We are coming to the end of January (already?), so lets take a look at our themes for 2016 and see what has happened or changed so far:
1) Volatility and Uncertainty (no change)
4) Diverging Monetary Policies (even more uncertainty):
8) We Are In A Low Return Environment
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When a new client transfers their exisitng portfolio into our care, it never ceases to amaze me what I will find.
We might live in Canada, but Canada represents only about 3-4% of world capital markets. Having a 5-10% weighting in Canadian equities might be acceptable. But a 50% plus weighting? That is not a properly diversified portfolio and "yikes!" to have to endure a year like 2015 where Canadian equity assets were one of the worst performers.
I will not even begin to list the junior oil and gas and mining stuff that the former advisor stuffed in there likely to capture some "new issue" commissions.
Only 15% fixed income assets and less than 5% in government bonds? That is not balance my friends. In times of high levels of volatility, this is a portfolio that is going on the wild ride.
DSC (deferred sales charge) mutual funds. Advisor gets 5% up front (no cost to the client, yet) and an MER (management expense ratio) of 2.5% (advisor gets a trailer of .5%). The conflict of interest here is extraordinary! I cannot believe that these still exist. Oh and if you want to get out of them before the 7 year penalty period...this is where it "costs" the client.
This was not a portfolio put together by someone who truly cared about the client.
Broad diversification, balance among asset classes in a fee based account with a full understanding of any third party management costs and respect for your long-term goals and objectives is the sign of an advisor who cares.
Ask yourself, does your advisor really care?
What has she / he done for you lately?
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Last week High Rock Capital Management sent its quarterly reports out to clients.
And, as we always ask for, received feedback:
"Good work and good calls. Only place I did not get slaughtered..."
Balance, diversity, an underweighting of equities, fewer preferred shares and an overweighting of cash (as we have preached since last May) has been beneficial for portfolios.
Today is webinar Tuesday and as we do each week, we will talk about all the pertinent financial news, our views and address how we see the global economy impacting financial markets and our model portfolios for our clients.
Feel free to tune in to the recorded version at
which should be posted at or about 5pm EDT.
As the major focus has been on oil prices and specifically the impact of the new supply as Iran comes on stream, short-term traders (computer generated and not) have pushed volatility levels on financial markets higher playing on the fear of investors. Interestingly, not enough panic (or capitulation) yet to drive volatility to last August's levels.
After the Bank Of Canada's "wait and see" approach was revealed on Wednesday, yesterday, The European Central Bank suggested more Quantitative Easing for March and traders decided to use that as the catalyst to buy in short positions.
Oil is higher about 12.5% off of its lows, the Canadian dollar is back above $0.70 US and as it stands at the moment, the S&P 500 is approximately 4.5% off of its lows.
The Bank of Canada remains rather optimistic about the second half of 2016 (they were rather optimistic about the second half of 2015 at this time last year) but their track record has not been stellar. They keep pointing south and hoping that the optimism of the US Federal Reserve will play itself out.
While all this is going on, behind the scenes, the US jobless claims numbers are creeping higher:
Historically, declining jobless claims have been correlated with rising stock prices, but now that jobless claims are rising?
This is also data that may make the Fed less optimistic about the US economy in 2016.
Clearly, lower equity prices have brought them closer to being of better value based on projected earnings, the 10 year price to earnings ratio average for the S&P 500 is 14.2 times. When the market settles this week, the 12 month forward projected price to earnings ratio is going to be quite close to that number.
So is it time to buy yet (to get some of that better value)?
However with the global economic situation showing no signs of pulling out of the current malaise (IMF earlier this week lowered global growth targets and so also did the Bank of Canada) and the US economy seemingly unable to provide the impetus and under-performing on many levels, there could be further reductions to forecasted earnings, so it is likely prudent to remain cautious.
And so we shall.
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The global economy will expand 3.4% this year, down from a projected 3.6% in October. Growth for 2017 has been revised to 3.6% from 3.8%.
According to the report: There are important risks to the outlook, which are particularly prominent for emerging market and developing economies and could stall global recovery.
These risks relate mostly to the ongoing adjustments of the global economy, namely China’s rebalancing, lower commodity prices, and the prospects for the progressive increase in interest rates in the United States. They include the following possibilities:
• A sharper-than-expected slowdown in China, which could bring more international spillovers through trade, commodity prices, and waning confidence.
• A further appreciation of the dollar and tighter global financing conditions which could raise vulnerabilities in emerging markets, possibly creating adverse effects on corporate balance sheets and raising funding challenges for those with high dollar exposures.
• A sudden bout of global risk aversion, regardless of the trigger, could lead to sharp further depreciations and possible financial strains in vulnerable emerging market economies.
• An escalation of ongoing geopolitical tensions in a number of regions, which could affect confidence and disrupt global trade, financial flows, and tourism. New economic or political shocks in countries currently in economic distress which could also derail the projected pickup in activity.
Commodity markets pose two-sided risks. On the downside, further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.
On the upside, the recent decline in oil prices may provide a stronger boost to demand in oil importers, including through consumers’ possible perception that prices will remain lower for longer.
“All in all, there is a lot of uncertainty out there, and I think that contributes to the volatility,” said IMF chief economist Obstfeld. “We may be in for a bumpy ride this year, especially in the emerging and developing world,” he said.
More on this and plenty of other things to discuss today on our weekly webinar.
We will post the recorded version at or about 5pm (EDT) on our website:
So feel free to tune in!!
An excellent question, not an easy answer.
I /we have been trying to tell anyone who would listen for some time now (especially last April, May, June, July... December) that low interest rates had given investors a sense of complacency. Many said: even if the Fed raises rates, what is a quarter of one percent?
What we always stressed were the underlying fundamentals: prices of shares were not representative of earnings (or company value) and that as long as companies preferred to buy back there own shares, they were not investing in long-term earnings growth, they were pushing the price of their shares higher to satisfy investors / shareholders.
Investors are very happy when share prices go up, but when they start to go down, not so much and they lose patience quickly.
So, to get to the question at hand:
The simple answer is: either when earnings start to rise or when prices come down to a more reasonable level (or a combination of both).
Lately analysts have been continuing to lower their earnings estimates, but if all goes as expected we will likely see a 3rd quarter of declining earnings growth because revenue growth has been on the decline for all of 2015.
In picture format, when the green dotted line (prices) reaches the blue solid line (earnings), that would be neutral. As the green dotted line as been above the blue line since 2013, equity prices have remained expensive over that period. At the time, many told us that it was justified and that earnings would catch up as the economy picked up and resisted the idea of caution. Some of those were at the same time, rather vocal about the overvalued housing market. In my former job I was out-voted on my caution. So I got a new job (where I own half the company) where my caution was appreciated and where our (my business partner, Paul and my) money is invested in the same models as our clients.
The ratio of share prices to expected earnings (over the next 12 months) reached a peak of a little over 17 times in May of 2015. Very expensive, but has fallen recently as equity prices have fallen to closer to 15. At the moment, the 10 year average is near 14. So based on that metric, we have still some room to the downside. Back in 2011, the green dotted line was actually below the blue solid line and equity prices were cheap.
So, it is possible to see prices fall to levels where equities will be cheap if the economy does not grow enough to allow revenues and earnings to grow and investors lose confidence.
Certainly corporations are going to have to do a better job of thinking and acting to facilitate long-term growth to re-establish investor confidence. Share buy-backs using low cost funding (borrowing at low interest rates) is now going to add risk to those who lent them the money for those share buy-backs (and that could possibly exacerbate the situation).
We (investors / traders) have become an impatient bunch, always looking to make money fast and looking for instant gratification. When the short-term runs out, we become frightened at how volatile things become.
So, the answer to the question, ultimately, is: when we finally grasp the understanding that it takes time to build a solid economy and regain true confidence, that is when stock prices will achieve levels of reasonable relative value and volatility will subside.
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More selling as lots of "talking heads" hit the airwaves with negative prognostications. Of course this means that they have already established their short positions and now are happy to talk to the emotions of regular investors.
On the S&P 500 Daily chart, the short-term technical picture is pretty clear: the range from last August's lows is being tested. If it holds there may be some short-term buying support that enters the market, if it does not, then we will be into the next phase of the down-trend which will likely bring in further selling.
This could take us back to test the 1750-1800 level which marks the up-trend established in 2009.
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Busy day of webinar prep today, feel free to tune in to the recorded version after 5pm:
or for your reading pleasure check out the High Rock "Market Views for 2016" on our website at
I received a referral last week for an investor who wanted a second opinion on her current portfolio. She stressed that she was quite comfortable with her current advisor but wanted to double check to make sure that her asset allocation was appropriate and that she was not paying too much in fees.
Her current advisor likes to use managed mutual funds.
Of course I said that I would be happy to help (because I really enjoy this part of my work: helping folks figure out how to maximize their returns, limit their risk and keep their costs low). However, I said that in order to do a proper assessment of her current situation, it would be important for me to have a greater understanding of what she was trying to accomplish with her investments and how that merged with her current financial situation.
So we have sent her a Wealth Forecast questionnaire which helps us to get a greater understanding of her current financial status. With that information and an understanding of what her goals and objectives are (as well as her tolerance for risk), we will create a forecast that will help us determine what her appropriate investment strategy (asset allocation) will be. When we review her current portfolio, we will have the appropriate information to determine if our proposed asset allocation aligns with what she currently has.
The Wealth Forecast (prepared by our Certified Financial Planner Professional) also will help her get a sense of how time and compounding will grow her wealth and what she can expect her retirement to look like and help determine if their might be a need for further estate planning. We look at the forecast as a "working model" that allows us to make adjustments as changes occur in a person (or family's) circumstances and allows us to determine if changes need to be made in their portfolio strategy.
In other words, to give her a proper second opinion, we need to have a good deal more information. This can require a little more effort on her part, but I said that there is no obligation to continue to work with us unless over the course of the assessment, we prove to be worthy of her business (our fees equal the satisfaction of having confidence in our service offering which might prove to be a better deal for her).
I thought it would be interesting to follow the process and progress of our analysis on this blog and report back on the results. (Of course, we will, as always, give our prospective client complete confidentiality).
So stay tuned!
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The headline employment numbers looked pretty good for both the US and Canadian economies for December:
US non-farm payrolls jumped 292,000, well above the expected 200,000. The gain was led by professional and business services (+73,000) which is considered a leading component for future hiring. As well, there were upward revisions of 50,000 to previous months. Unemployment remained at 5.0% as the labour force participation rate moved off of its lows to 62.6% (from 62.5%).
Uncertainty comes with the lack of inflation seen in wage growth which was unchanged in December (expected to be higher by .2%)
So as we try to determine how this will influence future US Federal Reserve interest rate policy (which has a dual mandate to facilitate maximum employment and price stability), it raises the question as to when will inflation (which remains well below the Fed's and other central bank targets) begin to turn higher?
The US Federal Reserve governors have suggested that inflation will eventually return to target levels (although there is little sign of this at the moment) and they also see the likelihood of 4 interest rate increases through 2016.
Other central banks want to keep their monetary policies stimulative, the US Fed wants to reduce stimulus.
We financial market participants have coined the term for this as "Diverging Monetary Policies" (see my blog from Wednesday of this week for the Themes for 2016 http://www.highrockcapital.ca/scotts-blog.html).
As the US Fed raises interest rates, they will drain liquidity from the monetary system. This will only add to the potential for greater volatility in asset prices (and 2016 has only just begun!).
So a stronger economy is not necessarily an antidote for the equity markets. You don't buy an economy, you buy assets.
If asset prices are under duress (volatility) then you are less likely to be comfortable buying those assets. Investors may postpone asset purchases in this case and buying support may not contain market prices until they get to more attractive and more comfortable levels. If owners of assets perceive that prices in the future are likely to go lower, then they may be more inclined to sell in the near term.
Simple economics: more sellers than buyers means prices are heading lower.
Volatility creates uncertainty and uncertainty creates volatility.
Volatility is on the rise and until there is more certainty and comfort, volatility will continue.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist