Thursday, December 8, 2016

Caveat Emptor

It is that time of year where the pundits (economists, analysts, advisors and journalists) all have to make thier predictions for 2017.

At the same time, we at High Rock (portfolio managers) are busy trying to determine what our key investing themes will be for 2017.

For 2016, our key theme: that uncertainty would create greater levels of volatility channelled our focus on non-correlated assets and tactical trading.  Slower than expected economic growth and deflationary pressures in the first half of the year, followed by Brexit and the Trump election in the second half, helped to reinforce that theme and financial markets found themselves  providing lots of big swings in price. Protecting our clients from these swings and taking advantage of low prices in times of high volatility were key in  helping us to come out well ahead of our combined benchmark indexes over the course of the year. 

As a result our clients (and ourselves, because we invest in the same asset models as our clients) have been rewarded with excellent risk-adjusted returns and above average portfolio growth (a great deal of our performance did come from our taking advantage of the volatility in the first half of the year) over the course of the entire year.

As we ponder our key themes for 2017, we are watching financial markets build in a lot of positive economic and earnings growth based on the election promises of Donald Trump. 

So one important theme (coming to the forefront) is one of reflation: whereby bond investors are demanding higher yields to protect themselves from higher future inflation. This is something that central banks have been working hard to achieve with extraordinarily easy monetary policy, but had basically been unsuccessful at achieving until Donald Trump was voted in as the next president of the United States.

He was able to apparently convince (sell) financial markets on his proposed agenda that he would, with lower taxes and big spending, be able to propel economic growth (and inflation) forward. He is obviously a very good salesman.

Caveat Emptor: (buyer beware) he has made some pretty big promises in his past as well.

There is going to be a big gap (of time) between the initiation of all his promises, the implementation of them and the end results and there will be plenty of water to flow under the bridge in the meantime (something that financial markets appear to be taking for granted).

So, financial markets and  maket particiapnts, at this moment seem to be fairly convinced. I have to admit (if you have not already figured it out) that I am rather skeptical (if not out-rightly cynical).

Perhaps see this article as a reference point:

Oddly enough, I have always been more of an optimist (than a pessimist), but there is something that just does not sit right with me about all of this (too many close encounters with slick salespeople and manipulative personalities in my time as a Branch Manager in the investment industry, perhaps).

Sometimes (and it is pure human nature that does it) we just get caught wanting to believe. I hope that it all comes true, but I still think that we need to stay cautious.


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Tuesday, December 6, 2016

Trump Tactics Spell Trouble

Perhaps he is just "poking the bear" as part of his skillful art of negotiation (remember Trump University?), but even before taking the helm (Commander In Chief), the president-elect is picking fights.

His latest Twitter tirade ( lashing out at China) may be a glimpse into what to expect in the years to come and the word diplomacy doesn't much seem to be factored in.

China's response via an op-ed in the Peoples Daily (the Communist Party Newspaper):

Op-Ed: Trump's irrational China bashing shows his ignorance of China

 and it suggested the option of "retaliation" if necessary and that "Not only is the US more dependent on China than Trump seems to realize, but world peace and prosperity depend on a healthy develop of China-US relations. Trump needs to get the China-US relationship right."

The difficulty here is that the word "apology" is not in a narcissist dictionary (believe me, I have had the experience). That could provide some challenges for Trump's relationships on the global stage. For a person used to getting his way because he could force it or "scam it" (read: ), this is a bit of a different situation.

And, according to Bloomberg, a client survey by forecasting firm Oxford Economics:

suggests that Trump's future policy stance poses " the single largest risk to the global economy".

"More than half of respondents said that the probability of a sharp slowdown has increased..."

As I said yesterday, if stock markets believe that reduced taxes and increased spending (if and when it all comes to fruition sometime in 2017/2018) are beneficial, they will have to come to grips with the fact that earnings are a function of revenues that are generated by sales. This may pose some serious difficulty as far as finding growing markets to sell into if the US goes about alienating itself from the rest of the world.

We will talk about this and other developments in financial markets and the global economy on our weekly client webinar today. We will post the recorded version at or about 5pm EST on our website:


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Monday, December 5, 2016

Reduced Volatility Following The Italian Referendum Is  Only A Short-Term Victory For Central Banks

The Bank of England reacted strongly and swiftly following the Brexit referendum and although volatility soared in the aftermath, it quickly settled as the BOE made it clear that it was further prepared for action to reduce the volatility. 

The European Central Bank made it clear in 2011 that it was prepared to do everything in its power to defend the Euro (and it has) with extraordinary stimulative monetary policy. 

Market participants have come to rely on the central banks to be there to artificially prop up financial markets when they are experiencing the uncertainties that arise in the economic and geo-political arenas which might otherwise give rise to significant bouts of volatility.

While the Italian referendum may not have any immediate ramifications for the Euro, it puts the Italian political situation into question and clearly advances the populist movement that began with Brexit, gathered momentum in the US presidential election and has now permeated the Euzo Zone's third largest economy. Italy's banking crisis will not be resolved swiftly in this environment.

Clearly, without the "back-stop" of central bank intervention, this significant development would have created a great deal more volatility. Add in elections looming in France, The Netherlands and Germany in 2017.

So what is real?

Global trade is at risk and the economic advancement that would benefit export countries, like China and other developing nations as well as Germany (which has been a net beneficiary of the European Union) is also at risk.

In a nutshell, this puts the global economy at risk.

Trumpenomics (if he can advance all his desired proposals) might seem favourable for corporations with tax advantages offsetting higher operating costs, but without the continuation of global growth, US companies are going to run out of markets (where there is demographic growth) with which to sell into in order to continue to get revenue and earnings growth.

Populations are rising in developing nations and falling in developed nations. The 21st century is a very different world than was the 1980's where the next US government wishes to return us. It is not going to happen.

And central banks will not be able to forever protect us from the fallout.

Saturday, December 3, 2016

US Unemployment Data Pushes Out 
Recession Risk

As you all know by now, one of the metrics that we have used to determine where exactly we are in the economic cycle in the US is the historically significant relationship between current unemployment and the 3 year moving average, which when they have converged in the past has indicated the beginning of a  recession:

The lines had been converging at a fairly rapid pace, within about 0.06% or so, as unemployment levels had held steady at or near the 4.9-5.0% point, while the moving average continued to decline. Until yesterday's US data showed that unemployment had dropped to 4.6%, widening out the spread to about 0.9% :

We can analyze the unemployment data (participation rate of the labour force), but that doesn't matter so much in this metric (yet), because the likelihood of near-term recession has been reduced, but that does not mean that it has completely gone away either. As we say often, one month's data, that can often be fraught with revisions, does not a trend make. Be that as it may, the 3 year moving average (in purple above) continues to decline at a good clip, so we shall continue to monitor the monthly data as it progresses and the status of the economic cycle that it produces.

More importantly, it  (the most recent unemployment data) does nothing to impede the US Federal Reserve from raising interest rates on December 14, in fact it gives them more reason. This plus the increase in longer rates (higher bond yields) will have longer-term implications on a highly leveraged global economy that is firing out on less than all cylinders at the moment.

The recession may not come next month or the one after that, but it's eventuality has not gone away either.

Now we move on to see what the Italian people want for their future and what that may mean for all of the Euro Area.

Stay tuned.


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Monday, November 28, 2016

Plenty of Uncertainty To Watch For This Week

Beyond the "Trump Trade", which is as much bluster and mis-direction as his tweets (meant to take our focus off of the real issues), there are more important near-term questions:

1) OPEC meets on Wednesday (Nov. 30) and whether or not a meaningful production cut can be achieved will be a significant  hurdle and oil prices will be impacted (one way or the other). 

2) US Employment Situation Report is on Friday (Dec. 2): our focus is (and has been) on the current unemployment data (now at 4.9%) and the 3 year moving average (5.6%) and how when these numbers have converged in the past it has indicated recessions. With little change in the unemployment rate and a falling 3 year moving average, this convergence is happening rather quickly. An uptick in the current unemployment rate (more workers looking for jobs) may signal that (with this indicator) a recession may not be far behind. Whether or not Trump can provide economic stimulus is not going to be an issue in this case, because the impact of that would not be felt until well into 2017 (reason why equity and perhaps bond markets have got way ahead of themselves).

3) In what could be a very important moment for the future of the Euro, Italy votes on constitutional reform on Sunday (Dec.4). Prime Minister Renzi has indicated that if a "no" vote wins, he will resign and once again Italy will be thrown into political chaos and it is likely an election will follow. This may give the "populist" parties (who want to hold a referendum on the Euro) an opportunity to move into power. This is at a time when banking issues in Italy are already problematic and could create even more financial market chaos.

Next Week: Central Banks start to take the stage.


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Wednesday, November 23, 2016


Last year at this time I wrote about being thankful for the time my family and I spent living in the US (and all the great memories) and the return to Canada (that likely extended my stay on this planet).

We still celebrate the holiday because it became part of our lives and for us, kicks off the Christmas / Holiday season. It also allows us to think about what we have and reflect on our good fortune and take the time to consider those that have not had such good fortune.

My wife and I have had the great pleasure to be involved with the folks at New Circles over the last year. These are people who dedicate their lives (or a very large chunk of them) to helping those who have not had such good fortune, try to get to a bit of a better place.

It starts by making sure that they have clothing (Gently Loved Outfits to Wear or GLOW) that they can shop for (without cost) in a dignified setting, but goes much further and helps them to begin to grow into productive members of the community with skills training and social programs.

We had the wonderful opportunity to attend a graduation ceremony last summer. There was a great deal of pride and accomplishment in that room and it was moving to say the least. People who had come, with basically nothing, to live in Canada were ready to become independent members of the community in a very positive way.

At High Rock we recently met with a new Canadian (referred by Cindy, the founder of New Circles) who was educated, trained and worked in the world of investment finance in a developing nation. He had packed up his family and taken the bold step of trying to create a better life for them. We helped him develop his "value proposition" for marketing himself as an expert in emerging markets and build a successful resume.

At this time of year, one of our favourite programs is the  Holiday Angels , where donors are matched with families in need who provide a wish list which includes items such as clothing, kitchen wares, toys and giftcards for groceries. The notes of thanks from small children and their parents in past years have touched us deeply. Many are in sheer awe of the kindness of strangers.

So for us it is not just a time for giving thanks, but a time for giving to make the spirit of the holiday season a meaningful time.

So thank you to Cindy, Alykhan, Diana and all the staff for allowing us the privilege to be part of the New Circles family, it has enriched us and opened our eyes and our hearts.

Tuesday, November 22, 2016

US Stocks At Record Highs: Building In A Large Number Of Positives 

S&P 500 prices are up close to 8% on the year and earnings for 2016 are expected to show close to zero growth. 

Earnings expectations for 2017 (building in all the positives) are for growth of 11.4%.

Inclusive of all that is positive, 12 month forward Earnings Per Share are at 16.7 times, well above the 10 year average of 14.3.

Simple question: if you had new cash, where would you want to buy US stocks (with a long-term investment in mind)?

If you are buying a stream of future earnings, which is why you invest in equities (which are completely built-in to the 16.7 times Earnings per Share data), then you are buying at relatively rather expensive prices.

At prices that put Earnings per Share below their longer-term average, it would likely make more sense.

So why the hurry?


Stock prices are running on emotion: they are calling it the "Trump Trade" and most investment companies and financial institutions want you to buy into the hype, because if stock prices go up, all is well with the world, apparently.

I am a contrarian by nature, so I am not likely someone who runs with the crowd and I am definitely not running with this one. In fact, I notice the cracks in the argument (part of my cautious nature: keeps me agile, fit and slims my waist line): like the possible end result of the continuation of the populist, anti-free trade movement. First Brexit, then Trump (tearing up the Trans Pacific Partnership, which accounted for about 40% of the global economy), next the Italian constitutional referendum and/or the French presidential elections (which could, in fact be the beginning of the end for the Euro).

Are we to ignore all that because apparently Donald Trump will make America great again?

He has certainly pushed interest rates higher and left a great deal of those with overwhelming debt (at record levels) with higher debt servicing costs and only hope for some economic help from the yet to be announced fiscal spending.

Hope is a good thing as long as there is some follow-through.

Are we to believe that Donald Trump is going to be able to pull it off (he also claimed that he was going to put Hillary in jail)?

Good luck with that. The man is all talk, little substance.

As my business partner Paul says..."One month does not a trend make..."

We will talk about this and more and how our models and portfolios continue to beat the benchmark averages despite our cautious approach on our client webinar today. The recorded version will be posted on our website: High Rock Capital Weekly Webinar at or about 5pm EST.


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