Are You Kidding Me?!

Banks Still Take Big Spreads On FX Transactions

For some, it is that time of year again: thinking about a warm weather vacation somewhere south. For me, I am heading to NYC (where I lived and worked for a number of years) for U.S. Thanksgiving to visit old friends and family. So for fun, I thought I would check in on the Canadian banks to see what they were charging regular folks to buy $US. 

Just for reference, the "spot" price on foreign exchange markets, the wholesale market, where a standard trade is about $5,000,000 (and the place where I began my trading career almost 40 years ago) is at about 1.3305 as I write this note.

That means that for every $1 of Canadian currency, you get $0.7516 of the U.S. version.

Like most Canadian banks, TD, as indicated above, wants to charge you 1.3641. That my friends is a mark-up of over 2.5% above the wholesale rate.  On $1,000 of Canadian Loonies, they are taking $25 of your hard-earned dollars.

For some that may not seem too daunting, but if you are going to be spending $10,000 of the Canadian stuff while you are away, that becomes $250. Not only that, it is a huge fee to pay in this day and age of transparency. No wonder banks are continuously making record profits.

How do you avoid this?

1) Open a $US chequing account at your favourite Canadian financial institution.

2) Get yourself a $US credit card (preferably with a travel award option, or other reward options).

3) Use your $US credit card when you are out of Canada and when you get your monthly bill, pay it off immediately, of course, but do so with the $US in your $US chequing acount.

4) How do you fill up your $US chequing account?

If you are a High Rock client, you just advise us to use $US cash that we have in your $US account with us. We always have $US assets that generate income from interest and / or dividends and we can electronically move it to your $US bank account within a couple of business days.

We always buy $US for our clients on the wholesale market (because we usually do it in bulk) and we tend to be somewhat tactical when we do so, adding when the $C strengthens.

Otherwise there are plenty of alternatives out there who will give you better than bank prices, just do a little on-line research.

Many Canadians have chosen to put their full faith and trust in Canadian banks and financial institutions because that has been the way that they have been taught (usually by the vast marketing efforts of those institutions).

That trust has become, obviously (as in the evidence above), very expensive (helps to pay all those advertising costs, I suppose).

I / we are of the lonely (but growing number of) voices trying to spread the word that there are alternatives to the old system and it may just be time for those of you who have not yet done so to explore the options and find some more efficient ways to manage your wealth.

While Stocks Soar, Economy Tumbles

While stock markets built in a perfect outcome for a trade solution, the economic deterioration continued as retail trade and industrial production releases on Friday pointed to a significant reduction in Q4 U.S. GDP:

That would put annualized U.S. GDP for 2019 below 2%:

Meanwhile Earnings for Q4 and Q1, 2020 are being revised down further:

Which, if you pay attention to the fundamentals (which apparently are currently out of fashion?), makes stocks look even more expensive:

When this happens, when the world just does not make much sense, cautious folks, like us at High Rock, tend to be thinking more of capital preservation and risk mitigation.

Opportunity always comes to those who are patient.

Harvesting Tax Losses

If you have capital gains that you have incurred in 2019 in the non-registered part of your portfolio, you might consider taking some tax losses by selling investments that are down so that you can take a capital loss to offset your 2019 gains and reduce your tax burden.

Tax rules state that you cannot buy that same security back for another 30 days in order to maintain the capital loss. However, you can replace it with a similar security, perhaps another ETF of like holdings so that you don't miss out on the possible recovery of that asset or asset class.

You should talk directly with your advisor on this matter, in order to do what is best for your own portfolio and tax situation, but with the preferred share ETF down some 15% over the last couple of years, this may be one area of opportunity.

High Rock private clients have had very little exposure to preferred shares, but the volatile interest rate environment has certainly created some problems for the rate-reset preferred share markets in Canada. Sometimes you have to weigh the risks of a higher dividend yield (like that which preferred shares offer) against the potential downside. CPD (above chart) offers a very attractive 5% dividend yield, but a 15% decline in value and a 0.5% MER, leaves you well into the negative. Sometimes having an exposure to a money market fund (cash equivalent) that pays 2% becomes a smarter option. I would take the 2% over the -10%, any day. That being the case, because I /we invest in the exact same securities as our clients (which is not always the case in the advisor community), our cautious stance, can have, in time, its benefits. We manage risk first, with a view to providing protection to our and our client portfolios capital when it appears to be at higher than normal levels of risk.

Canadian High Yield bonds have also been a better risk-adjusted asset class, with little correlation to interest rates and / or stock market volatility: (TXPRAR is the TSX preferred share index). Annualized Standard Deviation = Risk.

The one thing to be weary of, and the reason to be asking for assistance / advice on the tax-loss harvesting, can be the timing. If lots of folks are running to the same exit, it may get a bit tricky and could artificially and temporarily push prices lower. That being said, it may also provide buying opportunities for those who have cash / cash equivalent.

A Conversation With A Prospective Client

We (at High Rock) recently undertook a client survey with about 9 questions (quick and easy), mostly centered around our communications: blogs, monthly video, quarterly reports, semi-annual reviews). The lead-off question (above graph), however, was intended to affirm (or not) our view that most of our clients were thinking long-term in nature which came in at a pretty solid 97% (56% most concerned about meeting their Wealth Forecast (financial planning) goals, 41% most concerned about long-term Return On Investment (ROI)).

Me: So when it comes to your personal finances, what keeps you up at night?

PC (Prospective Client): Just making sure that I am going to have enough money.

Me: And what does that mean, to you, "having enough money"?

PC : A number of things, I suppose: being able to live financially independent, working at what we choose to work at, when we want to work at it. A good education for our kids, lots of travel, some philanthropy and something, in the end, left to our kids and some charities.

Me: Sounds like some pretty great goals. How far along are you with your plan? 

PC: We don't have any real plan, as yet, we have TFSA's, RRSP's, RESP's and some inheritance money in a savings account.

Me: A house? a mortgage?

PC: Yes. And I hate debt. I want to get that mortgage paid off as soon as possible.

Me: Absolutely! Debt can be a scary thing, especially when you are overwhelmed by it. What do you hate about debt?

PC: I guess it is just the way that I was brought up: debt was always frowned upon. 

Me: I guess interest rates were pretty high back in the 80's and 90's, carrying debt was a pretty expensive proposition. How do you feel when you see how low interest rates are now and the pretty significant amounts of household debt that Canadians have taken on?

PC: Higher interest rates frighten me.

Me: Sounds to me like it might be time to get down to the hard part and create a structured plan? We call it a Wealth Forecast. It is basically ground zero for all of the building blocks that you need for your investing strategy. When we understand exactly what you want to accomplish and over what period of time, we can then start to put together a long-term plan: what kind of portfolio growth you need, the kind of risk that may be necessary for you to endure and if you are comfortable with it.

Some years will be more difficult than others. Last year our balanced portfolios had small negative returns. This year they have, so far, bounced back nicely. However, we want to look at this in terms of decades, not years. Especially when you likely have more than four decades of life to go. Your plan has to take this into consideration, not every year will be at the average annual rate of return. We cannot control the economy and how financial markets might respond to it. We have to think in terms of what it takes to meet your long-term goals and the most efficient way to get to them: return for the risk taken,  taxation and the costs of investing.

Any idea of how much you are paying your current advisor and portfolio managers?

PC: We have a number of mutual funds in various accounts, our bank advisor looks after those. I am not sure what we pay.

Me: Do you think that might be worth looking into? 

PC: I tried to get her to show me, I didn't really understand it, but I didn't want to bother her more than necessary, she's pretty busy.

Me: I hear you. I bet it would be nice to have that made a little more transparent?

PC: I should pay closer attention, I think.

Me: Time to get down to the planning part?

PC: Let's do this!

Oh Cannabis

Flashback to June 21, 2018: PM Trudeau announces a legalization date of Ocober 17, 2018 for marijuana sales. I happen to be the guest host on BNN's The Street with Paul Bagnell and of course the topic du jour was the said legalization and all the Cannabis company stocks already involved in the feeding frenzy. At the time there were about 44 listed Cannabis companies on the TSX.  When Paul asked for my comments, I remarked on the number of listed companies, all with limited, no or negative cash flows and suggested that this would not end well (my well-informed opinion courtesy of my business partner Paul Tepsich's keen insight and research, in which he had stated that he would not touch this industry for investment on the cash flow issue alone). Of course speculation was rampant and we were thought of by some to be missing out.

I have not followed the story too closely, other than by virtue of news reports from time to time, but was brought front and centre to it again by a Globe and Mail story that I read over the weekend titled : "All Dried Up: How Bay Street Cashed In on The Cannabis Frenzy Before The Carnage" .

"With little access to fresh cash, Canada's licensed producers now face a new reality. They have spent years focused on financings to fund their expansions, paying little mind to positive cash flow."

"The vast majority of the companies are going to go bankrupt",said Igor Gimelshtein, the former chief financial officer of MedReleaf Corp."

 The chart of the Horizon's ETF, HMMJ (above) really does tell the story behind the emotion and psychology of bubbles.

The early excitement (left peak), the Fear of Missing Out (FOMO) (all time high peak and right peak), and the reality .

Technically referred to as a classic "head and shoulders" chart pattern.

"For all the money they made, the industry's original financial backers have now largely moved on to more promising U.S.- based companies, or are out of the sector altogether. Retail investors, meanwhile, are still heavily invested, holding 80% or more of many cannabis companies' shares".

"It is all too familiar a tale. As with so many bubbles, much of the smart money got out early, leaving behind retail investors who clutch shares with dwindling values - with little hope of recouping big losses".

Classic in many ways, but horribly devastating to those who bought in to the hype and have been subsequently crushed. 

Where was the fiduciary responsibility to those retail investors who took their advisor's advice to participate, when they were supposed to be looking out for their best interests?

High Rock chose not to participate because the industry lacked a basic fundamental. In turn, our fiduciary duty to our clients (do we want this for our own portfolios? Absolutely not!) was to assess the risk, apply it to our and our clients long-term goals and determine that there was no point in owning (investing in) the Canadian cannabis industry until real value (positive and predictable cash flow) became apparent.

That is how we boringly and methodically determine how to invest. Not because everyone else is buying into it and pushing prices higher (creating upward price momentum and the inevitable excitement). As I will always say, ad nauseum, if you want excitement, go to a Casino! If the value is not there, at some point in time, the smart money will figure it out (leaving emotions on the sideline) and bid adieu, while the more emotionally driven investors remain on "Hope Island".

We may apologize, from time to time, for erring on the side of caution, when we are uncomfortable with relative value. However, our fiduciary duty to our clients is to protect them when we see risk that does not make sense too us and to our/their long-term plans.

We are stewards of wealth, not gamblers.