JMRD Market Observer for January 15, 2016 – JMRD U.S. Growth Basket & JMRD ETF Basket Q4 Update

January 15, 2016

**January 15th Issue of The JMRD Market Observer**

 

In This Week’s JMRD Market Observer

 

  • JMRD Strategy Comments
  • JMRD U.S. Growth Basket & JMRD ETF Basket Q4 Update
  • NBF Asset Allocation Strategy
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

 

JMRD Strategy Comments

 

Without getting into the detailed numbers, this week was not good for the financial markets.

 

Two of the most significant reasons were issues in China as well as the price of oil being breaking $30.  There is no shortage of commentary warning of worse markets ahead and other risks to the financial system.

 

We would be hard pressed to find a time in our careers when the negativity has been this widespread and universal.   There is no doubt that the question marks for the global financial markets are numerous, some which need to be monitored more closely than others.  We do not see the same circumstances unfolding that led to the significant pull back in 2008 and early 2009.

 

Instead, to us this time around looks like a downward revision to earnings and commodity prices to reflect a global economy that will not grow as much as was priced in over the past 6 months.  We do believe that there will still be growth but it will be at a lower rate.

 

Our experience tells us we should resist selling some of the holdings that have been affected most and that the right thing to do is make sure accounts are balanced and diversified and still able to participate when the tone of the markets improve.  We know they will improve but we do not know the timing.

 

We did sell some holdings in our baskets this week as they went below certain levels we set for their price.  We have not re-committed those funds and are waiting for some stabilization to occur.

 

We are here to discuss any questions you may have and understand these times are very difficult and can be very emotional.  We are not there yet but if we see some stabilization it will lead us towards considering one of the following investing rules; “Be greedy when others are fearful.”  In the meantime, call or email us with any questions or concerns

 

Last week, the main theme in the Market Observer (MO) was a recap of 2015 and how the JMRD Baskets performed.  We appreciate all the feedback and continue to ask you to send any comments or questions.  The Team has been discussing ways to improve the MO as we get 2016 underway.

 

This week we will review the JMRD US Growth Basket and the JMRD Exchange Traded Fund Basket.  Next week we will discuss our Canadian Baskets: the JMRD Diversified Income and Growth Basket (DIG) and the All Cap Basket.

 

 

JMRD U.S. Growth Basket Q4 Update:

 

JMRD continues to recommend that clients have exposure to the U.S. equity markets and have a portion of their investments in US dollars.

 

Launched on January 1st, 2014, the 2015 return was 0.14% for the JMRD U.S. Growth Basket, after a 15.0% return in 2014.  Our benchmark, the S&P 500 Total Return, was the same at 0.14% in 2015 after being up 13.7% in 2014.

 

We launched the U.S. Growth Basket as a way to participate with any US dollar appreciation, in addition to portfolio returns.

 

This compares to the following returns from other benchmark indices:

 

US Growth Basket

 

Some clients own the US Basket in accounts denominated in Canadian dollars which has resulted in further gains due to the appreciation of the US dollar.  The USD added to the yearly gain, up another 19%.

 

Which companies are currently held in the Basket?

 

  • We continue to include company updates on the holdings in our Market Observers so you can become more familiar with the individual positions.
  • You will find below a full snapshot of all holdings.

 

US Growth Basket 2

 

Facebook, Nike and Home Depot performed quite well during the quarter and were among the best performers in the basket in 2015.

 

New positions t in the quarter were Avago Technologies, Six Flags Entertainment and Vail Resorts.  Avago is a designer, developer and global supplier of a range of analog semiconductor devices.  Six Flags is a regional theme park operator. The Company operates 18 regional theme and water parks. Of these, 16 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada.  Lastly, Vail Resorts operates through three segments: Mountain, Lodging and Real Estate. The Company’s Mountain segment operates around 10 mountain resort properties and two urban ski areas, as well as ancillary services, primarily including, ski school, dining and retail/rental operations. The Company’s Lodging segment owns and/or manages a collection of luxury hotels under RockResorts brand, as well as other lodging properties.

 

How do we decide on which companies to buy?

 

  • We use a proprietary relative strength technical analysis research that helps us to identify the stronger sectors to invest in.
  • From there, we look to buy the strongest stocks in the best sectors. Stocks can be trading well but if they are in a strong sector, they can still be underperforming.
  • Conversely, we look to avoid weak sectors as weak sectors and companies within those sectors can often stay weak for an extended period of time.
  • Instead of trying to ‘guess’ when a stock might bottom, we look to identify the strongest companies that are performing well compared to their peers.
  • For the U.S. Model we select among the top companies in the S&P 100 combined with Credit Suisse’s top picks.
  • The requirements are: Minimum $1B market capitalization, no more than two securities per sector and an initially equal weighted portfolio.

 

What are the parameters in terms of buying the new Basket?

 

  • The current value of the JMRD U.S. Growth Basket is approximately $22,300 (all figures in US dollars).
  • The initial minimum position mandated by is 2.5 Baskets, or approximately $55,800
  • Subsequent purchases can be made in increments of half Basket, or about $11,150.

 

Notes:

 

  • The minimum and subsequent purchase amounts are mandated by National Bank Financials Baskets department, not by JMRD.
  • The returns above are before fees.

 

 

JMRD Maximum Growth Exchange Traded Fund (ETF) Basket Q4 Update

 

As many clients know, we have an Exchange-Traded Fund Basket which we will provide a full update on below.  We will focus on how we are positioned going 2016 to take advantage of the ever changing financial markets.  The ETF Basket is managed by the JMRD Wealth Management Team and is invested solely in exchange traded funds.  This Basket is meant to provide a diversified portfolio that can be used as a long term core holding.

 

In 2015 the ETF Basket posted a return of -1.98%.  This portfolio is predominantly an equity portfolio.

 

Let’s have a look at how the ETF Basket is positioned going into 2016.

 

Current asset allocation of the ETF Basket is follows:

 

Cash and fixed Income: At the end of Q3 – 7.2%, now at 11.1% as we wait to add to positions.

 

Equities: 88.9%

 

Geographic breakdown:

 

14.1% Canada

37.8% United States

30.5% International

6.5% Other (A diversified hedge fund ETF position)

 

The ETF Basket currently generates $295 in annual cash flow per basket, which equates to a yield of approximately 1.7%.   We consider the ETF Basket a good way to take advantage of the recent equity market weakness to start 2016.  The current value of one ETF Basket is approximately $17,300 making the minimum initial position approximately $34,600, which is 2 Baskets.  This amount will continuously change as the prices of the ETF Basket components fluctuate daily.  Subsequent purchases can be made in half Basket increments, or approximately $9,000.

 

Note that ETFs have underlying costs.  The blended annual Management Expense Ratio (MER) for the ETFs in the Basket is 0.37%.

 

A portfolio snapshot is provided below.

ETF Basket

 

 

NBF Asset Allocation Strategy: Navigating the minefield

 

Highlights

  • Uncertainty was the name of the game in 2015.
  • In this context, the decline of commodity prices — rather than benefitting consumers — raised the level of uncertainty, pushing international investors either to the side lines or into more defensive sectors.
  • The impact of the crude downturn was felt everywhere in Canada, the economy tipping into recession in the middle of the year and the stock market producing a negative annual return for the first time since 2011.
  • If no negative shocks materialize, oil supply and demand should be balanced by the end of 2016/ beginning of 2017.
  • In the US, the service industry is well into expansionary mode, auto sales are strong, housing starts are healthy, and the U.S. consumer is benefitting from lower gasoline prices.
  • The Eurozone is still benefitting from extremely accommodative policy and the situation should persist well into 2016.
  • The Chinese transition from an investment-intensive and credit-fuelled model toward a consumer-based economy certainly proved more difficult than previously anticipated.
  • Unless there’s a recession, stocks rarely suffer negative returns or underperform bonds on a relative basis for long periods of time.
  • The initial hike doesn’t change the fact that Fed policy remains accommodative and friendly to stocks in general.
  • However, since target rates are poised to increase somewhat over the course of the year, we would advise limiting exposure to government bonds in favour of other fixed-income investments.
  • Because we think inflation is set for a comeback in the coming months, inflation-linked bonds (ILBs) represent a clear opportunity

 

Full report attached

Asset Allocation

 

 

Retirement Corner

 

 

 

Week at a Glance

 

See Week At a Glance Report.

Week At a Glance

 

 

Reads of the Week

 

 

 

 

 

 

  • Highly recommended weekend read. Latest memo from Howard Marks: On the Couch 

 

 

Economic Reports

 

Monday January 18th – U.S. Markets Closed for Martin Luther King Day

Tuesday January 19th – None

Wednesday January 20th – Wholesale Trade Sales, Canadian Manufacturing Sales, Bank of Canada Rate Decision, Bank of Canada Releases Monetary Policy Report, U.S. Building Permits, U.S. Housing Starts, U.S. CPI

Thursday January 21st – U.S. Initial Jobless Claims

Friday January 22nd – Canadian Retail Sales, Canadian CPI, U.S. Existing Home Sales, U.S. Leading Index.

 

Earnings Reports

 

Monday January 18th – None

Tuesday January 19th – Bank of America, IBM, Morgan Stanley, Netflix

Wednesday January 20th – Goldman Sachs

Thursday January 21st – Canadian Pacific Railway, Starbucks, Union Pacific

Friday January 22nd – General Electric

 

Have a good weekend!

 

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