The Market in Review
Paul Siluch, Lisa Hill, Peter Mazzoni, and Sharon Mitchell
Financial Advisors
Raymond James Ltd. – Victoria BC
May 19th, 2017
This week’s articles and insights
1.
2.
3.
4.
Trump’s Troubles
Fixing Debt With More Debt
Merck’s Keytruda
Don’t Panic!
“A child cannot be president. I love my children; they cannot have the
nuclear codes.”
- Ross Douthat, New York Times
Your Index Report
Current
Dow Jones Ind. Avg.
S&P 500
TSX
Trump’s Troubles
20,804
2,382
15,458
Last
Week
-0.44%
-0.38%
-0.51%
Year-to-Date
+ 5.27%
+ 6.38% (+6.96% in $CDN)
+ 1.12%
Some of you may remember the Trump Shuttle, the current US president’s airline
that started in 1989 only to be shuttered by 1992. The airline got off to a very
rocky start just three months after its inauguration when the nose gear crumpled
on one of the jets, forcing a crash landing.
Trump the President did a similar nose-dive this week as the mercurial president
became caught in a widening scandal between the Russians, the FBI, and
himself. It seems he never misses an opportunity to point the gun at his own foot.
We bring this up simply because the markets are no longer brushing off the
antics happening in Washington. Much hope has been built on the prospects for
tax and health care reform, as well as the repeal of many regulations hampering
business. All of these initiatives are now in doubt. Impeachment talk is now
swirling, something that is still a longshot, but less of a longshot than just a week
ago.
Markets hate uncertainty. There is suddenly too much, all at once.
But, here’s how markets work:
-
In the short-term, they are influenced by events, such as politics and wars.
In the long term, they are influenced by earnings.
Earnings today are excellent. US earnings were +8.9% higher in the 1st quarter
over last year, and 74% of companies beat their earnings estimates, compared to
the five-year average of 68%. Dividend payments by US corporations are at alltime highs. A weaker US dollar and inexpensive oil are like stimulus programs to
the world’s emerging markets. Japan just recorded its longest string of economic
growth in years and there are almost no signs of recession on the horizon..
Outside of Washington, the economy is fine. Better than fine, actually.
It will take a few days, or weeks, for the markets to digest all the turmoil and get a
sense of what happens next. If impeachment becomes a real possibility, we
could see markets flounder through the summer, but it does give us a chance to
buy at better prices.
Fixing Debt With More Debt
Wouldn’t it be nice to borrow as much as you want and never repay it? A credit
card with no limit?
It seems like that is what governments have taught the world since the year
2000. Lower the interest rates and borrow more. Consume! Spend! Grow the
economy!
There was a time in the 1990s when elections were won and lost simply on the
deficit theme. Canada’s Reform Party pounded the drum on Canada’s growing
debt, which then forced the governing Liberals to slash spending to get the
balance sheet back onside. Ross Perot, with his clever infomercials about the
growing US deficit, drew enough votes away from the Republican George Bush
Sr. in 1992 to allow Bill Clinton to take the White House.
Today? Ontario now has more debt than Canada had in 1990. At over $300
billion, the province has twice the debt of California, a state with three times as
many people and a state often singled out for its high debt. Granted, it is debt
financed at much lower rates, so is more easily carried. But still…more than
Canada had just as we approached our own debt crisis in 1995.
We are solving a debt problem by adding more debt, something that seems
absurd on the surface. It works only if the debt never has to be repaid.
In its simplest form, a debt is simply borrowing money to consume today
something you would normally consume tomorrow, when you had the money. By
bringing demand into today, we remove it from the future. Think of borrowing to
buy a car today instead of saving to buy one in two years.
The issue of global debt repayment is a simple question with a complicated
answer.
A debt is settled in one of three ways:
1. It is repaid in full.
2. It is defaulted on and the lender loses some or all of the investment.
3. It is repaid with a devalued currency, either through inflation or a
devaluation of the currency.
Most of us like to think the worst of the debt crisis is behind us. The Financial
Meltdown years of 2008-2009 were marked by poor credits, sub-prime loans, and
mortgage defaults. Thankfully, this period is well in the rear-view mirror. Bank
balance sheets and real estate prices in the USA have recovered nicely.
But at what cost?
A recent chart from Ned Davis Research shows total world debt (government and
private) climbing to new highs. What? Weren’t we out of the woods?
There was a pause in the level of global debt from 2010 to 2015. This was a
period when hundreds of thousands of homeowners in the US defaulted, Cyprus
banks were wiped out, and Greece negotiated a debt restructuring that removed
US $130 billion from its balance sheet (most private investors were forced to
accept $0.50 on the dollar).
Suddenly, though, we are back on the treadmill. The average Canadian now
“owes” $94,000 per person in accumulated government, provincial, and personal
debt (source: Government of Canada), a number that is climbing at a faster clip
now that Alberta is adding close to $11 billion per year in new debt.
Should we worry? Interest rates are so low, we can carry ten times the amount of
debt with interest rates at 1% as we used to when they were 10%.
But as Herbert Stein, the economist, once said “If something cannot go on
forever, it will stop." At some point, the world will either start paying back all those
bonds it has issued, or it will be forced to restructure them.
For now, governments have begun tapering back their extreme debt increases.
Quantitative easing is finished in the US and slowing down in Europe. Of course,
we are all still deficit spending every year, so debt continues to pile up. Just at a
slower pace.
Reading various journals and speaking with a strategist from a leading fund
company, it appears likely that rates will stay low for years. There is too much
debt out there to raise rates very far without sinking us all, but growth will be low,
as well.
Ultimately, just about every currency in world history has been devalued and
restructured at some point. Ten or twenty years in the future, don’t be surprised if
this happens again to all currencies at once.
The ramifications of this are likely that bonds carry less risk for the next few years
than we fear. If rates stay low and government tax revenues pick up due to a
stronger economy, bonds should be fine. They would suffer most in an eventual
devaluation, though that is likely many years away.
Stocks would do best in such a low interest rate, low-growth environment.
Gold is also likely to do well, but not until we enter another round of quantitative
easing, zero percent interest rates, and a possible global currency realignment.
Again, years away, but almost inevitable.
Merck’s Keytruda
In 2006, three scientists began work on cancer drugs that worked differently than
existing ones. Rather than attack the cancer directly, which was often almost as
harmful to the patient as the cancer itself, they sought to harness the body’s own
immune system. Cancer cells have ways of hiding from our immune systems,
which are normally very good at detecting and destroying errant cells. If the
cancer cells could be unmasked, then the body’s own defenses could destroy
them far more efficiently than traditional chemotherapies and radiation
treatments.
Today, these drugs are a reality. Other versions were unveiled by Bristol Myers
(NYSE BMY) but the one that has emerged as the most effective is called
Keytruda and it is made by Merck (NYSE MRK). Sales are running at almost $2
billion per year and are rising at an 80% clip. It is a new “blockbuster” drug for
them, one which could become one of their biggest ever.
Pharmaceutical stocks have been tough to own since their heydays in the 1990s.
Driven by breakthroughs such as Viagra in a time when medical costs were
much less of an issue, the 1990s were the best days for the drug stocks. Many of
these have declined in the last few years, with Merck one of the few near its alltime highs.
The drug is now being used for melanoma, lung, bladder, and head and neck
cancer treatments. Interestingly, Merck is finding the drug works even better
when paired with existing treatments, which could extend its reach even further.
Merck is held in our Dividend Value portfolios.
We want to say thanks to our clients for introducing their
friends and family members to us throughout the year. It’s a
tremendous compliment and a huge responsibility, and
something we never take lightly.
Don’t Panic!
A recent study by the investor firm Dalbar looked at why the average investor
underperforms. Not just underperforms the index, but often worse than the
mutual fund the investor holds.
How can this be?
On average, over the last 20 years, investors underperformed the S&P 500 index
by an average of 3.52% per year. This was composed of the following:
0.54% Lack of availability of cash to invest – return that is lost by delaying the
investment
0.68% Need for cash (planned and unplanned) – return that is lost because of
withdrawals before the end of the period being measured
0.79% Fund expenses
1.50% Voluntary investor behavior underperformance – panic selling, exuberant
buying and attempts at market timing
The average investor received 5.48% per year versus the index return of 9.0%
per year. The largest contributor (40%) was human emotion. In fact, this
component was double the amount lost to fees, which is the current target of
regulators and the press.
It has been increasingly shown that investors who use advisors are less prone to
panic. It may simply be a second opinion, or just someone to “talk them down”
when panic strikes.
And it will strike, for all of us. When it does, take a deep breath. It will save you
money!
http://www.raymondjames.ca/siluchhill/
We thank you for your business and your referrals and we hope you find our site
user friendly and informative. We would welcome your comments.
How to contact us:
[email protected]
[email protected]
[email protected]
(250) 405-2417
Disclaimers
The information contained in this newsletter was obtained from sources believed to be reliable, however, we cannot
represent that it is accurate or complete. It is provided as a general source of information and should not be
considered personal investment advice or solicitation to buy or sell securities. The views expressed are those of the
authors, Paul Siluch and Lisa Hill, and not necessarily those of Raymond James Ltd. Commissions, trailing
commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus
before investing. The indicated rates of return are the historical annual compounded total returns including changes
in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or
optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are
not guaranteed, their values change frequently and past performance may not be repeated. This newsletter is
intended for distribution only in those jurisdictions where Raymond James Ltd. is registered as a dealer in
securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This
newsletter is not intended for nor should it be distributed to any person in the USA. Raymond James Ltd. is a member
of the Canadian Investor Protection Fund.
Raymond James does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any
alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent
through the Internet is not secure or confidential. We reserve the right to monitor all e-mail.
Any information provided in this e-mail has been prepared from sources believed to be reliable, but is not guaranteed
by Raymond James and is not a complete summary or statement of all available data necessary for making an
investment decision. Any information provided is for informational purposes only and does not constitute a
recommendation. Raymond James and its employees may own options, rights or warrants to purchase any of the
securities mentioned in e-mail. This e-mail is intended only for the person or entity to which it is addressed and may
contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of
any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited.
This email newsletter may provide links to other Internet sites for the convenience of users. Raymond James Ltd. is
not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant
or guarantee the products, services or information described or offered at these other Internet sites. Users cannot
assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund
investments. Please read the prospectus before investing. There can be no assurances that the fund will be able to
maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund
will be returned to you. Mutual funds and other securities are not insured nor guaranteed, their values change
frequently and past performance may not be repeated.
Amazon.com Inc. - Raymond James & Associates makes a market in shares of AMZN.
Alphabet, Inc. - Raymond James & Associates makes a market in shares of GOOG.
Home Capital Group Inc. - The Analyst and/or Associate or a member of his/their household has a long position in
the securities of HCG.
th
Prices shown are as of close May 19 , 2017.
You are receiving this message because our records indicate that you have requested this information. If you no
longer wish to receive research from Raymond James, please reply to this message with unsubscribe in the subject
line and include your name and/or company name in the message. Additional Risk and Disclosure information, as
well as more information on the Raymond James rating system and suitability categories, is available at
www.rjcapitalmarkets.com/Disclosures/Index.
To unsubscribe and no longer receive any email communications from
this sender, including information about your account, please either
click here or send a reply email to the sender with [UNSUBSCRIBE] in the
subject line.
Pour vous désabonner de cet expéditeur soit cliquer
ici ou envoyer un e-mail de réponse à l'expéditeur
avec [UNSUBSCRIBE] dans la ligne d'objet.
____________________________________________________________________________________
This email, and any files transmitted, is confidential and may contain privileged information. Any unauthorized
dissemination or copying is strictly prohibited. If you have received this email in error, please delete it and notify the
sender immediately. We may monitor and review the content of all email communications. Trade instructions by
email or voicemail will not be accepted or acted upon. Please contact us directly by telephone to place trades. Unless
otherwise stated, opinions expressed in this email are those of the author and are not endorsed by Raymond James.
Raymond James accepts no liability for any errors, omissions, loss or damage arising from the content, transmission
or receipt of this email. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.
Le présent courriel, de même que tout fichier transmis en pièce jointe, est de nature confidentielle et peut contenir
des renseignements privilégiés. Toute diffusion ou reproduction en est strictement interdite. Si vous avez reçu ce
courriel par erreur, veuillez le supprimer et en informer immédiatement l'expéditeur. Nous pouvons surveiller et
examiner le contenu de toutes les communications électroniques. Les instructions portant sur des opérations,
données par courriel ou dans une boîte vocale, ne seront pas acceptées ni exécutées. Veuillez communiquer avec
nous directement par téléphone pour donner des ordres en bourse. Sauf indication contraire, les avis exprimés dans
le présent courriel sont ceux de l'auteur et ne sont pas avalisés par Raymond James. Raymond James décline toute
responsabilité en cas d'erreurs, d'omissions, de pertes ou de dommages découlant du contenu, de la transmission ou
de la réception du présent courriel. Raymond James Ltd. est membre du Fonds canadien de protection des
épargnants.
____________________________________________________________________________________