Friday, March 27, 2015

Volatility and the Bank of Canada
(and possibly other central banks to follow)


I have been pounding the table on volatility a fair bit in this blog in the last while and my theme has been that central bankers do not like volatility.

In a speech in London, England to the Canada - United Kingdom Chamber of Commerce on Thursday, BOC governor Poloz addressed that very topic:

more here

Certainly central bankers did not like the extreme volatility brought on by the 2008 financial crisis and the subsequent "after-shocks" of volatility that have followed the Great Recession.

Historically low interest rates (ordinary monetary policy tools) and Quantitative Easing (extraordinary monetary policy tools) have been utilized on a global scale to fight of deflationary pressures that threatened the global economy.

In most cases, central bank mandates are to promote "price stability", which for all intents and purposes is an inflation rate of 2%. (the US Federal reserve has a dual mandate of achieving  price stability and maximum employment).

What does this all mean to us?

  • If there is economic growth, there is likely to be inflation of some degree.
  • We all desire economic growth because it allows us to improve our standard of living: 
  • greater likelihood of employment = potentially better income.
  • In other words, a little inflation is a good thing.
  • Too much inflation erodes purchasing power and is counter-productive.
  • low inflation, disinflation and deflation are all symptoms of a weak economy and nobody wants that (except the doom and gloom types).
To get economic growth, individuals and businesses need to be confident that the future will hold the potential for higher incomes and growing earnings.

As I have repeatedly mentioned (like the proverbial broken record), central banks have been trying to turn the tide of non-confidence with their aggressive (extraordinary) monetary policies.

Now....

They want to start to "wean" us off of our expectations that they will be there to hold our hands through the inevitable volatility that may arise as they begin to "normalize" interest rates. 

That is what Governor Poloz was talking about on Thursday.



It is time to "take the punch bowl away from the party" and that as a result we should anticipate higher levels of volatility in financial markets. We need to adjust our expectations.

So prepare yourselves, as I have suggested so many times before, for a bumpy ride. For the short-term, this may provide lower than hoped for portfolio returns. Certainly lower than what we have been experiencing over the last few years and quite possibly, lower than the long-term averages.

Repeat after me....

Balance

Diversification

Long-term planning

And so on and so on.....



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, March 26, 2015

Talking the Talk, Walking the Walk.


So....
I write this daily blog about Wealth Management.
Do you wonder how I actually invest my money?

It might be somewhat hypocritical if I were to go on and on as I do and not have my money invested in one of my models.

Oh, and the other question, do I rent or own?

  • Rent.
and...

I prefer the 60% equity / 40% fixed income model with a few caveats (at this time):
  • I have a little more cash that I have come into recently and I am being patient with it (keeping it in a short-term money market fund) for the moment.
  • My fixed income holdings are a little overweight in high yield bonds and preferred shares because the yields are so relatively attractive.
  • However, once I feel more comfortable about the equity and fixed income markets (yes, I am watching what the Fed and BOC are up to next, the general economic trends and volatility), I plan to ear-mark that cash for the 60/40 target model.
  • Yes, because I believe in what I write about, but more importantly, I feel it is paramount to invest for the long-term.
  • This 60/40 model, in all the research that I have done, consistently provides returns on average, over multiple years of approx. 7-8% .





I still spend a significant amount of time researching and back-testing as to how to best allocate the 60% equity into sub-categories:
  • % of Canadian Equity (do you know that Canadian Equity makes up only approx. 4% of the World Equity Index).
  • % of US Equity (clearly the best performer over the last few years, but perhaps ahead of itself at the moment?)
  • % of International Equity (and in this category how much in Emerging Markets)
  • % of Alternative Strategies (ie a more tactical approach other than ETF's?)
  • Speaking of ETF's...which ETF's are best suited to providing me with what I consider to be good liquidity, strong performance, distribution yield and very importantly, cost.
Equal research goes into analysis of the 40% that makes up the cash and fixed income sub-categories:
  • % dedicated to the safety of Government and Investment Grade Corporate bonds (relative to their very low yields and high prices).
  • % of inflation indexed bonds (will inflation pick up into the future and when?)
  • % of high yield bonds (pretty inexpensive at the moment, with some fairly attractive yields, but you want to have those that will survive to pay their coupons and return their principal).
  • % of preferred shares with tax efficient dividend yields.
I believe in balance and diversification and know that whatever comes that may, in the long-term, that is where I want my money. So that is where it is/will be. 

Same place that I would want my clients money to be. 



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, March 25, 2015

Checking in with Copper

More Positive Signals?



  • I have often talked about Copper as a metal that is regarded as a leading indicator of the future health of the global economy.
  • Monday witnessed a spike in the price of copper that seemed rather surprising.

  • According to the Wall Street Journal:
Possible explanations for Monday’s move ranged from an earthquake in Chile, the world’s No. 1 copper producer, to harried trading ahead of a contract expiration to anticipation of Chinese manufacturing data that was due later Monday. Copper is used extensively in manufacturing and construction, making it sensitive to economic data. 

  • Regardless of the reason, buyers were scrambling to get into copper (or cover short positions) and the technical picture appears to be changing  from a downward trend that has existed since 2011 to what is either a correction of significance or a new trend altogether.
  • I first noticed this turnaround in my blog of February 26: "Positive Signals".
  • Since hitting a multi-year low at just above 2.40 in January (prices not seen since 2009), copper has rebounded to trade near 2.80 (after spiking above 2.90 on Monday) as I write this. 
  • That would be a 16% move from the lows.
  • While it is certainly too soon to say that this is in fact a new up-trend developing, it may well suggest that  there may be a more positive story beginning to take shape for the global economy .
  • It will probably be worthwhile to continue to monitor Copper's progress.

And on the Inflation / Deflation Front:


  • The Bureau of Labour Statistics announced yesterday that the US Consumer Price Index (CPI) for February grew at a rate of .2% (the first positive number in 4 months), a change of 0% over the last year. 
  • The Fed would like to see this number at 2%.
  • The core (without the more volatile food and energy components) CPI data showed a 1 year change of 1.7%. 
  • We do all have to eat and use energy, however!!
  • Nonetheless, it was slightly higher than expected which market participants will view as a signal for a sooner than later increase in the Fed Funds rate.
  • However, this is just one month's data, we will need to see the next few months to determine a pattern.

 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 24, 2015

Euro Zone Recovery


  • European Central Bank (ECB) Quantitative Easing (QE) has pushed some short-term interest rates across the euro zone to negative levels.
  • This helps to force money to move to potentially more productive assets.
  • The Euro/$US has tumbled from near 1.40 last May to current levels near 1.10 (after touching below 1.05 last week).
  • This assists the export sector and forces higher prices for imports to limit the deflationary impact.
  • Oil prices have remained at lower levels, reducing transportation costs to both business and consumers.
  • Led by Germany, recent economic data had shown signs of the beginning of economic recovery.

  • The latest data show that this is gathering steam:
  • Data firm Markit, which surveys more than 5,000 businesses across the eurozone, said Tuesday its composite purchasing managers index—a measure of activity in the manufacturing and services sectors—rose to 46-month high of 54.1 in March from 53.3 in February. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.
  • more here: http://www.wsj.com/articles/eurozones-modest-economic-recovery-gathers-momentum-1427189791

  • Expectations are that this growth momentum will continue.
  • It should continue to lift confidence levels among businesses and consumers.

  • There are still some issues that are unresolved:
  • The ongoing debt problems for Greece and the concerns as to whether they will remain in the Euro zone.
  • Russian aggression continues to be a geo-political concern.
However:
Central Bank actions appear to have had the desired impact and while it is early going, the Euro zone appears to pulling out of the its long-standing economic stagnation.

Most importantly:

With Euro/C$ at 1.37... 

A European Vacation is still looking like an excellent option for the summer!!!




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.

Monday, March 23, 2015

Checking in on Volatility


The VIX hit a new low for the year on Friday at a little above 12.5, before closing near 13. 

For perspective: the high this year was 23.43 in mid January. The high last October when the S&P 500 was correcting was near 31.

  • One of my key themes since I started actively writing this blog to help investors make some sense of all things impacting the management of their wealth, has been that central banks do not like volatility because it erodes confidence in financial markets.
  • Investor confidence is directly related to economic confidence and plays a major role in the decision making of households and businesses as they determine their desire for future spending.
  • If households are confident about the future of their net worth (asset growth and income growth), they will be more inclined to spend.
  • If businesses are confident about future prospects for growth, they will invest in growing their respective companies.
  • Future economic growth is contingent on "upbeat" consumer and business spending.
There is a lot riding on this confidence thing:

(click on the chart to enlarge)


Are the central banks just buying time?
or
Do they actually have control?
  • This is an important consideration.
  • There are still many uncertainties hovering over financial markets and the global economic condition.
In addition to the concerns in the chart above:
  • Are current asset prices inflated by so much global monetary stimulus? 
  • As we end Q1 2015, what impact will the strong $US have on S&P 500 earnings? Earnings and future earnings are the key fundamentals for equity valuation. At this point earnings (for Q1) expectations have declined by an approx. 8% since Dec. 31.  more here:(file:///C:/Users/JScott/Downloads/EarningsInsight_032015.pdf

  • If volatility should return, do central banks have enough "arrows in their quiver" to answer it?

From 2004 until 2006 volatility was subdued and began picking up in 2007 and spiked in 2008.

From 2012 until 2014 volatility was subdued and has picked up in 2015, will history repeat?



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, March 20, 2015

"Risk-Adjusted" Returns and Costs


  • If we are heading into a period of lower returns (with a protracted period of low interest rates) there are some very real concerns that investors need to be mindful of:


  • A portfolio of 60% equity assets and 40% fixed income assets has, over the last 5 years has returned close to 10% (on average).
  • The long-term average for this model is closer to 7.5%.



(click on this chart to enlarge)
  • In all likelihood, then, the next 5 years may prove to be under-performing years.
  • The "human behaviour" response to this might be to want to be more "aggressive" with your portfolio.
  • Expectations of lower returns in the future can and may inspire investors to take on more risk to try to generate higher returns.
  • When we discuss "risk-adjusted" returns and look at the above chart, we can see how, historically, a more aggressive (70% equity weighted) portfolio has not necessarily generated longer-term higher returns.
  • In times of higher levels of volatility it will take a 70% equity portfolio more time to recover from a negative performance.
  • That is longer "down-time", when a portfolio is not growing but playing "catch-up".
  • This impacts the compounding potential of a portfolio.
  • My counsel, stick to your plan, don't be tempted to make a short-term adjustment, it may just backfire.
Costs

  • In a lower return environment, one way to improve your "net" return is to pay close attention to the costs associated with investing.
  • If you are in the "old school " per transaction brokerage commission world, what is your advisor making when he/she buys and sells securities for you and how does this impact your return?
  • If you are in the world of "fee-based" advisory services, what other (hidden) costs are you paying?
  • Mutual Fund or ETF MER's are adding cost and reducing your "net" returns (and are not tax-deductible as are the fees). Do you know what these are?
  • Fortunately for investors, the regulators are going to require that you are made aware of all of these costs in the upcoming implementation of the :
  • Client Relationship Model - Phase 2 
  • Performance Reporting and Fee / Charge Disclosure 


Ask your Advisor more about this. Ensure that you have the transparency that you deserve!


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, March 19, 2015

Later Rather Than Sooner: 
The Fed (Part 2)


From the outset of the Fed's post-meeting press release, it was fairly obvious that there were some concerns with recent economic data:
  • Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat.
more here:

And in the end:
  • When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

The $US collapsed on this statement.

Financial Markets began to build in a scenario of lower interest rates for a longer period of time:
  • Bond yields fell: US 10 year yields to 1.92% (from 2.03%).
  • Bond prices rose.
  • Equity markets rose.
  • The "party" continues for asset prices.
Remember that the Fed is "data dependant" and the data has not been good lately (other than the employment data).

  • So we wait to see what the future data will reveal.

Does this impact our longer-term view?

  • It could, if we are looking at lower levels of inflation for longer periods (and that's what the bond markets are suggesting), we will have to brace ourselves for potentially lower returns for our portfolios into the future (especially for the lower risk investments).
  • To get greater returns, investors will be forced to take on greater risk and this can be dangerous.
  • More importantly, investors will need to be vigilant to ensure that the fees they pay are not going to eat into their returns.

While we wait for the data and the Fed (and the other central banks), we need to assess the prospects for our portfolios and what steps might need to be taken to ensure continued reasonable "risk-adjusted" returns.

More on this to come.

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.