February 2017

The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on some of the people at MacNicol & Associates Asset Management (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


“Beware of little expenses; a small leak will sink a great ship”- Benjamin Franklin



Market Commentary: What’s Next?


After a few weeks of picking up steam, the New Year managed to get off to a great start to kick off 2017. A perfect sign of this bullish sentiment that seems to be taking Wall Street by storm was on January 25th when the DOW broke through that record setting 20,000 mark.



Exhibit 1 shows the DOW since the U.S. election and what many would be referring to with regard to its stellar performance. One reason for its performance, and its ability to break through this level was due to the Trump Administration, and the policies/potential policies he has or is planning to implement in the coming months.


Not to get to into U.S. politics, but some of the most notable moves Trump and his administration have already started pushing for are; the U.S. to withdraw from the TPP (Trans Pacific Partnership), the approval of two pipeline projects (North Dakota & Keystone), and the most media grabbing headline thus far the immigration ban. U.S. stocks fell the most since November’s election following the announcement of the travel ban, with the DOW losing 175 points, retreating back below the 20,000 range. This ban also sent the shares of U.S. airline companies tumbling, due to potential retaliations by other nations. The U.S. does $200 billion in trade with Muslim countries, with Iraq having a rather significant trading relationship with the U.S., as it is the 6th biggest source of U.S. oil imports. Trump and his administration have made numerous mentions towards potential trade barriers between countries, two in particular have been China and Mexico. Recently, this has caused some individuals to panic and further increase the level of concern around the market place, due to what is being referred to as ‘Trump’s America first’ mentality and attitude with the potential rise of a ‘protectionist’ economy. However to quickly touch on the effect of any potential trade war and the risks associated with it, the S&P500 has 44% of its revenue coming from overseas according to JP Morgan. Now it is only a waiting game to see what the new Presidential administration will have in store for NAFTA, and how it might affect Canadians, our economy, and our loonie.


The loonie has gained 4% against the USD since touching a 10 month low at the end of last year. Some believe we are in for a potential reversal as the loonie may have moved up too fast. Two factors that have helped contribute to the loonie’s strength thus far are the stronger price of oil, and how the loonie has managed to avoid being caught up in Trump’s trade lash outs that we have seen over the past few weeks. Recently we have heard how the USD is currently too high, making exports uncompetitive on an international scale. On Monday February 13th, Prime Minister Justin Trudeau plans to meet with President Trump for the first time, and you can be sure that one potential topic will be regarding trade, and more specifically NAFTA.


One key component of both the U.S. and Canadian market that fuels industrial production is the auto market. The U.S. auto production in particular has started coming down in early 2017 due to slowing sales and rising inventories. The Financial Post recently published an article that stated all these years of rising U.S. auto sales are starting to work against car makers. A glut of used vehicles has started to depress prices. This trend will continue as 3.36 million Americans will return their leased cars this year. GM has also just announced that it now has more than 100 days’ supply in its inventory. This follows an incredible run where new vehicles sales jumped each of the last seven consecutive years. According to the Federal Reserve Bank of New York, the number of subprime auto loans falling into delinquency rose in Q3 to its highest level in six years. The much anticipated higher interest rates will only worsen this already deteriorating situation. In December, all three of the U.S. domestic car companies, including Ford, took the unusual step of announcing assembly plant closures, and one reason for this might be due to an excess inventory problem.


This sector rotation is why we, at MacNicol & Associates, intend to become more sector oriented in our investment approach due to the current uncertain macro environment. David MacNicol believes that making sure you are invested in the right sector even though you might possibly be in the wrong stock, should still manage to perform better than the right stock in the wrong sector. This investment strategy is being modeled closely to that of TD’s Chris Dutton who works closely with Mr. MacNicol to determine the outlook for the current capital markets. Dutton is under the belief that we are currently in the late cycle of our economic environment. One such sector they are currently favouring heading into this late cycle is the Technology sector. This is due to his belief that we are to be expecting a defensive rotation into the second half of 2017.


Seasonally, the period between January-April tends to be fairly strong for a handful of different sectors. This seasonal price strength may help carry the market rally higher into May, as the S&P/TSX composite index tends to be very strong through the winter-spring period. This same winter-spring period also tends to be a fairly positive seasonal period for oil prices. However prices will remain supressed as we have seen recently due to the risks of higher than expected levels of U.S. inventories. For this reason we may see oil struggle to break out further, limiting its potential upside. Two stronger trends that seem to be showing positive signs are both Copper and Gold. Copper inventories are believed to be relatively low at this current period in time, as demand is picking up, and if current supply/inventory were to fall we would see a rise in the price of copper globally, which many including Dutton are expecting. Another positive for copper is that we are now entering a strong period historically for the price through January until April.


Gold has recently just hit a new multi week high of $1245, before settling back down. As you can see in Exhibit 3 investors have been flowing back into gold backed ETF’s recently to offer a hedge against a potential uncertain economic and political environment. Gold seems to have a habit of starting the year off extremely well. Since 2000, Gold prices have risen in January two thirds of the time. According to the Wall Street Journal Exhibit 2, “to say that the result of the U.S. Presidential election has been positive for mining would be an understatement. Since Trump’s election victory the S&P Metals and Mining index are both up more than 20% vs the DOW, which is only up 9.4%”.


This could be a sign of a potential pullback some in the markets have been expecting, prior to the markets next leg up. The S&P 500 has not lost even 2% at any point since the election, even though there have been plenty of opportunities for it to do so, due to numerous uncertainties around both the globe and with this new presidential administration. This could be viewed as a bullish signal that the market refuses to breakdown and be held down. However others are looking at this recent economic environment and saying that we are long overdue for a dip. Based off Exhibit 4 below, one can clearly see that it appears we might be due for a potential dip in the near future. Keep in mind that a pullback greater than 5% has yet to appear in our recent past, and a pullback of this size would be perfectly healthy and could set the market up for its next move upwards.

The New Year has brought and will continue to bring an increase in volatility, making the environment ripe for an active investment management strategy. Investors have recently changed their attitudes to become more cautious, willing to wait and see how things play out globally. One such area that might have investors’ attention is the coming Debt Ceiling meeting in mid-March, which is where Trump and his new administration will push for an increase, which they are likely to get. However if any setbacks or negative news happen to appear around this story we could possibly see a similar story playout to that of the debt ceiling crisis in 2011, which sent Gold to sky highs.


It is hard to argue that there are not increasing risks appearing in the market on a more and more frequent basis. Stocks have had quite a good run up since the election. There might be further positive news to come, which could help to send the markets even higher through various policies, such as the deregulating of financial markets, as well as an increase in further tax cuts for both corporations and individuals. However, there also happens to be signs flashing showing significant risk due to Trump’s populist policies, which could hurt the world economy.


Behavioural Investing:


There are periods throughout history that help usher in change or transition where individuals need to learn and be able to adapt. One prime example of this is how technology has and will continue to change, and with it, one’s mentality and life may change on a day to day basis, hopefully for the better. As an investor or market watcher these learning experiences throughout history remain extremely important as they help usher in a new era, such as the tech revolution, making one’s day more productive and enjoyable. While being more aware of what is going on and changing around you, one is better able to implement certain investment strategies that will allow one’s self to capitalize on opportunities that the market may present.


Economic guru Woody Brock feels that throughout our lives we have seen productivity overall increase without fully realizing and comprehending its day to day capabilities, and effect it has on our lives. Many of us take for granted the effect technology has had on our daily lives, as we have almost come to expect it. This is a new era, one that is fast moving and changing constantly. The only way for us to grow is to adapt and change with it.




Jordan Rosenberg joined our growing MacNicol team on Oct. 1st 2016.  As a Business Development Manager he is responsible for introducing MacNicol to Financial Advisors that are seeking alternative investment options for their higher net-worth clients.


Jordan and his wife Annie live in Oakville, Ontario and have 3 children ages 13, 16 and 17.  Rounding out the bunch is “Buddy” their 7 year old golden retriever.  When Jordan is not working, he can be found running, jumping or throwing.  Specifically, he is Canada’s top Decathlete for his age (10 track and field events) and came 4th in the world championships in 2011.  More recently, he crossed Lake Ontario (51km) on a stand up paddle board on Sept. 21st 2015.  This took 8 hours and over 9,000 individual paddle strokes.  Lastly, Jordan enjoys acrylic painting and is an avid motorcycle enthusiast.


MacNicol & Associates Asset Management Inc.

February 2017