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Wealth Notes

November 2018

The markets are sending a message.


The price of gold, the price of bonds, the price of real estate and the price of stocks are all falling together.
I have been a market observer and investor for many years and I cannot recall a time when all assets lost value at the same time. The only place to hide has been the short-term money market, where we have almost 50% of our assets invested.

The returns are low, but the money is safe and interest rates have been rising regularly, which is helpful.
I have been cautious for some time and it is starting to pay-off.
The FAANG stocks, which led the market higher, have been leading the market lower amid warnings that revenue and profits are experiencing much slower growth.
Housing in North America has been suffering for about seven months, and there is no sign of relief as interest rates continue to escalate, seriously impairing affordability. Housing is important because so many other industries are dependent on a strong housing market. The home building stocks are at new lows.
Home Depot and Lowes are also seeing their stocks weaken.

The cannabis stocks are weak, but it is too soon to get a handle on their operations. My problem with the industry is the huge number of shares they sold at low prices in their start-up phase. For example, Aurora Cannabis has about a billion shares outstanding. If we assume the company earns as much as a billion dollars after tax, it’s only $1.00 per share and the shares are trading at 9 times that number today.

The Canadian banks are down about 11% from their highs in January, so no matter where one looks, the stock prices are lower.
Oil has fallen into bear market territory, and the metal stocks are struggling.

Higher interest Rates and shrinking money supply are the culprits causing all assets to fall in value. The problem is more of the same medicine is on the way, as Central Banks try to unwind 10 years of stimulus.
The markets are sending a message and it is beginning to be quite painful. The European Central Bank is slated to withdraw their QE program next month, and their banks are more fragile.
In the midst of this period of growing financial stress, the U.S. Office of Management and Budget announced they must raise $1.43 Trillion in the bond market to finance spending in the face of falling tax revenues.
Japan, China and the Euro area have indicated they will be reducing their purchases. Consequently, the bond market will be stressed to absorb such a huge supply of debt, putting more
upward pressure on interest rates.

A fantastic opportunity.

To bargain hunt is going be available in the not too distant future. Each day the markets decline, more and more investors approach the panic stage and prepare to rush for the exit. It always happens and this time will be no different.

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WealthNotes

The Federal Open Market Committee (FOMC) reduced the central bank rate by 0.25% yesterday. The Dow closed down 334.75 points (1.22%) which reflects the disappointment that the cut wasn’t 0.50%, with promises of more stimuli to follow.

The market fully recovered that loss early today but Trump’s announcement of additional tariffs of 10% on over $300 Billion of Chinese exports caused that gain to evaporate to a loss of another 280 points (1.04%).

The FOMC is walking a delicate tightrope. If they had made a bigger cut and promised more stimuli, investors would have interpreted that as confirmation that the economy is in worse shape than is understood.

The question period after the announcement was an amazing display of circumlocution. I found it quite understandable because the US economy has some pockets of weakness that are concerning but the indicators are not universally bad.

I will give them the benefit of the doubt for the time being but I suspect that the 20% market decline in late 2018 increased pressure from Mr. Trump to cut rates. Trump does not want a strong US currency or falling markets.

He has been trying to talk down the US currency.

The European and Asian economies are clearly in a slowdown, which will impact the US in due course. This cut in rates could be the FOMC’s response to the risk from external weakness. The European Central Bank is promising to join in with more stimuli. Their rates are already negative, which is killing the European banks.

The FOMC denies that more cuts will be automatic unless the economy needs more help. I don’t believe that statement, because there has never been just one cut and done through history.

They seem to be trying to get out of the way of the financial markets, rather than promise to come to the rescue of investors if markets decline. This is probably the most important message because investors have been rescued from falling markets since 2009 and have been expecting this to continue.

Currently, short-term bond yields, have fallen below the Fed’s new rate. Clearly, the bond market is anticipating more rate cuts.

All-in-all, the rate reduction is not meaningful. In the meantime, we are implementing a significant adjustment to our portfolios with the expectation the change may provide a solid gain over the next few months.  There is no guarantee of course but it is a strong likelihood.

Sincerely

Bruce Sansom

 

 

 

 

 

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Investment Wisdom

WealthNotes

WealthNotes

The Federal Open Market Committee (FOMC) reduced the central bank rate by 0.25% yesterday. The Dow closed down 334.75 points (1.22%) which reflects the disappointment that the cut wasn’t 0.50%, with promises of more stimuli to follow.

The market fully recovered that loss early today but Trump’s announcement of additional tariffs of 10% on over $300 Billion of Chinese exports caused that gain to evaporate to a loss of another 280 points (1.04%).

The FOMC is walking a delicate tightrope. If they had made a bigger cut and promised more stimuli, investors would have interpreted that as confirmation that the economy is in worse shape than is understood.

The question period after the announcement was an amazing display of circumlocution. I found it quite understandable because the US economy has some pockets of weakness that are concerning but the indicators are not universally bad.

I will give them the benefit of the doubt for the time being but I suspect that the 20% market decline in late 2018 increased pressure from Mr. Trump to cut rates. Trump does not want a strong US currency or falling markets.

He has been trying to talk down the US currency.

The European and Asian economies are clearly in a slowdown, which will impact the US in due course. This cut in rates could be the FOMC’s response to the risk from external weakness. The European Central Bank is promising to join in with more stimuli. Their rates are already negative, which is killing the European banks.

The FOMC denies that more cuts will be automatic unless the economy needs more help. I don’t believe that statement, because there has never been just one cut and done through history.

They seem to be trying to get out of the way of the financial markets, rather than promise to come to the rescue of investors if markets decline. This is probably the most important message because investors have been rescued from falling markets since 2009 and have been expecting this to continue.

Currently, short-term bond yields, have fallen below the Fed’s new rate. Clearly, the bond market is anticipating more rate cuts.

All-in-all, the rate reduction is not meaningful. In the meantime, we are implementing a significant adjustment to our portfolios with the expectation the change may provide a solid gain over the next few months.  There is no guarantee of course but it is a strong likelihood.

Sincerely

Bruce Sansom

 

 

 

 

 

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