Post Fed & Pre-Election


With the September Fed meeting behind us and the US Presidential Election ahead we are in between days it seems, like waiting for Godot, waiting for a catalyst to change the investment landscape be it political, economic or otherwise. In the meantime, investors are exposed to many different crosswinds that muddle the investment process.

The corporate earnings picture has been declining for 5 straight quarters. Q3 for the S&P 500 is expected to decline -2.3% making it six declines in a row yet 2017 earnings expectations show an increase of 14.8% year over year. On the GDP front Q3 consensus is at 2.8% and Q4 at 2.4%. These follow 1.1% for Q1 and 1.4% for Q2. Consumer Confidence in the US surprised to the upside yesterday however the manufacturing PMI printed 49.4 in August, down from 52.6 in July, while service rose to 51.9 in September from 51 in August to reach a 5 month high. Wages and housing – the main drivers of inflation – have been modestly better but capital investment is declining or flat suggesting the improvement in wages is not reliable or sustainable.  And we have a sanguine Fed, or at least the appearance that they are optimistic.

When we look outside of North America we see that Europe has lots of challenges, the most pointed being nagging deflation and a banking sector with some serious problems at Deutsche Bank (Germany) and Monte Paschi Bank (Italy). We will certainly hear more about these two in the coming days and months.  Japan can’t imagine inflation growth let alone conjure it nor convince the markets that its convinced of its own plans  China is somewhat of a mystery but with rumours of debt piling up higher than the known print of  250% of GDP (whisper is 300%) it seems like its a mysterious time bomb.

Crosswinds aside, markets are not in too bad of shape though slightly extended at present, and continue to reflect a bias toward portfolios that are convex or that display balanced risk  between pro-growth and pro-cyclical themes.


poopShort term the S&P is positive and range bound between 2190 and 2120

SPX ST 2016 09 27On an intermediate term basis the S&P is rolling over slightly.  We have taken on some hedging in our US Equity Portfolio

TSX ST 2016 09 27The TSX too is positive short term but divergences are now showing

TSX LT 2016 09 27 On an intermediate term basis the TSX is softening with energy falling

EUROPE ST 2016 09 27Short term Europe is capped by its spring highs.  Indicators are falling

EUROPE LT 2016 09 27Longer term Europe has overhead supply to work through and falling indicators.

TNX 2016 09 27 STYields are again falling short term…

TNX 2016 09 27 LT…and capped by overhead resistance longer term


TNX Seasonality 2016Speaking of interest rates, this rolling 5 year chart of performance has looked different in each of the last 5 years (4 charts below).  Seasonality at the asset class and individual security level translates forward or back – it migrates – based on the overall market structure.

TNX Seasonality 2015TNX Seasonality 2014TNX Seasonality 2013TNX Seasonality 2012


Class weekly 2016 09 23Big drop for the S&P and the USD. These are all short term looks (trading). The monthly data (investing) comes out next week.

CDN Weekly 2016 09 23No significant moves in TSX sectors.

US Weekly 2016 09 23In US sectors info tech falls out of top 5 and smalls caps move in.

INTL weekly 2016 09 23In international indices Turkey has a big jump and Hong Kong a modest move down

TSX Weekly 2016 09 23Some softening of a few pro-cyclical themes



poop3This long term comparative chart of pro-cyclicals (US financials, grey) vs. defensives  (US utilities, back) is representative of how convexity plays out in portfolio management.  Defensives have outperformed since the end of 2007…

poop2…but since Brexit (June to August 2016) financials were better.  As of September utilities took the lead again. This is one picture of why managing assets using convexity helps to reduce the importance of “Fed speak” or business headlines,  examples of powerfully distracting forces.    While you may own both at times,  some areas are to be traded and others invested.

SNC 2016 09 29We recently sold SNC based on a technical breakdown. The company lowered guidance today to $1.30-1.60 vs. forecast of $1.50-$1.70  We try not to love our holdings and why sometimes shoot first. We’ll revisit the stock again.

EXE 2016 09 29Extendicare is a recent acquisition and is part of a bullish secular theme in healthcare and social demographics.

FFH 2019 09 29Fairfax Financial is also a recent purchase.  Not only do we get “convexity” within one single security but we also get to stand on the shoulders of the giant Prem Watsa and his global perspective.


In general, balancing risk instead of asset classes reduces the need to be right at each market pivot.


Robert Sneddon, Portfolio Manager, robert@castlemoore.com