June 4th, 2013 Market Update

Markets in Japan rebounded overnight as Premier Abe declared that he would continue to encourage increased overseas investment and increased investment in equities with the $2trillion Japan Pension Plan.  That news caused a 2.75% rally in the Nikkei.

European markets moved higher on UK constructions showing an upside surprise in May and Spanish employment increasing for the first time in a long time.  While the employment numbers are still terrible overall in the country, seasonal hiring this summer is up strongly over last which does suggest that businesses are seeing some rebound.  Markets in the region are up about a half a point with Spain up more than 1.25% at midday.

The US futures markets are up about a quarter point this morning on continuing discussion over the Fed’s bond buying program and the different opinions coming from the various members. The New York Federal Reserve Bank president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of banks, one bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.  Of course this is where the problem seems to be arising currently as each region is at a different stage in regard to economic recovery and the members are being quite vocal publically as to there current opinions on when the bond buying program will be tapered and by how much and what duration. While markets have been quite volatile as asset managers scramble to rotate through sectors (out of defensive stocks into cyclicals) and change their secular allocation models (out of fixed income and into equities) the entire process reminds me of the famous, “irrational exuberance” speech from then Fed Chairman Alan Greenspan in December 1996.

It would seem that the Fed, whether conscious of it or not, are effectively doing the same thing Mr. Greenspan did in the late nineties to try and slow down the rapid increase in real assets, stock markets and debt.  That phenomenon coupled with continued deregulation in industry, financial services and lenders.  He did spook the markets and they did correct though early 97 and again in mid-98 but the trend continued higher as the tech bubble continued to form as rational thinking seemed to go out the window.  We all know what occurred in the late summer of 2000, the tech bubble burst and it took until October of 2007 for that next bubble to burst.  The recovery from that period to the present has seen five corrections of differing levels however each high in 2000, 2007 and the present are all higher than the previous and the trend continues to be up.

Are we currently in a bubble?  Based on current growth levels which are low to moderate at best I would suggest not.  Will the markets correct?  It would seem the Fed is doing its best to get that to occur but is having a hard time justifying at the end of the day any real movement on the QE and have not mentioned interest rates at all.

Bond prices have moved higher and will likely continue to albeit at a very slow pace especially at the short end of the curve.  Longer bonds I do have more concern with as that is the debt that finances countries and as risk models are adjusted the yield curve by default should move higher in the 15 year and longer maturities.

Based on the above, while I am making some slight sectorial changes to mandates, I am not throwing out the baby with the bathwater.  Defense is still the best offence in these times and will continue to be for the foreseeable future.

Gold is off more than $20.00 this morning giving back all of yesterday’s increase at 1395, oil is lower by a half a point at 92.75 and the loonie is off half a cent to 96.86.

Lastly, the CRTC did come out with their Code of Conduct for cellular providers which did actually have some positive developments for customers.  I suggest you speak with your carrier to determine what savings you may be eligible for.

Kenneth A. Dick, BA, CIM, CFP, FCSI

Branch Manager & Portfolio Manager | Independent Wealth Management

Canaccord Genuity Wealth Management

www.glwm.ca

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