The Post-"Brexit" Referendum World

Things financial look like they have already seen the results of the UK referendum to depart or remain in the European Union.  If you have been following the media, the polls and the odds-makers, the choice was basically down to a sovereignty (leave) issue and an economic (stay) one.

In the polls it was too close to call. The gambling odds favoured the stay camp.

The British Pound is, this morning, at it's best levels since December, up more than 6% from its lows last week (indicating that financial markets are going with the "bookies"): 

Global stock markets are higher as well. Relief is in the air, this morning, but the polls don't close until 10pm UK time (5pm EDT) later today.

It will be behind us soon and will be one of the many uncertainties that financial markets have been facing.

If, as the sentiment appears to be indicating, the status-quo is maintained, the focus shifts back to the global economy which in a number of major advanced economies remains mired in deflation or low inflation and economies are not yet showing the expected results of the massive amounts of monetary stimulus in Europe, Japan and China.

Further, the path of the US economy remains a major question mark. The US Federal reserve wants to "normalize" interest rates, but cannot, at the moment, because the economic data does not yet warrant it.

And, even if the data permits it (as we have suggested numerous times on our weekly webinar over the last number of weeks http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html ), a flatter yield curve (higher short-term rates or lower long-term rates or a combination of both) pushes the US economy closer to recession (as was the case in 2007):

And of course, there is the US presidential election campaign and who knows what twists and turns that situation holds for us.  A"Reality TV" show like no other!

And of course, if equity markets rally, as they have already this morning (S&P 500 is closing in on 2100, only 35 points or 1.6% away from its all time highs) with earnings and expected earnings levels entering their 5th consecutive quarter of negative growth, then the fundamentals will continue to be out of line with market prices and equities remain very expensive on those metrics.

If the bookies are wrong? I do not even want to think about the consequences of the UK leaving the European Union and the domino effect on all of Europe and the global economy, but the volatility meter would spike because the added uncertainty would send investors into a flight out of risk assets.

Thanks for all the great feedback, please keep it coming...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Wealth Interrupted: Protection Against Identity Theft, Fraud And Insolvency

A reader writes: "So I was talking to my friend today and she mentioned that she literally had 50K stolen from her bank account. She had a GIC, cashed it, and was about to make a downpayment for her condo. When she checked her account from the time she cashed it to the time she checked (about 2 days), the money went missing. The bank froze all her accounts and did an investigation where it was revealed that a bank employee actually used my friends drivers license to steal her identity and her money.

Of course, it was all refunded to her. After a police investigation and the bank investigation. But it did bring a topic to mind - Identity theft.

Maybe you can write about the controls that are in place to ensure that investments are not 'stolen'. Also, you can tie that into the insurance that is available in the event of losses, the role of the ombudsman etc."

 I always wonder about the folks that perpetrate these crimes, as in : how is it that you think that you're not going to get caught?

Anyway, it is a great question, because given all the new regulation around anti-money laundering and "proceeds of crime" issues as well as the "know your client" rule, we are asked to give up a great deal of personal data and information just to prove we are who we say we are, as well as our personal finances, objectives, risk tolerance, etc. 

And then all of that information, while protected under privacy laws, is in someone else's hands, usually in a computer data base which as we read about regularly can be hacked into and stolen.

The investment industry has rules and regulations to protect client data (as we all are aware) it is not only in a computer data base, but in most large institutions there is also the physical data (mounds of paper-work filled out and signed) that also represents a risk.

http://www.iiroc.ca/Documents/2016/09cf32f7-236c-4d13-a3ca-4c53a2a32fd0_en.pdf

Individual firms will also have there own internal security systems (and firewalls) that they have to maintain and upgrade to stay ahead of the "genius" criminal element.

In my time at Raymond James, I can say that there was a very heavy emphasis on cyber security and while other institutions were experiencing difficulties, to the best of my knowledge, Raymond James never did have a breach and were very efficient in identifying potential problems and notifying employees of their courses of action.

This is one of the reasons that we use Raymond James Correspondent Services for our High Rock client account custody (back-office).

With apologies (in advance) to Canada Post, the regular mail can get "lost", so we always use a courier that can be tracked (to protect that data as it physically flies about the country).

In my time as a branch manager, there were a few instances that I was made aware of,  where client emails were "hacked" and the criminal element used the email to ask to have money sent to a (different than the usual) bank account. If I recall correctly, the "fake" client was on a vacation and that was the excuse for a different bank account for the money to be sent to.

Needless to say, any money sent would have to be verified by a follow-up phone call, but we had to make sure that we were paying attention.

The Canadian Securities Administrators (CSA) has a number of suggestions for "protecting yourself" against fraudulent activity https://www.securities-administrators.ca/investortools.aspx?id=736

However, if you do not get satisfaction from the institution or the advisor, you can also go to the Ombudsman for Banking Services and Investments (OBSI) https://www.obsi.ca/en/home

for any dispute resolution.

You also want to ensure that the institution (like Raymond James) where your accounts are held is a member of the Canadian Investor Protection Fund (CIPF), so that if they do become insolvent, your accounts are covered for up to $1,000,000.

More here: http://www.cipf.ca/

Questions? Feedback?...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

The Skinny On Canadian Bank Risk

It is webinar day at High Rock today, so I am working away on prepping the power point slides on the latest economic news and financial market charts and returns and all the interesting metrics that we follow in order to allow us to make the best possible decisions on getting ourselves and our clients the most efficient risk-adjusted returns (maximum growth / minimal risk).

We will post the recorded version at or about 5pm on our website : http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

In the meantime, my very astute business partner and the guy responsible for the lions share of company "bottom-up" research (I do the lions share of "top-down" or macro research) at High Rock has written some great pieces on Canadian Banks:

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

I would highly recommend having a look at these, it does put a lot into perspective.

Together we have been breaking new ground on affordable wealth and portfolio management, while continuing to provide clients with a high level of service for the ultimate client experience that you likely will not find anywhere else.

In addition, we are also here (with many, many years of experience in financial markets and wealth management and with lots of widely recognized credentials) to help improve financial literacy for those who want help doing so...

So please feel free to ask questions and send feedback because it does provide me / us with excellent topics (beyond what you might find in the media) to discuss...

scott@highrockcapital.ca

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

bianca@highrockcapital.ca

Behavioural Finance: Mental Accounting

Another great question from a reader: 

"Can I have 2 separate accounts, one for investing in your portfolio models and one for my house money?".

We can make the assumption that at some (at the moment unidentified) point of time in the future, there is the desire to purchase a house. I won't get into the debate about whether a house purchase makes sense or not because that becomes the realm of a wealth forecast and is a highly personal (and perhaps emotional) decision. There are plenty of risks involved in home ownership and our job is to identify them and quantify them in the context of a family's goals and needs (which allows them to make an informed decision). It is however, their decision.

Back to the answer to the original question:

Of course you can, but why would you?

It is natural human behaviour to want to categorize different classes of the same basic asset: money.

It however, doesn't really matter:

If you have a $500,000 "investment account" that earns an annual total return of 5.5% (before fees and taxes)  and a $250,000 "house account" that earns 1% annually, then you actually have $750,000 that earns 3.9%.

But people like to separate "risk" money from "safe" money, because the pain of loss is greater than the pleasure of gain. It is, according to Richard H. Thaler (one of the foremost experts on Behavioural Finance), part of "the set of  cognitive operations used by individuals and households to organize, evaluate and keep track of financial activities."

http://www.anderson.ucla.edu/faculty/keith.chen/negot.%20papers/Thaler_MentalAccounting99.pdf

The theory behind "Mental Accounting" can often lead to decisions which may have irrational and detrimental impact on their consumption decisions and behaviour.

If you have a $500,000 investment portfolio earning 5.5% (or more) annually, why would you rush to use that money to pay down a line of credit or mortgage that has a cost of 2.5-3% just because you don't like debt?

And vice-versa: if you have a mortgage or line of credit at 2.5-3%, why would you put money in a (safe) savings account earning less than 1%. Especially if it is the held at the same institution because they are thrilled that you are paying them 2.5-3%  (to borrow from them) on one account and they are borrowing from you at 1% on the other.

Basically, all money is "fungible": whether you "worked" for it or "found" it (unexpected windfall), it is the same and its use all has risk associated with it.

If you spend it, you don't save it.

If you want it to grow, then you have to ensure that its growth is at a rate above the growth in the cost of the things that you will need to eventually purchase with that money (inflation). You also need to ensure that the risks of getting that growth are suitable.

Need help with that concept? (or other feedback)

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Thank You Readers, Friends, Clients 

It is really exciting to get the feedback that you continue to send. I do really appreciate it all because it tells me what you are interested in reading about and I can go about the business of doing just that.

I am not, nor was I ever trained as a "professional" writer (and my Chief Compliance Officer often reminds me of this when he corrects my grammar and punctuation). So I may not have the wit and charm that others may bring to the blogging world. 

However, I have been trading and managing risk and wealth for over 35 years now and have lived through lots of economic and market cycles (and seen lots of crazy volatility) over this period of time. Oh and I hold a Chartered Investment Manager designation as well. My business partner Paul, is a Chartered Financial Analyst and our other partner (at High Rock), Bianca, is a Certified Financial Planning professional. Between the three of us we have some pretty strong skill sets that we combine to offer a very solid wealth management team.

But my job and my passion are really about helping people. I have all of the time in the world for that and I have a fantastic platform from which to do it. It has taken me years to find the best possible way to offer a truly client oriented strategy that tailors very specifically to the needs of each family that we work with.

However, it is your questions and feedback that gives me continued insight into all the many different goals, objectives and needs that various families have. This fuels my research (our research) and provides me with interesting topics to explore and report back on. I am of the mindset that, many of you likely have similar questions and hopefully I am (in this blog) covering issues that are important to you all. If not, please, there is no such thing as a "stupid" question when it comes to financial literacy (because they do not teach you this very important topic of personal finance in school, unless you are a business/finance major, if then) and it is so important to seek the help and advice of someone (or in my case, a team) who has the skill set to give you the correct direction.

So, thanks for being in touch and for those who want to participate, don't be shy! 

scott@highrockcapital.ca

 and...

if you would like to receive this email directly to your inbox...

bianca@highrockcapital.ca

Preferred Share Index Dive Gets A 5!

With apologies to all the judges of such events.

As we have suggested on numerous occassions on our weekly webinar and on this blog, after last years fixed-rate reset preferred share debacle, that particular asset class has slipped into a new category of potential volatility.

Case in point, yesterdays plunge:

From the recent high's to yesterdays bottom, a drop of more than 5%. That is approximately a whole year worth of dividends (in this asset class) or thereabouts. Clearly the volatility level has risen and investors need to clarify their exposure to this asset class.

This is not the sleepy, decent yielding, low volatility investment that it may have been a few years back and as with all things that change, we need re-assess our exposure to it relative to our risk tolerance.

Looking at the 2 year Total Return Analysis (including re-investment of dividends) it is not a pretty sight:

According to the Bloomberg Analysis, (using CPD as a proxy), the annualized return (daily basis) over the last 2 years has been worse than  -9%. 

Will it comeback?

We don't think anytime soon because Canadian banks need to contuously raise Tier 1 capital and as was the case last year they utilized the fixed-rate reset preferred share market. But this market was overcome by the supply and it forced banks to "sweeten" the deal by offering more attractive dividend yields to move it. 

The whole secondary market in these preferred shares was re-priced lower to accomodate the new yields (hence the negative return). This could happen again, if and when the supply is increased with new issues and if and when it overwhelms the market demand (regardless of the yield or interest rates).

Capital requirement rules for systemically important banks changed in 2013 and they have a sliding scale each year from 2013 to 2020 to hit and maintain annual targets for Tier 1 capital ratios according to their Risk Weighted Assets.

This is by no means a recomendation to take (any buying or selling) action, but a suggestion to get in touch with whomever advises you in these matters and to discuss it with them.

The point is, for the forseeable future, the basis of the preferred share index has changed and we need to take note.

Great feedback folks! Thanks! Happy to take all questions...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Fed Holds On Rates: Risks AreToo High

"There are also more long lasting or persistent factors that may be at work that are holding down the longer-run level of neutral rates" said Fed Chair Janet Yellen in her post meeting press-conference.

And there is the heightened risk of a UK vote to leave the European Union which could have potentially devastating economic circumstances not only for the UK but for all of Europe and the global economy. This will take place next Friday, June 23.

Federal Reserve governors have also suggested that there is a lower probability of 2 interest rate increases for 2016 (there are now 6 of 17 that expect only 1 rate increase in 2016, up from 2 of 17 in March):

Volatility, as we have always held as a key factor in global monetary policy, is the enemy of central bankers and the likliehood of higher interest rates in the current environment is just not prudent from their perspective.

If the UK votes to leave the EU (and the polls are currently favouring that situation), there could be a very significant repricing of assets. 

That could prove to be a rather difficult time for a fully-invested portfolio.

The US Federal Reserve very much wants to find a reason to "normalize" interest rates, but they cannot find the justification because the risks are too high.

The message is clear here: risk assets are vulnerable. 

Cash (and cash equivalent assets) and safe government bonds (of a longer duration) are prudent and defensive assets to be over-weight of in a portfolio.

Equally, risk assets (like equities) are good to be under-weight of.

You can always get back in to a market if volatility subsides. It may be a lot more difficult to get out if it doesn't.

Thanks for all the feedback, please keep it coming....

scott@highrockcapital.ca

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bianca@highrockcapital.ca