The Latest 

On Tuesday, on our weekly webinar, we showed a number of indicators that historically have preceded recessions in the US.

(you can listen and view more on that here: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html )

The probability of a recession is rising, the current cycle is coming to its inevitable conclusion and only a few indicators are yet to turn lower.

One of the final pieces to the puzzle will be the US Federal Reserve: as it has been in the past, they have raised interest rates forcing short-term bond yields to rise and flatten the yield curve and subsequently tip the economy into recession:

This may happen in June or perhaps in September, when they determine that, despite slowing economic growth and an uncertain consumer, the prospect of inflation and robust employment growth outweigh all the other signs (declining corporate profitability and business outlook) and leaves them little choice, because their dual mandate of full employment and price stability will be the final determinant. 

The big problem is the fiscal austerity that has come with political deadlock and the polarization of the two parties away from the compromising middle.

So it will not, ultimately, be the central bank who bears the responsibility (as they will have little choice), but the failure of the US political system (or the politicians themselves, failing to find a way to work through their differences for the benefit of the economy). 

We may have our issues in the Great White North (like cold winters, that give us snow and freezing temperatures in late April), but we have managed to at least free ourselves from political gridlock, where whether we like it or not, things are getting done at the federal level.

Unfortunately, our economic wherewithal is still somewhat closely tied to the largest economy in the world that lies to our South, so a recession there (although it likely won't be as long and as deep this time around), will be impactful on Canada. 

We should prepare ourselves. It is likely only a matter of time.

We will prepare our client portfolios appropriately.

Your feedback is always welcome: scott@highrockcapital.ca

and

If you would like to receive this blog directly to your inbox, please email: bianca@highrockcapital.ca

There Is A Rising Probability Of A US Recession And It May Come Sooner Than Many Think.

A South Florida Real Estate agent that I know just told me that she has not seen anything like this since 2006: "The market has just shut down"! she told me. I know it's anecdotal, but it gave me time to think on the long drive back yesterday and there are lots of things that are "adding up".

My business partner Paul made one of his top picks on BNN's Market Call Tonight (last night) as 30 year Government of Canada bonds. A safe place to park money when risk assets start to falter.

Paul talked about lots of things, especially the preferred share market, so it is worth tuning in, if you have a moment (click on the link):

http://www.highrockcapital.ca/in-the-news.html

So it is webinar Tuesday at High Rock where we will (as we do each week) update our clients on our thoughts on the global economy, financial markets and anything that we think could impact the management of their wealth. Certainly this will include our thoughts on the the coming US recession and will be one of our key topics.

We do post the recorded version on our website, so if you are interested to hear what we have to say, please feel free to tune in at or about 5pm EDT at :

http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

I Am Really Tired Of The Argument About Advisor Fees

First and foremost, the investment industry argument is that if advisors do not get paid well, there will ultimately be fewer of them and that could lead to a lack of "retirement saving advice" which could hurt retirees. 

Really? Seriously?

Check it out:

http://policyschool.ucalgary.ca/sites/default/files/research/financial-advice-lortie.pdf

That is courtesy of Rob Carrick (from yesterday's G&M):

http://www.theglobeandmail.com/globe-investor/retirement/retire-planning/adviser-fee-reform-investors-youll-be-fine/article29710701/

Old fashioned style stock brokers (commissioned salespeople in reality) who charge a per transaction commission have an inherent conflict of interest in trying to "sell" as many transactions as possible, especially new issues (IPO's) that have a hefty commission incentive paid by the issuing company.

Ever wonder why your "broker" highly recommended a new issue and a few months later turned and suggested that it was time to get out? A commission grab (both on the buy and the sale). I saw it all the time from colleagues in the "advisory" business (border-line "churning").

Finally the regulators (as of July 15 this year) are going to force these folks to show the total annual dollar value of all of these types of costs that the client is charged.

Then there was the "advisor" who sold Deferred Sales Charge (DSC) mutual funds. No cost up front to the client, the advisor received 5% commission on the sale from the mutual fund company, plus a trailer commission each year. The client had to hold on to the fund for 7 years or face a penalty when selling.

The mutual fund also charged an MER of something in the vicinity of 2.5% annually.

Ever wonder why those did not work out so much?

I say good riddance to those folks. 

The industry encouraged them because the investment dealers and banks got 50-60% of the "advisor's" commissions.

I say welcome transparency!

However, it is not yet "total" transparency.

There are still "hidden" costs associated with mutual funds and ETF's that, as of yet, do not have to be declared.

Do the math on an extra 1% - 1.5% of additional costs that you may or may not be aware of (on top of whatever you are paying the advisor). It adds up over time. For retirees, I think they might rather have the additional cost savings? What do you think?

I / we believe in "total" transparency, so at High Rock, we are a step ahead of where the regulators suggest we need to be and state, up front, what your total costs will be. That is one of the many things that make us different and better.

If a bunch of over-charging "advisors" leave the business, because it is not lucrative enough for them (or the banks and investment dealers that they work for), we are happy to take up the slack. We are in the business of helping people, getting appropriately compensated for doing so and independent of the large institutions (with their targets for revenue and "asset gathering". )

Your feedback is always welcome: scott@highrockcapital.ca

and

If you would like to receive this blog directly to your inbox, please email: bianca@highrockcapital.ca

What's New And Exciting!

I do tend to go on and on about the state of the global economy and financial markets and portfolio management. I hope that it makes some sense to all of you who honour me by taking the time out of your valuable day to read the words that I write here and view the charts that I present (and perhaps enjoy whatever humour I can bring, or not).

I eat, drink and breathe this stuff (some might respond with the phrase: "get a life"), but this is, in fact, my life.  Those who do put their faith in me / us (because I do not do this alone) to guide them through the minefield that is wealth management are, for the most part, quite appreciative of this guidance.

 One of the scariest parts of the whole wealth management process (because it is more than just getting decent returns on your portfolio, although I do not want to detract from the importance of growth) is the planning process.

It is not a simple task to gather up all of your very personal and private financial data and present it to someone who you don't necessarily know so well. It is certainly a human emotion to fear their judgment. Fortunately, I have had the privilege to work with some wonderful families over the past number (15 or so) of years who did, way back when, check their fears and test the waters and found them somewhat less scary after all. 

The fact that almost all of them are still putting trust in me to guide their financial livelihood is a great compliment. An even greater compliment is the referrals that they, from time to time, send my way. I get to meet some wonderful people in this business. A good number of these folks, after so many years, have become good friends.

Since my former business partner and I agreed (to disagree and...) to go separate ways (another story coming your way soon, for those of you who may be interested), I have literally received hundreds of calls from those with whom I was no longer permitted to work with.

What is exciting (for me anyway) is that the time is slowly approaching when my handcuffs will become unlocked, I will no longer be in "exile" and there will be an opportunity to look after (guide, assist) all of the wonderful people I was able to meet during that phase of my career. 

And when I say "look after", I mean that in the truest sense. We do not take on new (or former clients) just to shuffle you in, invest your money and rarely, if ever, hear from me again. It is one of the many aspects of High Rock that makes us different and better: Fiduciary Duty which is more than a simple "standard of care".

I can't wait to get you all (those of you who will still have me, of course) back into my life!

So stay tuned.

Your feedback is always welcome: scott@highrockcapital.ca

and

If you would like to receive this blog directly to your inbox, please email: bianca@highrockcapital.ca

Searching For Positives

And not finding many...

Where to start?

US Economy:

On Friday, Industrial Production for March was reported to have declined more than expected:

Later on Friday, Chinese Q1 GDP was reported at an annualized +6.7%.

However, on Saturday (somewhat under the radar), the quarter to quarter data was released at +1.1%. In an article by Bloomberg Intelligence, they suggested that something was not adding up and that there was a discrepancy between the quarter to quarter data and the annualized data:

(click on the chart to enlarge)

Finally, the much ballyhooed OPEC and Russia oil production cap meeting ( that pushed oil prices higher last week) ended in failure because Saudi Arabia and Iran cannot agree. Certainly the politics of this is not lost on many: Saudi Arabia is not happy with the nuclear accord granted to Iran, so there is, for the moment, not much hope for any real or perceived agreements. Oil prices have fallen 4% (or thereabouts) and may test the lower support level of the recent, but tenuous up-trend channel:

The C$ is weaker, global stock prices are weaker, but perhaps less than some might have thought, so despite the potential for more uncertainty and greater volatility, the hope for something better in the future remains in the psychology of financial market participants.

Earnings (with only about 10% of S&P 500 companies having reported) are coming in at better than the significantly lowered expectations (so that might also be seen as a positive for some).

We shall talk about all this and more (including our strategic portfolio adjustment ideas) on our weekly client webinar tomorrow. The recorded version will be released at or close to 5pm EDT at http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html 

Feel free to tune in for a listen...

Dear Scott

I got mail:

"Dear Scott, I received my quarterly report, thank you. I only have one question: My portfolio is up over the last year, all my friends say that their's is not. How do you do it? Can I refer you? Sorry, that was two questions..."

Actually, I don't do it. We have a team (interestingly, my former business partner didn't like the term "team", another story for another day, however...) who works diligently to try and determine the best portfolio strategy for each of our clients.

Not only that, my own money (and the rest of our team's money) is invested in the exact same models as is our clients, so I (and we) have a vested interest in the performance of our models.

For each individual and / or family we do a Wealth Forecast (prepared by our Certified Financial Planning Professional) to determine their current financial situation and how their goals, risk tolerance and time horizon dictates what strategy and combination of our investing models best suits their situation, now and into the future, through retirement for the remainder of their lives.

We do not invest for anyone until we have made that determination (because how could we ever begin to assume that one set strategy was right for everyone?). Some advisors just go about gathering clients and their assets and popping them into a pre-ordained strategy that is pretty much the same as every other client. 

But everybody's circumstances are different and therefore their investing strategy should be tailored to those differences.

That is why we are not advisors. We are a portfolio management company: a team of varying (and accredited) skill sets that work closely together to identify appropriate strategies for ourselves and our clients. Many advisors do not have the same combination of accreditations (ask your advisor what their accreditations are, just to be certain). 

Disk jocky's, journalists, former politicians, meteoroligists, psychics, etc. may even have a title like VP alongside their name, but unless they have CFA (Chartered Financial Analyst), CIM (Chartered Investment Manager) or CFP (Certified Financial Planner) among others, they are not accredited to properly look after you with active portfolio management (and many advisors don't).

Active portfolio management. That is the difference maker.

It has been a tough year (since last April) for investing because stock markets hit their highs in May and fell thereafter. 

Having more than normal cash in your portfolio and perhaps less stock market exposure has helped. This has been no secret, because I go on and on (and perhaps on, even more) about that on this blog, on our weekly webinars and anytime a client asks about the over-weight "cash-equivalent" in their portfolio or in their portfolio reviews or just in general conversation (another difference we bring: our clients can talk directly to the people managing their portfolios, anytime).

The Canadian dollar move from $.83 US to $.68 US and back to $.78 US has left heads spinning (and for those with $US in their portfolios some pretty wild swings). Our benchmark (as most of you know) for equity markets is the MSCI All Country World Index and it has had a total return (including dividends and currency adjustment) over the last year of about - 6%.

So it is understandable if portfolio values might be lower.

However, our active management strategy (and a few very good  value additions along the way in our tactical model) has benefitted our models and our and our clients portfolios.

So, I say to you (client who thanked me): thank you for putting your trust in us, because it is a major leap of faith to do so and something that we do not take lightly.

Oh and certainly feel free to refer "us"! 

(Although I will also say: we will be limiting the number of households that we look after in order not to compromise our level of service, but at the moment, we have some room for new families and individuals who appreciate our philosophy and methodology).

If you would like to receive this blog directly into your inbox: please email bianca@highrockcapital.ca and we would be ever so happy to do so.

The Good, The Bad and The Ugly!

(With apologies to Mr. Eastwood et al)

The Good: Stock markets (especially in Europe) are higher. 

Basically it is a "relief rally"...some good news for the economy  from the headline news :

• Data on Chinese trade showed a jump in exports, giving investors hope that the situation in China may be improving.
• Oil prices have resumed their upward trend with the hope that OPEC and Russia will announce a production cap and the International Energy Agency outlook suggests a reduction in the current over-supply through the end of 2016:

• JP Morgan earnings results were better than expected.
• The Bank Of Canada left interest rates unchanged as they were pleased with the fiscal stimulus offered up in the budget.

The Bad: (behind the scenes)

• International Sales in China continue to fall.
• JP Morgan still posted declines in earnings, Bank Of America missed estimates (and posted declining earnings) and Wells Fargo (the 3rd biggest bank) also reported a slide in Q1 earnings and set aside more money to cover losses from lending to energy companies.
• Bank Of America, JP Morgan and Wells Fargo were among the US banks that learned Wednesday that they had failed a key regulatory requirement aimed at avoiding another financial crisis.
• The Bank Of Canada lowered forecasts for growth, expecting business investment to grow at only .5% vs. the .8% projected in January and also cut forecasts for consumer spending and exports.
• Volume on the S&P 500 remains considerably lower than volume in January and the beginning of February.

The Ugly:

• Retail Sales in the US declined unexpectedly in March.
• As the Consumer (2/3 of the US economy, as if I have not said this enough over the past year and my sincere apologies for the repetition) is not showing up so far this year.
• The outlook for US Q1 GDP has now been revised to within a "rounding error" of 0% growth.

Well my friends, we are certainly happy to see stock prices higher, especially in Canada because we re-balanced at the beginning of the year to add more Canadian equity assets and reduce exposure to US equity assets. 

Year to date, total return on the S&P 500 (including dividends and currency adjustments) is about -4.5%. For the TSX, the total return is about + 6.75%. That works nicely in our favour by about 11.25%. 

Time to take profit and quarterly re-balance back to even-weight? 

Probably. 

And perhaps raise a little more US cash as the S&P 500 is only about 3% from its all time highs and the Bank Of Canada clearly does not want a stronger C$.

Active, discretionary portfolio management can accomplish this in a "heartbeat". Perhaps, if you don't have active, discretionary portfolio management you might wish to call your advisor and have a conversation. If the conversation is not to your liking (or there is an effort to convince you otherwise), I am more than happy to chat.

If you would like to receive this blog directly to your inbox, please email: bianca@highrockcapital.ca

The Great Escape

(with apologies to Steve McQueen et al)

Well friends, the Polar Vortex got the best of me so we hopped in the car and headed south. After some 22 hours of driving (and an overninght stay in Charoltte N.C., just in time to watch Jordan Spieth put 2 in a row into the water), we arrived in the warmth and just in time to prepare the weekly client webinar for yesterday's regular time slot. (which, if you wish to listen to, is available in a recorded version on our website at:  http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Needless to say, I am a little zonked but I am watching the price of oil rise and draw buyers back into equity markets as if this would be the panacea for all the global economy's ills. 

Be carefull out there!

However, as I re-charge my mushy brain in an effort to put something coherent together for tomorrow, you may be interested in having a peek at my High Rock partner Paul's most recent blog:

http://www.highrockcapital.ca/pauls-blog.html

(because he is the true talent behind High Rock's ability to garner better thn average risk-adjusted returns for our respective clients).

Enjoy!

Confusion Reigns!

We, like many other participants in the financial markets, have watched and analyzed the minutes from the March 15-16 Federal Open Market Committee (FOMC) meeting (joint with the Board of Governors of the US Federal Reserve) and can conclude that it is quite possible that they are as confused as everybody else.

They (the members) "judged that information received since the Committee met in January suggested that economic activity had been expanding at a moderate pace despite the global economic and financial developments of recent months".

"They also agreed that household spending had been increasing at a moderate pace..."

Here is the big however... (that disputes the consumer / household spending theory that they apparently agreed upon):

The latest GDP Now data (which tracks input for Q1 GDP) released on April 5th (just a few weeks later) suggests that:

"...the forecast for real GDP growth declined from .7% to .4% due to declines in the forecasts for real consumer spending and real equipment investment growth."

So folks, as the US consumer is 2/3 of the US economy and as we have suggested is the "tipping point" for US economic growth (while the drag from the rest of the global economy persists) and if the US economy is 20% of the global economy, the US consumer is some 13.5% of the global economy.

Despite what the FOMC and Fed governors may think, the consumer is not (if we can put any faith in the GDP Now data, which has been rather accurate at forecasting in the past) spending (at least at the moment).

The Fed has tied a great deal to the consumer to pull the US economy (and by virtue of it, the global economy) along. 

But it is not unfolding that way.

If the Fed were to raise rates into this scenario, with all the other global issues at hand, then there is going to be a greater risk of a US recession. 

So the Fed, until things get better is not going to raise interest rates.

So there is some apparent relief for stock markets that have been more focused on the direction of interest rates than they have been on the fundamentals which are looking like they will experience 5 straight quarters of negative earnings growth.

So things are not looking so good and the Fed does not really have an answer for it, other than to try to put forward a brave and optimistic "outlook".

The Dow At 20,000 (By The End Of This Year)?

Another reader writes: "Hi Scott, what's your thoughts on this?:"

"This" being a blog by a NY based Investment Advisor explaining his reasons for a positive outlook on equity markets entitled: "4 reasons the Dow is headed toward 20,000 by the end of the Year:

1. 1) Psychology - Nobody is looking for a big move higher, and that is a positive, considering the market tends to fool the majority.

My Thoughts:

As a contrarian, I would tend to think that this argument might have some merit. If the majority of traders are already positioned to take advantage of lower equity prices (for perhaps all the right fundamental reasons) the short-term path of least resistance is likely to force buying and drive prices higher when these positions become no longer profitable.

Historically (since the peak in 2007 through the crash of 2008-09 and beyond, bullish / bearish sentiment (in white) has had mixed results in leading markets (Dow in yellow). The Gap widening since 2014.

We have focused in recent weeks on the impact of Corporate Share Buy-backs for distorting the true picture and it is possible that as long as this continues (or until it doesn't), this gap will continue to widen. But what should happen if corporations should find themselves with a need to raise capital and they need to access the equity market to do so? 

Canadian banks had to re-capitalize last year and raise money in the preferred share market. Look what happened there: a decline of more than 20% (in the preferred share index).

2) Market Resilience - Between the attack in Brussels and Fed officials calling for rate hikes, stocks could have easily fallen in recent weeks. They haven't.

My Thoughts:

Actually, to be more precise: some Fed officials would like to see higher rates (Chair Yellen's latest speech had a more cautious tone). But the Bank Of Japan, The Peoples Bank Of China and the European Central Bank have all been aggressively easing monetary policy to counter the financial market volatility that we saw in January and early February. I would put "market resilience" to date as a result of easier monetary policy globally (another possible distortion to where markets should really be?)

3) Breadth- The number of S&P 500 stocks above their 50 day moving average went from less than 10% to above 90% in the past 2 months, a rare and bullish signal.

My Thoughts:

There are literally hundreds of technical studies we can look at to try to determine market direction. On its own, one study can send a positive signal, while many others, simultaneously, can send the opposite. The key is the volume of trade (bottom of chart). If a market moves up on low volume, then it will not have much staying power. That is what we have seen lately:

4) The Fed - The Advisor (in his blog) doesn't see higher rates this year, and that should be a tailwind for stocks.

My Thoughts:

The Fed will not (in all likelihood) raise rates if economic circumstances do not warrant it. The domestic US economy is grinding along with strong employment growth, but there are many signals that are showing less than robust growth.

The theory that lower rates (or at least not higher rates) is good for stocks is misleading on a number of fronts. Low interest rates force investors into riskier assets as they chase higher returns. However, the fundamentals cannot be over-looked.

Our job as portfolio managers is not to gamble on whether a market will rise in price in the short-term or not. It is to make sure that we are not taking undue risk to get returns for our clients (and ourselves for that matter, because at High Rock we own the same assets as our clients). 

Would we like to see equity market prices go higher? Of course, because that would increase the value of our and our clients collective net worth and in the long-run we expect that if corporations are growing and paying dividends it means that they are working in our (the shareholders) best interests.

Our diligence is in determining if and how much we should allocate to any asset class. If it represents value, then it is a wise investment. If not, we should not have ownership (or at least limited ownership) of it.

Today is webinar Tuesday at High Rock where we will host a live webinar for our clients to discuss our interpretation of value, relative to what we see in the global economy and financial markets. We will post the recorded version on our website at about 5pm EDT, so feel free to have a listen:

http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Ready To Retire: Part 4

More questions from readers....(please keep them coming).

"Scott, given the current economic circumstances, how can anyone expect to see an average annual return of 7% again in our lifetime? You keep reminding us that we are in a low return environment!"

Indeed, an excellent question.

Of course, the real key to this discussion is: over what time period?

As I have said many times in the past and expect to say many times into the future: everything economic is cyclical, always has been, always will be. No matter what the central bank monetary policy and / or government fiscal policy does, they can only try to smooth out the length or depth of the cycle.

We have seen 8 recessions (cycle periods) in the US since the 1960's. We have not seen one since 2008-2009, so there is one coming, likely sooner than later (the longest period without one was 10 years, through the 90's).

The MSCI All Country World Index has returned (total return = dividends re-invested) almost 7% annually since 1995:

The Canadian Bond Index total return has been approximately 5.7% over the same time period. Blended into a balanced 60% (ACWI) 40% (XBB) mix, this would give a total return the vicinity of 6.5%.

We are going to have periods where growth assets stall and even turn negative: 2007-2009 the total return for ACWI was -24% (ouch!). 

Back then I fielded a great many similar questions about how we might ever see 7% returns again. It is human nature (behavioral finance 101) to project forward the bias of what has happened to us most recently: The Recency Effect. In other words, after a year of low or even negative returns, we make expect that we will not likely see positive returns again. Many investors refused to participate in equity markets after the 2008-2009 recession (and were also frightened by the 2011 debt crisis), but the ACWI returned an annual average 13 plus % from 2009 until now.

The real story is that over time: 10, 15, 20 years or more, the averages smooth themselves out. In the short-term you can get higher levels of volatility and swings in markets from cycle to cycle, but over longer periods, over multiple cycles, returns become significantly more consistent and stable.

We may be in a "low return environment" at the moment, but as the cycle evolves (and as future cycles evolve), we will likely be able to get back to higher returns and over the longer term, back to the average annual returns at or near 7%.

Of course, prudent portfolio management, planning and strategy (re-balancing) should be able to add value (so you get the benefit of the fees that you pay).

So, if you have 30 or 40 years (or more) of life left, you are going to see another 4 0r 5 cycles (at the very least). Make a plan, stick to it and get good (and resonably priced) advice.

And as I am sure that you all are aware (and to make sure that you all know in no uncertain terms):

Investing has risks, although we do our best to control that risk. Past returns are not in any way a guarantee of future returns and although we work our tails off to try to be better than the benchmarks,  there is always the possibility that circumstances out of our control will , at times, interfere with the year to year returns. Over longer terms, the historical average returns are certainly possible, but in no way are they certain.

If you would like to receive this email directly to your inbox, please email: bianc@highrockcapital.ca