Asset protection

Are You Prepared For The Melt-Down?

A recession is coming, that much we should all be able to agree on. Sure, we can debate the exact timing, but the reality is the global economy is going to have a significant melt-down soon.  And when the economy falls into a recession the stock markets go down with it. It may be starting today, or start next week, or not until next year, but make no mistake, it is coming.

Not only are we sure it is coming, we are convinced that the next recession will be much deeper and far more caustic than previous recessions. We say this because the next recession will be truly global. We believe that the coming recession will make the 2007–2009 period seem like a cake walk…..CLICK for complete article

March Madness

Global financial markets had a tremendous start to the year and continue to hold up well in March. Positive drivers for the markets have been the U.S. Federal Reserve’s pivot to a more accommodating stance, indications of a potential U.S.-China trade deal, corporate stock buybacks and so on. On the other hand, slowing global growth, rising recession fears, and Brexit uncertainty continue to hang on the wall of worries for investors. We will revisit these concerns below.

Given the extent of the rally from the Dec 24, 2018 lows, it would in fact be healthy for the markets to take a breather here and digest the gains year to date without reaching levels of madness. From a charting perspective for the S&P 500 (bellwether index), the area of 2800 to 2820 is of most interest and importance. This range serves as a key area of battle between buyers and sellers. Recent attempts to break above or below this range have only seen prices get pulled back into it shortly after. We could see prices consolidate and trade sideways here for a bit longer. At the same time, this area is important because a sustained break above or below this range could move the S&P 500 higher to challenge its previous all-time high at 2940 or lower to retest the 2650 level. In short, we are at an inflection point, reflecting the mix of positive and negative macroeconomic factors.

Let’s briefly revisit the key concerns and see how they have developed.

Concern #1: Slowing Global Economic Growth

  • Update: 2019 Forecasted Real GDP Growth*: U.S. = 2.4% (was 2.5%); CA = 1.5% (was 1.9%); EU = 1.2% (was 1.5%); Japan = 0.7% (was 1%); China = 6.2% (unchanged); India = 7.2% (unchanged); World = 3.4% (was 3.5%)
  • Takeaway: Forecasted economic growth has moderated for certain countries and regions, such as Canada and Europe, but the world’s two largest economies, U.S. and China, which make up about 60% of world GDP are still growing at a solid pace. Hence, our eyes should be on the U.S. and China to monitor any signs of significant slowing.

Concern #2: Fear of Global Recession

  • Update: 2019 Recession Probabilities for major economies*: U.S. = 25%; CA = 20%; EU = 20%; Japan = 40%; China = 15%; India = 0%
  • Yield curve inversion, which occurs when short-term interest rates exceed long-term interest rates, has been a reliable precursor to recessions. When the yield curve inverts, financial conditions tighten because it’s not profitable for banks to borrow money under short-term rates and lend out under long-term rates. Over time, this leads to more friction in the financial system and slower economic growth.
  • Takeaway: The recent concern surrounding recession is based on the fact that the U.S. 3-month to 10-year yield curve has inverted. This makes great news headlines. However, the U.S. 2-year to 10-year yield curve, which is more widely tracked by market practitioners, has yet to invert. Furthermore, banks don’t stop lending overnight, financial conditions tighten over time. Many years of empirical data shows that even after the U.S. 2-year to 10-year yield curve inverts, the median gain for the S&P 500 is 21% in 19 months before a recession hits.

Concern #3: Tighter Monetary Policy (central banks hiking interest rates)

  • Update: The U.S. Federal Reserve remains dovish, signalling no U.S. interest rate hikes in 2019. The same goes for Canada, Japan and the Euro Zone, where no rate hikes are expected this year. On the contrary, the market is now projecting a higher likelihood of a rate cut in all the countries and regions above for the rest of this year.
  • Takeaway: This is the least of the key concerns at the moment. Accommodative central banks are a tailwind for the markets. Slower rate hikes are favourable for businesses (lower cost of borrowing) and consumer spending (more disposable income).

Concern #4: Heightened Trade Uncertainty (U.S. vs. China trade war)

  • Update: The meeting between President Trump and President Xi has been delayed at least until April. If President Trump wants to win the next U.S. election in 2020, he is likely to release pressure on the trade conflict to maintain confidence in the U.S. economy. China has a GDP growth target of 6% to 6.5% for 2019. It needs a trade deal to help reach that growth target.
  • Takeaway: Trade uncertainty remains a pending issue, but it’s in the best interest of both sides to reach a trade deal. Hence, trade conflict is likely a transient issue when viewed through the lens of politics and game theory.

*Source: Bloomberg

Ethan Dang, CFA, MBA is a Portfolio Manager at McIver Capital Management at Canaccord Genuity.

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Best Start Since 1987

It is always darkest before dawn. The fourth quarter of 2018 was full of market uncertainties and concerns, such as U.S.-China trade tensions, that gripped the global markets. Financial markets are forward-looking, forecasting machines; as a result, many of the risks were being priced into the markets during the corrective phase. From peak to trough of the correction, the S&P 500 declined about -20% and the TSX dropped about -18%. Despite the negative market sentiment, the underlying macroeconomics and fundamentals remained sound and stock valuations had returned to a more reasonable level. After the correction low was put in on December 24, 2018, investors went shopping on Boxing Day and delivered 5% and 3% gains for the S&P 500 and TSX respectively in a single day. The ensuing rally has been relentless, producing a V-shaped recovery and bringing the S&P 500 and TSX within 5% of their all-time highs. This rally has been impressive even by historical standards, producing the best start to the year since 1987.

Just as uncertainties and fear took hold of the markets last Fall, we have seen those concerns alleviated by various developments in 2019. Let’s take a look at the key concerns and see how they have been addressed.

Concern #1: Slowing Global Economic Growth

  • Counterpoint: 2019 Forecasted Real GDP Growth*: U.S. = 2.5%; CA = 1.9%; EU = 1.5%; Japan = 1%; China = 6.2%; India = 7.2​
  • Takeaway: Despite slower economic growth compared to previous years, major global economies are still growing at a good pace on aggregate and corporate earnings remain strong.

Concern #2: Fear of Global Recession

  • Counterpoint: 2019 Recession Probabilities for major economies*: 15% to 25%
  • Takeaway: Although economic recession probabilities are not insignificant, they are relatively low for 2019. Yield curve inversion, which has been a reliable precursor to recessions, has not occurred.

Concern #3: Tighter Monetary Policy (central banks hiking interest rates)

  • Counterpoint: U.S. Federal Reserve reversed their aggressive stance on interest hike rates from December 2018, expressing a patient and data dependent approach. In Canada, just one rate hike is expected in 2019, while Japan and the Euro Zone are expecting no rate hikes this year.
  • Takeaway: Accommodative central banks are a tailwind for the markets. Slower rate hikes are favourable for businesses (lower cost of borrowing) and consumer spending (more disposable income).

Concern #4: Heightened Trade Uncertainty (U.S. vs. China trade war)

  • Counterpoint: If President Trump wants to win the next U.S. election in 2020, he is likely to release pressure on the trade conflict at the maximum point of leverage to maintain confidence in the U.S. economy.
  • Takeaway: Trade uncertainty remains a pending issue and is the biggest risk for global markets, but it is likely a transient concern when viewed through the lens of politics and game theory.

*Source: Bloomberg

Given the extent of the rally from the Dec 24th low, it would not be unexpected to see a short-term pullback or consolidation develop in the markets. However, from a charting perspective, most North American stock indices have now moved back above their respective 200-day moving average, which is an important technical development and a sign of strength in this recovery. The odds of a retest of the December 2018 lows have decreased. 2019 is proving to be an interesting year for the markets, like every other year!

Ethan Dang, CFA, MBA is a Portfolio Manager at McIver Capital Management at Canaccord Genuity.

CLICK HERE to receive the McIver Capital High Net Worth Newsletter direct to your Inbox or to request account or client information from the Mcilver Capital Management team.

You Can’t Afford To Miss This

Let me get straight to the point. If you had attended the World Outlook Financial Conference last year and acted on the advice you would have made money on almost every single investment recommended. Here’s just a few examples.

We recommended Viemed Healthcare at $2.41 at the WOFC – today it trades at $5.30…up 119%.

Photon Control Inc – recommended at .62 cents at the WOFC  – today 1.17 …up 98%

Boyd Group – recommended at the WOFC at $61– today $119…up 95% – (Boyd was first recommended at under $20 at the 2013 Outlook Conference.)

Sylogist – recommended at the WOFC at $8.60 – today $13.62… up 58%

The official WOFC Small Cap Portfolio was up 66%. Incredible but let me make perfectly clear that doesn’t happen every year. However, in the 10 years since we released the first WOFC portfolio it has never failed to deliver double digit gains.

Of course, past performance is no guarantee of future results but I like our chances given that I choose our speakers based on their track record. And on that score the group of headliners – including the incredible Martin Armstrong, Keystone Financial’s Ryan Irvine and Aaron Dunn, BP Global’s Paul Beatty, Timers Digest Market Timer of the Year, Mark Lebovit, and Josef Schachter – is the best you’ll get to see anywhere.  I appreciate that’s a bold statement but their results speak for themselves.

I have to add that the results I just mentioned don’t include the incredible profits in the marijuana sector, which was first recommended by Mark Leibovit and Jim Dines at the World Outlook in 2014 – over three years before virtually anyone else in the business.  People who acted on the advice and invested in the marijuana sector anytime between 2014 and 2016 made an absolute killing.

By the way, this year’s conference will have a special session on cannabis and where to invest as we enter the second phase after legalization.

One More Thing

Martin Armstrong, who the Wall Street Journal calls the highest paid financial advisor in the world; the man whose computer model correctly predicted Brexit, the Trump’s victory, the precise date of the high in the NASDAQ, S&P, and Dow this year; is now calling for a panic cycle to begin just days before the conference with big things coming in March and May in the build-up for what he calls “The Trade of the Century.”

What’s coming in March and May and what does he mean by “trade of the century?”  Everyone at the Conference is going to find out from the man whose usual clients are governments and sovereign wealth funds. If you haven’t bought your ticket yet I urge you to join us. If you can’t attend in person I highly recommend subscribing to the streaming video archive.

Sincerely,

Mike,
Host of Money Talks

Conference Details

When: Friday February 1st from 1:00pm to 8:00pm and Saturday, February 2nd from 9:00am to 4:00pm
Where: Westin Bayshore Conference Centre, Vancouver BC
To Book Your Ticket or Video Subscription CLICK HERE or go to moneytalks.net

Opportunities in 2019

As we move into 2019 we wanted to provide you with some context on what has recently happened in the capital markets and what we can expect as we begin this new year.  We also wanted to provide you with an update on some specific components of the market such as Canadian equities and blockchain as well as provide you with an idea as to what we at McIver Capital Management are doing tactically to adjust to our current environment.

2018

2018 was both an uncharacteristic and more challenging year in the equity markets than most imagined it would have been one year ago.  The year began well enough for the equity markets in North America, with a hiccup in February which was significant enough to suggest that the market may be more fragile than in previous years. Nonetheless, by the summer both markets briefly reached all-time new highs.  This was particularly welcome for the anemic TSX here in Canada which had struggled to match the high it set back in 2014, 4 years prior.  However, after setting that new high in July the TSX slowly rolled downward, falling over 10% and now stands, depressingly, 9% below where it was almost 5 years ago.

Similarly, the S&P 500 achieved a new high in October before collapsing in dramatic fashion, losing almost 20% by Christmas Eve.

Fiscal 2018 ended with the TSX down -11.6% and the S&P 500 off -6.2%; internationally the MSCI (Europe and Japan) gave up -16% and emerging markets lost -12.3%. The top performing asset class for 2018 was cash which provided a +1.7% return.

Our sophisticated process, mathematically structured to insulate portfolios during market corrections, continued to outperform.  The primary P1 to P5 portfolios slipped between -2.99% (P1 – Very Conservative) and -4.87% (P5 – Growth) after fees over the same time frame, with all portfolios experiencing just a fraction of the market downside and volatility.  Long-term performance remains intact.

Please see our December year end performance here.

As we consider 2018 it is important to keep in mind that there were no systemic problems in the market or economy that caused the selloff, rather general confidence was nibbled away at by a thousand ducks.  The equity markets were extended and generally more expensive than in most years creating an air pocket; trade war concerns between the United States and China as the U.S. continues to seek a more equitable trade balance (and to protect against state-sponsored theft of intellectual property) shook confidence; the Republican loss of the lower House to the Democratic Party was perceived as negative for tax policy and regulation; a slowdown in Europe, and in particular Germany which may now be in recession.

While each of those listed inputs were and are valid concerns, perhaps the most impactful input has been rising interest rates driven by the U.S Federal Reserve in response to a growing economy. With U.S. GDP growing at +3.5% in the 3rd quarter, the U.S. Federal Reserve has raised rates 9 times in a row in order to keep the lid on a hot economy (and to create room to lower rates when the inevitable recession appears). However, this puts pressure on the equity markets for several reasons. With money more expensive, companies cannot borrow capital to expand as easily as they could previously, nor can investors borrow with impunity to invest as they had previously. Additionally, higher rates create a more competitive environment for investment capital as investors begin to buy more bonds, fixed income and guaranteed investments because the interest rates have become more attractive, leaving less capital for the equity markets.

2019

With the above said, markets tend to overreact to events or to new economic environments. Additionally, trade wars end and slowdowns such as the one Germany is experiencing are normal.  Again, it’s important to point out that there is no systemic economic problem, simply a market which is adjusting.

In our December note to you we mentioned that the equity market reaction to rising rates was overdone (markets had fallen too far in reaction) and that a sharp oversold bounce was likely. Our McIver Capital Management call has proven to be accurate. The equity markets have popped +9% – 10% since the market bottom on Christmas Eve but remain well below their summer highs from last year.

In the short term, Technical Research (charting) suggests that a retest of December lows is likely near the end of January or early February. Double bottoms are very typical of bull market corrections.  While this may not feel comfortable if indeed we do roll back down, such market movements are normal and natural. Since 1950 there have been 3 previous -20% peak to trough non-recession corrections and, in all instances, the market behaviour has been consistent – once the market reached its climactic low there was a sharp reflex rally followed by a retest of that low within 4-5 weeks. This supports the likelihood that the second leg of the double bottom will occur in a few weeks.

While we are not here to cheerlead the stock market and we do not pretend to have a crystal ball, research suggests that the larger picture remains positive and conducive to higher equity prices. Several factors suggest this. Firstly, inflation remains subdued and certainly under control. Secondly, the U.S. Treasury 2 – 10 year yield curve remains positive and has not inverted (an inverted or negative yield curve suggests a pending recession within 2 years). Thirdly, U.S. corporate earnings may very well beat expectations this coming quarter providing a positive catalyst for the markets. Lastly, fears of a recession are likely overblown and are not supported by the data.

We are not alone in our opinion. Market targets by the respected RBC Global Asset Management and Canaccord Genuity (among many others) both exceed 10% over the next year for both the U.S. equity markets and the TSX here in Canada.  As do their targets for Europe, Japan and emerging markets.

All this data and research suggest that 2019 should be a nicely profitable one.  If you have cash on the sidelines, you may want to consider deploying it within the next few weeks if we do indeed retest the December lows. Please just let any of us at McIver Capital Management know how we can help.

Canadian Equities – Undervalued

Canadian equity markets have dramatically underperformed the U.S. and other international markets over the past 4 to 5 years.  As mentioned earlier the TSX is now 9% below where it was almost 5 years ago.  There are several reasons for this, the most impactful being a bear market in base commodity prices which are the backbone of the Canadian economy.  However, this has been exacerbated by a lack of transparency on domestic tax policy, rising personal and corporate taxes (making us less competitive), large unexpected federal government deficits and an international business community that sees Canada as politically resistant to future growth in its resource sector.

While those current realities have resulted in a stagnant market over the past number of years, they have also created an opportunity.  Firstly, commodity prices bottomed many months ago and research suggests prices should begin to build into the next upward cycle at some point within the next year. Secondly, the Canadian economy is both resilient over time, and common sense orientated. Today Canadian companies are very much undervalued. An example would be Enbridge.  This is a stock which was trading at $63 three years ago.  Today it has solid gold assets (5,000 kilometers of pipelines) and is trading at just $47 with a 6.2% dividend.  We added this to our model portfolios last year at $43 (when it had a dividend of 7%). There are many more such opportunities in Canadian equities which we will be reviewing over the coming weeks.

Rebalance- Earlier Than Normal

We are not market timers, nor do we pretend to see the future, however if the market does begin to rollover and retest those December lows we will be conducting our annual rebalance much earlier in the year than we normally do, perhaps by the end of January. By rebalancing early, we will be safely taking tactical advantage of shorter term market anomalies.  This rebalance will result in increased positions in equities generally, including out-of-favour Canadian equities and U.S. growth positions.

Blockchain/Bitcoin/HIVE – Recovery Pending?

While 2018 was a challenging year for equities, it was a devastating one for the very speculative cryptocurrency marketplace generally.  Those millennial crypto millionaires we were reading about one year ago may have to wait a few more years to retire.

After striking an all-time high in December 2017 of ~$20,000 USD, Bitcoin fell more than 80% to a low of some $3,200 USD in December last year.  Currently it is trading in the $3,600 USD range, up a modest 15% from where it was in December. This trajectory was roughly followed by virtually all blockchain-related assets and cryptocurrencies.  It is the third time in its short history that Bitcoin has lost more than 80% of its value.

While the bloom has certainly come off the rose for blockchain, the plant remains.

There are several factors which are suggesting that the swoon may shortly be ending in this embryonic sector.  While some still question whether there will ever be mass acceptance of cryptocurrencies, the number still skeptical is becoming fewer.  Beyond simply the currencies, the technology involved in the blockchain is proving to be increasingly important, useful and valuable.

Some landmark developments hint at a more positive future for the sector. It is important to keep in mind that through the previous run-up in cryptocurrency prices there was always a worrying lack of institutional participation (banks, pension funds, endowments, large pools of capital, etc.) to backstop the cryptoassets.  The vast majority of investors were individuals.  That former reality is changing.

Recently the owners of the New York Stock Exchange, Boston Consulting Group, Microsoft and Starbucks (which intends to increase its use of Bitcoin as a trusted global currency) created BAKKT which is described as a “federally regulated market for bitcoin”.  This is set to launch later this month.

In September TD Ameritrade announced it’s backing ErisX, a crypto exchange designed to trade all currencies and related derivatives. At the same time the massive Fidelity announced its launch of Fidelity Digital Assets which will provide much needed security, storage and trade execution for crypto assets. Each of these sets the stage for much larger investors entering the crypto market.

These services will be needed as in October some of the largest endowments in the world, including Harvard, Yale, MIT and Stanford among them, all announced first-time investments in at least one cryptoasset.

Technical Research has been suggesting for several months that if Bitcoin follows the same pattern as past collapses that the point of maximum pessimism will be reached in February or March of this year.

All of these developments, taken in aggregate, suggest the potential for a significant recovery in all cryptoassets on the short term.

Over the past two years we at McIver Capital Management have done our research into this speculative sector and have identified a number of positions where investors can gain a reasonable amount of exposure. We may very well be adding to these positions in our model portfolios shortly.

Because of its depth and breadth, this area of the capital markets is challenging to encapsulate in a few short paragraphs.  If you are interested in reading more on this fascinating subject, please email anyone on our team and request the most recent Canaccord Genuity Crypto Quarterly or Bitcoin Monthly. They are excellent, industry leading reads.

Neil McIver is Sr. VP and Portfolio Manager at McIver Capital Management at Canaccord Genuity.

CLICK HERE to receive the McIver Capital High Net Worth Newsletter direct to your Inbox or to request account or client information from Neil and his team.

Indicators Suggesting Market is Oversold

I should be putting the final touches on my Christmas shopping (and so should you) however, considering the ongoing market volatility, I thought it prudent to provide some perspective.  I will keep it as brief as possible, as I know everyone is busy.

Both the Dow in the U.S. and the TSX in Canada have now corrected more than -15% and international markets are down more than -20%. The TSX, in fact, is now down more than -1,000 points from where it was over 4 years ago.

It is important to keep in mind that our portfolios at McIver Capital Management are constructed with both specific and ample holdings of cash, bonds, Gold and other negatively correlated positions. They are further buffered by the large percentage of assets held in U.S. dollars; which is strengthening in relation to the Loonie (increasing the value of those assets). These portfolios are, in fact, specifically designed to weather these types of storms and accordingly they have experienced a fraction of the market volatility.

Market corrections are normal, natural and healthy. They prevent bubbles, excess speculation and they moderate expectations. The root of this compression can be found in three areas of concern; the ongoing China – U.S. trade dispute; slowing global growth (primarily in Europe and China); and most importantly the financial markets adjusting to rising U.S. interest rates.

On Wednesday this week, the U.S. Federal Reserve (FOMC) did not help when it raised interest rates for the ninth consecutive time. While the FOMC did suggest that there will only be two more rate hikes in 2019 (instead of the expected 3), they did not indicate that interest rate hikes would cease or that rates would be coming down any time soon. Stock markets (and real estate markets) generally prefer lower interest rates for a number of technical reasons, but primarily because the lower the cost of money, the more of it there is to circulate through your market place.

That said, the cumulative reaction in the equity markets to an unfriendly, rate-raising, U.S. Federal Reserve over the past two months, appears to be overdone. Please keep in mind that there is no evident systemic problem in the economy, such as there was during the financial crisis of 2008. I hesitate to even mention the financial crisis of 2008 in the context of this garden variety correction.

Indicators Suggesting Market is Oversold

With the equity markets well below their highs and the shock of higher rates now baked into future expectations, most indicators suggest that this market is over-sold. Clearly, investor expectations toward major market inputs (Interest rates, trade, Brexit, European growth) have been reduced, setting the stage for a potential positive surprise should one or more of those worries turn positive.

Research suggests that this current decline should have been damaging enough to potentially generate a sharp oversold bounce at some point in the near future.

Last Friday December 14th, the S&P 500 (SPX) dropped 1.9% which was followed by a 2% compression on Monday. Sundial Inc (a research partner of Canaccord Genuity Wealth Management) studied every occurrence since 1950 in which a drop of 1.5%, or greater, of the SPX on a Friday was followed by a 1.5%, or greater, drop on the following Monday. There were 10 such occurrences and in all cases the SPX was higher 2 months later and in 9 of the 10 occurrences the market was higher 1 year later. More than that, the numbers themselves are impressive. The average gain 2 months following was 7.9% and the average gain 1 year hence was 25.7%. In fact, there was only one occurrence in which the return 1 year later was less than 20% (-1.2% in 2001, which was the one occurrence the market was not positive a year later).

This data strongly suggests adding to your investment portfolio if you have any latent cash on hand.

Context

While I do not have a crystal ball and I cannot see the future (despite the rumours), I do have a tremendous amount of experience and touch, as does McIver Capital Management. Your portfolios have been built and managed specifically in anticipation of such market corrections.

McIver Capital Management and I are not paid to cheerlead the market, we work only for you and we are here to build portfolios that protect your wealth. We, and our portfolios, are doing exactly that.

Two Simultaneous Truths Collide:

1) All markets fluctuate. 2) As humans we are flawed, because we are conditioned to react to immediate stimulus.

Imagine if every home (house, condo, apartment), including yours, had a large digital sign installed outside stating the value of that home at that exact minute. You would likely be shocked at the volatility. How would you feel if the value went down over a number of weeks, or months (as has happened to real estate in most regions in B.C. and many across Canada), or sharply over a few days? Would you sell the home? Every moment you looked at the price sign you likely would feel a need to. But we all know this is likely a poor decision.

Minute by minute pricing only feeds this human need to react. A sophisticated, high quality, mathematically diversified portfolio is no different than a real estate asset, except it has a tendency to grow much faster over time and it is priced minute by minute. To be effective, it needs to be held in the same way as real estate.

Neil McIver is Sr VP and Portfolio Manager at McIver Capital Management at Canaccord Genuity Corp.

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