DOW 20,000 is here! Or at least it was a few days ago. I'm sure you've seen the headlines so it shouldn't come as a surprise that major North American equity markets are at or near all-time highs, including the TSX Composite.
How did this happen? There was Brexit, the Donald Trump surprise victory, rising interest rates, a slow down in the Chinese
economy, a collapse in the Euro, plunging oil prices etc. These events were suppose to be catalysts for a sell off yet all of them combined could not prevent stocks from moving
Imagine the following story:
You get a Fitbit for Christmas and you love it. What a fantastic gadget. It tells you how many steps you took for the day, how many calories you burned, how many hours of sleep you got and how close you are to reaching your health and fitness goals. How could you live without it?
Have you ever blown up your trading or investment account? I have and it sucks. After making a few successful trades in my first self-directed account over 14 years ago, I thought I had things figured out. My next trade was going to be the "big one". With no regard for money management and position size I put on a couple trades and Kaboom! My account went up in smoke.
Watching profits and hard earned money evaporate in a short amount of time is difficult to recover from both financially and emotionally. One or two bad trades should never blow up an account but they can if you don't properly position size.
Do you care about your investments? Most people think they do but I don't think they really care that much. I've met more people over the last couple years who don't know what they're invested in, what their returns have been and what they're paying in fees.
If this sounds like you that's perfectly fine and it's nothing to be ashamed of. You're not alone. But, if you just cared even a tiny bit you could save 2 to 3 percent in fees and outperform the majority of actively managed funds. That's right. Just by caring a little you can do better than the majority of professional fund managers by purchasing low cost Index Exchange Traded Funds (ETFs).
The following quotes are from 3 famous and very successful investors throughout the ages:
“It was never my thinking that made the big money for me, it was always my sitting.” - Jesse Livermore
"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime." - Jim Rogers
"The stock market is a no-called-strike game. You don't have to swing at everything. You can wait for your pitch" - Warren Buffett
Gold has been a big performer this year and is up over 17% year-to-date. As I wrote in Newsletter #14 gold needed to clear through $1200 to suggest that the bear market may be over. It did break through in stellar fashion making a high around $1260. From there it survived it's first retest of $1200 and is now trading around $1240 near the top of its descending channel.
1. What Mutual Funds Do I Own and Why?
I'm always amazed when I discuss the topic of investing with someone and they have little to no knowledge of what they own. "I own a bunch of mutual funds. All low risk stuff." they say to me. There is a funny misconception that all mutual funds are "low risk". I'm pretty sure this idea of safety comes from the way they are sold and who's selling them.
Canadians trust the banking system like no other nation and many have been with the same institution for their entire lives. So, if an employee at your bank is telling you to invest your excess savings into mutual funds it must be the right thing to do. Or is it? Don't forget that banks bring in billions of dollars a year in fees. The financial institutions who sell mutual funds are in the business of earning fees and so is the person recommending them to you.
I've also found that most people have little or no idea what they own and why they own it. The most common answer is that it's a "long term" investment and very "low risk". In my opinion it's risky to have very little knowledge of what you own and why.
If you own mutual funds you at least owe it to your hard earned money to find out what type of fund it is, what sectors or individual stocks it owns and how much it charges in fees.
It's here. It's back. Not seen since 2011. Yes, the dreaded bear market. A bear market in most cases is defined as a downturn in a broad market index of at least 20%. The TSX Composite Index is now in this camp having traded down over 23% from the highs set in 2014.
Some cliches are worth repeating and remembering especially when it comes to your hard earned money. Before you make your next investment take a moment to remember these old adages...
1. Cash Is King:
There's absolutely no need to always be fully invested. There's nothing wrong with having a larger than normal amount of cash in your investment account. Think of cash as a position. Or better yet as ammunition. Think of the financial crisis of 2009 or more recently the sell off in oil and gas related stocks. Having cash allows you take advantage of extreme situations when the markets offer up incredible opportunities.
What does it mean to be a contrarian? The most common definition is a person who opposes or rejects popular opinion and goes against the current practice. So, if you're a male and you don't have a beard, skinny jeans or a plaid shirt and your hair isn't shaved on the sides, you just might be a contrarian. Or, according to this E-Trade commercial with Kevin Spacey you may actually may be on to something. A new trend perhaps?
A once super hot trending industry where stock returns where outperforming seems to have lost some of its luster as of late. What has happened? Have investors realized the returns aren't
sustainable and the stocks have become overvalued? Is it a sign that the US economy is starting to slow? or is it just a case of the stocks correcting to more reasonable valuations?
Many of the most loved and largest issues are well off their most recent highs: Chipotle Mexican Grill (CMG) -20%, Panera Bread Company (PNRA)
-16%, Buffalo Wild Wings (BWLD) -27%, Papa John's International (PZZA) -24%, El Pollo Loco (LOCO)
-60%, Shake Shack (SHAK) -50%. Many of these names have gotten expensive. For example CMG and PZZA both have price-to-earnings (PE) ratios in the high 30s. In comparison McDonald's (MCD) is 24
and the S&P 500 PE is 22. (The higher the PE ratio the more expensive the stock is considered to be).
What's your shopping preference? Enclosed malls? Outlet Stores? Big box retailers? or Online? Personally I can't stand the thought of bumping shoulders with strangers in a crowded line. Not to
mention the traffic, parking, broken shopping carts and incompetent sales people. What a nightmare. Some purchases are best accomplished at a physical store but if you know what you want why not
swipe your screen and wait for it to be delivered to your door. One day it may even be delivered from the air via drone. If you haven't seen Amazon's drone delivery system that's in the
works you can check it out here.
How important is price to you? To most people it's very important. The smartphone has brought us near instantaneous price comparison when shopping on and offline. Why not check to see how much a
product costs at a competing store across the street or how much it costs online? Common sense dictates that this is the way most people will chose to shop as price comparison becomes even easier
and more convenient.
At the end of the day its each to their own when it comes to how you shop but the trends don't lie. Online purchases have been increasing every year. The Centre for Retail Research reports that in the USA online sales are expected to increase from $306 Billion in 2014 to $349 billion this year. That's a 14% increase in one year. In Canada the increase is expected to be around 11%.
A survey conducted by Pitney Bowes found that about two-thirds of consumers would rather purchase their products online through a marketplace such as eBay, Amazon and Alibaba as opposed to going
directly to a retailer's own website. This is another knock for the big box retailers who are trying to sell online.
What does this have to do with investing? The chart below compares the performance of Amazon stock vs Walmart which clearly shows how this trend is playing out in the world of investing. Even
know Walmart sells many of its products through its own website it's still losing out to Amazon as people would rather buy through their market place. The stock chart below clearly reflects the
increasing trend of online shopping.
It's obvious that technology has affected our attention spans in all aspects of our lives. We can see it every day and probably every hour. Just look around. First, it was the mobile phone
creating unwanted interruptions at restaurants, coffee shops and meeting rooms. Then came text messaging and with it the constant need to read and respond to texts. More recently Instagram,
Twitter and Facebook have created their own attention sapping powers. It's amazing that we still speak to people face to face. Well at least sometimes we do.
Can technological advances also be to blame for the lack of attention span with regards to how long investors hold a stock? Every day investors have access to a steady stream of information right
at their finger tips. Are the TV, radio, internet and smartphones to blame for the average holding period of stocks plummeting over the last 50 years?
The below graph is from an article at Business Insider that displays
the average holding period of stocks from 1940 to 2010.
The US equity markets have been very sleepy for the last 4 to 6 months moving sideways within a trading range. One day up. One day down. Essentially going nowhere causing investors to become very
complacent. That all changed over the last two weeks when the S&P 500 moved lower by over 11% in less than six trading days. This caused the volatility index (VIX) to spike by over a 100%.
Even know we are well off the lows, the wild swings continue in both directions keeping volatility at elevated levels as you can see in the chart below.
(Click on chart to enlarge)
It seems like almost any type of business can take off these days. Not just the next hot app or biotech company. There have been some interesting IPOs (Initial Public Offerings) that have come to market over the last 12 months that may surprise you. Having said that some things never change and that's North American's appetite for cuisine that is not very healthy. That's right. Burgers, fries, shakes, burritos, chicken wings and fried chicken.
Just like there is a new idea or concept when it comes to technology or social media there are fresh or new ideas within the restaurant industry as well. Eating at the establishments below may
not be very good for your health but some have served up some pretty healthy returns.
El Pollo Loco (LOCO) +118%
Bojangles' Famous Chicken'n Biscuits (BOJA) +7%
Shake Shack (SHAK) +106%
Wingstop (WING): +18%
Fogo de Chao (FOGO) +5%
The Habit Burger Grill (HABT) +48%
Dave and Buster's (PLAY) +135%
(The percentage gains above are calculated by taking the opening price on the first day of trading and the highest price traded since)
Some other popular IPOs that you may have heard of over the last 12 months include the following:
Alibaba Group Hldg Ltd. (BABA) +29%
Etsy Inc. (ETSY) +15%
David's Tea Inc. (DTEA) +20%
Virgin America Inc. (VA) +67%
Box Inc. (BOX) +22%
GoDaddy Inc. (GDDY) +26%
Fitbit Inc. (FIT) +71%
Shopify Inc. (SHOP) +50%
(The percentage gains above are calculated by taking the opening price on the first day of trading and the highest price traded since)
With the US equity markets near all time highs the IPO market continues to be active and healthy. Speaking of healthy, Planet Fitness Inc. (PLNT) started trading yesterday and is making new highs as I write this.
Another fitness based company Soul Cycle Inc. has filed to go public in the near future. Check out the article about Soul Cycle on Bloomberg. Apparently people pay a dollar a minute for a spin class? Maybe people are not working out to stay fit but are actually working out so they can feel less guilty about eating at their new favorite burger joint?
Every day we're bombarded with information about what stocks to buy from the talking heads on TV, Internet, social media, radio and our friends and family. While some of this information may be
accurate most will leave you scratching your head and feeling overwhelmed and confused. Have you ever googled a stock that you're interested in learning more about or all ready have in your
portfolio? If you have you'll see conflicting analyst ratings, good news, bad news and different "expert" opinions. Who should you believe? What information should you use? How can we bring back
some "common sense" when it comes to choosing what stocks to invest in for the long term?
I think we complicate what stocks to buy because the simple and obvious seems, well, too simple and too obvious. The amount of information you can find about stocks on the internet at any point
in time is overwhelming and confusing. There are always new and exciting "trending" stocks or sectors but the reality is we don't know how long these trends will last and if the company will
still exist 5 or 10 years from now.
What if we simplified our investment philosophy to a common sense approach where you only invest in stocks that manufacture or produce items that are used every day by millions of people?
Companies that you think will be around for a very long time and will easily out live you. Think of everyday items that you use such as personal grooming products, food and beverages and where
you buy these common household goods.
It's not easy to predict the longevity of a new technology without the help of hindsight but it's fairly safe to assume that french fries and hamburgers (McDonald's Corp.), soft drinks
and bottled water (Coca-Cola
Company) and shampoo and toothpaste (Proctor and Gamble) will be around longer than any of us. Take a look at the long term price charts and the 5 year performance of the
aforementioned companies stocks.
ETFs (Exchange Traded Funds) have been gaining in popularity over the last few years because of their diversity, increased liquidity and low management fees. There are ETFs for pretty much any market you would like to trade or invest in. Do you want exposure to the Japanese Yen (FXY)? An emerging market like India (SCIF)? Companies that buyback their own shares (PKW)? The casino/gaming industry (BJK)? A specific commodity such as Corn (CORN) or Soybeans (SOYB)? Maybe you would like to protect your portfolio from volatility (UVXY)? Or maybe you want to trade crude oil with some leverage built in (UWTI)? If you have an idea or think of something that you would like to trade or have exposure to, you can probably accomplish it with an ETF.
One of the primary reasons I like to use ETFs is to invest in a specific sector or market instead of trying to choose an individual stock within the sector. There's nothing worse then buying an
individual stock and watching it lag behind the sector as a whole. You may have the sector or industry right but if you don't chose the correct company you may lose money even know the sector has
Lets take a look at the Energy sector (XLE) which has been in the news a lot lately with crude oil trading near 5 year lows. At the end of the day there are a lot of energy
companies to chose from, each with their own compelling story, fundamentals and chart formations. Most professional money managers and analysts who spend every single day researching specific
stocks have a difficult time choosing a stock that will outperform the sector. If you are looking for exposure to a sector but are confused as to what stock to choose, look to an ETF to
simplify things and take some of the guess work and frustration away. Take a look at the example below showing the performance of an individual stock (SWN) vs. the
You've just been sold a great story by your stock broker/adviser with regards to a specific stock. Maybe you've been given a "hot tip" from someone in your office or a good pal. "Jim's dad knows a guy who works for a guy who told him about this great stock..." Or, you've actually done your own research and now you're ready to pull the trigger and buy that "sure thing". Done. You're now the proud owner of company XYZ and you're sure it's going to be a big winner. You can already imagine how sweet that cocktail will taste on that beach holiday you'll book or that new big screen TV that you'll buy with the profits. All you have to do is sit back and watch the stock go to the moon.
Sound familiar? It happens all the time even to experienced investors and traders. You buy the stock because you feel so good about the compelling story, the explosive chart pattern or the idea that the stock couldn't possibly go any lower. You're blind to the realities of what can happen to your "investment" because you're so emotionally involved in the idea of making money.
Hitting the buy button is by far the easiest part of buying a stock. It probably takes less than 30 seconds and a monkey could probably do it. Having a complete plan in place before you buy and
managing the position is by far the most important aspect of any stock purchase but so few people ever do it.
The most familiar scenario is that there's no plan in place but you move forward and purchase the stock because the story is so compelling and you don't want to miss out on the easy money. It
goes up, down and sideways from day to day but all of a sudden it starts to move lower. You open up your stock quote app on your smartphone one day and realize that your sure thing investment is
now down 50%. You think to yourself, its only a paper loss I'm sure it will "bounce" back. This is what's called burying your head in the sand or "hoping" the stock will magically rally back to
As I've said before "doubles" or 100% winners are not easy to come by. The chance of the stock you bought getting back to break even is very unlikely. The key is to not let this happen in the first place and it can be easily avoided by having a written plan.
Lets rewind to the beginning of this scenario and assume the decision to buy that fantastic stock has been decided. Now what? Do you just buy an arbitrary number of shares and hope for the best?
The first question you need to ask is how much am I willing to lose or put at risk on this position? How much "heat" or room am I willing to allow the stock to move against me before I sell for a
loss? Or more simply at what price am I going to get out? This is called a stop- loss. Once these questions are answered it will dictate
the amount of shares you're capable of purchasing which will be your position size.
The decisions don't only exist to manage your risk if the stock moves lower. What if the stock starts to move in your favor and goes higher? What are you going to do? Are you going to take
profits on part or all of the position at a certain point? Are you going to use a trailing stop? Maybe you're going to add more shares to take advantage of the current trend or you've decided to
hold the stock to retirement until you need the money?
If you don't know the answers to these questions you really shouldn't be buying individual equities, especially stocks that are speculative or carry more risk than your average "blue chip" company.
The next time you buy a stock on your own or on the advice from some other source, make sure you've answered the above questions and have the discipline to follow your plan. If you don't there is a good chance you will end up burying your head in the sand.
Over the last few months I've begun speaking to more people about their investments. I'm very surprised to find out that the majority of people know very little about what they are invested in,
what fees they are been charged and how the current state of the economy will affect their existing portfolio. Most people put a lot more time and effort into researching what vehicle to purchase
then they do researching an investment or choosing an investment professional. Personally I've always put a lot of weight in the old saying, "no one cares more about your money then you do".
Maybe I've got it wrong? Maybe someone else does care more than you? At least that's what the financial advisers and planners competing for your business want you to think.
I feel that most people only start to care about their investments after they have suffered a serious loss. Or they start to go through their statements in more detail and find out that they
actually do pay fees for their mutual fund holdings or their latest stock purchase. Do these fees make sense for the level of service provided?
The time to be most vigilant about your investments is when everything seems to be all rainbows and unicorns. Complacency is the ultimate destroyer of portfolios. The latest example of this is
Canadian energy stocks. It was only about 4 months ago that the oil and gas sector was working its way higher without a care in the world. Now things look a lot different and many well loved oil
and gas stocks are down 50% or worse. This means if you suffered a 50% decline in one of your holdings it will have to double to get back to where it was 4 or 5 months ago. How many 100% winners
have you experienced since you began investing? Did anyone mention reducing exposure to equities when the market was making new highs? Or how about hedging? Has that ever been mentioned as an
The reality is most investment professionals are sales people and have little to no experience investing and trading. The more assets they manage or the more transactions they initiate the more
fees/commissions they make. The more assets and clients they have the less time they can focus on your investments. There's an inherent bias that exists in the financial planning industry to
either place your hard earned money in funds that pay the highest fees or to make more trades than necessary in order to generate more commissions. I'm not saying all planners and advisers do
this but the temptation is always present. Make sure that the investment professional you use is not just another sales person.
Make 2015 the year that you take more of an active role with regards to your investments. This doesn't mean you have to open a self directed account and make all your own decisions. What it does
mean is that you take the time to ask some questions such as how much am I paying in fees? How much time does my adviser or planner dedicate to my portfolio? What have my returns been minus fees
and expenses? Also, spend time educating yourself on investing and the equity markets so that you can be armed with solid information when making decisions with regards to your portfolio. In the
end no one should care more about your hard earned money then you do!
A terrible week in the oil and gas sector saw some of Canada's largest oil and gas stocks down over 10%. In the mid to small cap space it was even uglier with some stocks receiving a 20% haircut.
So was that the bottom you may ask? I have no idea and either does anyone else for that matter. I do know that many financial experts were pounding the table calling a bottom when October's sell off occurred. WRONG. You will only know when stocks have bottomed in hindsight and well after the fact.
As in previous blog posts XEG.TO (Ishares Sp TSX
Capped Energy Index) is a good representation of the energy sector. Keep in mind it's heavily weighted in the largest stocks by market cap (SU.TO, CNQ.TO, CVE.TO, ECA.TO and CPG.TO). Lets take a look at a monthly chart of XEG to see
where the sector was and where it may be headed.
Why the "Vegas" in parentheses you may ask? The TSX Venture Exchange can be compared to a Casino because of its small and micro-cap listed companies that are viewed by many as a gamble. Not only are these companies tiny in comparison to the listings on the TSX (Toronto Stock Exchange) but many produce little to no cash flow and can be compared to a "burning match".
Choose the right company that discovers the next big oil well or gold deposit and you could see some gigantic gains. Unfortunately the odds are stacked against you when you invest/speculate in
TSX Venture stocks just like they are when you gamble at a casino. At least in Las Vegas you get free drinks while you play!
Lets take a look at the performance of the TSX Venture and the TSX to see how "small" vs. "big" has worked out for investors involved in these markets over the last 5 years.
Click on the chart below to enlarge
If you live in Canada there is probably a very good chance that you own a LOT of Canadian based companies in your portfolio. This may be through a Mutual Fund, an Exchange Traded Fund
(ETF) or individual stocks.
Do you know that 59% of the S&P/TSX Composite Index is comprised of Financials and Energy? Add the Materials sector to the mix and we are looking at a 70% combined weighting of three sectors. Basically, when you invest in Canadian equities you own Canadian banks and Oil/Gas companies. So much for diversification.
There is a strong bias by Canadian investors to hold a portfolio that is primarily comprised of Canadian stocks. I've seen a lot of portfolios lately that are loaded with Canadian Energy and
Banks. What about technology and Biotech? How about owning some foreign markets like China and India? Simpler yet, what about the US equity markets? How have they done in comparison to their
northern neighbor? With ETFs you can access all of these markets very easily and with minimal fees.
By owning too much Canada and not enough America what have Canadian investors missed by not looking south?
Below are the returns over the last 5 years of the S&P Composite Index (XIC.TO), the S&P 500 (SPY), and the NASDAQ Composite (QQQ). Warning. If you didn't own any US equities over the last 5 years you might not like what you see.
Click on the chart below to enlarge.
It's time to revisit XEG.TO which is a solid representation of the Canadian Energy Sector.
With the slide in Crude oil prices in the last few months from the $105 area to around $80, energy stocks were taken for a ride in the same direction. DOWN.
A recovery rally has occurred after such a dramatic fall and now the question is, was that it? Or is there more pain to come? Unfortunately no one will know for sure but we can use price as a guideline as to where a low risk entry point may be.
On a weekly chart price has moved from around $21 to a low of $15.27 and now we have rallied to around $16.50. There is good solid support in the $14 dollar area from the lows made in May 2012 and September 2011. This is a critical area of support in the longer term outlook. Will prices revisit this area again? If we fail to stabilize above the lows made this week then a revisit could be possible.
As of right now the sector has transitioned into a downtrend and any rallies need to be treated with suspicion.
Trying to pick a bottom is extremely difficult so letting things settle down and normalize is the prudent thing to do at this stage. The bottoming process takes time and I will be watching the sector closely for clues that the selling is indeed done.
The first thing I'm looking for is the bottom from this week to hold for a least a few trading days. If price doesn't hold the lows from this week the next leg down should take price to the $13.50 - $14.00 area shown in the chart below.
Click on chart to enlarge.
The volatility has picked up in the markets recently with some serious price range action in the broad market indices. SPY, QQQ, IWM have all suffered some losses as of late with the exception of today's explosive rally.
Three stocks that have ignored the recent market volatility and have stood their ground in the recent sell off have been TWTR, FB and GPRO. All three have experienced exceptional relative strength
and have kept their up trends intact.
Do you defend your core holdings in your portfolio? If not you should. The individual investor has a wide variety of vehicles to choose from to help protect/hedge a portfolio from downside risk.
When the market tanks it usually takes everything down with it. It doesn't matter how solid of a company or mutual fund you own, it will more than likely get dragged down with the market as a
Here are some examples of ETFs (Exchange Traded Funds) that can help soften the blow from a market "correction". These vehicles involve leverage so consult your financial professional for further information.
Is most of your portfolio in Canadian equities? HXD.TO can be used to profit when the TSX Composite goes down.
Are you overexposed to the Canadian Oil and Gas sector? HED.TO will go up when the sector sells off like it has recently.
Do you have exposure to some or all of the Canadian banks? HFD.TO will help reduce your risk by rising when the bank shares are getting sold.
These are only a few of the many vehicles available to protect your hard earned dollars invested in the equity markets.
Want to learn more? Contact me to find out how I can help.
Its time to take a look at some ugly charts of some of the most beaten down and hated markets.
The markets most hated right now are Gold, Silver, Wheat, Soybeans and Corn. None of these commodities can catch a bid but maybe one day soon they will.
When a market, stock or sector goes from being hated to less hated and the price action begins to show signs of bottoming, the potential for profits can be substantial. Now is the time to start
Lets take a look...
GPRO - The stock exploded 8.12% today to close at $63.52. Its up 68% in less then a month.
Video recorders and cameras have been around for a long time but now they're small and wearable. Combine this with social media and it proves just how much we love to show off what we're doing
whatever it is that we do.
TWTR - Moving 2.56% higher today to close at $52.00 and up 79% over the last 3 months.
Similar in a way to GPRO it is another way for us to express ourselves. We can speak our mind and share whatever we feel necessary whenever we want.
How Twitter continues to monetize and attract new users moving forward will be key to the stocks performance.
TSLA - Same old same old. Once again short sellers are being taken out behind the woodshed. The stock is only $4 off its all time closing high of $286.04. On Friday the stock sold off and gave the shorts some hope. Today a nice $4.72 pop.