FIRST QUARTER 2016 RETROSPECTIVE AND PROSPECTIVE – Bull or Bear?  

Bull or Bear Voltaire

Bull or Bear “Uncertainty is an uncomfortable position. But certainty is an absurd one.”- Voltaire

Last quarter, we titled the Retrospective and Prospective “Foggy Weather”. While we would like to report that the fog has cleared, unfortunately that is not the case.

Global markets proved to be very volatile in the first quarter of 2016. In the first few days of the year, the sell-off was precipitous as investors’ concerns grew over the state of the global economy, particularly with respect to China as indications of lower levels of manufacturing were released. Trading in China halted as market circuit breakers were triggered. The sell-off persisted for the first half of January, corrected in the latter half, only to reverse trend again in the first half of February. Investors struggled with conflicting economic news relating to the deteriorating fundamentals in the energy and mining sectors, increasing corporate layoff announcements yet better employment statistics. From mid-February on through to the end of the quarter, the global markets were more sanguine focused primarily on improving conditions in the US.

The first quarter managed to record some positive results overall, despite severe declines in some sectors.

                     Canadian Dollar US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 4.5% 4.5%
S&P 500 -4.7% -4.7% 1.3% 1.3%
MSCI EAFE* -9.5% -9.5% -3.7% -3.7%
91 Day T-Bill 0.1% 0.1%
CUBI** 1.4% 1.4%
CDN/US dollar 6.7% 6.7%

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

At year-end 2015, the Federal Reserve in the US postured a more aggressive stance going into 2016. Expectations were that there existed a strong possibility that interest rates would possibly be raised over four increments in the coming year as the US economy was getting stronger and employment was increasing. These facts appeared to be confirmed early in the quarter as estimates of 2015 GDP (Gross Domestic Product) came in ahead of expectations at 2.4% compared with 2014’s 2.1%. However, the quarter had not progressed very far when pronouncements from the Federal Reserve suggested a less aggressive stance and pundits began to forecast more gradual rate increases with possibly only two instances this year. This change in posture has caused some doubt about the strength of the US economy but this change is possibly more related to the state of the global economy and the continued strength of the US dollar.

In terms of geopolitical issues, the usual suspects continued to concern market participants. The issues dealing with the Ukraine and Russia, the South China Sea, conflicts in the Middle East (particularly Syria) and the massive refugee crisis in Europe were still very much in the news. Other unexpected issues occurred starting with a political fight between Saudi Arabia and Iran that temporarily impacted energy markets. North Korea claimed to have set off a hydrogen bomb although the rest of the world suspects it was really a less powerful atomic bomb. Terrorist attacks in Brussels generated concerns over the ability of authorities to coordinate efforts to protect the public. Surprisingly, the Brussels attack seemed not to have a major impact on markets suggesting that investors are becoming inured to these events.

The focus of investors was very much concentrated on the actions of the central banks this quarter. The ECB (European Central Bank) reduced the deposit rate to –0.4% from 0.3%, cut its interest rate from 0.05% to 0 and the lending rate reduced to 0.25% from 0.30%. Non-bank corporate debt was added to the ECB’s buying list and the Bank’s quantitative easing (QE) program was increased to 80 billion euros per month from 60 billion. The annual QE program of an estimated 1.74 trillion euros is now larger that the GDP’s of Italy and Spain. This action suggests conditions in Europe are not improving fast enough and that the problems with Greece, Portugal, Italy and Spain may re-emerge. Furthermore, these conditions bolster the side that wants Britain to leave the European Union; an event that would have many repercussions both domestically in Britain and globally. Norway reduced its interest rate to 0.5% from 0.75% sighting the possibility of negative rates while Hungary cut its overnight rate to –0.05% from 0.1%. One bright spot in Europe is the German economy that posted a year over year 2.3% increase in industrial production in February, the best in six years.

The Bank of Japan kept its overnight rate at –0.1% although the outlook for the economy was downgraded as exports fell 4% in February and imports fell 14.2%.

China reduced its reserve requirements for the fifth time in a year in order to increase liquidity. Exports in February were down 25.4% year over year while imports fell 13.8%. Concerns continue to grow with respect to the shadow banking system in China and the huge leverage in the economy.

It is in this light that the Federal Reserve has taken a more cautious stance as concerns grow about global growth and inflation. The US economy has thus far been resilient in the face of these global issues. Auto production is running at 17.5 million units a year, which is a record. Consumer credit continues to expand, albeit at lower rates than previously. Exports are beginning to feel the pinch of the high US dollar. Fourth Quarter GDP came in at 1.4%, better that the 1.0% expected. However, it is the state of the global economy that has alarmed the Federal Reserve.

In Canada we are fortunate to be situated so close to the United States. This is becoming more evident in the improving manufacturing sector; particularly auto parts; Canada’s largest export item.

Since the advance in the North American markets in mid-February, valuations in our view have become a little stretched as prices have risen faster than earnings, and, the quality of those earnings has deteriorated as more of the increases are stemming from cost cutting and share buybacks as opposed to revenue growth and investments in assets. Therefore, we advise a cautious approach at this juncture. This is becoming a stock pickers market where individual stock selection and valuation will be the critical ingredients to successfully navigate the volatile times ahead.

You can read and download your own copy of our Retro and Pro here:

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 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.

 

What is Investment Risk?

What is investment risk? Risk is generally defined as the chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of your original investment.

Many definitions of risk go on to explain that risk can be measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Even if you took a statistics course at university, you might find it difficult to apply that concept to a specific investment.

what investment risk

What is Investment Risk? Risk is generally defined as the chance that an investment’s actual return will be different than expected.

To better understand the concept of investment risk, it may be help to consider some familiar investment instruments. Government bonds and guaranteed investment certificates are generally considered to be risk-free investments. Investors have full faith that the principal and interest will be paid in full and in a timely manner.

The riskiest investment most Canadians are likely to make is buying a lottery ticket. When you buy a lottery ticket, the potential return is huge. However, because the odds of you winning are many millions to one against, it is very likely that you will suffer a total loss of your initial investment.

The investments that most Canadians purchase fall somewhere between these two extremes. Consider shares in a high tech startup: the business could go on to become the next Apple, Google or Facebook. If it did, the return to investors might be hundreds of times their original investment. But if the business fails to sell enough of its product or service, it could go bankrupt and the stock price decline to zero. Not as risky as a lottery ticket, but still risky.

On the other hand, consider a large cap stock such as TransCanada. The company recently wrote off $2.5 billion as a result of the US government’s refusal to approve its Keystone XL pipeline project. But the company has not gone out of business. In February, TransCanada announced an 8.7% increase to its quarterly dividend to $0.565 per share. While its stock declined from a 2015 high of $57 to a low of $41, it has since recovered to $50.

Update Nov 20, 2017 – Nebraska approves alternative route for TransCanada’s Keystone XL  Also, TransCanada’s stock is now trading at $63.50 and its quarterly dividend in now $0.62 per share.

So holding a large cap stock such as TransCanada entails some risk. But the level of risk is significantly less that buying a lottery ticket or small cap stock. And here is the key point: the risk is not that you will lose all of your investment as you likely will with a lottery ticket or could with a small cap stock. The risk is that your funds might not be available when you need them. But time can mitigate much of that risk: if you don’t need your money today, you can afford to wait for the price to recover. And in the case of TransCanada, you continue to receive 3.9%  annually in dividend income.

At Sprung Investment Management, our portfolio management approach is based on managing risk. How do we do that? We work with clients to match our value-based investment management approach to their goals and risk tolerance. Based on the client’s situation, we will determine an appropriate mix of equity and fixed-income investments. On the fixed-income side, bonds offer clients the potential for regular income, preservation of capital, portfolio diversification and a hedge against economic uncertainty.

With over three decades of experience, we have found that our three-part value investing strategy is the best way to reduce risk and volatility and earn consistent returns over time. Our diligent, patient and opportunistic approach has served our clients well, through good and bad markets:

  • Appraise the intrinsic value of each company over a business cycle;
  • Seek long-term growth of capital by investing in companies that we perceive to be mispriced;
  • Utilize a margin of safety to promote return of capital…not just return on capital.

Why does our value investing approach work? The prices of well-established, high-quality stocks tend to rise over time as the companies create value for shareholders. Stocks touted by brokers and the media often rise to extreme highs in expectation that they will meet or exceed their short-term earnings forecasts. However, they can decline dramatically when they fail to meet those forecasts.

What is Successful Investing? Learn more 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.

What are dividend stocks and why should they should be a part of your portfolio?

Since the credit crisis of 2007, central banks around the world have pushed interest rates to historic lows in an attempt to stimulate economic growth. That has led investors to develop an appetite for dividend paying stocks.

So, what are dividend stocks and why should they should be a part of your portfolio?

To understand what dividend stocks are, you have to understand the difference between owning and loaning. If you buy a fixed-income investment, such as a bond or a GIC, you are making a loan to a borrower. The borrower typically agrees to repay you the capital and pay you interest over some set timeframe. However, the interest rate is typically fixed and you may find that over time inflation has eroded the value of your capital and income.

What are dividend stocks part ownership business

What are dividend stocks and why should they should be a part of your portfolio?

When you buy a stock, you are buying a part ownership in a business. Stocks represent a claim on the business’s assets and earnings. A dividend is a portion of a company’s earnings that is returned to shareholders. A well-managed business should grow over time. As earnings increase, management have the option of increasing the dividend.

Why do some businesses offer dividends while others don’t? Businesses that offer dividends are typically ones that have progressed beyond the high growth phase. When businesses no longer benefit sufficiently by reinvesting all of their profits, they usually choose to pay out a portion to their shareholders. Dividends make holding the stock more appealing to investors and can over time increase demand for the stock and therefore increase the stock’s price.

Consider the following example: In 2005 BCE Inc. (TSE:BCE) paid an annual dividend of $1.32. In 2015, the company paid its investors an annual dividend of $2.60. In the same period, BCE’s stock price has risen from around $25 to $58.

When monitoring their portfolios, investors should think about total returns. Total investment returns include both dividend income and capital gains. Some stocks pay no dividends, but may offer the potential of capital gains. On the other hand, high yielding dividend stocks may offer limited capital gains potential. A well-diversified portfolio should include both.

Traditionally, investors with modest portfolios have held dividend stocks inside mutual funds. Over the past decade, investors have moved billions of dollars out of mutual funds and into exchange traded funds. Why are ETFs popular? Low management fees are the main reason. ETF fees are in the 0.5% range, compared with 2% to 3% for many large Canadian mutual funds. However, ETFs can expose investors to unexpected risks. 

We believe that investors can benefit from our three-part value investing strategy. In our view, it is the best way to reduce risk and volatility and earn consistent returns over time. Our diligent, patient and opportunistic approach has served our clients well, through good and bad markets:

  • Appraise the intrinsic value of each company over a business cycle;
  • Seek long-term growth of capital by investing in companies that we perceive to be mispriced;
  • Utilize a margin of safety to promote return of capital…not just return on capital.

Why does our value investing approach work? The prices of well-established, high-quality stocks tend to rise over time as the companies create value for shareholders.

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 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.

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.

You can view and download your own copy of our market commentary here:

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 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.

 

SECOND QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE – A GREEK TRAGEDY

A Greek Tragedy and Other Woes

“Do not confuse motion and progress. A rocking horse moves but does not make progress.”- Alfred A. Montapet

To have a grievance is to have a purpose in life. A grievance can almost serve as a substitute for hope; and it not infrequently happens that those who hunger for hope give their allegiance to him that offers them a grievance. – Hoffer

The economic woes of Greece have dominated headlines and investor concerns over the latest quarter. As the quarter ended, the negotiations between the lenders (Germany and Brussels in particular) and the Greek government had reached an impasse after months of activity with little progress. A default by Greece on 1.6 billion Euros due was a certainty. At the time of this writing, a referendum in Greece was scheduled that would give the current government the authority to accept more austere bailout terms. The mood of the Greek electorate has deteriorated from the great hopes that the Euro loans had created to increasing resentment of the austerity imposed when the debts came due. The government of prime minister Alexis Tsipras that was elected on a wave of “austerity” grievance has been less than successful in staring down the country’s creditors.

As a result of this ongoing uncertainty, as well as other global economic and political imbroglios, global markets had little to cheer in the second quarter of 2015.

            Canadian Dollar                       US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 2.6% -1.6% 0.9%
S&P 500 10.1% -1.2% 8.8% 1.0% 0.3% 1.2%
MSCI EAFE* 13.7% -1.8% 11.6% 4.2% -0.4% 3.8%
91 Day T-Bill 0.3% 0.2% 0.4%
DEX** 4.2% -1.7% 2.4%
CDN/US dollar -8.5% 1.6% -7.0%

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

Given that the Greek economy represents only 1.8% of European GDP and around 0.3% of global GDP, it is reasonable to ask why this crisis has caused so much consternation throughout the world. Greece is only the first of the Euro nations to hit the wall. Not far behind are much larger economies such as Spain, Italy and Portugal with their own debt crises looming. Either outcome in Greece will not be a panacea from the point of view of the Euro nations. Above all, they do not want to set a precedent that it is acceptable to borrow far more money that you can ever repay without substantial consequences. Alternatively, if a compromise is not reached and Greece leaves the European Union, the resulting meltdown in the Greek economy may force the nation to turn to Russia for aid. Russia would covet access to the Mediterranean, particularly with the loss of ports in Syria. In a recent poll by Pew Research, some 60% of Greeks view Russia favourably. Given the incursion of Russia into the Ukraine and fears of greater Russian hegemony, this would only foster more geopolitical uncertainty. A vote to leave the Euro would likely embolden anti-Euro parties in other countries. If by some chance Greece were to leave the Union and regain a more solid footing in the next few years, pressures to dissolve the Union would gain further traction.

Problems in China have also been of growing concern to investors. At the end of the second quarter, the long suspected bubble in the Chinese stock market appears to have burst as the Shanghai declined over 7% in the final month and continued to decline thereafter. As largely margin borrowing financed the market advance, margin calls are perpetuating this decline for the time being. The slowdown in the growth of the Chinese economy to around 7% has continued to impact commodity price expectations, particularly in base metals and coal.

Tensions in the Middle East perpetuate fears of instability spreading from that region. Ongoing emigration from the Middle East across the Mediterranean is adding to tensions in Europe.

The US economy stands out as it continues to exhibit positive growth. Employment has achieved pre-financial crisis levels although wage gains have to date been lacklustre. Speculation continues as to the timing of a rate increase by the Federal Reserve but the strength of the US dollar remains a concern.

Low interest rates, combined with low growth prospects, have exacerbated a global boom in mergers and acquisitions (M&A). For the year to date over US$2.8 Trillion in global M&A activity has ensued; half of which is in North America. Much of this activity has been in the energy sector as companies with the wherewithal take advantage of their weaker compatriots in this sector that is still reeling from the dramatic decline in oil prices last year.

Despite some recovery in oil prices in the second quarter, the Canadian economy is still adjusting to the effects of the decline as they reverberate throughout the economy. Recent months have exhibited negative growth in GDP raising concerns that we may be in a technical recession (two consecutive quarters of negative growth).  There has been talk of a possible rate cut by the Bank of Canada in an attempt to spur growth despite concerns about the over-indebted consumer. The possibility of a rate increase in the US and a decrease in Canada will put downward pressure on the Canadian dollar in the short term.

Within this environment, we are not anticipating robust earnings from the corporate sector over the next few months. We have already seen some pullback in stock prices that could be further eroded in a choppy earnings season. This is a good period to be looking to position portfolios for the next few years in those companies that will ultimately prosper from current conditions.

You can view and download our commentary here:

Please continue to our fixed-income commentary here>>

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.

 

Market Outlook – First Quarter 2015 – Retrospective and Prospective

Market Outlook – First Quarter 2015 – Will She or Won’t She

Janet Yellen Chair Federal Reserve

Janet Yellen, Chair of the Federal Reserve – will she or won’t she?

“Neither a borrower nor a lender be, For aft loses both itself and friend, And borrowing dulls the edge of husbandry” –  Polonius, Hamlet, Act I , Scene 3

“High debt levels, whether in the private or the public sector, have historically placed a drag on growth and raise the risk of financial crisis that spark deep economic recessions.” – The McKinsey Institute, Debt and (not much) Deleveraging

In the first quote above, Polonius is advising his son, Laertes, who is about to leave for Paris to complete his gentleman’s education, that lending money to friends is risky and can end up causing resentment and even the loss of the friendship.  Furthermore, Polonius points out that borrowing money can endanger husbandry or thrift.  The second quote, taken from a study by The McKinsey Institute, concludes that high levels of debt can lead to slower economic growth and even financial crisis.

It has been seven years since the last financial crisis.  In that seven-year period, the total global debt has increased by even more than it did in the seven years previous (2000-2007).  From the end of 2007 through to the end of the first half of last year, total global debt increased by 40%, or $US 57 TRILLION!  This massive increase in debt has been a consequence of easy money in a low interest rate environment aided and abetted by programs of quantitative easing (the provision of liquidity by central banks) in order to promote economic growth and investment.

The first quarter managed to record some positive results overall, despite severe declines in some sectors.

Canadian Dollar                        US Dollar
Q1    Q2    Q3    Q4    YTD       Q1    Q2    Q3    Q4    YTD

Toronto Stock Exchange    2.6%                           2.6%
S&P 500                          10.1%                         10.1%    1.0%                1.0%
MSCI EAFE*                    13.7%                         13.7%    4.2%                4.2%
91 Day T-Bill                     0.3%                           0.3%
DEX**                               4.2%                           4.2%
CDN/US dollar                                                                 -8.5%                -8.5%

* Europe, Asia and Far East Index
** Canadian Bond Universe Index

Investors’ concerns are now largely centred on the repercussions of these easy money policies and the massive build up of debt.  Debt has increased globally in 22 of the advanced economies and consumer debt has risen sharply in all of them with the notable exceptions of the US, UK, Spain and Ireland.

Within the emerging markets, US dollar denominated debt now exceeds $9 trillion, up from $2 trillion just 14 years ago. A large portion of this debt is corporate debt.

In China, debt levels have quadrupled in the last seven years.  Twenty-five percent of the corporate debt in China is denominated in US dollars.  Only 8.5% of corporate earnings in China are earned in US dollars.  Five percent of Chinese firms hold over 50% of that debt.

In conclusion, the combination of low interest rates and quantitative easing has flooded the world with liquidity and made borrowing all too tempting to resist.  Japan holds the record with debt now exceeding 250% of their GDP.

In Canada, debt levels have been highlighted by the Bank of Canada as an area of concern particularly consumer debt that has reached all time highs.  Consumer debt is reaching troubling levels in more than just mortgages.  Margin debt (money borrowed to make investments) is near record levels at over $19.2 billion.  Margin debt places those investors in a vulnerable position if their investments fall in price and they are forced to cover that debt.

So, will she or won’t she?  The she being Janet Yellen, the Chair of the Federal Reserve in the US.  The question is as to when she may deem it appropriate to raise interest rates.

While there has been a great deal of speculation as to when the first increase in rates may occur, it is not altogether clear that it will be in the immediate future.  There is no doubt that the Federal Reserve would like to raise rates given the strengthening of the US economy with the commensurate improvement in employment levels.  However, the strength of the US dollar that has appreciated 9% against the currencies of its major trading partners in the first-quarter, is already a concern as exports from the US are already facing a competitive disadvantage.  The US would not want to risk the economic chaos that night ensue globally as more fragile economies with large US denominated debt tilt back towards recession.

The decline in oil prices is beginning to reverberate throughout the world economies, particularly in Canada and the other large oil producing nations.  Over the last seven years, the US has become a large producer of oil and gas with the success of modern drilling technologies.  As we enter the next quarterly reporting period, we will be looking for the impact that this weakened environment will have on earnings.  In an environment where valuations are looking stretched, in our opinion, we could be entering a very volatile period in global equity markets.

As we concentrate on the valuations at which individual companies are trading, we will be looking for opportunities to compliment portfolio exposures in this environment.  We are well positioned in this regard.

You can read and download our complete market commentary here:

You can continue to our fixed-income commentary here>>

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 investors benefit from an independent investment manager who acts in their best interest.

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.

Tiger Woods, Lipper Fund Awards and the Sports Illustrated Jinx

Lipper Fund Awards – performance that is well above average doesn’t stay there forever; it usually comes back to earth.

This morning’s Report on Business features three pages on this year’s Lipper fund awards. Lipper, a division of Thomson Reuters, honors funds and fund management firms that have “excelled in consistently strong risk-adjusted performance, relative to their peers in 17 countries.”

Before purchasing any of the funds included in this list, investors should first understand the concept of regression to the mean.

Regression to the mean refers to the tendency for things to even out over time. It is a statistical phenomenon that can make natural variation in repeated data look like real change. It happens when unusually large or small measurements tend to be followed by measurements that are closer to average.

For folks who are not math wizzes, we can think of it this way: performance that is well above average usually doesn’t stay there forever; it usually comes back to earth. Performance that is well below average often gets better.

Tiger Woods Lipper Fund Awards Sports Illustrated Jinx

Tiger Woods – Lipper Fund Awards & the Sports Illustrated Jinx. Performance that is well above average doesn’t stay there forever.

A great illustration of regression to the mean is the so-called ‘Sports Illustrated Jinx’, an urban myth that suggests that a disproportionately large number of the stars that appear on the cover of the famous magazine go on to suffer a decline in their fortunes.

This has nothing to do with jinxes, but can be explained by regression to the mean. A large number of cover stars should be expected to fall from their giddy heights, as the performances that led to their feature are extremes from which they should statistically be expected to regress.

Gamblers tend to ignore regression to the mean. If they win a few hands, they think they are ‘hot’, or more foolishly that they have superior skills. They keep playing until their winnings and their initial stake are gone. Sadly, too many investors do the same thing by placing big bets on last year’s hot fund or star manager.

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.

Exchange Traded Funds Expose Investors to Unexpected Risks. Read more 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.

Investment Risk and the Market Cycle – as Valuations Rise, so too Does Risk

Investment Risk – at Sprung Investment Management, we believe that investment management is about managing risk, not chasing speculative returns. Based on over three decades of experience, we also believe that as markets and valuations rise, risk increases.

investment managing risk pair dice future

Investment risk – managing risk is about one thing: dealing with the future.

Sadly, too many investors believe the opposite: at the nadir of a market cycle they think that risk is extremely high. They want to wait “until things look more certain” before investing. Of course, by the time that happens, stock prices have risen significantly. Today, as equity markets reach new highs, they continue to buy believing that the good times will continue.

Managing risk is about one thing: dealing with the future. No one can predict the future with certainty. Therefore, risk is inescapable. However, we believe that our three-part value investing strategy is the best way to reduce risk and volatility and earn consistent returns over time. Our diligent, patient and opportunistic approach has served our clients well, through good and bad markets:

  • Appraise the intrinsic value of each company over a business cycle;
  • Seek long-term growth of capital by investing in companies that we perceive to be mispriced;
  • Utilize a margin of safety to promote return of capital…not just return on capital.

Why does our value investing approach work? Investment risk arises primarily when investors become excessively optimistic and pay too-high prices for investments. The best way to reduce risk is to buy high quality assets at reasonable prices.

As we discuss in our recent quarterly commentary, we believe that after five years of rising prices, equity valuations are looking somewhat stretched. We are not market timers and do not attempt to predict short-term market movements. However, as conservative investment managers, we think it prudent to take some profits in securities that have substantial capital gains. When markets are going up it takes discipline to increase cash positions. Cash can provide a good option to purchase good investments on any market setback.

Many investors feel that there is no need to question their advisor’s approach if their investments are performing well. Nevertheless, high returns may be the result of a risky investment strategy such as an excessive exposure to an investment class (equities, bonds, or real estate for example,) a single market sector, (here in Canada many investors have significant exposures to the volatile energy and materials sectors.) Ask yourself the following question: how would I feel if the gains I made over the past two or three years were lost in a sudden market downturn next month or next year?

As an investor, you must be vigilant in reviewing the investments you hold. Given your individual time-frame, you may find it prudent to make some adjustments in your portfolio.

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

Investment Risk – Is Your Stock Broker Acting in Your Best Interest? Read more here>>

Investment Risk – Exchange Traded Funds Expose Investors to Unexpected Risks. Read more here>>

Investment Risk – Risk vs. Return. Read more here>>

Investment Risk – we believe clients are more concerned about losing money than making speculative gains. 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.