Damned lies

DOUG  By Guest Blogger Doug Rowat


Hockey used to be so easy.

Long ago, how good an NHL player was could be summed up with two data points: goals and assists. Maybe throw in penalty minutes to get a flavour for a players’ toughness and you had all you needed. In the past, the cartoons on the backs of hockey cards actually meant as much as the ‘data’. It was a simpler time.

O Captain, My Captain


Source: Google Images

Today, of course, the game has changed enormously. I now have to Google almost every advanced hockey statistic: Corsi, Fenwick, deltaSOT, DIGR, GVT, LAEGP, etc. For that last one, even Googling it—Location-Adjusted Expected-Goals Percentage—doesn’t help me.

Simply put, hockey stats have become so complex that they’re a complete mystery to most fans.

However, I despair any NHL general manager who ignores these metrics and attempts to build a team based purely on ‘gut feel’ or scouting reports. To be successful these days, general managers have to crunch numbers. And most NHL teams now employ full-time data-analytics specialists.

This data-driven approach to hockey is, of course, not dissimilar to portfolio management. For instance, it might feel like a bear market or recession is coming, but how I feel isn’t useful in terms of making an accurate forecast. The data must confirm my suspicions. Similarly with ETF selection, the numbers HAVE to support the inclusion of new positions in our portfolios, just as advanced hockey stats must justify, say, the selection of a particular draft pick.

To illustrate, let’s start with some broad, hypothetical forecasts: a bearish view of the energy sector and expectations for more overall market volatility. Therefore, we want to reflect these views with our choice of a Canadian equity ETF. Naturally, data analysis is also involved in making these broader forecasts, but let’s take the bigger-picture conclusions for granted and focus purely on the next step: the ETF selection itself. This process might be similar to a general manager who concludes that he needs a new second-line center, but must now make the correct trade or call-up from the minors.

Let’s also assume that it’s a simple swap: a Canadian equity ETF that we currently hold for another Canadian equity ETF that better reflects our new outlook. In this case, we need an ETF that fits with our overall thesis of a negative energy-sector outlook and expectations for more market volatility.

We typically begin with some simple screens in Bloomberg to narrow the enormous ETF universe—there are, for instance, more than 800 Canada-domiciled ETFs trading in the market presently. However, once we’ve refined the universe, then the more detailed one-on-one comparisons can begin. These initial comparisons might look something like this, first based on the ETFs’ energy-sector exposure and longer-term volatility:

ETF point-by-point comparison – step 1

Source: Bloomberg, Turner Investments

The point-by-point comparisons would continue until a fuller picture is realized. We look at more variables than what are shown below, but the below gives a rough example of the comparative process. The preponderance of ‘green’ for the potential replacement ETF suggests that further investigation is definitely warranted:

ETF point-by-point comparison – step 2

Source: Bloomberg, Turner Investments

Ultimately, we might end up with a short-list of 2-3 replacement candidates. The next steps would be to read more about these ETFs (websites, prospectuses, etc.) and contact each of the ETF providers to ensure that there aren’t any hidden features that we’re unaware of. It’s also useful to make all the ETF providers aware of the other options that we’re considering. This allows them the opportunity to punch holes in their competitors’ arguments, which sheds even more light on the best potential candidate.

More often than not, the ETF we select will be the correct choice, but regardless of the outcome, it’s a defensible selection, one well supported by the data and due diligence.

We also don’t lose sight of the fact that talking to real people at the various ETF companies can be just as important as the number-crunching. Getting their insight, which is largely unbiased because we’ve developed good long-term relationships, provides additional valuable information.

The data analysis itself will only take us so far. The perspectives of real people matter too.

And proof that numbers aren’t everything? I recently had a chance to meet the guy on the hockey card. And meeting one of the greatest Maple Leaf captains of all time?

Well, it’s hard to put a number on that.

Rowat meets Sitt

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


Spendy people

A rate cut this year? Fuggedaboutit.

Canada created over 35,000 jobs last month. The unemployment rate fell. The 2019 job creation total – despite a few months of suckiness – was the second-best in 13 years, at more than 320,000. So the central bank took a gamble last year when the Fed was chopping (three times) and held fast. It was the right call.

What did bonds do today? Yup. The yield on 5-year GoC debt popped. Bond yields have risen 30% since September – the reason mortgage rates have been inching higher. Given the latest jobs stats, expect more. And did I mention no Bank of Canada cut?

By the way, we’re creating the right kind of jobs, as opposed to self-employed embroiderers, dog walkers and freelance lepidopterologists. Last month 38,400 people found real full-time work. The private sector created 57,000 positions while 21,500 civil servants went home.

All this sounds pretty good until you look at household finances. Debt continues to rise, along with the monthly cost of servicing it. This is why consumer spending in Canada has tanked with retail sales down yielding a poor Christmas for shopkeepers. Remember that two-thirds of the entire economy comes from spending, which is why jobs (good) and debt (bad) are critical.

Given the fragility of our situation, the last thing we need are more taxes. But here they come!

We’ve already alerted you to the plan Chateau Bill and his bearded buddy have to ‘modify’ the way capital gains and perhaps dividends are treated, as well as further tighten the screws on the self-employed with professional corps. But closer to home (if you live in the GTA or the LM) is the continuing assault on real estate.

Don’t be surprised. You were warned.

In Vancouver property taxes are taking a giant leap – up about 8% or four times the rate of inflation. Some of the tax burden is being transferred from businesses to residential owners. And as the market value of high-end detached houses is constantly eroded by the NDP’s venomous  assault, more of the property tax must be shouldered by those buying ‘affordable’ real estate – like $2 million Vancouver Specials or $700,000 weensy condos. That’s what happens when you elect spendy people.

In Toronto we’re just weeks away from the announcement of an ‘empty house’ tax in the nation’s largest market, as well as a jump in the ridiculous double land transfer tax on high-end digs. Oh yeah, and property tax is rising 8% over the next few years.

As you know the vacant house thing was pioneered in YVR when advocates screamed 25,000 places were empty. That was a lie. The number of homes not inhabited full-time turned out to be about 2,000. The city has extracted about $38 million from those owners and for 2020 has increased the tax by 25%. The low rental vacancy rate – the supposed reason this levy was put in place – has not dropped. So, it was just a tax to be a tax, aimed at Hovering off additional revenue from wealthy people. The Canadian way.

Toronto also spends more than it takes in, a significant amount of that to pay for the defined benefit pensions of employees, past and present. Then there’s transit. Subway extension and the cross-town line cost billions upon billions, and are grossly over budget. The city is desperate. The anti-tax, right-wing, former-Conservative-leader mayor is now a spend-and-tax liberal. So his metamorphosis is complete. And up goes the cost of living.

The trouble is, Toronto is Canada’s commercial, corporate and financial capital. There are thousands of homes and condo units used by people who need access to the city for business reasons and for whom hotels are impractical. When all these units were bought, they were taxed. During ownership, they are taxed. When sold, taxed again. Now a 1% vacancy tax on a $700,000 one-bedroom unit used the equivalent of four or five months a year will amount to seven grand – or twice the property tax owing. Coming next month.

The impact of this tax plus the new tough Airbnb regs (there are over 21,000 units for rent) and a creep in lending rates could be palpable. Will gutting the stress test mitigate that? Or has real estate become just too juicy a target for governments – who will encourage ownership and debt, only to feast then on the hapless owners?

Alas. Harry and Meghan may have no idea what awaits them.