Plenty of Uncertainty To Watch For This Week

Beyond the "Trump Trade", which is as much bluster and mis-direction as his tweets (meant to take our focus off of the real issues), there are more important near-term questions:

1) OPEC meets on Wednesday (Nov. 30) and whether or not a meaningful production cut can be achieved will be a significant  hurdle and oil prices will be impacted (one way or the other). 

2) US Employment Situation Report is on Friday (Dec. 2): our focus is (and has been) on the current unemployment data (now at 4.9%) and the 3 year moving average (5.6%) and how when these numbers have converged in the past it has indicated recessions. With little change in the unemployment rate and a falling 3 year moving average, this convergence is happening rather quickly. An uptick in the current unemployment rate (more workers looking for jobs) may signal that (with this indicator) a recession may not be far behind. Whether or not Trump can provide economic stimulus is not going to be an issue in this case, because the impact of that would not be felt until well into 2017 (reason why equity and perhaps bond markets have got way ahead of themselves).

3) In what could be a very important moment for the future of the Euro, Italy votes on constitutional reform on Sunday (Dec.4). Prime Minister Renzi has indicated that if a "no" vote wins, he will resign and once again Italy will be thrown into political chaos and it is likely an election will follow. This may give the "populist" parties (who want to hold a referendum on the Euro) an opportunity to move into power. This is at a time when banking issues in Italy are already problematic and could create even more financial market chaos.

Next Week: Central Banks start to take the stage.

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Scott

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Bianca

Thanksgiving 

Last year at this time I wrote about being thankful for the time my family and I spent living in the US (and all the great memories) and the return to Canada (that likely extended my stay on this planet).

Giving Thanks (11/25/15)

We still celebrate the holiday because it became part of our lives and for us, kicks off the Christmas / Holiday season. It also allows us to think about what we have and reflect on our good fortune and take the time to consider those that have not had such good fortune.

My wife and I have had the great pleasure to be involved with the folks at New Circles over the last year. These are people who dedicate their lives (or a very large chunk of them) to helping those who have not had such good fortune, try to get to a bit of a better place.

It starts by making sure that they have clothing (Gently Loved Outfits to Wear or GLOW) that they can shop for (without cost) in a dignified setting, but goes much further and helps them to begin to grow into productive members of the community with skills training and social programs.

We had the wonderful opportunity to attend a graduation ceremony last summer. There was a great deal of pride and accomplishment in that room and it was moving to say the least. People who had come, with basically nothing, to live in Canada were ready to become independent members of the community in a very positive way.

At High Rock we recently met with a new Canadian (referred by Cindy, the founder of New Circles) who was educated, trained and worked in the world of investment finance in a developing nation. He had packed up his family and taken the bold step of trying to create a better life for them. We helped him develop his "value proposition" for marketing himself as an expert in emerging markets and build a successful resume.

At this time of year, one of our favourite programs is the  Holiday Angels , where donors are matched with families in need who provide a wish list which includes items such as clothing, kitchen wares, toys and giftcards for groceries. The notes of thanks from small children and their parents in past years have touched us deeply. Many are in sheer awe of the kindness of strangers.

So for us it is not just a time for giving thanks, but a time for giving to make the spirit of the holiday season a meaningful time.

So thank you to Cindy, Alykhan, Diana and all the staff for allowing us the privilege to be part of the New Circles family, it has enriched us and opened our eyes and our hearts.

US Stocks At Record Highs: Building In A Large Number Of Positives 

S&P 500 prices are up close to 8% on the year and earnings for 2016 are expected to show close to zero growth. 

Earnings expectations for 2017 (building in all the positives) are for growth of 11.4%.

Inclusive of all that is positive, 12 month forward Earnings Per Share are at 16.7 times, well above the 10 year average of 14.3.

Simple question: if you had new cash, where would you want to buy US stocks (with a long-term investment in mind)?

If you are buying a stream of future earnings, which is why you invest in equities (which are completely built-in to the 16.7 times Earnings per Share data), then you are buying at relatively rather expensive prices.

At prices that put Earnings per Share below their longer-term average, it would likely make more sense.

So why the hurry?

Hype.

Stock prices are running on emotion: they are calling it the "Trump Trade" and most investment companies and financial institutions want you to buy into the hype, because if stock prices go up, all is well with the world, apparently.

I am a contrarian by nature, so I am not likely someone who runs with the crowd and I am definitely not running with this one. In fact, I notice the cracks in the argument (part of my cautious nature: keeps me agile, fit and slims my waist line): like the possible end result of the continuation of the populist, anti-free trade movement. First Brexit, then Trump (tearing up the Trans Pacific Partnership, which accounted for about 40% of the global economy), next the Italian constitutional referendum and/or the French presidential elections (which could, in fact be the beginning of the end for the Euro).

Are we to ignore all that because apparently Donald Trump will make America great again?

He has certainly pushed interest rates higher and left a great deal of those with overwhelming debt (at record levels) with higher debt servicing costs and only hope for some economic help from the yet to be announced fiscal spending.

Hope is a good thing as long as there is some follow-through.

Are we to believe that Donald Trump is going to be able to pull it off (he also claimed that he was going to put Hillary in jail)?

Good luck with that. The man is all talk, little substance.

As my business partner Paul says..."One month does not a trend make..."

We will talk about this and more and how our models and portfolios continue to beat the benchmark averages despite our cautious approach on our client webinar today. The recorded version will be posted on our website: High Rock Capital Weekly Webinar at or about 5pm EST.

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Scott

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Bianca

The Biggest Risk: Running Out Of Money

For each of our clients, as regular readers know, we prepare a Wealth Forecast that attempts to project (as best as is possible) how their money is expected to grow and meet their needs for their respective time horizons. There are many assumptions that we have to make and as I discussed on Friday, understanding inflation is one.

We also assume a steady or increasing employment income (for those who are earning one, i.e. not retired) as the means to add to savings and grow wealth (income - expenses = savings).

But, what if that income should suddenly be reduced?

If it is merely a change in employment circumstances from losing a job, there is hopefully only a short time frame where you can land a new job and resume the income stream.

If however, there is something more dramatic: illness, injury or worse, loss of life, that income stream may never be resumed.

More often than not, these situations take you by surprise.

That is the benefit of Critical Illness, Disability and Life Insurance: they offer the protection you  and/or your family need if you suffer a loss of income (under the respective category) that would remedy your income needs and reduce the risk to your financial health.

Of course their is a cost associated with protecting you from that risk, but what is appropriate (if it is at all needed) can all be determined through the Wealth Forecasting process (High Rock's Certified Financial Planner (CFP) professional, Bianca Tomenson is also licensed to sell insurance products and is co-authoring this blog), which helps to identify risks across your wealth growing years.

There are a number of benefits that come with the use of insurance products, but much of it stems from the fact that you (in most cases) pay the premiums in after-tax dollars, so the beneficiary(s) receive after-tax dollars.

For Life Insurance especially, this can be a significant factor in planning for your estate and what you wish to pass on, to whom and what tax burden you wish to pass on as well.

Life Insurance benefits by-pass the estate and go directly to the beneficiaries, tax (and probate) free.

Interestingly, whole life, participating policies (which pay annual dividends that can be used to purchase additional paid-up life insurance each year and as a result potentially increase the death benefit significantly over longer periods of time) can be used as a way of supplanting income in later years (if necessary). These types of policies accumulate a cash surrender value (CSV) over time and the policy owner, while still alive, can utilize the CSV by borrowing against it and making the amount borrowed payable to the lender, by making the lender a beneficiary (of the policy) for the amount borrowed (plus interest).

The borrower pays no tax, the lender receives the re-payment of the loan, tax-free, on the death of the insured.

As well, the death benefit is guaranteed and therefore an asset that is highly diversified away from the financial markets and the risks of price volatility.

Depending on your circumstances, of course (and this needs to be looked at in conjunction with an expert who is not selling you what you don't need), this may fit well into your financial goals. We have seen may positive outcomes from this type of planning over the years and the security and peace of mind can be well worth the cost.

Questions...

Bianca

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Scott

Ever Considered Your Own Personal Level Of Inflation?

Inflation is an enormously important component in planning (Wealth Forecasting), because your actual or "real" rates of return of growth have to take inflation into account.

If your annualized rate of return (after fees and taxes) on your savings is growing at or about 2.5% (our benchmark 60/40 balanced return as of last Tuesday was 3.25%, after fees, before taxes, although High Rock clients are getting a significantly better rate of return) and the basket of goods that Statistics Canada follows, as it was announced this morning, is growing at an annualized rate of 1.5%, the net or real rate of return is 1%.

However,

Statistics Canada's "basket" of goods and services may not necessarily be your "basket", so it is relatively important to understand your own basket when planning your family budget:

Here's what Statcan suggests:

And this is what they show as to what represents the annual growth in the prices: 

You can decide for yourself what weights you should prescribe to your own personal basket, but if you like a glass of wine more than the "average" or travel a little more than average, you may find that your personal rate of inflation is a little higher than the average. This could very well impact your real rate of growth as well and when you project it out over a long-range period of time, this could be significant.

As painful as it may be, the whole budgeting thing that is, it is absolutely essential in determining how you are going to reach your financial goals and an extremely important part of forecasting your wealth.

That is why we are adamant about preparing a Wealth Forecast for our clients, because how can anyone begin to know how to build a strategy for achieving those goals if they do not understand your lifestyle and the costs of that lifestyle and the impact of that lifestyle on your projected net worth?

They cannot.

If you have an advisor, ask her/him how they know what your strategy should be?

If they are just popping you into a standard plan (that everybody has), they are not doing their due diligence appropriately.

And that my friends is what happens when you get "Robo-style" advice and portfolio management. 

Don't settle for it, there is a better alternative.

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Scott

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Bianca

Back To The Active vs. Passive Argument

In a recent paper published in the Journal Of Finance (Oct. 9, 2016), Lubos Pastor of the University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER), Robert F. Stambaugh of the University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER) and Lucian A. Taylor of The University of Pennsylvania - the Wharton School (all fellows with very impressive credentials) found that skilled active portfolio management out-performed passive investing.

More here: Active vs. Passive

One interesting conclusion that they made was that smaller managers had greater flexibility (to take advantage of "mis-pricing opportunities"), but that these highly skilled portfolio managers could charge more (for their skill).

So, as we have been suggesting since the inception of the High Rock Private Client Division, there is a place for tactical (active) portfolio management in a wealth management strategy as long as it is "highly skilled".

Sometimes it is nice to have academic support to back up your theory and model (to go along with the better than benchmark risk-adjusted returns).

Interestingly however, we have added a low-cost alternative: whereby you can get the same highly skilled money management at a significantly lower cost. And it also includes personal, tailored family financial planning (Wealth Forecast) with a Certified Financial Planner (CFP) professional.

Let me talk about the skill level, because it is high: Paul Tepsich and I were bond traders together at Merrill Lynch in the 90's (I actually started a little before he did, in the 80's), managing/trading billions of dollars of risk. Paul continued on trading as the head of of Canadian Credit (corporate bonds) and then he eventually built High Rock to manage money (4 funds) for Scotiabank. In an advisory role from 2000 to 2104, I saw that (the advisory) side of the business (and what other advisors do) was inefficient. Most advisors had to do what I had to do at the time: farm out client money to skilled active (like High Rock) and passive (ETF) managers to get exposure to all the important asset classes. But now we don't have to, we manage the great majority of our client money "in house" for our private clients, using our built-in synergies with our managed funds. What this means is that our clients are not paying fees on top of fees for the larger portion of their portfolio. 

Why?

Because we have the skill set, experience and expertise to be a small, nimble "active" manager.

We are doing it better.

I challenge any and all financial institutions to come up with a better solution for clients (there isn't one). One where the people who are looking after you (and I mean really looking after you: not many portfolio managers talk directly to their clients) also have their money in the exact same portfolio models that you do.

We are breaking new ground and providing conflict of interest - free, disciplined investing and wealth management services, unparalleled in the investment industry.

It can be done: there is an alternative to the common mainstream, old-school style of passive investing and it doesn't have to cost 1.5-2% above the returns that you are getting and I am passionate about that alternative. Academics have studied and proven it and we have also shown how it works in real time.

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Scott

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Bianca

Traditional 60/40 Balanced Portfolios Have Had The Stuffing Knocked Out Of Them Since Last Weeks Election

This year (2016) to date, the total return of a balanced 60% (All Country World Index, ACWI ETF) equity and 40% (Canadian Bond Index, XBB ETF) portfolio, after fees and costs (according to Bloomberg TRA, daily basis data) is 2.53%. Last week, prior to the election it was 4.58%.

Why? 

Bond market volatility for one : US government 10 year bond yields jumped close to 1/2% (and Canadian bond yields were not far behind). At the same time emerging market equity prices (EEM ETF) have fallen over 7.5% in the same time frame.

If you are fully invested in a traditional 60/40 portfolio you may have seen a similar swing in your portfolio.

How do you avoid these swings?

Diversification into non-correlated assets: in last Friday's blog, I talked about Canadian high yield and/or a higher allocation to cash and money market assets (under-weight exposure to more potentially volatile emerging markets).

Adding a more tactical approach to portfolio management has reduced our and our client portfolio swings to 1/4 to 1/2% over this same period, certainly better than a 2% swing, unless you don't mind that kind of thing.

The point is that there is an alternative to the traditional standard, but it is like comparing apples to oranges: traditional advice (put it in place and "let it ride") to portfolio management (where the portfolio managers are continuously researching the best ways to lower volatility and maximize returns).

We will talk about this and other aspects of financial markets, the global economy and wealth management with our clients on our weekly webinar today.

The recorded version will be available on our website at or about 5pm EST today. Feel free to have a listen: 

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

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

US 10 Year Bonds + 1/2% Will Be Tough On The Global Economy Until Tax Reductions And Infrastructure Spending Kick In

US government 10 year bond yields (gold line) have jumped by about 1/2% since the US presidential election results were announced. Canadian 10 years are higher by about .35% (white line). This will impact borrowing costs on a global scale and with record debt levels, debt servicing just got about 30% more expensive. If you have a renewing mortgage this will be impactful. Business borrowing for investment or share buy-backs also just got more expensive.

This is all happening because it is anticipated that US GDP will rise on the back of expected tax reductions and infrastructure spending in the US and will, as a result be inflationary and bond investors will demand higher yields to protect them from future inflation:

However, there is going to be a gap between when higher interest rates (from the bond market) occur (immediately) and when all this positive economic impact will occur, likely in late 2017 or early 2018.

Between now and then, there is a decidedly tricky time period when expectations will be rising without any real action having taken place and the costs of debt are rising with no real economic stimulus to offset it.

As we always say, a great deal will be in the hands of the consumer because they are about 2/3 of the US economy. Their debt servicing costs are going up, so are they going to feel so inclined to ratchet up their spending?

Maybe the 25.5% who voted for Trump. Less likely that the 25.6% who voted for Clinton will be as confident. What about the 46.9% who didn't vote? What about the folks who are all of a sudden expecting to get jobs? Will they re-enter the labour-force now, or will they wait until late 2017, early 2018?

In the meantime, what of a more protectionist trade agenda that could place the global economy in further jeopardy?

There are many questions still to be answered. 

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

Canadian High Yield Bonds: 

A Very Good Place To Be Invested.

I will state my bias right off the top because at High Rock we are High Yield experts. It has been a good year for our funds:

AHY.un (Advantaged Canadian High Yield Bond Fund) has produced a better than 20% return year to date. (This is in no way a a recommendation to buy or sell these securities, it is just an example for illustrative purposes and historic returns are in no way a guarantee of future returns) . Our other fund HHY.un (High Rock Canadian High Yield Bond Fund) has also had strong total returns year to date (above 17%). (These are 2 of the 4 funds that High Rock manages for Scotiabank).

Canadian high yield bonds offer a very good, non-correlated asset class with reasonable risk adjusted returns:

With return on the vertical axis (higher returns at the top) and risk along the horizontal axis (higher risk to the right), C$HY (Canadian High Yield) has had better risk adjusted return (NE quadrant of the chart) than the TSX and Canadian or US government bonds.

In fact, as interest rates rise, as we have been seeing in the bond market over the last couple of days, Canadian high yield bonds are a proven place to be invested because they have 0 correlation to interest rates:

So we beilive that there is a place for this asset class in a portfolio to add diversification and lower potential risk. Again, this asset class should always be looked at in conjuntion with your total portfolio strategy depending on your risk tolerance, investing objectives and time horizon goals. Your advisor should know about this, but if not, we are happy to discuss it with you.

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

Change Is Upon Us And We Have To Adjust To The New Order

If President-elect Trump follows through with spending plans and tax reductions (as promised, I think), that will push deficits higher and bond yields up (prices down) as the US Treasury will have to issue plenty of debt to pay for it (creating supply that will make bond investors demand higher yields). It also means that, at long last, inflation may return also forcing investors to ask for more inflation protection in yield (especially in longer dated maturities). Higher bond yields will also put upward pressure on mortgage rates.

Is this, in the end going to be favourable for corporate earnings? Certainly the stock markets, while initially very worried, decided in the end, that this might be favourable. Certainly banks will benefit from a steeper yield curve, anything related to infrastructure will possibly benefit, health care-related activity will be under reduced pressure from the authorities (de-regulation vs, greater regulation under democrats).

Will this bring out the consumer? In the end that is the key because the consumer represents 2/3 of the US economy and the consumer, has been less than comfortable with the outlook thus far. Potentially, more jobs may give the consumer more confidence (will they be good, high-paying jobs? or low-paying jobs?). More confidence may mean more spending.

Will trade protection rhetoric be enforced?

This is where the greater uncertainty lies: protectionist practises reduce productivity and stoke inflation which will call for higher interest rates.

Do higher interest rates counter all the potential growth that increased government spending adds? 

Debt burdens are huge on a global scale and it appears that they are going to get bigger, so there will be a negative impact, just how much will be the discussion amongst the central bankers and economists around the world.

There will still be lots of uncertainty, so volatility will likely not go away.

A US recession? It seems less likely, but it can't be ruled out completely (if more workers enter the labour force, unemployment numbers could rise, if they are not finding work). Higher interest rates now could choke off growth, before all the promised spending is eventually put into place.

Inflation will return.

Bond markets, having resumed their leadership role are telling us that now.

Stocks will remain expensive until earnings are able to catch up (and that may or may not happen, depending again on what happens to consumer and business confidence).

The low return environment: rising inflation, improving growth, higher yields (will start to raise the risk-free rate of return) could start to improve.

In the end, adding a little risk to a portfolio now may make some sense, but caution should be maintained in order to properly assess progress along the way.

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

2016 Theme #1: Uncertainty Will Continue To Create Volatility 

Text from a client this morning: 

Client: I hope we were positioned for this!!!

Me: Do you follow our blogs and weekly webcasts www.highrockcapital.ca ?

Client: Not religiously

Me: Over-weight cash, under-weight equities

Client: Nicely done

And then I read an advisor's blog where he tells people to ignore their investments and that if they have balance, bonds will soar when stocks tank.

What if that negative correlation doesn't co-exist anymore? What if bonds and stocks tank together (it has been happening for a few months now). What next?

It is easy work to tell investors to just not pay attention (and will their human nature let them?) but the real hard work is preparing their portfolios to  withstand (as best as is possible) volatility when it strikes and to be able to use volatility as a tool to further enhance a portfolio's growth (and that is why they pay us our fees).

That is the difference between investment advisor's who give advice and a portfolio management company that manages portfolios (apples vs. oranges).

Sometimes that distinction gets blurred, however we want our clients to look at their portfolios today (and perhaps every day if they want) because while the traditionally balanced portfolios are under pressure, our client portfolios are not under anywhere close to the same pressure.

If it helps our clients sleep better at night, then part of our work is accomplished. Of course, there is lots of other work to be done: researching new opportunities that the new state of the world (post-Brexit, Trump presidency) might offer, reviewing client wealth forecasts with them to make sure that they are still on track to reach their goals and re-balancing their portfolios as is necessary.

Expect more volatility as financial markets try to figure this all out, but there is going to be plenty of fall-out that will have much longer-term consequences as time moves on and the traditionally balanced portfolios may be in for some surprise.

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

Ground Zero For The Global Economy

Massive uncertainty or somewhat less uncertainty is on the table today. From what I can gather, North Carolina is an important state which is too close to call and Florida also carries a big decision factor weighting. Trump needs them both.

There is also the outside chance of civil unrest if Trump loses but does not accept the outcome.

So the US economy, reliant on its citizens to consume, needs less uncertainty for them to do so. If they are not confident in the future, they will postpone their spending until they are. If businesses are not confident, they will not invest in growth.

Brexit taught us a few lessons about polling and odds-makers, there is no reason that the quiet majority could easily ask for change (despite the style of leadership on offer).

Health insurance premiums have jumped significantly for many under "Obamacare" and this in and of itself could prove to be problematic for Hillary. I have heard a good deal about this in my travels down here.

How goes the US economy will determine how risk will be perceived on a global scale. The greater the uncertainty, the less risk investors will be willing to take and markets, showing a spike in volatility over the last few days will certainly add to that volatility if risk is taken off of the table.

A global economy with fractured trade (if that should occur) will undo whatever positives globalization has brought and this will not create a good footing for longer term growth and investment.

Many have remarked upon how the lower pound has helped the UK economy post-Brexit, but this is merely short-term activity, the longer run outlook is grim.

So the American voters will decide today whether to embrace uncertainty, take a step backward and alter the current path or to keep working toward economic strength with a social conscience.

Whatever happens, it will not be pretty going forward (at least in the near term), although stock markets will likely breathe a sigh of relief (for the moment) if Hilary prevails. That plus a Republican congress would further the political gridlock and while still not positive for the economy, it would be the least disruptive for markets.

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

The Human Element

Back in September of 2015, I received a rather anguished call from a young woman who was, with her husband, in the process of looking to buy a house for their young family. They had been living in a rental apartment with their two small children and were feeling the walls "closing in".

Her/their investment advisor had adamantly stated that buying a house at this point in the market would be a huge mistake and would diminish a good chunk of their savings (for which he was earning a tidy 1% by having those assets under his administration) and that if they did so, he would no longer be interested in working with them. He fired them.

We met and with tears welling in her eyes, she showed me the advisors email. We chatted about the nature of investment advice and those who were in it for the money and those who actually cared about the people that they served.

We decided to prepare a Wealth Forecast just to get a look at how all of the moving components (home purchase, cash flow, income, expenses, future savings, etc.) would play out in time. 

As a relatively young couple, they had enough income and although much of their savings was in an RRSP, they were first time buyers and could take advantage of the Home Buyers' Plan ( http://www.cra-arc.gc.ca/hbp/ ) to minimize the tax burden of using RRSP money.

They transferred their accounts to a discount brokerage and I agreed (as a friend) to offer guidance (without any fees or costs to them, but perhaps with an understanding that when they were ready, they might eventually become clients, sometime in the future) with the timing of the liquidation of their holdings.

So they found a house in an area that they liked in early 2016 and bought it and were thrilled (only one other offer to contend with) and a little scared, but felt, finally, that they had put down roots.

And yesterday, in a message that touched my heart: 

"Every day from sun up to sun down there are boys playing baseball in the park across the street from our house. I can see them out our front window. Somewhere in this pack is (my son), grinning ear to ear having the time of his life. Somebody pinch me"

And so my friends, it can be done and it is not necessarily about trying to time the housing market (because your children may have left the nest by the time this market turns sour), it is more about making a plan and re-structuring your financial situation so that you can live your dreams.

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scott@highrockcapital.ca

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bianca@highrockcapital.ca

Earnings Up, Prices Down

As we await Tuesday's election outcome, lets have a peak at one of the fundamental metrics that we like to look at: The ratio of stock prices relative to company earnings.

With 85% of S&P 500 companies having reported 3rd quarter earnings thus far, the actual plus expected (for the 15% who have not yet reported) earnings data (according to Factset) is +2.7% (year over year). At the end of the 3rd quarter, the expected number was -2.2%. This will be the first positive earnings quarter since the 1st quarter of 2015.

At the same time, the S&P 500 has slipped by about 5% since it made new highs in late August.

In essence, stock prices are now cheaper on a relative basis: the 12 month forward price to earnings (P/E) ratio has dipped to 15.9 times from highs of above 17 times when stock prices were higher.

However, historically, the 14.3 times average over the last 10 years suggests that prices are still expensive and could move significantly lower before there is reasonable value.

Price action in equity markets has been generally negative and volatility has climbed in the run-up to the election, uncertainty has put investors purchasing decisions on hold and sellers are now in control.

The good news is that we have remained under-weight equities and over-weight cash (cash equivalent, money market, high interest savings), waiting for better value. We have been patient and we believe that we still have room to be patient. After all, our underlying theme for 2016 was to expect more volatility.

It is not just the election, central banks have been reviewing their strategies and fears that they will be less supportive of financial markets concerns with some support for underlying inflationary trends.

The release of US employment data yesterday showed a healthy year over year increase in wages of 2.8%. This will register with the US Federal Reserve when it comes to their interest rate decision making in December, adding impetus to their desire to raise interest rates.

So we (at High Rock) continue to act prudently for ourselves and our clients to not succumb to chasing returns and taking more risk than necessary, waiting for opportunities to  get reasonable value into our models and portfolios. That has been our mantra for some time. In fact, that is the nature of our investing philosophy: you do not have to be fully invested at all times. There are times when it is advantageous to shift asset exposure when prices become expensive because it is the nature of markets to get over-sold and over-bought. We add value to our client portfolios using our years of experience (and deep research) to pick the appropriate price points (to buy or to sell).

It is easy work for an advisor to recommend a buy and hold strategy, but we are not advisors, we are a portfolio management company with a very strong understanding of wealth management and that is a clear distinction.

Sometimes that distinction gets blurred, but is like comparing apples to oranges, it is just not the same.

We will make model and portfolio adjustments as we see fit and our clients trust in our judgment to do so. Our track record has justified our philosophy and helped to immunize (as best as is possible) our clients portfolios from volatility. And volatility/fear is high and rising (or greed is low and falling):

Stay tuned!

Feedback, questions, etc...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Chicago, St.Louis, Oklahoma City, Santa Fe, Phoenix: My Drive Through The US Heartland 

Geographically fascinating with all the changing landscapes and topography: The vast cotton fields of Texas (miles of the white stuff yet to be harvested) was the "jaw-dropper" (i.e. first time for that) as was the Ponderosa Pine forest on the climb down the mountains from the New Mexico desert to the Arizona desert: spectacular mountain scenery.

It began with back to back University of Notre Dame Fighting Irish victories over the University of Miami Hurricanes (football) and over the University of Connecticut (UConn) Huskies (hockey) in South Bend, Indiana. An excellent start!

But there was certainly anecdotal evidence of a subdued US populace with those whom I engaged: this election has frightened many, you could feel it, the energy was missing. Folks talk about it and shake their heads. The sports were a welcome distraction for them.

Chicago was big and bustling, but the airport seemed to be more crowded with sports enthusiasts than business travellers (Cubs fans, Indians fans, college sports fans) and traffic was reasonably light.

St. Louis was a ghost town, but it was Sunday night and they do not have a football team this year. Monday morning in the gym, every TV add that I saw was political all the way through the ballot and the adds were all negative about the other candidate. Normally I like the variety of US advertising, rather than the same commercials played over and over again on Canadian stations, but this was over the top.

Traffic was pretty light heading out of ST. Louis and there were fewer commercial trucks on the roads than I might have expected in a strong vibrant economy (which it appears, is not happening).

Oklahoma City (oil country) was empty. Gas prices at $1.75 per gallon (or $1.75 for 3.75 litres = less than $.50 per litre and if you convert to C$, about $.67) Wow! No wonder sales of F150's are picking up. In this part of the world the pick-up truck rules!

Texas is vast and you can see forever, but what struck me most was not oil drilling, but enormous wind mills, everywhere. There is a subtle change happening and it does not favour the oil economy.

We drove through mostly "red"states (i.e. Trump support), but I must say, there were only a few instances where there was very visual Trump support (billboards, etc.). I am surprised that Arizona is listed as a swing state, when they have never before voted for a Democrat for President.

Oh and we listened to plenty of "Bloomberg Radio" on the satellite radio along the way and the advertising is always interesting: especially the "guaranteed principle, 12% REIT's for Brooklyn buildings" really ? (if the risk free rate of return is 0%, then these must have some very risky catch, eh?) 

So the Fed remains on hold (at least until December), more uncertainty over Brexit as a panel of London judges ruled that it must be voted on by the British parliament and of course Clinton's lead has narrowed.

All that has lead to greater uncertainty and higher volatility:

And weaker stock prices...

As sellers have taken over the market on the uncertainty... and the 1 year total return on our benchmark All Country World Index has dipped below the break-even point into negative territory.

We (at High Rock) see volatility continuing to rise and have protected ourselves and our clients (because unlike many advisors, we invest in the exact same models as our clients: we "eat our own cooking", as it were). 

But of course, we are not advisors, we are a portfolio management company that specializes in wealth management. There are enormous differences between the two that very much favour the client. Yet with all the same safety features you would get through the standard advice channel of a bank - owned advisory and fee transparency to boot (as well as the expertise and experience) and likely better service.

There is an alternative.

Are you protected from volatility? We are!

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scott@highrockcapital.ca

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