SECOND QUARTER 2018 RETROSPECTIVE AND PROSPECTIVE – Trade Machinations

SECOND QUARTER 2018 RETROSPECTIVE AND PROSPECTIVE

Trade Machinations

“What protectionism teaches us, is to do ourselves in time of peace what enemies seek to do to us in time of war.” Henry George

 “In the business world, the rear-view mirror is always clearer than the windshield.” Warren Buffett

Donald Trump, Trade tensions

Donald Trump – Trade tensions intensified in the second quarter of 2018.

Trade tensions intensified in the second quarter of 2018. The US aggressively enacted more encompassing tariffs that were soon countered by their disgruntled trading partners. Investors reacted by retreating from the markets as fears of a trade war escalated. It is becoming increasingly evident that the US in no longer going to accept what it views as asymmetrical trade and military alliances as the status quo. This state of affairs has enormous implications for the US and its trading partners. Market participants must be prepared for a period of enhanced volatility as negotiations continue between the effected parties.

In Canada, the S&P/TSX Total Return Index advanced 6.8% in the quarter led largely by the Energy sector (up 15.8%) as investors reacted to greater tensions in the Middle East. The US market advanced 3.4% as measured by the US dollar denominated S&P 500 Total Return Index in the second quarter as share buybacks alleviated much of the negative pressure stemming from retail selling. It is of note that smaller capitalized stocks outperformed larger companies by a wide margin. The S&P SmallCap 600 gained 9% in the quarter. Chinese and other Emerging markets were mostly negative. The Canadian dollar lost another 2.1% to its US counterpart.

 Canadian Dollar              US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange -4.5% 6.8% 1.9%
S&P 500 1.7% 5.4% 7.2% -0.8% 3.4% 2.6%
MSCI EAFE* 0.0% -0.3% -0.3% -2.4% -2.2% -4.5%
91 Day T-Bill 0.3% 0.3% 0.6%
CUBI** 0.1% 0.5% 0.6%
CDN/US dollar -2.7% -2.1% -4.7%

 

* Europe, Asia and Far East Index

** Canadian Universe Bond Index

Until recently, markets shrugged off political and geopolitical developments. Even the potential of increasing barriers to trade failed to disrupt the positive market momentum. Market participants generally seemed to perceive that the sabre rattling emanating from the US was a negotiating ploy that would soon give way to “common sense” as new trade agreements would fall into place, maintaining the status quo with few modifications.

The current world trading system evolved in the post war period. The US took on a leadership role as it had the largest economy in the world and it needed to foster alliances during the cold war that followed WWII. During this period the US covered most of the costs in establishing these alliances and everyone benefited from the growth in economic trade that was precipitated. The US is now taking the stance that the cold war has ended and global economies have grown to the point that other countries should bear more of the costs implicit in these alliances. Furthermore, as trade has grown some inequities have developed in terms of the flow of trade, the protection of intellectual property rights and non-tariff barriers that have frustrated “fair” trade.

As the quarter progressed, the rhetoric emanating from the US became more vitriolic. The US enacted more encompassing tariffs on goods from foreign sources. Other countries have responded in kind. The real possibility of an out and out trade war has roiled global markets as investors begin to perceive the damage these tariffs may cause to corporate earnings.

The global synchronized recovery also appears to be stumbling as the momentum in the Chinese and European economies exhibit signs of slowing down. Tariffs and counter-tariffs are going to put the brakes on even harder, leading to higher interest rates as investors demand greater compensation for greater risk.

In the midst of all this trade chaos, the Federal Reserve continues to pursue a policy of tightening the money supply through rising interest rates. This policy is progressing even in the face of rising deficits in the US as the recent tax cuts take effect and government spending increases. Presumably, the US is going to want to finance these deficits. Attracting capital from their major trading partners that they have just enraged may prove difficult.

Despite these factors, the US market managed to post positive returns in the quarter on the back of strong employment numbers and economic growth. However, it is interesting to note that mutual funds in the US experienced US$52.9 billion in net outflows in the quarter; US$23.7 billion in June alone. Perhaps the US$433.6 billion in share buybacks more than compensated for the exodus. US firms are sitting on over US$2 trillion in cash. At this juncture, buybacks, mergers and acquisition activity and dividends appear to be taking precedence over capital expenditures.

Canadian investors have been focused on the NAFTA negotiations during this period of escalating tariffs. The US has made it clear that the world is changing and access to their market cannot be taken for granted. The best outcome would be a world of more open trading with fewer barriers but that may be hard to achieve with Canada where inter-provincial barriers are so ingrained.

Investors must concentrate on fundamentals during this period where volatility and uncertainty will continue to vex markets.

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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.

 

THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE – Ten Years Later

THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE

Ten Years Later

In economics, things take longer than you think they will, and then they happen faster than you thought they could.”- Rudiger Dornbusch

It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007. The Canadian market continued its upward trajectory into the following year peaking in June as energy stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about five years, the current bull market has gone on for ten years without any significant setback.

financial crisis US S&P 500

It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007.

Global stock markets generally continued their upward bias in the third quarter of 2017. The US market gained 4.5% as measured by the S&P 500 Total Return Index in US dollars. A strong Canadian dollar had the effect of subduing that return to 0.5% when expressed in Canadian currency. With the exception of Spain and the UK, European markets were positive. Asian markets were very strong in US dollar terms with the Hong Kong market up 6.9% and China’s market up 4.9%. The Japanese market was pulled into positive territory by a very strong September (up 3.6%) bringing the quarter to 1.6%. Resource heavy markets such as those of Latin America, Australia and Canada improved as commodity prices generally improved. The Toronto Stock Exchange recorded an advance of 3.7% led by Energy (5.7%), Consumer Discretionary (4.2%) and Financials (3.7%).

             Canadian Dollar             US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 2.4% -1.6% 3.7% 4.4%
S&P 500 5.0% 0.4% 0.5% 5.9% 6.1% 3.1% 4.5% 14.2%
MSCI EAFE* 5.4% 2.3% 0.8% 8.7% 6.5% 5.0% 4.8% 17.2%
91 Day T-Bill 0.1% 0.1% 0.1% 0.3%
CUBI** 1.2% 1.1% -1.8% 0.5%
CDN/US dollar 0.8% 2.5% 4.0% 7.6%

* Europe, Asia and Far East Index

** Canadian Universe Bond Index

Global economic growth continues to strengthen in both the developed and emerging economies although at subpar levels compared with traditional recoveries. As central banks have cautiously raised interest rates, bond prices have come under pressure. Wage demands in the developed countries have not accelerated as inflationary expectations have remained low and productivity improvements have been driven by technology. In this environment, central banks may temper their enthusiasm to normalize interest rates and reduce their bloated balance sheets. Both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) are forecasting modestly better growth in 2018.

Among the advanced economies, Canada has posted strong growth primarily due to higher commodity prices. The Canadian dollar has appreciated against other currencies as our interest rates have gone up faster than other countries. This strength in the Canadian dollar has served to lower the returns from foreign investments.

In this environment, stock markets have continued to advance. The S&P 500 in the US has hit new highs surpassing levels from before the economic crisis. Valuation levels have also hit high levels making the search for new investment ideas challenging. Overall, we have been taking more profits than reinvesting funds, causing cash levels to increase.

A number of factors could come into play that would precipitate a more meaningful market correction than we have seen in the last ten years.

Foremost in Canadian concerns has been the resumption of NAFTA negotiations. Since the Brexit vote and the start of the Trump presidency, a backlash against global free trade has been evident, causing uncertainty in the business community, thus dampening the appetite for capital investment.

Other geopolitical factors are also of concern. North Korea’s nuclear threat and heightened discord with the US has been very prominent in the headlines as have tensions in the Middle East, Venezuela, Spain, Russia and the Ukraine. Monetary concerns in Greece, Italy, Spain and Portugal have not gone away.

Technology is also having an increasing impact on businesses and consumers. Disruptions in the retail trade are changing the way supply and delivery systems operate. The hotel and taxi industries are threatened by innovations such as Uber and AirBnB. Financial technology is changing traditional banking. Artificial Intelligence (AI) threatens to cause massive changes in employment.

Demographics are also going to have an affect on employment and retirement as well as government finances. As the population ages, the growing shortfalls in funding for health care and pensions will become critical.

All of these factors lead us to exercise caution and prudence in our investment practices. We will continue to scour for well financed, well managed and reasonably priced companies in which to place our funds.

THIRD QUARTER 2017 FIXED INCOME COMENTARY

“Be thankful we’re not getting all the government we’re paying for!” ~ Will Rogers

Fixed income markets have started to react to the shifting winds of interest rate policies. With two rate hikes so far this year and indications that the Federal Reserve will be slowly unwinding its quantitative easing program, the trend seems to be firmly in the tightening mode. In light of this, markets are now considering the increasing likelihood of one more hike in December by the Federal Reserve.

As we have stated in the past, much depends on economic variables both domestic and international. Similarly, the potential impact of geopolitical events can have outsized shock effects on markets.

While President Trump has not been much of a supporter of Chairman Yellen, whose term expires in January 2018, it may well be that a steady hand at the tiller will win the day. As Vice Chair Stanley Fischer has recently resigned due to personal reasons, there are now two other vacancies in the Reserve. Filling the Board to its full complement in a short period with members who may not be as well known in the markets, could cause turbulence.

In Canada, Governor Poloz’s seven year term has three more years to run. Influences on his decision making may well be coming from domestic economic factors which may be heavily influenced by the impact of changing trade agreements and taxation policies.

The situation in Europe remains unclear. Chancellor Merkel’s majority has been significantly reduced by the ascendancy of the nationalist AfD party. Their ascendancy may not directly affect her ability to form a government; however it will influence her political decision making going forward. Increased caution will likely be the German approach to a number of vexing European issues.

The enormity of the Brexit project is starting to sink in and indications are surfacing that there may not be enough time for an orderly negotiated divorce. The spectre of a disorderly breakup is definitely focusing the attention of various financial institutions and international corporations who are making their own alternative plans in the absence of a clear direction from officials.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the third quarter was a decline of 1.8%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased by 0.35% over the course of the quarter to end with a yield of 2.1%. During the third quarter the Canadian dollar appreciated by 3 cents from 77.1 cents US to 80.1 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.

 

SECOND QUARTER 2017 FIXED INCOME COMMENTARY

SECOND QUARTER 2017 FIXED INCOME COMMENTARY

“The more you observe politics, the more you've got to admit that each party is worse than the other.” ~ Will Rogers

The victory of Emmanuel Macron in the French presidential election, followed by a decisive victory of his party in the legislative round, gave him control of the National Assembly, thereby reducing any near term concerns regarding the stability of the European Union (EU).

fixed income emmanuel macron EU stability

Fixed income – the victory of Emmanuel Macron reduced near term concerns regarding the stability of the EU

The EU’s next test will be the German election scheduled to occur in September. At present Mrs. Merkel's chances look better than they did last year. Still, nothing is for sure in politics as we have seen in Britain.

Theresa May's gamble to strengthen the country’s position going into the Brexit negotiations has failed, leaving her with a minority government. Questions already being asked about her leadership in the aftermath of this election have been further exacerbated by the events surrounding the tragic Grenfell Tower fire. It now appears unlikely that she will survive politically.

These factors will create greater uncertainty as to the outcome of the looming Brexit negotiations. From the UK’s point of view, the final terms of the Brexit negotiations will very much depend on the person doing the negotiating and the political support they can muster both in the country and within their party.

President Trump has had a successful Middle Eastern trip. Nevertheless, domestically the administration continues to be bedevilled by a number of controversies. The ongoing questions regarding Russian involvement in the presidential election and any contacts with the Trump team or family are a festering distraction, inhibiting the administration from moving forward with a legislative agenda.

Firmer economic statistics have given sufficient manoeuvring room for the Federal Reserve to raise rates by a quarter percent this quarter: The second such raise so far this year. Canada has lagged the US in raising rates. Recent comments emanating from the Bank of Canada suggest that we are in line for a rate hike, although the timing is still in doubt.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the second quarter was an increase of 1.1%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased by 0.129% over the course of the quarter to end with a yield of 1.75%. During the second quarter the Canadian dollar appreciated by 1.9 cents from 75.2 cents US to 77.1 cents US.

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We believe that clients gain from our focus on the long-term fundamentals and not chasing short-term trends. 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.  

FIRST QUARTER 2017 FIXED INCOME COMMENTARY

Fixed Income Commentary – First Quarter 2017

“Globalization is the process by which markets integrate worldwide.” ~ Michael Spence

If the first quarter is a harbinger of political turbulence to come, then we are looking forward to interesting times! The Trump presidency has had a rocky start with changes in tack regarding appointments and implementation of promised reforms. While new administrations do tend to have their challenges as they settle into their roles, the Trump administration seems to have had more than their share. It can only be hoped that they will find their "sea legs" soon.

Market sentiment wavered realization Trump campaign promises

Market sentiment has wavered with the realization that not all of Trump’s campaign promises are likely to be delivered. (DoD photo by U.S. Marine Corps Lance Cpl. Cristian L. Ricardo)

Market sentiment has wavered with the realization that not all of Trump’s campaign promises are likely to be delivered. (DoD photo by U.S. Marine Corps Lance Cpl. Cristian L. Ricardo)[/caption]While the chaos swirling around the White House continues, the Federal Reserve (Fed) has finally pulled the trigger on the expected rate hike in the first quarter, likely the first of a number. The President may not be a fan of Chairman Yellen, however having a sober, low key person in charge at the Fed provides some assurance to investors that there is some continuity in policies that are being carried out.

The US government's large spending program is likely to be inflationary. During a period  when economic growth and labour markets have continued to firm, this growth will give the Fed ample reason to continue their rate hike program. As the Fed has stated, any action will continue to depend on subsequent economic readings.

Foreign buyers in turn have been scaling back their purchases of US Treasury securities as the expected rate hikes and the potentially inflationary actions of the government are likely to put pressure on bond prices.

Major questions remain regarding Europe. The combination of upcoming elections in France and Germany, terrorist attacks and growth in populist political movements all add to the uncertainty. As we have stated in the past, there continue to be overhanging issues, primarily related to debt and borrowing in various countries. Political uncertainty regarding the future of the European Union and the consequent stability of the Euro will make investors that much more reluctant to participate in various refinancing attempts. Weakening of the Union and any further departures along the lines of Brexit would only increase the pressure on Germany to act as a backstop to the Euro denominated debt; a situation that will have its limits!

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the first quarter was an increase of 1.2%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield declined 0.09% over the course of the quarter to end with a 1.63% yield at quarter-end. Over the course of the quarter the Canadian dollar appreciated by 0.7 cents from 74.5 cents US to 75.2 cents US.

You can view and download our complete quarterly commentary here:

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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.  

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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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.  

 

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.

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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.

 

BONDS – FIRST QUARTER 2015 FIXED INCOME COMMENTARY

Bonds – the benchmark ten-year Government of Canada bond yield declined by 0.4% to end the quarter at 1.4%.

“Facts are stubborn, but statistics are more pliable.” ~ Mark Twain

Mark Twain Facts stubborn statistics pliable

Mark Twain: “Facts are stubborn, but statistics are more pliable.”

Bond markets continued to develop a split personality. In the US a consensus seems to be building towards a June rate hike by the Fed. Of course this is being hedged in various pronouncements and realistically it will depend on whether economic data continues to show improvements and whether inflation convincingly rises from the current near zero level.

In Europe on the other hand, concerns have been building about deflation where in a number of countries at least some debt instruments now carry a negative yield. This effectively requires investors to pay up for the safety of having high quality government debt instead of more questionable bank deposits. In addition the seemingly never ending wrangling with Greece about debt repayments vs. further demands for loans and / or some sort of restructuring doesn’t seem to be ending.

Layered on this has been the issue of geopolitical events that seem to be spinning out of control as the middle eastern instability seems to be sucking in ever more countries and players. While aerial bombardment and support for anti ISIL fighters has contained their military advance in Iraq, other offshoots seemed to have spread to Libya and Yemen. The recent military action by Saudi Arabia in Yemen has brought yet another player into the fray.

At the same time, the nuclear non proliferation talks with Iran seem to have been progressing at a somewhat unsatisfactory manner without a clear, comprehensive, agreement in sight. Realistically the best that seemingly can be expected is an agreement that may slow down their development of nuclear weapons, but not halt it permanently. This of course translates into a political kicking of the can down the road to be dealt with at another time by another set of politicians, or more darkly, by military action.

In Canada the precipitous decline in oil prices has not only had its negative effects on Alberta, but has had a spreading impact on other sectors of the economy. In line with this, Bank of Canada governor Poloz has warned about the likely “atrocious” first quarter economic performance. Central bank governors generally fall into one of two categories. Either they speak in riddles and keep markets guessing so that any direct pronouncements or interest rate actions have that much more impact, or the kind that gives clear indications as to what the Bank thinks, what are their concerns so that market participants can take into consideration when formulating their views on the direction of the economy and monetary policy. Both of these approaches have their successful practitioners, and either is defensible. What is needed though is consistency. Mr. Poloz does not seem to be able to make up his mind as to which row to hoe. His surprise January rate cut was unexpected, his atrocious comment was trying to be clear and forthcoming. The market’s expectation is for another rate cut this year.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index (formerly DEX Universe Bond Index) for the first quarter was an increase of 4.2%. The benchmark ten-year Government of Canada bond yield declined by 0.4% to end the quarter at 1.4%. Over the course of the quarter the Canadian dollar declined by 7.2 cents from 86.2 cents US to 79.0 cents US.

You can read our first quarter market commentary here>>

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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.

BONDS – FOURTH QUARTER 2014 FIXED INCOME COMMENTARY

Bonds – twice during the quarter, there was a “wobble” in the junk bond market.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~ Paul Samuelson

The events of the fourth quarter brought to mind the purported ancient Chinese curse, “may you live in interesting times”: Not so much as to what actually happened, but more as to what they seem to presage.

The Federal Reserve’s (Fed) asset purchase program (quantitative easing) came to an end in October as planned. Announcements from the Fed’s Open Market Committee (FOMC), following their meetings during the latter part of the quarter, continued to reinforce the notion that interest rates will remain at a low rate for an “extended period”. Nevertheless, it was clear that this may well be influenced by future economic developments.

By quarter end, Russia appeared to be near a financial collapse. While the impact of this situation appears to be limited to their domestic sphere at present, low oil prices, western sanctions, and outflows of capital are all increasing the pressure on the government.

Greece will be going to the polls in a snap election called for January 25th   in order to establish whether a consensus exists to continue with austerity measures.  Post election, it is certain that there will be increased pressure by Greece to reopen the issue of debt relief. As much as Germany may not feel inclined to entertain this notion, a potential Greek exit from the Euro zone will likely focus politicians’ minds towards reaching “creative” solutions.

In previous comments we sounded a note of caution regarding the mispricing of risk. In order to garner higher yields, when compared to the paltry returns available in government securities, bond investors have increased their exposure to high yield (formerly “junk”) bonds. In general, as demand increases for such instruments, yields decline and investors in turn look to higher risk instruments offering yields previously offered by less risky investments. This cycle continues until … it stops. Sometimes catastrophically!

Twice during the quarter, there was a “wobble” in the junk bond market. In October a short period occurred where clients began to withdraw assets from high yield funds. In line with this reduced appetite for risk, prices declined temporarily. The second event occurred as oil prices plummeted. In turn, the risk profile of oil companies increased. Once again, investors moved to lower risk and reduced their exposure to oil related, high yield instruments. These events tend to suggest that investors are becoming more jittery about riskier assets, especially in the context of increased geopolitical uncertainty.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index (formerly DEX Universe Bond Index) for the fourth quarter was an increase of 2.7%. The benchmark ten-year Government of Canada bond yield declined by 0.4% to end the quarter at 1.8%. Over the course of the quarter the Canadian dollar declined by 3.1 cents from 89.3 cents US to 86.2 cents US.

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

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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.