Speaking Of Short-Term Noise:

It's Employment Data Day!

I have said it before and shall do so again:

The headline data, US Non-Farm Payrolls, will be revised and re-revised well into the future (it is the trend over longer periods that is important). Stats Canada's data is equally as erratic.

The amount of attention paid by the media to this monthly number is classic noise.

The belief that the US Federal Reserve will make any final decisions based on this data is naive.

There are significantly more important global economic developments that have more far reaching implications than one month's US jobs data.

With that in mind:

• US non-farm payrolls rose by a less than expected 173,000
• Revisions to previous months were +44,000 (as I said, there are always revisions).
• The unemployment Rate fell to 5.1%
• Wage growth was a better than expected +.3%
• Labour force participation remains at historically low levels (62.6%).

In Canada: (according to Statscan)

http://www.statcan.gc.ca/daily-quotidien/150904/dq150904a-eng.htm

Employment was little changed (+12,000 or +0.1%) in August. However, the unemployment rate increased 0.2 percentage points to 7.0%, as more people searched for work. Prior to August, the unemployment rate had held steady at 6.8% for six consecutive months.

• An increase of 54,000 in full-time employment in August was mostly offset by a decline of 42,000 in part-time work.
  Compared with 12 months earlier, employment was up by 193,000 or 1.1%. Over the same period, full-time work increased by 318,000 (+2.2%) while part time declined by 125,000 (-3.6%). At the same time, the total number of hours worked rose 2.1%.

In the US, better wage growth is important and positive (and slightly inflationary).

In Canada, more full-time employment is positive.

Whether the US Fed raises rates in September or December (or somewhere in between) it matters little in the long-term.

Any rate increases will be gradual and will be be limited.

In Canada, there will be no change in the BOC rate, likely into 2017.

Whatever the case, bond markets are telling us that the lack of inflation will keep longer-term interest rates low well into the future = a low return environment.

So: "pay no attention to the man behind the curtain!!" (making all the noise)

And have a great labour day weekend!

www.highrockcapital.ca

Staying Focused On the Long-Term

I have been using the term "uncertainty" a lot lately and usually that involves the word "volatility" in the same sentence.

And while it is my job to try and get some perspective on what is happening in the short-term in financial markets, trying to separate the reality from the noise, it is also important to remember that all this short-term "stuff" will soon fade and what is truly important is what remains: the focus on long-term goals.

What I enjoy the most about my job is helping people.

My favourite is after we have finished the first go-round of a Wealth Forecast and looking into the faces of our clients and seeing the huge sense of relief as they finally get a glimpse as to what the future holds and 90% of the time it is significantly better than they had surmised.

Why?

Because everybody has goals for the future, if at the very least, just making sure that they have enough money to live a comfortable life to the end.

Sometimes I have to drag them "kicking and screaming" down the road of information gathering that is the necessary part of the preparation of the Wealth Forecast, depending on the complexity of their situation and how organized they might have been beforehand.

But the end result is worth all the work to get there.

Because now there is a plan. A plan for the future. Now we can develop a strategy for making the plan work. You cannot have a proper investment strategy until you have determined the direction that you are heading in.

You have a plan.

You have a strategy to make it work.

Then you need to monitor the progress of your plan.

The world is a dynamic place (and seems to get more so as time passes) and there is lots of short-term stuff that will need to be considered along the way that may impact your plan and require adjustments to the strategy.

So we meet regularly  to make sure your goals are still the same (or if they have changed, we re-work the plan) and that we are still on target to meet them. If not, we make the appropriate changes to get the plan back on track.

It is a great tool for decision making. We can also develop "what if" scenarios that can help you determine what new goals might have on your plan: how might a major purchase, more education funding or charitable giving impact your net worth and your estate?

In the long-term, risk is whatever may preclude you from achieving your goals. If we know your goals, we know and fully understand your risk and can then take all the important steps to mitigate it. 

Without a plan, you cannot fully understand your risk and risk becomes impossible to properly define. You cannot have an investment strategy if you don't fully understand your risk.

It defeats the purpose of saving and investing if you do not have a long-term plan based on your goals and understanding the risk of not achieving your goals.

A Wealth Forecast (prepared by a Certified Financial Planner) will do all of this for you.

Presenting Wealth Forecasts to our clients is the best part of my job, if for no other reason, do it for me! 

Is It Different This Time?

In the world of financial markets, we are always asking ourselves the big question?

and the answer is always YES (and NO).

Of course it is different because it is usually different factors driving uncertainty and in financial markets, we very much do not like uncertainty.

However, there are also plenty of similarities if you look from a grander perspective and the similarity is the emotional response to uncertainty that remains the same: Fear represents buying opportunity.

CNN Money Fear And Greed Index:

http://money.cnn.com/data/fear-and-greed/

Higher levels of Fear = higher levels of Volatility

And they all line up with buying opportunities.

If you look closely, there has been 1 good buying opportunity each year for the last 4 years (2 in 2014).

This is what we mean by patience, flexibility and discipline for investing. It is what differentiates good portfolio management from mediocre portfolio management.

That is the difference.

http://www.highrockcapital.ca/private-client-division.html

Out Of The Frying Pan And Into September

Better than expected Canadian GDP data for June will not be the headline for global markets today as most are focusing on the 2nd largest economy and further detrioration in China's manufacturing sector.

Canada officially endured a recession with 2 consecutive quarters of negative GDP growth on the back of lower energy and commodity prices. The good news is that in June, GDP rose .5%, the fastest since May 2014, led by a rebound in mining, quarrying and oil and gas extraction. Clearly a sign of a potential turnaround.

However, China is clearly on the minds of financial market participants as manufacturing data point to further economic malaise there.

As well, the debate over the timing on the US Federal Reserve's next steps (interest rate "normalization") have been front and centre.

In the background, oil prices have "bounced" considerably from the Aug. 25 lows (37.75) to yesterdays highs near 50.00.

Clearly, as we enter what is historically the most volatile month of the trading year, financial markets have a lot of uncertainty to digest. 

As I have repeated endlessly before (and likely will continue to do so long into the future) markets do not like uncertainty and market participants will move out of riskier assets and into safer assets until the crystal ball becomes less cloudy.

Further, as we have also been continually suggesting, equity markets have been overvalued because revenues and earnings (the key fundamentals behind stock prices) are not reflecting  reasonable value (although it has improved with the recent sell-off). Instead, low interest rates and cheap costs of borrowing have increased the amount of leverage being used as investors chase returns by taking greater risk.

When they decide to exit this risk (en masse as it appears), volatility spikes.  We are seeing levels of volatility that we have not seen since 2008:

(click on the chart to enlarge)

We do know that volatility can bring opportunity to pick up cheap assets, so we are watching closely and waiting for opportunity, but we need more evidence that this situation will not blow up further, so we are exercising patience (which, as we have been for some time, are quite long on).

Long on patience, long on caution, overwieght of cash and looking for opportunity!

Today is "Webinar Tuesday" so feel free to tune in to a more detailed look from our perspective  (our recorded version will be released at or about 5pm EDT) at:

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

For more info on High Rock Private Client:

http://www.highrockcapital.ca/private-client-division.html

What's Up With Inflation?

Lots and lots of central bankers gathered at a yearly meeting in Jackson Hole, Wyoming over the weekend to discuss inflation and how best to get it fired up again.

The grand conclusion: it's not so easy.

The US Federal Reserve believes that economic growth will continue to improve in the 2nd half of 2015 and that with this growth, inflation will naturally re-assert itself.

Bank of England Governor, Mark Carney, is in the same camp, although he admitted that they need to pay attention to what is happening in China.

The public optimism they hold is intended to transcend into the psychology of markets and the economy in general, however according to Bloomberg:

 "At Jackson Hole, academics effectively delivered a beating to central banks' confidence in their ability to predict and manage their key variable, by pointing out wide gaps in knowledge about how inflation works."

In Europe and Japan, extraordinary monetery policy easing has yet to positively impact inflation. The Euro economy has improved, Japan is still struggling.

Falling commodity prices, especially in energy, have been a significant contributor to the current lack of inflation and have complicated the experts ability to predict the outcome.

Why is this important?

Because the US Federal Reserve and The Bank Of England are going to start raising interest rates and if their timing is off, there is a risk that this could choke off the 2 economies that have been growing in a global economy that has been struggling: Europe, Japan, Canada, Australia and China have all been lowering interst rates or easing monetary policy with extraordinary stimulus.

In fact, despite their optimism, the latest data on inflation from the US shows a rate well-below the Fed's target:

The uncertainty surrounding the timing of raising interest has been one of the catalysts that has created recent stock market volatility.

The real question on monetary policy, on the global scale is:

Is it wise to raise rates when there is so much global uncertainty? We believe it is not. The market odds on a September increase  by the Fed are 36%.

Central bankers and finance ministers will gather to further discuss this further when the G20 meets later this week. We are of the opinion that it should not be a country by country decision (to raise/lower interest rates), but a joint decision considering the global outlook.

With this in mind, we remain cautious on the outlook for global financial markets and will continue to be defensive with our client portfolios.

www.highrockcapital.ca

After A Volatile Week:

An Update On The Balanced Model

Generally speaking, the 60/40 model (60% equity / 40% fixed income) should be basically close to flat on the year, however, it would depend on the weightings of the various sub-asset classes as to exactly how this would look at this moment.

My old model (2010-2014) is in fact down approx. 1% thus far this year.

Our new model (slightly adjusted earlier this year: increased cash position, reduced exposure to pref. shares, lower ETF costs among other changes) is up by approx. 1% on the year.

Europe, Australia and The Far East indexes (large and small companies) continue to be the best performers in the models.

The Canadian Preferred Share index is the worst performer.

Interestingly, the composition of the Canadian Preferred Share Index has been changing: as older, higher yielding issues are matured, they are being replaced by more recent, lower yielding issues (lower interest rates) which has reduced dividend distribution and made them a less desirable asset class.

Government and Corporate Investment Grade Bonds have made positive contributions, High Yield bonds are negative.

Also and interestingly, High Yield bonds are down less (thus far this year) than the S&P TSX and the S&P 500. This makes sense, because as I have pointed out in past blogs, Canadian High Yield offers better risk-adjusted returns than either of those 2 indexes over time:

As far as the equity markets contributions, as I have suggested earlier, non-North American (developed market) Indexes have out-performed, North American indexes are negative and Emerging Market indexes are basically flat (which, all things considered, is a bit of a surprise).

Remember, with a balanced portfolio, it is the re-balancing that will guide you on how next to proceed. Sell over-weight, out performing asset classes and buy under-weight under-performing asset classes. As the cycle progresses, out-performing assets will likely under-perform in time and under-performing assets will likely out-perform in time. Don't try to time the cycle, let the portfolio tell you when to trade.

What Now?

Expect The Unexpected!

Equity Markets are cheaper:

S&P 500 is down 12.5% from its highs (May 2015).

Canada (S&P TSX) is down 15.5% from its highs (Sept. 2014).

Japan down  10.5% (Jul. 2015).

UK down 15% ( Apr. 2015).

Euro down 16.5% (Apr. 2015).

Australia down 13% (Apr. 2015).

So we have our correction.

Volatility hit levels not seen since 2009 on Monday (near 55 on the VIX) but closed back below the weakest levels in 2010 and 2011 yesterday (at 36 on the VIX).

Historically, higher volatility spikes early on, but volatility levels remain lofty for a period of time following the big spikes, but gradually decrease.

The S&P 500 should see some further buying support at last Octobers lows near 1820-40, if that holds, then we could possibly move back to the 2000 - 2100 level (as the next move).

Otherwise the up-trend line from the 2009 bottom will be the next test of support at or near 1700.

The 2007 high near 1600 follows that.

Until the up-trend line is broken, we are still in a long-term (secular) bull market.

Key Catalysts will be:

What will happen to the Chinese economy, will it be able to restructure and return to growth?

Will the US economy lift off in the 2nd half of 2015?

Both of these resolved in a positive way should help commodity prices eventually find support.

This will assist developing economies.

Inflation will likely remain low for some time to come.

 At this point we have not seen what the collateral damage has been and if there will be "knock-on" effects after the equity market melt-down.

Certainly the trillions of $ of realized and/or unrealized losses will leave investors a little less wealthy, but the impact on the market psychology will take a little while to determine.

So we shall be watching closely.

Remember, that these are all short-term phenomenon and despite all the doom and gloom that may be foisted upon us by the media in the next little while, we have to stay focused on the long-term:

Most importantly your future goals and managing the risk of not achieving them. 

Stay Tuned.

www.highrockcapital.ca