INTEREST RATES AND BONDS – 4TH QUARTER 2016 FIXED INCOME COMMENTARY

“Last year we said, 'Things can't go on like this', and they didn't, they got worse.” ~ Will Rogers

Interest Rates and Bonds: After peaking in the summer, the bond market’s direction has decidedly deteriorated. In December the US Federal Reserve started its widely expected tightening by raising the Fed Funds rate 0.25% to 0.50%. Further interest rate hikes will likely proceed at a moderate pace as dictated by economic conditions. According to the commentary emanating from Federal Reserve governors and other pundits indicates that the consensus view is that historical interest rate lows are behind us.

interest rates bond market direction deterioated

Interest Rates and Bonds – After peaking in the summer, the bond market’s direction has decidedly deteriorated.

Mr. Trump's unexpected election win is causing some uncertainty as to the economic agenda going forward. His promises of corporate and personal tax cuts, increased military spending and infrastructure investment will have to be funded through increased borrowing that would normally be expected to be inflationary. In addition, his penchant for random Tweeting has, and will likely continue to cause, turbulence in the markets.

European concerns continue. The Italian banks' need for recapitalization, the most notable being the insolvent Banca Monte Paschi di Siena (the world's oldest and Italy's third largest bank), has called into question the viability of the entire Italian banking system. As it stands, approximately 18% of Italian banks' loan portfolio is non-performing.

Italy’s problems dwarf those of Greece. Italy is the third largest economy in Europe. A banking crisis in Italy will require all the resources of the European Union. The strapped Italian government simply does not have the resources to recapitalize some, or all, of its banking sector. Questions as to the continued viability of the European Union are multiplying.

In 2017 elections will be taking place both in France and Germany. These two countries have been traumatized by terrorist attacks and they have been severely impacted by the immigration crisis. Nationalist sentiment and anti-immigrant rhetoric have exacerbated tensions.

Indications are that Canadian government borrowing and deficit spending will be of longer duration that originally indicated. Increased borrowing and similar spending policies in the US should keep the interest rate differentials, and hence the exchange rates, between the two countries in a relatively tight range, unless Mr. Trump's policies result in significantly increased economic growth and job creation in that country.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the fourth quarter was a decline of 3.4%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased 0.72% over the course of the quarter to end with a 1.72% yield at year-end. Over the course of the quarter the Canadian dollar depreciated by 1.7 cents from 76.2 cents US to 74.5 cents US.

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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.  

 

Market Outlook – THIRD QUARTER 2016 RETROSPECTIVE AND PROSPECTIVE

Market Outlook – And The Band Played On…

“When democratic governments create economic calamity, free markets get the blame.”-Jack Kemp

“Politicians and diapers must be changed often, and for the same reason.”– Mark Twain

Thus far, the calamities predicted by the pundits that would result from the Brexit vote to leave the European Union have not been as severe as anticipated. Perhaps this is due to the building geopolitical and economic stresses that have diverted the focus from Brexit to other issues. Furthermore, the impact of Brexit will likely take some time to discern as the trade, migration, political and other ramifications evolve over the coming months and years. Meanwhile, governments globally continue in their efforts to stimulate economic growth with what appears to be diminishing results.

The Canadian stock market continued its advance for the year as the S&P/TSX Index increased 5.5% for the quarter bringing the year to date return to 15.8%. Information Technology was the leading sector up 12.2% in the quarter followed by Industrials (10.8%), Health Care (9.0%) and Consumer Discretionary (8.9%). Only Real Estate (-1.5%) and Materials (-1.1%) recorded negative results. The US market was less robust as the S&P 500 advanced 3.9% in the quarter while the Dow Jones Industrial Average recorded a 2.8% gain.

 Canadian Dollar

              US Dollar

Q1

Q2

Q3

Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 4.5% 5.1% 5.5% 15.8%
S&P 500 -4.7% 1.9% 5.4% 2.2% 1.3% 2.5% 3.9% 7.8%
MSCI EAFE* -9.5% -3.2% 7.3% -6.0% -3.7% -2.6% 5.8% -0.8%
91 Day T-Bill 0.1% 0.1% 0.1% 0.4%
CUBI** 1.4% 2.6% 1.2% 5.3%
CDN/US dollar 6.7% -0.3% -0.8% 5.5%

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

 We head into the final quarter of 2016 with some trepidation. Many parts of the world are experiencing political and economic uncertainty. For the most part, stock markets have exhibited great resiliency in the face of anaemic economic growth, rising protectionist sentiment and increasing regulatory constraints.

Clinton Trump Election fever US voters presidential candidate dislike

Election fever will dominate the news as US voters attempt to decide which
presidential candidate they dislike the least

In the US, election fever will dominate the news as the voters attempt to decide which presidential candidate they dislike the least. Investors will continue to look for evidence of a strengthening economy as growth continues to be lacklustre despite relatively positive trends in employment and housing prices. It is interesting to note that despite a short rally in September following the Federal Reserve’s decision to leave interest rates unchanged, the Dow Jones Industrial Average was down 0.4% for the month. Investors continue to be concerned over declining corporate earnings that have been evident over the past six quarters in an economy that is exhibiting growth below potential. Earning per share have increased largely as a result of massive share buy backs and dividend increases that have been delivered at the expense of lower capital investment.

Europe is dealing with more problems than just the aftershocks of Brexit. The ongoing migration crisis continues to bolster extremist political rhetoric while the underlying financial instability of the European banking system continues unabated. The most recent shock has come from Germany, which up until now has been the economic engine of Europe. The US has levied a fine of US$14 billion against Deutsche Bank for its participation in selling mortgage-backed securities in the US in 2008. A fine of that size would be close to the bank’s total market capitalization of US$18 billion while expectations are for a settlement in excess of US$5 billion. The failure of Deutsche Bank would have the potential to be very destabilizing to the world’s financial system. Deutsche Bank has the second largest derivative exposure in the world after JP Morgan. As the Bank’s creditors and depositors concerns grow, it remains to be seen if a bailout or refinancing will be forthcoming.

In Eurasia, the Russian economy continues to deteriorate under the pressure of low energy prices. The Russian response has been to exhibit bravado in the Ukraine and the Middle East, particularly in Syria. Whether these actions are anything more than posturing remains to be seen but tensions with the US and its allies are escalating.  China continues to exhibit hegemony in the South China Seas to the chagrin of neighbouring states. The US has responded with stationing a naval presence in the area only to have Chinese aircraft fly by in close proximity. North Korea continues to build on its nuclear energy program much to the entire world’s consternation. These demonstrations add to geopolitical tensions even if they turn out to be mere sabre rattling.

Since 2008, the global central banks have intervened in the economy through maintaining low interest rates in their efforts to stimulate economic growth and spending. In this environment, asset prices have been bid up on the back of easy money and debt, both in the public and private sectors. The build up of debt, much of it at negative interest rates, has reached proportions that make the contemplation of higher rates ever more alarming. Low rates used to be a sign that investors were less risk averse whereas now they appear to reflect an insurance premium paid to park money for a period. With or without productivity growth, lenders will want to be compensated at some point and governments will be forced to curtail their voracious spending appetite.

More worrisome is the propensity of politicians to exploit unrest in the electorate by blaming business, free trade and globalization for their plight. Trust must be fostered in the economies in order to promote investment, job creation and economic growth. The enabling of barriers to trade will do little to engender greater trust and investment.

Longer term, technology will continue to generate great opportunities and great dislocations. Rapid technological advances that are reshaping media, retailing, manufacturing, and administration and service delivery are impacting whole industries. These changes will cause greater stress as the skills required for employment evolve and leave many people behind. At the same time, the faster speed and volume of business will foster economic growth and prosperity.

The emerging economies are lifting vast numbers of people out of poverty into middle and upper class consuming environments. Aging populations in the developed world are putting greater pressure on health care and service delivery as lifestyles and consumption habits evolve.

So, despite our near term trepidation we think that investors will have many opportunities. It is through these periods of greater uncertainty and disequilibrium that our efforts will be directed towards identifying investments to enhance portfolio profiles towards meeting investors’ goals and objectives.

You and view and download our third quarter commentary here:

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We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

THIRD QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE – Market Commentary

Market Commentary – We’ve Seen This Movie Before

“The markets are the same now as they were five to ten years ago because they keep changing- just like they did then.”- Ed Seykota

Once again, investors had little to cheer about in the third quarter of 2015.

Global markets remained in turmoil as concerns regarding the global economy persisted. While much of the international focus was centred around the slowing economy in China, there were few places that investors could hide as even cash, paying little to negative interest in some parts of the world, was a relative winner in the quarter. For the quarter, emerging markets declines 19.5% as Brazil was off 34.2% and Indonesia declined 25.1%. Developed markets were off 9.1% for the quarter; 10.8% down if you excluded the US. In total, the S&P Global Broad Market Index lost $US 7.4 trillion of value in the third quarter. Through August 17, the S&P 500 in the US was in positive territory only to decline sharply in the final month and a half.

Market Commentary Federal Reserve interest rates September

Market Commentary – the Federal Reserve postponed the anticipated increase in interest rates during September

Investors were taken by surprise as the Federal Reserve postponed the anticipated increase in interest rates during September, thus causing concern as to the strength of the economy.

 

 Canadian Dollar               US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 2.6% -1.6% -7.9% -7.0%
S&P 500 10.1% -1.2% -0.2% 8.6% 1.0% 0.3% -6.4% -5.3%
MSCI EAFE* 13.7% -1.8% -4.8% 6.2% 4.2% -0.4% -10.7% -7.4%
91 Day T-Bill 0.3% 0.2% 0.2% 0.5%
CUBI** 4.2% -1.7% 0.2% 2.5%
CDN/US dollar -8.5% 1.6% -6.2% -12.7%

* Europe, Asia and Far East Index

** Canadian Universe Bond Index

Economic factors were not the only factors weighing on investors’ concerns in the third quarter.

The continuing upheaval in Syria dominated global headlines as countries were faced with having to deal with the mass emigration predominantly in Europe. Russia and the US have taken different positions on the Syrian situation adding to the tensions already present as a result of Russia’s deployment of troops into the Ukraine. China continues to take its place as a world power backing up its claims on much of the South China Sea through large demonstrations of its military might. In Europe, Greece voted to continue its current government almost in hope that their current difficulties would just go away.

As mentioned, investors were taken off-guard by the Federal Reserve’s decision not to raise interest rates at this juncture. The US economy continues to standout for its progress in declining unemployment and positive growth in many sectors.

Canadian investors find themselves in a tediously long election debate soon to be decided in mid-October. The uncertainties resulting from the threat of a change in government are adding to the concerns stemming from the collapse in energy commodities and the waning demand for base metals. However, more recent monthly data suggest that the economy may well be stabilizing alleviating fears of a technical recession.

Also, investors’ confidence was shaken during the quarter by several corporate developments. Perhaps the most noteworthy was the discovery of malfeasance by Volkswagen purposely deceiving customers as to the environmental integrity of their diesel engines. In addition, Glencore, one of the worlds leading mining companies, finds itself at odds with creditors in the current malaise in the base metals industry. The Glencore situation is symptomatic of many companies currently in the energy and materials sectors. Several large companies announce their intentions to layoff large parts of their workforce: Hewlett-Packard (10,000 to 20,000), Caterpillar (10,000), Johnson Controls (3,000), etc.

Market Commentary – Have we seen this movie before?

Economic cycles are part ebb and flow of commercial enterprise. As much as politicians would like to tell you that economic cycles could be controlled, there has never been a case where this has been accomplished. After seeing market increases since 2008, we are now witnessing a period of adjustment as valuation levels get reset. This is not to say that there aren’t legitimate concerns that economies are slowing down. The most recent employment data from the US appear to have given pause to the Federal Reserve’s intention to increase interest rates. Indications are that the rapid growth of the Chinese economy of the last two decades is coming to an end. This slower growth is to be expected as the economy matures. Sooner or later, China will exhibit recessions like any other developed nation. In our view, it is premature to project that a recession is imminent.

It is during these periods that staying with your investment discipline is paramount. While it is difficult to ignore the negative sentiment that comes to the fore in market corrections, it is precisely during this period that investors should be repositioning their portfolios for the next market cycle. One need not rush into buying whole positions; it is prudent to be prepared to add to positions in companies that are financially strong and well managed.

We will continue to seek such opportunities in the current market conditions.

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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

SECOND QUARTER 2015 FIXED INCOME COMMENTARY

Beware of Greeks bearing gifts.” ~ Virgil – Aeneid

Or perhaps, beware of Greeks issuing bonds! That certainly must have crossed the minds of European politicians and bankers as they attempted to negotiate a solution to the current impasse. It would seem that we are heading towards the last chapter in this modern Greek drama. Or perhaps not?

economic woes Greece dominated headlines investor concerns latest quarter

The economic woes of Greece have dominated headlines and investor concerns over the latest quarter.

At first blush it would seem to be a simple matter to negotiate a refinancing of the Greek debt given that most everybody acknowledges that Greece is unable to pay its debts as it now stands. However, this ignores the political / economic realities of the situation. Greece needs more money and a more flexible repayment schedule. Germany and the EU on the other hand are loath to cut too much slack to Greece as they want to avoid other, much larger, countries following the Greek example in refinancing, or depending on your view, shirking, their obligations. Unfortunately, the situation appears to be stuck between the proverbial rock and a hard place. It is unlikely to be a happy ending – for anybody!

The second quarter saw some disconcerting signs of tensions in fixed income markets. Interest rates reached negative values in a number of credit worthy European countries, such as Germany and Switzerland. At approximately the same time, liquidity concerns started to come to the forefront. Yield hungry investors have been bidding up prices on various fixed income securities, especially in the corporate sector. Now questions are being asked as to what would be the exit strategy if investors decided to liquidate or trim their positions. Of course there are always buyers at some price. However trading may become volatile with wildly fluctuating valuations. It’s no wonder that investors are willing to earn a negative return for safeguarding their cash!

The Canadian economy has been flirting with a recession over the course of  the second quarter, although consumer confidence has remained quite positive. The somewhat inconclusive direction of the economy calls into question the right stance for the Bank of Canada to take. A second “pre-emptive” rate cut after this spring’s quarter point cut would be unlikely to have much effect given the already low level of interest rates. Secondly, it may be well worth retaining the dwindling stock of rate cut “ammunition” in case the economic malaise deepens. It is worthwhile to remember that rate cuts not only have an economic impact, but also a psychological one. To cut rates when confidence remains reasonable, is wasting the “shock” effect of such an action. Perhaps the BOC should wait?

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the second quarter was a decline of 1.7%. The benchmark ten-year Government of Canada bond yield increased by 0.3% to end the quarter at 1.7%. Over the course of the quarter the Canadian dollar increased by 1.1 cents from 79.0 cents US to 80.1 cents US.

What is Successful Investing? Learn more here>>

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

FOURTH QUARTER 2014 – RETROSPECTIVE AND PROSPECTIVE

Market Outlook – Deja Vu?


“One Two Three Four/ If I had ever been here before/ I would probably know just what to do/ Don’t You?”-  Déjà Vu, Crosby Stills and Nash

Geopolitical events continued to dominate headlines and investors’ concerns through the end of 2014 and into the New Year.  In the Middle East, the rise of the Arab Spring continues to foster fears of contagion.  Worsening economic conditions in Egypt, Iran’s nuclear ambitions and Syria’s obstructionist leadership all served to increase tensions.  Despite sanctions, Russian leadership exhibits no intention to leave the Ukraine and may even be considering some interference in the Baltic region.  Chinese policy appears to be more inwardly focused as attempts are made to bring more order to the banking system while fighting corruption on a massive scale.  In the face of all these events, US policy appears to be weak and ineffective as they head towards another election year with an embattled political system in which agreement or consensus is unlikely.

As the Fourth Quarter progressed, economic concerns grew on a global scale.   European economies continued to exhibit signs of stagnation and fears of deflation.  Germany, the primary economic engine of Europe, reported slowing rates of production.  The slower rate of growth in the Chinese economy continued to weigh on many commodity prices.  Despite the apparent oversupply of oil, Saudi Arabia decided not to curtail production in order to support prices.  This event caused crude oil prices to fall precipitously from near $100 per barrel to nearer $60 and had a major negative impact on markets with larger oil exposure, such as Canada.  The US economy and market stood out as a refuge in this turmoil.
 
The collapse in oil prices has been particularly painful to the Russian economy where nearly 65% of their exports are related to oil and gas.  The Energy Sector in the Toronto Stock Exchange fell 17% in the quarter.  As we enter 2015, it is interesting to note:

  • There is a financial crisis in Russia
  • We are in a period of weak oil prices
  • Investors have fled into US securities and treasuries resulting in a strong US dollar…
  • While currencies in emerging markets are very weak
  • The Japanese and German economies are exhibiting signs of slowdown…
  • While the US economy stands out as the economy expands and employment improves
  • The strongest sector globally was Technology (Hardware) in 2014, and,
  • The democratic President of the United States is under siege from the Republican House and Senate

 

Market Outlook – Have we not seen this before?  This looks a lot like 1998!


If the analogy was perfect perhaps we would know just what to do, but some things are a lot different.  The emerging markets of the late 1990’s were the BRIC’s (Brazil, Russia, India and China) along with the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan).  Today, China is a much bigger and more dominant player on the world stage.  Also, many of the emerging economies of the late 1990’s had fixed exchange rates but are now facing the dilemma of having floating rates at a time when they are saddled with debt, much of it denominated in US dollars.  Eventually, it was the collapse in the Technology Sector that brought down the markets in the early 2000’s, including the US market.

Weak oil prices may yet have a damaging effect on the US economy.  Oil and gas production has soared over the last five years in the US as shale production has benefited from new techniques.  The strength in the US dollar will affect their ability to export into weaker economies with less purchasing power.  Many oil and gas companies have already announced cutbacks to dividends and capital expenditures in the face of uneconomic prices.  These cutbacks will reverberate throughout the economy as illustrated early in 2015 as US Steel laid off 800 employees involved in the manufacture of pipe for the oil industry.

On the positive side, lower prices will put more money in consumers’ pockets.  Lower prices should also spur demand while supply shrinks as companies cut back on programs.  In other words, the energy markets remain cyclical.  Where prices settle is anyone’s guess but we would surmise that ultimately prices have to reflect the marginal costs of production.  $100 per barrel may well be too high in today’s world but $40 is likely too low.  The strong, well-financed companies will survive and benefit from the opportunity to take advantage of acquisitions at low prices as the weaker companies fail.

As we enter 2015, a number of events will be on investors’ watch lists.  The United Nations Climate Change Conference will be taking place in Paris where nations will be outlining their national goals for moderating carbon emissions.  Two very important trade negotiations are also underway: the Trans-Atlantic Trade and Investor Partnership between the US and the European Union and the Trans-Pacific Partnership with the involvement of the US and China.  Freeing up trade will spur global economic expansion to everyone’s benefit.

You can read our forth quarter fixed-income commentary here>>

You can view, read and download our forth quarter commentary here:

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Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that investment management is about managing risk, not chasing speculative returns.  

Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.