U.S. President Donald Trump reacts as he attends a joint news conference with French President Emmanuel Macron at the Elysee Palace in Paris, France, July 13, 2017. REUTERS/Gonzalo FuentesGONZALO FUENTES/Reuters
It wasn't that long ago that an investor wanting to know a price-to-earnings ratio for a stock had to call their broker. Possessing this information was a big part of the value proposition for brokerage companies and for professional traders, it gave them a huge informational advantage over retail investors.
The Internet democratized market data and erased these benefits for the industry. With everybody having the same information, the easy money for professional traders became much harder to come by.
Many pros deserted the equity markets in favour of derivatives. The higher volatility and speed of futures and options markets puts a premium on trading acumen and a degree of constant focus that allows them to immediately react to market news.
Most of the traders I know from social media – carefully filtered over time for knowledge and success (and temperament) – now buy and sell assets with symbols most investors have never heard of. 'ES', for instance, is the S&P 500 Emini contract that trades like water, and 'CL' is the West Texas Intermediate crude contract.
Derivatives markets also allow an extreme level of complexity. Traders and hedge fund managers will design strategies that simply aren't accessible to most investors, and this now forms the 'competitive advantage' professional investors attempt to exploit.
Here's an example of a typical derivatives trade. Citi interest rate strategist Jabaz Mathai believes the Canadian dollar is currently overvalued, primarily because he does not believe the Bank of Canada can raise interest rates as fast as the market expects. To take advantage of this, Mr. Mathay could have suggested an immediately intelligible trade idea like shorting Canadian government bonds in a U.S. dollar account. Instead, he recommends shorting 'BAM9' , a futures contract tracking domestic bankers' acceptance rates that expires in June of 2019, and using the proceeds to buy 'EDM9', a Eurodollar contract which follows the Fed Funds futures rate, which expires in the same month.
We can only speculate on the effects of this complexity on the portfolios of individual investors. I described my belief this week that futures trading was significantly affecting oil prices. It's also entirely possible that historically low rates of equity market volatility are caused by active professional investors abandoning conventional equity markets.
One thing that is clear is that the asset management industry, thanks to poor performance, information transparency and low fee investing options, is struggling to market a business proposition to investors. After having moved into derivatives to differentiate themselves, let's hope they don't blow up the market in the attempt.
-- Scott Barlow is The Globe's in-house market strategist
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The Rundown
How bond investors can survive rising rates
Doing the right thing as an investor can sometimes be costly and painful. Example: Holding bonds when interest rates are rising. Bonds are a non-negotiable part of a well-diversified portfolio, but they're struggling right now. Count on this continuing as long as there's an expectation of high rates in Canada. Rob Carrick reveals his seven-point guide for investors.
David Rosenberg: The Canadian dollar's big move is done
The fact that the loonie rallied a further 0.4 per cent on Friday while oil prices slid 2.3 per cent provided a clear sign that the Canadian dollar is responding more to expectations of additional Bank of Canada rate hikes at the time when the U.S. Federal Reserve has suddenly turned a bit more dovish. While the Fed has good reason to be less strident on its growth and inflation view, the same could be said for the BoC. David Rosenberg explains why this all translates into a loonie that's not going to rise much further.
A new way to get in on today's hottest investment - and why you shouldn't do it
Forget stocks and bonds. Today's hottest investment is digital currency. As exuberance grows, promoters are rushing to market with new products designed to make it easy for even the most technologically inept investor to place a bet on the continued growth. Ian McGugan explains why you shouldn't buy into the trend.
Here's how you can stay ahead of the curve on oil
Energy investors correctly follow the weekly U.S. Department of Energy report on oil inventories, but it's the interplay between inventories and futures markets – with data available daily – that is driving the spot price. Scott Barlow explains.
Why you can thank Donald Trump for the 80-cent loonie
The Canadian dollar touched 80 cents (U.S.) on Monday, its highest point in two years, thanks to growing confidence in the Canadian economy and fading enthusiasm about U.S. President Donald Trump. The loonie has been boosted in recent weeks by strong economic reports and rising interest rates at home. But mounting skepticism about the outlook for Trumponomics in the United States has helped as well. Ian McGugan explains.
Others
Research report: The fast-approaching threat to the energy sector
Number Cruncher
Venturing beyond valuations: An attractive portfolio of 13 Canadian stocks
Ask Globe Investor
Question: I currently do not have a position in Enbridge. Do you think that this might be a good entry point or do you foresee further downside? – Gord Z.
Answer: I cannot predict the day-to-day price movements in a stock. No one can, to my knowledge. What I can tell you is that, over the long term, I regard Enbridge as a core holding in any portfolio. I see the current price pullback as a buying opportunity. The stock pays an annual dividend of $2.44, to yield 4.6 per cent at the current price. The dividend provides a nice cash flow while you are waiting for the share price to turn around.
-Gordon Pape
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What's up in the days ahead
In Wednesday's Globe Investor, John Heinzl looks at high-yielding stocks that are now on sale, while John Reese outlines some stock picks for the value investor. Later this week, Brian Milner has a reality check on the high-flying pot stock sector.
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Compiled by David Leeder and Darcy Keith