The Month Of May Brings Some Significant Changes To The Structure Of Our Models:

One of our mandates at High Rock Capital Management is to use our pricing power as an institutional asset manager to pass on cost savings to our Private Clients where we can.

Our thorough research through the month of April has identified a number of areas where we can replace ETF's and Mutual Funds (with relatively expensive MER's) by creating our own baskets of securities to replace them thereby eliminating the additional costs.

By reducing ETF / Mutual Fund use from 100% to approx. 46% we will reduce MER costs from over 0.50% to approx. 0.08% on my original 60% equity / 40% fixed income model.

Management Expense Ratios (MER's) can add up: 

In a November, 2014 article in the Globe and Mail, referencing a Vanguard study: The Average Fee Based Advisor charges 1.25% fee and purchases  mutual funds for client portfolios with an average MER of 1.36%.

(click on this chart to enlarge)

Investors should be aware of these costs because they can, over time turn out to be significant.

In a low return environment even more so!

We believe that it is our responsibility to our clients to provide them with not only better than average risk-adjusted returns, but also to add value by reducing their costs.

www.highrockcapital.ca

The Global Economy is Counting on The US

As we get the first reading on Q1 US GDP growth today, it is widely acknowledged that the global economy is looking to the US economy to pull it through the 2nd half of 2015.

In his testimony to the House of Commons Standing Committee on Finance yesterday, Bank of Canada Governor Poloz stated: 

"The segments of non-energy exports that we expected to lead the recovery are doing so, and we expect this trend to be buttressed by stronger U.S. growth..."

more here: http://www.bankofcanada.ca/2015/04/opening-statement-28-april-2015/

• The Euro area (led by Germany) is showing some improvement and with the Quantitative Easing by the European Central Bank, bank lending to the private sector has reported its first increase in 3 years:

• The weaker Euro/$US has been helping exports.
• However business and investor confidence has slipped in recent data and
• The issues surrounding Greece have been overshadowing.
• China's 7% target growth rate for 2015 appears to be in jeopardy and the Chinese central bank has eased on reserve requirements to encourage borrowing.
• Despite aggressive monetary stimulus, Japan's economy has been sluggish.
• Emerging market economies have also slowed considerably, despite central bank monetary policy stimulus.

All eyes are on the US economy and the US Federal Reserve's interest rate policy:

It is expected (according to a Bloomberg poll) that US Q1 GDP grew at a below average 1%. Led by reduced consumer spending and a greater savings rate.

Much of this slower growth has been blamed on the weather, but the much stronger $US has also been a significant headwind.

As the US Federal Open Market Committee ends its 2 day meeting today (statement at 2pm) it remains to be seen how this weaker economic scenario will be received.

Most expect an interest rate increase in September as the Fed begins the process of normalizing interest rates.

With the global economy needing direction, US data and US economic activity will take on an increasingly larger role and the Fed will have to take this into consideration in its decision making process.

www.highrockcapital.ca

Sell in May and Go Away?

The long standing market cliche (for short-term trading) suggests a summer break, with a return to the market in October or thereabouts.

It has not really been statistically accurate over the years.

The last couple have certainly been "break-even" propositions at best, although buying in October has ended well for most investors as markets have fared well into the end of the year:

The S&P 500 is currently breaking out of its recent consolidation, through the February highs, likely because traders are getting more comfortable with Q1 earnings announcements:

• 201 companies (of the S&P 500) have reported thus far and 73% have reported earnings above the mean estimate.
• Earnings estimates at March 31 were for a 4.6% decline.
• They have now been revised to a 2.8% decline.

• Financial market expectations for an interest rate increase by the US Federal Reserve remain mixed, with most calling for a September hike by .25%.
• The Fed will conclude a 2 day meeting on Wednesday of this week. As per usual, there will be much interest in the wording of the Federal Open Market Committee (FOMC) statement which will follow the meeting (2pm).
• Concern remains over the impact of the stronger $US on the US economy.
• If the negative impacts continue to be felt, the Fed may hold off on raising rates.

The S&P 500 remains "pricey", with the 12 month forward Price to Earnings (P/E) ratio at 17.1.

The 10 year average is 14.1.

• Low interest rates (globally) have increased investor appetite for riskier assets as they chase (potentially) higher  returns and abandon safer (yet lower yield/growth) assets.
•  On this note, we continue to take a cautious stance, although technical, short-term indicators are looking more positive.

So...perhaps don't sell in May, but look for a better buying opportunity in September /October.

More on RRIF Minimum Withdrawals

(from the Budget)

Age of RRIF holder or spouse	Previous RRIF Withdrawal %	New RRIF Withdrawal %
Under Age 71	1 / (90 – age)	1 / (90 – age)
71	7.38	5.28
72	7.48	5.40
73	7.59	5.53
74	7.71	5.67
75	7.85	5.82
76	7.99	5.98
77	8.15	6.17
78	8.33	6.36
79	8.53	6.58
80	8.75	6.82
81	8.99	7.08
82	9.27	7.38
83	9.58	7.71
84	9.93	8.08
85	10.33	8.51
86	10.79	8.99
87	11.33	9.55
88	11.96	10.21
89	12.71	10.99
90	13.62	11.92
91	14.73	13.06
92	16.12	14.49
93	17.92	16.34
94	20.00	18.79
95 and over	20.00	20.00

• Basically, if you have (for example) a $1mm RRSP at age 71 and convert it to a RRIF, your minimum withdrawal will now be $52,800 of taxable (T4) income vs. $73,800 from the previous RRIF withdrawal calculation.
• You will eventually have to pay income tax on your withdrawals, but you can now reduce the tax burden on receiving this money, potentially lengthening the deferral.
• Remember: RRSP contributions can be helpful if you receive a deduction in high income earning years and are in a lower tax bracket when you take it out.
• The new withdrawal rules will be helpful in managing your income levels in the future (and hopefully reducing taxable income in later years).

The budget proposes to reduce the RRIF minimum withdrawal rates for taxpayers age 71 and over to reflect the

longer life spans of Canadians and existing investment return rates. These measures will be effective for the

2015 and subsequent taxation years.

If a taxpayer has already withdrawn more than the new reduced minimum amount, they will permitted

to re-contribute the excess amount up to the previous minimum back into their RRIF. The deadline for

recontributions is February 29, 2016 and the amount will be deductible for the 2015 year. Similar rules will apply

to taxpayers receiving annual payments from a defined contribution RPP or PRPP.

• In no way should this take precedence over TFSA contributions.
• With the new limits, earning tax free growth/income on greater amounts with no tax consequences on withdrawal, the TFSA should be the first vehicle to utilize.
• Further, when the budget is passed, you will be allowed to add another $4500 for 2015 to bring your contribution to $10,000 total:

Year	Annual	Cumulative
2009	$5,000	$5,000
2010	$5,000	$10,000
2011	$5,000	$15,000
2012	$5,000	$20,000
2013	$5,500	$25,500
2014	$5,500	$31,000
2015	$5,500 + $4,500	$41,000
2016	$10,000	$51,000

An Excellent Budget for Savers!

Are you a saver?

If you are, the TFSA is an excellent vehicle and it just got better.

If you max out your TFSA for the next 10 years ($10,000 per year), you will have an additional $100,000.

(Present Value = $40,000, 10 payments of $10,000 each year at a 7% annual growth rate, Future Value = $209,966).

If you have $40,000 in your TFSA now, you should have roughly $210,000 in 10 years. 

No tax!

That should provide some incentive!

http://www.budget.gc.ca/2015/docs/plan/ch1-eng.html#_Toc417204080

Helping Families Make Ends Meet

• Increasing the Tax-Free Savings Account annual contribution limit to $10,000.
• Reaffirming the Government’s commitment to reduce EI premiums for over 16 million Canadians in 2017.
• Extending Employment Insurance Compassionate Care Benefits from six weeks to six months to better support Canadians caring for gravely ill family members.

Supporting Seniors

• Reducing the minimum withdrawal factors for Registered Retirement Income Funds to permit seniors to preserve more of their retirement savings.
• Introducing a new Home Accessibility Tax Credit for seniors and persons with disabilities to help with the costs of ensuring their homes remain safe, secure and accessible.

Protecting Consumers and Enhancing Canada’s Financial Sector

• Delivering a new and exclusive financial consumer protection framework for federally regulated banks.
• Expanding the voluntary mortgage prepayment disclosure commitment to non-federally regulated mortgage lenders.
• Launching a National Strategy to support improved financial literacy.

German 10 yr Bond Yield Near 0%

It is difficult to comprehend how investors would want to invest in a 10 year fixed rate that provides almost no return.

In essence, they would have to be quite worried about deflation and the security of a German bond (bund) is the safety feature driving their purchasing decisions.

The European Central Bank is also assisting in this low yield as they continue to purchase bonds and reduce the supply with their version of a program of quantitative easing.

With yields as low as they are in Germany, other investors are looking to North American bond markets for higher yield (with similar credit quality) driving prices higher and yields lower.

click on the chart to enlarge

• US 10 yr yields this year have dipped to near 1.80%, despite anticipation of a US Fed rate increase.
• Cdn 10 yr yields have fallen to near 1.50%.
• Interestingly, with the inflation levels reported last week, the "real" return on US bonds (bond yield - inflation) = 0%
• In Canada, with the core rate of inflation at 2.4%, the real return is -.9%.
• Investors looking for better returns than this are being forced from the safety of bond markets and are taking on more risk in the equity markets.
• At the same time, corporations are borrowing at very low rates of interest to buy back their own shares.
• This is what we mean when we say that central bank stimulus (pushing interest rates lower) is driving asset prices higher.
• As more money flows into equity markets, equity prices are driven higher, perhaps higher than the fundamentals might suggest.
• When the media start to refer to this as the "new normal", that is when complacency starts to set in.
• We do need to be all the more cautious as this scenario develops.

More on this and some up to the minute budget commentary on our weekly webinar today at 4:15pm.

If you would like to participate or receive a recorded version, please email bianca@highrockcapital.ca

S&P 500: A Market Looking For Direction:

Until last Friday, trading volume had been lighter than average for the S&P 500 companies. On Friday, volume spiked as significant selling entered the market. The S&P 500 ended the day down more than 23 points.

This is a nervous market (as are many equity markets at the moment), being propped up by global central bank monetary stimulus.

Over the weekend the Bank of China reduced reserve requirements for lenders, adding additional stimulus to a slowing Chinese economy.

• Technically, since making new highs in late February, the S&P 500 has struggled to get back to those highs and on 2 occasions, following those attempts, sold off considerably.
• At the moment, this is a market no longer able to make higher highs.
• On the other hand, the market continues to find support at higher lows.
• This narrowing consolidation is, at some point in the not too distant future, going to break out.
• The catalyst to break out to the upside (higher highs) could be earnings results which continue to come in at a "better than expected" rate.
• Thus far, with 56 of the 500 companies having reported, 77% have reported earnings higher than the mean estimate.
• Q1 earnings, originally expected to decline at a rate of 4.7% have now been revised to a decline of 4.1%.
• If this trend continues, the combination of continued central bank stimulus and better than expected earnings could be enough to generate new buying interest and drive prices to test the old highs.
• However, if a buying catalyst does not develop, markets will test the lower trend-line of the consolidation, which could escalate into greater selling if it cannot hold.
• While most of this is short-term in nature, it could have implications for the longer-term and how investor confidence will deal with what appears to be equity prices that have reasonably high valuations.
• We remain cautious about adding new money to equity markets for the time being.

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

What does a "Winning" or "Losing" day on Financial Markets have to do with Investing?!

http://www.680news.com/2015/04/13/business-report-tsx-on-7-day-winning-streak-apple-sells-1-million-watches/?show_id=1741

Investing is not a sport.

In Laurence Fink's (CEO of Black Rock, the worlds largest asset management company) letter to the CEO's of the S&P 500 companies (earlier this week) he suggested that :

“Investors need to focus on long-term strategies and long-term outcomes,” Mr. Fink said, suggesting we’re currently living in a “gambling society.”

http://www.nytimes.com/2015/04/14/business/dealbook/blackrocks-chief-laurence-fink-urges-other-ceos-to-stop-being-so-nice-to-investors.html?_r=0


It irks me to hear the media pandering to this gambling mentality.

Investing is not about the stock markets performance over 1 day, 1 week or even 1 year. Anybody who purchases stock in a company and expects immediate gratification is gambling.

Gambling is not investing.

“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Mr. Fink writes in the letter. He says that such moves were being done at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

US companies spent nearly $1 trillion on stock buy-backs and dividends last year under shareholder pressure for price appreciation and short-term gains. 

More buying of shares drives prices higher in the short-term but has the ability to push valuations to unrealistic levels.

Share prices reached unrealistic levels in 2000 and 2008.

We certainly know what followed.

Sadly and unfortunately, our thirst for "at the moment" information leaves us tuned in to those who make their living by selling that information. It can be addicting. They want it to be. Increased readership / listenership brings advertising revenue. Churning short-term news keeps folks "tuned in".

When I tune in to 680 (Toronto's "all news" radio station) for "traffic and weather together" (useful and practical information) and get the "business report" that suggests that a financial market had a "winning" or "losing" day (useless information) ...

I turn it off.

Investing and the management of wealth are about setting and achieving long-term goals. The daily fluctuations (volatility) can and may be unnerving. That is why a good wealth manager is there to help you focus on those goals. 

The day to day, week to week, month to month, quarter to quarter stuff is just noise.

The idea of "rockstar" portfolio management (how did they perform this quarter?) is short-term noise.

My suggestion:

Turn it off.

Focus on your long-term goals. 

Need help?

Let me know.

And now... from the Bank of Canada:

Monetary Policy Report : April 2015

http://www.bankofcanada.ca/wp-content/uploads/2015/04/mpr-2015-04-15.pdf

Key Takeaways:

• The effects of lower prices for oil and other commodities are working their way through the world economy, boosting overall global growth, but weakening growth prospects in some countries. All things considered, the Bank expects global economic growth to strengthen and average about 3 1/2 per cent over the 2015–17 period, in line with the January Monetary Policy Report.

• As the U.S. economy strengthens, the Federal Reserve is widely expected to start normalizing monetary policy later this year—in contrast to the ongoing easing in other advanced economies. The substantial strengthening of the U.S. dollar against most other currencies, notably the euro, the yen and the Canadian dollar, largely reflects such differences and, over time, will contribute to mitigating them by boosting net exports in the weaker economies.

And... In Canada:

• The decline in oil prices has had a greater impact in the short-term than was initially expected.
• Cdn Q1 GDP is expected to be flat (0% growth rate).
• As a result  projected 2015 GDP growth has been revised down to 1.9% (from 2.1%).
• However, Q2 and Q3 growth rates are being revised upward ( Q2 from 1.5% to 1.8% and Q3 from 2.0% to 2.8%) as the oil price shock wears off and the lower $C impacts non-energy exports positively.
• Regionally, Alberta, Saskatchewan and Newfoundland/Labrador have been hardest hit (no surprise here).
• Elevated levels of Household Debt and  the impact on incomes from commodity price declines will restrain household spending.
• Housing market conditions have diverged across regions and have slowed considerably on a national scale with the exception of Toronto and Vancouver.
• Inflation is expected to return to the 2% target by the end of 2016.

No change in current monetary policy and likely no change in future monetary policy for some time.

and the $C?

Is at the best levels since early January:

And the trip to Europe just got cheaper!!