JMRD Market Observer for July 14th, 2017 – JMRD US Growth Basket Q2 Update

July 14, 2017

In This Week’s JMRD Market Observer

 

 

  • JMRD U.S. Growth Basket Q2 Update

  • JMRD US Growth Basket: Q2 2017 Update

  • Forex (August 2017): Is the loonie’s surge sustainable?

  • Bank of Canada hikes policy rate for the first time in 7 years

  • JMRD Basket Corner

  • JMRD at The Cycling Grand Tour Quebec

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD U.S. Growth Basket Q2 Update

 

Last week we featured the quarterly results of the JMRD Diversified Income and Growth (DIG) Basket and the JMRD All Cap Basket (ACB).  This week we turn our attention to the JMRD U.S. Growth Basket.  As per usual, before we get into Basket specifics, we have once again provided below the handy table below showing how the various global indices and commodities performed during the month of June and Year To Date (YTD). 

 

 

 

JMRD US Growth Basket: Q2 2017 Update

 

The JMRD US Growth Basket continued its strong run in the second quarter, posting a return of 4.61% versus the S&P 500 Total Return Index of 3.09%.  The Q2 number brings the year to date return on the JMRD US Growth Basket at 15.27% versus the benchmark’s return of 9.34%.  Since the JMRD US Growth Basket was launched on January 1st, 2014, the compound annual rate of return is 10.5%, slightly ahead of the benchmark return of 10.3%.

 

How do we decide on which companies to buy in the JMRD US Growth Basket?

  • 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.

 

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. The current annual cash flow is $350 for a yield of 1.18%. 

 

 

The best performer in the quarter was XPO Logistics (XPO), posting a return of 35% in the quarter.  This global provider of supply chain solutions logistics enjoyed a nice earnings bounce in the quarter after a rough year in 2016.  Arista Networks (ANET), a supplier of cloud networking solutions, was up almost 14% in Q2 after continuing to take market share from its competitors and after winning a legal battle against its largest competitor Cisco Systems.  United Health Group (UNH), a US health benefits and service provider, gained 12% in the quarter after a strong quarter for the health care sector in general and after posting solid earnings in April.  The detractor in the quarter was HD Supply which had a sub-par earnings release and subsequently was sold.    

There were few changes in the quarter.  We sold positions in Nasdaq Inc. (NDAQ) as it the stock had stagnated and sold our position in HD Supply Holdings (HDS) as discussed above.  In Q2 we initiated a position in Marriott International (MAR), the lodging company and added to the position in the quarter.  We also added to Norfolk Southern (NSC), a US rail company.

 

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

  • The current value of the JMRD U.S. Growth Basket is approximately $29,600 (all figures in US dollars).
  • The initial minimum position is 2 Baskets, or approximately $59,200.
  • Subsequent purchases can be made in increments of a half Basket, or about $14,800.

 

Notes:

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

 

 

Forex (August 2017): Is the loonie’s surge sustainable?

 

  • In the last Forex, anticipating a change in stance from the Bank of Canada, we had brought forward to October the timing for when we expected an increase in the overnight rate. While right about the change in stance we were not aggressive enough about the timing. The central bank’s decision to raise interest rates in July prompts us to lower our 2017 quarterly targets for USDCAD, i.e. stronger C$ than in our prior forecasts. The loonie’s recent surge, however, warrants caution. While momentum could allow for further near term C$ gains, we expect a giveback afterwards as the USD makes a comeback with markets starting to price Fed rate hikes. We continue to expect USDCAD to remain in the 1.25-1.35 trading range over the next 12 months.
  • Under pressure since the beginning of the year, the US dollar could find renewed strength later this year and in 2018 if, as we expect, the Fed surprises markets with rate hikes and balance sheet reduction.
  • The euro’s upside potential is limited in our view amidst Brexit, next year’s Italian elections, and the European Central Bank’s loose policies. While the ECB said interest rates will not be cut again, it made clear it stands ready to increase asset purchases if inflation continues to disappoint.

 

See the full article

 

 

Bank of Canada hikes policy rate for the first time in 7 years

 

Stephen Poloz delivered today his first ever interest rate hike as Governor of the Bank of Canada. The central bank raised the overnight rate to 0.75%, a first rate increase in almost 7 years, a move that was widely expected by markets. The decision to tighten monetary policy was supported by the BoC’s confidence that above-potential growth will absorb excess capacity in the economy. The central bank raised its real GDP growth forecast for both this year to 2.8% (from 2.6%) and next year (up one tick to 2%). The reason for the 2017 upgrade was not only the stunning Q1 (when growth surged to 3.7% annualized), but also a solid follow-up with Q2 and Q3 pegged at 3.0% and 2.0% respectively. While it acknowledged that inflation remains low, the central bank blamed temporary factors and “the lag between monetary policy actions and future inflation”.

In its updated Monetary Policy Report, the BoC raised its forecast for world growth by one tick to 3.4% this year (from 3.3%). Part of the increased optimism about the global outlook was due to the U.S. whose 2017 growth was revised up one tick to 2.2% and the euro area whose growth was raised three ticks to 1.9%. China’s growth was raised one tick to 6.6%, while oil-importing emerging economies were raised three ticks to 4%. Next year’s global growth was estimated at 3.4% as well, with a moderation in the U.S. and the Eurozone offset by higher growth in the rest of the world.

For Canada, the upgrade to 2017 growth was largely due to consumption and inventories, while investment is now seen to be slightly less of a drag on growth than previously thought. Those upgrades more than offset downgrades to contributions from government and trade, the latter now expected to be a drag on growth due to larger imports (which explains the upgrade to inventories). The contribution of housing was left unchanged for both this year and next, although those point to diminished contribution from that sector over time: “Macroprudential and housing policy measures, as well as higher longer-term borrowing costs resulting from the projected gradual rise in global long-term yields, are all expected to weigh on housing expenditures”. Real gross domestic income is expected to rise 4% this year, versus 3.6% in last April’s estimate.

The estimate of Canada’s potential GDP growth was left unchanged at 1.0-1.6% for this year. The BoC estimates the output gap at the end of 2017Q2 was about 0.5%. Thanks to the growth upgrades, the central bank now expects slack to be eliminated by the end of this year, two quarters earlier than what it had expected in the last MPR. The BoC’s estimate of the neutral policy rate was left unchanged at 2.50-3.50%. The central bank’s inflation forecasts were lowered slightly for this year but the BoC still expects inflation to be close to 2% by next year.

 

See the full article

 

                                                                                                         

JMRD Basket Corner

 

DIG Basket

 

Open Text (OTEX)Investor Day Takeaways. We spent the better part of today at Open Text’s well attended annual user conference and investor day. While the Company’s quiet period prevented management from providing any colour on the quarter and outlook, the time was used to lay out a course going forward. To us, while M&A remains a prominent growth driver for Open Text, we were surprised by an increasing number of drivers around organic growth; namely a ripening product cycle, expanding sales force and partner channel tied together by a roadmap of integration. Add to that a timely release of Magellan, Open Text’s product to capture the growing level of interest in artificial intelligence (AI), and what we have is a refreshed opportunity for organic growth which has been elusive in years past. This note covers the key takeaways from the day. 

 

See the full article

 

All-Cap Growth Basket

 

New Flyer (NFI) – New Flyer Announces Second Quarter 2017 Orders and Backlog

 

Shopify (SHOP) – Shopify partners with eBay so merchants can sell directly on the online marketplace

 

 

JMRD at the National Bank Grand Tour last weekend

 

Steve and Joe made the trek to rural Quebec to participate in the 7th annual event. We are happy to report that 180 National Bank employees raised $170,000 to support children in sport and mental health awareness. The event was comprised of 3 days of cycling  totaling 390 kilometres. We are looking forward to participating again next year!

 

 

 

Retirement Corner

 

 

 

 

Reads of the Week

 

 

 

 

 

  • Hot Charts – Canada: Is a payment shock just around the corner? The Bank of Canada just announced its first interest rate hike in seven years with Mr. Poloz guiding for more increases in the coming quarters. What does this mean for the highly leveraged Canadian households? Is a significant payment shock just around the corner for homeowners? Of course, variable rate mortgage holders will be immediately impacted by the 25 bp rise in the prime lending rate announced by the major commercial banks. However, based on our calculation, this is far from being an economy killer as such an increase represents less than 0.1% of disposable income given the mortgage amount outstanding at variable rates. That being said, in anticipation of the central bank move, other mortgage rates have also been increased. As today’s Hot Chart shows, despite the rise, current rates remain below the average effective rate on loans coming due over the next two years (we use the readily available NHA mortgage back securities pool as a proxy of the market). In other words, at current level, households that are due to refinance their mortgage would still benefit from lower interest payment. It will take a lot more than a 25 bp increase in the overnight rate to break the Canadian economy. See the full article

 

  • Teranet-National Bank HPI: Home prices still rising in June: The slowdown in Toronto home prices that is expected to result from the implementation of the Fair Housing Plan by the Ontario government has yet to be seen. But given the effect of the Plan on home sales and listings (middle chart), it should only be a matter of time. In the meantime, home prices still give the impression of a dichotomy on the Canadian residential market, the Composite index being pulled by Toronto, Hamilton and Victoria (top chart). Furthermore, the seven Golden Horseshoe regions for which price indexes are available (but not incorporated into the Composite index) display home price increases well over 20% on a year-over-year basis (bottom table). But outside Ontario and B.C., home price rises over the last 12 months are modest if not negative, ranging from -0.6% in Quebec City to +3.3% in Ottawa-Gatineau. See the full article

 

 

 

 

 

 

Economic Reports

 

Monday July 17th – None

Tuesday July 18th – NAHB housing market index July (USA)

Wednesday July 19th – Manufacturing sales May (CAD)

Thursday July 20th – Initial jobless claims July (USA)

Friday July 21st – Consumer price index June (CAD)

 

 

Earnings Reports

 

Monday July 17th – Netflix Inc.

Tuesday July 18th – Bank of America Corporation, Goldman Sachs Group Inc. (The), IBM, Lockheed Martin Corporation, Johnson & Johnson, UnitedHealth Group Incorporated (DE)

Wednesday July 19th – Canadian Pacific Railway Limited, Kinder Morgan Inc., Morgan Stanley, Philip Morris International Inc., Steel Dynamics Inc.

Thursday July 20th – Visa Inc., Microsoft Corporation

Friday July 21st – Encana Corporation, General Electric Company

 

 

Enjoy the weekend!

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