Friday, July 8, 2016


Something quite strange is going on in financial markets, the strangest being the direction and level of interest rates. For decades, when there was risk on the horizon it was often caused by rising rates and dropping stock prices. These days stocks drop when interest rates drop, now below zero in many countries except North America. This is most likely a result of too much cash in circulation, as the rich keep getting richer and corporations hoard cash. This too is quite strange because too much cash in the system used to mean higher inflation. No sign of that either. Japan in fact has been in deflation for more than twenty years. Only place inflation is showing up is the playground of the rich; fancy cars and multimillion dollar homes are in short supply, great demand and exploding prices. Thankfully, bananas still sell for $0.57 a lb.

There is considerable consensus that interest rates will be lower for longer or as some say zero for ever. But as we have known in the past consensus is a dangerous thing in stock markets. A few positive gestures from Europe or China and all of this may become a faint memory as are the so many apparent catastrophe we have faced over the few decades let alone this century.

The bottom line for investors is where can you get some return on your money with less risk? Bank accounts or bonds will not do, now or in the near future. Even if there were some positive economic numbers over the next few quarters the best you can hope for will be 2% or 3%. Yet there are corporations with stable balance sheet and reasonable future such as telephone companies, utilities and banks paying more than 4% to 5% yields. And our favourite preferred shares have few takers. Sure, in a sell off such as we just saw when UK decided to leave the EU, prices of even such dividend paying stocks drop. But with no alternatives, they bounce right back. One day this may not happen but for now trillions of dollars need some return and they have no place to go.

In Canadian funds, Canadian stock market has kept its gains with a total return of 9.6% year to date but due to a fast snap back of C$, a US market portfolio of S&P 500 stocks returned a -4.2%. Much of Canadian market performance is due to superior returns from energy and gold sectors.Unfortunately we are not in these sectors and do not plan to be there due to very high volatility and unreliability of performance.
Blue line in the chart below is the gold sector, beige energy and black TSX which includes the two. Without these two sectors, TSX would have been much worse than the reported 9.6%.

We do not see any need to change our strategy at this time although we are very cognizant of changing forces. 

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