This morning, the US released 1Q15 GDP which came in far below the Street expectation of 1.0% with a print of .2%. Sort of on the brutal side. And what is really scary is that although the economy at least grew, albeit small, if it were not for the absolutely massive, world record Private Inventory build in the 1Q15, the US economy would have seen very negative growth. Another Q like that and the press will start using the R-word.
Why did Inventories build so much? Some may say the weather (an easy explanation) but I would say because of the strength of the U$. That strong U$ makes it very expensive for foreigners to buy US goods. So goods were produced but not bought and sat in warehouses as Inventory. This is very problematic. And don't forget the Post we put here http://www.highrockcapital.ca/1/post/2015/03/why-the-fomc-wont-raise-rates-this-year.html about why the FOMC won;t raise rates this year...because Inventory to Sales ratio went ballistic, due to the strong U$. This is all about global competitive currency devaluation.
So what can the Fed do? If they raise rates, the U$ may gather more stream and push the US economy into recession. If they don't raise rates, then they risk a further asset bubble in most asset classes. Quite a conundrum for them.
Another important fact is the following: Central Bankers have two tools to affect monetary policy: 1) raising and lowering the o/n rate and 2) trying to manipulate the currency (frowned in by G10 countries) So with the U$ going from a global trade weighted 80.00 a year ago to 100.00 in Mar/15, one could easily argue that the move of 25% strength in the U$ was a de facto huge amount of tightening in the US economy. They really don't need to raise front end rates right now because the currency has largely tightened for them.
We still don;t think they will raise rates at all but if they do, one thing we know for sure is the yield curve will flatten substantially...which means long bonds (30yr bonds) will rally while 2yr bonds will weaken off.
Rob Carrick wrote a pretty good article on how High Yield bonds are actually a very good diversifier within a Fixed Income portfolio. Actually, we think they are a very good diversfier within an overall portfolio, not just Fixed Income. Why?
Because if you regress monthly returns of various asset classes over a period of say 5yrs, you find that high yield has a pretty low correlation of returns to different asset classes:
This data is a bit stale and covers monthly total returns on all asset classes/Indices from Feb/09 thru Feb/14 but it wouldn't change much if I had time to update it.
Note that C$ HY has a very low correlation to pretty much all of the asset classes listed here and what that does is, as Rob correctly points out, is provides diversification to your portfolio, but the entire portfolio, not just Fixed Income...simply because it has low correlation to Equity Indices too.
Note that C$ HY has effectively negative low correlation to interest rates as represented by the C$ 5yr Govt of Cda bond. Why? Well HY is credit risk, NOT interest rate risk...very important differentiating factor.
And also note that C$ Investment Grade (IG) has a pretty high correlation to interest rates at 64% (highlighted). What does that tell you? When you buy IG bonds, you are really buying about 65% interest rate risk.
Decent article but it could be taken a lot further on the diversification story as the numbers don't
Our first weekly conference call/webinar will be held on Tuesday, April 14th at 4:15pm. If you would like to attend the call please let me know and I will send you an invitation. If you cannot attend but would like to be sent a recorded version please let me know. Email below...
Bianca M Tomenson, CFP
High Rock Capital Management Inc.
1 Toronto St., Suite 210, P.O. Box 4
Toronto ON M5C 2V6
Tel: (416) 795-1732
Fax: (416) 642-5709
Investment Executive picked up on our Press Release from April 7th:
High Rock Press Release - High Rock Capital Announces Scott Tomenson as Managing Partner and the start of Private Client Division
Today, Tuesday April 7, 2015, High Rock announces a significant change to it's ownership structure and to our business model. A new chapter begins.
Read the full Press Release here: http://cnw.ca/hU25a
Scott Tomenson, CIM joins High Rock as a Managing Partner, co-Owner and Portfolio Manager (pending OSC approval). Scott is a long-time friend and business associate of mine and the perfect Partner to move our business forward.
The new Private Client Division was set up in response to some friends and families who asked when we would have a vehicle to manage money for them.
Well, today we have created that vehicle.
Importantly, Scott and I are putting our own family money in the exact same models as our Private Clients so we have our money where our mouths are and have skin in the game.
This will be a fairly unique vehicle in that we will manage client money on a separately managed account (SMA) basis where clients will gain exposure to three models that are highly customizable to pretty much everyone.
We have also gone above and beyond our regulatory requirement and created an Independent Review Committee which will be chaired by Wychrest Compliance Services. Wychrest will report to our Private Clients on a quarterly basis on such important items as conflicts of interest and portfolio composition and suitability. This is solely for the benefit of our Private Clients and groundbreaking as we do not believe any other Portfolio Management company managing SMA's has done so and we are certain no Investment Advisors in the country have or ever will do so.
For more information on our Private Client Division, please contact us at:
Scott Tomenson, CIM
Paul Tepsich, CFA
Bianca Tomenson, CFP