Obviously things economic are not looking so good for the Chinese economy, if the central bank is further encouraging lending to ease the liquidity problem and put further downward pressure on their currency.
Meanwhile, the most recent inflation data in the Euro Area continues to defy the efforts of the European Central Bank. They announce their interest rate decision on March 10 and financial markets expect further easing of monetary policy.
On the other side of the world (and the equation), the world's largest economy has picked up a little and the core inflation data has jumped. The US Federal Reserve's key inflation indicator is the Personal Consumption Expenditure (PCE) core price index:
This is what the Fed has been suggesting in their expectations and will certainly be part of the conversation when they meet on March 15-16.
Adding to the positive side of the equation, the latest data suggests that the consumer (approx. 70% of the US economy) is spending again: January spending was up 0.5%, well above economist expectations (purchases of durable goods, especially automobiles was the key driver).
For the moment, the US economy is growing:
The latest expectations put Q1 growth at a little over 2%.
So, is the US economy going to be able to survive the global economy's continued drag?
Few currently expect the Fed to raise rates at their March meeting. Other central banks are easing or are expected to ease monetary policy. What happens next for financial markets?
Investors have been moving away from risk assets into safer assets.
More uncertainty = more potential for volatility.
Tuesday is webinar day at High Rock and we shall be discussing all of this and more with our clients.
We will post the recorded version of our call at
Mohamed El-Erian is a Bloomberg View Columnist. He is also the chief economic advisor at Allianz SE. He is chairman of President Barack Obama's Global Development Council, a Financial times contributing editor, and the former chief executive officer and co-chief investment officer of Pimco. He holds a masters degree and doctorate in economics from Oxford University.
He is and has been giving our (High Rock) market sentiment a great deal of credibility, because he is echoing a great deal of what I write about and discuss in regards to the global economy and financial markets.
I would highly recommend a read of his view from Feb 22:
In a nutshell:
1) Corporate earnings will continue to be challenged by spreading global economic weakness.
2) The ability of central banks to repress volatility is increasingly in doubt.
Market participants have used cheap money to finance asset purchases, but those assets are no longer providing positive returns because their prices have become inflated. We have been on this story since last May, telling anyone who would listen that this was not going to end well. We continue to invest from a defensive posture (believing that prudent investing for ourselves and our clients demands an over-weight position of cash and an under-weight position of equities).
Dr. El-Erian also suggests, as we have also been saying on our weekly webinars, that:
3) Recent market stability has been traders covering their short positions but has not triggered long-term capital to return to the market:
"It would appear from data about the flow of funds that markets still need to re-price considerably lower to find the anchoring inflow of significant patient capital."
High Rock has been and will continue to have "patient capital".
And further, and in line with the style in which we run our business and our client portfolios:
"This does not mean that investors should just reconcile themselves to passively riding roller-coaster markets that will likely create anxiety and may even force some to liquidate at the wrong time. Instead, investors would be well advised to consider adding a tactical component to their longer-term strategic and structural positioning."
At High Rock we have 3 models (in our private client division): Fixed Income, Global Equity and Tactical Equity.
If your advisor is telling you to "sit tight", it is not good advice, and it may in fact be because they don't have the discretionary authority to adjust your portfolio and it would be too daunting for them to do so for every client individually.
High Rock Capital Management has discretionary authority to make simultaneous adjustments to client portfolios so that it is quick, easy and fair for all clients.
Also, they may not have the time or the skill-set to do advanced market or individual company research as we do at High Rock. Most advisors are paid to "gather" assets, not manage money.
So thank you Dr. El-Erian for your supportive comments!
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Did you know that... In Canada, securities regulation requires every public investment fund to have a fully independent body, called an Independent Review Committee, whose role is to oversee all decisions involving an actual or perceived conflict of interest faced by the mutual fund manager in the operation of the fund?
An independent oversight regime for all publicly offered investment funds is intended to improve investment fund governance in Canada.
There is some irony in the whole "conflict of interest" debate.
Does an advisor who is payed by a mutual fund company to sell their mutual funds pose a potential conflict of interest?
I would argue yes.
Of course the new regulations (CRM2) coming in to effect in a few months will finally force advisors to have to disclose the dollar amount of what they are paid (by the mutual fund company). At least that conflict of interest will be exposed.
What I (as a client) would really want to know is: does the advisor who is recommending my portfolio holdings own any of the same securities / funds that she / he is selling me?
And if not, why not?
At High Rock we are not required to have a Independent Review Committee because we do not offer a public mutual fund. However, we do want our clients to have total transparency not only to fees, but also to any potential conflicts of interest and as we suggests to our clients, that we are invested in the same assets that they are. Importantly, the IRC ensures portfolio suitability (which we often see when a new client transfers in old assets).
To our knowledge, we are the only portfolio management company in the country (managing money on a Separately Managed Account basis) who has formed an IRC. The IRC is for the sole benefit of our clients.
So we have hired a former OSC staff member who has an independent compliance company to review our accounts and portfolios quarterly and report directly back to our clients.
Nothing builds trust like the comfort of knowing that we are doing what we say we are going to do.
For our clients, we want to go beyond that which is required so that they know that what we do for ourselves, we also do for them.
We don't just say it. We do it.
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1) Volatility / Uncertainty
Volatility spiked in mid January, but has settled down through February. There are still many contrary forces (driving uncertainty) at work in the global economy but for the time being, anyway, the extreme negativity has abated.
2) Can The US Economy Survive The Global Economy?
After a troubling end to 2015, early indicators have the US economy looking a little better:
The GDP Now forecast for Q1 GDP is at 2.6%. Tomorrow we shall see how the consumer has responded to all of the influences of volatility on their psychology, with the latest reading on consumer confidence, followed by data on incomes and spending on Friday.
3) Commodity Prices (Deflation Risk):
Commodity prices have stabilized and moved a little higher lead by Gold and Copper. Even Oil prices have moved off of their lows. Deflation fears, while still a factor, are lessening (at the moment).
Consumer price inflation (albeit a lagging indicator) has been rising:
4) Central Bank Monetary Policy Divergence:
The US Fed may be softening their position on raising interest rates (with rising global uncertainty). The European Central Bank and The Bank of Japan have gone negative and the ECB may have more stimulus on the way. The Bank of England and The Bank of Canada remain on hold. A stronger C$ is adding interesting circumstances and a weaker pound providing a different influence.
5) Geo-political issues:
"Brexit", the referendum whereby the UK may leave the European Union, has started to gain in the headlines. If they do decide to leave, it could have lots of negative implications both for the UK economy and the European Union itself.
Russia and OPEC are negotiating on oil production.
North Korea continues to try to keep itself in the spotlight.
6) Bond Markets Lead:
Bond markets have raised the probability of further economic slowdown and deflationary pressures (with flattening yield curves). But are bond markets being manipulated by central banks? Can their signals be trusted?
7) Equity markets remain expensive:
10 year average price to earnings (P/E) ratios sit at 14.2 times.
The 12 month forward P/E ratio is still an above average 15.4 times.
Since the beginnig of the year, analysts have lowered their earnings growth expectations for 2016 from 7.4% to 3.4%.
8) Negative returns (thus far in 2016) continue to pull the long-term averages back to the averages and investors who have been re-evaluating their portfolios have been in rather "grumpy" moods (like Mr. Grumpfish above).
I have been fielding plenty of calls from unhappy folks.
Lots of those folks (in greater numbers) have been tuning in to our weekly Tuesday webinar to get our perspective, which we will host tomorrow for our clients. Following this, the recorded version will be posted on our website:
So feel free to tune in!
Smarter folks than me are suggesting that once again: "this time it's different"!
(Bloomberg) -- Global financial markets are in turmoil because inflation expectations have declined and central banks aren’t in a position to prop them back up, Bob Prince, co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, wrote in a note dated Feb. 17.
“Inflation expectations are falling rapidly” in the U.S.
despite above-potential growth and monetary policy stimulus, pushing up the real return on simply holding cash, Prince wrote in the note, a copy of which was obtained by Bloomberg. This pressure makes stocks and other financial assets less attractive, and is what’s driving a stock-market sell-off.
“Central bankers and governments need to contain the deflationary forces before the pressures are too great to control,” he concluded.
At the same time, as a result of a weaker C$, consumer prices in Canada have bounced higher:
But now that the "transitory" effects of low energy prices are leaving the equation, CPI has come back into line with the "core" CPI. But, there are now the "transitory" effects of a weaker C$ that have pushed food costs to higher levels.
Prices for fresh vegetables were up 18.2% in the 12 months to January, following a 13.3% increase in December. The other fresh vegetables index, which includes broccoli, cauliflower, celery and peppers among other products, registered its largest year over year increase (are you ready for this?)
(since April 2009)
As a wealth manager, something that we have to be continuously on guard for is the cost of living for our clients as we try to project cash flow needs into future years.
This makes it rather interesting when you get intelligent financial market comentators pontificating on declining "inflation expectations" when the reality that most regular folks are facing is far from the case (unless you have an aversion to fresh vegetables).
If the consumer is feeling like they don't have increased cost of living issues, they will be less demanding for wage increases, which is the other "shoe" in the inflation picture. But now that we have adjusted to lower energy costs, we have to adjust to higher veggie costs.
The Bank of Canada (and most of the other central banks) have a 2% target for "core" inflation. The Bank of Canada is "on target". Other central banks are imposing monetary policies to get to target.
The big question, ultimately, is what is happening to the world's biggest economy:
A similar story, the core cost of living as reported in the US yesterday is at 2.2% above the 2% target (the US Federal Reserve monitors the Personal Consumption Expenditure (PCE) Core Price Index which will be released at the end of the month).
Wages, according to the most recent US Employment Situation Report have risen 2.4% over the course of the last 12 months.
So what are the current consumer expectations for inflation?
Not even close to negative.
That is what it would need to be to have a deflationary environment.
Can that change in the future? perhaps yes, but it will take a very deep recession to do so and that is not yet close to reality, nor do the probabilities of it happening suggest that it is going to.
Are there some structural issues (debt issues) making risk assets less desirable, certainly, but like everything in financial markets, those who are positioned to take advantage of uncertainty and volatility will be quoted on the front pages of the financial media hoping to encourage greater levels of fear.
In the meantime, central banks are, hopefully, exercising monetary policies that will keep economies growing and inflation well above the zero level.
Stocks are getting cheaper (being sold) because they were expensive and earnings were not keeping up with expectations.
No the rules have not changed and like every economic cycle we have endured, asset prices will likely get sold to levels that are not warranted and good asset managers will be positioned accordingly to pick up good quality assets cheap.
We wait for that moment.
A few weeks ago a leading Canadian financial journalist referred an investor who was looking for a second opinion (no charge for that, no obligation) on the composition of her portfolio:
Here is what I found:
Cash and Cash Equivalent (1%)
Fixed Income (28%):
4% Canadian Bond Index ETF (MER = .33)
4% Canadian Bond (Cdn Bank Managed) Fund (MER = .61)
7% World Bond (Cdn Bank Managed) Fund (MER = .80)
13% Canadian Preferred Share Index ETF (MER = .50)
Canadian Equity (31%)
12% Cdn Equity Index ETF (MER = .18)
5% Cdn Equity Dividend (Non-bank Managed) Fund (MER = .85)
5% Cdn Focused Equity (Non-bank Managed) Fund (MER = 1.33)
4% Cdn Small Cap Equity Index ETF (MER = .61)
4% Cdn REIT Index ETF (MER = .61)
1% Cdn junior Oil and Gas names (7 of 10 still have value)
US Equity (24%)
14% US Equity Index ETF (MER = .11)
5% US Equity Dividend (Non-bank Managed) Fund (MER = .85)
5% US Small Cap Equity Index ETF (MER = .37)
International Equity (17%)
11% Europe,Australia and the Far East Index ETF (MER = .51)
6% Emerging Markets ETF (MER = .82)
Advisor Fee = 1.25% annually.
MER (total portfolio) = .52%
Total cost = 1.77%
Last portfolio review : November 2014
Time to check in with your advisor:
Question 1) What am I getting for your 1.77% annual fee?
Question 2) Given my desire to retire in 12 years (it was 17 years when we started working together), is this risk profile (only 28% Fixed Income) adequate?
Question 3) Why so much exposure to Canadian Equity markets when Canada is only 4% of the global equity market?
Question 4) How much did you get paid to sell me those high risk and (for the most part) losing Junior Oil and Gas stocks that you were so excited about?
5) My total portfolio value is now back to the same level as it was in early 2013, what do you propose we do next?
I suggested that if she doesn't get the right answers, we would be more than happy to help!
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Lots of sellers not yet finding buyers:
S&P 500 is looking for buying support, but may not find it until near 1775 where the long-term up-trend line from 2009 crosses and then it remains to be seen if that will be enough. If it is not then the 2007 high's near 1575 will be the next major point of support.
At the moment the bad news and the worries continue to build and that is causing anxiety amongst financial market participants.
Fed Chair Janet Yellen will address The US House of Representatives and The Senate this week (Wednesday and Thursday). Perhaps this will help us all to understand what the US Federal Reserve has in store.
Obviously financial markets fear rising interest rates in a deflationary environment that is being driven by lower commodity prices. However, growing employment and declining unemployment in the US and in many developed nations is providing somewhat of a dilemma for policy makers and adding to the uncertainty.
Build in a large global debt burden, much of it tied to commodity producers and further uncertainty surrounding economic growth in China and as we have been advising for months (and months and months), the holdouts are now, finally moving to less risky assets and cash, driving the selling.
Further, value in equity markets is being reduced as analysts continue to lower earnings forecasts, making them less appealing and buyers (with cash to invest) are comfortable waiting.
We shall talk in detail about all of this and more on our weekly webinar tomorrow.
We shall post the recorded version at about 5pm EDT on our website:
Feel free to tune in.
As all questions are, this is an excellent one because at the moment, for planning purposes, it is hard to imagine getting back to those returns in the years to come, given what we are currently experiencing.
Behavioural Finance 101: people will project the current situation long into the future. That is just normal human behaviour.
Everything economic is cyclical, we shall in the future, as we have in the past continue to cycle through economic periods.
The timing is the tricky part.
The academics will tell us in study after study that "timing" the market is perhaps successful in some short-term periods, but over the longer term, it is not as successful as a broadly diversified and balanced portfolio that is built to ride the waves of volatility.
Many failed to either get back in or stay the course through 2008 and as is always the way, most of the selling occurred right at the bottom of the market when the "pain" was too great to take any more. We humans are averse to pain.
The sceptics missed the rally for the next few years, piling back in in 2014 and driving stock prices to way over-valued levels (in my humble opinion) encouraged by low interest rates (chasing higher returns by taking greater risk) and share buy backs.
Now that seems to be coming apart. Equity prices in many cases are at or below 2014 levels.
In general, the bulk of your portfolio (the "core") should be devoted to the balanced and diversified stuff.
However, there is also some room for a more tactical approach.
My brilliant business partner Paul spends countless hours using his CFA and his business acumen finding value in small and medium sized companies, be it in their high yield bonds or their common and preferred shares.
We have a "tactical model" that allows our clients to participate in some of his ideas ( I am learning from him).
We caution that there is greater risk here and that this needs to fit with a clients goals and objectives, time horizon and tolerance for risk as determined by their wealth forecast.
This week, one of our holdings that had been looking a little distressed, jumped by almost 100% overnight when it was announced that Lowes would be taking over Rona.
Our tactical model owned Rona shares.
When you think of it, Canadian assets have become very attractive to US companies with the weakness of the C$. So there may be more opportunities out there.
Back to the main point of the answer: there will always be opportunities in financial markets. The experts (like my colleague Paul) can help add value, however it is also important to keep a long-term perspective and allow for the cycle to assert itself: supply and demand will eventually find equilibrium and the patient will prosper.
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January was a difficult month for financial markets and despite some technical buying on Friday (short-covering on the back of the Bank Of Japan's move to negative interest rates), the All Country World (equity) Index (ACWI) was down about 5%.
The Canadian Bond Index was basically flat over the month, which leaves the Benchmark 60% equity (ACWI) and 40% fixed income (XBB) portfolio with a negative return of - 3%.
Depending on the model structure, a High Rock portfolio of similar composition was down -1 to -1.5%. Nobody likes a loss, at anytime, but we have worked tirelessly to find solutions to mitigate the volatility: overweight cash and a little overweight Canadian equities (TSX was down a little less than 1.5% in January) and underweight US equities (S&P 500 was down a little more than 5% in January).
We are also a little over-weight in Government of Canada bonds (relative to Investment Grade, Corporate bonds).
A more conservative mix benchmark of 40% equity (ACWI) and 60% fixed income (XBB), had a negative return of about -2%.
Depending on the model structure, a High Rock portfolio of similar composition was basically flat (no growth, but no loss).
We (at High Rock) have taken a defensive stance since April of last year and those of you who know me from my former gig, also know me as a more conservative investor, fearful of over-valued assets and mindful and patient to wait for market corrections to purchase assets at better values (and that it can take a long time to build a solid portfolio).
If you take the goalie out of the net, you are vulnerable! (yes that is me in the photo at the top, in the 2009 Baycrest Proam fundraiser for Alzheimer's research) I live, breathe and play defence (goal)!
Here is what one thankful client wrote (after having seen the plunge in equity markets):
Thanks so much, Scott. I feel better now. I am so glad that you are handling my money. I really do not know much, at all, about the best way to handle my money.
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Tuesday is webinar day at High Rock, at 4:15 we will hold a live call for our clients and post the recorded version on our website at:
We will discuss current economic events, our thoughts on those and their implications for financial markets and our portfolio models.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist