Thursday, May 19, 2016

Financial Markets: It's All About The Fed! (And Your Advisor)

As it is my job to understand what is driving financial markets and try to put a short-term perspective to price swings and buying and selling opportunities and how they might have implications for longer-term portfolio strategy, I sat down to read the minutes from the latest Federal Open Market Committee (FOMC) / Fed meeting.

It is here, if you want to have a go....

The financial markets are no doubt focused on whether their might be a June interest rate increase (they next meet on June 14-15). The fact that it was  "still on the table" was a surprise, apparently. Personally, I think that it is always on the table, because they do want a "normalization" of rates and they do have a rather optimistic outlook, in general, about future economic growth.

When the proverbial "punch bowl" of monetary accommodation is pulled away (and we had just a glimpse of it yesterday), volatility will jump. Too many investors and traders have been lulled into complacency by the global central bank mantra that volatility is the enemy.

Volatility is inevitable, if interest rates are going to be normalized, just like it was when everybody "flipped out" in the summer of 2013 in advance of the potential secession of QE3 (remember the "taper tamtrum"?).

But it provided a great buying opportunity, especially for bonds. This time, it will be stocks.

So we think it is wise to have more cash in your portfolio to take advantage of the upcoming buying opportunity (and to avoid the inevitable melt-down of now over-priced equity markets).

You can, if you wish, just ride it out, or if you want a more active (and caring) approach (real portfolio management), let me know (it might just cost you less in fees, but may just help portfolio performance too).

Your feedback is always greatly appreciated, but there are some Q and A that I can no longer post on the blog because it apparently upsets some people (who don't like controversy), however, keep it coming, because I can and will respond privately: 

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Tuesday, May 17, 2016

Asset Allocation : 
Are You Positioned Appropriately?

There is only one way to properly develop a portfolio strategy: First and foremost you need to prepare a wealth forecast. Without doing so, without understanding the goals and objectives that you are trying to achieve and the time horizon over which you want to achieve them, you will not be able to consider all the variables that will go into building the portfolio strategy that is appropriate for you. 

I have written about many folks that I have worked with or work with now who have had great success saving and growing their wealth. The common denominator amongst them all is that they had a plan that was turned into a strategy that was followed, monitored and amended (when necessary).

Few families have the exact same goals that they wish to fulfill over the course of their lives. Which means that very likely, they will not require the same investing strategy either. 

Determining an appropriate asset allocation as part of your investing strategy comes down to a broad array of options, but the bottom line is finding the best (most appropriate) risk-adjusted returns for your specific situation.

It also needs to be re-visited when different asset classes become more or less volatile, because volatility is a determining factor in the risk adjustment. We have talked about preferred shares a good deal recently. They are no longer the safe and stable asset class that they once were perceived to be (see the chart below). Active portfolio management should and will make the appropriate adjustment to a specific asset class that now displays a greater degree of volatility. You may no longer have the appropriate weighting in your allocation (depending on your specific goals, risk tolerance and time horizon). 

(click on the chart to enlarge)

This is what you pay a portfolio manager to look after for you. Ensuring that you have the best possible returns for the risk that you are taking (and there is always going to be risk if you are trying to get returns better than just putting your money in a Government of Canada issued t-bill).

And, always, please remember that any historical returns are in no way representative of future returns (although we are always working our very hardest to get the best possible and hopefully better than average risk-adjusted returns for our clients)!

Today is webinar Tuesday for our High Rock clients where we will discuss what is happening in the global economy, financial markets and the world of wealth management. Which includes developments that may lead us to make some important decisions in the management of our portfolios and asset allocation. It is part of why we are different and better.

We do post a recorded version on our website, for those who may be interested following the presentation, at or about 5pm EDT:

I would love your feedback:

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Saturday, May 14, 2016

US Recession Watch: 
Retail Sales Jump = Catch 22

Yesterday's data on US retail sales for April showed a healthy jump (above expectations) as consumers bought automobiles and shopped on line. 

This follows about 8 months of rather lacklustre results, so it could well be a deferred shopping spree. As I often will say, one month's data does not define a trend.

However, it has pushed expectations for consumer spending higher and, as the consumer is such a significant part of the US economy, has increased Q2 GDP growth expectations.

The "catch 22" is that if the US Federal Reserve uses this economic improvement as an excuse to raise interest rates, then it does play into our theory about the flattening of the yield curve that we discussed on our weekly client webinar last Tuesday (available at the link below):

The yield curve flattens before a recession: either 2 years rise faster than longer dated maturities, or a combination of higher short term yields and falling long term yields can create this flattening.

Stay tuned!

I would love your feedback!

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Thursday, May 12, 2016

Recession Watch: 
Big Jump In US Jobless Claims.

Last Saturday I wrote about US unemployment levels as an indicator of forthcoming recession probability.

Today US Jobless Claims data showed an unexpected increase (to 294,000) for a second straight week, to levels not seen since February of 2015:

One or 2 weeks data may not be completely definitive. However, in light of our increasing probability of a US recession over the next 4 to 6 months, this is data that will now potentially be more market-moving. Jobless Claims are announced each week on Thursday morning.

Interestingly, Jobless Claims data has been historically inversely correlated to the S&P 500. As Jobless Claims fall, the S&P 500 rises and vice versa:

Something that we and financial markets will be keeping a closer eye on in the weeks to come.

Stay tuned.

I love feedback and questions!

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Tuesday, May 10, 2016

Supply And Demand: 
Why Fixed-Rate Reset Preferred Shares 
(And The Canadian Preferred Share Index) Are Still Vulnerable

Paul and I have been focusing more on the preferred share dilemma in our respective blog's and discussions of late and just in time, a report from Bloomberg to corroborate our concerns that banks will have to continue to raise Teir 1 capital to maintain their ability to absorb losses:

"Canadian Banks Fall Behind US, Europe Lenders In Strength Gauge"

In a nutshell, this means that Canadian banks will once again likely have to turn to the fixed-rate reset preferred share market to issue new preferred shares (because it is the cheapest way for them to do build the required capital) and add supply to a market that is only just now finding a way to absorb last years supply.

Total return on the Canadian (SP /TSX) Preferred Share Index (including dividends) is close to - 15% over the last year. The index is made up of close to 65% fixed-rate reset preferred shares. That kind of volatility has not been seen since the 2008-2009 financial crisis.

This has not been the "comfortable", low volatility, approximate 5% dividend return vehicle that it once was. If supply is coming, then the little bounce since the January lows may be just about over and the downward trend may be about to reassert itself.

You just might want to have a look at your preferred share allocations.

Today is webinar Tuesday and we will be discussing this and many other topics surrounding the global economy, financial markets with our clients. As we do each week, following the webinar, we will post the recorded version on our website, so feel free to tune in at

And, as always, your feedback is greatly appreciated:

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Saturday, May 7, 2016

US Recession Watch: Coming Soon, 
But Not Just Yet

Remember a recession is 2 quarters of back to back negative growth (GDP).

It is never good to try and put too much stock into the US monthly employment data because it is so often revised. However, one should instead look at the developing trend:

Despite a blip higher in the trend in March, April's data (released yesterday) continued the lower growth trend that began at the beginning of 2015 (February and March data were revised lower).

As for the unemployment rate, it ticked up to 5% (from 4.9%) and the labour force participation rate fell. Not, for the moment, anything of any apparent major significance. However, if the trend is turning (higher unemployment), it could be very significant:

Historically, when the unemployment rate (green line) crosses the 36 month moving average (brown line), it indicates the beginning of a recession (blue area). At the moment the brown line is at 6%, so they are still rather far apart. 

But, the brown line is falling at a steep clip, about .2% per month. In 3 months it will be close to 5.4%, in 4 months 5.2%.
If the unemployment level increases just .2% in 4 months, it could indicate the recession will begin then.

So folks, 4 months to prepare.

Here is the caveat: bond yields.

When the yield curve flattens, short-term yields rise to higher levels than long-term yields: as they did in 2007 (somewhat in advance of the 2008-2009 recession).

However, it could also happen that long-term yields fall as investors move to higher quality (less risky assets) in advance of a coming recession.

As you may recall, one of Paul's top picks on BNN a couple of weeks ago was 30 year Government of Canada bonds. So that is why.

It may not be that the US Federal Reserve needs to raise rates (push short-term yields higher) to create a recession (but if they do, that will certainly add to the probability).

So, we shall be watching these developments closely.

Stay tuned.

Your feedback is always welcome:


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Wednesday, May 4, 2016

Here Comes The Volatility

Sell in May? (and go away).

An age old market and trading cliche which I have discussed here before. Perhaps the uncertainties that are piling up are finally coming home to roost:

  • Interest rates: Will the Fed push rates higher in June?
  • Oil Prices: Higher? Lower? Sideways?
  • The US economy: higher employment, higher inflation and slow growth.
  • Geo-politics: Trump as Republican candidate, Brexit, Russia, China, Greece, Saudi Arabia, Iran, North Korea, Terrorism, Refugee Crisis...
  • Negative yields in Japan, Europe
  • Expensive stock markets, declining earnings
  • Low returns

Certainly a good deal of things to keep us on our toes in the world of managing money and getting reasonable risk-adjusted returns.

Risks are high and rising and it is a time to think defensively when it comes to portfolio management (something that we have been doing since last May at High Rock):

Higher than normal cash holdings.
Lighter than normal weight in risk assets.
More government bonds.

Volatility will bring opportunities to those who are patient.

Feel free to check out the weekly High Rock Webinar:

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