What a month this has been in the stock markets. The S&P 500 (United States) passed the resistance levels of 2,800 and has risen quickly towards the next level of 2,930, which was the high in September. When the stock market keeps trying to go higher but stops multiple times at a certain level, that creates a ceiling. It is seen as a resistance point. It will hold back the market until the market breaks through. Once broken through it is believed to now become a floor and the market will have to prove that it will drive lower before giving up that floor level.

The S&P 500 has continued upwards to 2,886 which is 1.5% away from the September high and is 22.7% above the December 24 low of 2,351.

This is only one aspect of the market. This is what’s called technical analysis. There is also fundamental analysis which looks at things like earnings, cash flows, sales, debt servicing and growth.

This monthly will cover:

  1. Investments: An overview of the fundamental analysis globally
  2. Mortgages: Trevor Dale gave a presentation to the iBridge Capital team on mortgages, mortgage backed securities and how they related to the economy and interest rates,
  3. Housing market
  4. Insurance: How to use a policy in conjunction
  5. Private mortgages: How to become a lender

Resources:

  • Presentation about mortgage backed securities, mortgages and the economy: https://bit.ly/2IqXm4p
  • Want to know what houses in your area sold for? Check out bungol.ca This is a fascinating and free tool.
  • Want to get a free house property value assessment and free credit check? Check out: http://mopolo.ca/ and select Trevor Dale as your mortgage agent
  • Coming soon: Video and podcast with Michele Caranci from Right at Home Realty about expediating the thought of buying a house to making it an action.

Investments:

With the backdrop of Canada still having one of the highest debt to income ratios nationally, it still remains an area of concern from an investment standpoint. The yield curve inverted this month and is usually a canary in the coal mine for a coming recession in the next 6-18 months.

An inverted yield curve means that the short-term government bond yields are higher than the long term yields. For example the 3 month, 2 year and 5 year US and Canadian government bonds were all lower than the 10 year bonds. For developed countries, lower interest rates (yields) are an indicator of easy monetary policy which is usually that way because of weakness in the economy. Higher interest rates (yields) are an indicator of a healthier economy which can withstand higher costs of funding or perhaps it is a hot economy that will require slowing to cool inflation.

When the yield curve inverted that meant that interest rates were expected to be lower in the future due to a weaker economy. Typically it is an indicator that a recession is coming in the next 6-12 months. Having said that, the markets often rallied over the following 6 months of an inversion before retracing the gains. It is a pretty strong indicator however the curve was only inverted for a short period of time. Some are wondering if it was a head fake.

It is often thought that the bond market is the smartest market and that it can be used as a predictor. The US Fed and Canadian central banks eased their rhetoric of increasing interest rates and indicated that they would be likely to be steady. President Trump and Larry Kudlow have been using the mantra of a cut in interest rates which is testing the independence of the US central bank as they seek to add members that reflect their thinking and monetary policy beliefs.

In light of potentially steady or lower interest rates, the markets rejoiced. Risk assets outperformed defensive names such as utilities. One area that doesn’t do as well as can be hoped for is financials as higher rates and a healthy economy increases their margins and lending activity.

On the positive macro fundamental side:

  • China and US housing activity were healthy
  • China manufacturing improved as did German retail sales
  • Across the EU, wage growth remained healthy at a 2.3% increase year over year
  • China’s stimulus seems to be taking affect
  • China/US trade negotations appear to be heading towards a conclusion, although major obstacles still remain
  • Brexit has been extended and the UK has a little more time to negotiate a structured withdrawal from the EU or hold another referendum to cancel the exit. It’s still possible that the UK exits the EU without a trade deal which is seen as a negative risk to the economies.

On the negative side:

  • Canadian bond yields continue to decrease with concerns over the economy
  • Canadian and Chinese car sales remain in a downtrend
  • German manufacturing continued to slow and is in a contractionary phase
  • US inflation is on the lower side along with producer prices
  • US retail sales are in a downward trend
  • US and Canadian manufacturing is still in a downward trend, although still expanding, just at a continuing slower rate

Oil continues to rise above $70/barrel (Brent oil) and copper was flat. Both are seen as indicators of inflation and economic activity as you need oil to move vehicles and copper is used in building materials of all sorts.

Our playbook on investments is minimal to zero allocation to Canadian stocks, a major focus on currency hedged US stocks and a small allocation to German stocks. We are watching closely for Germany to take a turn for the better and will increase out allocations there if we see some positive economic numbers. Overall, we are a little more cautious on stocks in general and are keeping to the mid to light range of equity allocations within our client’s exposure ranges. Another area is to see if the US manufacturing weakness and trade issues begin to show up in the job numbers which are showing no sign of slowing with respect to weekly jobless claim.

As a reminder, we focus on building portfolios as a pension fund would. We always ask all clients two questions:

  1. How much cash do you need?
  2. When do you need that cash flow(s) by?

Once we know the answer to those two questions then we can engineer the amount of bonds required to fund those cash flows for the next market cycle and within that we can further dive in to the appropriate allocation of stocks across the world and what locations and sectors should be held.

Financial planning by answering the two above questions is critical to the construction of portfolios which are augmented with fundamental and macro analysis.

Mortgages:

Don’t forget to check out Trevor giving a presentation about mortgages and how lenders sell them off in mortgage backed securities. There’s also a strategy in there when fixed rates are higher than variable mortgage rates.

Housing Market:

The Canadian Real Estate Association reported that February had home sales decrease on the MLS System by 9.1% month over month to the lowest level since November 2012. This could be an outlier in the numbers as weather played a role in February. Nationally, homebuilding rebounded in March from a frosty February’s numbers. TD Economics is calling for a near-term increase due to “ultra-strong population growth, low rental vacancy rates in key markets, and past gains in pre-construction sales. Further they are not expecting any further Bank of Canada rate hikes which should be supportive for the housing market and consumer. Having said that, residential investment will likely be a drag on the economy for a third quarter in a row.

Insurance:

When do you buy life insurance that expires after a set term and when do you buy life insurance that will last your whole life?

This is dictated by the purpose of the insurance. Are you trying to mitigate the risk of passing away before your mortgage is due and forcing the remaining spouse to sell the house if they can’t qualify for the mortgage on their sole income or are you trying to mitigate the loss of capital gain taxes that might occur in the even of death. Many people are not aware that if two people originally applied for a mortgage and one of them passes away that the lender will require the surviving person to apply for that same mortgage.

Some other considerations are if you would you like assets to flow directly to a beneficiary rather than flow to the estate? Would you like more anonymity in how your estate is disbursed?

For young couples or people trying to match off a particular debt then a term insurance policy is an affordable way to go. It gives you something to be protected by and also has a lower insurance premium than a whole life policy that follows with you for your entire life.

When there are legacy concerns, privacy concerns, or desire to use your assets to fund your own lifestyle rather than borrowing from a bank then a whole or universal life policy is a good solution. There are many nuances and should be examined and compared across different carriers.

Either way, a comprehensive financial and personal analysis should be conducted to see where the most effective and efficient insurance solutions can be deployed.

Private Mortgages:

Note: All mortgage discussions are provided by Trevor Dale, Mortgage Agent via iBridge Capital Inc #13506 unless otherwise indicated.

Private mortgages are not only for people with bruised credit or non-traditional qualifications. They can be very helpful in a number of circumstances. For example if an investor bought a residence from a builder and has to close on the house in order to sell the property but doesn’t qualify for traditional lending from a bank or credit union then private funds can be a good choice in order to sell the property and preserve their down payment and price appreciation.

Trevor has seen a number of people who are living in condos as they have already received occupancy and will be closing and have to fund a mortgage shortly. Due to the B20 mortgage rule changes, some borrowers no longer qualify.

Other times funding has fallen through at the last minute and someone will need to close on a property in 48 hours or less. Private funding may be a solution.

In the case of someone with bruised credit, perhaps they have suffered a loss of job or other life circumstance. Anytime a private mortgage is issued, we require a plan to get that person from private mortgage to a “B” lender and back to an “A” lender. Our goal is to work with them to graduate them back to a more traditional lender. This includes coaching on how to repair credit, budgeting and follow up.

We require both borrowers and lenders to keep this cycle going. People with excess capital can choose to become lenders. The process is to have a conversation with us to make sure that they understand the process, discuss with a real estate lawyer who is well versed in private mortgages and to complete an application to become a lender through the brokerage. We then work with the lender and borrower to arrange the funding if it is a fit.

We have many creative solutions to mitigate risk to both parties for an optimal outcome.

Until next time,

Trevor Dale, CFA

 

Disclaimer