Monday, November 30, 2015

Lots On Our Radar Screen This Week

The next round of European Central Bank stimulus is on tap for Thursday and the impact on global financial markets will depend on whether or not the ECB lives up to expectations: a .20% cut in deposit rates and a 20B Euro expansion in QE.

Financial market reaction will be based on on how much of this is built in to current pricing (if it is expected, then it is likely built in) and if there are any surprises and new announcements from ECB President Mario Draghi.

Interestingly, European equity markets are currently testing selling resistance at the down-trend line that began last April (the best levels since August's "melt-down").  A break to the upside in prices could extend the current positive move from the early October lows as buyers may then feel more comfortable. 

It could possibly put the "Santa Clause" rally back on the table (if this spills over to other global equity markets). Euro equity markets have been one of the best performers this year to date, better by about 10%.

Janet Yellen (US Federal Reserve Chairwoman) addresses the US Congress' Joint Economic Committee on Thursday. She will also speak to the Economic Club of Washington on Wednesday. Currently bond markets have priced in close to an 80% likelihood of the Fed raising rates in December.

Friday is Employment Data Day in the US and Canada and is always widely watched for the latest clues to the direction of the economy. Although we will pay closer attention to revisions to previous months data and wage inflation behind the scenes.

OPEC meets on Friday. This could in fact prove to be a pivotal meeting if the those oil producing nations are at all interested in stabilizing oil prices.

In the meantime, tomorrow will bring the latest update on US manufacturing. In Canada we will see Q3 GDP data (although Q3 is well behind us).

We have brought up the "diverging monetary policy" issue before, but there are many implications for a continued and aggressively stimulative monetary policy in Europe while the Fed turns to a tighter monetary policy: most importantly it is the value of the $US. A weaker Euro is positive for the European export economy. On the flip side, a stronger $US becomes restrictive for the US economy. 

US corporate profits have continued to slow and the fundamentals for future revenues and earnings become a greater drag on US equity prices if economic growth continues to struggle.

Despite weaker profitability, US large cap equity markets (S&P 500) have advance by 2.5% thus far this year. The smaller Dow Jones Industrial Average is flat on the year. The broader Russell 2000 index is also flat on the year.

The global economy also continues to struggle as China and other developing economies are slowing. We won't see any significant data on China until next week, but the Trade data due on Dec. 7 will be widely watched for clues as to the state of the Chinese economy.

We shall expand on all of this at our weekly webinar tomorrow.

The recorded version will be available at 

Wednesday, November 25, 2015

Giving Thanks!

I had the very good fortune to have had the experience working on trading desks in New York back in the 90's (was it really that long ago?) and to have met some very bright and fantastic folks along the way. Many have remained friends to this day.

I had a particularly good commute (as NYC commutes go), leaving my home, Baxter House in Port Washington (north shore of Long Island) and walking to catch the 5:36 am train to Penn Station every day. I was usually at my desk by 6:30. It was an energized city in an energized time (for me).

The Thanksgiving tradition from that time is something that will endure for our family: Bond markets closed at 1pm on Wednesday and after my 3 daughters finished school, my family would jump on the train to come join me in the city.

My uncle and his family lived on the upper west side, W81st and Central Park West, where it happens that some of the character balloons for the Macy's Thanksgiving Day Parade were inflated. We would bunk in at the Excelsior Hotel for the night, a half block west on W81st. 

We would arrive early Wednesday evening to see the likes of Spider Man, Clifford The Big Red Dog and Buzz Lightyear laid out flat surrounded by large tanks of helium gas and the all night crew that would make them into the larger than life characters for Thursday's parade.

In the meantime it was off to Wolman Rink in Central Park to go for a skate. If you haven't done it, night skating in Central Park is like something out of a movie, it always felt surreal and with that there was a unique sense of peace in the heart of that very noisy city.

Then it was off to dinner at a restaurant on Columbus Ave and by the time we  got ourselves back to the hotel, those balloon characters had started to take life. The girls, aged four, six and eight were tired but thrilled.

We got the wake up call at 5am on Thursday, and down to W81st we would drag ourselves to see all the floats fully inflated and ready to go. This was the parade for us, walking amongst all the participants and handlers looking for Snuffelupagus as they prepared for the call to "join the parade!". It was a magical time. 

We have been back many times to celebrate (having since moved back to Toronto) but when we don't get to NYC, we still try to keep "US" Thanksgiving because of the wonderful memories.

In 1995, while I was working at the World Trade Centre (where our trading desk was located on the 104th floor of the North Tower), I received a job offer to return to Toronto, which I accepted.

To this day, I remain thankful to the gentleman who "brought me home" and for all the others that I worked with at the time who decided to find other places to work over the course of the next 6 years.

Happy Thanksgiving!

Tuesday, November 24, 2015

Geo-Politics Back In The Mix

Add this to the economic uncertainty: following terrorist attacks in Paris and Mali, Turkey (A member of NATO) and Russia are now at odds.

Greater uncertainty means traders / investors tend to move to safer assets from riskier assets, at least temporarily.

Add in the US Thanksgiving holiday and less liquid markets and there is potential for some volatility.

US Q3 GDP was revised higher this morning from 1.5% to 2.1%.

However, behind the scenes, much of this revision can be attributed to a build-up in inventories. Consumer spending was revised lower.

Something we have been watching closely (I mentioned it on BNN a couple of weeks ago and in our last couple of Tuesday webinars)  is the relationship between rising inventories and weakening sales. Historically, a rising ratio of inventory to sales has been correlated to past recessions.

At the moment, the US Fed is on track to raise interest rates at their December 15-16 meeting and markets have priced in a 70% probability. 

At the same time, credit market conditions (lending) are tightening up ( becoming more restrictive) and this has potential ramifications for the record levels of outstanding global debt, including record amounts of "sub-prime" lending for automobile purchases in the US. No wonder automobile purchases have been the main catalyst for consumer spending (along with restaurant spending).

A couple of weeks ago when Michael Hainsworth (BNN: "The Close" asked me about a "Santa Clause" rally, I suggested that either Santa had come early or it might be called the "Trick or Treat" rally, but I felt that with all that was going on in the world, it would be unlikely.

Now there is more going on in the world, so look for expensive equity markets to test buying support.

For a more in-depth look into all that is impacting the global economy, financial markets and wealth management, tune in to our weekly webinar. We will post the recorded version on our website at or about 5 pm today:

Monday, November 23, 2015

The Global Perspective

There is lots going on in the world as we head into the US Thanksgiving holiday. 

You may ask why we focus so much on the global situation (and a lot about what is going on in the US) and not so much on Canada when we discuss the global economy and financial markets in this blog.

We do live in Canada so we do have to focus on personal financial matters from a wealth management perspective and we do have a reasonably high degree of regard for the Bank Of Canada (so we do listen and follow their perspective), but we invest globally and a good portion of the diversification that we suggest includes monitoring all that is happening in the world.

Our global equity benchmark is the MSCI All Country World (ACWI) Index: 
  • 2483 companies
  • 46 countries
  • 23 developed markets
    • US = 51.5%
    • Japan = 7.9%
    • UK = 7.0%
    • France = 3.3%
    • Canada = 3.2%
    • Switzerland = 3.2%
    • Germany = 3.0%
    • Australia = 2.8%
    • (Euro Area ex UK = 16.2%)
  • 23 emerging markets
    • China = 2.6%
    • S. Korea = 1.5%
    • Taiwan = 1.3%
  • Multiple Sectors
    • Financials = 21.9%
    • Information Technology = 13.6%
    • Consumer Discretionary = 12.8%
    • Health Care = 12.4%
    • Industrials = 10.3%
    • Consumer Staples = 9.5%
    • Energy = 7.4%
    • Materials = 5.3%
    • Telecommunication Services = 3.7%
    • Utilities = 3%
Needless to say, that is very broad diversification. 

A few years ago it was made quite clear to me that Canadian Investors who owned equities had close to 70% of their investment portfolios tied up in Canadian equities (referred to as "home country" bias).

From a global and diversified perspective, the index suggests 
about 3% should be Canadian.

With the under-performance of Canadian equity markets over the last year (S&P TSX is lower by over 8%, year to date) the broadly diversified portfolio has proven extremely effective.

The US equity market is better by approx. 2% so far this year (in comparison) and the ACWI is better by 1.3%.

Of course, our objective in managing our client's money is to beat the benchmark index (over longer time frames).

As I often say, different asset classes perform differently at different times in the economic cycle. It is rarely clear as to the future timing on this, (see last Fridays blog and previous blogs on the success of economists and analysts predictions: not very good), so it is best to be exposed to multiple asset classes and use re-balancing to take profits when an asset class's growth takes it to an over-weight position in a portfolio.

More on what is going on in the world tomorrow on our weekly webinar.

The recorded version will be posted on our website at or about 5pm.

Friday, November 20, 2015

Predictions For 2016

Here they come! It is that time of the year when the economists, analysts and journalists start to get clarity in their crystal balls for the coming year.

Few get it right. 

If we look back to the predictions for 2015, our theme was to "expect the unexpected", that was pretty close to the best prediction you could get.

The US economy was expected to drive global economic growth and carry the global economy. Meanwhile, every major forecast for US economic growth was continually revised downward over the course of the year and the global economy continued to stagnate.

The fallout from continuing lower oil and commodity prices held inflation at levels well below central bank target levels.

Expected interest rate lift-off from the US Federal reserve in June or September did not happen. Canada cut rates twice, German short-term yields went negative.

Equity markets (as measured by the MSCI All World Country Index (ACWI) are basically flat. The US market which is about 52% of the ACWI was also little changed.

Government bond yields in Canada are slightly lower on the year, in the US, slightly higher, but neither significantly as was expected. Many called for US 10 year yields to be at 3% or higher by now.

With many asset classes flat on the year and some lower, holding more cash (or an interest earning money market fund) in a portfolio has been a good option.

The best performer on the year was the $US (especially vs. the $C) so if a Canadian investor had a $US component (even cash) in their balanced and globally diversified portfolio, then that was likely the key driver for positive returns.

Balanced Portfolio returns on the year are going to likely end up slightly positive, but pulling the longer term averages lower.

We have been in a lower return environment and will likely remain there for a while longer. This was also one of our themes for 2015.

For 2016?

Risks to the global economy remain.

Short-term thinking by corporate CEO's (using cash for manipulating share prices higher with buy-backs) and demographic shifts in consumption habits will continue to depress revenue and earnings growth.

The restructuring of China's economy to increase domestic consumption is a wild card. Thus far, the slowing of both imports and exports continues without signs of easing up (shipping indexes are at the lowest levels in years).

Steering the "new" Chinese economy is akin to steering a mega-tanker ship: rather difficult and taking a long period of time. Add a relatively inexperienced crew and there is a recipe for disaster.

The Chinese economy is itself an anchor on the global economic ship and will either keep it from moving forward or drag it down further. The engine is the US economy which without being at "full-steam" cannot pull the global economic ship forward. 

Basically, watching China and its global  economic impact is going to be as important in 2016 as watching the US Federal Reserve was in 2015.

Thus far, I have seen predictions on both sides of the extreme:
check them out at the link below.

This one stands out for me....

Ruchir Sharma, head of emerging markets and global macro, Morgan Stanley Investment Management:

"We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment and population decline are combining to undermine growth, while relatively low debt countries from Eastern Europe to South Asia are better positioned to weather the inevitable next turn in the cycle".

I am not likely to be considered for the list of the "brightest minds in finance", however there are plenty of hurdles to overcome to see growth return to the levels of 2009to 2013 for investor portfolios.

In a balanced and diversified portfolio spread across many different asset classes, any of those asset classes may unexpectedly out-perform or under-perform.

Balance and diversification and an over-weighting of cash to take advantage of future opportunities (if and when they arise) is the best strategy for 2016 portfolios. 

Do not expect above average returns until an improvement in global growth allows revenues and earnings to grow again.

Keep the discipline, do not get drawn in to chasing returns at the expense of greater risk.

Wednesday, November 18, 2015

US Stocks Are Expensive

And they might get more expensive (in the short-term). But it does not mean that you should invest in them anyway.


As we discuss regularly on our weekly webinar, valuations are stretched: The 10 year average price to earnings ratio is 14.1.
The 12 month forward price to earnings ratio is currently at 16.1. In May, when the S&P 500 peaked it reached 17.

Not only that, with 90% of companies reporting earnings for Q3 and 74% beating expectations, earnings actually declined by 1.8%.

That makes for the second quarter in a row that earnings growth will have been negative (and that hasn't happened since 2009).

Expectations for Q4 2015 earnings are a decline of 3.6%.

In fact, for the year 2015 expectations are now for a decline in earnings growth of .3%.

What makes them more expensive, is that corporations have continued to reduce the amount of shares available (with share buy-backs) therefore making earnings per share look better than they might have in previous years.

In other words, earnings have in fact declined more on a $ for $ basis.

Behind the scenes, revenues have declined more than earnings.

This means that S&P 500 companies have been forced to cut costs more. They have not been investing in future growth.

What investors/traders are doing right now is buying risk assets hoping that they will continue to move higher (get more expensive) and that will provide them with growth regardless of what the fundamentals (revenue and earnings) are suggesting.

Remember gold in 2011 at 1920?

Markets will rise as long as there is buying. When the buying stops?

It is musical chairs. Make sure you have a chair. Or cash.

Tuesday, November 17, 2015

It Is Financial Planning Week In Canada

"Created by Financial Planning Standards Council (FPSC), Financial Planning Week is dedicated to raising awareness of the importance and benefits of financial planning with a qualified professional, encouraging Canadians to take control of their future and achieve their goals through sound financial planning, and ensuring that Canadians have financial hiring literacy so that they are armed with the information they need to find the right financial planning professions".

What does this have to do with investment portfolio strategy?

It is not possible to have a proper portfolio strategy unless you have a plan.

A portfolio strategy has to be built to focus on your goals, the time horizon necessary to achieve those goals and a complete understanding of the risks necessary to achieve those goals. Paramount, is your ability (which is not always clear and may require deeper investigation) to tolerate risk.

All of this is brought out in your financial plan.

And this plan has to be prepared by a qualified professional.

If you want to know if your advisor is a qualified CFP (Certified Financial Planner), go to the website above, click on the tab on the top right titled 


and type in their name.

At High Rock, we have a CFP that prepares our client's "Wealth Forecast" (the financial plan), before we structure a portfolio strategy. After we present the Wealth Forecast, we then develop, in conjunction with our client(s), a strategy that is in keeping with all of the tenets of the plan.

A portfolio strategy without a corresponding Wealth Forecast (the plan), is like driving without a steering wheel, it has no sense of direction.

Oh and by the way, the planning at High Rock is inclusive in the completely transparent fee. 

More on our website:


It is Webinar Tuesday at High Rock, lots to discuss on financial markets, portfolio strategy and wealth management.

Tune in to our recorded version at

Should be available at or about 5pm today.