Wednesday, March 4, 2015

The Big Picture


Why do we really care about all this economic data anyway?

We as businesses, consumers and investors are continually forced to make decisions on how we will best utilize our money.

As investors we need to have confidence that the investments that we put our hard earned money into will give us a reasonable return through growth of the value of the asset that we purchase and / or a reasonable amount of income payment that is regularly generated and distributed back to us.

When we lack confidence, we tend to put off making our economic decisions, this is human nature.


Since the great recession of 2008 - 2009, businesses have been focused on preservation more than growth. Consumers have been more focused on saving and paying down debt rather than saving. (Canada may be an exception). The consumer represents 60-70% of the global economy.

In order to force investors from the sidelines, central banks have continuously added monetary stimulus to the global economy driving the value of "safe havens" (government bonds) to record highs and interest rates to record lows.

As time has passed money has moved to the equity markets because it is the only place to get returns greater than the rate of inflation:
  • Rising equity markets have given investors confidence.
  • Businesses have begun to start spending on the their own growth (hiring new employees).
  • Consumers have grown more confident.

"Shocks" that upset our confidence have appeared from time to time (oil price shock most recently, other economic and geo-political events before that) and this is signaled by the spikes in volatility.

Central bankers have been quick to respond to ensure that order is restored and that confidence returns.

Money continues to flow into equity markets and many have been pushed to record highs.

Investors remain confident that the prices that they pay today for equity assets still represent value.

However, if and when interest rates start to move higher (because economies are growing at sustainable levels) investors are going to have more choices and they will be re-examining the prices that they are paying for equity assets.

This is why we are so focused on the "next move" by the central banks.

When will the Fed start to raise rates?
What will the BOC say in today's rate announcement.

Stay tuned!

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund



Tuesday, March 3, 2015

Reading The Yield Curves


Bond Markets can give us some very good insight into what is in store for the economy:

click to enlarge

After the latest round of economic data (and remember that central banks are now "data dependant" as to the future of any changes in their monetary policies) this what the Yield Curves are telling us:

Europe:
  • Using German Government Bond yields as our proxy for Europe:
  • Short-term yields are actually slightly negative.
  • Deflation remains a concern in the near term.
  • However as we move out the "curve": (to the right) there is a slightly positive rise in yield which signals that expectations are for the potential of improving economic growth and a return to mild levels of inflation in the longer term.
  US:
  • Current short-term yields are near 0% reflecting some concern over recent inflation data below the Fed's targets.
  •  However, stronger economic growth expectations are shown in the steepening "curve" as we move out to the right.
  • Bond Markets are building in short-term interest rate increases after 6 months (possibly September).
  • With expectations of increased future inflation, bond investors are demanding yields of better than 2% in the 10 year maturity.
  • Financial markets will focus on this weeks latest reading on employment data (for February), especially wage growth, for clues to what the Fed will do next and when.
Canada:
  • A mildly "inverted" yield curve in the short-term indicates expectations of continuing slow economic growth, but likely not a recession.
  • Further out the curve, the positive slope suggests expectations for improved economic conditions, not as strong as the US, but somewhat stronger than Europe.
  • The BOC will announce it's latest policy decision tomorrow, the consensus expects no change in interest rate policy.


The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Saturday, February 28, 2015

Month End 60/40 Model Report

What's Working?



At the beginning of 2010, I built a series of portfolio models based on a Balanced Asset Allocation Strategy.

The base model was 60% Equity and 40% Fixed Income.
(derivative models of 30%, 40%, 50% and 70% Equity as well). 

  • Fixed Income consisted of a Government Bond ETF, a Corporate Bond ETF, a Real Return bond ETF, a basket of Preferred Shares and a High Yield bond fund.

  • The Equity allocation consisted of a combination of Canadian (including REIT's), US and International (including Emerging Market) ETF's.

  • There was also a portion of the Equity allocation allotted to a "tactical" (more actively managed) fund.


There have been a few adjustments along the way (minor changes in % allocations to geographical and style):

  • The models have been rebalanced quarterly and cash (from distributions and dividends) have been redeployed.
  • Before any advisor fees and taxes (but including fund MER's) , A fully invested $100,000 in the 60% equity model on January 1, 2010 is now (as of Feb.27, 2015, or 5.16 years) worth  $158,260 (without any additional contributions having been made).
  • A compound annualized return of over 11%.
  • Of course, past performance is not necessarily a guarantee of future performance.
  • However, long-term back-testing through the very volatile period of 2007-2009, revealed that a portfolio of similar composition should be able to achieve a target return of between 7-8% over a multiple year period.



click on the chart to enlarge.


The broad diversification of the model has revealed many different levels of  performance for many of the different asset classes over the last 5.16 years: 

  • in 2011, a very difficult year for equity markets, the International Equity allocation fell by close to 15% (emerging markets were the worst performer). 
  • Canadian small cap companies were also very weak that year.
  • On the other side of the equation: Fixed Income assets as a group were up by almost 10% (inflation indexed bonds were higher by over 18%). 
  • The REIT allocation was better by 0ver 20% that year.
  • It is the diversity that helped to limit the downside pressures on the portfolio that year.
  • 2012 and 2013 were strong, above average total return years led by strong equity markets.
  • 2014 was an average year, with mixed results : weak international equity performance, strong fixed income performance (after a weak Fixed Income year in 2013).

Thus far in 2015 (the Year to "Expect the Unexpected"):

  • Fixed Income:
  • Bond markets continue to out-perform, led by inflation indexed bonds.
  • Preferred shares are under performing as the Canadian Preferred Share index is down by approx. 4% thus far.
  • Equity:
  • REIT's are leading the Canadian Equity sector allocation.
  • While at record levels, US Equities are under performing on a relative basis.
  • International Equities (lead by emerging markets) are out-performing.
The important takeaway:

Different asset classes will out-perform and under-perform throughout time over multiple years.

Instead of trying to pick which ones will perform, have them all in your portfolio and reap the rewards of diversification.

What is working?

Diversification is Working



The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Friday, February 27, 2015

Consumer Prices


The Consumer Price Index data for January  in both Canada and the US were released yesterday, no real surprises as energy prices fell precipitously in the first month of 2015.

you will need to click on this chart to enlarge it.

  • Interestingly, without gas prices included, Canadian CPI has been fairly steady to slightly higher.
  • In fact 7 of the 8 major categories posted gains in January.
  • Some of this is attributable to the weaker $C and the increasing cost of imported goods.
  • The BOC monitors "core" inflation, which strips out the more volatile food and energy sectors, which is actually above the BOC's 2% target.
  • But we do all need to eat, drive and stay warm!

Similar (but different) story south of the 49th!



  • The all items index declined 0.1 percent over the last 12 months, the first negative 12-month change since the period ending October 2009. 
  • The energy index fell 19.6 percent over the span, with the gasoline index down 35.4 percent. 
  • The index for all items less food and energy increased 1.6 percent.
  • The stronger $US keeping import prices down and the "core" CPI well below the Fed's targets.
Important takeaways for the "data dependant":
  1. part of both central bank's mandates are to keep inflation within certain target ranges:
  2. with core inflation above 2%, the BOC likely will keep the Bank Rate steady for the time being.
  3. with US core inflation below 2%, the Fed can continue to be "patient" in beginning the normalization of interest rates.

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Thursday, February 26, 2015

Positive Signals


Despite fairly high levels of uncertainty surrounding the global economy, there a some indicators that may be offering some optimism:

  • Copper is one of the metals that is followed closely for indications of the future direction of the global economy:
  • Since early 2011 copper has been trending lower from a high of close to 4.65.
  • In January of this year it plummeted, hitting a low of approx. 2.40.
  • The lowest level since 2009.
  • In December of 2008 it bottomed out at near 1.25.
  • It has rebounded through February back to near 2.70, a 12.5% recovery.
  • It is too early to tell if this is a new trend developing, but it is worth watching.

  • This morning Germany announced that unemployment fell more than was forecast in February, remaining at a 2 decade low 6.5% unemployment rate.
  • Higher wages have been bolstering domestic consumption and a lower Euro has been fuelling an increase in exports as the German economy continues to expand.
  • Chinese manufacturing data released yesterday showed a slight improvement.

  • Closer to home, RBC surprised with strong earnings results yesterday stating that despite lower oil prices and the resulting economic headwinds, some parts of the country were experiencing stronger than expected economic conditions.

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Wednesday, February 25, 2015

Embracing Uncertainty


On the heels of yesterdays blog (where I suggested that we not be paralyzed by uncertainty) comes BOC Governor Poloz's speech at the University of Western Ontario yesterday:

more here:

In his Conclusion, he states:

Our decision to lower the policy interest rate last month was intended to take out some insurance against both sets of risks. It gives us greater confidence that we can get back to full capacity and stable inflation by the end of 2016, instead of sometime in 2017, and it will cushion the decline in income and employment, as well as the rise in the debt-to-income ratio, that lower oil prices will bring.
Using the term “insurance” underscores that we are in a very uncertain setting, and what we are trying to do is to manage the risks we face, not eliminate them - we are not in a position to engineer the perfect outcome. The negative effects of lower oil prices hit the economy right away, and the various positives - more exports because of a stronger U.S. economy and a lower dollar, and more consumption spending as households spend less on fuel - will arrive only gradually, and are of uncertain size. Plus, the oil price shock itself is of uncertain size. So, the downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds.
As you can tell, it’s an exciting time to be a central banker. Monetary policy-making is evolving in real time and, as I have argued, is deserving of true reinvention. We need to develop a monetary policy framework that integrates inflation risks and financial stability risks, both statically and dynamically, and captures much more accurately the uncertainties we face - in short, a true synthesis that takes full account of the lessons of the past, both new and old. Let’s get to it.
  •  Who would have ever thought that you might see the words "exciting" and "central banker" in the same sentence?
  • However, on a Global scale, central bankers have been steering economies with monetary policy trying to contain the aftershocks of The Great Recession.
  • They have been battling uncertainty and it is clearly having an impact on volatility:


The fight goes on....

Also yesterday (and continuing into today), US Federal Reserve Chairwoman, Janet Yellen was giving testimony before the Senate Banking Committee:
more here:

the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2 percent over the medium term.

The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting. Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.
It continues to be the FOMC's assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run. It is possible, for example, that it may be necessary for the federal funds rate to run temporarily below its normal longer-run level because the residual effects of the financial crisis may continue to weigh on economic activity. As such factors continue to dissipate, we would expect the federal funds rate to move toward its longer-run normal level. In response to unforeseen developments, the Committee will adjust the target range for the federal funds rate to best promote the achievement of maximum employment and 2 percent inflation.

Exciting Indeed!!

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund

Tuesday, February 24, 2015


Information Overload


It is never an easy task to try and find the most pertinent information to pass along to my readers.

There is a constant barrage of loud headlines fighting for attention, most of these focus on very short-term issues:

In the financial media:
  1. Greece's future in the Euro zone.
  2. When will the Fed begin to raise interest rates?
  3. Corporate Earnings results (for last quarter).
  4. Consumer confidence.
  5. The state of the housing market.
  6. RRSP or TFSA?
  7. Oil prices.
  8. Deflation.
  9. Russia and the Ukraine.
  10. Financial market volatility.
  11. Global economic growth.
  12. Climate change.
It is hard to get through the noise:



It is true that some of these issues may have an impact on the long-term , but it is also important not to get paralyzed by the uncertainty that surrounds us.

Many folks that I talk to can find themselves so full of uncertainty that they have difficulty make important decisions that can and may be significant for their future.


We all want to be protected from uncertainty and volatility. It is human nature.

However, when it comes to managing our wealth, we need to continue to move forward, we must always be working toward an end result. 

Finding a way to keep working toward our goals despite the  current levels of uncertainty can be accomplished with solid investment planning:
  1. Balanced asset allocation.
  2. Diversification across many different geographical and economic sectors.
This investment style will under-perform when equity markets are strong, but it will out-perform when they are weak. It will help keep volatility to a minimum when uncertainty is high.

It will also provide confidence that will help you to overcome the paralysis that comes with being bombarded by too much information.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.