Equity Prices Are Rising While Earnings Expectations Are Falling

According to FactSet (Earnings Insight) data, S&P 500 companies earnings for 2017 at the outset of this year were anticipated to grow by about 11.5% (after basically flat earnings growth in 2016). 

For the 1st quarter of 2017, 57 (out of 82) companies issuing forward guidance have issued negative guidance: lower than expected earnings per share (EPS).

For all of 2017, expected earnings growth has been lowered to 10.3%.

The forward 12 month price to earnings ratio has jumped to 17.3 times.

Remember that the S&P 500 provided a total return of 11.3% through 2016, while earnings were, as I said basically flat. Which in simple terms, means that investors were looking ahead to 2017 for growth (even though the P/E ratio remained well above its 10 year average at 14.4 times).

So far this year, the S&P 500 is higher by about 3.5%.

In other words, earnings need to grow by close to an additional 15-20% (above the current 2017 expectations of 10.3%) to bring the P/E ratio back to its 10 year average (if S&P 500 prices remain at current levels).

Needless to say, we have more than built in a "phenomenal" US tax plan (if, as and when it becomes a reality) and buyers are pushing emotion to higher levels, while the fundamentals are showing us that prices are rather expensive on a relative basis.

As always, with our (High Rock) focus on the long-term, we think that short-term caution is the order of the day.

Equity market risk is rising and that becomes a warning signal. 

Have you looked into the risk levels in your portfolio?

Happy to help.

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

"Have I Got A Deal For You":

Advisor Conflict Of Interest

I get feedback, a fair bit of it sometimes, depending on the topic, but recently I have received a significant amount asking about the difference between the "standard of care" that is required by IIROC (Investment Industry Regulatory Organization of Canada) licensed financial / investment advisors ("brokers") and the "fiduciary duty" required by portfolio managers (like High Rock) licensed by the OSC (Ontario Securities Commission).

As it stands at the moment (because the various provincial regulators continue to kick the can down the road with "proposed targeted reforms") there is only a requirement of "suitability" for those who offer financial advice (from a bank or independent investment dealer, IIROC licensed). At best, pretty vague terminology. At worst, as the great majority of them are paid commission, wherein there is the potential for a conflict of interest. 

Even those who charge you a "fee" (fee-based account) are in fact paid a "commission" as a percent of that fee by their employer (the bank or investment dealer). If you are a "top producer" (generate lots of fees / commissions) you are paid a bigger % of that fee (as commission). If you are a top producer, you are put into the "Presidents or Chairman's Club (at your respected firm) and held in high (if not somewhat dubious) esteem. (see Paul's blog:http://highrockcapital.ca/pauls-blog.html :I Am Going To Blow My Top! 1/25/17)

Dubious because the standards you are measured by (generating revenue for your firm) are not necessarily in your clients' best interest (performance). I know this because I have been there. In fact, at one bank where I was a financial advisor (and Branch Manager), the president of the "brokerage" operation told me that they would not publish client performance returns on the client website because the advisors didn't want it. My response: "are you kidding me?", was not well received. I didn't last at that institution for very long (my decision). My moral and ethical standards were considerably higher than theirs were: Shareholders (and the bottom line) were their first priority. Not their clients (other than the revenue they generated).

So, in a nutshell, even as a fee-based financial advisor, they are incentivized to build their "assets under administration" (AUA), otherwise known as "asset gathering". This becomes, in and of itself a conflict because it may leave you, as a client, fighting for the attention of your advisor. How many times a year do you get to have a one on one with the girl/guy who "sold" you on joining her/his "wealth management practice" as a client?

If they are a "big producer", unless you are a "big client"... forget about it. I know, because I have been there. There is only so much available time in a day, week, month and year (and not enough to have a meaningful conversation), especially if the focus is on bringing in new clients (because that is where the $$ are).

Fiduciary duty requires that portfolio managers put their clients interests before theirs: no conflict of interest. Period!

So we ( at High Rock) have taken on a very challenging task of trying to change the existing order of things which is controlled, for the most part by the biggest financial institutions.

Not only are we (as a licensed portfolio management company, with our legislated fiduciary duty) held to a higher standard, we are trying to change the conversation about what exactly is a conflict of interest: selling mutual funds, structured notes (or new issue stocks, bonds and preferred shares) for a commission and trailer fees are fairly obvious,  but so is the pressure to have an enormous "book of business" over-populated with clientele.

So we limit the number of families that we look after. The personal contact is, for us, extremely important and we need the time to make sure that we are in touch. Regularly.

In the end, we don't sell. We serve. It is a very major difference. 

We are trying to change the conversation (and the world of financial literacy and "advice").

Join us!

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

Conversations About Risk:

In my world I get to talk to a great many folks across a very broad cross-section of financial knowledge and literacy. Some of them have titles like Doctor because they have studied economics or behavioral finance (for quite some time and are recognized for the expertise that they have developed). Some are pure traders who rely on things like market momentum and other technical factors to assist them with their decision making and yet others have a Finance education (CFA) and do in-depth research on specific companies and are masters of understanding the "fundamentals" for finding value in a company in which they might invest.

My job, in a nutshell, is to listen, learn and bring a great deal of this information to my clients in terms that they might understand. Some folks may have a greater understanding than others. Some folks want to understand at different levels than others. Some just put their full faith in my/our ability to know what is right for them. I certainly do not take that lightly.

I do hear lots of commentary about what other advisors do (and don't do) because we are still growing our business and interviewing with plenty of prospective clients.

Lately, I have been hearing a lot about how (now that equity markets are up) folks are feeling better than they were at the beginning of 2016 (we seem to get a significantly higher number of in bound calls when equity markets are more volatile).

The common denominator of a large number of my conversations reveals that so many have a very limited grasp of how much risk they actually have in their respective portfolios.

Most advisors really don't want you to know.

If portfolios are rising in value, it is human nature to be less concerned (and you are less likely to be paying close attention). In fact, it should be the exact opposite. You want to be asking yourself (and your advisor): "what is the downside potential from here?" and "how well am I protected?".

If you get a "don't worry about it" type of response, your antennae should pop up.

Every investor should have a deep understanding of their risk profile: what happens when the market (relatively complacent at the moment, despite some potential for a shock) all of a sudden gets volatile. Because, as history has revealed, when things do turn ugly, advisors tend to vanish and that discussion may be difficult to come by.

As I asked in last night's client webinar: http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Would you like your portfolio to look like this? (a new High Rock client's old portfolio, before High Rock):

or this? (an actual High Rock client)

(Over the exact same time period)

As I have said before, it is all about not losing sleep.

Remember that historical returns are in no way a guarantee of future returns, but at High Rock we work darn hard to get our clients the best possible risk-adjusted returns as we possibly can.

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Uncertainty Is High and Volatility Is Low: 

Yet Another Relationship Suffering From Changing Correlations

Our key theme for 2017 is that being "tactical" (with portfolio strategy) becomes even more important because normally reliable and long-held relationships between asset classes have been breaking down (and as a result adding greater risk to what was previously understood to have lower risk). 

We saw this beginning to happen in 2015 when we began High Rock Capital Management and as a result,  added a third dimension to the standard balanced portfolio of equity and fixed income with a model that features a more tactical approach. This is intended to be a vehicle that is non-correlated to the standard balance which helps to lower risk and increase 

risk-adjusted returns : more return for the amount of risk taken. 

This has allowed our clients to avoid the very volatile swings through 2015 and early 2016 and come out with a significantly better 2 year performance (to the end of 2016).

So far this year, volatility has remained at very low levels, while the uncertainty swirling around the global geo-political and economic fronts has been rising significantly.

Certainly the new US administration has made some robust promises that favour stock market fundamentals. However the rhetoric and the tweets coming from the President have focused on immigration and protectionism. 

Stock markets remain hopeful (and relatively expensive), but await detail and timing to justify their current levels and recent economic data has been mixed at best (inflation slowly ticking higher, employment and wage growth stalling, manufacturing index rising). 

So we wait, with growing levels of anxiety over what happens next and what priorities emanate from the White House.

Our strategy: be nimble,  (don't wait for the markets to go ballistic before you make adjustments to your strategy).

Be tactical.

Remember that historical returns (as mentioned above) are in no way a guarantee of future returns, but at High Rock we work darn hard to get our clients the best possible risk-adjusted returns as we possibly can.

Today is webinar Tuesday, where we will discuss the above as well as developments in global geo-political and economic circumstances and financial markets with our clients and how all of it impacts portfolio strategy for our and their wealth management and portfolio strategies. We will post this on our website at or about 5pm, so feel free to watch and listen: http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

This Blog Might Be A Long One!

Let's start with US Employment: the headline number of a robust 227,000 new jobs in January was about 50,000 more than anticipated. However, as I frequently have stated, this is a number that is potentially subject to significant revisions and looking back to November, lo and behold, the data was revised from 204,000 to 164,000 so over the last 3 months of data, a net change of plus 10,000 (above the expectation)... overall, I think that we can basically call that a wash.

Wage growth stalled and is now down from an annualized 2.9% to an annualized 2.5%. That might not be good for the consumer.

More people were looking for work (they are more hopeful) and that pushed the unemployment rate up to 4.8%. And while the current psychology of the masses doesn't even consider a US recession a possibility, here is how our unemployment rate stacks up against the ever-telling 36 month moving average:

(a shout out to Paul and the Help team at Bloomberg for getting this chart functioning again!)

When they intersect, historically(white line moves up through the gold line), it has been a very accurate predictor of a recession to follow.  The gold line is falling fast, the white line is leveling off (stay tuned).

Fed "watchers" suggest that the data isn't enough for a rate increase at the next meeting.

Good for stocks in general (perhaps not for the consumer durable sector), temporarily, anyway.

In other news... In order to prevent a financial crisis - like scenario from developing, the Dodd-Frank law was created back in 2010. This was intended to put more scrutiny on bank lending policies and practices. On Friday, President Trump signed an order to  scale back the law that had added significant compliance costs to financial institutions.

Good for financial stocks.

And, a little closer to our world, a new Obama regulation called the "Fiduciary Rule" which was intended to force financial advisors to put their clients interests ahead of their own (and allay any potential conflicts of interest) was also put on the chopping block.

Good for advisor commissions, good for financial stocks, perhaps (in my humble opinion) not so good for the unsuspecting clients of less than fiduciarily responsible financial advisors in the US.

Fortunately in Canada, although the financial industry continues to resist, new CRM2 regulations have come into force and advisors at least must show all their commissions (and trailer fees!) It is not enough (MER's should also be shown), but it is a start.

At High Rock, the company receives a fee (we are not advisors, there is a huge difference, check out our intro: http://highrockcapital.ca/private-client-division.html ). Paul and I are paid a salary, not a commission. We also go above the required rules and regulations to ensure our clients that we have no conflicts of interest with an Independent Review Committee (IRC). You can visit our website to see the quarterly letter that is sent to our clients at http://highrockcapital.ca/index.html.

So, short-term, Dow is back above 20,000. Long-term, while details are skinny, it appears that all the Wall Streeters in the new administration are reducing regulations for their peers and quite possibly putting the general public at greater risk.

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Groundhog Day!

Tired of the front page news headlines? Exhausted from the mental math of assessing every Trump tweet, policy pronouncement  and executive order (is it real or reality TV)?

I have never put much stock in groundhog prophecy, but it was always a welcome hope (on the coldest days of February) when it was determined that there might be a chance of an early spring (whether it was true or not). Punxsutawney Phil (Pensylvania) has apparently been correct only 38% of the time. Closer to home Wiarton Willie (Ontario), only 37% of the time.

So this year Phil predicted 6 more weeks of winter (which technically is fairly accurate, because the spring equinox falls on March 21), however, his northern "cousin", Willie, thinks that spring will actually come early this year! 

Get the golf clubs ready Ontario!

And maybe this sort of upside-down (early spring in the north / long winter further south) prognosticating is a function of the current debate (at some levels there is debate, anyway) surrounding environmental issues and the changing climate?

Or perhaps it is just a nice distraction from all that is currently swirling around in the winds of change in the global geo-political and economic cyclone.

Buy the rumour, sell the fact (or so goes the old financial market trading cliche that I grew up with). Whatever the case, the crystal ball is looking awfully cloudy these days and rumour and fact are not so easy to discern.

So when a client asks: "what's going on ?", I have to pause and think of a reasonable answer: how much time have you got? There is so much going on and we are so busy trying to assess all of the potential scenarios (and the possible impact) that Groundhog Day (and its ultimate relevance) becomes a comically wonderful metaphor for the times: get it right or get it wrong, there is only a 37-38% percent chance of it happening (and like Phil Connors, the Bill Murray character in the movie, you might just wake up tomorrow and have it happen all over again).

Enjoy!

Inflation Watch

The "reflation" theme is alive and well as we head into February, largely on the back of expectations for increased fiscal measures by the new US administration, but also on the back of a global economy that appears to be slowly improving.

Euro Area total consumer prices jumped by 1.8% in January, although when energy prices are factored out, the core inflation data was less than 1%.

The European Central Bank may start to get some pressure to raise interest rates at least to move them out of negative territory. Arguably, the growth in the Euro Area is largely taking place in Germany and countries like Italy are still struggling.

The US Federal Reserve will announce its latest decision today at 2pm, and although it's key inflation target, the PCE core price index was higher in December at 1.7% (from 1.5% in November), it remains below the Fed's target 2% level.

The Bank of Japan left rates unchanged on Monday night.

At the moment, most central banks continue to use the uncertainty argument to keep their respective monetary policies at the current levels:

However, if inflation does pick up, we would expect that policies will start to tighten (become less accommodative) shortly thereafter.

Bond markets are already pointing us in that direction: the German Government bond yield curve has steepened since the US election.

We discussed this and a number of other key issues (including some of our tactical strategy) on our weekly client webinar yesterday. Feel free to listen to the recorded version at http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html