Thursday, February 4, 2016

A Reader / Client Asks:
How Can We Ever Expect To Get Back To 7% Average Annual Returns?

As all questions are, this is an excellent one because at the moment, for planning purposes, it is hard to imagine getting back to those returns in the years to come, given what we are currently experiencing.

Behavioural Finance 101: people will project the current situation long into the future. That is just normal human behaviour. 

Everything economic is cyclical, we shall in the future, as we have in the past continue to cycle through economic periods.

 The timing is the tricky part.

The academics will tell us in study after study that "timing" the market is perhaps successful in some short-term periods, but over the longer term, it is not as successful as a broadly diversified and balanced portfolio that is built to ride the waves of volatility.

Many failed to either get back in or stay the course through 2008 and as is always the way, most of the selling occurred right at the bottom of the market when the "pain" was too great to take any more. We humans are averse to pain.

The sceptics missed the rally for the next few years, piling back in in 2014 and driving stock prices to way over-valued levels (in my humble opinion) encouraged by low interest rates (chasing higher returns by taking greater risk) and share buy backs.

Now that seems to be coming apart. Equity prices in many cases are at or below 2014 levels.

In general, the bulk of your portfolio (the "core") should be devoted to the balanced and diversified stuff.

However, there is also some room for a more tactical approach.

My brilliant business partner Paul spends countless hours using his CFA and his business acumen finding value in small and medium sized companies, be it in their high yield bonds or their common and preferred shares.

We have a "tactical model" that allows our clients to participate in some of his ideas ( I am learning from him).

We caution that there is greater risk here and that this needs to fit with a clients goals and objectives, time horizon and tolerance for risk as determined by their wealth forecast.

This week, one of our holdings that had been looking a little distressed, jumped by almost 100% overnight when it was announced that Lowes would be taking over Rona.

Our tactical model owned Rona shares.

When you think of it, Canadian assets have become very attractive to US companies with the weakness of the C$. So there may be more opportunities out there. 

Back to the main point of the answer: there will always be opportunities in financial markets. The experts (like my colleague Paul) can help add value, however it is also important to keep a long-term perspective and allow for the cycle to assert itself: supply and demand will eventually find equilibrium and the patient will prosper.

If you would like to receive this "blog" directly to your inbox, please email:

Sunday, January 31, 2016

What's Working So Far This Year?


January was a difficult month for financial markets and despite some technical buying on Friday (short-covering on the back of the Bank Of Japan's move to negative interest rates), the All Country World (equity) Index (ACWI) was down about 5%.

The Canadian Bond Index was basically flat over the month, which leaves the Benchmark 60% equity (ACWI) and 40% fixed income (XBB) portfolio with a negative return of - 3%.

Depending on the model structure, a High Rock portfolio of similar composition was down -1 to -1.5%. Nobody likes a loss, at anytime, but we have worked tirelessly to find solutions to mitigate the volatility: overweight cash and a little overweight Canadian equities (TSX was down a little less than 1.5% in January) and underweight US equities (S&P 500 was down a little more than 5% in January).

We are also a little over-weight in Government of Canada bonds (relative to Investment Grade, Corporate bonds).

A more conservative mix benchmark of 40% equity (ACWI) and 60% fixed income (XBB), had a negative return of about -2%.

Depending on the model structure, a High Rock portfolio of similar composition was basically flat (no growth, but no loss). 

We (at High Rock) have taken a defensive stance since April of last year and those of you who know me from my former gig, also know me as a more conservative investor, fearful of over-valued assets and mindful and patient to wait for market corrections to purchase assets at better values (and that it can take a long time to build a solid portfolio).

If you take the goalie out of the net, you are vulnerable! (yes that is me in the photo at the top, in the 2009 Baycrest Proam fundraiser for Alzheimer's research) I live, breathe and play defence (goal)!

Here is what one thankful client wrote (after having seen the plunge in equity markets):

Thanks so much, Scott.  I feel better now.  I am so glad that you are handling my money.  I really do not know much, at all, about the best way to handle my money. 

If you would like to receive this bog directly to your in-box, please email:


Tuesday is webinar day at Hgih Rock, at 4:15 we will hold a live call for our clients and post the recorded version on our website at:

We will discuss current economic events, our thoughts on those and their implications for financial markets and our portfolio models.

Thursday, January 28, 2016

Re-visiting The Themes For 2016

We are coming to the end of January (already?), so lets take a look at our themes for 2016 and see what has happened or changed so far:

1) Volatility and Uncertainty (no change)
  • I probably don't need to dwell on this, but volatility is up and will remain so until we get a better handle on the global economic picture and all the various influences on it (and there are many).
2) The US Economy (soft and getting softer)
  • The domestic economy continues (for the time being) to carry the whole economy.
  • Labour markets improved throughout 2015.
  • Consumers (70% of the US economy) remain confident, although that does not appear to be being translated to retail spending:

  • Consumers are saving, not spending.
  • The strong $US and the weak global economy, especially in China and emerging economies has been negatively impacting the export economy and manufacturing data continue to be soft.
  • Looking backward, Q4 2015 GDP is not expected to be anywhere close to what was expected in early 2015.
  • Official data on this will be released tomorrow.

  • Looking forward:

3) Commodity Prices (more uncertainty):
  • There is serious concern over the massive debt that has been amassed as interest rates have remained low for such a long period of time (especially in the energy sector) and that low oil prices will make servicing that debt extremely difficult as it is expected that supply and demand factors will continue to put downward pressure on them.
  • This situation not only impacts North American producers but Emerging economies who have built their economies around oil and do not have the monetary reserves to sustain their debt levels, hence a greater potential for default.

  • It has been suggested that this scenario could possibly drag the US economy into recession, but one of the sharpest of economic thinkers, Mohamed El-Erian only puts this at a 30% probability.

4) Diverging Monetary Policies (even more uncertainty):

  • The US Federal Reserve raised rates in December and are expected to do so again in March (tightening monetary policy), still promoting a rather optimistic view. However, yesterday's meeting and policy statement revealed concern over the global situation.
  • Meanwhile in Europe, Japan and China there are expectations of further easing of monetary policy.
  • Obviously, this creates uncertainty as to who has the greatest understanding of current economic conditions and that uncertainty transcends into financial markets:
  • Liquidity dries up and volatility rises.
5) Geo-political concerns (rather quiet on the headlines at the moment, but lurking):

  • Middle East
  • Russia
  • UK exit from the European Union
  • Greece
  • North Korea
  • Global terrorism
  • US political gridlock (Donald Trump ?)
6) Bond Markets:
  • Yield curves are flattening: investors / traders are selling expensive risky assets and buying safe government bonds.

7) Equity Markets Remain Expensive
  • Earnings growth is declining: 

  • 10 year average price to earnings ratio at 14.2 times remains below the current 12 month forward expectation of 14.9 times, although well below the peak near 17 times.
  • There is better value now, but economic uncertainty may continue to put earnings growth at risk.
  • Investors are (finally) becoming uncomfortable with over-valued assets.
8) We Are In A Low Return Environment

  • Equity markets are down by about 8% so far this year.
  • Bond markets are up slightly.
  • After 6 years of above average growth we must now endure below average growth that will bring us back to average growth.
  • This may last well into 2016 and possibly into 2017.
  • Overweight cash as a defensive asset remains prudent, but there will come a time when that cash can be put to work and we will remain vigilant for that time.
Stay tuned!

If you would like to recieve this email directly to your inbox, please email:

Wednesday, January 27, 2016

Mind Boggling!

When a new client transfers their exisitng portfolio into our care, it never ceases to amaze me what I will find.

We might live in Canada, but Canada represents only about 3-4% of world capital markets. Having a 5-10% weighting in Canadian equities might be acceptable. But a 50% plus weighting? That is not a properly diversified portfolio and "yikes!" to have to endure a year like 2015 where Canadian equity assets were one of the worst performers.

I will not even begin to list the junior oil and gas and mining stuff that the former advisor stuffed in there likely to capture some "new issue" commissions.

Only 15% fixed income assets and less than 5% in government bonds? That is not balance my friends. In times of high levels of volatility, this is a portfolio that is going on the wild ride.

DSC (deferred sales charge) mutual funds. Advisor gets 5% up front (no cost to the client, yet) and an MER (management expense ratio) of 2.5% (advisor gets a trailer of .5%). The conflict of interest here is extraordinary! I cannot believe that these still exist. Oh and if you want to get out of them before the 7 year penalty period...this is where it "costs" the client.

This was not a portfolio put together by someone who truly cared about the client.

Broad diversification, balance among asset classes in a fee based account with a full understanding of any third party management costs and respect for your long-term goals and objectives is the sign of an advisor who cares.

Ask yourself, does your advisor really care?

What has she / he done for you lately?

If you would like to receive this blog directly to your inbox, please email 

Tuesday, January 26, 2016

A Client Writes:

Last week High Rock Capital Management sent its quarterly reports out to clients.

And, as we always ask for, received feedback:

"Good work and good calls. Only place I did not get slaughtered..."

Balance, diversity, an underweighting of equities, fewer preferred shares and an overweighting of cash (as we have preached since last May) has been beneficial for portfolios.

Today is webinar Tuesday and as we do each week, we will talk about all the pertinent financial news, our views and address how we see the global economy impacting financial markets and our model portfolios for our clients.

Feel free to tune in to the recorded version at
which should be posted at or about 5pm EDT.

Friday, January 22, 2016

Oversold Financial Markets Are Settling, 
Now What?

As the major focus has been on oil prices and specifically the impact of  the new supply as Iran comes on stream, short-term traders (computer generated and not) have pushed volatility levels on financial markets higher playing on the fear of investors. Interestingly, not enough panic (or capitulation) yet to drive volatility to last August's levels.

After the Bank Of Canada's "wait and see" approach was revealed on Wednesday, yesterday, The European Central Bank suggested more Quantitative Easing for March and traders decided to use that as the catalyst to buy in short positions.

Oil is higher about 12.5% off of its lows, the Canadian dollar is back above $0.70 US and as it stands at the moment, the S&P 500 is approximately 4.5% off of its lows.

  The Bank of Canada remains rather optimistic about the second half of 2016  (they were rather optimistic about the second half of 2015 at this time last year) but their track record has not been stellar. They keep pointing south and hoping that the optimism of the US Federal Reserve will play itself out.

While all this is going on, behind the scenes, the US jobless claims numbers are creeping higher:

Historically, declining jobless claims have been correlated with rising stock prices, but now that jobless claims are rising?

This is also data that may make the Fed less optimistic about the US economy in 2016.

Clearly, lower equity prices have brought them closer to being of better value based on projected earnings, the 10 year price to earnings ratio average for the S&P 500 is 14.2 times. When the market settles this week, the 12 month forward projected price to earnings ratio is going to be quite close to that number.

So is it time to buy yet (to get some of that better value)?


However with the global economic situation showing no signs of pulling out of the current malaise (IMF earlier this week lowered global growth targets and so also did the Bank of Canada) and the US economy seemingly unable to provide the impetus and under-performing on many levels, there could be further reductions to forecasted earnings, so it is likely prudent to remain cautious.

And so we shall.

Stay tuned.

If you would like to receive this blog directly to your email, please email:

Tuesday, January 19, 2016

The International Monetary Fund (IMF) Cut Its World Growth Outlook

The global economy will expand 3.4% this year, down from a projected 3.6% in October. Growth for 2017 has been revised to 3.6% from 3.8%.

According to the report: There are important risks to the outlook, which are particularly prominent for emerging market and developing economies and could stall global recovery.
These risks relate mostly to the ongoing adjustments of the global economy, namely China’s rebalancing, lower commodity prices, and the prospects for the progressive increase in interest rates in the United States. They include the following possibilities:

• A sharper-than-expected slowdown in China, which could bring more international spillovers through trade, commodity prices, and waning confidence.

• A further appreciation of the dollar and tighter global financing conditions which could raise vulnerabilities in emerging markets, possibly creating adverse effects on corporate balance sheets and raising funding challenges for those with high dollar exposures.

• A sudden bout of global risk aversion, regardless of the trigger, could lead to sharp further depreciations and possible financial strains in vulnerable emerging market economies.

• An escalation of ongoing geopolitical tensions in a number of regions, which could affect confidence and disrupt global trade, financial flows, and tourism. New economic or political shocks in countries currently in economic distress which could also derail the projected pickup in activity.
Commodity markets pose two-sided risks. On the downside, further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.

On the upside, the recent decline in oil prices may provide a stronger boost to demand in oil importers, including through consumers’ possible perception that prices will remain lower for longer.

All in allthere is a lot of uncertainty out there, and I think that contributes to the volatility,” said IMF chief economist Obstfeld. “We may be in for a bumpy ride this year, especially in the emerging and developing world,” he said.

More on this and plenty of other things to discuss today on our weekly webinar.

We will post the recorded version at or about 5pm (EDT) on our website:

So feel free to tune in!!