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A Fed Full of Surprises

Richard Croft
September 23, 2013
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Last week we saw something that we haven’t seen in some time: a market that completely misread the actions of the Federal Reserve (Fed)! This is particularly noteworthy in that Fed Chairman Bernanke has been a proponent of transparency, preferring to telegraph his intent to the market long before action is taken.

That changed last week when the Fed decided not to begin tapering in September. Traders were expecting, and in fact had planned for, tapering to begin. Homeowners and those looking to buy homes were prepared. In fact, it seemed like a foregone conclusion to everyone… except of course Chairman Bernanke.

So what does this all mean? Not much in terms of investment strategy. Whether tapering begins in September, December or early in the first quarter of 2014 is not relevant. That it will begin at some point is!

The markets have already adjusted interest rates and even with Tuesday’s surprise announcement, fix term mortgage rates remained steady. US ten year interest rates initially fell on the news, but rose slightly through the remainder of the week. I suspect rates will settle in a range slightly over the 3% demarcation line for ten year US treasuries. Most analysts believe that a ten year rate above 3% would make US treasuries very competitive, and might cause investors to re-think their allocations between bonds and stocks.

Despite the variability in the US treasury market, Canadian fixed term mortgage rates remained steady, which is positive for our interest margin thesis underpinning our move into Canadian banks. In fact, Canadian banks held up nicely when the US markets sold off on Friday.

I doubt the action last week will do harm to Canadian banks and most likely will have minimal affect on the net interest margin thesis that I talked about in previous columns. In other words, Canadian banks may be some of the best places to put your money for the foreseeable future.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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