JMRD Market Observer for August 29th, 2014 – NBF Monthly Economic Monitor

August 29, 2014

**August 29th Issue of The JMRD Market Observer**

In This Week’s Market Observer…

  • NBF Monthly Economic Monitor – September 2014
  • NBF Hot Charts – Canada: A well functioning economy
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

NBFM Monthly Economic Monitor – September 2014

Highlights

A disappointing first half of 2014 for the global economy is set to be followed by a better second half. Despite the continued stagnation of the eurozone, advanced economies as a group should do better thanks to the U.S. regaining its vigour and Japan recovering from a sales tax-related GDP slump. The related improvement in OECD demand should give a boost to emerging economies’ exports. We are keeping unchanged our forecast of 3.3% for global growth this year.

Upward revisions by the BEA, coupled with a strong second quarter, prompted a two-tick upward revision to our 2014 U.S. GDP growth forecast to 2%. That assumes growth averaging 3% in the second half of the year, a conservative estimate considering the potential for consumption and investment spending to accelerate. We have trimmed our inflation forecasts marginally to reflect softer energy prices.

Like the U.S., Canada accelerated in the second quarter. It’s unclear if domestic demand can maintain the momentum over the rest of the year as housing softens and as debt-burdened households cap consumption spending. Still, we remain comfortable with our 2014 growth forecast of 2.3%, expecting healthy contributions from investment spending and trade in the second half of the year. The decline in energy prices prompted us to lower our CPI forecasts slightly.

Economic Monitor 0914

NBF Hot Charts – Canada: A well functionning economy

Bank of Canada Governor Stephen Poloz recently went on record to say that “persistent slack in the country’s labour market is restraining income growth”[1]. More specifically, Mr. Poloz argued that because almost all of the new positions created in the past year were part-time “we are not generating the kind of income we should normally get from a usual 1% y/y gain in employment…we know that is significantly less than we would expect from a well functioning economy”. Looking at the just-released Q2 national accounts, we have trouble coming to terms with Mr. Poloz’s assessment that Canada is not a well functioning economy. Job creation may have been on the soft side in the past year, but not the growth in wages & salaries.

As today’s Hot Charts show, the wage bill grew at a 4.5% annual clip through the month of June, a marked acceleration from the 2.7% reported in March (note that Statistics Canada releases this data in batches of three months to coincide with its quarterly GDP report). This pace of growth is strong enough to support nominal spending, debt-servicing costs and nominal GDP which is currently expanding at its fastest clip in 2.5 years. At 4.9% y/y, nominal GDP in Canada is the strongest in the G7 and a full percentage point above the pace assumed in the last Federal budget. If sustained, that would be a potential revenue windfall of about $2.5 billion for the government. From a fiscal standpoint, the Canadian economy appears to be well functioning so far in 2014.

JMRD Basket Corner

DIG Basket

CI Financial (CIX): An update on CI Financial following Bank of Nova Scotia’s equity sale in May: How is CI Financial’s Steve MacPhail still so damn happy?

Toronto-Dominion Bank (TD) – TD reported Q3 f2014 core cash EPS of $1.15 of this week. This compares with $1.09 last quarter and $0.82 one year ago. Earnings were above NBF’s forecast of $1.11 and the consensus estimate of $1.09. Strong results in Canadian Personal & Commercial Banking and Wealth & Insurance should solidify the market’s premium valuation of TD. But to widen its valuation premium, NBF Bank analyst Peter Routledge says TD needed to perform better in U.S. Retail and Wholesale Banking. Net income in U.S. retail grew just 3.8% y/y (on a US$ basis) while Wholesale Banking’s result was less robust than those at the capital markets operations at some of TD’s peers.

TD 082914

All-Cap Basket

Canadian Energy Services (CEU) – CEU announced a small acquisition, likely in the $15M range, of Southwest Treating Products LLC based in Texas. The company is a production and speciality chemicals business and will build on CEU’s presence in the Permian and Eagle Ford.

Inter Pipeline (IPL) – For Canadian oil-sands pipeline companies, operating under the radar pays. Inter Pipeline Thrives Out of Keystone Spotlight: http://bloom.bg/1oqJzph

Stantec (STN) – Stantec announced their 2nd U.S. acquisition in two weeks by acquiring Santa Barbara- based Penfield & Smith. A 90-person civil engineering and land planning firm with local offices in Santa Barbara, Camarillo, Santa Maria, and Lancaster, Penfield & Smith has a sizeable roster of public and private sector clients. This transaction is expected to close in October. Stantec also announced they a new headquarters that will be Edmonton’s tallest tower at 62 storeys. Stantec will occupy about 450,000 square feet of office space when the building opens in 2018. The company will consolidate its 1,700 employees, currently occupying parts of four downtown buildings. Besides signing on as anchor tenant, Stantec is designing, engineering and project-managing the tower:  Stantec shares traded to a new 52-week high this week.

U.S. Basket

Dow Chemical (DOW) – Dow confirmed market rumours this week that it has hired investment bankers to sell two specialty chemicals units, which could bring the company about $2 billion, Reuters reported Wednesday on its website, citing people familiar with the matter.

Retirement Corner

1) “Preparing for death: Tips on how couples should discuss and plan their finances” (Globe and Mail)

2) “Encore jobs” a new trend in retirement” (The Star)

Week at a Glance

Week At A Glance

Reads of the Week

A good explanation of how tax inversions work: “Burger King May Move to Canada for the Donuts” (Bloomberg)

“Time, not timing, is key to investing success” (Washington Post)

“Resist Changing Direction Because of a Single Event” (New York Times)

“House prices keep going up but they are more affordable thanks to cheap debt” (Financial Post)

“How the S&P’s Mighty Have Fallen: Ritholtz Chart” (Bloomberg) This week, the S&P 500 Index closed above 2,000 for the first time. The largest companies in the S&P 500, now and before the index first hit 1,000 in February 1998 are shown in this chart. Can you guess the 3 companies that were in the top 10 on Dec 31, 1997 and are still in the top 10?

“Interview With Bill Gurley: The Guy Who Backed OpenTable, Yelp, GrubHub, Twitter, Zillow And Uber” (Forbes)

“108-year-old investor: ‘I doubled my money in 1929 crash – and I’m still winning’” (Telegraph) Investment veteran Irving Kahn, who has weathered every financial storm since the 1920s, reveals everything he has learned

“3 things to know now that the stock market has tripled” (Smarter Investing by Covestor)

Economic Reports

Monday September 1st – North American Markets closed for Labour Day holiday
Tuesday September 2nd – RBC Canadian Manufacturing PMI, U.S. ISM Manufacturing, U.S. Construction Spending
Wednesday September 3rd – Bank of Canada Rate Decision, U.S. Factory Orders, U.S. Total Vehicle Sales
Thursday September 4th – U.S. ADP Employment Change, U.S. Initial Jobless Claims, U.S. Nonfarm Productivity, U.S. ISM Non-Manufacturing Composite
Friday September 5th – Canadian Unemployment Rate, Canadian Net Change in Employment, U.S. Change in Nonfarm Payrolls, U.S. Unemployment Change

Earnings Reports

Monday September 1st – None
Tuesday September 2nd – None
Wednesday September 3rd – Alimentation Couche-Tard
Thursday September 4th – None
Friday September 5th – None

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