News & Events Archive
December 2011 Market Commentary: In Need of Credible Policies
December 9th, 2011The month of November produced mixed results for North American stock markets. The Dow Jones Index was up marginally at 0.7%, NASDAQ down 2.4% and the TSX and S&P 500 down marginally at 0.4% and 0.5%, respectively. The markets were heading for a downturn for the month until the last day when global central bankers announced a coordinated effort to provide U.S. dollars (liquidity) to financial institutions (likely European banks) that were having difficulty raising funds. With this announcement, stock markets soared and ended the day 4.0% higher, having erased much of the month’s losses.
Liquidity has been a powerful force for stock price movements since the financial crisis of 2008. Below we highlight the relationship between liquidity growth (purchasing of assets with U.S. dollars) and stock market movements by geographic location. The U.S. Federal Reserve and the Bank of England (BoE) have provided significantly more liquidity than the European Central Bank (ECB). The result is these markets have performed noticeably better.
In many ways the troubles in Europe resemble those of the U.S. in 2007 to 2009. The U.S. problem in 2007 was related to a weak housing market caused by easy credit conditions that impacted the banking sector and financial markets. Today, in Europe, the problem is related to weak government finances (again caused by easy credit conditions) impacting the European banking sector leading to tighter financial conditions (less lending by financial institutions) and a weaker economy. We believe there are many lessons Europe can take from the U.S. experience.
See the complete commentary attached below:
In many ways the troubles in Europe resemble those of the U.S. in 2007 to 2009. The U.S. problem in 2007 was related to a weak housing market caused by easy credit conditions that impacted the banking sector and financial markets. Today, in Europe, the problem is related to weak government finances (again caused by easy credit conditions) impacting the European banking sector leading to tighter financial conditions (less lending by financial institutions) and a weaker economy. We believe there are many lessons Europe can take from the U.S. experience.
See the complete commentary attached below:
2012 Investment Outlook Presentations: Audio / Visual
November 23rd, 2011Were you unable to attend this year's 3Macs Investment Outlook seminars held in Montreal, Toronto, London, & Kingston? We are pleased to provide you with both the audio recordings of our speaker's presentations as well as their presentation notes, posted below.
Please contact your 3Macs Investment Advisor directly for further information, or email macdougall@3macs.com.
November 2011 Market Commentary: Super Mario to the Rescue?
November 9th, 2011The month of October was a strong one for equity investors. In Canada, September’s loss was partially reversed by the strong month of October with the TSX up 5.4%. In the U.S., all major stock markets reversed September’s losses. For the month the S&P 500 was up 10.4%, the Dow Jones up 9.5% and NASDAQ up 11.1%. The prime cause for the rally (some call it a relief rally) was due to the agreement the Euro-zone members struck with the financially troubled country of Greece. Prior to the agreement many investors felt the financial markets would need to go through another “Lehman” moment, whereby a sudden default from a relatively small country, in this case Greece, would cause a massive ripple effect across financial markets and another severe recession. Last minute negotiations among Greece, France and Germany prevented this from happening, despite some nervous events along the way. There are other European countries that will likely need assistance (think Italy and Spain) so this saga is far from over, but we do feel we have a powerful friend/ally in the newly appointed President of the European Central Bank (ECB), Dr. Mario Draghi (or his nickname has become Super Mario). He assumed the presidency of the ECB on November 1.
Dr. Draghi is well versed in financial markets and is a trained economist, unlike the previous ECB boss Jean-Claude Trichet. Dr. Draghi earned his doctorate in economics from MIT and studied under two Nobel laureates; Dr. Franco Modigliani (known for his work on capital markets and monetary policy) and Dr. Robert Solow (known for his work on economic growth). In contrast, Mr. Trichet’s education was in political science.
Dr. Draghi’s first decision as President of the ECB was to lower interest rates by one-quarter of one percent. This may seem a trivial move, but this was not expected, as most forecasted Dr. Draghi to continue the policies of the former president and leave interest rates alone. Mr. Trichet’s philosophy and indeed the ECB is deeply rooted in a different era: an era of high inflation.
See the complete commentary attached below:
Dr. Draghi’s first decision as President of the ECB was to lower interest rates by one-quarter of one percent. This may seem a trivial move, but this was not expected, as most forecasted Dr. Draghi to continue the policies of the former president and leave interest rates alone. Mr. Trichet’s philosophy and indeed the ECB is deeply rooted in a different era: an era of high inflation.
See the complete commentary attached below:
2012 Investment Outlook
October 12th, 2011The MacDougall, MacDougall & MacTier Inc. 2012 Investment Outlook Seminars will be held in Montreal, Toronto and Kingston, Ontario this fall.
Please refer to the invitations by seminar location below:
Montreal Invitations: (English) (French)
Toronto Invitation: (English)
Kingston Invitation (English)
For further information about any of these seminars, please contact your 3Macs representative or email investoutlook@3macs.com
October 2011 Market Commentary: Waiting on Europe
October 6th, 2011September was a poor month for equity investors as all major stock indices fell. The sell off in equity markets resulted from two broad concerns/fears: The first is the current economic slowdown underway. Investors have recognized the global economy is slowing, but the length and severity of the slowdown/downturn is unknown. There are several respected economists who argue both the U.S. and Europe are in a recession. The second concern and the more worrisome is the financial health of the peripheral countries in Europe. The term peripheral is used as they are relatively small countries in relation to their economic contribution to Europe. These countries include Greece, Ireland, Portugal and Spain. They each have large debt and deficits as a percentage of their Gross Domestic Product and need to re-finance some of their debt. The most worrisome country is Greece. It is very likely to default on its debt and is basically “shut out” of the capital markets. A disorderly default by Greece could cause a banking crisis impacting some of the largest European banks. If Greece is left to default in a disorderly way, a contagion could arise. We use the word contagion as investors will be very reluctant to fund other countries with high debt and deficits. Should these larger countries be unable to “tap” the bond market, more defaults could occur affecting more financial institutions. A banking crisis/contagion would certainly affect all of Europe and could easily spread globally. To many investors the events of the past few months seem eerily similar to what happened leading up to the 2008 financial crisis; with equity/commodity markets selling off, volatility rising and safe haven assets (U.S. dollar/ U.S. treasury bonds) becoming the prime investment vehicles.
Our view is the slowdown could well turn into a U.S and European recession, but a large scale contagion is unlikely, as European policy makers are currently working on a framework that provides countries with access to reasonable financing rates while fiscal solutions are implemented to restore investor confidence. European policy makers recognize the consequences of failure are unacceptable and are likely to do whatever it takes to avoid another full-blown financial crisis. As German Chancellor Angela Merkel states:
“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece...the danger that it hits everyone, or at least a number of other countries, is very big...I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”- Source: Bloomberg, September 13, 2011
See the complete commentary attached below:
“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece...the danger that it hits everyone, or at least a number of other countries, is very big...I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”- Source: Bloomberg, September 13, 2011
See the complete commentary attached below:
September 2011 Market Commentary: Life in the Slow Lane
September 12th, 2011August was a poor month for equity investors. For the month the TSX was down 1.4%, but fared much better than their U.S. counter-parts. All three major U.S. indices were down for the month. The biggest drop came from NASDAQ (down 7.0%), followed by the S&P 500 (down 5.7%) and the Dow Jones Index (down 4.4%). Government bond prices rose (interest rates fell) as investors sought safe haven securities. For the month of August, U.S. Ten-Year Treasury yields fell from 2.8% to 2.2% and Canadian Ten-Year Government bond rates fell from 2.8% to 2.5%. The cause of the decline in stock indices is due to concerns over the state of the U.S. and global economy. Most of the economic data continues to be poor and economists have clearly underestimated the level of weakness, but the data appears to be consistent with an economy still growing but at a very slow pace as opposed to pointing to a renewed recession (the so called double-dip recession).
One of the economists we read and respect is Professor James Hamilton at the University of California, San Diego. He regularly writes a blog called Econobrowser (http://www.econbrowser.com/). He comments on various economic releases and uses the data to forecast the probability of a U.S. recession. His record has been excellent, calling a recession well before the National Bureau of Economic Research (the official body that declares if the U.S. is in recession). His probability of being in a recession is quite low versus consensus (around 35%). Based on the economic data at the end of July he places a probability of a recession that started in the first quarter of 2011 at only 14.4%. He has not updated his probability given the various poor economic statistics released in August, but on his blog (September 2) he writes the following:
See the complete commentary attached below:
August 2011 Market Commentary: Fighting Fear
August 8th, 2011July was a harsh month for equity investors as the Toronto Stock Market fell by 2.7%, while the S&P 500 fell by 2.2%. Near the end of the month investors became concerned about the ability of the US Congress to “routinely” pass legislation to increase the federal government debt ceiling (to allow payment of interest on their debt and entitlement programs). Once the US debt ceiling was passed markets bounced back but quickly (within hours) reversed as disappointing economic news reminded investors that economic growth, though not recessionary, is slowing. With confidence/fear waning/rising on August 4th European debt problems resurfaced putting further pressure on confidence and causing a large one day sell off. The base case forecast for economists is the US and global economy will continue to grow, though at subpar levels.
We have noticed the reappearance of the R word (recession) has taken hold in the press which further undermines confidence. By our reading, the economics community has increased their projected probability of a recession in the U.S. and other developed countries (not Canada) to the 30% to 35% range. One of the economists at the U.S. bank J.P. Morgan states “We would put the odds of a recession in the U.S. and U.K at 1/3, compared with a normal risk of 1/6 as recessions have happened on average every six years or so.” Fear, unfortunately, can feed upon itself as confidence about the future wanes and a negative feedback loop develops (consumers slow their spending, therefore businesses either let employees go or do not hire and those affected employees slow their spending etc) and confidence/fear further deteriorates/rises. In the past we could look for governments/central banks to restore confidence, but many investors are saying they are part of the problem (government deficits are too large, their ability to deal with problems on a bipartisan basis is questionable, the loss of confidence in paper currencies are but some examples). Finally, on late Friday August 5, the U.S. credit rating was lowered by one (Standard and Poor’s) of the three largest rating agencies one notch to AA+ from AAA.
See the complete commentary attached below:
July 2011 Market Commentary: Mid Cycle, Not End of Cycle
July 6th, 2011The month of June was particularly harsh for Canadian investors as the TSX was down 3.6% for the month and down for the year at 1.1%. U.S. markets performed considerably better as all three major indices we follow; the S&P 500, the Dow Jones Industrial and NASDAQ recorded gains of 1.8%, 1.2% and 2.2%, respectively and 5.0%, 7.2% and 4.5% year-to-date. After lagging the Canadian market for the seventh consecutive year, the U.S. market appears set to outperform the Canadian market, at least in the short-term. We do note that the Canadian dollar adjusted returns would be weaker as the Canadian/U.S. dollar is up/down 3.5% for the year. Despite negative returns for Canadian investors for the month/year-to-date, investor sentiment turned decidedly positive in the last week of the month as investors appear to embrace early hints that stronger economic growth (more later) and greater stock market returns lie ahead in the second half of the year.
We continue to believe the global economy (Canada included) is transitioning to a slower rate of growth, not a collapsing (recession) economy, despite recent (and likely on-going) threats to the stability from Europe’s periphery countries (Greece, Ireland, Portugal, etc.) and the ongoing tensions over raising the U.S. debt ceiling. With a slowing of the global economy, earnings growth will likely slow and equity returns will likely be moderate, generating solid single-digit returns, not the mid teens and higher equity returns we have experienced in the past two years. We continue to believe the “old” highs of the TSX (June 2008 of 15,155)will be surpassed in the next two years and retain our 2011 year-end TSX target, which we feel is conservative, at 14,250 which we established late last year.
See the complete commentary attached below:
June 2011 Market Commentary: Do Lower Bond Yields Lead to Lower Equity Markets?
June 7th, 2011The month of May was not a very merry one for equity investors. The stock market in Canada fell by 1.0%, while in the U.S., the S&P 500 fell by 1.3%, the Dow Jones fell by 1.9% and the NASDAQ fell by 1.3%. Bond and income seeking investors ”won” the month as long-term interest rates fell pushing up bond prices and non-economically sensitive high-dividend yielding equities. Long-tem interest rates (Government of Canada 10-year Bonds) in Canada fell by 13 basis points (one basis point is one hundredth of a percent), while 10-year Government Bond Rates in the U.S. fell by 23 basis points. The prime reason for the decline in interest rates is over renewed concerns about the direction of the economy and debt worries in Europe.
Recent economic data has been softer than most economists’ expectations, indicating a general slowdown in the global economy. The news for the month has been particularly weak from the U.S. as house prices, housing starts, employment gains and industrial production was weaker than expected. We are not of the opinion that we are entering a recession (a contraction in the economy), but we are transitioning to a slower growth rate in the economy, which typically happens after an initial bounce from a recession. A mid-cycle economic slowdown is very different from an end of cycle (recession) event. The former is associated with an increase in equity markets, albeit at a slower pace than the previous two years, while the latter is associated with an equity market decline. We feel the former situation will prevail.
The biggest risk to our forecast is the price of oil. It was in mid-December of last year that oil prices rose from US$88 a barrel to over US$110 due to political concerns in the Middle East
See the complete commentary attached below:
3Macs Participates in Défi Canderel
June 6th, 2011Défi Canderel began 22 years ago when Jonathan Wener’s wife, Susan, was diagnosed with cancer. He asked how he could help, and Susan’s Doctors told him he could improve the lives of others by donating to cancer research. Rather than simply making a donation, he began working on an idea to create a large-scale corporate fundraiser that would have an impact far greater than he could achieve alone. He began rallying support, approaching business partners, suppliers and friends, and soon the “corporate challenge”, the Défi Canderel, was born.
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To enter, corporations simply make a donation of $2,000.00, which allows them to participate in the event with five (5) runners. The run is a short 3 KM run in downtown Montréal. The event begins around 11:30 and ends around 1:30. Lunch is served to all participants. It’s a great day and one which we know all participating teams enjoy.
May 2011 Market Commentary: Can Equities Keep Moving Up?
May 10th, 2011The month of April saw U.S. stock markets (S&P 500 and DJII) hit new cycle highs, while the TSX was down slightly (1.2%) for the month. Shortly after the month-end, stock markets sold off over various concerns, none of which appeared to be new to us, but nevertheless markets reacted. The numerous concerns have recently been tabulated by the U.S. firm Merrill Lynch. To obtain and rank these concerns, the company has started to send out a quarterly questionnaire to institutional investors (mutual funds, hedge funds, pension funds).
The “new” concern in the quarter was the high price of oil. Other concerns that are high on the list, though not new, are inflation and sovereign (country) debt levels. We suspect one concern that would have been high on the list one year ago would have been the possibility of a double dip/deflation environment. Today, it barely registers as a concern, with less than 10% of respondents citing it. Despite these “rotating” concerns, markets continue to move up and we believe this upward trend will continue. It does appear the stock market may be in for a pause for the next two to three months, as the global economy shows signs of transitioning to a slower growth rate.
We continue to feel equity markets are attractively valued for purchase, as the alternative to equities is near zero returns on fixed income securities and cash. Typically, the other variable (in addition to the level of interest rates) that determines the performance of the stock market is profit growth. We see no sign that increasing profits are about to end.
See the complete commentary attached below:
April 2011 Market Commentary: Shock Absorbers
April 5th, 2011The month of March proved to investors how resilient the stock market has become. During the month, it was faced with two unexpected events; a sudden rise in oil prices (approximately US$10 a barrel) and a devastating earthquake/tsunami in Japan (the world’s third largest economy). Despite these shocks, world equity markets were essentially unchanged during the month and up strongly for the quarter. The Morgan Stanley Composite Index (MSCI AC) closed the month at 343.64, basically unchanged from February’s month end of 344.82. Closer to home, the TSX closed at 14,116.1 versus 14,136.5 (down 0.1%), while the broad U.S. stock market (S&P 500 Index) closed at 1,325.8 versus 1,327.2 (down 0.1%). For the quarter, equity markets were strong with the TSX up 5.0%, the S&P 500 up 5.4% and the MSCI AC up 3.9%. The Japanese stock market (Nikkei 225) fell by 8.2% for the month. Given the challenges the country faces, it was much less than many had expected. Judging by the headlines and “nuclear” problems, many would have expected a much greater decline (in the 20% range). The rebuilding of the areas affected in Japan will certainly cost more than the previous earthquake (Kobe in 1995) and the country faces an oil price materially higher today than in 1995 (US$30 a barrel). In 1995 the Nikkei fell by 12%.
How can we account for these muted declines in the stock market? We believe there are several variables at play or “shock absorbers” that have lessened the impact of not only these exogenous (unforeseen) events, but more importantly other unforeseen events (within reason) that may occur. First we deal with the current shock; oil and Japan and then discuss why we feel the stock market can withstand other “reasonable” shocks.
Energy: The price of oil was already on the rise prior to the unrest in the Middle East. The rise started as the global economy recovered from the recession. At the depth of the economic downturn, oil prices (West Texas Intermediate) hit a low of US$35.12 a barrel and continued to rise and by mid-December 2010 (what we believe was just prior to the uprising in the Middle East), oil was at US$88 a barrel. Currently, the price of oil is US$108 a barrel. We attribute the rise in the price of oil from December to the events in the Middle East. Global economic growth is very strong (more later) accompanied by supportive monetary policy (low interest rates) and in our view, will not alter the direction of the overall economy. As a reminder, oil prices peaked in October 2008 at US$148 a barrel and interest rates were much higher.
Oil has become less important for economic growth. We illustrate this in the graph below. Our starting point is 1980. With the exception of Saudi Arabia, all countries energy intensity has lessened, in some cases (China), dramatically.
See the complete commentary attached below:
Stock Market Commentary
March 15th, 2011The month of March looks like it is going to be a negative one for the TSX. Unfortunately, this will break the nine month consecutive gain of the stock market (see below). The question we ask ourselves is: is this a, "normal" stock market correction in an ongoing secular (lasting several years) bull market or the start of a secular bear market? We find it difficult to argue the latter. We present our case below:
History shows that once the economic recession is over and stock markets move up, they continue to move up (though not every month) and pass the previous stock market highs. Please refer to our first graph on the following page. Currently, we are still below the highs of the previous economic cycle. We do not believe this stock market cycle will prove to be any different.
There are few, if any, economists calling for a recession. The rise in oil prices will have a dampening impact of the rate of economic growth but a recession, in our view, is very unlikely as the low interest rate environment even with higher energy prices is conducive for further economic expansion. We wrote about this in our last monthly commentary. The second graph below was taken from our last monthly commentary. Oil prices have since declined slightly while the shapes of the yield curve remains very steep (indicating economic growth is stil intact). Only when we get a spike in oil prices and short-term interest rates are at or above long-term interest rates (an inversion in the yield curve) does a recession occur.
See the complete commentary attached below:
