Preparing for the unpredictable?
What does 2015 bring? I’m always plagued by theorizing on what the future will bring, when most of the time, it is difficult to understand the past. I’d like to think I’m a “free thinker”. Meaning I make up my own mind and not dictated to by anyone or anything, such as a corporate policy. To ensure this for myself and my clients, my team and I have moved our practice to MacDougall Investment Counsel Inc. (MIC), a division of MacDougall, MacDougall MacTier Inc. (3Macs) – Canada’s oldest private investment firm. My opinion will remain my own simply because MIC or 3Macs does not provide corporate banking or underwriting, thus no conflict of interest when it comes to the firm and investment advice or recommendations.
I know that as independent as I believe I am, I’m still subject to the persuasion of others, but this is a good thing when we apply rules as filters. For me a good basic rule is: is the person I’m listening to also independent? If they are, then I’ll put more credence to their thoughts and opinions. One such individual is Ben Hunt, author of the Epsilon Theory. If you wish to subscribe his blog just head to the following link, http://www.salientpartners.com/epsilontheory/.
The paragraph below is drawn from Ben’s letter entitled “The Clash of Civilizations”. With 2014 closed, the New Year is like the dawn of a new era. A fresh beginning, an opportunity to do things better… But this isn’t always the case as we all now. Ben, in this brief comment brings a political and economic perspective of where we have been in the past few years to the present, and what we should be thinking about now.
“The Clash of Civilizations is not going to get better in 2015. It’s going to get worse. Why? Because for the past five years we have had a US government that was willing to pay the high price of empire to extend its monetary policy hegemony over the entire world to save the infrastructure of modern Western civilization: the US banking system and its collateral assets. Five trillion dollars later, the Fed has now declared victory and is demobilizing the QE troops. Is it a lasting victory? I don’t know and it doesn’t really matter. It’s a useless question. In the immortal words of Bill Parcells, you are what your record says you are, and the Fed’s record looks pretty darn good. So they’re declaring victory and that’s how it will go down in the history books. The better question is: what now? What happens in the rest of the world now that the peace-keeping and price-raising and prosperity-bringing delivered by five trillion dollars in asset purchases … stops?”
The question “what now” is profound because it is the most important question, one that we’d all love the answer to. As I write this the S&P/TSX Composite has fallen about 4% in the past two days and we’re in another down day. Early September saw the peak of the 2014 market, it is down about 9.5%, but still positive 5% over the past 12 months. Energy has been the major crux of the problem in Canada, down over 50% since June of 2014. The 10 year chart on energy shows that this isn’t new territory, extreme volatility is the norm in this sector.
A very important question is how long can a key sector in an economy stay down? To answer, consider the chart on the Materials sector in Canada. It’s been in a vicious slump for about 4 years and is still down from the peak by 50%. Could our energy sector be in for the same?
S&P TSX Composite: 1 year chart
Capped Energy Sector: 10 year chart
Materials Sector: 10 year chart
Mr. Hunts question should be haunting us from the perspective that the world has literally gone through another crisis in a way unlike any financial crisis has previously. The US, as he points out, can claim a victory at the cost of 5 trillion dollars. What’s next? The world is again in uncharted territory. Looking at the charts above the answer to me remains clear.
At the Tycuda Group we will continue to do the two things we are good at. We compare the markets to publically traded strategies like mutual funds and Exchange Traded Funds (ETFs) to determine what strategies have been the most productive at tip toeing through the mine fields of investing over similar time periods. A common thread is that the strategies that have achieved the better results than the markets are few, but often the few are consistent in accomplishing the job. So we’ll just keep doing tomorrow what we did yesterday, searching for and owning the strategies that keep out performing their peers through market cycles. For our stock portfolios, we’ll keep running our Relative Strength process that helps determine which sectors are performing the best, and which stocks in those sectors are the most preferable to own. The above processes helped us limit the impact in portfolios as energy collapsed. No process is perfect, but a good process ensures that you have done your homework that not only prepares you for the bad, but the good, and how to find it.
If 2015 is leaving you out in the cold, give us a shout and we’ll bring you inside where it’s warm.
Portfolio Manager, MacDougall Investment Counsel Inc.