks are now cheap and high yield energy bonds are now expensive) but the bulk of our energy exposure was in high yield energy bonds that we acquired over a year ago. What is so fortuitous lately, is that, we have had a couple of our biggest high yield energy bonds called from us at $100 (par) including Athabasca (a Top Pick I gave on BNN last April) and now Perpetual. I am thrilled with this as it enables us to re-allocate our energy exposure to some select energy stocks that have been hit very hard lately.
Here is what happened over the past year and with yesterday's call on the bonds:
Issuer - Perpetual Energy (one I have been involved in over the years)
Bond - Perpetual Energy 8.75% 2018
Price Purchased - 1) For clients who were with us before March 22, 2016, they got in at $56.50 and 2) For clients who joined before June 28, 2016, they get in at $71.50.
Call Price - $100.00
Call Date - April 17, 2017
Total Return @ $56.50 - +93.30% (includes the ~13 months of interest income)
Total Return @ $71.50 - +48.01% (includes the ~10 months of interest income)
Still think the only way to make money is in stocks? Not bad for a bond, eh?
Well, Perpetual Energy has public stock outstanding too, so let's look at how it performed over the same two time periods and compare to the bond:
PMT Total Return (no dividends on this stock) from Mar 22, 2016 to Mar 22, 2017 - +14% (from $1.40 to $1.59 today)
And from June 28, 2016 to Mar 22, 2017 - -28% (yes, that is right "negative return" from $2.20 to $1.59 today)
To conclude and compare:
Time Period 1 - Bond +93.3% / Stock +14%
Time Period 2 - Bond +48% / Stock -28%
There was a very good reason why we bought these bonds and not the stock. If you want the in-depth reasoning, feel free to give me a call. Always happy to discuss our rationale and reasoning.
Risk-adjusted returns - our major focus on every trade/position we take.
Past performance is no guarantee of future performance
I last wrote on this topic of Crowded Trades (when, mostly hedge funds, are all positioned the same way) on Feb 8th (highrockcapital.ca/pauls-blog/revisiting-government-bonds-and-crowded-trades).
I thought today would be a good day to revisit and to see the effect of a crowded trade. The crowded trade to look at, again, is the US 10yr Treasury bond (futures) short positions for non-commercial holders. Recall that non-commercial means, non-businesses that would naturally need to hedge against higher interest rates, so, therefore, non-commercial are largely seen as speculators/hedge funds. And being short means that the short seller short sells them at a high price (low yield for bonds) and hopes to cover them at a lower price (higher yield for bonds). Here is the chart (as of Feb 28th) on the short interest in US 10yr bond futures:
This is the most short the market has ever been on 10yr US Treasury bonds. Ever!
Onto Employment. By all/most measures, as Scott pointed out this morning after the Employment data, (highrockcapital.ca/scotts-blog/employment-unemployment-data-will-not-stop-us-federal-reserve-from-raising-rates) the Employment situation in the USA (and Canada too) appears to be improving. Most notably I would add that up until this February report, the quality of the employment gains in the US have been lower quality jobs like in the service industry and retail. Today, however, we found that the bulk of the hirings were in manufacturing (higher paying jobs). The reason why this is all so important for the bond market is the specter of inflation. Should the employment picture look like there are more jobs, better paying jobs, and higher wages, the Federal Reserve will get nervous about inflation and move to hike rates faster.
So with today's strong employment report, one would have thought that bonds would have been hit pretty hard because after the report, some economists increased their calls for further rate hikes this year. Not good for the bond market, right? Maybe, but what happened? Have a look at the US 10yr Treasury bond in yield over yesterday and today:
Hard to see in the graph above but the yield closed at roughly 2.61% yesterday and today it is at 2.59% (now 2.58% at time of writing)...after such a strong employment report and increased odds of further rate hikes?? How can this be...rates should have continued on their recent one week path to higher yield levels. But they didn't. Why not?
Answer? - Refer back to the first chart. Everyone is short, and record short at that. They all want to take profits at higher yields. And I could show another chart that shows that "longs" or those holding US Treasury bonds are at an all-time low (these longs could be seen as mutual fund portfolios etc)
One thing I learned back in 1990 from a guy I worked with at Merrill Lynch (and eventually took over his trading job there) was - "Sometimes you don't know what the event will be to cause a market to move but if everyone is lined up on one side of the boat, the path of least resistance becomes the opposite of what everyone is expecting" - J Scott Tomenson. (27 years on, and I will never forget that quote (paraphrased, to be honest).
So what do we do at High Rock with this knowledge? Our government bond exposure was largely trimmed last September. Government bonds performed very well for us for about 1.5yrs but things changed, and so did our position. We added a small portion back two weeks ago when correlations changed in our favour. At this stage, we are debating buying some more government bonds back but we are trying to be selective with our entry points because going against the grain means we need to decipher if this is just a "short covering bid" which will be only temporary, or if it a longer-term change, caused by some event we just cannot predict.
Sometimes, you just don't know what the event will be.
Yesterday I wrote about how the ADP Payrolls report for February may be a leading indicator of the US Non-Farm Payroll report that is due tomorrow at 8:30am EDT. You can review the blog here: highrockcapital.ca/pauls-blog/adp-payroll-data-a-leading-indicator
At the end of the blog, I said that if the non-farm payroll is as stout (or even half as stout) as the ADP, that I could only come up with one possible reason why the Fed wouldn't raise the Fed Funds target by .25% next Wed. I lied. I came up with two possible reasons, and I don't think either of them are even that strong in the Fed's eyes, but interesting observations nonetheless.
1) The first possible reason the Fed may not raise rates next week is that the Atlanta Fed's GDPNow model. I wrote on this model a week ago, here: highrockcapital.ca/pauls-blog/us-gdpnow. Interesting how the Fed is going to raise rates when one of their own regional board's model claims that 1Q GDP in the USA has been dropping each week from a high estimate in early February of 3.4% to a new low estimate as of March 8th at 1.2%. Maybe the picture will help, but it seems to me the Fed may be on the verge of a policy error (hiking rates when the economy is weakening).
2) And the second possible reason, one which no one seems to be talking about at all right now, is the US Debt Ceiling expires March 15th (the very same day as the Fed announcement). Remember how the Republicans in Congress and Obama squared up and Congress threatened to shut down the government back in 2011? At the 11th hour, they kicked the can down the road, and have done the same upon hitting each new deadline. Effectively, they suspend the limits and spend, spend, spend...until the deadline approaches. They may very well suspend the $20.1 trillion limit, yet again, but what if Trump, who has been arguing that they are $20 trillion in debt, says something about it (not likely as he wants to put forth a ton of fiscal stimulus) or Tea Party Republicans (who largely hate Trump) refuse to budge and force Trump's hand? This could actually be interesting. Will the Fed care? Probably not a ton, but we are always on the look-out for what could side-swipe the conventional thought. Regardless, here is the chart and history:
So for the news junkies out there (and you shouldn't be economic data news junkies...that is part of what you pay High Rock for), both Canada and the USA release their employment reports for the month of February. And then next Wed Mar 15th, the Fed will release what they are doing on Fed Funds at 2pm...and the US Debt Ceiling limit expires, presumably at midnight the very same day...
In anticipation of the much-watched monthly (February) US Non-Farm Payroll number that comes out this Fri Mar 10th, I though I would highlight that the monthly US ADP Report came out this morning and was rather stout.
The ADP report is comprised of the payroll company's monthly data from about 500,00 US industrial business clients across 24mm employees...so broad enough to matter.
Today, the month-over-month change was +298,000. A big number, to be sure. For context, the economists who model these types of data series were looking for +187,000 new jobs, so the economy appeared to add about an extra 100,000 from expectations. And last month's report was moved up from +246,000 to +261,000, to boot.
With that in mind, we might have some insight into what this Friday's non-farm payroll number will look like in the US. The economist crowd is estimating that it will come in at +200,000 vs January's +227,000.
Time will tell, but we could also look a the correlation between ADP and the non-farm payroll data. As you can see from the chart below, the correlation looks fairly "tight" or "high". That is to say, it is not often that the two payroll reports vary more than by 100,000 jobs. Could the non-farm payroll on Friday come in closer to +300,000? That would really be something.
The reason why this is so important is because a strong number will be another good reason for the Fed (US Federal Reserve Board) to raise rates when they conclude two days of meeting on Mar 15th. At this stage, only 3 of about 26 Wall St Economists do not expect the Fed to raise rates next week..the other 23 think they raise by .25%.
Fed officials have been all over the press the past two weeks making comments about raising rates next week, so it is all but a certainty they will go up.
Now for those worried about rising rates, I would add that the bulk of the damage has already been done in the bond market. Our job now is to 1) ascertain if they will move to a more aggressive path on rate hikes and 2) what might leave them more cautious and on a slower path.
At this stage, I only have one possible reason why they may pass on raising rates next week and may put them on a slower path than the market thinks. Tune in tomorrow.
Besides all we do at High Rock to meet, and go above and beyond, the regulatory requirements for our Fiduciary Duty obligations and Trust, things like:
we also have a large layer of due diligence placed upon us that not many other PM companies do, and I can guarantee, no Advisors do.
By virtue of the fact that we manage two public funds for a division at BNS, the bank does semi-annual due diligence reviews on High Rock to ensure we are compliant on all matters.
Annually, the bank comes on-site to our offices with a team of about 5 bank employees from various divisions, including compliance. They spend about two hours here grilling us on everything from our business model to our research process to our compliance procedures.
And then for the semi-annual review, they all hop on a conference call with me to go throw much the same information to check and see if anything has changed. Why a phone call and not on-site? I suppose they 1) don't want to make the two block walk in the middle of winter, 2) they don't want to get all dressed up to see me or 3) they have been doing these due diligence calls/meetings with us for six years!
Anyway, last week, we held our semi-annual due diligence meeting with BNS. The call lasted about one-and-a-half hours. I can report - All Good.
And I would also add further layers of due diligence having been performed on High Rock. We are engaged with a small boutique dealer and a fellow portfolio management company on providing them some investment management services. Both of these companies have been in here and performed due diligence on High Rock. Again, I can report - We are approved to be sub-advisors (manage money for them on certain mandates) by both companies.
We strongly encourage our existing and new private clients to perform at least some form of due diligence on High Rock. Think of some tough questions to ask us. Or, if you want, you can take BNS's (and at least two other company's) word for it. .
Scott gave us a run-down on the slew of US economic indicators that came out this morning (can be found here: highrockcapital.ca/scotts-blog/plenty-of-stuff-for-financial-markets-to-digest-this-morning). I will show what the effect may be on US economic growth.
There is a "model" for US GDP (Gross Domestic Product) that the Federal Reserve Bank of Atlanta (one of several regional offices of the US Central Bank) created a couple of years ago. This model is called GDPNow. It takes into account a pile of US economic indicators, weights them all, and then tries to spit out a guesstimate on what the next quarter's GDP will be.
As you will see, this Index is pretty volatile and reacts to the economic numbers as they come out and puts revised GDP forecasts out about 6-7 times per month. The economic indicators that go into this model are both "soft" data (being "surveys") and "hard" data (being real empirical data).
Today, the Atlanta Fed incorporated this morning's data into their model and moved their 1st Quarter 2017 (1Q17) GDP forecast from 2.5% on Feb 27th to 1.8%. Big move, but keep in mind it is volatile and subject to a strong economic indicator coming out next week.
Their reasoning for today's move was based on Real Personal Consumption Expenditures that fell from 2.8% to 2.1%, which was the lowest it has been since September 2009 and September 2001, before that. Those two dates alone should make us all pause, as neither were pleasant dates, for various and obvious reasons
Here is the GDPNow graph for the 1Q17 (remember, it is just for the 1Q17 and changes according to the input data):
As you can see, the model predicted that, back only one month ago, that the US GDP would be +3.4% (the peak in green). It then spent one month making it's way back closer to the 2.5% range. Today it dropped precipitously to 1.8%
Ironic, on a day when the Dow is +1.5%.