June 2017

The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on MacNicol & Associates Asset Management (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham


Market Commentary:

Merriam-Webster defines the word transitory as…

A good use of the word transitory would be to describe the occurrence of warm, sunny days thus far in 2017 or Toronto Maple Leafs playoff hopes during the last few decades. However, the word itself is not an especially popular one in every day English. If you look closely, you might notice that the popularity of transitory is in the bottom 50% of words. We would venture to guess that transitory ranks near the bottom of any survey of English words. Transitory then is a word that was ostensibly left for dead…until recently that is…


On May 24th, 2017 the United States Federal Reserve System [The Fed] released the minutes from its joint meeting of the Federal Open Market Committee [FOMC] and Board of Governors. The meeting was held on Tuesday May 2nd, 2017 and continued into Wednesday May 3rd, 2017. Meeting minutes show that the word transitory was used nine (9) times during the course of proceedings and that is before accounting for variations such as transitorily. Readers might persuade us that transitory is a revenant word, and we would probably agree with them. But the bigger story is the Fed hinting to the market that it is willing to look through weak economic data in the name of policy normalization.


Regular readers of The Monthly will know that the MAAM investment team has been aware of the prospect of rising interest rates for some time. The trouble is that recent forward guidance by the Fed appears to be data agnostic rather than data driven. So the stage is set for what should be a very interesting June meeting of the FOMC. Markets are widely forecasting policy makers to raise the Fed’s key interest rate at that meeting. But the bigger question concerns what the Fed will do about its monstrous balance sheet. At $4.5 trillion the Fed’s balance sheet is gargantuan and roughly the size of the entire Japanese economy.


The solution to such a large problem surely cannot be transitory.


The Fed will want to tread lightly on rate hikes and balance sheet unwinding. American think tank New America recently released data which showed that more than a 25% of Americans could not afford a surprise expense of just $10.


Indeed the solution that the Fed has to come up will almost take a backseat to how delicately it gets implemented.



Don’t hold your breadth


In stock markets breadth is an important indicator followed by technical analysts and other investors. Market breadth attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth is said to occur when more companies are moving higher than are moving lower, and suggests that bulls are in control of the market’s momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.

The above table from Raymond James demonstrates that most of the main breadth indicators are falling. A more visually striking depiction of what’s going on in the markets comes from Bespoke Investment Group:


The S&P 500 has performed well recently. But more and more of its return is driven by just five technology companies. Strip out those five companies [the navy blue line above] and the resulting return profile looks a lot more ordinary. Readers of last month’s edition of Market Commentary will know that our views on technology’s recent run up is that it will be short lived…speaking of transitory.


Harvest Season?

Markets continue to climb a wall of worry and there is indeed a lot out there for investors to digest. Just this past Thursday alone investors were balancing the testimony of former FBI Director James Comey, the Election in the United Kingdom and the European Central Bank’s “hawkish” stance in the face of downwardly revised inflation expectations. Still other factors will garner the markets attention in the weeks ahead such as the Bank of Japan’s revised communication strategy on deflation.


Throw into the equation ballooning consumer debt levels especially in student and auto loans, a sluggish Canadian economy coupled with a runaway bull market in home equity loans and US employment figures falling short of the mark, and you have a Witches’ Brew of things to worry about.


As this Monthly Commentary goes to print, markets globally appear to have shrugged off Mr. Comey’s testimony and the predictable retorts from the Trump camp. The same holds true for the UK Election shocker whose only collateral damage is a sharply lower pound. Broader Eurozone equities finished the week higher. “Super Thursday”, it seems, did not live up to its hype. We question the view of an imminent collapse in global financial markets. For one thing, bear markets so widely telegraphed rarely happen. In addition, despite Central Bank rhetoric, policy remains highly accommodative.


But from a client-based perspective, market timing is fraught with its own evils. For one, correctly timing markets is extremely difficult. Secondly, adverse tax implications and hastily made market timing decisions frequently go hand-in-hand. Lastly, a tremendous degree of luck must accompany one’s attempt to get back into the market at the right time.


At MAAM, our time-tested process and innovative investment platform marry together defensively selected Equities purchased at attractive valuations and Alternative Assets, which better diversify an overall portfolio. Together these components offer investors with more stable return profiles and the confidence to stay focused on their longer-term financial goals.


Blindly following the heard into overvalued momentum stocks or the latest ETF’s makes for entertaining chatter around the golf course or water cooler, but it forms no part of the MAAM investment process. Being the “last man to the party” flies in the face of the fundamental reason for investing which is to beat inflation and thus to always be able to afford one’s lifestyle.


By always asking ourselves who we are buying an investment from we avoid the pitfalls of value traps and momentum driven stocks. Our well diversified, balanced approach across conventional and Alternative Asset classes completes our focus on capital protection.


So the question we also ask is where you can get the biggest bang for your intellectual buck as investment fund managers…it has rarely misguided us.


The MAAM Investment Team


MacNicol & Associates Asset Management Debt Fund

Safeguarding and maximizing wealth through prudent, long-term global investing

Can there be a more overpriced asset class than conventional fixed income investments right now?


Next to housing prices in the Greater Toronto Area, few asset classes are more expensive than conventional fixed income instruments. In fact, bonds are almost assuredly the world’s most dearly priced major investable asset class. In an age where investors seek yield in stocks and capital gains in bonds there is a growing awareness that low yields actually impede economic progress and broaden the divide between the rich and the poor.


That stocks and bonds are so disjointed has implications for asset mix decisions and portfolio diversification too. Traditional applications of conventional fixed income investments can no longer be relied upon as shock absorbers in balanced portfolios during periods of sheepishness in the stock market. In short, the traditional narrative of bonds as the protective “superhero” ingredient in well diversified balanced portfolio is really a soft veneer with fragile underpinnings.

MacNicol & Associates has been safeguarding and maximizing client wealth for many years and we believe that the 35+ year bull market in traditional fixed income instruments has come to a conclusion.

While our core scenario for fixed income is not of a spectacular crash that some mainstream outlets warn of, textbook approaches to fixed income investing no longer apply. Interest rates are set to become a headwind to bond investors for the first time in well over three decades, which represents a sizable challenge…we feel the central challenge…to modern finance.  MacNicol & Associates is well positioned to respond to the challenges facing today’s balanced and fixed income oriented investors.


MacNicol & Associates Debt Fund


By coordinating a team of experts closely focused on the new realities of fixed income investing, MacNicol & Associates will offer investors the opportunity to generate a more reliable rate of return in the current environment of anemic yields and principal uncertainty. The MacNicol & Associates Debt Fund is specifically designed to invest in a broad array of fixed income and debt related strategies targeting a low duration and stable return profile, such as:


  1. Development Government
  2. Senior Loans
  3. Preferred Shares
  4. High Yield
  5. Public and Private Corporates
  6. Supple Chain Finance
  7. Emerging Market Fixed Income
  8. Structured Credit
  9. Asset- Based Lending
  10. Convertible Bonds


All fixed income investors want to know that they will receive periodic coupon payments and the final return of their principal. Sophisticated investors want to know that their fixed income investments will help offset volatility in the equity component of their portfolios. With interest rates biased upwards, the future is opaque for conventional fixed income investments. At MacNicol & Associates we understand that a traditional approach to fixed income investing is a lot more than just a minor foible, it can be dangerous to your financial well-being. We feel the optimal way to invest in bonds over the next two to three decades involves being pragmatic and opportunistic.


Working with leading experts in global fixed income and debt solutions, MacNicol & Associates has developed a sound, prudent and world class investment solution for tomorrow. Whatever the path interest rates ultimately take, investors can be assured that MacNicol & Associates is ahead of the curve and will continue to apply our experience for the benefit of investors in a focused and disciplined way.


Firm News:


MacNicol and Associates Asset Management hosted its Spring presentation at Rosedale Golf Club on May 8th, 2017. David MacNicol and Senior Portfolio Manager, Ross Healy were on hand to talk about current trends in domestic and global markets, and various MAAM staff members were in attendance also. The event was attended by clients, colleagues and Advisors from across Ontario.


June 2017