Following up from a previous video (Why investors are told to stay invested in bad markets), we must recognize that we can’t always pick and choose when we need money from our savings. So how should we pick what investments to sell in a poorly performing market? Here’s one strategy to consider and help guide you!
As always, I’m available to talk any time and can be reached on my cell phone, through our office number or via email!
Sincerely,
Adrian Walker
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.
A quick video looking at the sudden rise in markets last week and what conclusions we can draw from it.
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.
A series of bad days, a moment of respite, and then more selling. This was the story of 2008, and it lasted for months. The rout lasted until finally investors felt that enough was going to be done to save the economy that people stopped selling. Massive quantitative easing, an interest rate at 0%, aggressive fund transfers, bailouts to whole industries, and the election of a president who seemed to embody the idea of “hyper competence”. That’s what it took to save the economy in 2008. Big money, an unconditional promise to save businesses and people, and the rejection of a political party that oversaw the bungled early handling of a crisis and had lost the public confidence.
I don’t think Donald Trump has never had been viewed as hyper competent. I doubt even his most ardent supporters see him as incredibly clever, but instead a thumb in the eye of “elites” who have never cared to take their concerns seriously, and to an establishment that seemed incapable of making politics work. Trump was a rejection of the status quo and a “disruptor in chief”. A TV game show host who played the role of America’s most sacrosanct character, the self made man, asked now to play the same role in politics.
There’s nothing I need to cover here you don’t already know. A history of bad business dealings, likely foreign collusion to win an election, surrounded by sycophants and yes men with little interest or understanding of the machines they have been put in charge of, and an endless supply of criminal charges. Like a dictator his closest advisors are members of his own family, and perhaps more shockingly he fawns over and publicly admires the dedications of respect other dictators get from their oppressed populations. Never has a person been so naked in their desires and shortfalls as Donald Trump.
Markets have played along with this charade because Trump seemed, if anything, largely harmless to them. Indifference to the larger operation of the government and the laser like focus on reduced regulations and tax cuts made Trump agreeable to the Wall Street set. If he could simply avoid a war and keep the economy humming, Trump was a liveable consequence of “good times”. Until the coronavirus issue, Trump had not done terribly. The economy wasn’t exactly humming. It had a bad limp due to a trade war with China. It had a chest cold because wealth inequality was continuing to worsen despite decreasing unemployment. And its general faculties were diminished as issues around health care, deficit spending, and other aspects of the society began to languish. But as far as unhealthy bodies go, the American economy still had its ever strong beating heart, the American consumer.
Today, @realdonaldtrump said: “I’ve always known this is a pandemic. I’ve felt that it was a pandemic long before it was called a pandemic … I’ve always viewed it as serious.”
Whatever name you prefer; COVID-19, the coronavirus, SARS-CoV-2, or the #Chinesevirus (as Trump is now busy trying to get it renamed) has exposed the fault lines in the administration and the danger of such blinkered thinking by Wall Street. Having spent the last few weeks downplaying the severity of the outbreak and hoping China would be able to contain it, until finally, grudgingly, acknowledging its seriousness. Markets have suddenly come face to face with a problem that bluster and bravado can’t fix. Trump is a political liability for markets, and his leadership style, which is heavy on cashing in on good times with little management for rainy days, means that markets may not really have any faith that he can properly address these problems.
Other efforts to calm markets, largely through the federal reserve, have not reassured anyone. Two emergency rate cuts are not going to fix the economy but did spook investors globally (it did signal to banks that they should take loans to cover potential shortfalls). The promise of a massive set of repo loans to provide liquidity will keep markets open and lubricated, but again won’t save jobs and won’t prop up the physical economy. What will fix markets is an end to the pandemic, a problem with the very blunt solutions of “social distancing”, “self isolation” and the distant hope of a vaccine.
What investors are facing are three big problems. First, that we don’t know when the virus will be contained. Optimistically it could be a month. Realistically it could be three. Pessimistically people are talking about the rest of the year. Even under the best conditions we are also likely facing a recession in most parts of the globe, and even then stimulus spending and financial help won’t be as effective until people can leave their homes and partake in the wider market (postponing tax filings and allowing deferrals on mortgages are good policies for right now, but at some point we need to spend money on things). But the last problem is one of politics. The Trump administration is uniquely incompetent, has shown little interest in the mechanisms of government, and in a particularly vicious form of having something come back to bite you, dismantled the CDC’s pandemic response team.
The best news came last week, when it seemed a switch had been flicked and the general population suddenly grasped the urgency of the situation and people began self isolating and limiting social engagements (I am now discounting Florida from this statement). Those measures have only been strengthened by government action over the last few days. Similarly, while I write this, Trudeau has announced a comprehensive financial package to come to the aid of small businesses and Canadian families. All this is welcome news, and I expect to see more like this over the coming weeks as Western governments take a more robust and wide ranging response to the crisis. So there is just one issue still unaddressed. The political mess in Washington.
I can’t say that markets will improve if Trump is voted out of office, but its hard to imagine that they could be made worse by his exit. Markets, and the investors that drive them, are emotional and it is confidence, the belief that things will be better tomorrow, that allow people to invest. Trump promised a return to “good times”, to Make America Great Again, and it is his unique failings that have left it, if anything, poorer.
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.
Late last week markets began to take the novel corona virus very seriously, and returns started to walk back from the all time highs earlier in the month. That retreat accelerated this week as COVID-19 virus fears exploded and the potential of a wide ranging global pandemic seemed possible despite the enormous efforts of the Chinese to quarantine and contain the virus. In South Korea, Italy, Iran, Japan, Canada and the United States the virus has appeared in varying states of severity, and are sparking varying degrees of public health responses.
COVID-19 strikes me as a black swan event, an unpredictable outlier that can’t really be planned for. An “unknown unknown”. Governments have plans in place to deal with epidemics, and learn from past outbreaks, but can’t plan for a virus they don’t know about and proves to be better than the precautionary measures already established to contain such events. In the instance of COVID-19, the virus seems very virulent, spreading rapidly but also having a long incubation time. You may not show any signs of the virus, and, in a cruel twist, many people with the disease may only have mild symptoms, making it easily confused with the common cold and less likely for an infected person to seek treatment while being an effective transmitter.
The Dow Jones Industrial Average over the last month.
Markets have capitulated to the fear that this virus is dangerous and will have an outsized impact on the global economy, already in a much weaker state than market returns suggested. But like all black swans what happens next will determine how serious it becomes. For my own part I believe the virus is serious, but that the 2% mortality rate may only apply to China, and that it is likely lower with a much larger pool of diagnosed people obscuring the data. This is backed up somewhat by the much smaller number of fatalities in other countries, including Japan and South Korea. What black swans really do is expose a society’s resiliency.
But resiliency covers a wider range of issues. From an investment standpoint diversified portfolios containing a wide selection of asset classes and geographic allocations are safer because they tend to be more resilient, and not through any confusing magic. Debt, both long term and short term, erode resiliency as they eat away at your ability to respond to new problems while shackling you to existing commitments. In terms of managing the economy, interest rates are also a form of resiliency, and the ability to cut rates or raise them speaks to the strength of an economy. A cursory glance at these issues might give one pause, since Canadians have all time records of debt, and an attempt in 2018 to raise interest rates for the wider health of the economy led to a rapid sell off at the end of the year, while in 2019 central banks cut rates almost everywhere to prop up a softening global economy.
COVID-19 is a significant challenge that I believe the world is up for, but as a black swan I suspect its impact will be felt more in its economic fallout. As we move into the second quarter of the year a clearer picture will emerge at just how serious the economic impact of the virus, and efforts to contain it, really have been. Given some of the existing issues within the economy, as well as those currently being stressed by the fraying of international trade, the corona virus has the potential to push economies into recession. At which point all citizens should ask, just how resilient is my country, and just how resilient am I?
Have questions about the resiliency of your portfolio? Please feel free to give me a call or send an email.
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.
The reality of the 21st century is that finding clarity in world events for investors is almost impossible. Take the recent price drop in oil, which has been hailed as both a good and bad thing. And as the new lower price of energy slowly becomes the norm, everyday news reports come in about its respective benefits and unintended negative consequences.
Those seeking to know what those events mean and what guidance headlines should give will only be frustrated by the almost endless supply of information that seeks to empower decisions but leaves many scratching their heads in wonder about the future.
A big reason for this is the sheer volume of information that we can now rely on. Since the advent of computers and the more recent rise of high-speed communication and networking we have found that the core truth of an event still isn’t apparent until after something has happened. In other words it’s almost impossible to predict corrections before they happen despite an almost inconceivable amount of data and endless ability to process it.
This is true no matter where we look in the world of investing. Consider Black Friday, the end all and be all day in shopping in the United States. This year Black Friday seemed to fizzle. Sales were down 11% year-over-year and that got people nervous. Yet Cyber Monday, the electronic version of Black Friday, sales were up 17% and topped $2 billion for the first time. Combined with the longer sales period leading up to the weekend, many suspect that total sales were actually higher.
All of this data conflicts with each other, which for investors means sometimes you will be wrong. Small things sometimes prove to be big things, and what initially appears simple turns out to be surprisingly complex, and much of it you simply won’t predict. This points investors back to some dull but surprising truths about investing.
1. Not much has changed when it comes to determining what makes a company worthwhile to invest in. Corporate health, sound governance and healthy cash flow still tell us more than loud hype about potential new markets, new products and new trends.
2. Time is a better arbiter than you about investing. The old line is time in the market, not timing the market, and that still appears true. Many Canadians are likely wringing their hands about the sudden drop of oil and the impact it is having on their portfolios. But the best course of action maybe not to abandon their investments, but make sure they are still sensibly invested and well diversified. The market still tends to correct in the long run and immediate volatility (both up and down) are smoothed out over time.
The S&P 500 over the last 50 years. From Yahoo Finance
Not every sensible investment will work out, but a portfolio of sensible investments over time will. For investors now wondering about the future and their investments in Canada, the best thing to do is understand the logic behind their investments before choosing a course of action.
All year people have been expecting a correction in the US Markets. For most of the year I have listened to portfolio managers discuss their “concern” about the high valuations of American companies. I have also listened to them point out that America remains the strongest economy and the most likely to see significant growth in the coming year.
Flash forward to late-September, early October and the markets have finally had their corrections. At the bottom every market was negative, including the TSX which had given up all of its YTD high of 15%. That was the bottom. The recovery was swift, money flowed back into the markets, and hedge fund managers managed to make a mockery of some otherwise nervous DIY investors. Now the markets look strong again, with the S&P 500 reaching new highs. Nobody is happy.
All of this comes on the news that US GDP was up 3.9% in the third quarter, a full .5% above analyst expectations (that sounds small, but it’s worth billions) while energy prices continue to decline, manufacturing is highly competitive and US consumers look poised for a significant Christmas bonanza. So what’s wrong with this picture? Why are both the Globe and Mail and the Financial Times worried about the US stock market?
The answer is a combination of fear, data, and the insatiable need for stories to populate the media everyday. First is the fear. Stocks are at all time highs. The problem is that “all time high” isn’t some automatic death sentence for a stock market. The stock market always hits new highs all the time, and a by-product of that is that corrections can really only happen after a high is reached. Look at the history of the S&P 500 since 1960:
As you can probably tell, there are a lot of “new highs” that had occurred over the last 40 years, but each new high did not automatically translate into some automatic correction. There were legitimate reasons why the economy could continue to grow, and in the process make those companies in the stock market more valuable. That isn’t to say that the stock market can’t be “frothy” or that their aren’t problems in the stock market today. It merely means that setting a new market high isn’t proof of an impending collapse.
The second issue is data. We live in an age of Big Data. Data is everywhere and there is so much it can be hard to separate the useful data from the useless. Some of the data is concrete, but much of it takes time to understand or even become clear. The first analysis of the higher than expected GDP numbers seemed great (more economy, Yay!) but upon closer inspection, there are reasons to be cautious. While the GDP was higher than expected, it was largely due to growth in government spending, not consumer spending. In fact consumer spending was lower quarter over quarter. In addition there are a number of concerns about how corporations are spending their profits and whether that is sustainable. Many of these concerns, when taken in context, seem to be the same from earlier in the year.
The third factor is the insatiable need to write something. Content is king in the news world and providing insight (read: opinion) means that you must constantly produce new stories to publish. That means that there is a need to be constantly suggesting that things are about to go wrong (or more wrong than they already have) to create a compelling story. It isn’t that these stories are wrong, just that constantly saying the stock market is going to go down isn’t insightful, since at some point we can expect the stock market to correct for one of a number of reasons.
So is America frothy? Are we poised an some kind of financial collapse? I don’t know, and nobody else does either. We are no more likely to correctly know when the market might correct again than we are to guess the future price of gas. The best response is to diversify, and remember some core elements of investing. Buy low and sell high. With that in mind sturdy investors should probably start giving the beat-up and maligned Europe a second look…
Last week Google announced that it would not be proceeding with another round of Google Glass for 2015, meaning that the most ambitious experiment in wearable technology had come to an end. Google Glass has many failings, ranging from looking stupid to attracting angry mobs of people, but it did seem to be the vanguard of wearable technology. Wearable tech has attracted a great deal of attention, both from consumers and investors, but I have a feeling that it’s rise may be overstated.
For the most part wearable technology is a subset of the “internet of things“, the growth of cloud computing, mobile sensors and high speed communication between stuff. The most beneficial forms of this could be about smart city grids communicating with cars to smooth traffic flows and reduce congestion. In reality it is largely counting how many steps you take everyday.
Looking past the incredible number of terrifying elements about our privacy and data mining that go along with these devices, by and large most wearable technology hasn’t really taken off. Google Glass may be a high end flop, but the vast amount of wearable devices on the markets today have yet to win over big audiences. They remain largely niche devices with a high drop off rate. Where as people adopted smartphones on mass, many people have just shrugged their shoulders and moved on, while those that do buy into wearable tech often stop using it after a few months. This suggests that there is a disconnect between understanding what smartphones get right and wearables get wrong.
That gap is clearly frustrating tech companies, and it will be interesting to see whether Apple’s first wearable device, the Apple Watch, is able to change the pattern. But for investors the allure of the new as a reason to invest should be tempered, and excitement over the prospect of “the next big thing” and the importance of getting in on the ground floor may prove financially costly.
Take for instance TESLA Motors (TSLA: Nasdaq). Tesla may be a car company, but it is treated like a technology company on the stock market, meaning that it is currently trading with a ridiculous P/E ratio, close to 130x next years earnings. Put simply, if Tesla were to pay out all of its earnings to its shareholders it would take 130 years (given current earnings) for you to receive the equivalent value of what you paid for a share. That gives Tesla, a company that sells cars by the thousands a market cap similar to General Motors, a company that sells cars by the millions.
That’s crazy, but normal for the tech world. This has been exceptionally true social media sites like Twitter, Linkedin and Pinterest. All of them also trade well and above “normal” valuations, especially given that they don’t make anything.
The lesson for investors is to be cautious about technology companies. They come with a host of pitfalls and unique qualities that are frequently glossed over in the excitement of the new. Investors have been swept up before with the prospect of some great new device that can’t go wrong, but with some notable exceptions much technology often finds itself on the scrapheap of history. Or maybe we will all start carrying around smart glasses for every beverage…
***This post will refer to both a mutual fund company and a particular fund. This post should not be construed as endorsing that fund. We always make sure that we cite our sources and in this instance our source is a fund company, and we are not suggesting in any way that you should invest in or purchase this fund. If you are interested in any fund, please consult with your financial advisor first for suitability, especially if that financial advisor is us!***
Since the price of oil dropped there have been lots of reasons to be excited. First the price of gas at the pumps is so low that I don’t hate going there anymore. Second, investments in energy have suffered since oil lost close to $30 in value.
WTI price over the last 6 months. From NASDAQ.com
And while energy stocks have recovered somewhat from their low points, they are still way off where they were earlier in the year. I’m not going to get into the finer points about the nuances of energy producers and the various types of oil and costs of production. It’s a worthwhile article, but will take up too much time here. Instead I wanted to focus on a different way that Canadians can participate in the energy sector.
Commodities can be volatile but also a valuable element of a portfolio. So how can Canadians play the energy sector while being mindful of the risks associated with it?
The answer may be by investing in what is called “Midstream MLPs”. Midstream MLPs (Master Limited Partnerships) are American operators that transport energy from the producers to the consumers. It’s a capital intensive business that is federally regulated but traded on the stock market. It therefore provides consistent cash flow while offering liquidity to investors. But Canadians already have opportunities for energy infrastructure, so why should they care about this in the United States?The answer has everything to do with the rising levels of oil production in the United States combined with what federal regulators are willing to do to encourage new growth.
That brings us to the growth of the shale revolution in the United States. Newly discovered reserves (of significant size), improved technology and a dropping costs of production have set the US on a course to be the largest global energy provider in the coming years. This combination of efficiencies means that the United States is going to continue to increase its oil production over the next decade, while dropping the cost of extraction for each additional barrel. But each barrel produced has to go somewhere.
Projected Oil Growth in the United States
In the United States, Midstream MLPs are responsible for moving that oil. But it’s a sector that also must grow. Infrastructure to move oil efficiently from shale producers doesn’t exist yet, and regulators are eager to get MPLs in place with new development. New infrastructure is costly, and while the business model for an MLP doesn’t require a high price for energy to be profitable, it does need assurances about the consistency of the volume of oil to be moved. To encourage that growth regulators are allowing the price that MLPs charge to rise at a rate faster than inflation. Why are they doing that? Much of the shale oil is having to be shipped via rail to get to its right home. This causes price disparities that reduces producer margins and rankles federal governments.
Pipelines in the US. Most of the pipelines direct energy to Texas, which isn’t set up to handle the ultra light crude from shale projects. that energy, coming out of North Dakota, needs to get to New Jersey. The lack of pipelines means it is being shipped by rail to Chicago and then via pipeline.
The various prices of oil. Oil from Canada is sold at a discount while Brent crude is sold at a premium to WTI. Improving infrastructure would rectify this problem and equalize prices. (The WTI price is listed from the summer). Click on the image to see it larger.
Currently there is only one fund option in Canada that we are aware of for investing in MLPs. We had an opportunity earlier this week to meet the managers of this fund and were greatly impressed by what they had to show us. I am already a big believer in the growing Shale Revolution, and am particularly pleased by the arrival of new opportunities for investment. Growth in the Canadian and American energy sectors is good news for not just investors, but also citizens. Russia, Saudi Arabia, Venezuela and a host of other despotic and semi-despotic regimes have been able to get by on the high price of oil. Now they are feeling the pinch of a decreasing price that has the benefit of bringing jobs back to North America while weakening their influence. In all, this is a good story for everyone.
To many Canadians the CPP is something that you simply receive when you turn 65, (or 70, or 60, depending on when you want or need it) with little consideration for how the program works or is run. That’s too bad because the CPP is successful, enlightening and puts its American counterpart, Social Security, to shame.
You’ve probably heard American politicians decrying the state of Social Security, claiming that it is broken and will one day run out of money. That’s a frightening prospect for those who will depend on it in the future. Social Security is a trust that buys US debt, and its use of US Treasuries (low risk debt issued by the US government) is crippling that program and even puts it at odds with attempts to improve government financial health (it’s more complicated than this, but it’s a useful guide). In comparison the CPP isn’t bound by the same restrictions, and operates as a sovereign wealth fund.
A sovereign wealth fund is simply a fancy way to describe a program that can buy assets, which is exactly what the CPP does. The Canada Pension Plan may be larger and more elaborate than your RRSP, but it can look very similar. The CPP has exposure to Canadian, American, European and Emerging Market equity. It invests in fixed income both domestically and abroad, and while it may also participate in private equity deals (like when the CPP bought Neiman Marcus) in essence the investments in the CPP are aiming to do exactly what your RRSP does.
The big lesson here is really about risk though. The CPP is one of the 10 largest pension plans in the world. It’s wildly successful and is run in such a way as to be sustainable for the next 75 years. The same cannot be said for Social Security. But by taking the “safest” option Social Security is failing in its job and will run out of money by 2033. But by buying real assets and investing sensibly the CPP is far more likely to survive and continue to thrive through all of our lifetimes.
What’s also notable is what the CPP isn’t trying to do. It isn’t concentrated in Canada. It doesn’t need to get a substantial rate of return, and it doesn’t need every sector to outperform. It needs consistent returns to realize its goals, and that’s how it’s positioned. By being diversified and not trying to time the market, the CPP finds success for all Canadian investors.
I’ve said in conversation that if there was an opportunity to invest directly in the CPP I would take it. However until then the best thing investors can do is take the CPPs lessons to heart!
The answer has everything to do with the rising levels of oil production in the United States combined with what federal regulators are willing to do to encourage new growth.
The Walker Report 