How Are You All Doing?

We have been in touch with all of our clients, in some capacity over the last couple of months and apart from a few personal issues (not Covid-related), most seem to be in relatively good spirits. Some had to quarantine (some had to quarantine more than once) upon returning from travel or warmer climates. Paul has been able to go into the office, Bianca (sans daycare) and I have hunkered down in our home offices.

We have spent time balancing and re-balancing as market swings have dictated that we should. I have not received anything other than positive feedback. Most client experiences contained limited exposure to some of the potential bigger swings in portfolio value (avoidance of REIT's and preferred shares certainly helped).

Our success in keeping big volatility out has been partly responsible for new clients coming on board. As well, our new clients are joining us because they are frustrated by a "one size fits all" investment portfolio. Concerned that they do not have a tailored strategy, tired of over-paying and worried about advisor conflicts of interest (gathering assets for commissions, rather than providing quality service). As it turns out, the stewardship that we provide gives people some comfort that we know what their goals are and that we can work diligently and carefully to getting them to them.

I am encouraged when I talk to our 20 and 30 something clients, they seem to be developing long-term perspectives and continue to add to their savings and that has been timely for them.

As for me, a little less commuting has turned into a more rigorous exercise regimen (including yoga) and I have shed a bunch of unwanted pounds. Not yet at the point where I could participate in "kilted" yoga (that is never likely to happen), but enough so that I feel a little mentally sharper, despite the lock-down.

To all of our clients who are out on the front lines (you know who you are!), a huge thank you. To any of our clients who just want to chat, you know where to reach me and to anyone who might like a different kind of investing and wealth management experience, we are happy to open up discussions.

To everyone, stay safe and stay healthy. There may be more Covid-19 to come, but being prepared is paramount. Hope for the best, but be prepared for the worst.

The Stock Market Has Become A Casino

For you regular readers of this blog, you know that my ongoing battle continues to be to try and reconcile the current reality of stock market moves with the fundamentals (Price to Earnings ratio for one metric), which (courtesy of Liz Ann Sonders, Chief Investment Strategist at Charles Schwab) has for the last 20 years has had a 90% correlation:

Until March 23, 2020. Remember that day?

Since then, the correlation has been a mirror image: -90%

What?

In other words, stock market buyers have in fact been pushing equity prices higher while earnings expectations continue to erode. 

So who is buying and more importantly why?

I wrote this question in my daily journal on May 12 and have been trying to figure it all out since. I hear on the radio, see it on T.V. and read it in the financial news print: financial advice givers telling us that "investors" are looking "beyond" the current pandemic. Seriously? How far do we have to look? Are these supposed "investors" expecting a return to normal? Even the U.S. Federal Reserve Chairman Powell has warned that this is going to be tough economic time for quite some time into the future (and he is normally rather optimistic). The Fed (along with the BOC and other central banks) has pushed plenty of liquidity and almost 0% interest rates on us. Some might say that their policies are forcing investors into stocks as the only alternative.

In his morning research that our friend David Rosenberg sent a couple of days ago he posed the exact same question: "Who are the people doing the buying?"

And then in yesterday's note it became rather clear:

"We know from the fund flow data that it isn't the general public. We know from the BAML survey it isn't institutional investors. We know that from the CFTC data that it isn't the hedge funds. If I told you who the people are that are bidding equity prices higher you wouldn't believe me."

But an article in the Financial Times may have shed some light on the subject: "Frustrated Sports Punters Turn to U.S. Stock Market" :

"Gamblers who cannot bet on professional sport because fixtures have been scrapped are flocking instead to the US stock market, creating a new class of customer for online brokerages and adding fuel to the market rally."

Sure, there have always been gamblers trading stocks, but now there a whole lot more of them and from that the risk in owning stocks becomes that much more egregious. 

As David said in yesterdays briefing: "Hundreds of thousands of frustrated gamblers have shifted from on line sports gambling... this is infinitely worse than the cab driver giving you stock tips, which in the past was always a sign of a speculative market top".

My friends, I believe that we may need to prepare ourselves for a whole lot more volatility before this is all over. Certainly, when you hear financial media commentators calling stock market participants "investors", you are going to have to think a little harder on that.

Be safe, stay healthy!

Set Your Goals

The crystal ball is a bit cloudy at the moment (for some that may be a bit of an understatement), so it is a great excuse to put off setting (re-setting) our goals. We had a good look at and discussion about procrastination in my ongoing Friday sessions last week, courtesy of my friend and coach Greg Wood. One of the key takeaways was the idea that: "if you are standing still, you are not moving forward". Certainly the current life-situation on the back of the ongoing pandemic in which we find ourselves is definitely a cause for concern and likely making us take a good hard look at our life priorities, but we cannot stay in paralysis forever, we have to keep going and we will. Those who get on it more quickly are those that are likely to benefit the most.

I enjoy the conversations with our younger clients who are most eager to get back to building their compounding curve. With 50 to 60 (or more) odd years in front of them, they can afford to be taking a little more risk.

I can't help but be motivated by their attitudes toward building their wealth and their future.

However, we all do not have the same time horizon's, so it is important to pull out our plans (at High Rock, we call them Wealth Forecast's), take a good look at how they are structured and note what adjustments may have to be made. Everybody's circumstances are different: building our wealth or utilizing our wealth, we need to assess our current circumstances and take a good hard look at our expectations of return as a function of the risk that we are prepared to take on.

That is why a "one size fits all" kind of strategy is only to the benefit of the advisor who cares more about building her / his practice for scale and revenue rather than addressing the needs and goals of their clients (in my opinion, an enormous conflict of interest). Anybody who has been / is still over exposed to Canadian preferred shares or REIT's will understand that. 

So it is time to reassess. Perhaps set out your lifeline: ask yourself where you want to be in 1 year, 3 years, 5 years, 10 years and so on. Set your goals and prioritize them (they may not necessarily all be financial goals).

Optimism Sells. Be Careful What You Buy Into

How many times have I heard about financial advisors (almost, but not quite promising) stating that annual average returns in the 7% range are pretty easy to achieve? Conveniently forgetting to remind us that past performance is not a guarantee of future performance.

Yesterday, White House officials (Mnuchin, Kudlow, Hasset) were on the airwaves talking about an economy that will bounce back in the second half of 2020 and have a "tremendous snapback" in 2021. Meanwhile, Fed official Neil Kashskari "wishes" it were true, but expects a slow, more gradual recovery. The National Bureau of Economic Research has a working paper that is suggesting an "L" shaped recovery. Our friend David Rosenberg thinks it will be more of a "W" shaped recovery. So what's it going to be?

My natural skepticism suggests those least likely to have an agenda may be closer to the reality of the circumstances. Like Kashkari, I too wish for a strong economic bounce back, but to be honest and fair to myself and our clients, we need to be prepared for some disappointment.

Despite being told often enough by presidential tweet that stock market strength is representative of a great economy, there has been an increasing disconnect between the two. So frequently, lately, have I heard the optimists and "cheerleaders" tell us that the stock market is "forward looking". How far forward is it looking? would be my next question.

Factset, the folks who supply us with earnings data and estimates (remember earnings? one of the metrics, supposedly, for analyzing a stock's value) suggest that the current stock price to  forward (12 months estimated) earnings (P/E) ratio has not been this high (expensive) since 2002:

Forward earnings guidance by many (about 40% of) companies has been pulled as the crystal ball has gone particularly cloudy, so the "E" in the ratio is a "best guess" for analysts. For those of us who still care about fundamentals, that means that anyone buying stocks at this point is likely tacking on some pretty hefty risk.

David Rosenberg did remind us this morning: "Equities have become little more than a casino, with central bankers as the blackjack dealers as they do all they can to support the investment community".

For a deeper dive on the disconnect between stocks and the economy, the New York Times had this article: Repeat After Me: The Markets Are Not The Economy : "For decades, the market has been growing increasingly detached from the mainstream of American life, mirroring broad changes in the economy".

"So why do millions of Americans continue to think the market really is a barometer on the economy? That's more a question of history and culture than economics".

If you have a portfolio that is 60% equity, you may be gambling  (vs. investing) a little more than you are lead to believe and the downside risk may be growing. Optimists tend to downplay the risk factors. Not that you should not have risk, we do need to take risk, but you need to be aware of what risk you have and how it may impact your investment portfolio, especially when markets are negatively impacted.

Our philosophy at High Rock has always been to manage risk first. That is one of the features that makes us different and better from those who just want to sell to you (their agenda). Our agenda is to invite clients who want that kind of risk-adjusted portfolio  management.

As I suggested in my blog "Won't Get Fooled Again", it may be worth looking at your risk profile and trying to determine if, perhaps, you might want to revisit your investment risk, given the current circumstances. The time is now, while the stock market is strong. You don't want to be making these decisions when the market starts to reassess value and risk. Always happy to offer an opinion directly.