September 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 some of the people at 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.


“Many of life’s failures are really people just not realizing how close they were to success when they gave up”. –Thomas A. Edison




…or is it?


Shortly before Monthly Commentary goes to print, a wave of students and teachers will return to the classroom for another year of learning, development and experiences. The Toronto District School Board [TDSB] alone has over 250,000 elementary and high school students, 31,000 permanent staff and 8,000 temporary staff. That’s 290,000 people who all have to get where they need to go on the first day of school and that is without counting the other Toronto school boards [there are 4 more] or the GTAs vast assortment of colleges, universities and technical schools. These people have for the most part been ubiquitous throughout the GTA during the summer months: after all parents, teachers and students do not simply vanish into thin air in June and then “re-spawn” in September. True, the summer schedules of many students and teachers are a lot more laissez faire than what awaits them every September. The traffic patterns of Muskoka are likely to resemble the traffic patterns of Toronto’s Yonge Street during summer months. But the fact remains that, come September, parents, teachers and students will all have to reach a common location at a common time. In short, the first week of school will be all about patience, especially for drivers.


Canadian equity investors know a thing or two about being patient.


The performance of Canadian equities has been a tough pill to swallow thus far in 2017 especially when compared to the bourses south of the boarder. Our investment team had difficulty tracking the number of times major US indexes hit all time highs. However, it wasn’t always like this, February of this year there was nary a hint of indication that the love affair between US and Canadian markets was on the rocks. The two indices were inseparable and tangoed together like dance floor veterans.


Since that time however, the two indexes could not be more different.


As seen in chart #1, the TSX is now officially negative for the year and trailing its American counterpart by an embarrassing wide margin. Canadians with US domiciled investments got “some” relief in their portfolios but only from February until late April. Those gains were eaten alive by the Canadian Dollar, which rallied from the low $0.70s to hit $0.80s in late July. Clients and Portfolio Managers alike were not amused, but more on this in a moment.


For the time being let’s conclude that at some point money will naturally begin flowing into attractively priced Canadian equities. The resources patch is fresh off a 24-month long beat down and represents attractive valuations for real assets, and underlying company fundamentals that are about as lean as Iggy Pop. This patch represents opportunity, and somewhat of a safety net to those willing to step up. Thanks to attractive valuations, many Canadian firms can miss earnings expectations by a mile and be spared a vicious stock market drubbing. The wild card remains the Canadian dollar, we will examine this further in a moment.


US equities are a totally different story: miss by a penny and “look out below”. Unforgiving is probably the best way to describe US equities. At MAAM we closely monitor a variety of domestic and global financial markets firstly with an eye towards risk and secondly with an eye for opportunities. While resources stocks in Canada represent a compelling value propositions, we continue to play wait and see. In the mean time, we may capitalize on Canadian dollar strength to review our shopping list of US Equity ideas. Our friends in Europe should review their own shopping list of investment ideas by looking across Atlantic. Euro strength makes Canadian equities more affordable and US equities that have not gotten too far ahead of themselves somewhat of a bargain.


September is indeed a wonderful time of the year but it can be scary if you don’t know what your game plan is. Taking a look at your investments in the context of your overall financial plan is critical to achieving your long-term goals. We welcome the opportunity to sit down and discuss your financial needs with you.



Birds of Prey?



Earlier this summer, this Portfolio Manager vacationed on the shores of Doe Lake in beautiful Katrine, Ontario just south of Burks Falls. On this yearly pilgrimage, all ties to the outside world are periodically severed. No televisions, no computers and no smart phones…okay, okay those are locked up in vehicles at the top of a hill located about a half kilometer from the cabin. It was on this pilgrimage this Portfolio Manager was reminded of his appreciation towards our nation’s beloved national bird the Loon. The Loon can be found in much of Canada, featuring striking black-and-white plumage, the ability to dive up to 80 metres and a call that is so quintessentially Canadian.






The currency bearing the Loon’s image on the other hand is another matter…


At $0.82 the Canadian dollar’s meteoric ascendance through May, June, July and here again in the early rounds of September, reflects a great deal of confidence in the Canadian economy and a great deal of confidence in higher Canadian interest rates. Bank of Canada Governor Stephen Poloz did not disappoint, earlier this week he raised short-term interest rates by 0.25% cementing $0.80 as more of a floor and less of a ceiling for the Loonie, at least for the time being. We were not exactly sure what to make of this, nor – would it appear – were dozens of our colleagues. Some market observers interpreted the Bank of Canada’s move as removing the final bit of accommodation associated with the oil price shock of Q4, 2014 and returning our national monetary policy to the level it stood at for five years following the global financial crisis. However, other market observers view the rate hike as problematic since recent Canadian economic data has been mixed. On the one hand you have throngs of reports touting Canada’s economy as “red hot”, on the other you have a plethora of reports suggesting that Canadians coast-to-coast are riding an economic expansion that is debt fueled, wafer thin and beginning to show signs of stress.


Meyers, Norris, Penny LLP., a large Chartered Accountancy, Assurance and Insolvency firm recently wrote a report that stated:


“…over 70% of Canadians rate their ability to cope with a 1% interest rate increase as less than optimal. Moreover, the majority of Canadians (77%) would have difficulty absorbing an additional $130 per month in interest payments on debt”.  


That second sentence truly is scary. So, is the Loonie set to batter the Eagle further on a one-way trip to parity or are Canadians simply living on a prayer?


As the saying goes “it’s complicated”


But before we say why, something of a disclaimer:


We are not fast-paced, frenetic global macro investors. Our clients are not short-term, highly caffeinated hedge funds or institutional, program traders whose attention spans are measured in nano-seconds. Our clients are Canadians who want to save for their future, outpace inflation and always afford their lifestyle.


With that said, it is hard not to look globally for answers to domestic problems, such is the reality of an increasingly inter-connected and globalized world. The Canadian dollar has just about swallowed US Dollar whole but the subtle nuance in the exchange rate is not so much Loonie strength as it is Greenback weakness. The US dollar itself has declined substantially off its post US election highs.


We all the cover of the December 2016 cover of The Economist. This Portfolio Manager inadvertently “misappropriated” a copy of this very edition of The Economist from his daughter’s dance class back in 2016. Back then it was tough to find anyone who thought that the US dollar might decline and it was tough for me to put the magazine down. Idea was simple: Trump would usher in a new era of Reaganesque free-market delirium. We all know how that story is going, oh and I did return the said copy of The Economist to the said dance class upon discovering my malfeasance, and yes it had notes, underlines and highlights on almost every page. In the end the US Dollar declined for the very reason that no one thought it could.







US Dollar index weakness has a bewildering multiplicity of effects on a variety of asset classes. Not the least of which is our beloved Loonie. But take a look at its impact on Gold.













US Dollar denominated version of gold’s price chart are looking pretty good as of late.













What’s the story in other global currencies?







This is Gold priced in Euros, not as convincing compared with USD.














Gold priced in Yen. Until very recently nothing earth shattering either.














In other words gold appears to be moving higher only because the US Dollar is moving lower. The US dollar is moving lower mainly because of the Trump administrations inability to coalesce with Congressional leaders. At the same time, structural reforms in Europe and the temporary reprieve in the populist movement have caused the Euro to move sharply higher in 2017. Have a look at the below chart of the Euro.


Euro strength, this is a huge problem for ECB President Mario Draghi. For one thing, a pricey Euro makes European stocks that much more expensive for foreign investors to buy. It also makes Draghi’s hopes of escaping balance sheet expansion that much more precarious. Look for a euro style “tapper tantrum” coming to a bourse near, or far from, you.

American investors having purchased European equities back when “Trump-mania” was taking the world by strong are the real winners in 2017.


Back to the Canadian Dollar


$0.82 is a tough level for the Loonie but as we showed in the beginning the Loonie is a tough bird and if there was one global currency that can punch above its weight it would be the CAD. Yet if you figure the US Dollar to be pricey even today, assume that no one is really in charge of the White House and theorize that the Eurozone’s economic expansion continues to move forward, then what you have is an awful lot of external global support to a $0.80+ Loonie. In other words, the Loonie isn’t intrinsically good nor is the Canadian economy in sterling shape, both are simply the beneficiaries of global externalities. Maybe that is why on September 6, the Bank of Canada slipped in one last rate hike for the year with the following tag line in their monetary policy report:





“Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates”.










We at MAAM struggled hard with the decision about whether to hedge or not. In the end, we balked at the chance to buy Canadian dollar shock absorbers for foreign investments. Hedging always costs money but it does not always work. Perhaps, the currency Gods are reading too much into the Bank of Canada’s moves or Canada’s supposedly red-hot economy. In summary, the Loonie is a bird of prey, it is strong until it’s not. Left to its own devices, the Loonie would probably be trading lower relative to its US Dollar peer but as the saying goes, it’s complicated.


Our view is the best hedge for anything at this point in the cycle is US dollar denominated equities that haven’t gotten too far ahead of themselves. We will let you know how this worked out for us in the near future.



Hurricanes Harvey & Irma


MAAM has been working closely with our partners in the United States to evaluate our exposure to property damage resulting from hurricanes. As of the time Monthly Commentary goes to print, we can report that 4 of 150 properties indirectly held by our 360 Degree Real Estate Income Fund were impacted by Hurricane Harvey. MAAM can confirm that each property affected only sustain minor wind and water damage, and is covered by $50 million worth of private flood and named storm insurance. At the present time we do not have updates regarding Hurricane Irma. The long-term fundamental reasons for us investing in these areas remain firmly intact.  MAAM will continue to monitor the situation closely in order to protect client capital.


The residents of Texas and Florida remain in our thoughts.



Firm News: A Message from the MAAM Investment Team


MAAMs investment team reminds all readers that safety is everyone’s responsibility. Please always exercise caution when driving but especially in and around school zones. Our precious children are this great nation’s future.


Bob Farrell


Bob Farrell is a Wall Street veteran who draws on some 50 years of experience in crafting his investing rules. After finishing a masters program at Columbia Business School, he launched his career as a technical analyst with Merrill Lynch in 1957. Even though Mr. Farrell studied fundamental analysis under Gramm and Dodd, he turned to technical analysis after realizing there was more to stock prices than balance sheets and income statements.


Bob’s 10 rules on investing stem from personal decades of experience with dull markets, bull markets, bear markets, crashes and bubbles. In short, Bob Farrell has seen it all and lived to tell about it.


With many students returning to the classrooms and cottages and amusement parks entering their fall swan song, the MAAM investment team thought it prudent to review Mr. Farrell’s 10 investing rules for perspective and clarity on where we are, and where we are going:

In Bob’s final commentary he underscores the danger of myopia and encourages all investors to approach their financial goals with foresight and discernment. After all narrow-mindedness and intolerance are the enemy of the investor.


Bitcoin Documentary: Banking on Bitcoin


Netflix recently ran a documentary on Bitcoin the worlds most widely used digital currency. The documentary directed by Christopher Cannucciari featured interviews with enthusiasts and experts, and covered Bitcoin’s roots, its future and the technology that makes it tick. MAAMs investment team recently began making initial investments in digital blockchain technology, the infrastructure behind Bitcoin and other cryptocurrencies. This might just be the most interesting 1h, 43 minutes you’ll watch all season.


A link to the documentary can be found here:






September 2017