Wednesday, May 27, 2015

Higher Highs and Higher Lows:

The Up-Trend For The S&P 500 Is Still Intact.

  • Technically, long-term trend line support for the S&P 500 is at approx. 1970-80.
  • Although yesterday registered a significant drop on higher than average volume, until enough selling interest enters the market to push it through that level, the up-trend will continue.
  • Trading volume is a concern, as the up-days continue to reveal lower than average volume and the down-days have higher than average volume, however there has not been enough price movement or momentum in either direction to take the S&P 500 out of its short-term range:

  • Volatility jumped yesterday, but in general has been well below its historic averages and certainly significantly lower than it was earlier in the year:

What comes next?
  • We continue to believe that stocks are expensive:

  • However until a sustained break-out from the current trading range in (either direction) occurs, the short-term looks like it will be more of the same, range-bound trading.
  • If enough buying emerges to make new highs above 2135 and the market is able to sustain those, a move to 2150 will be likely.
  • If selling enters the market, there are a number of points where we would expect to see buying support:
  • 2090 at the short-term trend-line.
  • 2040 at the March lows.
  • 1970-1980 at the December lows and the long-term trend-line.
  • That would be approx. a 6% correction.
  • We are due for a correction, but only time will tell as to when.
  • We remain cautious.

Tuesday, May 26, 2015

A Few Thoughts on DIY (Do It Yourself) Investing

There is a reason why professionals are labelled as such:
They have taken the time to study, pass exams and practice their profession for many years.

I remember the first time I tried to install a new shower valve myself:

12 hours and 3 spools of solder later, I called the emergency plumber, who quite cynically quipped that he had attended school for 2 years to learn his trade.

As will always be the case, there are some who may take advantage of their superior education and training to over charge and under serve their respective clientele.

This prompts a number of folks to decide to try it on their own.

In the investment industry, the advance of ETF's (Exchange Traded Funds) in recent years has offered the DIYer's an opportunity to get low cost broad exposure to create balanced and diversified portfolios.

When the equity markets are rising in price (as they have been since 2009) it is easy to persuade yourself that you are good at this investing thing.

The S&P 500 (total return) is up approx. 21% annualized over that 6 year period. 

The SPY (low cost ETF ) is up just a little less that that.
The EFA (non-North America) ETF is up approximately 14% per year on average over the same period.
The broadly diverse World Equity Index ETF (ACWI) is up approx.  17.5% .

Not even the housing market in Toronto or Vancouver has given off this kind of return.

Of course you had to have bought in at the bottom in March, 2009 and held on through the stomach churning "is it 2008 all over again" period in 2011.

And then you had to resist the urge to take your profit along the way (and perhaps re-enter at higher levels).

Of course, all of the DIYer's that I talk to have done this and then some.

It's been a great run.

But what comes next?

What happens if volatility spikes (few have confessed to being "unnerved" by last October's steep drop) again?

How will you protect that handsome return?

Is it worth it to pay an additional 1% per year to get an expert to help you re-balance and to ensure you keep all that hard-earned return?

Your call.

Oh, and good luck with this....

Need help (not with the car engine or plumbing though)?
Let me know.

Monday, May 25, 2015

Inflation in North America:
Outside of Energy, It Is Gathering Strength

While the "headline" numbers look passively benign, when energy is factored out, both Canadian and US Consumer Price Index (CPI) data show inflation creeping higher.

  • April CPI fell .1%, the "core rate" was unchanged from March.
  • Year over year (last 12 months), April CPI was +.8%, the "core rate" was +2.3%.
  • Gasoline prices were down 21% in April, 19.2% year over year.

  • All components except transportation rose.
  • Looking forward, when the impact of energy is reversed in 9 - 12 months time, the CPI headline number is going to shoot higher, with everything else being equal.
  • Canadian bondholders "real" returns (after inflation) will also move considerably lower.
  • It would not be surprising for longer-term bond investors to be demanding higher premiums over inflation (higher yields / lower prices).
  • Something to watch for as it will impact mortgage rates and other term borrowing costs.
  • The Bank Of Canada will have to be "on guard" if inflation rises without economic growth. 
  • In the 1980's we termed that scenario as "stagflation"!

  • A similar story: CPI in April rose .1%, but core (after food and energy) prices rose .3%.
  • The year over year core rate increased to 1.8% (closing in on the Fed's target of 2%).

  • Bond investors will be wary of their future "real" returns.
  • Attention must be paid.
  • We will be watching closely.

Friday, May 22, 2015

What's Happening Around The Globe:

China: Slowing Economy

 = expectations of lower interest rates =  record equity prices:

2015 = +44%

Germany: Business Confidence stalls:


 Clearly it is not economic growth that is driving global equity markets, but it is lower interest rates or the expectation of lower interest rates as central banks continue to fight deflation and slow economic growth with stimulative monetary policies.

What happens when economic growth begins to improve?
What happens if economic growth does not improve?

How high is too high?

Thursday, May 21, 2015

Little New From The Fed's Minutes
But "Expect The Unexpected"

There was nothing significant in the Federal Open Market Committee (FOMC) minutes released yesterday other than a re-affirmation of expectations of better US economic growth in the coming quarters:

  • Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace.
  • While participants continued to see potential downside risks resulting from foreign economic and financial developments, most still viewed the risks to the outlook for economic growth and the labor market as nearly balanced.
  • Participants generally agreed that data on private spending for the first quarter had been disappointing, with unexpectedly weak household expenditures and investment spending. Retail sales had continued to be tepid, although consumer sentiment stayed high and auto sales rebounded in March.
  • Participants also pointed to other reasons for anticipating that the weakness seen in the first quarter would not endure. A number of the fundamental factors that drive consumer spending remained favorable, among them low interest rates, high consumer confidence, and rising household real income. 
  • A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms’ investment spending might be larger and longer-lasting than previously anticipated.
  • In addition, the expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged. Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand. 
(more here)

My Take:

  • There are some concerns about the consumer (who represents close to 70% of the US economy).
  •  Last week I posed a theory that suggested that demographic issues may be responsible for this change in the consumer.
  • Aging Baby Boomers are not spending (like they used to) as they save for (or enter) retirement.
  • Frugal Millenials (now the largest cohort in the population) have generally different lifestyle and consumption habits (than did their folks, the Baby Boomers).

  • It may be a combination of the winter slowdown and demographics or maybe it is as the Fed claims: just "transitory".
  • Nonetheless, attention must be paid!

Wednesday, May 20, 2015

Canadian economy rebuilding, though headwinds remain, says (BOC) Governor Poloz

Some key points from his speech yesterday to the Greater Charlottetown Area Chamber of Commerce:

"The Confederation Bridge has simplified the trip since it first opened. If you come to the Island by car, you don’t have to navigate the waters of the Northumberland Strait. According to the Canadian Encyclopedia, the shallow waters of the strait are susceptible to strong currents, tides and turbulence. Even the most skilled sailor can find it challenging to read the winds and waves, and to judge all the cross-currents.
If only the Canadian economy had a similar bridge. We’ve been on a voyage of rebuilding since the Great Recession. But the trip has been longer and more complicated than previous recoveries because of all the cross-currents acting on the economy. Not only are the headwinds of the global financial crisis still blowing, but now we’re also dealing with lower prices for oil and other key commodities, which previously were a key growth engine for us. The implications for income and investment, and the adjustments they’re causing across sectors and regions, may take years to work themselves out."
(more at the link below)

  • Canadian economy is once again on a course toward balanced sustainable growth.
  • However, there continue to be headwinds.
  • Led by non-energy exports (which are benefiting from a weaker C$) and stronger US demand.
  • There are signs of a recovery in the creation of new export companies.
  • Despite the uncertainties surrounding the oil price shock, the impact has occurred more quickly than expected, but has not been larger.
  • The underlying trend of inflation is somewhere 1.6 to 1.8%.
  • Expect the Canadian economy to reach full capacity by the end of 2016.

In a nutshell:

  • No surprise: The BOC continues to count on the future strength of the US economy to carry the Canadian Economy.
  • We will have to watch developments in the US to get a sense of what to expect for Canada.
  • We will also have to continue to watch the C$ performance vs the US$ (see last Fridays blog).
  • Oil prices are a "wild card".

Latest US Economic data:

Yesterday: Housing Starts showed some improvement after a difficult winter:

Tuesday, May 19, 2015

Bond Market Volatility: ECB Answers.

One of my Themes for 2015 has been that Central Bankers do not like volatility.

Volatility erodes confidence for those who participate in the economy: 

Consumers who are uncertain focus on savings and don't spend. Businesses postpone investing in growth activities until there is more certainty surrounding the future.

Recent Bond market activity, especially in the German bond market (but also in north American bond markets), has been quite volatile as bond investors  have become increasingly more concerned about building-in future inflation expectations in bond yields and prices.

In response, this morning the European Central Bank, through executive director Benoit Coeure, has announced that they will speed up their bond-buying operation (Quantitative Easing) in May and June. This has brought some buying back into bond markets as bond investor's fears of future inflation are brought back to more reasonable expectations.

In the UK, it was announced that inflation for April fell more than expected.

Meanwhile, last Friday's US economic data pointed to a less confident consumer and lower industrial production.

For the US Federal Reserve, a less confident consumer will be an important consideration when making the determination to begin to normalize interest rates in the US.