September 2016

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 some of the people at MacNicol & Associates Asset Management (MAAM).

We hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


“Never invest in a business you can’t understand” and “Beware geeks bearing formulas.” Warren Buffett



Market Commentary: Eye of the Storm

Despite our attempts to the contrary, it seems that the 2016th year continues to fly by, with the entrance of September officially bringing us into the fourth quarter of the year. Kids are returning to school, universities are re-opening, cottages are closing, and apparently, traders and market participants may finally be returning to their desks. We say this, as the market activity through-out August suggests many market investors were definitely doing something other than trading stocks. The S&P 500, for example, has now traded less than 1% in either direction for over 40 business days, which marks the longest such streak since the summer of 2014; funny how these streaks of inactivity always seem to lineup with cottage season. The resulting effect has been rather sideways markets over the last month or so, as the S&P 500 and the TSX fell 0.13% and rose 0.70% through August, respectively. In conjunction, there has been a noted trough in volatility on Wall Street, which can be seen in Exhibit 1 below.


Exhibit 1:


Although this chart only shows until August 9th, as of September 8th, the VIX remains slightly above 12, which is approximately the same level shown at the end of the chart. Trading volumes throughout August were also the slowest in two years.

The overall justification of this inactivity and apprehension to trade has been potential impact of significant events on the horizon, namely the US election and the ostensible rising of interest rates. The upcoming US election – which many believe to be one of the most consequential in our lifetime – takes place on November 8th, and the market, as well as the Fed, seem to be awaiting further clarity on the matter before committing to action. The stated reason for this seems to be the vastly different directions each candidate has vowed to take American policy. This timeline also influences the schedule of interest rate increases by the Fed, one of their scheduled meeting is November 1st or 2nd, less than a week prior to the election date. Many believe it would be foolish for them to raise interest rates on the precipice of such a momentous election.

It is also believed to be unlikely that interest rates will be increased at the upcoming meeting on September 21st, because key economic data such as the ISM Manufacturing and Non-Manufacturing data out of the US have disappointed as of late. The data is simply not strong enough for the Fed to justify raising rates. In tandem with the prior statement, this leads us to believe that rates will remain steady until at least December, if not for the remainder of 2016, which should benefit gold and precious metal stocks. Exhibit 2, borrowed from CME Group, shows how professional traders are heavily betting on stable rates through the upcoming Fed meeting.


Exhibit 2:




As stated above, we believe that the fourth quarter will likely further benefit gold and precious metal stocks, which typically react positively when rates show less probability of rising. In addition, the fall – and particularly September and October – tend to be the strongest months for gold bullion prices, seasonally. A few of the reasons for this can be attributed to strong physical demand from Asia, particularly India and China. Both of these countries have large celebrations which take place over these months, where the chosen gift is often in the form of gold. Adding to this demand has been a resurgence of institutional purchases, largely driven by ETFs; for example, the GLD, which is the largest gold ETF in the world, saw their demand for gold purchases increase 140% in Q2, compared to the prior year. We expect this demand to continue. Gold stocks checked back throughout August, which we believe will be a buying opportunity. The HUI/Gold ratio, which measures the relative value of gold miner stocks compared to the price of bullion, has fallen to 0.18; historically, the average has been 0.36, with bull market averages hovering around 0.50 – 0.60. The major indication here is that, even without a strong rally in gold prices, gold mining stocks are slated to rebound.

Further adding to our affinity to precious metal stocks heading into Q4 has been the underwhelming US corporate earnings data. According to FactSet, through Q2, S&P 500 revenue growth has dropped 0.2%, while earnings have fallen 3.2%, compared to the same period last year. Combined with sideways markets, the resultant effect can be seen on the first page of our commentary, where standard valuation multiples have expanded significantly. Under such a scenario, we are looking to take profits from positions exhibiting extended valuations. As opposed to gold, the fall also tends to be the worst seasonal period for stocks, which is illustrated in Exhibit 3 below


Exhibit 3:



Combining the notions of the upcoming election, recently weak US economic data, and a seasonally weak period for stocks, which are now exhibiting fairly extended multiples, we believe it to be prudent to maintain and even increase our defensive tilt, while possibly raising cash and adding to precious metal positions. Preservation of our clients’ capital remains our number one goal, and we believe that we are entering a period where we are able to materially assist in that matter.

As we have seen for some time now, increased risk in the market does not mean that the stock market will crash, and also does not mean that it cannot continue to rally. It is simply our belief that there are enough risks on the table that justify a tilt towards safety, until such a time where we can envision a higher level of transparency in terms of the market and overall economic growth.  The continued zero interest rate policy of the Fed provides a definitive floor to the market, which we believe will prevent any major collapse in the near term; however, the upside picture is vague and difficult to gauge for traditional stocks in this current environment.


Behavioural Investing: 


For this month’s behavioural section, we would like to discuss Self-Serving Bias, also known as Self Attribution Bias. In general, this bias tends to discuss the tendency for individuals to attribute their successes to their own individual abilities, while attributing their faults or losses to extraneous factors. Specifically, as it relates to investing, many investors tend to believe that their successful trades are due to their trading skill or research diligence, while their losses or poor calls are due to factors outside of their control. These outside factors which are often held up as scapegoats include currencies, interest rates, or other government actions.



It is vitally important, as investors and market participants, to remember that movements in many investments in the short term are very loosely tied to intrinsic long-term value. The only sure-fire way to accumulate strong long term performance is to invest based on long-term trends and fundamentals, and short term movements in either direction should not be immediately translated into perceiving an investment as a win or loss. The important pillar to remain cognizant is, which we have discussed previously, is the idea of framing. Have a long term mind set, and attempt to extricate short term volatility from your investing decisions, unless underlying company fundamentals have materially changed.




Last Friday I had the privilege of participating in the 20th Annual Yellow Bus Foundation 100 Hole Golf Marathon.  Many of you will know of this from previous correspondence but for those who do not know, The Yellow Bus Foundation supports several children’s charities.

Our mandate is to enable children living with chronic illnesses or disadvantaged youth to enrich their lives – and the lives of their families and communities – by expanding their access to programming and support.


Who We Help:


The Yellow Bus Foundation is proud to support its 2016/17 charity partners:


This year, I am very proud to say that a small group of a little more than 30 of us managed to raise over $420,000.

The weather cooperated and we all managed to play more than 100 holes in about 14 hours.

I have to say the older I get the longer it takes me to recover but the short term pain is well worth the satisfaction we all receive.




MacNicol & Associates Asset Management Inc.

David A. MacNicol, B.Eng.Sci., CIM, FCSI

President, Portfolio Manager
September 2016