JMRD Market Observer for April 17, 2015: JMRD DIG BASKET Update‏

April 17, 2015

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

In This Week’s JMRD Market Observer

  • JMRD Diversified Income & Growth Basket First Quarter Update
  • Bank of Canada Policy Monitor
  • Market’s Review – First Quarter 2015
  • JMRD Basket Corner
  • NEW!!! JMRD Insurance Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

The Diversified Income & Growth (DIG) Basket: Q1 Update

The DIG Basket is off to a strong start in 2015 with a gain of 2.9% for the first quarter.  As you will see below, the year is off to a different start for the markets in general overall as volatility continues.  What is interesting to note is the sectors in Canada that are posting gains (health care / technology) and those posting losses (financials) after the first quarter.

Screen shot 2015-05-12 at 11.10.22 AM

The strength in the DIG Basket is continuing into April with a gain of 3.88% this month alone.

For new clients and for those not familiar with DIG Basket, we provide some historical returns:

  • 2009 return of 41.51% versus the TSX Total Return of 35.05%.
  • 2010 return of 17.27% versus the TSX Total Return of 17.61%.
  • 2011 return of 6.35% versus the TSX Total Return of -8.71%.
  • 2012 return of 8.61% versus the TSX Total Return of 7.19%.
  • 2013 return of 16.33% versus TSX Total Return of 12.99%.
  • 2014 return of 4.66% versus the TSX Total Return of 10.55%

 Compounded returns have been very good.  Below are results as of the end of March 31, 2015:

  •  3 year compounded average return of 8.56%, versus the TSX Total Return Index of 9.58%
  • 4 year compounded average return of 8.16% versus the TSX Total Return of Index 4.39%
  • 5 year compounded average return of 10.63% versus the TSX Total Return Index of 7.41%

We also wanted to highlight the risk-adjusted returns of the DIG Basket versus the TSX Total Return Index and the S&P 500 since January 2009.  Risk adjusted return is an important concept that refines an investment’s return by measuring how much risk is involved in achieving that return.  An ideal situation is when an investment has a lower standard deviation (volatility) but a higher return than what it is being compared to.  As you can see from the attachment, the DIG Basket achieved a higher rate of return and a lower standard deviation versus the TSX Total Return Index (its true benchmark).  See the Risk Return attachment.

Risk Return – DIG

Below is a snapshot of the current holdings.  The current annual cash flow is $499 for a yield of 2.99%.

Screen shot 2015-05-12 at 11.10.42 AM

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $16,700 making the minimum initial position approximately $33,700, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components do fluctuate.  Subsequent purchases can be made in one Basket increments.

For this update, some extra time needs to be spent on changes as there have been many.  Also, a few comments on holdings that added positively to the returns this year and a few that have been detractors.

During the quarter we initiated a position in Dollarama, the retail store chain, at an average price of around $60.  It recently broke through $70.   We also initiated a position in Agrium.  The stock had had a good run before we bought but we decided to initiate a position on a recent pullback.  We think the company is the leader in its sector and there are steps the company can take to continue creating value for shareholders.  We also bought WSP Global, formerly Genivar, a global infrastructure company and lastly Metro, the grocery chain.

Stocks that hindered performance for the quarter were Bank of Nova Scotia, which we have since sold, and TD Bank.  As alluded to above, the banks were weaker in the first quarter.  That said, we still like the diversification of TD’s business with its presence in the United States and banks have recovery some lost ground month to date.  Stocks that contributed to performance in the first quarter were Whitecap Resources up 25%, and Dollarama, up about 16% since we bought.

Bank of Canada Policy Monitor- BoC leaves its target rate unchanged at 0.75%

The Bank of Canada left the overnight rate unchanged at 0.75%. The BoC said that while growth stalled in the first quarter, it attributes this to a more front-loaded impact of the oil price shock than predicted in January. The central bank made clear that while the impact is more front-loaded than initially thought, it is not larger. The central bank expects a rebound later in the year, with real GDP averaging 2.5% (above potential) until the middle of 2016.

 

The BoC marginally lowered its forecast for global growth this year to 3.3% due to downgrades to the U.S, Japan and China more than offsetting upgrades to the eurozone. It remains optimistic about a pick-up in growth later due to widespread easing in global financial conditions thanks to central bank action worldwide.

 

For Canada, the central bank lowered its growth forecast for 2015 to 1.9% (from 2.1%), but raised next year’s forecast to 2.5% (from 2.4%). The downgrade this year was largely due to investment whose contribution was lowered from -0.1% to -0.7%, i.e. a larger drag on the economy than initially thought. Consumption was also downgraded a bit. Gross domestic income is expected to grow just 0.2% this year (versus 0.6% in the prior estimate). Looking at the quarterly growth profile, the BoC lowered Q1 growth to zero (from 1.5% annualized), but raised Q2 and Q3. Next year’s growth forecasts were lowered slightly in all quarters. Potential GDP growth was lowered one tick to 1.8% for both 2015 and 2016. The central bank estimates the output gap widened a bit in Q1, but still expects it to close “around the end of 2016”. While the BoC raised its inflation forecasts a bit, headline inflation is not expected to return to 2% before early 2016.

 

Press conference: In late March, Governor Poloz said that the slump in the oil prices was having an atrocious effect on the Canadian economy. When asked if he still believes that the situation is atrocious, Governor Poloz said that data for Q1 will look quite weak and that is reflected in the Bank of Canada’s zero growth forecast for the quarter. In his view, the important question is whether the Canadian economy faces a more front loaded impact of the oil shock or an overall larger impact. He repeated the message sent out in the MPR and said that at this stage, the BoC is confident that growth will rebound in coming months, resulting in the economy reaching full capacity around the end of 2016. Based on this analysis, he believes that the amount of “insurance” taken in January is the right one. But he made clear that monetary policy is data dependent, and the BoC is constantly monitoring the evolution of the economy. If the forecast proves wrong, the policy stance will be adjusted accordingly ¯ a stronger economy will call for rate hikes while a larger oil shock would call for a more accommodative policy path.

 

Bottom line: While the BoC lowered its Canadian growth forecast for this year, it didn’t feel the need to provide additional stimulus. It acknowledged that the impact of the oil shock is more front-loaded than initially thought, but not larger. The output gap is still expected to close around the end of 2016. The central bank thinks the risks to the oil price are tilted to the upside, something that will limit further damage to oil producing provinces. All told, it would take major disappointments on growth, inflation and employment in the coming months to prompt the central bank to move away from its current stance and dispatch another rate cut. Like the BoC, we see growth picking up significantly in the second half of the year, and based on that outlook we continue to expect the overnight rate to remain unchanged through 2015

(see full report attached)

BoC Policy Monitor

 

Markets’ Review- First Quarter 2015

 

A noticeable increase in volatility marked trading in markets during the first quarter of 2015. Uncertainty related to the timing of the Federal Reserve’s (the “Fed”) first interest rate hike, coupled with weaker- than-expected economic data in the U.S. and a murky situation in Greece kept investors nervous.

 

Notwithstanding the volatility, equity markets around the world charged ahead to close the quarter with respectable gains. In some regions, Europe in particular, equity prices climbed to near all time highs, as the European Central Bank embarked on its quantitative easing journey.

 

Bond prices also closed the quarter with solid gains, defying yet again expectations to the contrary. The flight to safety, which propelled investors back into bonds, peaked in January and eased to a degree as the quarter drew to an end.

Central bank interventions continued to play a major role in driving asset prices. As mentioned, the timing of potential interest rate hikes by the Fed remains in question, but the ECB began implementing its bond buying program in the quarter. The two central banks that managed to surprise markets during the quarter were the Bank of Canada (BoC) and the Swiss National Bank (SNB).

 

The BoC cut its benchmark rate by 25 bps and left the door open to cut more, while the SNB blindsided markets when it lifted the Franc’s peg to the euro, promptly causing a 20% appreciation in its value.

The decision taken by the Bank of Canada was induced by declining commodity prices, particularly oil, which continued to slide throughout the first quarter. A barrel of West Texas Intermediate Oil declined an additional 11.6%, while natural gas prices lost 12.4%.

 

Outside of Energy, gold prices traded within a wide range, gaining on flight to safety early in the quarter but settling largely unchanged, as that bid dissipated late in the period

(see full report attached)

 Q1 Markets’ Review 2015

JMRD Basket Corner

DIG Basket

DH Corporation (DH) – DH closed their financing this week for the ~$1.6B acquisition of Fundtech, a global “fintech” provider. Fundtech provides payments and transaction solutions, its offering including: 1) consolidating payment / processing applications across multiple channels and geographies; 2) managing secure messaging; 3) cash, liquidity and working capital requirements management; and 4) remote deposit capture, e-billing and internet payment services. The company was founded in 1993 and has ~1,200 clients, including banks, non-bank financial institutions, credit unions and corporates located across the Americas (47% of its f14 revs), Europe, Middle East & Africa (39%) and Asia Pacific (14%).

 

All Cap Growth Basket

 

CCL Industries (CCL.b) – “Why Investors Should Buy CCL Industries Inc.” http://www.fool.ca/2015/04/08/why-investors-should-buy-ccl-industries-inc/

 

Magna (MG) – Magna announced on Thursday the sale of their Interiors operations to Spain’s Grupo Antolin for about $525M.http://www.bloomberg.com/news/articles/2015-04-16/magna-agrees-to-sell-interiors-business-to-spain-s-grupo-antolin

U.S. Growth Basket

 

Apple (AAPL) – Apple Moving Into Dual Cameras? Stick To Apple, Stick To Leaders – Barron’s

Delta (DAL) – Delta Air Lines Inc. on Wednesday said it would reduce international capacity by 3% this winter to buffer the negative impact of the strong dollar and low energy prices. The Atlanta-based airline announced its plans along with its March-quarter results. For the first quarter, Delta reported earnings that more than tripled, beating analyst expectations, boosted by lower fuel prices. Revenue increased 5%. Overall, Delta posted a profit of $746 million, or 90 cents a share, up from $213 million, or 25 cents a share, a year earlier. Excluding special items, such as tax benefits, per-share earnings were 45 cents. Sales increased to $9.39 billion from $8.92 billion. Analysts had predicted per-share earnings of 44 cents and revenue of $9.4 billion, according to Thomson Reuters

HCA Holdings (HCA) – Hospital operator HCA Holdings Inc. on Wednesday reported better-than-expected preliminary earnings for its March quarter and raised its full-year guidance. The shares traded to a new high of $80.20 before pulling back on the week. The Nashville-based company expects first-quarter revenue of $9.68 billion, above the $9.59 billion analysts had expected. It also forecast earnings of about $1.08 billion, up from $680 million in the prior-year period.

JMRD Insurance Corner

Although it’s not discussed much, insurance strategies can be a very integral component of a family’s financial plan.   We wanted to start shedding more light on these various strategies and decided to add a new feature to the weekly Market Observer – THE INSURANCE CORNER.    Each month we will highlight and discuss a new insurance idea.  Various members of the JMRD are insurance licensed (Life and Disability) so do not hesitate to call or email if you have any specific questions on any insurance matter.  This week’s topic will be Insured Annuities.

  • Can using an insurance strategy really get you 5-8% annual income during retirement?  You might have thought insurance was just for protection, but using the insured annuity strategy could provide you with monthly income, guaranteed for life, with your capital secured!  To top it off, there are host of other benefits which include reducing the OAS clawback and avoiding probate.   This little known strategy can be great for those ages 60-85 with non-registered funds looking to maximize their retirement income and reduce their taxes.

Read the attached article “The Insured Annuity Strategy” and find out how.

The Insured Annuity Strategy

Retirement Corner

1)     Federal budget to benefit seniors, including relaxation of RRIF rules

 

 Week at a Glance

 (See attached Week at a Glance report)

 Week at a Glance

Reads of the Week

  • NBF Forex: Can USD keep the Momentum? The Canadian dollar just had its worst quarter since the last recession. But it should be able to offer better resistance over the rest of the year. Terms of trade have now stabilized and that bodes well for trade-related net inflows. Moreover, markets continue to price greater odds of a Bank of Canada rate cut than is justified by the central bank’s recent communications. So, unless oil prices take another dive, the loonie could show more resilience than several other major currencies in the face of headwinds generated by a strengthening USD. See FOREX attachment Forex April 2015
  •   Saudi Arabia’s Plan to Extend the Age of Oil” (Bloomberg) 
  • “Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans to Borrowers” (Wall Street Journal) Subzero rates have put some lenders in an inconceivable position 

 

Economic Reports

Monday April 20th – None

Tuesday April 21st – Canadian Federal Budget Presentation

Wednesday April 22nd – US Existing Home Sales

Thursday April 23rd – US Initial Jobless Claims, US New Home Sales

Friday April 24th – Us Durable Goods Orders

Earnings Reports

Monday April 20th – Rogers, CN Rail, IBM, Morgan Stanley

Tuesday April 21st – CP Rail, Teck Resources, Dupont, Verizon, Yahoo

Wednesday April 22nd – Metro, Transforce, AT&T, Boeing, McDonalds, eBay,

Thursday April 23rd – West Fraser Timber, 3M, Altria, Dow Chemical, Microsoft, Eli Lily, Pepsico, Google

Friday April 24th – Capital Power

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