May 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.


“Markets, like life itself, are a series of ups and downs, and all one can do is maximize the ascent and control the damage on the way down. Autopilot works fine when you’re climbing to cruising altitude, but you might want a skilled pilot when the descent starts.” – Kopin Tan, Barron’s


The Numbers:


Market Commentary: Something is missing…what could it be?

 Welcome to our monthly market missive. In this month’s segment we begin with a focus on…wait, wait just a moment…something is missing…what could it be? Perhaps a chart might help:

The chart above is a long-term measure of volatility in the stock market. As you can see volatility is at 24-year low. Want volatility? Book a flight on United Airline or apply for the job vacancy at the FBI. Goldman Sachs has their own way of explaining the market’s noticeable lack of fear in the form of a cross-asset volatility table:

Cross-asset volatility tables are nowhere near as interesting as volatility charts to look at but they tell the same important message: uber-low levels of volatility are bad, especially with interest rates having hit rock bottom last July.


But why all the worry over a stock market that does not seem to be worried about anything? Well in short, it is because stock markets are supposed to be volatile. Short-term stock market volatility is the implicit trade off one makes for a higher long-term return potential. Stock market volatility is a bit of an anachronism now.

The world’s major Central Bankers have played a major role in volatility’s disappearance. Years of low interest rates and accommodative monetary policy have trained [fooled] investors into believing that moral hazard pays off. Moral hazard pays off because Central Bankers will step in to save the markets with cheap money at the first sign of trouble, or so the thinking goes…



With each new bullet the market dodges Central Bankers are one step closer to sharpening their hawkish talons in the name of something called interest rate normalization [technical jargon for higher interest rates] and that could create a lot of problems for unprepared investors. Yet, even as we write, just a few short hours after the firing of FBI Director James Comey, stock index futures are down a “whopping” 0.2%.

Rather than assuming the market’s tranquil ride to ever higher valuations will continue, the MAAM investment team has prepared for the potential of a world of higher interest rates. An environment in which interest rates are a headwind to investors and not a tailwind really is a game changer. It has been nearly twelve years since the world’s major Central Banks last embarked on a semi coordinated campaign of interest rate hikes. We believe things could get a little dicey once the punch bowl is taken away. The stock market’s valuations suggest that it really doesn’t care about much…we think it should.


Click, click, boom…

Back in 2007, just ten years ago, shares of Amazon were attainable for anywhere between about $60 and $90 per share. The very next year Amazon, like a lot of stocks, experienced a “fire sale” when the large US investment bank Lehman Brothers imploded dragging down global markets. Back in those anxious days of 2008, you could find shares of Amazon in the $50s and at one point the stock briefly dipped into the $40s.


What about today you ask?

Believe it or not, Amazon shares now trade at well over $900 per share. In fact, the privilege of ownership will cost you $961 per share at the time this article is written, and that is a lot. But Amazon is a lot of company. In 2016, the company’s top line revenue figure was well into the $130 Billions and recall that revenue is a high-fidelity figure which cannot be adulterated as easily as earnings can. Clearly a lot of people use Amazon. But the bigger question from an investment perspective is why are investors piling into the company at an accelerated pace more recently? Amazon shares have tripled since the beginning of 2015. We are similarly miffed about why investors continue to pile into ETFs they know very little if anything about in year 7 of a Bull Market.

Will Amazon’s sophisticated artificial intelligence systems one day have electronic drones dropping off products to your home that you did not even realize you needed? Perhaps. Will Amazon’s stock price correct sharply at some point in the future? That question is easier to answer, yes. Long-term investors not prone to altitude sickness will note that the “” Bubble of 2000 is almost hard to spot when compared to the mountain of market cap the stock is today. 


Amazon is not the only stock in the world whose valuation is ambitious given its expense growth and mounting pressure from bricks and mortar rivals such as Walmart, as well as, more traditional tech peers like Microsoft. That investors are dripping with euphoria over the company having recently beaten downwardly revised earnings estimates takes our breath away even more. To be sure the MAAM investment team is not hyperventilating just yet, but we do feel that some added perspective, common sense and caution is warranted.


Now is certainly a good time to re-evaluate one’s view on Amazon since it was twenty years ago this week that the company went public. Amazon’s market capitalization now stands at the equivalent two (2) Walmarts plus an entire additional company the size of Canadian oil and gas producer ARC Resources. We will be watching the rest of this story unfold from the sidelines…


Behavioural Investing:  The Dow’s Dizzying Heights and Investors’ Cognitive Dissonance


In psychology, cognitive dissonance is the mental discomfort experienced by a person who simultaneously holds two or more contradictory beliefs, ideas, or values. The occurrence of cognitive dissonance is a consequence of a person performing an action that contradicts personal beliefs, ideals, and values; and also occurs when confronted with new information that contradicts said beliefs, ideals, and values. In finance, cognitive dissonance is really the same. Except in finance it can prove costly…

Suppose an investor concludes in advance that he or she is going to begin investing excess cash when the Dow Jones Industrial Average stock index falls to 18,000 points. Let’s suppose the Dow is currently at 19,000 points. Let’s further suppose that in subsequent trading sessions the Dow begins to climb higher and higher.


The investor’s original thought [investing when the Dow falls to 18,000 points] seems at odds with the behaviour of the Dow after the decision to invest has been made. Throwing caution into the wind, the investor decides to begin investing with the Dow at 19,000 points [and climbing] instead of waiting for a pullback to the 18,000-point level to reconcile the cognitive dissonance he or she is experiencing.


While this certainly may not be a good investment decision, it will allow the investor to rationalize him or herself into thinking it is…if for no other reason than to rid him or herself of the feelings of cognitive dissonance.


Are your investments safeguarded?


Firm News: We’re Growing

MAAM is pleased to welcome new staff members to the team. Brook Pickering joins MAAM in the role of Portfolio Administrator and Joseph Pochodyniak, CFA joins as Portfolio Manager, Alternative Assets.

Brook Pickering graduated from Ryerson University with a B.A this past spring. She enjoys competing in the equestrian discipline of 3-Day eventing and has represented Canada, winning both team and individual bronze medals at the North American Junior Championships.


Joe Pochodyniak graduated from the University of Toronto in 1999. Joe is a CFA Charter Holder and earned the FCSI Designation from the Canadian Securities Institute. Joe is also a lecturer at Centennial College’s School of Business where he teaches the investment funds course. In his spare time, Joe enjoys spending time with his family and listening to jazz music.


Warren Buffet Documentary

 A documentary following the life of the world’s greatest investor, Warren Buffett. This documentary combines key moments from Warren’s life with his world of wisdom on how to become a better investor.


May 2017