JMRD Market Observer for July 10th, 2015 – JMRD U.S. Growth Basket & JMRD ETF Basket Q2 Update

July 10, 2015

**July 10th Issue of The JMRD Market Observer**

In This Week’s JMRD Market Observer

 

  • JMRD U.S. Growth Basket Q2 Update
  • JMRD Maximum Growth Exchange Traded Fund (ETF) Update
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

 

JMRD U.S. Growth Basket Q2 Update:

 

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

 

Launched on January 1st, 2014, the Team is delighted to announce a first half gain of 5.68% on the JMRD U.S. Growth Basket, after a 15.0% return in 2014.  Our benchmark, the S&P 500 returned 1.23% and 13.7%, respectively, over the same periods. In fact, it was the smallest first-half move in the history of the S&P.

 

This compares to the following returns from other benchmark indices:

 

Table 1

 

We launched the JMRD U.S. Growth Basket after we received numerous requests for a portfolio of US companies trading in US dollars.   Diversification by asset class and currency is important and at the time of launch, the Team was expecting the US dollar to strengthen making for a timely start.

 

We will focus on five questions you may have on the new Basket as a way of re-introducing it:

 

  • Who should buy it?
  • How do I buy it?
  • What is in the Basket?
  • How do you pick the holdings?
  • What are the parameters in terms of buying the new Basket?

 

Who should buy it?

 

1)

 

  • Clients who have US dollar accounts are the best candidates for the Basket.
  • The Team was being proactive in this Basket launch as NBF has just recently rolled out US dollar RSP accounts. The U.S. Growth Basket can be purchased in this new USD RSP.
  • Remember, if you don’t have US dollars, a new buyer would first need to convert to US dollars.
  • With the weakness in the Loonie over the past year, it takes more Canadian dollars to buy US dollars
  • NBF’s current forecast for 2015 for the USD/CDN dollar is to end the year at $1.28.
  • The rate at the time of writing was $1.273, after a recent uptick on the uncertainty surrounding the Greece situation as well as the Bank of Canada’s impending interest rate decision next week where most economists are predicting another rate cut of 0.25%.

 

2)

 

  • Clients who think the Canadian dollar will continue to decline are also good candidates as this is also a currency call.
  • For those in this camp, the conversion provides a way to diversify by currency as well.

 

How do I Buy it?

 

  • The JMRD US Growth Basket is purchased the same way as our other Baskets.
  • We would recommend setting up a US dollar account as a start.
  • We would need to ‘code’ the account for Basket purchase as per usual – for those interested let us know and we will get the paper work together.
  • The Basket is purchased on an annual fee basis similar to our other offerings.

 

What is 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.

 

Chart

 

There was a number of companies that contributed to the first half returns. Among the top performers in the first half of the year were:

 

  • NXP Semiconductor which announced a $40B merger with Freescale Semiconductor and was up 28% year-to-date, as of the end of June.
  • HCA Holdings, a beneficiary of the Supreme Court’s ruling to uphold subsides for health care customers, up 23% Hanesbrands, up 21% Sealed Air, up 22% Ilumina, up 19%.

 

Stocks that lagged were:

 

  • Lockheed Martin, down 3% and Limited Brands which was flat.
  • In the quarter, we sold Raytheon and Delta Airlines which showed poor relative strength and triggered our sell levels.

 

A new position to the Basket was Tableau Software (DATA) which is an innovative Business Intelligence software company that provides its clients with tools and interactive dashboards to search, query, analyze and visualize chunks of data, so as to generate useful business insights. The company is considered a pioneer in the field of data discovery.  We also added to the Global Payments (GPN) position in the portfolio. Global is a Fortune 1,000 company that is a provider of electronic transaction processing services for merchants, Independent Sales Organizations (ISOs), financial institutions, government agencies and multi-national corporations located throughout the United States, Canada, Europe, and the Asia-Pacific region.

 

How do we pick the holdings?

 

  • 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 $12,500 (all figures in US dollars).
  • The initial minimum position mandated by is 5 Baskets, or approximately $62,500.
  • Subsequent purchases can be made in increments of 1.5 Baskets, or about $18,750

 

Notes:

 

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

 

 

JMRD Maximum Growth Exchange Traded Fund (ETF) Basket Q2 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 into the second half of 2015 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.

 

The ETF Basket posted a gain of 1.68% for the first half of 2015.  As you will see below, the year is off to a different start for the financial markets.   The first quarter of the year saw solid gains, while the second quarter, as you saw in the Market total returns chart above, witnessed many markets giving back much of those early returns.

 

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

 

Current asset allocation of the ETF Basket is follows:

 

Cash and fixed Income: 3.5%

 

Cash is 3.5%

Fixed Income is 0% – we recently sold the high yield bond weighting in the portfolio.  We feel that equities will outperform high yield over the second half of this year.

 

Equities: 96.5%

 

Geographic breakdown:

 

22.0% Canada

39.7% United States

29.0% International

5.8% Other (a diversified hedge fund ETF position)

 

The main detractor in the ETF Basket for the first second quarter was XIN – iShares EAFE (Europe Australasia Far East) ETF.  This mostly came in the last week of June when Greece officially pulled out of negotiations with the EU.  It was a rough last week of the quarter for most major markets but specifically for European Equities.  At this point, we feel that the possibility of Greece exiting is mostly priced into the market.  Europe’s economic data has improved from this time last year due to the stimulus being provided through quantitative easing (QE).  Once the panic subsides, we think that international equities will recover the ground they’ve recently lost. (This ETF is up 5% the past two days on growing optimism that Greece’s new proposal may be approved on the weekend).

 

The BMO Nasdaq 100 Equity (ZQQ) and the BMO Health Care Equal Weight US Health Care (ZUH) had very good quarters.  Both sectors (technology and healthcare) have been strong this year.  ZQQ is up 3% in 2015 and ZUH is up 11% year to date.  We have overweighted both ETFs in our Basket at 7% each.

 

The ETF Basket currently generates $287.00 in annual cash flow per basket, which equates to a yield of approximately 1.5%.   We consider the ETF Basket a TOP PICK for the second half of 2015. The current value of one ETF Basket is approximately $18,800 making the minimum initial position approximately $37,600, which is 2 Baskets.  This amount will continuously change as the prices of the ETF Basket components do fluctuate daily.  Subsequent purchases can be made in half Basket increments, or approximately $9,400.

 

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.

 

Portfolio

 

JMRD Basket Corner

 

 

All Cap Basket

 

CCL Industries (CCL.b) – “The materials mid-cap stock you can bank on: CCL Industries” (article attached) The Materials Mid-Cap Stock You Can Bank On

Colliers International (CIG) – Colliers International Group announced that it has acquired IDB Management, a leading asset and property management firm in Belgium. As part of the transaction, IDB will be rebranded as Colliers International and the principals will lead its asset and property management segment going forward. The terms of the transaction were not disclosed.

 

 

U.S. Growth Basket

 

CVS Health (CVS) – The merger announced this week between Aetna and Humana could be good news for CVS Health. CVS currently has a long-term contract to provide pharmacy-benefit management services to Aetna, and analysts suggest that it could benefit from the addition of Humana. JPMorgan’s Lisa Gill estimates that Aetna’s business already represented 2%-3% of CVS’s earnings per share in 2014. Humana business could add more than 300 million additional scripts of PBM volume annually, plus it might bring CVS’s pharmacies into the insurer’s preferred Medicare drug plan networks.

 

Lockheed Martin (LMT) — Lockheed Martin is in advanced talks to acquire Sikorsky from United Technologies (UTX), reports WSJ. At a price of more than $8B, the deal would be one of the largest since Dealogic starting tracking deals in 1995. The biggest is UTX’s $16.5B purchase of Goodrich in 2011. LMT buying Sikorsky would rank within the top four, says Dealogic. LMT and UTX ticked up to session highs on the news, with shares up 1.9% and 1.4%, respectively.

 

Nike (NKE)  – The real winner of the Women’s World Cup: Nike” 

 

 

Retirement Corner

 

 

 

Week at a Glance

 

(See attached Week at a Glance report)

Week At a Glance

 

Reads of the Week

 

  • NBF Economics & Strategy Special report – Canada’s second quarter: Two divergent economies Growing downbeat comment on the Canadian economy and talk of a technical recession prompt us to offer our assessment of the situation.

The recent poor showing is neither Canada-wide nor economy-wide. The downturn is in energy and was concentrated in Alberta in Q2. Though GDP may have edged down for a second consecutive quarter, it would be hard to call this a recession. Happily, the stars seem aligned for a much better showing in Q3. A combination of federal fiscal stimulus and resilient labour market is likely to buoy domestic demand. What’s more, exports will have support from a strong pickup of the U.S. economy in the second half of the year if the global backdrop does not worsen. Though the Bank of Canada could cut its policy rate once more on July 15 (the market is giving about 50% odds of this outcome), that would be a matter of beefing up insurance coverage. The Canadian economy is not moribund. (Full report attached) NBF Special Report

 

 

 

 

 

Economic Reports

 

Monday July 13th – None

Tuesday July 14th – Canada Teranet/National Bank Home Price Index; US Retail Sales

Wednesday July 15th– Bank of Canada Interest Rate Decision, Canada Existing Home Sales; US Fed Beige Book

Thursday July 16th– US Initial Jobless Claims

Friday July 17th – Canada Inflation; US Housing Starts, US Inflation, U. of Michigan Consumer Confidence

 

Earnings Reports

 

Monday July 13th – None

Tuesday July 14th – Alimentation Couhe-Tard, Cogeco Cable, Johnson & Johnson, JP Morgan Chase & Co, Wells Fargo & Co

Wednesday July 15th– Bank of America, Intel Corp, Neflix Inc

Thursday July 16th– Google, Goldman Sachs

Friday July 17th – General Electric, Honeywell International

 

Have a good weekend!

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