US Recession Watch:

Stronger Economic Data Increases Chance Of Higher Interest Rates

I have suggested on a number of occasions recently, that we felt a US recession was an increasing probability and although economic data from the beginning of the 2nd quarter is coming in at levels that are better than expected, this is only adding to that probability.

Let me explain:

As the US Federal Reserve sees their mandates of full employment and price stability (inflation target of 2%) being realized and expectations of 2nd quarter growth now close to 3%, they have little, if any official justification for holding off on raising interest rates.

When they raise interest rates, they will be raising the cost of servicing debt, debt levels that have been growing on a global scale:

and...despite all the talk of de-leveraging in the post 2008-2009 economy, US debt levels are fast approaching 2007 levels:

Auto loans and student loans have been leading the way.

The impact on the economy of a December rate hike saw US growth in Q1 2016 decline significantly. The consumer (2/3 of the economy) was "hunkered down". As the storm passed, the consumer has re-appeared, but they are funding purchases (of autos and restaurant outings) with debt that is vulnerable to increased costs of servicing when interest rates rise.

If and when unemployment levels rise because corporations continue to be unable to generate profit growth (and they are forced to cut expenses), this will exacerbate the problem (as I have also suggested, recently: 

When unemployment levels rise and intersect with their 36 month (3 year) moving averages, it has signalled recession in the past 3 out of 3 times.

Rising debt costs and higher unemployment do not make for economic strength and more importantly, do not make a good case for stocks that at the moment are already over-priced.

Thank you for all the great feedback, please keep it coming!

scott@highrockcapital.ca

If you would like to receive this blog direct to your inbox:

bianca@highrockcapital.ca

Fees And Costs

If you were able to discern your portfolio's performance relative to the benchmarks from yesterdays blog, how did it stack up?

If you found that you were under-performing or even keeping up with the benchmark (especially over the longer-term), then it may be time to assess exactly what it is you are paying for with your fees and especially the hidden / embedded costs built in to ETF's and mutual funds.

Here are (what I consider to be) some of the key services that you should be looking for in the fees and costs that you incur:

1) Are you getting a financial plan and investing strategy that is specifically tailored to your needs?

• As I have said many times and will continue to say (sorry for being boringly repetitive), you cannot have a proper investment strategy until you define your goals and the time  frame in which you wish to acheive them. In order to do that you need a plan.
• Beware the strategy that tries to force the round peg into the square hole.

2) Are you getting active or passive money management (or a combination of both)?

• If you are getting active money management (from a discretionary portfolio manager), you may be paying a higher fee, which is acceptable as long as they are providing you with better than average returns (added value).
• If you are getting passive management (a diversified group of ETF's, for example), are you getting active regular re-balancing? 
• The difference between discretionary and non-discretionary portfolio management is that portfolio re-balancing is automatic (with discretionary management), but has to be discussed first with non-discretionary advice.
• This can have a significant impact on the timing of any buys and sells and can be instrumental in getting the re-balancing done appropriately and strategically (and fairly for all clients).

3) Are you getting the appropriate amount of communication?

• Weekly updates
• Quarterly reports
• Semi-annual reviews (and plan monitoring, appropriate asset allocation adjustments, strategy modifications, etc.)
• Or do you have to initiate the communication?
• Do you get direct access to the portfolio manager (if you want to address specific concerns)?

Lots of things to think about when assessing what service you receive vs. the price that you pay. 

But most importantly, ask yourself: Is this a good client experience? Am I getting good (or just mediocre) stewardship for my financial future? 

It baffles me how some folks get hooked in to signing up and then are just left to drift in the hope of something better in the future (promises unfulfilled). Actually makes me kind of angry when I hear stories like that.

I say "Client First"!

Thanks for all the recent feedback friends, glad I can be of some help. Keep it coming....

scott@highrockcapital.ca

If you would like to get this blog direct to your inbox:

bianca@highrockcapital.ca

Measuring / Comparing Portfolio Performance

It should not be a mystery.

So you requested that your advisor (or their assistant) send you a portfolio summary (hopefully consolidating all of your "household" accounts) and it includes a "Monthly Equity Growth Graph", something like this sample portfolio:

(click on the graph to enlarge if you wish)

The rates of return in this particular situation are as of May 24, so for comparison purposes you want to pick your benchmark return dates to match the return dates on the chart.

The longer term "annualized rate of return since inception" (from September 13, 2012) should be matched with benchmark returns from the indexes you choose for the same dates.

For our purposes we use the MSCI All Country World Index (ACWI) for equity assets (2500 companies from 23 developed countries and 23 developing countries) and the Canadian Bond Index (XBB).

• From September 13, 2012 to May 24, 2106, the ACWI had a total return (including dividends re-invested) of 6.87%, annualized (source: Bloomberg TRA, daily).

• For the same dates, XBB had a total return of 3.55%, annualized (source: Bloomberg TRA, daily).

If you have a 60% equity and 40% fixed income portfolio:

• 60% of 6.87% = 4.12%
• 40% of 3.55% = 1.42%
• Total Return of the benchmark 60% ACWI / 40% XBB = 5.54%
• Don't forget to allow for fees / costs, say 1.0% for example.
• For comparison purposes, the portfolio rate of return of 7.70% (after fees) "beat" the benchmark of 4.54% (after fees) over the same period.

For the 1 year period (May 22, 2015 to May 24, 2016):

• 60% of - 7.65% (ACWI, source Bloomberg TRA, daily) = -4.59%
• 40% of  3.17% (XBB, source Bloomberg TRA, daily) = 1.27%
• Total 60/40 benchmark return = - 3.32% 

For comparison purposes, the portfolio rate of return of -0.37% (after fees) "beat" the benchmark of -4.32% (after fees) over the same period.

I hope that this helps you all to be able to determine how your portfolios are doing and... to justify the fees that you are being charged. Need help, let me know.

And...as a reminder: historical performance is in no way a guarantee of future performance. Although at High Rock we do work our butts off to try to get the best risk-adjusted returns that we possibly can because we invest our money in the same models as our clients. 

Feedback always appreciated...

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox:

email bianca@highrockcapital.ca

Financial Markets: It's All About The Fed! (And Your Advisor)

As it is my job to understand what is driving financial markets and try to put a short-term perspective to price swings and buying and selling opportunities and how they might have implications for longer-term portfolio strategy, I sat down to read the minutes from the latest Federal Open Market Committee (FOMC) / Fed meeting.

It is here, if you want to have a go....

https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20160427.pdf

The financial markets are no doubt focused on whether their might be a June interest rate increase (they next meet on June 14-15). The fact that it was  "still on the table" was a surprise, apparently. Personally, I think that it is always on the table, because they do want a "normalization" of rates and they do have a rather optimistic outlook, in general, about future economic growth.

When the proverbial "punch bowl" of monetary accommodation is pulled away (and we had just a glimpse of it yesterday), volatility will jump. Too many investors and traders have been lulled into complacency by the global central bank mantra that volatility is the enemy.

Volatility is inevitable, if interest rates are going to be normalized, just like it was when everybody "flipped out" in the summer of 2013 in advance of the potential secession of QE3 (remember the "taper tamtrum"?).

But it provided a great buying opportunity, especially for bonds. This time, it will be stocks.

So we think it is wise to have more cash in your portfolio to take advantage of the upcoming buying opportunity (and to avoid the inevitable melt-down of now over-priced equity markets).

You can, if you wish, just ride it out, or if you want a more active (and caring) approach (real portfolio management), let me know (it might just cost you less in fees, but may just help portfolio performance too).

Your feedback is always greatly appreciated, but there are some Q and A that I can no longer post on the blog because it apparently upsets some people (who don't like controversy), however, keep it coming, because I can and will respond privately: 

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox:

bianca@highrockcapital.ca

Asset Allocation : 

Are You Positioned Appropriately?

There is only one way to properly develop a portfolio strategy: First and foremost you need to prepare a wealth forecast. Without doing so, without understanding the goals and objectives that you are trying to achieve and the time horizon over which you want to achieve them, you will not be able to consider all the variables that will go into building the portfolio strategy that is appropriate for you. 

I have written about many folks that I have worked with or work with now who have had great success saving and growing their wealth. The common denominator amongst them all is that they had a plan that was turned into a strategy that was followed, monitored and amended (when necessary).

Few families have the exact same goals that they wish to fulfill over the course of their lives. Which means that very likely, they will not require the same investing strategy either. 

Determining an appropriate asset allocation as part of your investing strategy comes down to a broad array of options, but the bottom line is finding the best (most appropriate) risk-adjusted returns for your specific situation.

It also needs to be re-visited when different asset classes become more or less volatile, because volatility is a determining factor in the risk adjustment. We have talked about preferred shares a good deal recently. They are no longer the safe and stable asset class that they once were perceived to be (see the chart below). Active portfolio management should and will make the appropriate adjustment to a specific asset class that now displays a greater degree of volatility. You may no longer have the appropriate weighting in your allocation (depending on your specific goals, risk tolerance and time horizon). 

(click on the chart to enlarge)

This is what you pay a portfolio manager to look after for you. Ensuring that you have the best possible returns for the risk that you are taking (and there is always going to be risk if you are trying to get returns better than just putting your money in a Government of Canada issued t-bill).

And, always, please remember that any historical returns are in no way representative of future returns (although we are always working our very hardest to get the best possible and hopefully better than average risk-adjusted returns for our clients)!

Today is webinar Tuesday for our High Rock clients where we will discuss what is happening in the global economy, financial markets and the world of wealth management. Which includes developments that may lead us to make some important decisions in the management of our portfolios and asset allocation. It is part of why we are different and better.

We do post a recorded version on our website, for those who may be interested following the presentation, at or about 5pm EDT: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

I would love your feedback:

scott@highrockcapital.ca

And... if you would like to receive this blog in your inbox, please send an email to:

bianca@highrockcapital.ca

US Recession Watch: 

Retail Sales Jump = Catch 22

Yesterday's data on US retail sales for April showed a healthy jump (above expectations) as consumers bought automobiles and shopped on line. 

This follows about 8 months of rather lacklustre results, so it could well be a deferred shopping spree. As I often will say, one month's data does not define a trend.

However, it has pushed expectations for consumer spending higher and, as the consumer is such a significant part of the US economy, has increased Q2 GDP growth expectations.

The "catch 22" is that if the US Federal Reserve uses this economic improvement as an excuse to raise interest rates, then it does play into our theory about the flattening of the yield curve that we discussed on our weekly client webinar last Tuesday (available at the link below):

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

The yield curve flattens before a recession: either 2 years rise faster than longer dated maturities, or a combination of higher short term yields and falling long term yields can create this flattening.

Stay tuned!

I would love your feedback!

scott@highrockcapital.ca

and... if you would like to receive this blog directly to your inbox:

bianca@highrockcapital.ca

Recession Watch: 

Big Jump In US Jobless Claims.

Last Saturday I wrote about US unemployment levels as an indicator of forthcoming recession probability.

http://familywealthmanager.blogspot.ca/2016/05/us-recession-watch-coming-soon-but-not.html

Today US Jobless Claims data showed an unexpected increase (to 294,000) for a second straight week, to levels not seen since February of 2015:

One or 2 weeks data may not be completely definitive. However, in light of our increasing probability of a US recession over the next 4 to 6 months, this is data that will now potentially be more market-moving. Jobless Claims are announced each week on Thursday morning.

Interestingly, Jobless Claims data has been historically inversely correlated to the S&P 500. As Jobless Claims fall, the S&P 500 rises and vice versa:

Something that we and financial markets will be keeping a closer eye on in the weeks to come.

Stay tuned.

I love feedback and questions!

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox:

bianca@highrockcapital.ca

Supply And Demand: 

Why Fixed-Rate Reset Preferred Shares 

(And The Canadian Preferred Share Index) Are Still Vulnerable

Paul and I have been focusing more on the preferred share dilemma in our respective blog's and discussions of late and just in time, a report from Bloomberg to corroborate our concerns that banks will have to continue to raise Teir 1 capital to maintain their ability to absorb losses:

"Canadian Banks Fall Behind US, Europe Lenders In Strength Gauge"

http://www.bloomberg.com/news/articles/2016-05-10/canada-banks-fall-behind-u-s-europe-lenders-in-strength-gauge

In a nutshell, this means that Canadian banks will once again likely have to turn to the fixed-rate reset preferred share market to issue new preferred shares (because it is the cheapest way for them to do build the required capital) and add supply to a market that is only just now finding a way to absorb last years supply.

Total return on the Canadian (SP /TSX) Preferred Share Index (including dividends) is close to - 15% over the last year. The index is made up of close to 65% fixed-rate reset preferred shares. That kind of volatility has not been seen since the 2008-2009 financial crisis.

This has not been the "comfortable", low volatility, approximate 5% dividend return vehicle that it once was. If supply is coming, then the little bounce since the January lows may be just about over and the downward trend may be about to reassert itself.

You just might want to have a look at your preferred share allocations.

Today is webinar Tuesday and we will be discussing this and many other topics surrounding the global economy, financial markets with our clients. As we do each week, following the webinar, we will post the recorded version on our website, so feel free to tune in at http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

And, as always, your feedback is greatly appreciated:

scott@highrockcapital.ca

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

US Recession Watch: Coming Soon, 

But Not Just Yet

Remember a recession is 2 quarters of back to back negative growth (GDP).

It is never good to try and put too much stock into the US monthly employment data because it is so often revised. However, one should instead look at the developing trend:

Despite a blip higher in the trend in March, April's data (released yesterday) continued the lower growth trend that began at the beginning of 2015 (February and March data were revised lower).

As for the unemployment rate, it ticked up to 5% (from 4.9%) and the labour force participation rate fell. Not, for the moment, anything of any apparent major significance. However, if the trend is turning (higher unemployment), it could be very significant:

Historically, when the unemployment rate (green line) crosses the 36 month moving average (brown line), it indicates the beginning of a recession (blue area). At the moment the brown line is at 6%, so they are still rather far apart. 

But, the brown line is falling at a steep clip, about .2% per month. In 3 months it will be close to 5.4%, in 4 months 5.2%.

If the unemployment level increases just .2% in 4 months, it could indicate the recession will begin then.

So folks, 4 months to prepare.

Here is the caveat: bond yields.

When the yield curve flattens, short-term yields rise to higher levels than long-term yields: as they did in 2007 (somewhat in advance of the 2008-2009 recession).

However, it could also happen that long-term yields fall as investors move to higher quality (less risky assets) in advance of a coming recession.

As you may recall, one of Paul's top picks on BNN a couple of weeks ago was 30 year Government of Canada bonds. So that is why.

It may not be that the US Federal Reserve needs to raise rates (push short-term yields higher) to create a recession (but if they do, that will certainly add to the probability).

So, we shall be watching these developments closely.

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

Here Comes The Volatility

Sell in May? (and go away).

An age old market and trading cliche which I have discussed here before. Perhaps the uncertainties that are piling up are finally coming home to roost:

• Interest rates: Will the Fed push rates higher in June?
• Oil Prices: Higher? Lower? Sideways?
• The US economy: higher employment, higher inflation and slow growth.
• Geo-politics: Trump as Republican candidate, Brexit, Russia, China, Greece, Saudi Arabia, Iran, North Korea, Terrorism, Refugee Crisis...
• Negative yields in Japan, Europe
• Expensive stock markets, declining earnings
• Low returns

Certainly a good deal of things to keep us on our toes in the world of managing money and getting reasonable risk-adjusted returns.

Risks are high and rising and it is a time to think defensively when it comes to portfolio management (something that we have been doing since last May at High Rock):

Higher than normal cash holdings.

Lighter than normal weight in risk assets.

More government bonds.

Volatility will bring opportunities to those who are patient.

Feel free to check out the weekly High Rock Webinar:

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

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

Portfolio Re-Balancing Is The Secret Sauce

In December of 2015, with Canadian Equities having been the worst performer of the developed nations, the natural re-balancing equation would indicate that a balanced portfolio would be adding this under-performing asset class (because it's allocation % would have fallen relative to the total portfolio), while reducing the % holding of an out-performing asset class to pay for it.

Natural profit-taking and redistribution of assets.

It turned out well, because so far this year the Canadian equity market has been the best performing equity market.

As discretionary portfolio managers, we can accomplish all of our client re-balancing in an instant, because we do not have to wait to discuss the re-balancing with each client at their portfolio review.

With non-discretionary advisors, it is difficult to perform just 5 or 6 reviews per day and properly execute all of the trades required for a re-balancing. A large advisory practice may not even get to each client once per year (unless the client was insistent) in that case.

Believe me, that was my challenge in my previous situation, however we could not agree to re-establish our process (because it meant that everyone had to be licensed as a portfolio manager, but I was the only one).

It really was a disadvantage to the clients. So, in the end, it turns out that building a new, different and better portfolio management operation at High Rock has become a great advantage for our clients.

It also means that we can be more tactical in our approach to re-balancing and add even more value.

The S&P TSX total return (including re-invested dividends) this year to date is + 7.7%.

The S&P 500 total return this year to date (including re-invested dividends and currency adjustments) is  -7%.

Combined, that re-balancing alone would have been worth more than 14.5%.

Great added value!

As I said, re-balancing is the secret sauce (and executing it in a timely manner is also important).

Oh and by the way, as you may all know, this is not a recommended trade at this point in time. In fact, it is / has been a good opportunity, but re-balancing again is / was in order and what has occurred historically is never a guarantee of future performance. DIYer's go carefully!

It is webinar Tuesday for our clients, where we discuss the global economy, financial markets and other things wealth management. We will publish the recorded version on our website for all of you who may want to listen / watch at or about 5pm EDT: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html feel free to tune in.

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

Earnings Update

Each week on our weekly webinar, we view the latest earnings metrics to see how the fundamentals stack up, because when investors buy stocks, they are buying a stream of future earnings (some may be retained in the company for future investment in growth, some may be paid out as dividends).

As we have reported on more than one occasion: a great number of companies have been buying back their own shares with their cash or borrowed money (and not necessarily investing in future growth) in an effort to continue to push their share prices higher. In the short-term this has the desired effect and shareholders don't complain because they get the immediate gratification of a better share price. CEO's who are compensated on the performance of share price also reap the benefit. However, the long-term prospects for the company suffer. 

Without a long-term focus on corporate growth, productivity suffers as well and economies stagnate.

According to Factset: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_4.29.16/view

For the first quarter of 2016: 62% of S&P 500 companies have reported earnings and of those reported 74% have reported earnings above estimate (over the last 5 years 67% of companies "beat" estimates, on average).

At the moment, the blended (both reported and estimated) earnings decline for Q1 is -7.6%. If the earnings decline continues for Q1, it will be the 4th consecutive quarter of year over year declines, something that we have not seen since Q4 of 2008 to Q3 of 2009.

The S&P 500 on Sep 30, 2009 was at 1057

It closed Friday at 2065. 

95% higher.

Last May, the S&P 500 peaked at a record 2134. At the moment it sits only about 3% below that high.

At the moment, analysts are projecting earnings growth for all of 2016 of 0.8%.

The 12 month forward Price to Earnings (P/E) ratio is currently at 16.8 times (17.1 at the S&P 500 peak last May) and the 5 year average is 14.4 times, the 10 year average is 14.2 times.

Back on Sept 30, 2009, it was somewhere around 12.5 times.

And yet, central banks keep pushing investors toward stocks with aggressively stimulative monetary policy.

Something is going to give and we think that there will eventually be a more realistic re-pricing of equity assets. Cash and government bonds are going to be the safe places to be (not to get good returns, mind you, to protect yourself from this bubble). If your advisor is telling you to "sit tight", you might want to remind her or him about the preferred share "re-pricing" that happened last year (where "sitting tight" has not turned out to be such a great strategy). Or for a more pro-active approach, feel free to get in touch with me and I will talk to you about the High Rock difference.

or check out our (newly updated) introductory webinar :http://www.highrockcapital.ca/about-high-rock.html

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