Tuesday, July 3, 2012

False Prophets Revisited

On Feb 14th our blog for Weigh House Investor Services commented on the poor job of forecasting by the financial industry. We expressed concern that the market forecasters were glossing over a lot of real problems that had yet to be solved. Specifically on the macro side we referenced the Euro crisis and Greece’s bond default, significant on-going debt issues for consumers, and a dysfunctional U.S. government. Our take on these issues was that advisor/salespeople were ignoring the storm clouds that were obvious to everybody and pushing equities as the best option for your portfolio. The common mantra was “dividends can pay you nearly 4% per year while bonds and GIC’s are stuck at 1-2%”. It seemed "risk" was being treated as equal for equities and fixed income securities.
We had also discussed pending credit downgrades from Moody’s for the big banks and sure enough those downgrades arrived recently and included Royal Bank of Canada. We discussed the dysfunctional U.S. government and we are disappointed to see that no solution is in sight for the pending mandatory spending cuts and the expiry of investment tax credits in the new year. It seems the U.S. politicians will be arguing immigration policy issues when the country drives over the debt cliff!

We pointed out that the Greek fiscal problems were far from solved and now find the world watching the recent Greek elections to see if the tiny population of Greece could cause the whole of Europe to plunge. If Greece should chose to reject Europe’s requirement that Greece drive it’s economy (what little is left) into the ground - then look for a massive bank run across southern Europe as everybody tries to safeguard their bank savings under a mattress.

In the financial markets we noted the challenges brokers were having with selling overpriced IPO’s into the market. It appears that the folks over at FaceBook were too busy counting future option payments to pay attention. FaceBook has the potential to be the worst IPO ever by the time the dust settles but it did serve to expose the price fixing strategies of the deal makers. They clearly were able to prop up an over-priced IPO while waiting for retail suckers to buy in.

On the debt side we commented on how the 99% needed two jobs to pay their debt payments and the housing market was still in the dumps. Now we have seen the Canadian government adjust mortgage insurance policy for the third time in an effort to cool the debt growth in Canada.

When we wrote the article forecasters were priming the RRSP pump to flood the equity markets with what is lovingly known as “dumb money”. The TSX index ETF “XIU” ( it represents the major Canadian stocks) was at $17.82 and would be pushed up to $18.25 by Feb 28th as salespeople drove RRSP deposits into the equity markets. Today, with all the troubles still bubbling, the “XIU” sits at $16.46! It has dropped almost 8% but more importantly for RRSP investors it is down almost 10% since you made your end of February purchase. Even with your 4% dividend yield paying out over the next 12 months, that looks like a bad bet in the short term and who knows how it will look by year end.
So what? Are we suggesting we “knew” what would happen over the last quarter or that we are smarter that the stock guru’s? Absolutely not!

What we can say however is that we saw the high level of risk in the markets the same as everybody else did. It did not take a genius to see this was a pretty likely outcome for both the past quarter and likely for the next several quarters. The key difference is that we were not motivated to ignore the risk in the markets in order to exploit retail investors heading into the hype of the RRSP season.

The solution is for investors to follow a comprehensive investment policy statement. Based upon the policy guidelines it is possible to use RRSP deposits to re balance to the low end of the high risk assets and the high side of the low risk assets. While we do not suggest you can time the markets, we do suggest your financial advisor/salesperson has the flexibility to make tactical decisions to keep you off the train tracks until the obvious danger has passed. After all, what are you paying for if not prudent advice and commonsense for your investing strategy.

Or, referring back to the original blog’s ending statement; it was a time “not to be all in” to the equity markets. At the end of the day the issue is rarely about good forecasting and almost always about having a quality strategy and an advisor/salesperson who follows your investment plan first and his/her commission schedule second.

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