I was meant to write today on human psychology and the comfort we all feel when markets, and portfolio values, are going up, however, I got tied up with the most complicated excel macro I have ever used. A friend of mine in Miami, who I had coffee with in Toronto late last week, was gracious enough to share a possible trade idea, along with his research. I spent the entire day on it and probably have 13 more days to go but something hit me up that I forgot to mention last week on BNN (and just now on our weekly webinar...my mind was cluttered with this macro).
I mentioned on BNN last week that we had taken some profits in our longer-dated (10yr and 30yr) gov't of Canada bonds. We have had a great call in them the past year and what really drove my decision was that bonds and stocks, which usually move in the inverse direction (ie if stocks rise, bonds, which are seen as a safer instrument, fall in price) have been moving in the same direction for the past month or so. And it is getting rather extreme, in my opinion. See the chart below which shows the S+P in White and the US 10yr yield in Green. The bottom half of the graph is the correlation between the two (inverse due to the fact I am using yield on the 10yr). One would need to go back to 1999 to find a tighter correlation between the S+P and the US 10yr yield.
Part of the reason for owning long-dated government bonds is to provide a "flight to safety" if stocks and other risk assets melt. Not sure we own 30yr gov't of Canada bonds at 1.63% to make much in the way of yield...we own them in case risk assets (stocks) get hammered hard or, more importantly, deflation raises its ugly head. When I see them moving in the same direction, it makes me somewhat concerned.
So I can tell you that we took some profits when this correlation began to tighten up about a month ago, we bought some back at lower prices and now we sit. We are still holding less weight than before this correlation started tightening up a month ago.
I suppose part of the reason why this is happening is quite simply that, as I said on BNN, easy monetary (money) policy is driving all asset prices higher...stocks, bonds, even houses in Vancouver. And as the guest who was on BNN right before me last week, my former colleague and friend, David Rosenberg said, (paraphrased as I did have to go in for make-up when Rosie was talking) "it makes more sense to be investing in more idiosyncratic risk (commonly referred to as alpha) than the general market (commonly referred to as beta)".
So that is where High Rock is taking well-researched risk in our client portfolios...in our Tactical Model which is a model of certain stocks, bonds, convertible bonds and preferred shares. Coincidentally, that is why I spend large parts of my day doing research to support these investments. It is also no coincidence that the Tactical Model is where a large part of our performance year-to-date has been generated. (As I say to my three sons, "hard work pays off"). We will continue with this overall portfolio strategy until the correlation breaks.
If you want to know more about our Tactical Model...call me. It is not for public consumption.