JMRD Market Observer for July 25th, 2014 – U.S. Growth Basket update and a Team Announcement!

July 25, 2014

**July 25th Issue of The JMRD Market Observer**

In This Week’s Market Observer…

  • JMRD U.S. Basket update
  • Announcements! Announcements!
  • Pipelines, Utilities & Energy Infrastructure – Q2 preview
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

JMRD U.S. Growth Basket Update – up over 12% to the end of June this year!

The JMRD Wealth Management Team is excited to announce the second quarter update for our recently launched JMRD U.S. Growth Basket.  We launched the new US Basket as we have received numerous requests for a portfolio of US companies that trades in US dollars.   Diversification is important by asset class and currency making the launch of this new Basket very timely.

Note the US Basket has a cash weighting of approximately 14%.  The Team feels there may be an opportunity to add new names or top up existing positions on weakness at some point over the summer months.

We will focus on five questions you may have on the new Basket as a way of 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 new Basket as they already have US dollars available
  • Remember, if you don’t have US dollars already, a new buyer would first need to convert to US dollars
  • With the recent weakness in the Loonie, it takes more Canadian dollars to buy US dollars

 

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
  • The Canadian dollar has had a good move over the past 3 months – new data point here

 

3)

  • The Team is being proactive in this Basket launch as NBF will be rolling out US dollar RSP accounts in the not too distant future
  • The U.S. Growth Basket could be purchased in this new RSP once rolled out

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 a fee basis similar to our other offerings

What is in the Basket?

  • We will be featuring company updates on the holdings in up-coming Market Observers so you can become more familiar with the individual positions
  • Find below, a full snapshot of all holdings

What is in a basket

 

We are pleased to announce that as of the end of June the JMRD U.S. Growth Basket was up 12.26%.

Note that over the same period, the Dow Jones Industrial Average was up 3.46%, the S&P 500 was up 8.02% and the NASDAQ posted a return of 7.01%.

4) How do you 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.

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

  • The current value of the JMRD U.S. Growth Basket is approximately $11,400 (in US dollars)
  • The initial minimum position mandated by is 5 Baskets, or approximately $57,000
  • Subsequent purchases can be made in increments of 1.5 Baskets, or about $17,000
  • Note that the minimum and subsequent purchase amounts are mandated by National Bank Financial’s Baskets department rather than by JMRD.

Portfolio Manager Announcement

The JMRD Wealth Management Team at National Bank Financial is delighted to announce that Steve Lockner has achieved the designation of Portfolio Manager, making him the fourth PM on your investment Team.  We hope you take some time to send some notes of congratulations as this is a very difficult title to achieve.  Here is a bit of background on what this means:

 What’s the difference between an Investment Advisor and an Investment Advisor who is also a portfolio manager?

Investment Advisors who have received portfolio management certification by a recognized regulatory authority are able to make discretionary decisions on a client account. This service has typically been reserved for wealthy and institutional clientele. The Discretionary Management Program at National Bank Financial now enables the clients of approved advisors to take advantage of services and opportunities not always afforded them elsewhere in the industry.  JMRD now has Four!

What is a portfolio manager?

A portfolio manager is an investment professional certified by securities regulators who has discretionary management authority. To be a portfolio manager, investment advisors must meet strict criteria in terms of education and overall investment experience.

What qualifications are required to be a portfolio manager?

As a portfolio manager, the candidate must meet stringent criteria that are of the highest standard in the Canadian investment industry. At National Bank Financial, a select group of Investment Advisors have earned the required qualifications: Portfolio managers must be certified as a CIM (Chartered Investment Manager) or CFA (Chartered Financial Analyst). These two certifications are granted by recognized organizations that operate completely independent of National Bank Financial. Portfolio managers must have accumulated several years of experience as an active registered full-service brokerage representative. They can also qualify by having accumulated several years of experience as a research analyst with a company that is a member of a self-regulatory organization. Relevant experience in managing or analyzing investments, a history of above-average portfolio management performance and an adherence toward internal compliance criteria are all prerequisites for the program offered by National Bank Financial.

And there is more!

NBF is in the process of rolling out a trading system that will take JMRD to the next level in terms of discretionary portfolio management.  With this new tool, that we will be trained on in the coming weeks, we plan on rolling out a new suite of MODEL portfolios that will benefit clients greatly.

Steve will be instrumental in helping develop these new MODEL portfolios, some which will be turned into Baskets.

Join us in congratulating our partner on this impressive accomplishment.

Pipelines, Utilities & Energy Infrastructure – Q2 preview: The Midstream valuation jet stream – assessing blue sky upside from here

A Q2 preview of the Pipelines, Utilities & Energy Infrastructure sector

Highlights

NGL Midstream: frac spreads / marketing holds strong (IPL, PPL, ALA, KEY, VSN):

Q2 NGL frac spreads averaged US$34/bbl, 13% below Q1/14 levels, but in line with Q2/13 spreads and matching the long-term average – pointing towards another healthy quarter for NGL extraction, fractionation and marketing companies – namely IPL, PPL, ALA, KEY and VSN. Meanwhile, for KEY, we highlight record iso-octane gross profit margins in Q2 of US$38/bbl, more than double the long-term average of US$16/bbl.

Crude oil Midstream (GEI): Q2 heavy oil differentials (WCS-WTI) averaged US$19/bbl, tightening modestly from Q1/14 levels of US$21/bbl while remaining perched above the long-term average of US$18/bbl. Meanwhile, crude price volatility declined significantly in Q2 to ~18% versus the two-year average of ~47%, suggesting relatively fewer opportunities to capture robust Marketing margins. For GEI, we forecast Q2 Marketing contributions of $16-mln versus its two-year quarterly average of $20-mln related to average heavy differentials of US$23/bbl. We maintain our bullish outlook on GEI and recommend adding to the name on any potential weakness surrounding the quarter.

The Midstream valuation jet stream – assessing blue sky upside from here: We’ve long touted the unrisked organic growth upside across the Midstream names, underpinning our bullish stance for the sub-sector. However, year-to-date, the CAD 10-yr rate has pulled back ~70 bps to 2.1% – bucking earlier consensus views of rising rates through 2014 and no doubt providing another boost to valuations of late. Overall, we maintain our investment stance of overweighting the Midstream names despite current stock prices approaching or surpassing our current target prices (which are based on a 3.5% CAD 10-yr assumption, and exclude unrisked growth upside). Taking a look at Midstream stock prices relative to our total unrisked valuations – we highlight AltaGas, Pembina, Inter Pipeline, Gibson and Keyera as our current pecking order.

Other notables (SPB, TA/CPX/ACO/CU, TRP): We continue to recommend buying Action List Outperform-rated Superior Plus ahead of its Q2 and potential announcement of a sale for its CPD division – see our July 2nd Q2 preview. Elsewhere, with Q2 Alberta power prices dipping to $42/MWh (long-term avg.: $65/MWh) and a mid-$50/MWh outlook through 2015, we recommend staying clear of TransAlta, while looking for an opportunity to add to Capital Power, ATCO and Canadian Utilities on any potential weakness surrounding the quarter. Finally, with TRP up 11% since the end of Q1 amid rising energy (power) YieldCo valuations (+14%), we recommend awaiting a better entry point following relatively weak EPS of $0.48 forecast for Q2/14 (Q2/13: $0.50).

Pipelines, Utilities & Energy Infrastructure

JMRD Basket Corner

 DIG Basket

 A strong week for Canadian Banks, Bank of Nova Scotia and Toronto Dominion Bank, both held in DIG, traded at all-time highs. In addition, Midstream co’s Keyera and Pembina traded at new highs, buoyed by lower bond yields and anticipation of strong Q2 results

U.S. Growth Basket

Dow Chemical (DOW) – Dow Chemical Co. reported on Wednesday that second-quarter sales rose a better-than-expected 2% as the company reported growth in all its operating segments. The company has returned $3 billion to shareholders this year and expects to sell up to $2 billion of low-margin business, such as commodity chemicals production. Shares of DOW traded to a new 52-week high

 Halliburton (HAL)Shares of Tech-Savvy Halliburton Look Like a Bargain

Raytheon (RTN) – Raytheon Co. on Thursday reported a 12% rise in second-quarter profit, though left its full-year guidance unchanged, and a closely watched measure of new business fell short of analysts’ expectations. The company’s results benefitted from lower pension charges and efficiency gains

Retirement Corner

1) “Richest. Seniors. Ever. How the luckiest generation keeps making money — and spending it (Financial Post)

Week at a Glance

Week At A Glance

Reads of the Week

Economic Reports

Monday July 28th – U.S. Pending Home Sales

Tuesday July 29th – U.S. Consumer Confidence Index

Wednesday July 30th – Canadian Industrial Product Price, FOMC Rate Decision, U.S. GDP Annualized

Thursday July 31st – Canadian GDP

Friday August 1st – U.S. Change in Nonfarm Payrolls,

Earnings Reports

Monday July 28th – None

Tuesday July 29th – DH Corp, First Capital Realty, FirstService Corp

Wednesday July 30th – Barrick Gold, CGI Group, Home Capital Group, Intact Financial, Open Text, Macdonald Dettwiler & Associates, Methanex Corp, Suncor Energy

Thursday July 31st – AltaGas Ltd, CCL Industries, Canadian Oil Sands, Canyon Services, Constellation Software, Goldcorp, RioCan REIT, TransCanada Corp, Vermilion Energy

Friday August 1st – ARC Resources, Chevron Corp, Enbridge, Fortis Inc, Power Financial

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