**April 11th Issue of The JMRD Market Observer**April 11, 2014
In This Week’s Market Observer…
- Correction from last week’s DIG Basket Update
- JMRD All-Cap Growth Basket update
- NBF Markets’ Review – First Quarter 2014
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Correction from last week
Last week we had a few replies to our DIG Basket update. The TD Bank entry in the Basket holdings was not reflecting the recent stock split that occurred. In effect, the average buy price on a split-adjusted basis when we initiated the position was $36.99 and the annual dividend is now $1.88 for a 3.7% yield.
We have reattached the spreadsheet for your reference. However it will look a little different from last week as we also raised some cash on Tuesday by selling Intact Financial and trimming Pembina in light of the recent market volatility. Please do not hesitate to call or email if you have any further questions or comments.
JMRD ALL-CAP GROWTH BASKET (ACB) Update
JMRD Wealth Management Team is excited to provide our Q1 update for the ACB Basket – a strong quarter and great start to 2014!
We officially purchased the ACB portfolio on October 7th of last year and are pleased with the 9.46% return for the first three months of 2014. For the same period, the TSX Composite Index Total Return was up 6.06%. The Basket was launched to all clients in the Market Observer around the same time and since then we have been providing comments on the holdings within ACB. We hope you found the company descriptions timely and useful.
We have reviewed the portfolio and are looking to trim a few of the holdings as we have 40% and 50% gains in a very short period of time. Should the market have a pullback, having some cash on hand will come in handy.
Below we will re-launch the Basket for those who missed it.
There were 4 primary reasons for the launch of ACB:
1) A great complement to the DIG Basket
- Our flagship portfolio is the Diversified Income & Growth Basket (DIG) and is currently held by over 534 clients.
- We featured DIG in last week’s Market observer
- Clients who don’t own DIG own some or all of the holdings so exposure to DIG is even larger.
- Clients have been asking for some new names and we listened!
2) DIG is getting bigger
- A combination of solid returns and more clients buying have increased total assets in the DIG Basket to an all-time high which makes making changes more difficult to execute – record assets and record number of holders.
- The larger ‘size’ makes it difficult to add smaller names to DIG from a liquidity point of view.
- However, there are several of these ‘smaller’ or ‘less liquid’ companies that we like and we needed to have a mechanism for all clients to invest in these names – A NEW BASKET was the answer and the short term results have been encouraging.
- All-Cap means that we are able to invest in any company regardless of size (cap is short for market capitalisation).
- We are excited to get these new companies in more client accounts.
3)The investment environment has changed and we need to adjust; interest rates are no longer declining meaning that growth trumps income
We will always look for great companies paying solid dividends but just buying yield won’t work in a rising interest rate environment.
- JMRD All-Cap Growth Basket will have less focus on low-growth / high income companies. Rather, the priority will be to a higher growth / lower dividend strategy.
- We have added another new twist in that stocks selected for the JMRD All-Cap Basket do not need to pay a dividend to be eligible for inclusion.
- We continue to favour those companies that have a history of increasing their dividends and the majority of the stocks in the Basket will pay a dividend.
- Full list below for your information
4) Timing is good
- Our base case is that the global economy is slowly gaining traction and this improving environment will be favorable for equities.
- When we combine this stronger outlook with the inevitable rise in interest rates, we feel clients need to be positioned to take advantage of the potential for attractive equity gains. A mix of growth and income would be ideal.
Additional notes and other things in the works:
For clients interested in the new Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up.
The minimum purchase for the new Basket is 5 Baskets or just over $60,000, with subsequent purchases of 1.5 Baskets, or ~$18,000 at current prices.
We are working with NBF to lower the minimum purchase amount
A current snapshot of the JMRD All-Cap Growth Basket is below:
NBF MARKETS’ REVIEW – FIRST QUARTER 2014
The first quarter of 2014 was marked by heightened geopolitical tensions in Eastern Europe, which culminated in Russia’s annexation of Crimea from Ukraine.
The sequence of events that led to the annexation created an environment of uncertainty which in the end caused investors to seek shelter in safe assets, namely Treasury bonds and gold.
Nevertheless, investors did not abandon equities, which after suffering great losses in January, managed a turnaround to close the quarter with marginal gains.
The increasing appetite for equities occurred against an improving economic backdrop in the U.S. and despite comments from newly appointed Federal Reserve Chairwoman Janet Yellen that seemed to roil nerves, even if just briefly.
In her prepared comments before Congress, the new Fed boss asserted that the gradual withdrawal of liquidity (tapering of bond purchases) will continue and will in all likelihood end by the fall. The Chairwoman also managed to surprise markets following the March Federal Open Market Committee (FOMC) meeting, by divulging that the majority of the Committee supports a gradual increase in interest rates starting in the second half of 2015, if the economy continues to perform as it has. That being said, the comment concerning rising rates was somewhat tempered by the adjustment that was made regarding the link between rate hikes and unemployment falling to 6.5%.
Heading into the second quarter, market participants will in all likelihood be watching the U.S. economy to validate the view that the slowdown that transpired at the beginning of 2013 was indeed weather driven. In the same vein, investors will be keeping a close eye on the European Central Bank and the People’s Bank of China, which are expected to introduce new monetary measures that will deal with lingering issues such as disinflation in Europe and an excessive slowdown in economic growth in China. Investors will also be eyeing events in Eastern Europe as well as the evolution of talks between the West and Russia, which could have a meaningful effect on energy prices.
JMRD Basket Corner
Newalta (NAL) – NAL announced they have hired an advisor to review strategic alternatives for its Industrial division, including potential sale, IPO or spin off of the division in whole or in parts. NAL’s industrial division generates about $65 mln in EBITDA
(approx $40 to $45 mln net of SG&A), suggesting that it could be sold for about $200 to $315 mln (at a 5-7x EV/EBITDA multiple) according to NBF analyst Rupert Merer. Newalta eyes sale of 35-outlet industrial division
Crescent Point Energy (CPG), Enerplus (ERF) and Whitecap Resources (WCP) – Canadian oil prices traded near one-year highs. Along with a narrower discount for Canadian oil and a lower Canadian dollar, oil-weighted equities including Crescent Point, Enerplus and Whitecap traded to new 52-week highs.
All-Cap Growth Basket
Sun Life Financial (SLF) – Raised to a ‘Sector Outperform’ by NBF analyst Peter Routledge. SLF has the highest one-year return in his coverage universe. “We believe that SLF’s weighting towards wealth management (which includes an exceptionally strong platform at MFS) and the benefits that positive cash flow at the holding company confer, taken together, justify an Outperform rating for the company. Additionally, if long-term interest rates in North America begin to re-ascend through the balance of f2014 and into f2015 – as consensus expects – this could add further upside to SLF’s valuation.”
Surge Energy (SGY) – announced a new Saskatchewan Light Oil pool discovery and better than anticipated results across other key areas. The company increased their production guidance as they were already exceeding their 2014 exit guidance
1) “Despite pension plan changes, report says federal employees still overpaid” (Globe and Mail)
2)“Pre-retirement Canadians no longer rushing to repay mortgage debt” (Globe and Mail)
Week at a Glance
Reads of the Week
“National Bank Says Quebec Economy Must Meet Canada Growth” (Bloomberg) Chief Executive Officer Louis Vachon said Quebec must prove its economy can grow at the same rate as the country’s if it wants to improve a deteriorating business climate.
“Who wins when ‘activists’ invest? Not you” (Marketwatch) Hedge-fund managers may gain more than shareholders
“Progress Energy’s great push to be first in Western Canada” (Financial Post)
“Pimco’s Bill Gross Picks Up the Pieces” (Business Week)
“Gundlach’s crisis-era bet holds rising-rate lesson” (Marketwatch) DoubleLine Capital founder focuses on yield per duration in fund
“Tesla and Uber Are Driving Clunker Business Models to the Junkyard” (Institutional Investor)
Monday April 14th – Ternaet/National Bank Home Price Index
Tuesday April 15th – Canadian Manufacturing Sales, Canadian Existing Home Sales
Wednesday April 16th – Bank of Canada Rate Decision
Thursday April 17th – Canadian Consumer Price Index, U.S. Initial Jobless Claims, Philadelphia Fed Business Outlook
Friday April 18th – Canadian and U.S. Markets are closed for Good Friday
Monday April 14th – Citigroup
Tuesday April 15th – Intel, Johnson & Johnson
Wednesday April 16th – Bank of America, Google, IBM
Thursday April 17th – General Electric, Goldman Sachs, Morgan Stanley
Friday April 18th – None
Categorised in: JMRD Updates