Market Commentary - April 2013 - HugganWhite Wealth Management

Huggan White Wealth Management
April 2013
"Golf is not, on the whole, a game for realists. By its exactitudes of measurements, it
invites the attention of perfectionists."
~Heywood Hale Broun
CRAIG WHITE, CIM, FCSI
Financial Advisor
Phone: 250-979-3044
craig.white@raymondjames.ca
JOHN HUGGAN, FMA
Financial Advisor
Phone: 250-979-2707
john.huggan@raymondjames.ca
Raymond James Ltd.
Suite 500 – 1726 Dolphin Ave.
Kelowna, BC V1Y 9R9
Toll Free: 1-877-979-2700
Long time readers of these commentaries will likely recall your humble authors love for
competition and all things involving sport. One doesn’t have to dig too much to find my often
“lame” attempts to reference sport and investing in the same sentence (read on and you won’t
be disappointed). With the month of April now upon us, sports enthusiasts alike undoubtedly
find themselves immersed in the endless flow of sporting events. Baseball is in full “swing”,
hockey is a few weeks away from playoffs, the NCAA Basketball tournament recently concluded,
the 2013 NBA season is one for the history books and NASCAR, with its “catty” driver hostility,
restarts each Sunday afternoon. But for many, the first few weeks of April is synonymous with
one event; golf’s prestigious annual gathering known as The Masters.
For fans, it is indeed the Superbowl of golf. It’s the four days in April when the best 90 golfers
from around the globe travel to Augusta National Golf Club to test their talents on golf’s biggest
stage. Emerging as Masters Champion, cloaked in the infamous green jacket, is every golfer’s
dream and one that can change a career instantly. For names likes Tiger, Phil, Bubba, Mike and
Vijay, the hopes of sitting in Butler Cabin on Masters Sunday as a repeat champion, confirms
each one of their determination, drive and attention to perfecting the sport of golf.
To become Masters Champion requires an overwhelmingly amount of hard work, both mentally
and physically. Players, coaches and caddies work for years studying past champions, different
course layouts, shot selections, pin placements and general strategy they will use to attack
Augusta National. At times, an error in club selection may leave an approach shot short of the
green, while a 40 foot sweeping putt that drops for a birdie has the potential to change the
entire tournament. With thousands of eager fans only steps away during each shot, the mental
fortitude to remain focused is one of the toughest challenges in all of sport. One stroke may be
the difference. A forced shot on the 72nd hole may be catastrophic. In the end though, like the
76 previous Masters winners, the participant who manages the course prudently, while
remaining both mentally and emotionally tough, will be crowned champion on Masters Sunday.
When it comes to our business, similar principles apply as they do to golf. To become a
“champion” one must step onto the “course” with an understanding of the landscape and have
a strategy in place to achieve the best “score” possible. This will require the use of all of the
tools in your golf bag. At times, an errant drive or wrong decision may attempt to stray you
from the task at hand. Outside influences and “crowd noise” will test your mental capabilities.
Golf and investing are both a journey that have their highs and lows. In the end though, the
one who can remain thoroughly focused on the final result, will be rewarded with their own
version of the Masters “green jacket.”
With that let’s turn to the markets and review the tools we are currently using in our “golf bag”
to attack the fairway from “tee-to-green.”
HUGGANWHITE WEALTH MANAGEMENT MARKET COMMENTARY
January 1, 2012
With the first quarter now officially behind us, most global
equity markets have produced relatively favorable
results. Year to date, the strongest market performance for
the indices we follow has been seen south of the border with
the Dow Jones Industrial Average and S&P 500 gaining
approximately 10% January through March. A few
contributing factors to this strong performance has been
improving housing markets, increased consumer confidence
and lower unemployment figures (more on these points
later). This has propelled most US indices to their highest
levels on record on a nominal basis. Closer to home, the TSX
Composite Index (our benchmark) has not fared as well, but
has managed to show a gain of approximately 3% for the first
quarter. Year over year the TSX Composite is showing a
marginal gain of ~2.5% at the time of writing. From our
viewpoint, the underperformance for the Canadian markets is
reflective of a weaker commodity environment with gold,
silver, oil etc. all the recipients of softening demand. This has
also driven the “loonie” below par relative to the US dollar
YTD.
Generally, when markets have experienced such a strong
start to the year as seen so far in 2013, expectations emerge
for a serious market correction as it is often felt that the
market has gotten ahead of itself. The question arises “does
the market have any steam left to continue this advance
higher for the remainder of the year?” As always, looking
back at similar trading patterns should provide some
guidance to better answer these questions. Recently I came
across an article that explains the first quarter performance
over the past 62 years which illustrates what happened after
stellar first quarter gains and whether those strong starts
increased the likelihood of a market sell-off. The article was
written by the team at Investech Research, an advisory
newsletter
service
that
I
highly
recommend
(www.investech.com). The team goes on to state:
Based on historical precedent, investors should be encouraged
by the result of our study. The table at right lists each year
since 1950 when the S&P 500 Q1 gains (not including
dividends) were 5% or higher. It then shows the performance
of the S&P Index for the remainder of the year from April 1
through December 31 (Q2-Q4). Twenty-three years qualified
for the list, or about 1 out of every 3 years, with the current
first quarter ranking #10. In the vast majority of cases –more
than 86%- the S&P 500 went on to add further gains by yearend, with an average return of 9.1% for Q2-Q4. Only three
years (highlighted on the table) ended with the S&P 500 lower
than on March 31. Overall those are favorable odds.
While one might think that after a stellar first quarter
performance, a sharp pullback or bear market is more likely
th
over the next 9 months, that’s not the case. The 4 column
on the table shows the years when corrections of 5% or more
occurred in the Q2-Q4 timeframe (the numbers of corrections
are in parentheses).
Most years did experience 5%
corrections, but that’s about what we’d expect. Looking back
at the history of the S&P 500, corrections of at least 5% have
occurred on average about every 8.4 months during bull
markets. Thus it’s not surprising to see at least one correction
in the nine months covered by the Q2-Q4 period.
For those who have followed these commentaries over the
past few months, they will recall that our team has stated on
previous occasions that we felt a short-term correction is
likely. Although this call was “wrong-footed” for the month
of March, the first few weeks of April has seen a pick-up in
volatility and selling pressure. This has resulted in an
approximate 3-4% correction for the TSX Composite from the
mid-March highs. Despite our strong prejudice towards a
permanently rising market, we do view market corrections as
healthy. We appreciate that all markets do not trade in any
one direction indefinitely and pullbacks (and rallies) are part
of the overall market cycle.
The recent market correction looks to be the result of a
number of influences. First, as stated above, most U.S.
markets have recently broken out to new all-time nominal
highs. Looking at the longer term chart of the S&P 500 (next
page), we can see that all of the losses experienced as a result
of the financial crisis of 2008/2009 have been recouped.
Considering this is an ~ 130% gain off of the March 2009 lows,
we even find ourselves surprised by the strength of the equity
markets. As a result, we are not surprised to see some profit
taking at these current levels, as “traders” often look to re-
HUGGANWHITE WEALTH MANAGEMENT MARKET COMMENTARY
January 1, 2012
concerned. We are far from that bullish phase which is
positive as sentiment is a key driver of market direction!
balance portfolios when important technical levels are
surpassed.
Secondly, the recent U.S and Canadian unemployment
th
reports issued on April 5 were weaker than expected. The
financial press was quick to label the March payroll figures as
“weak” (only 88,000 jobs created in U.S. with 55,000 lost in
Canada), which it was relative to market consensus. Not
surprisingly the knee jerk reaction was a sharp sell-off in
stocks and a subsequent rally in bond prices; the typical flight
to safety reactionary trade. But further analysis of the U.S.
jobs data indicated a payroll revision in both January and
February that saw 61,000 more jobs created than originally
reported. Overall the unemployment rate edged down to
7.6% (from 7.7% in February and 8.2% a year ago). However,
despite these positive revisions, the sentiment on the street
was overwhelmingly pessimistic, which led to further losses
for stocks and extended the corrective phase already in place.
Finally, the recent increase in bullish headlines and media
coverage of new all-time highs does accentuate our shortterm cautious stance. Recall in February’s newsletter, we
often strive to think contrary to the investing public. With
recent calls for Dow 16,000 or 17,000 (currently at 14,600)
and articles titled “Don’t worry, be Bullish” and “What’s Up?
The Stock Market!” we view such statements as a contrary
indicator implying late speculation is entering the
marketplace after a prolonged rally. When this occurs, the
“latecomers” jump into stocks at or near the peak of the
market. Regrettably, for those who are late to the game, the
market rolls-over and enters a corrective phase to relieve the
over-heated buying pressure.
The good news though is that the aforementioned bullish
sentiment does not register anywhere near the extreme
bullish levels experienced in 2000 and 2007 before a severe
bear market ensued. During those market peaks, bullish
sentiment outnumbered bearish sentiment by 2, even 3-1
(chart above right). This suggests that although current
sentiment is turning more favorable, the attitude still remains
balanced between investors who remain cautious and those
who are willing to invest in stocks. It’s when your neighbor or
Uncle starts passing on “stock tips” and claims that making
money is easy that we need to become increasingly
From a valuation perspective, the stock market remains
attractive according to our work. One of the most widely
followed analytical tools used in investing is the
price/earnings ratio of a stock (P/E ratio). The P/E is a
company's price-per-share divided by its earnings-per-share.
For example, if XYZ is trading at $60 a share and earnings
came in at $3 a share, its P/E would be 20 (60/3). That means
investors are paying $20 for every $1 of the company's
earnings. If the P/E slips to 18 they're only willing to pay $18
for that same $1 profit. This number is also known as a stock's
"multiple," as in XYZ is trading at a multiple of 20 times
earnings.
Shown below is the longer term graph of the Price-toearnings for the S&P 500 Index produced by Investech
Research. The longer term average P/E based on trailing 4quarter earnings is 17.0. The current value is 18.1. As we can
see, this reading is only 6% higher than the longer term
average, indicating that the stock market is not expensive
from a historical basis. For those who believe stocks are
overvalued, the body of evidence paints a rather contrasting
picture. In addition, it must be noted that bear markets rarely
develop from current valuations and usually appear when
they are stretched far beyond the historical mean (see 2000).
This further supports our view that any correction in the near
future should be short lived and a severe bear market is
unlikely based on valuations.
HUGGANWHITE WEALTH MANAGEMENT MARKET COMMENTARY
January 1, 2012
Looking at our strategy, we continue to focus on
building diversified portfolios with a bias towards
dividends and dividend growth. From a geographic
perspective, we continue to look outside of Canada as
we feel there are attractive investable opportunities
beyond our borders. That being said, the majority of
the portfolios will focus on quality Canadian
corporations that have a reliable business model that is
predictable, repeatable and transparent. Over the past
number of years, we feel our strategy has performed
well given the challenging market environment we have
faced. We feel our clients share the same view.
For clients with exposure to commodities and in
particular precious metals, the results have not been as
promising. With gold trading as low as $1550 U.S./oz.
more recently, the selling pressure seen in precious
metals stocks has been unrelenting and to be blunt,
outright dismal. Based on the charts we follow (one
provided here), gold stocks are trading at their
“cheapest” valuations relative to gold bullion since the
financial crisis of 2008 and the start of the gold bull
market back in 2000. According to Jason Goepfert at
In summary, we expect our strategy to continue to
produce solid risk-adjusted returns relative to the
general marketplace. More importantly we feel the
portfolios will assist our clients in meeting their longer
term financial goals. As stated earlier, some of the
indicators and economic data we follow are showing
signs of moderating. With the recent passing of the 4th
anniversary of the bear market bottom (March 9th,
2009) we are cognizant of the fact that this latest bull
market has had four years of positive gains. Fortunately
though, the majority of our research continues to favor
stocks over fixed income and the environment remains
constructive at this time. Going forward, we view any
potential market correction as a buying opportunity and
a chance to add to names showing strong attributes.
The trend is pointing to higher levels for the indices we
monitor and as the saying goes “the trend is indeed
your friend.” We continue to invest accordingly.
By the way: my money is on Rory McIlroy! Any bets?
Until next month take care,
Craig White
Craig White, CIM, FCSI | Financial Advisor | Raymond
James Ltd
T: 250.979.3044 | TF: 1.877.979.2700 | F:
250.979.2749|
craig.white@raymondjames.ca
Suite 500, 1726 Dolphin Ave | Kelowna | BC | V1Y 9R9 |
Canada
www.hugganwhite.com
www.sentimentrader.com; “the latest data shows a
slight decrease in newsletter writers’ sentiment towards
stocks, but a large negative change towards gold.
Writers are now recommending a -31% net short
position in the metal, the largest in history, dating back
to 1997. There were two other weeks that exceeded a 30% recommended short position, 12/19/97 and
4/15/05. Both led to 1-3 month rallies (at least) in
gold.”
This does not guarantee that gold stocks cannot trade
lower, but the empirical evidence suggests that if gold
stocks were to rally, we are likely close to or near a
bottom. For those who have exposure to this sector,
we strongly advise against selling at these levels and we
would only look to reduce exposure if/when prices
trade higher.
From a business standpoint, in 2013 we are looking to add
new clients to our already valued client base. If you know
of anyone who may be interested in learning more about
our story, we sincerely appreciate your referrals.
This newsletter has been prepared by Craig White. This newsletter expresses the opinions of the writer,
and not necessarily those of Raymond James Ltd. ("RJL"). Statistics and factual data and other
information in this newsletter are from sources RJL believes to be reliable but their accuracy cannot be
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