Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Greedy Rally or New Reality?

Highlights This Month

The NWM Portfolio

It was again a “risk on” month in October, with all asset classes posting strong returns.

Lower interest rates helped fixed income products post positive results with two-year Canada yields ending the month at 1.11% versus 1.19% at the start of the month. Likewise for 10-year Canadas, which rallied from 2.54% at the beginning of the month to 2.42 on October 31.

NWM Bond was up 0.6%, which was driven entirely by our three alternative credit managers.

Narrowing credit spreads also helped returns in October, as NWM High Yield Bond increased 1.6%.

Global bonds were also higher in October, with NWM Global Bond increasing 2.4%. Part of this return was due to a 1.6% decline in the Canadian dollar, but firmer prices for emerging market debt also helped.

Mortgage returns were slightly higher than previous months, with NWM Primary Mortgage and NWM Balanced Mortgage returning 0.7% and 0.6% respectively.

The Canadian preferred share market was slightly negative for the month of October with the S&P/TSX Preferred Share Index ETF down -0.2% versus NWM Preferred Share returning -0.1%.

It was a busy month trading wise as several opportunities presented themselves. We opportunistically bought Northland Power as an aggressive seller brought the stock down over a dollar intra-day and we were able to buy a block of shares at the low. Northland has since recovered by 80 cents.

Canadian equities were stronger in September with the S&P/TSX gaining 4.5% (total return, including dividends), while NWM Strategic Income and NWM Canadian Tactical High Income were up 4.6% and 4.3% respectively.

In Strategic Income, we recently sold our position in Bonavista and used the proceeds to add our existing position in Encana. We also used the recent share price weakness in Canexus to add to our positions. Presently about 10% of our Canadian positions are covered and just under 1% of our U.S. holdings.

As for Canadian THI, we moved to a fully invested position in October by re-writing ten put positions and added to our positions in Heroux-Devtek and Guardian Capital.

Foreign equities were also stronger in October with NWM Global Equity up 3.8% versus +5.3% for the MSCI All World Index and 6.0% for the S&P 500 (all in CAD). All our external managers were up.

NWM U.S. Tactical High Income returned 2.5% (approximately 3.7% in CAD) and is currently fully invested after re-writing seven put option and writing put options on two new names, Unilever and Costco.

The REIT market had a strong month in October with NWM Real Estate up 1.3%.

The alternative strategy funds delivered a good month. Gold increased 1.2% in Canadian dollar terms while gold stocks registered a modest return, with NWM Precious Metals increasing 0.8% and NWM Alternative Strategies increasing 1.28%.

October In Review

By Rob Edel, CFA

The rally in the North American equity markets continued in October with the S&P/TSX, S&P 500 and Dow Jones Industrial up 4.5%, 6.0% and 4.2% respectively (in Canadian dollars).

International equities were also stronger, led by the blue chip Eurozone Index, the Euro Stoxx 50, up 6.1%. Asia was mostly flat, with the Shanghai Composite up 0.2% and the Nikkei 225 +0.3%.

With stocks in the U.S. up over 30% year-to-date, should investors begin to take profits? There are definitely some signs of caution in the markets.

Investor sentiment has turned decidedly bullish with volatility on the S&P 500 Index trending lower and the ratio of bullish option bets far outweighing bearish ones (the ratio of bullish option bets versus bearish is referred to as “skew”).

The Investor Intelligence gauge of advisor sentiment recently indicated 55.2% of respondents were in the bullish camp as opposed to only 15.6% claiming to be bears.

The American Association of Individual Investors points out that following the lead of these bullish investors hasn’t always been a wise move. Investing in the S&P 500 post the most bullish 10% of sentiment readings historically has yielded investors an annualized loss of 1.4% the following two months.

As Warren Buffet says, investors should “be fearful when others are greedy and greedy only when others are fearful.” There is presently a lack of fear in the market, and greed is making a comeback.

MMC-2013-10-Measuring Up

Is there anything to be fearful of? Well, yes, in fact there is.

While strategists have pegged S&P 500 earnings to increase a healthy 11% next year, double this year’s pace, fourth quarter earnings estimates for S&P 500 companies compiled on a company-by-company basis continue to plummet.

Why the big increase next year, especially since revenue growth is estimated to be below 5%? Surely the market isn’t banking on even higher profit margins? After-tax corporate profits as a percentage of GDP are already at their highest levels since 1929.

MMC-2013-10-Fall colors

Of course, it’s not profits driving this market, but liquidity. As long as the world’s central banks remain accommodative, equities are the place to be.

Technically, equities continue to look good, with market breadth remaining strong. A market rally typically begins to look long in the tooth when it is being driven by an ever decreasing number of stocks and sectors.

Year-to-date, all ten S&P 500 sectors are easily posting double-digit returns. Utilities and telecom are lagging the market, but even they are up about 15%. Also encouraging is the strength of cyclical stocks, such as materials, technology, and industrials, which tend to perform better when the economy is on the upswing.

MMC-2013-10-Coming Around

Perhaps investors are coming to the conclusion that monetary policy is likely to remain accommodative in the near term and interest rates are unlikely to be moving higher?

Last month, the Federal Reserve surprised the capital markets by choosing not to “taper” its $85-billion-a-month bond buying program. The uncertainty of the government shutdown and potential debt default as a result on Congress’ inability to raise the Federal debt ceiling or approve a federal funding budget was at least part of the reason the Fed blinked.

In the end, Washington followed an all too familiar playbook by kicking the problem down the road. The road ends in mid-December, however, when a newly formed bi-partisan congressional budget conference committee is scheduled to report on either a deal or no deal before Federal funding again runs out in mid-January.

Democrats want tax increases and a reduction in the Sequester spending cuts. Republicans want reductions to Medicare and Medicaid spending, citing the unsustainable future fiscal burden the current system places on young workers (and voters).

MMC-2013-10-Uncle Scam

So far, the Democrats appear to have the upper hand given the public opinion thrashing the Republicans took over the government shutdown fiasco.

An October CNN/ORC poll conducted just after the shutdown found 75% of Americans believe GOP (Republican) members of Congress don’t deserve to be re-elected with 52% blaming Republicans for the shutdown versus 34% blaming President Obama.

The poll also placed the Democrats with an 8-point lead for the upcoming 2014 mid-term elections. With numbers like these, why would the Democrats feel compelled to bargain with the Republicans?

Well, because the same poll found 70% of respondents didn’t believe any members of Congress deserved to be re-elected, with almost 40% including their own representatives. President Obama and his popularity rating are also taking some significant PR hits over the less-than-smooth roll out of Obamacare.

Obama promised Americans if they wanted, they would be able to keep their current health care plan. Turns out that is not the way it’s going to work, and Americans could be forced into more expensive government sponsored plans.

The American people feel misled and the government shutdown is quickly becoming a distant memory. A soft economy and fumbled healthcare rollout has many wondering if the Democrats are up to the challenge of running the country.

A mid-October Pew Research poll, in fact, found that while many voters may be mad at the GOP, 44% believe the Republicans are better able to deal with the economy versus only 37% who trust the democrats.

While we hope Washington is able to come to some kind of “grand bargain,” we wouldn’t be surprised if they end up kicking the can down the road once more.

If this is the case, it would be another reason for the Federal Reserve could put the taper on hold.  Viva la stock market!

MMC-2013-10-President Obama's Job-Approval Rating

If the current U.S. political landscape can be described as dysfunctional, the Eurozone appears beyond repair as hopes of reaching a deal to form a common Eurozone government are fading fast.

Newly re-elected German Chancellor Merkel is backing away from previous commitments to political union and major changes to EU treaties as German officials consider actually taking some powers back from Brussels.

At the same time, Germany’s current account and trade surplus has come under scrutiny by the U.S. and its Eurozone partners with complaints that Germany is not doing enough to spur domestic demand, thus making it harder for weaker competitors to increase exports.

For their part, German officials are widely of the opinion that Germany’s large trade surpluses are due to the competitiveness of German companies and a sign of a healthy economy. Germany should be emulated, not reprimanded.

Is it Germany’s fault French companies are subjected to payroll taxes that can tack on an extra 48% to what they pay their workers and Government spending makes up 56% of French GDP versus only 44% in Germany?

No wonder S&P downgraded French debt again in early November. Regardless, the Euro in its current form is unsustainable. The U.S. has problems, but at least they are not structural, as is the case with Europe.

MMC-2013-10-Above the Limit

Of course Europe’s biggest problem is that its economy has stalled. A growing economy can hide many problems, but economic growth in the Eurozone has failed to gain any kind of traction.

Even worse, inflation recently hit a four-year low and the Euro has been soaring. October consumer prices increased only 0.7% and the Euro has increased nearly 8% since early July against the U.S. dollar.

Low inflation and a strong Euro might be palatable for Germany, but it’s hard for countries like Spain and Italy. It’s much easier to reduce real wages in an inflationary economy. If there is no inflation, the only way to for companies to lower costs to become more competitive is to actually decrease wages, and that won’t win you any popularity contests.

MMC-2013-10-Modest Outlook

Bowing to the pressure of a soaring Euro, the ECB unexpectedly cut rates in early November, lowering their benchmark rate from 50 basis points down to 25 basis points. Of course the Federal Reserve has been at essentially zero interest rates for almost five years, so the ECB is a little late to the party.

The ECB has also trailed both the Federal Reserve and the Bank of Japan in using its balance sheet to buy government bonds in order to drive longer-term interest rates lower and increase liquidity in the financial system.

This might be the next step for the ECB if inflation continues to trend lower. Of course the Germans will oppose this, claiming concerns of a housing bubble in major German cities.

MMC-2013-10-Euro Zone Plays Catch-Up

Perhaps the government making the boldest change in government policy is Japan. Mired in a two-decade-long deflationary funk, Prime Minister Abe is on a mission to increase inflation and devalue the Yen in order to get Japan’s economy growing again.

Early results have been encouraging. Japan’s economy grew 4.1% in the first quarter this year followed by 3.8% in the second. Unfortunately, growth in the third quarter decelerated to only +1.7%, mainly due to an estimated 2% decline in exports during the quarter.

Japan had been the beneficiary of double-digit gains in exports, but a slowdown in demand from emerging markets, which is the destination for two-thirds of Japan’s exports, has hurt growth. Also hurting economic growth was a paltry 0.4% increase in consumer spending, the weakest showing from the consumer in a year.

Perhaps, the only bright spot in the third quarter was government-funded infrastructure spending, which increased 35%. With government debt-to-GDP of over 200%, Japan will be challenged to keep up this pace.

MMC-2013-10-Abenomics Hits a Speed Bump

Free trade is one way to increase exports and economic growth and Prime Minster Abe is participating in trade negotiations that could see a major free trade pact signed with the U.S. and other Asian nations.

Called the Trans-Pacific Partnership, being included in the deal could result in Japan sacrificing the rich subsidies it currently pays its farmers. It is estimated Japanese farmers currently rely on government handouts for 56% of their income, compared to just 7% for U.S. farmers.

Also being offered up for negotiation are the punitive tariffs Japan levies on imported agricultural products such as rice, which can attract tariffs as high as 778%. As a result, it’s not uncommon for luxury food shops in Japan to charge $15 for an apple and $100 for a bunch of grapes. Not bad for a country suffering from two decades of deflation.

Not surprisingly, agricultural exports make up a very small percentage of Japan’s exports and Prime Minister Abe smells an opportunity. Abe wants Japan’s reputation for high quality (aka expensive) fruit, rice, and beef to be used to market theses goods to the world’s elite, who would think nothing about shelling out a premium for Japan’s high quality produce.

Sounds like a bit of a sales job to the politically well-connected farmers who stand to lose a big portion of their income, but, then again, Abe has proved to be a great salesman – so far.

MMC-2013-10-Betting on Quality

While most of the developed world worries about deflation, stronger inflation is again a concern in China, with consumer prices increasing 3.2% in September. The good news is that, unlike Europe and Japan, China’s economy grew faster than expected in the third quarter, increasing 7.8% versus 7.5% in Q2.

MMC-2013-10-Leveling Off

Like the U.S., Europe, and Japan, China is also in the midst of making structural changes. Known as the Third Plenum, a four-day meeting of top Communist leaders just concluded in Beijing and news on some of the proposed changes are starting to filter out.

An easing of the One Child Policy is expected (if one of the parents is an only child, they will be allowed a second child) as well as the abolishment of forced labour camps. Also being discussed are a bank deposit insurance system, an increase in the amounts of profits state-owned enterprises have to remit to the government, and greater emphasis on environmental protection.

What we want to see is policies that would lead to greater domestic consumer spending and a re-balancing of China’s economy away from a reliance on exports and infrastructure spending. Stay tuned.

Overall, the fundamentals for the global economy remain weak. Liquidity is strong, however, and as long as monetary policy is simulative, the capital markets will remain content.

The U.S. Economy

MMC-2013-10-Economic Growth-Table-US

 The U.S. economy grew a stronger than expected 2.8% in the third quarter, though inventory building added 0.8% to the total and could result in the third quarter stealing some growth from future quarters.

Consumer spending only increased 1.5% versus 1.8% in Q2 and business spending actually decreased 3.7%. Industrial production in September was also strong and capacity utilization hit a five-year high, though it was mainly driven by higher utility utilization.

Manufacturing actually declined in September 0.1%, and while manufacturing indices posted healthy gains in October, like GDP growth, they were positively influenced by strong inventory building.

MMC-2013-10-Not as Good as It Looks


The employment situations report for October was also better than expected with 204,000 new jobs created and August and September’s totals revised a cumulative 60,000 higher.

Private employment actually increased 212,000 as 8,000 government jobs were eliminated. The unemployment rate ticked a little higher, though mostly likely due to the government shutdown. Overall, a pretty good month.

The data may be a little sloppy due to delays from the government shutdown, but momentum appears to be headed in the right direction. We would, however, like to see more high-paying jobs created.

Of the 2.3 million jobs created over the past year, retail and food service positions have dominated and 35% pay less than $20 an hour.

MMC-2013-10-Slowing Down

MMC-2013-10-Inflation-Table-US (2)

If last month’s employment report is supportive of a Fed tapering, inflation data in September provides the opposite.

Inflation in the U.S., while higher than the Eurozone and Japan, continues to moderate. It’s one of the things the Federal Reserve is looking at in order to determine when to taper and it’s one of the reasons they have chosen to wait.

MMC-2013-10-Failing to Register

MMC-2013-10-Consumer Confidence-Table-US

Consumer confidence continued to tumble in October to its lowest level in almost a year due to the government budget debate and the 16-day partial government shutdown. The rich and higher income earners tended to be more optimistic, however.

MMC-2013-10-Exhibit 1

MMC-2013-10-The Consumer-Table-US

Weak auto sales hurt September retail sales, though an early Labour Day that shifted auto sales into August was the main reason. Auto sales were on pace to hit an annualized 15.2 million units in October, up from 14.4 million a year ago.

Lower gas prices, a recovering economy and an aging auto fleet are driving Americans to look for a new ride. Other big ticket items, such as washing machines and boats, are also gaining the attention of U.S. consumers, despite the deterioration in consumer confidence.


October housing data was incomplete due to the government shutdown, but the data that was available indicated the housing market has cooled from its red hot pace.

Prices remain strong and the inventory of homes available for sale scarce, but sales are trending lower. Pending home sales, in fact, declined year-over-year for the first time since May 2011.

Some of the weakness is likely due to buyers rushing to close deals earlier in the year before mortgage rates increased, but existing sales in September also declined from the previous month, which itself was revised sharply lower.

We don’t have any data for new home sales, but a Wells Fargo survey of 150 sales managers indicated 29% of home builders who responded to the survey have increased the use of incentives versus 17% in August.

MMC-2013-10-Shown the Door

We still like the U.S. housing market and think it will be a positive driver for the U.S. economy in the near term. Higher interest rates could provide a headwind, but a gradual increase in rates should be manageable, especially if it is due to a strengthening economy.


The U.S. trade deficit widened in September as a slight decrease in exports failed to keep pace with a strong increase in imports.

While these results will weigh on GDP growth, it could be seen as a positive signal for the domestic U.S. economy. Likewise, the decrease in exports is an indicator of weak global economic growth.

MMC-2013-10-U.S International Trade in Goods and Services

The economy in the U.S. continues to recover, but not with the enthusiasm that that the equity markets would imply.

The key question is whether the recovery is strong enough to compel the Federal Reserve to taper. The consensus is they will start in March.

The Canadian Economy

MMC-2013-10-Economic Growth-Table-CAD

GDP grew more than expected in August with oil and gas extraction leading the way.

The manufacturing sector declined 0.3%, though strong October purchasing manager survey numbers point to potential strength later in the year. The Bank of Canada took a more gloomy view of the economy last month and backed off the idea of a future interest rate increase in its public communications.

The export sector continues to worry the Bank, and with the exception of the auto and forestry sectors, remains lackluster. Hopefully a new trade deal with the European Union announced in October will help Canadian exporters.

A joint study by Canada and the European Commission released in 2008 indicated a trade deal could add almost 0.8% to Canadian GDP and would help Canada diversify away from major trading partner, the United States, who presently receives 75% of Canada’s exports.


A decent month for Canadian job growth in October, especially given the average for the past six months is still upwards of 23,000 per month (multiply by 10 and compare to the U.S. job numbers). Given the pace of economic growth in Canada, we wouldn’t have been surprised to see a weaker result in October.

The quality of the increase was mixed. While 16,000 full-time jobs were created, 22,000 private sector jobs were eliminated (the public sector created 47,000 jobs).

Accommodation and food service added almost 30,000 jobs last month and healthcare and social assistance positions increased almost 20,000. Goods producing sectors were weak, with manufacturing shedding 6,000 positions and construction 9,000.

At 6.9% in October, the unemployment rate in Canada is lower than in the U.S., but many believe there is still room for improvement. The Conference Board of Canada agrees and thinks Canada could actually experience a shortage of workers in the near future.

In early 2008, before the financial crisis, the unemployment rate in Canada was less than 6% and many regions were experiencing tight labour markets. Already in Alberta and Saskatchewan the unemployment rate has fallen to only 4.3% with wages moving higher again.

By 2020, the Conference Board estimates Canada could be short nearly one million workers as boomers retire.


Food inflation ticked up slightly, from +1.0% to +1.2%, but inflation is generally non-existent in Canada. The Bank of Canada likely agrees, as the removal of the higher rate bias indicates the Bank of Canada is under no pressure to raise interest rates from inflation.

MMC-2013-10-Consumer Confidence-Table-CAD

MMC-2013-10-The Consumer-Table-CAD

 Consumer confidence moved slightly lower in October, but retail sales remain positive. The stronger housing market over the past few months have probably contributed to increased consumer activity.


We would expect consumers to become more frugal over the coming months as the housing market slows and consumer debt levels moderate.

The Canadian housing market had another solid month in October with existing home sales moving higher. Even housing starts increased in October, posting their strongest results since January.

We still expect the market to cool over the coming months as some of the recent activity is likely due to buyers hoping to take advantage of low mortgage rates before they move higher.


Stronger exports helped lower Canada’s trade deficit. Going forward, while a trade deal with Europe will help diversify Canada’s balance of trade, we expect the U.S. will continue to be the dominant destination for Canada’s exports.

As such, a continued economic recovery in the U.S. is essential if Canada hopes to move back to a trade surplus position.

Canada’s economy continues to defy the critic and slowly grind higher. The housing market should slow next year and provide a headwind for economic growth, but we would have said the same thing at the end of last year. The key is still the U.S. economy.

Let us know your thoughts on October’s market activity in the comments below!


This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. NWM fund returns are quoted net of fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value.