January 15, 2016

2015: The Year of Words

Filed under: Financial Planning,Investments — MikeT @ 12:57 pm

The study of the history of words is called Etymology and includes the study of word origins, how words are formed and how their definitions have changed over time. Although the written word was invented in southern Mesopotamia, c. 3500 -3000 BCE, words continue to evolve every day. On the topic of words, American poet Emily Dickinson once wrote, “I know nothing in the world that has as much power as a word”. Little did she know when she penned these words how quickly the world of words would evolve. Today we live in a world where information is readily available through many mediums. But even as advances in technology have enabled us to quickly enlighten ourselves, communication and news is still driven by the words used by journalists, politicians and policy makers. As a result, it is words that will forever shape our lives, help us form opinions and provide us with the information that we need to make the decisions that affect our future.

To this end, the Oxford Dictionaries Word of the Year for 2015 is “emoji”. Yes it’s true, a pictograph that is often used to express joy, sadness, anger and mischievousness, beat out traditional letter-based expressions. While the use of the proper emoji was on our minds in 2015, so too were other words, such as the Merriam-Webster dictionaries Word of the Year which for the first time named the suffix “ism” as its annual award winner. This choice illustrated that in 2015 a commonality existed in its most searched words: socialism, fascism, feminism, capitalism, racism and terrorism. The popularity of these words reflects the impact that events such as the troubling acts of terrorism in Paris in January and November had on 2015 as well as the resurrection of the word “socialism” in the same breathe as American politics.

However, ism’s and emoji’s were not the only words that dominated the political landscape in 2015, as terms such as “Grexit” (which references the potential exit of Greece from the Eurozone monetary union) and “Migrant Crisis” (which summarizes the movement of over a million migrants and/or refugees from the Middle East and North Africa to Europe) were used throughout the year.

While the threat of a Grexit reached its climax in the mid-2015 it subsequently diminished after the Greek government accepted a three-year, 86 billion euro rescue plan from its Eurozone partners in July. With the threat of a Grexit (at least) put on hold we can now draw our attention in 2016 to a similar play on words, that of “Brexit” which refers to, the potential of Britain’s exit from the EU, which will be voted on in a national referendum to be held perhaps as early as the summer of 2016.

The end of 2015 also saw the US Federal Reserve implement the word “tightening” for the first time since June 29th, 2006, when on December 16, 2015, they increased interest rates from an upper bound of .25 per cent to .50 per cent.

While the US tightened much of the rest of the world “eased”, as the Bank of Canada (BOC), European Central Bank (ECB), the Bank of Japan (BOJ) and the People’s Bank of China continued to maintain their easing biases.

In 2015 it also wasn’t just linguists who chose to create and popularize words; other organizations such as the National Football League coined words such as “Deflategate” (created to enlighten football fans on the amount of air pressure required to inflate NFL game ready footballs), while pop culture popularized the word “Yas” to vocalize ones approval of the subject at hand.

Like any year, 2015 had its share of highs and lows. It was a year that according to a report from the National Oceanic and Atmospheric Administration saw average temperatures in the US rise to the second highest level on record (only 2012 was hotter), marking the 19th year in a row that average temperatures have exceeded the 20th century average.

It was a year where the words used by global leaders such as Angela Merkel commanded the spotlight while others used by US presidential hopeful Donald Trump perplexed us. It was a year that on August 24th saw the Dow Jones Industrials Average have its biggest fall in four years, plunging more than 1,000 points at the open to eventually settle down 588 points on the day. And, as a result, saw the increase in the use of the word “volatility” by the financial press.

And finally, 2015 was the year that the “Force” finally “Awakened”, giving young and old alike, a new (and old) set of heroes to cheer for.

July 1, 2015

A Greek Tragedy

Filed under: Financial Planning,Investments — MikeT @ 12:52 pm

Now that the first half of 2015 is in the record books, it is a perfect time to reflect on what has happened so far and contemplate what the rest of 2015 will bring. Movie buffs will remember how “Back to the Future Part 2″ depicted 2015 – with flying cars and fusion power, which back in 1989, when the movie was produced, seemed ridiculously farfetched. While we may not yet have flying cars, 2015 brought the FIFA Women’s World Cup to Canada, and made it the runaway hit on our “smaller screens”.

The first half of the year also saw the retirement of another small screen icon. David Letterman retired from his late night show in May after a 30 plus year run. We also saw the release of Canada’s federal budget in April which, among other things, increased the amount that Canadians can contribute to their Tax Free Savings Account from $5,500 each year to $10,000. Yes the first half of 2015 has certainly had a little something for everyone. There have been ups, downs, and a lot of drama.

Greek politics once again dominated the headlines in the second quarter with each new deadline to repay its creditors and introduce new austerity measures coming and going, without resolution. While growth throughout the Eurozone was showing signs of a modest recovery prior to the latest “Greek Tragedy”, following the introduction of Quantitative Easing, the sustainability of that recovery is now in question given the escalation of the Greek crisis and potential contagion.

However, it must be said that despite the return of volatility in financial markets in Europe, the direct impact from a default on Greek debt is much less today than in 2012, as European bank holdings of Greek debt are only a fraction of what they once were. As well as the financial condition of peripheral countries such as Spain, Italy and Portugal have improved significantly over the last few years.

Perhaps overshadowed in the second quarter by Greece, was China. After the Shanghai Composite index rose approximately 150% from June 2014 to the middle of June 2015 it decreased sharply, causing concerns about the Chinese economy going forward. Should the economy not stabilize, it is expected that China will continue to introduce stimulus measures in a controlled and directed manner to try and achieve its targeted 7.0% growth rate.

Meanwhile, the United States remains the single bright spot in the global economy with solid economic data, albeit with a softer than expected start to the year. The timing of the Fed’s first rate hike remains the subject of continuous debate. Given the data-dependent nature of the decision and the recent firming of data points, it is expected that the Fed will begin to moderately raise the Fed Funds rate by year-end, assuming the Greek crisis is contained. The Fed’s ability to balance the gradual tapering of monetary stimulus without interrupting the U.S. recovery, or damaging investor sentiment, will be a key driver of the U.S. economy and equity markets.

The situation in Greece is not new to the Eurozone and Greece is not the only country to require aid from Eurozone members who seem intent on keeping the union together and in avoiding the spread of contagion to other countries. However going forward, it is likely that any headline news event will result in increased volatility in financial markets. Just imagine what the introduction of the first flying car will do!

November 1, 2013

The Perspective – Fall 2013

Filed under: Investments — MikeT @ 12:09 am

At the end of the third quarter the S&P/TSX composite index had increased by 5.31% (CPMS) on a year to date basis while the S&P500 was up 23.83% (TD Securities & Bloomberg).

While there is always a desire to try to measure investment performance, doing so against a market index may not be the most appropriate measure. This is because an index is a representation, rather than a benchmark.  The representation the index makes is only possible without the factors that govern our day to day existence.  Unlike most investors the index feels no fear nor does it have taxes to pay.  The index does not put children through school, never buys a house, and never plans to retire.  An index, in short, makes a poor proxy for the goals of an individual investor over any period of time, be it short or long-term.

The factors that drive individual investment decisions are myriad; dividend payment, dividend growth, earnings per share, quality of earnings, the industry, and broadly that each of those individual criteria are improving each day.  An oft quoted maxim from popular investment icon Warren Buffet is “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”  If indeed the market were closed for five years, it would be impossible to produce a value for the S&P 500, or the TSX, or any index for that matter.

Arguably investor’s should use vastly different criteria to measure their personal portfolio returns than index returns.  Instead of asking what the index did, investors should ask if the portfolio matches their personal objectives, and if the economies that the portfolio is exposed to, are better off today than yesterday?

Investors are not the only individuals that can use benchmarks to evaluate performance, as voters can also create benchmarks to evaluate their government’s performance. In creating political benchmarks voters can prioritize matters that are important to them such as taxes, social services, healthcare, humanitarian aid, deficit reduction, and how they worked with other government parties to better the economy and country.

While Canada’s federal government has of late been mired in spending scandals a more interesting study from a benchmarking standpoint might be that of the US government, who on Thursday October 17, came to an agreement on a deal to reopen the government and raise the debt ceiling. Without this deal, it was a very real possibility that the U.S. would default on its debt, which likely would have caused a financial catastrophe.

While nothing more than a short term fix, this deal does fund the government through January 15, and raises the debt ceiling until February 7. The reality is this deal did not fix any of the underlying issues. No progress was made on the budget, tax reform and the Tea Party’s view on Obamacare. It was 16 days of posturing and bickering and accomplished nothing.

With focus now back squarely on the economy until early in the new year, American voters must now ask themselves if the government is performing the way they want it to and if it not then just as with portfolio evaluation they must reassess their options.

November 11, 2011

Did you know …. all about dividends?

Filed under: Investments — Tags: , — MikeT @ 8:17 pm

Dividends have long been associated with stability and strength. After all, it is usually the strongest and most stable companies that can pay, maintain and even grow their dividends year in and year out. Given the current investment environment; slowing economic growth, a sovereign debt crisis, general economic uncertainty, there has never been a better time to focus on the strong and stable.

Typically defined as the regular payments that are paid out to investors out of a company’s profits, dividends also form an important role in the calculation of total investment return. From a historical perspective reinvested dividends have been responsible for approximately 40% of the investment return of the TSX/S&P over the past 10 years. Although this return representation is impressive domestically it is even more so globally, as dividends have contributed approximately 60% to the return of the MSCI World Index over the last 40 years.

More recently the effect that dividends have on return can also be seen. Over the past 10 years (period ending August 31/2011) the MSCI World Index has experienced a negative return of 10% (this is a simple return and is not compounded) vs. a return of 7% on the MSCI Total Return Index. Although these indexes are comprised of exactly the same stocks the return differential can be explained simply by dividends, which are assumed to be reinvested in any total return index.

While the investment rationale for investing in companies that pay a dividend is compelling, it is not without risks. Beyond the dividend payout, one must also consider the stability of the dividend. In other words, how likely is it that the company will be able to continue to pay their dividend going forward?  To their dismay many investors in Manulife Financial discovered this in the first quarter of 2009 when the company cut its dividend in half, with the share price following.

Manulife may be a high profile example of a dividend cut, however, the reality is that more often than not, many corporations actually increase their dividends. In fact, despite the slow pace of the economic recovery, numerous companies have recently raised their payouts. For example of the 60 companies listed on the S&P/TSX 60 index, 58 pay a dividend and approximately 35 of those companies have increased their dividend payout over the past year. Moreover up until 2008 the big six Canadian banks had all increased their dividends almost every year. In December of 2010 after a three year hiatus National Bank of Canada became the first of these big banks to raise its dividend since the financial crisis. Since then all of the big six with the exception of Bank of Montreal have followed suit.

Though the dividend payout ratio may be one aspect of the investment selection process, it is far from the only one. Traditionally companies with high payout ratios have experienced one of two events. They have either increased their payout or the valuation of their shares has fallen substantially.  Consideration should then be given to those companies with strong balance sheets, a history of growing their dividends and the ability to sustain them. With US non financial companies now holding nearly $2 trillion in cash on their balances sheets, a level that is the highest in about 50 years, the possibility of further dividend increases and shareholder reward certainly exists.

And really, who doesn’t love being rewarded? There is perhaps no better feeling. On this topic oil tycoon John D. Rockefeller once said “Do you know the only thing that gives me pleasure? It’s to see my dividends come in”. This also brings to mind the old proverb “a bird in hand is worth two in the bush”, as its lesson suggests that one should not be motivated by greed. As the adage implies if you already have a bird in your hand you will be well fed. However, if you let it go to pursue two birds that you see in the bush, you may catch neither, and as a result wind up hungry for the night. This proverb points out that by passing up pay- off for one with more promise you run the risk of losing both the pay-off as well as the promising possibility.



February 16, 2010

2009 Market Recap

Filed under: Financial Planning,Investments — MikeT @ 7:37 pm

So how do you think stock markets performed in 2009? If you’re like 74% of investors in a recent survey, you thought the S&P/TSX was flat, down or you didn’t know (1). Only 14% in the survey actually knew the S&P/TSX posted a return over 20% (1). In fact, our major Canadian stock index posted 30.7%, its best return since 1979 (2 & 3). Although I don’t have a survey or any stats to prove my theory, I believe that investors were far more cognizant of poor market performance in 2008 when the S&P/TSX’s return was -33% (2). I’m sure the media is to blame for much of investor’s knowledge of market conditions, with their tendency to focus and trumpet the negative as oppose to the positive.

For the record, the S&P500 (a major U.S. index) and the MSCI World index produced returns of 23.5% and 27% respectively (2).

At the end of the day it really doesn’t matter if you’re up-to-date with market returns as long as they don’t swing your emotions enough to make trading decisions. Investors that get caught up in emotions are more likely to make investment decisions that lead to timing the market, resulting in buying high and selling low.

Reviewing your portfolio annually in conjunction with your financial plan is the best way to support long-term financial health. Evaluating performance and matching it to your financial goals will ensure you remain on the financial path mapped and will help eliminate the emotions involved in investing.

(1) Angus Reid Survey Results (Jan 5, 2010)
(2) globeadvisor.com
(3) Bloomberg