Entries from September 2019 ↓

Go against the Herd

RYAN By Guest Blogger Ryan Lewenza

I know it doesn’t appear so based on my youthful appearance and washboard abs but I’ve been around the block a few times and one key market lesson that I’ve learned in my 20+ years in the investment industry is to question (and go against when prudent) the herd. I find time and time again that ‘the herd’ or consensus moves in extremes and is often wrong. One day the consensus is predicting a zombie apocalypse and an imminent bear market and the next day everything is unicorns and rainbows.

Most recently the bears came out in droves during the summer, pratting on about a looming recession and that everything is about to go down the tubes. The bears cited things like the inverted yield curve, the slowdown in manufacturing, and Trump’s trade war as supports for their recession call. Like so many times before, this call looks to have been premature and off the mark.

In recent weeks we’ve seen a nice rebound in some key economic releases, which validates our thesis of a slowdown rather than a full-blown, rip-your-face-off recession and bear market.

On the manufacturing side, which has been notably weak in recent months, data is showing signs of a rebound with industrial production bouncing back nicely in August, up 0.6% M/M, beating expectations of 0.2%. A week later we got the Markit Manufacturing PMI, which measures manufacturing activity in the US, and it rose to 51 in August, beating expectations of 50.3. Of course, a few prints don’t make a trend, but it’s possible that the manufacturing sector has seen the worst of it.

Moving over to the consumer side, which represents 70% of all US economic activity, data is also showing signs of strength. One of my favourite consumer metrics – retail sales – rose 0.4% M/M in August, beating estimates of 0.2%. And US housing activity rebounded in August with both housing sales and starts besting economist estimates.

All of these better-than-expected economic releases has led to a surge in the US Citigroup Economic Surprise Index, which has risen to 44.7. This great economic indicator measures whether economic data is coming in above economists’ expectations and when this indicator crosses above the zero line it means that economic data is beating expectations. I love this indicator because it essentially captures the momentum of the US economy and right now is suggesting an upswing.

The US Economic Surprise Index Rises to a One Year High

Source: Bloomberg, Turner Investments

With the better-than-expected economic releases in recent weeks, recession fears have started to abate, and this has led to a rise in US government bond yields. In the chart below I show the US 10-year Treasury yield (lower panel) and the US yield curve (upper panel). The 10-year yield has increased from a low of 1.4% at the beginning of the month to 1.75%. Basically, investors had become too bearish on the economy and the higher bond yields are reflecting the recent improvement in the US economy. As a result, the yield curve (the difference between short- and long-term government bond yields) has steepened, and officially has moved from an ‘inverted yield curve’ to a ‘flat yield curve’. Now this is no reason to break out the champagne and treat yourself to a kobe steak, but it is a positive development for the US economy and equity markets.

US Yield Curve Steepens on Better-than-Expected Data

Source: Bloomberg, Turner Investments

Having done this for a while now I’ve seen numerous examples of herd mentality and the results are almost always the same. The herd gets caught up in the hype and mania of fad stocks or some new hot investment with little attention or analysis of the underlying fundamentals. Then when the hype dissipates and the herd moves on to something else, prices crater. More recently, the pot stocks and bitcoin are good examples of this.

We strongly advised our clients to avoid these areas since the prices were completely divorced from the fundamentals and once the hype faded so would their prices. Below are the price charts of bitcoin and a marijuana ETF and you can see how prices initially rallied on the hype then end up giving away almost all the gains. Bitcoin went parabolic in late 2017 then crashed 80% over the next year. Lately it has staged a rally, but I see round two coming soon. For the marijuana ETF it more than doubled during the initial hype phase but is now down 50% since its peak.

Bitcoin Price Chart

Horizons Marijuana ETF Price Chart

Source: Bloomberg, Turner Investments

So what’s the point of all this Ryan?

Beware of the herd in all its forms and don’t let the excitement of a hot stock or some negative headlines on CNBC cloud your judgement and cause you to make an emotional and often deleterious decision. Instead, have a well-reasoned, disciplined and balanced approach to analyzing the markets and making investment decisions, so in short avoid being caught up in the herd!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.


The bribes

– Vieler Photography

Do people lie to pollsters, just to mess with their heads?

Maybe. But if the latest numbers hold, the T2 Libs are headed for a majority. This is astonishing to those who wondered how he could survive the Lavalin mess. Or the defection of Jody and Jane. The ethics charges. The godawful India trip.  Overspending, deficits and financial fibs. A tax assault on small biz. Blackface and coverup.

But there’s barely a word of such things in the campaign. Instead, this is all about giving stuff away. Bribes. Buying votes. And at the center of the vote-sucking is real estate. In the last few days, for example, the governing party says it will hand out $40,000 interest-free loans for house upgrades. That comes atop the enhanced downpayment/RRSP limit, the shared-equity mortgage and a new tax on non-maple buyers. The Tories have tried to keep up with a return to 30-year mortgages, a gutted stress test and retrofit cash.

Now that Mills form the single biggest voting block and in their house-horny years, politicians can’t help themselves. As mentioned here a few days ago, all this will end up making houses cost more, increasing debt and goosing risk. But our leaders care not. The kids lust for houses. They crave power.

Maybe it’s time we paleos just rolled over and accepted the fact nobody under 40 cares about fiscal sustainability, ethical leadership or less government. Federal deficits and national debt are remote, icy concepts. The big issues of demographics, pensions and productivity are pffft. Instead younger leaders catering to younger votes focus on wants and desires. At the top of the list, weirdly, is property.

So no wonder we’re seeing the kind of crap reporting that’s flooded social media lately. It reinforces the meme that moisters are screwed, implying Boomers are the screwees. A great example comes from the online real estate portal Zoocasa where the kids decided to find out how long it would take houseless Millennials to afford the average home in major cities. The conclusion was shocking – in Vancouver the typical household would need 52 years. Toronto was a bargain. Only 32 years.

The fake news even came with a snappy chart…

(Click to enlarge, but why bother?)

Why is this the wrong data on which to base national housing policies? Simple. In demand markets  where average prices are seven figures, nobody should expect to jump from no real estate at all to a detached house with three bedrooms and shiny taps. The notion of a ‘property ladder’ has even more validity in big cities where single-family homes are in limited supply. Families buying mid-priced real estate are usually trading up based on equity earned by selling cheaper properties. Maybe if a 30-year-old had traded her parents’ comfy basement and laundry service for a cheesy starter home in the burbs there’d be less moaning. Just a theory.

Second, the Zoocasa elfs took the average salary in YVR or 416, figured out how much mortgage borrowing that would bring (not a lot) then calculated the downpayment required to make up the difference. Bizarrely, that equaled a down of 76% in Vancouver, or about $750,000. Hence the 52 years needed to save up such an amount. Unfair!

See how moister math works? It’s awesome.

Today here are 379 active listings in Greater Van asking $600,000 or less. There are 180 asking five hundred thousand, or less. To buy one of these with 5% down would require about thirty thousand in cash and a household income of a hundred grand. Not every family in the region brings in that kind of income, of course. But we also don’t have 100% home ownership – never will, nor should we try. Real estate costs a lot of money to own, and in many cases (almost all, actually) renting is a cheaper option.

But, alas, it’s a losing battle. With the Trudeau re-election, taxpayers will be spending more than $2 billion a year subsidizing private mortgages, while a smorgasbord of homeowner incentives makes houses less affordable, and debt enhanced. By jacking its shared-equity loan limit to $800,000 in Toronto and Vancouver the Libs made a statement. More is more, they said. You deserve it.

But as the nation encourages greater household debt and more personal net worth shifts into a single asset, there is less capital for innovation, invention and advance. Concessions today. Consequences tomorrow. Things will change when Greta runs the world.