**January 17th Issue of The JMRD Market Observer**

January 19, 2014

In This Week’s Market Observer…

  • JMRD All-Cap Growth Basket Update
  • NBF Thematic Research: Impact of a Declining Canadian Dollar
  • Aston Hill Growth and Income Funds
  • Thackray Monthly Letter – January 2014
  •  Retirement Corner
  •  Week at a Glance
  •   Reads of the week
  •   Economic Calendar
  •   Earnings Reports

JMRD ALL-CAP GROWTH BASKET

JMRD Wealth Management Team is excited to provide our inaugural update for our newest portfolio – the JMRD All-Cap Growth Basket (ACB)!

We officially purchased the ACB portfolio on October 7th of last year and have been pleased with the 13.36% return in just over 3 months (as of Jan 16th 2014).  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.

Below we will re-launch the Basket for those who missed it.

There are 4 primary reasons for the launch:

1)  A great complement to the DIG Basket

  • Our flagship portfolio is the Diversified Income & Growth Basket (DIG) and is currently held by over 425 clients.
  • 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.
  • 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!
  • 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.

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.
  • We wrote the above in late September of 2013 before the financial markets went on to post truly remarkable gains for the final quarter of 2013

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 $55,000, with subsequent purchases of 1.5 Baskets, or ~$15,000 at current prices.
  • We are seeing great opportunities in the US and have just launched a US dollar Basket with US companies!  We will profile that Basket next week.
  • Stay tuned!

A current snapshot of the JMRD All-Cap Growth Basket is below:

JMRD ACB Basket

A couple of All-Cap Growth Basket holdings in the news this week:

Why Magna Still Has Another Gear (Barron’s)

Surge Energy Seeking More Deals to Expand in Williston Basin (Bloomberg)

NBF Thematic Research: Impact of a Declining Canadian Dollar

NBF Research released an in-depth report on the outlook for the Canadian Dollar and impact on companies including winners and losers from a weaker dollar. For those interested in the full report and investment opportunities, please let us know.

Event:

NBF’s analysts analyze a declining Canadian vs. U.S. dollar and the impact on the economy and companies we cover.

Key Takeaways:

The Canadian dollar depreciated 3% against the USD (2013 average versus 2012 average), the worst performance since 2009. A more dovish central bank, combined with soft commodity prices and bearish analyst reports caused sentiment to turn against the Canadian currency. The weakness in early 2014 is just an extension of last year’s downtrend. In this report we look at NBF’s Economy and Strategy Group’s forecast for the Cdn$, as well as the impact, if any, of a declining Cdn$ on companies in our coverage universe listed by sector.

NBF outlook

The large current account deficit, and hence the dependency on capital inflows, leaves the C$ vulnerable to a further decline. Our end-of-Q1 target for USDCAD is 1.10 (90 cents U.S.). The currency could indeed soften further as the Fed accelerates tapering of its QE program in the coming months. But we expect the loonie to stabilize after Q1. We view the market’s expectations of Bank of Canada rate cuts this year (roughly 30% probability as of January 14th) as exaggerated. The economy accelerated in the second half of 2013 and we believe that the labour market is not as bad as depicted by the Labour Force Survey. If we’re correct on the economy, a corresponding upgrade of market expectations would be positive for the loonie. Moreover, we also expect global growth to accelerate to 3.7% this year, something that should offer some support to commodity prices and the C$. Nonetheless, the upside seems limited and we expect USDCAD to average 1.07 in 2014 (93 cents U.S.). If we are right, this would still mark the biggest two-year cumulative depreciation of the CAD (7%) since 1999. We view this development as a net positive for the economy and for S&P/TSX earnings.

Related:

Canada: Still attracting foreign money, but at a slower pace

Foreign investor appetite for Canadian corporate bonds and equities remains strong according to latest data on securities transactions. Monthly net inflows over the June-November period averaged C$3.8 bn for equities (the highest since 2004) and a healthy C$2.6 bn for corporates. But as today’s Hot Charts show, those higher net inflows are being offset by divestment from other securities like money market instruments and government bonds. So much so, that the pace of overall foreign purchases of Canadian securities is moderating as evidenced by net inflows over the June-November period averaging just C$2.6 bn/month, well below the levels of 2012. All told, Canada continues to attract foreign money, albeit at a slower pace, something which partly explains why the Canadian dollar was under pressure last year and continues to be so early this year. But don’t rule out a rebound in demand for government bonds and, more generally, Canadian securities as a whole as foreign investors eventually look beyond bearish analyst reports and reacquaint themselves with Canada’s AAA-rating, healthy public finances and exposure to a growing US economy.

Hot Charts

Why a lower loonie is (mostly) good for Canada (Globe and Mail)

How the Canadian dollar’s plunge will juice the economy” (Globe and Mail)

Aston Hill Growth and Income Funds

As we’ve discussed in previous Market Observers, a lot of JMRD clients hold the Aston Hill Growth and Income Fund.  As the name implies, this fund endeavours to combine a steady stream of monthly income (about 5% annualized) along with long term capital appreciation.  This fund can invest in debt or equity securities in both Canada and the US, with no limit to its US exposure.  The management team had the foresight to overweight US equities relative to Canadian in 2013 and the returns are evidence of that.  The return last year was 18.5%, a pretty nice encore to the 15.7% return in 2012.  We continue to like this fund as it’s smaller than most Growth and Income funds, which means it can take advantage of smaller opportunities that large funds would not consider.  We find this a key attribute to any mutual fund.

A complement to the Growth and Income Fund is the Global Growth and Income fund which overweights US equities more so than the fund above.  This fund returned 27.2% in its first full year of existence which was 2013.  We will be utilizing this fund more in the year ahead.  The links below provide a more comprehensive review of the Aston Hill Funds.

http://astonhill.ca/mutual-funds/aston-hill-growth-and-income-fund-and-class

http://astonhill.ca/mutual-funds/aston-hill-global-growth-and-income-fund-and-class

Thackray Market Letter – January 2014

You will find below Brook Thackray’s Market Report for December.  Brook manages the Horizon Seasonal Rotation (HAC) ETF, which is the largest holding in our ETF Basket.  The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities and currencies during periods that have historically demonstrated seasonal trends. The Thackray Market Letter is for educational purposes and is meant to demonstrate the advantages of seasonal investing by describing many of the trades and strategies in HAC. In 2013, HAC returned 12.4% vs 12.99% for the TSX Composite Index and 29.6% for the S&P 500, with lower volatility than the indexes. Since November 19 2009 inception date, HAC has returned 43.0% vs the TSX Composite return of 17.4% and S&P 500 return of 68.8%. This month’s update includes a discussion of current holdings and seasonal trades in Metals and Mining, Industrials, Materials, Technology, Agriculture, Small Caps, Retail, Financials, Natural Gas, Silver, Homebuilders, Semicounductors, Canadian Banks and Energy

Thackray Market Letter January 2014

Week at a Glance

Week At A Glance

Retirement Corner

“Four ways to make saving for retirement easier” (Globe and Mail)

“The magic of compounding interest: Why saving now is better than saving later” (Financial Post)

Reads of the week

“Extreme Weather Wreaking Havoc on Food as Farmers Suffer” (Bloomberg)

“In year of abundance, Canada’s farmers miss the boat” (Reuters)

Illumina’s DNA Supercomputer Ushers in the $1,000 Human Genome” (Business Week) Illumina is held in the JMRD U.S. Basket

“What Secrets Your Phone Is Sharing About You” (Wall Street Journal)

“What Happened to Baskin-Robbins?” (Canadian Business)

Economic Calendar

Monday January 20th- Bloomberg Canadian Nanos Confidence Index, U.S. Markets closed for Martin Luther King Jr. Day

Tuesday January 21st – Canadian Wholesale Trade Sales, Canadian Manufacturing Sales

Wednesday January 22nd – Bank of Canada Rate Decision

Thursday January 23rd – Canadian Retail Sales, U.S. Initial Jobless Claims, U.S. Existing Home Sales, U.S. Leading Index

Friday January 24th – Canadian CPI

Earnings Reports

Monday January 20th- None

Tuesday January 21st – Halliburton, Johnson & Johnson, IBM

Wednesday January 22nd – None

Thursday January 23rd – Microsoft, Open Text and Starbucks

Friday January 24th – Kansas City Southern

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