We Are Blessed To Live In Canada

We should not take it for granted.

It is far from perfect and depending upon your perspective, it may never get there. Those who have become Canadians more recently (and especially those who have come from horrible circumstances) may have the greatest appreciation for our country.

We who have been here longer probably complain more.

Many try to rationalize away their right to vote, decrying the futility, but we all have the same ability to influence the outcome and we should make sure that we exercise that democratic right.

Politicians (both the party leaders and the constituent in my riding) and their goals may be questionable and objectionable and sometimes the choices are limited, but we should not let this dissuade us from voting, even if it is the best of bad choices.

I have a simple formula for making my choice:

I list my priorities, in order, then try to find which party platforms best suit those priorities.

My family's well-being (and future well-being) is always at the top of the list and there are many sub-priorities that fall under this heading, both long-term and short-term in nature.

I would never assume to try and influence anybody's personal choices.

It is arrogance in the highest form to try and impose my beliefs on anybody else.

It is weakness in the highest form to let others influence your beliefs.

We all owe it to ourselves to make our own decisions based on what our priorities are.

As a country or as a community, we have all obliged ourselves to co-exist within the context of what the majority wants, but if we collectively decide that they no longer (or never did) share our interests, then we also have the ability to vote for change.

Is it time for change?

I can't tell you that. 

Decide for yourselves.

But exercise your right to vote for the person or party that you think will take our beloved country in the direction that suits you best.

and..... GO GO BLUE JAYS!

Trust

We had a nice gathering of clients and friends last evening to celebrate the successful launch of our High Rock Capital Management Private Client Division. 

It was a great chance to chat with clients who had been working with me for years and some who were brand new.

We had some lovely wine tasting provided by Chris Mclean of Rogers and Company, the "Ferrari" of wine importers and distributors in the Toronto area (with special thanks to Dan Cook who set that up for us). Chris gave us some great discussion on the geographical, geological and ultimately the flavourful reasoning for his selections. 

Emerging Canadian artist Donna Chudnow kindly added plenty of colour to the evening with a wonderful display of a great cross-section of her work. 

One of our sponsored athletes, Miranda Tomenson, was also on hand to talk about her journey from being 23rd (and 3rd Canadian) woman to cross the finish line in the 2013, 1/2 Ironman World Championship, through an almost career ending knee injury in 2014 and back to world-class status for the 2016 season and her dream of competing at the Ironman World Championships (and finishing in the top 10) in Hawaii in 2018.

The Blue Jays were at the top of most conversations and the exciting time that it had become for the city of Toronto and Canada as a whole.

One of our more shrewd clients made a call to purchase playoff tickets well before the Blue Jays clinched and they were on hand to share their stories of Wednesday's game 5, emotionally charged, victory.

The mood in the room was positive and this in light of some financial markets that had been less so. In fact we had just finished sending out client 3rd quarter reports and in the words of one client: "Breaking even never looked so good!".

But with almost everyone I chatted with over the course of the evening, there was one underlying theme: Trust.

"We Trust you".

That is one very heavy responsibility, but one we accept and absolutely respect.

As I once read: Trust takes a long time to earn, seconds to break and an eternity to repair.

We take that very seriously.

So thanks to all of our clients for joining us last evening to celebrate, share your thoughts, your feedback and your trust.

http://www.highrockcapital.ca/about-high-rock.html

Exciting Times For Toronto Blue Jays Fans

Boom! Jose's home run drives the Blue Jays to Kansas City for the ALCS.

Not so exciting times for the US Economy however, as it appears that slower than expected September retail sales and lower than expected inflation reports further indicate that the US is importing the global economic slowdown.

It was hoped that the US economy would lead the global economy through the 3rd and 4th quarters of 2015, but this hope appears to be fading. 

Chinese and emerging economy weakness inclusive of currency weakness and US$ strength is exporting deflationary pressures into the US economy.

China is also at the heart of a commodities downturn that’s further weakening prices around the world. The slowdown in the No. 2 economy is colliding with increased supply resulting from efforts in the past decade by global mining and energy companies to boost production to meet what had seemed to be insatiable demand.

     Meantime, China’s investment binge since the 2008 crisis has created overcapacity in capital-intensive sectors from cars to commercial buildings. And its August decision to let the yuan depreciate means less demand for foreign products and even cheaper shipments abroad if further currency weakness ensues.

This is making the US Federal Reserve's decision on beginning the normalization of interest rates even more difficult.

Meanwhile, Industrial production in the Eurozone rose only 0.9% year over year in August, slowing from a downwardly revised 1.7% in the previous month.

3rd Quarter earnings reports are front and centre over the next month and expectations remain negative for both this earnings season and for the 4th Quarter as well.

Based on the slowing economic growth and negative earnings, we just can't get excited about the outlook for equity markets.

So for a much more positive experience for the next few weeks, stick with cheering on the Blue Jays!!

Live From Washington DC:

(that's me at the US Federal Reserve! Notice how it is not crawling with tourists!)

I am surrounded by economists and central bankers this (Canadian Thanksgiving) weekend in Washington as it is the 57th annual meeting of The National Association of Business Economists where the Theme is "North America's Place In A Changing World Economy", exploring the "tectonic forces" shaping the world economy: demographic shifts, political change, technological advances, deeper trade linkages and environmental stress which are pressing businesses to rapidly evolve and stressing governments, all in the context of a sub par recovery from the Great Recession. I am joined here in Washington by none other than Bank Of Canada Governor Stephen Poloz who will be addressing the conference today.

He comes to Washington from Lima, Peru where he addressed a meeting of the Institute of International Finance:  saying that "financial stability issues add a new dimension of risk to the many uncertainties that are already present in the conduct of monetary policy".

more here:

http://www.bankofcanada.ca/2015/10/integrating-financial-stability-into-monetary-policy-10102015/

"the reality is that central banks have to cope with tremendous uncertainty regarding financial stability issues"

Repeat: tremendous uncertainty!

So the institutions that we are counting on to lead us out of the "wilderness" are facing tremendous uncertainty.

Financial market participants are buying equities and commodities in joyous rapture over the last week while central bankers are questioning the very basis of monetary policy and how it is to be implemented with maximum efficiency (which they really have not figured out yet).

At the same meeting in Peru, US Federal Reserve Vice Chairman Stanley Fischer reiterated the Fed's desire to begin to raise interest rates, but added an interesting caveat: 

"However, that is an expectation, not a commitment. Both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy. "

"For example, it is conceivable that inflation may rise more slowly or rapidly than we currently anticipate. Should such developments occur, we would adjust the stance of policy in response".

In other words, they are just not sure.

Meanwhile 3rd and 4th quarter earnings expectations continue to be adjusted downward now anticipating negative earnings growth for Q4.

Tune in for a more detailed discussion of these and other investing and wealth management issues on our weekly webinar tomorrow.

We should have a recorded version available on our website by approx. 5pm

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

Let's go Blue Jays!!

Taking A Longer-Term Perspective

Back at the beginning of the year I laid out a few themes for readers and at High Rock we Incorporated those themes into our weekly webinar when we began that series in April.

I have never been one to fall into the trap of economic and market predictions because I know that when you look back at the record of most economists and portfolio managers, there are few who get it right.

Hence the theme to "Expect The Unexpected", because in all likelihood those who make those calls are going to be wrong.

 On Tuesday the International Monetary Fund (and there is no shortage of really smart folks in their ranks) lowered there expectations for the global economy (which means that their original estimates were wrong).

click on this table to enlarge it and if you want more info go to:

http://www.imf.org/external/pubs/ft/survey/so/2015/RES100615A.htm 

The point being, that no matter how smart the experts are (or think they are), there are a great deal of forces at work in the global economy beyond the scope of the economic models.

One thing that we do know however, is that the science of human behaviour is significantly altering the economic landscape.

There has been an enormous shift in the mentality of consumers, producers and investors as they have learned to deal with the repercussions of the 2008 financial crisis and "great" recession.

In fact, it may be more of a result of what happened as information technology took hold at the turn of the century. 

There is a growing sense of immediacy, a general impatience where results have to be achieved in a significantly shorter time horizon.

So short-term outcomes take priority over long-term objectives.

Investors monitor their portfolios daily, CEO's need to get their share prices higher to hold off the shareholder activists and capital moves from one asset to another in search of quick profits.

No wonder there is so much uncertainty in the global economy.

Uncertainty forces decision makers to hold off on making economic decisions: consumers don't consume, producers don't produce, economic growth slows.

Central banks don't like the uncertainty and because they are limited in their ability to affect global economic development to monetary stimulus programs that may or may not be effective if that additional money is not put to work in the economy (but used for share buy-backs to fuel upward share price movement). Then they become reduced to making positive commentary ("cheerleading") to inspire the economic decision makers to get off of the fence.

The US Federal Reserve has been talking about a stronger US economy in the 2nd half of the year, but recent economic data shows that it is not happening according to their outlook. If the latest IMF forecast is worth its salt, the uncertainties are getting bigger not lessening.

Inflation will return when economic growth drives commodity prices higher. 

Economic growth will return when investors start to take a longer-term perspective.

Until then, low economic growth, low commodity prices, low inflation, low interest rates and low earnings mean low investment returns.

How Discipline Has Worked So Far?

One of the first things we did at High Rock back in April was to put our heads into some rigourous re-evaluation of our investing models. We structured the basis for 3 models: a fixed income model (with government, corporate investment grade, high yield bonds and preferred shares) a global equity model (broad cross-section of equity ETF's) and a tactical equity model (small and mid-size Canadian companies).

Clients would have the ability to use all 3 of these models to form their strategy based on their goals and risk tolerance as determined through their wealth forecast.

My portfolio strategy, for example, is 40% of the fixed income model, 50% of the global equity model and 10% of the tactical/growth model.

Others with a more conservative portfolio have 60% fixed income, 35% global equity and 5% tactical / growth. Any combination of the 3 models can be structured to for a tailored strategy.

As we began the process for re-balancing out of the old 60% equity model, we undertook a significant amount of research to determine: 

1. How each model should be structured.
2. How we would transform the / my existing model into the new ones.

Structure:

Based on our fundamental view (I have talked often in this blog and on our weekly webinar  about our 2015 "investing themes" since January), it was our decision to be cautious and defensive with our and our clients capital (for at High Rock we invest in the same models as our clients) .

Discipline

This meant that in our fixed income models we would use bond market weakness (which we got in May) to add government bonds, but we would remain defensive about adding corporate and high yield names. We bought T-Bills for capital protection as well.

In our global equity model, our discipline to remain defensive and protect our and our clients capital  followed the theme that we believed that equity markets were at that time very expensive. As we went about replacing higher cost ETF's with lower cost ones (also a result of rigourous research efforts throughout the month of April) we under-weight most of our purchases and raised our cash weighting.

We also took advantage of some short-term $C strength in May to add $US as we felt that, at that time, the $C was likely to move lower based on the BOC's monetary policy surprises. Holding $US can help in times of higher volatility as the $US becomes a safety haven. Bond markets lead other financial markets and April's bond market volatility was telling and was a warning flag for things to come.

Our tactical / growth model was active in a couple of names, but when they ran their course we were able to take our profits and get to the sidelines. Cash is a defensive asset and while it is not a growth asset, when necessary, it is better to be in cash than to see our capital erode.

My portfolio is positive on the year with all of the adjustments. Most equity markets are negative on the year, some bond markets (not government) are negative on the year, the Canadian preferred share index is negative on the year.

Any new clients that have joined us since April are "barely" invested (still have the bulk of their portfolio in T-bills), so they have not been subjected to the extreme volatility.

You cannot completely avoid volatility, but with disciplined investing, you can seriously reduce the consequences. 

And that is what we have done so far this year.

www.highrockcapital.ca

What Is Disciplined Investing?

At High Rock we consider ourselves to be "Disciplined" with our investment process and while I often refer to various concepts for our approach in this blog, I thought it might be worthwhile to  review the philosophy behind those concepts. 

This is a philosophy garnered from experience of more than 30 (55, if you include our joint efforts) years of formal education, investing, trading and helping others to achieve their goals.

1) Investing is for the long-term.

• It is about creating a strategy to achieve our financial goals and objectives over the course of our lifetime (and perhaps beyond if we wish to leave something to a beneficiary).

• We cannot have an investing strategy if we do not know what we are trying to accomplish.

• Make a plan and stick to it: do not get caught up in the day to day "noise" of the market.

• Periods of market insanity never last forever, whether it is extreme optimism or pessimism, markets will return to the mean over time: periods of out-performance will be followed by periods of under-performance.

• Everything has a cycle: different asset classes will perform differently at various times throughout the cycle and a balanced and well-diversified portfolio which contains many different asset classes will have significantly less volatility (and better risk-adjusted returns) than one that is skewed to a single asset class.

• Otherwise, we are gambling. Gambling is not investing.

2) When there is new cash to invest we need to be aware of where we are in the longer-term cycle.

• We need to fully understand the economic fundamentals upon which the current market is based and the probabilities of what it may lead to next.

• We have to gage the "psychology" of the market: the general public buys most at the top because the positive "noise" (media, etc.) is loudest and sells at the bottom because the negative noise is loudest and the pain is the greatest. Human beings are conditioned to avoid pain.

• Human emotion is the greatest enemy of successful investing: fear and greed are stronger than long-term resolve.

• We need to be independent thinkers and not be afraid to be contrarian: when all the "experts" agree, something else is going to happen.

• With all this considered we can then pick the appropriate price points for making new asset purchases.

3) Regular re-balancing takes the "guess-work" out of the timing for buying and selling:

• As I stated earlier: different assets perform differently through the course of the economic or investment cycle.

• An out-performing asset will become "over-weight" (as a percentage of the total portfolio) which tells you when to sell what is the excess to return to the strategic weight.

• An under-performing asset will become "under-weight" and the "profit" from the sale of the over-weight asset can be used to purchase the necessary amount of the under-weight asset.

• Over time, this adds significant value by further compounding growth.

4)  The costs for investing can detract from the growth over time.

• The difference between paying 2.6% (all in) and 1.3% could cost well over $1,000,000 over 30 years (on a $1,000,000 portfolio now).

• Transparency of all costs must be available, at all times.

• Not just the fee, but the other "embedded" costs.

5) There can be no conflict of interest.

• In other words, any interests (be they financial or personal) cannot be put in front of the investor/client interests. That is the fiduciary duty that holds a portfolio manager / advisor accountable.

Next blog:

How has discipline been good for us this year?