November 2016

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).

We hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


 “The rate of interest is the reward of parting with liquidity for a specific period” –John Maynard Keynes


Market Commentary: The Moment We’ve All Been Waiting For


It has been an interesting month in the markets, with a 9-day trading period of consistently negative returns from the S&P 500. This was the longest such slump since 1980, and only the fourth time in history that the index has fallen for over seven days. It should be noted, however, that each daily decline was small, and that markets have fallen much farther in shorter periods of time in the past. Many have argued that the market weakness and volatility can be attributed to fluctuating opinions and questions on the outcome of the US election. For better or worse, these questions will be answered by midnight tonight.  On Monday (Nov. 7th) the markets managed to snap their 9-day losing streak, getting back into the green. Moving forward, we do not see the recent market volatility as being a flashing red light to exit the market, however, we have increased cash positions. Alternatively, as Canaccord Genuity Chief Market Strategist Tony Dwyer noted in his recent market update, volatile markets are often buying opportunities, as long as the underlying thesis and economic growth remains intact. We have yet to see a change in the US economic environment that materially changes our opinion on the economy.


Now, the discussion everybody knew was forthcoming; whom do we expect to be the next President of the United States, and what might we expect from the upcoming 45th President? Without making any predictions, it would seem that most market analysts have their final forecasts heavily favouring Hillary Clinton. Exhibit 1 below shows the current landscape of FiveThirtyEight’s projection, which rose to fame for predicting the outcome of all states, as well as the overall outcome, during the 2012 election cycle.


Exhibit 1


The Huffington Post is currently forecasting a 98% chance of Clinton winning, which is even more lopsided.


What we can say, is that the recent bounce in index returns have coincided quite closely with the fortunes of Hillary Clinton’s FBI investigation, rebounding once it was revealed that the FBI found nothing to change their mind. This, to us, suggests that the market also expects Clinton to win, and that market participants view it more favourably than a Trump presidency. Nonetheless, poll figures and projections are not canon, and, as we saw with the Brexit result, anything can happen.


As most expected, the Fed held rates firm prior to the election, which transitions focus towards the December meeting, marking the last chance to raise rates in 2016. Coming into the year, the Fed noted their desire to raise interest rates as many as three or four times. They have only been able to once, thus far. Odds of them raising rates in December have continued to rise and are now around a 60-70% chance, based on traders’ estimates. The Fed has stated in both of their last two meetings that the data justifying a potential rate hike in the near future has strengthened. Exhibit 2 below shows a visual of these predictions.


Following the conclusion of the Presidential election, we expect the markets focus to shift to OPEC and Russia, who are working to stabilize the oil market.  This will rely heavily on the ability of all parties involved to work alongside and with one another. The main discussion surrounds the issue of cutting production, and how each country can afford to cut. As we have seen, low prices have put a financial strain on many of the countries involved. The onset of fracking and the necessity of oil in regards to many countries’ fiscal budgets have combined to create a persistent international supply glut, which has yet to abate. Until recently, US inventory data had been experiencing fairly consistent drawdowns of surprising magnitude, which caused optimism that the supply glut had eased. This optimism was dashed, however, as the most recent report showed a build of 14.42 million barrels. Exhibit 3 below shows the recent oil inventory data.



Exhibit 3


As of Friday, October 28th, of the 290 companies in the S&P 500 that have reported earnings; 73% beat estimates, 10% matched, and 18% were below estimates. Netflix, specifically, stood out; blowing through estimates and surprising on the upside with higher than expected customer growth. Apple completed its fiscal year, cementing its first annual drop in revenue since 2001, and Tesla reported its first quarterly profit in more than three years, also noting that they do not believe they will require additional capital infusion. Also of note was Amazon, which disappointed investors in respect to their earnings. They have now missed estimates by 33% and 46% in two of the last four quarters. Facebook, who has been a top performer since its IPO on the back of mobile advertising monetization, also warned that their revenue growth from this area is likely to slow moving forward. Out of the so-called ‘FANG’ stocks (Facebook, Amazon, Netflix, and Google), which have been integral to the ongoing bull market, two had poor results.


Merger and Acquisition activity through October was also particularly active. Through October, $489 billion of deals were announced, including AT&T purchasing Time Warner, GE entering a Joint Venture with Baker Hughes, and TD acquiring ScotTrade.  This surge in activity is particularly noteworthy due to the size of the deals announced, and the prevalence of so-called ‘Mega Mergers’. There have been over 32 deals so far this year valued at over $10 billion. An uptick in M&A activity is often an opaque indicator, with some arguing it exemplifies the inability of companies to grow results organically, while others see it as companies capitalizing on salient value within the market.



The Story of the Mexican Fisherman


An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellow fin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.


The Mexican replied, “Only a little while”.


“Why didn’t you stay out longer to catch more?” The American asked.


“I have enough to support my Family’s immediate needs.” Said the Mexican.


“But,” The American continued, “What do you do with the rest of your time?”


The Mexican fisherman explains. “I sleep late, fish a little, play with my children, take siestas with my wife, stroll into the village each evening, where I sip wine, and play guitar with my amigos.  I have a full and busy life.”


The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats; eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman, you could sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”


The Mexican fisherman asked, “But, how long will this all take?”


To which the American replied, “15 – 20 years.”


“But, what then?” Asked the Mexican.


The American laughed and said, “That’s the best part.  When the time is right, you would announce an IPO and sell your company stock to the public and become very rich. You would make millions!”


“Millions – then what?”


The American said, “Then you would retire.  Move to a small coastal fishing village, where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”



Behavioural Investing:


Looking at the markets over the last month, it seems the most discernable constant factors seem to be persistent volatility and sideways markets. In these times, it’s about holding steady and not becoming consumed by fear, or greed. An investor needs to feel confident in his or her beliefs, and remain cognizant as to why they invested into a given stock in the first place. This is why, over the past month, numerous economists have urged the use of patience to drown out the fear and anxiety that tries to take hold of an investor’s emotions. It is also suggested to remain focused on the long-term goal, one that washes away the pernicious unsettling feelings of short term volatility. It is vitally important to remain insulated from being swayed by short term emotions; in order to avoid regretful actions.


In such scenarios, it is our belief that having an internal, well-researched thesis is the most important thing an asset manager can do, combined with explicit metrics that denote required times of reassessment. With a strong, independently-derived thesis, an investor is less likely to give in to short term emotions. If you have confidence in your own opinion and research, you are more likely to ignore the ‘noise’. It is also important to maintain a list of key criteria which would cause your opinion to chance, in order to separate the ‘noise’ from an actual structural shift in the market. If you can lay out a scenario that must occur before switching your opinion, you will be less likely to be swayed by exogenous information.





For this month’s personal section, we would like to welcome a few new additions to the MacNicol & Associates team.


Christopher Panagopoulos is a Portfolio Manager who focuses on Real Estate, Private Equity, Hedge Funds, Derivatives, and other alternative asset class strategies. Christopher brings vast amounts of experience to the MacNicol & Associates team, as he has over 16 years’ experience in asset management, accounting and finance. Prior to joining the firm, Christopher was a Portfolio Manager and Director of Finance with Faircourt Asset Management for 11 years. Christopher has also previously worked at TD Securities within the Global Derivatives Products Group. Christopher is a CFA Charter holder, a Chartered Accountant, and holds a B.A. from the University of Toronto. Christopher lives in Toronto and enjoys golfing in his spare time.


We would also like to welcome Harrison Newlands, who will be assuming the role of Research Associate for MacNicol & Associates. Harrison recently graduated from the University of Guelph, where he obtained a Bachelor of Arts degree. He is currently in the process of completing his CSC (Canadian Securities Course). As the Research Associate, Harrison will spearhead internal research, macro commentaries, and individual investment research activities. He joined MacNicol & Associates in September 2016. Harrison enjoys reading, as well as both playing and watching hockey. He supports our hometown Maple Leafs through thick and thin.




MacNicol & Associates Asset Management Inc.

David A. MacNicol, B.Eng.Sci., CIM, FCSI

President, Portfolio Manager
November 2016