A Summer to Forget! – Not really.

September 2015

Now that we have your attention, we have recently reviewed and read a lot of musings about the market and the action over the past months. Some of it is quite scholarly, while other pieces suggest gross opinions. Interestingly none of them are consistent in theme or thought. Perhaps this is part of the beauty of the world we live in. Some suggest China could fall into the East China Sea, while other comment on a normalized growth profile for an emerging market type of economy. As with all polarized views, the reality usually falls somewhere in between.

Behaviorally, we sometimes forget to look at the reality around us and our own daily activities and actions. Consider for a moment our friend we call average Joe. Average Joe and his family live outside the Joe city. They commute about 45 minutes each way to work, they subscribe to Netflix, they book holidays on Expedia, they likely have some Apple hardware in their homes, they bank at the local domestic or regional bank where their mortgage is held, they shop at Joe clothes store and buy their kids Joe brands. Once a week they fill up their car with Joe gas and sometimes they see a movie and occasionally eat out at Joe fast food. When the market goes down 1000 points, Joe continues to do the same thing he did yesterday tomorrow and onwards. This is life for the average Joe. We suspect there are lots of Joe’s in the world and more being added each day in emerging markets. Some Joe’s aspire to be superstar Joe’s and get to that point in time. However, the average Joe dominates the world. Why? Frankly there are more of them. This is where we turn to simple math as an example of the impact the average Joe can have.

Joe Math:

In this math example, we have 8 Joe’s and 2 superstars.

Joe Consumption:

8 Joes consume weekly (remember this is Joe math)          $8,000

2 Superstars consume weekly (double a Joe)                       $4,000

The contribution to the Joe economy from all Joe’s about 67%. If one Joe were to fall out of the economy (become unemployed or 12.5% of the Joes) the contribution would shift and change to about 64% for the Joe’s in absolute terms. Or in other words, the consumption economy would shrink by about 4.4%. Now our example above suggests a very big employment reduction.

This is where the world gets confused sometimes when it comes to understanding growth and cycles. Our Joe above did not disappear, he was simply misplaced for some period of time. If we assume Joe was 35 years of age, it would be unreasonable to assume he would remain unemployed forever. During the most difficult times in the 1920s people were unemployed for long periods. During most of the decade, unemployment hovered around 10% to 12%. In 1932, this rate spiked in the US to 23.6% (source US Department of Labour). Interestingly, the world did not end!

Now let’s go to Joe Canada for a moment and/or Joe China. Many things are happening to both economies right now that have people scratching their heads. In Joe Canada, we have commodities. The most news worthy headline commodity is oil; however, most other commodities are lower as well. Coffee is down 30% year to date, wheat is down 20% year to date, lumber is down 30% and the list goes on. Joe Canada is in a slump and the chatter remains very cloudy. We know from history that nothing remains in a straight line and a lot of the Joe Oil bears are suggesting $20 even $10 oil. Like every irrational Joe out there, when and if we get to $10 oil those bears will be screaming for negative oil prices (just like we experienced negative interest rates for a couple of trading sessions in 2009). They will start paying us to take the oil out of the oil sands because they just have too much of it. Sorry we digress here, but you can see how these things can get out of hand pretty quickly in the Average Joe world.

In Joe China, they have a different story. Their growth (GDP) has gone from over 11% to 7%. For some context, let’s assume Joe Canada is growing at 2.4% (source Bloomberg). Some time ago, China suggested they would manage their GDP number to a 7% target. We will see if they can maintain this number going forward. There is clearly a slowdown in place in China. In this world, Joe keeps going to work and living his life as he did yesterday and tomorrow. Remember Joe as we move forward.

Correction or Bear Market?

This has been the question of preference over the past month, and more acutely the past week of August, as it appears the emotional exuberance grabbed hold of better judgement. One only needs to have a quick peek at one or two stocks to gain a better sense of what unfolded in August.

First let’s look at Home Depot. This is a generally well branded North American name that most people have either been in the store or know something about the brand. We are going to focus on just one day, August the 14th and specifically on 3 minute intervals of trading to gain a sense of some of the emotion (or technology) that poured into the market in a very short time period. We have broken down the chart below to a number of periods of 3 minute intervals for a better graphical illustration. The data will show that for a 6 minute period on August 24, 2015 starting at 9:30 Home Depot traded as low as $92; 3 minutes later it traded at $111.91. Who trades like this and has time to think and/or react? We suspect just machines that have been programed with emotional disengagements.

Source: VIP Wealth Solutions and Bloomberg

It is suffice to say this is part of what we are starting to see from time to time. Some of these types of market reactions have little merit in owning companies for the longer term.

The reality of this type of movement is more in line with a short term correction than a long term bear market at present.

Bear markets can be started by many different means but typically have roots in declining economic activity of some sort. For example, one could argue that Oil is in a bear market and technically speaking because of this Canada is in one as well. Supply is up and demand is not so much. This is a specific bear market which we know in time will pass. Supply today is being cut almost daily.

The argument against the simplicity above is that China’s growth is slowing. Let’s remember this is not new news. The reality has been the China has been slowing for the better part of the last 5 years, one could even argue 10 years if we take out the speed bump of 2008/09. The chart below gives you a 10 year look at constant Price GDP year over year.

Source: VIP Wealth Solutions and Bloomberg

7% GDP growth by North American standards is still pretty good. However, the trend remains negative. 

We know we need the US to participate in growth or the rest of the world to a degree remains meaningless. The real proof in the US will be the change in interest rate policy from the FED. Many believe that rates are going nowhere while others believe the FED needs to act slowly. This common juxtaposition is helping fuel the unrealistic volatility we are seeing and feeling in the market place. This volatility will likely remain in place until there is actual clarity on this policy. Perhaps a clear message from the FED in September gives the world the clarity it is looking for, good or bad. One thing we can remain clear on today is that the economic data numbers coming out of the US are just okay, not great, nor are they terrible. They are just okay. Why are they just okay? Think about the dollar for a minute. In Canada, we know the US dollar has been super strong but the US dollar has been pretty strong relative to most currencies. This makes it more difficult when reporting global companies with multiple currencies report earnings in US dollars. This will likely unwind over time, but is just one more lever adding to the volatility.

The US GDP is as mentioned okay. There is currently nothing super exciting nor is there anything currently to be worried about. The chart below shows the longer term GDP experience of the US. Clearly we have climbed out of the 2008/09 experience and remain in positive territory but stability seems to be questionable quarter over quarter.

Source: VIP Wealth Solutions and Bloomberg

Now that we have determined that the US and China are okay, what’s next?

The topic of US interest rates has as many opinions as Baskin Robins has ice cream flavours. Simple answer many flavours/opinions. The reality is that part of the heavy markets can be attributed to this contrast of opinion. Markets like certainty and want to understand the playing field. Right now with all the opinion out there it is creating some uncertainty. If we go back and look at some history, we can see that the FED Funds rates has been pretty much at or near zero for the better part of 6 years. This is a long economic recovery.

Source: VIP Wealth Solutions and Bloomberg

The Fed meets this month to discuss and set the rate range. The current rate range is 0 to 0.25%. There are lots of things or tools that the FED has at its disposal. Some examples of things it could do include pegging the rate at 0.25%, moving the range to 0.25 to 0.50. Changing gears all together, it could shift to moving the rate a half measure or 0.125%, or do nothing. The list could likely be longer but this gives us some sense of choices. Now the bigger question is probability of a move. This is tracked and plotted and the historical chart is presented below. The current probability of a move higher on the 18th of this month is 34% and climbs by higher measures thereafter.

Source: VIP Wealth Solutions and Bloomberg

They say the FED is to act independently of capital markets but clearly the probability has been reduced with the recent moves in the market. At this point, we wait and watch. If there is a move it will likely be marginal and may set the market up for some forward looking stability in some regards. The cat will be out of the hat so to speak.

Keeping in Touch

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What’s Happening This Quarter

We are pleased to present our popular lunch and learn series again this fall. Join our in-house Tax & Estate Planning professionals, along with specialists in their respective fields, for a series of informative presentations about preserving and growing wealth in the context of key life stages.

Being an Executor – An honour or a burden?

Thursday, September 17th

Many of us have been asked to act as the Executor on a friend of family member’s estate. This is a major responsibility and it gives pause for each of us to consider who should take on this role for our own estate. Learn more about the roles and responsibilities of acting as an Executor and Trustee of an estate in Ontario.

Retirement, for one

Thursday, October 8th

Planning for your retirement and structuring your estate plan as a single individual requires careful thought and strategies in place for unforeseen events such as a critical illness or the cost of long-term care. Join us to learn about strategies and solutions for your retirement.

Your first Will, Power of Attorney and Life Insurance

Tuesday, October 20th

Wills and insurance are a critical component of your financial plan at any age. Join us as we discuss how a will gives you an opportunity to plan for the future and transfer assets to your beneficiaries, including family, friends or charitable organizations. You’ll also learn that although insurance is typically used as a risk management tool, it can also be used as an alternative asset class for the purpose of transferring wealth from one generation to the next.

Demystifying divorce

Thursday, October 29th

Divorce can create all sorts of questions about how best to negotiate a settlement or navigate your future. Join us for an informative lunch on demystifying divorce. We’ll discuss common concerns such as equitably splitting assets – learn what you should sell and what you should keep – and what impact divorce may have on retirement.

Time                     All seminars begin at 11:45 am.
                             Lunch will be served.

Location               145 King Street West, 5th Floor      

RSVP                    Please indicate your preferred seminar(s) and date(s) to VIPWealthSolutions@RichardsonGMP.com or 416.943.6182

Back To School
We hope everyone enjoys the back to school season and with more people on the road the risk elevates. Please be careful out there, enjoy the season. Thank you for reading and for your continued patience with our capital market environment.


The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.