Entries from February 2019 ↓

The calling

Fat week. Stuffed with news. And politics rules.

Monday brings federal by-elections, normally as riveting as when this blog parses RRSPs. But this time it’s different. Three votes tomorrow, three crucial outcomes for four parties. With a federal election just eight months away, and the current government embroiled in its sauciest scandal, what happens in a  few hours may be a harbinger. Or a dead canary. We’ll see.

First, in the LM the NDP’s limping leader’s in the fight of his life. If Jagmeet Singh doesn’t win in Burnaby South, he’s toast. Already his personal polling numbers suck  and his party’s in a steady descent – a mere 14% approval rating. If this keeps up it will be the worst showing for the Dippers this autumn since Kevin O’Leary had hair.

But frankly, the odds of him losing the by-election are slim. It’s a left-leaning riding and the poor guy’s been campaigning there for months. Still, if he chokes, squeaks in or doesn’t rack up a big plurality, Jag’s not long for politics.

In the GTA, more high stakes. The riding there has been in the Con camp for a long time, owned by my former nemesis and Harper hitman Peter Van Loan. York-Simcoe is the land of particleboard McMansions, inflated real estate values, endless burbs, minivans and big roads. It should be a shoo-in for Scheer’s candidate – but what about the Mad Max factor?

Every vote for the People’s Party is one less for the Cons, just as every ballot handed to Preston Manning took one away from the Progressive Conservatives – leading to that party’s ultimate collapse. Will vote-splitting sink the Cons this time allowing Libs to sneak up the middle – once again turning a minority of votes into a majority of seats?

And that brings us to Quebec, where T2 is praying the NDP collapse will send left-leaning voters in his direction. Bracing for losses in Doug Ford’s Ontario, the Libs hope to Hoover up all of the 14 Quebec seats the Dippers took last time – starting with Outremont tomorrow. That’s former NDP leader Tom Mulcair’s old seat, and a big Liberal win in this urban Montreal riding would calm a lot of sweaty-palmed PMOers. Of course, if the JWR-Lavalin scandal turns voters away from the current prime minister, Monday will be the beginning of the end.

So, will the nation start to polarize as America’s done? The left-right divide in that country seems intractable. And it makes one worry about how the Trump years will end. Not with a whimper, likely.

In Canada Liberals have moved left with an emphasis on move government, spending and taxes. The Cons have moved right, now dragged more in that direction by the PPC. But math means as the Dippers flame out and Max barges in, Liberals have a numeric advantage. Given the deficiencies of our first-past-the-post system, when five parties (remember the Bloc Quebecois? They’re back…) carve up the votes, riding-by-riding, the team snatching even a third of overall ballots can take it all.

Logically, that means a Liberal win on the morning of Tuesday October 22nd. Finance guy Bill Morneau can continue where he left off – higher taxes on upper-income earners, more social spending, continued deficits, a continuation of the war on the self-employed and professional classes and some diddling with capital gains and dividend taxes. Maybe that’s what most Canadians want. Plus a pony.

What could change this?

Lots. Jagmeet could turn out to be a hero, mopping up Burnaby South with the sorry butts of his Lib and Con opponents, plus that fetching but xenophobic PPC moppet, Laura-Lynn Tyler Thompson. (Her FB bio: “God called her to the media miraculously one night in 1999.  In her television career, she has been privileged to speak on camera with many great men and women of faith like Josh McDowell, Tony Campolo, Patsy Clairmont, Bill Hybels, Dr. Gary Smalley, Liz Curtis Higgs, Dr. Gary Chapman, Pat Robertson, Kay Arthur and Thelma Wells). Well, if Jag comes out of this as juiced as he was in his Mexican wedding vid, look out, Justin.

Scheer could crush Max in the first direct conflict, fought on the bloody shoulders of Highway 400. If the Tories triumph there, with Singh resurgent south of Van, Trudeau will be feeling big pressures on both his comely flanks. Likewise, if the NDP hangs on to Outremont, extending the 12-year dominance the party’s had there, Libs will be shocked.

Remember, politics is math. Especially in Canada, where voters usually ignore local candidates and vote along party lines. Unlike in the States, our choices are not just red or blue. We have orange, red, green, blue and peacock. Plus in America you get to vote for the president independently from your Congress person or Senator. Citizens can mix and match. But in Canada a single ballot chooses a local MP, a party and a prime minister. No wonder we sometimes get it wrong.

By the way, there’s more. This week Trump again turns dictator Kim into a glam boy. Fallen lawyer Michael Cohen testifies before Congress in an explosive session. The world’s two biggest economies try to stave off a bigger trade war. And the Fed boss tells markets what comes next.

Isn’t this exciting? So glad God called on me to blog.

Disrupted

DOUG  By Guest Blogger Doug Rowat

I’m not a fan of golf and don’t play; it’s one of the few Bay Street investment advisor clichés that I’ve actually managed to avoid. However, I’ve still heard of the 13th hole at the Augusta National Golf Club in Georgia, which is widely considered one of golf’s best and most challenging holes to play. It’s a 510-yard par-5 with a green that isn’t even visible for the first 270 yards.

However, because of advances in golf club and golf ball technology, particularly in recent years, it’s now become a lot less challenging. In fact, according to Sports Illustrated, the 13th hole at Augusta played as the easiest at the 2017 Masters. PGA Tour players now drive the ball an average of more than 295 yards, five more yards than just three years ago, so going for the green in two has become straightforward.

In other words, an iconic golf hole has been completely ‘disrupted’ by improving technology.

Disruptive technology, of course, doesn’t just affect the PGA Tour, it also regularly affects the stock market. A few examples:

Nokia was once the world’s largest and hippest cellphone manufacturer—Nokia phones were featured prominently in the first groundbreaking Matrix movie, for instance. However, once Apple’s much cooler iPhone was launched in 2007, it was game over for Nokia. Below is a 10-year comparison of their share price performances:

Disrupted: Nokia vs Apple – 10 years

Source: Bloomberg

VHS and DVD rentals were a damaging advancement for movie theatre chains, but they amounted to a minor inconvenience versus the vast array of movies that suddenly became available at low cost via a Netflix subscription. And, as the release dates between theatre launches and Netflix launches compressed, not to mention the release of more and more original Netflix content, things got even worse for movie exhibitors. Below is a five-year comparison of Cineplex and Netflix performances:

Disrupted: Cineplex vs Netflix – 5 years

Source: Bloomberg

Video games were once the sole domain of the big game developers who published in physical CD format and online competition was largely ignored by them. This changed almost instantly with the online release of the tournament-style shooter video game Fortnite. Fortnite was released in 2017 but rapidly gained traction and became a phenomenon less than a year later. Below is the performance of Activision Blizzard, Electronic Arts and Take-Two Interactive, a few of the world’s largest video game publishers, over just the past year:

Disrupted: Activision Blizzard, Electronic Arts & Take-Two Interactive – 1 year

Source: Bloomberg

A natural impulse is to look at these examples and conclude that the disruptive forces could have been easily predicted. And some investors, no doubt, correctly did. But the majority didn’t, which is why all of these ‘disrupted’ companies have so badly underperformed. Ultimately, it’s an impossible task to correctly forecast and time disruption.

But deluding oneself with I-knew-it-all-along thinking is a favourite investor pastime and brings me to the behavioural investing trait of hindsight bias. Hindsight bias occurs when an investor treats any past event as if it were a logical, obvious and easily predicted occurrence. And hindsight bias usually leads to overconfidence with respect to future investment decisions. Investors prone to hindsight bias also have a tendency to exaggerate how easily and far in advance one could have anticipated a particular future outcome. Like witnessing an investor tell people that they knew the iPhone would be invented the minute they saw Gordon Gekko call up Bud Fox on his Motorola DynaTac 8000X. And if you don’t believe hindsight bias exists, read the comments section and see how many posters will claim to have easily foreseen any of the above-mentioned disruptive technologies. But only they and their god know if this is true and if they actually profited from this foresight.

Forecasting is incredibly difficult and outcomes only seem obvious in retrospect. And if you think you can anticipate each and every disruptive market force, you’re mistaken. Nokia was once a great stock to own, but not after the release of the iPhone. But did you invest in Nokia only on the way up and then exit precisely as Steve Jobs walked across stage at the Macworld convention in January 2007? Probably not. It only seems obvious to have done so in hindsight.

Now, we recently increased boring health care exposure within many of our clients’ portfolios. Naturally, different kinds of disruption can also occur within the health care sector—a dramatic shift in government policy, for example—but we think that the beneficial long-term effects of an ageing global population minimizes this risk. However, an even more important way that we minimized the disruption risk was by purchasing a broadly diversified health care ETF, added at only a modest weight and held within an even more broadly diversified portfolio.

Recognizing how golf technology is advancing, Augusta varies and enlarges its course by frequently acquiring additional land. The club also constantly redesigns its course layout—lengthening holes, adding trees, bunkers, etc. The 13th hole won’t be easy to play for much longer.

In a sense, Augusta has employed the best of all defenses against disruption: diversification.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.