JMRD Market Observer for June 26th, 2015 – NBFM Monthly Equity Monitor – July/AugustJune 26, 2015
**June 26th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- NBF Monthly Equity Monitor
- JMRD Insurance Corner
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
NBFM Monthly Equity Monitor – July/August 2015
- Global equities have been consolidating in recent weeks as uncertainties about Greece and U.S. monetary policy test investor resolve. With P/E ratios now roughly in line with historical averages, the outlook for earnings growth will be the key factor in the direction of equity markets. Fortunately, that outlook is constructive for the second half of 2015.
- Our Q3 growth forecast is especially aggressive for the U.S. If we are right, the “more decisive evidence” of sustained economic growth that the Federal Reserve has said it would like to see before embarking on interest-rate normalization is likely to come sooner rather than later. Expect some turbulence as financial markets adjust to this scenario. That said, volatility due to monetary policy uncertainty need not be synonymous with market correction.
- Though our recommended asset-class allocation is unchanged this month (equities still overweighted relative to our benchmark), we have made a slight change in our regional equity allocation. Guided by past experience of Fed tightening phases, we have reduced the beta of the equity portfolio by shifting away from Canada and emerging markets in favour of the U.S. and EAFE. This adjustment is consistent with our forecast of a 3-to-5 cent depreciation of the Canadian dollar over the coming months. Our year-end targets are 15,600 (revised down from 16,200) for the S&P/TSX and 2,220 for the S&P 500.
(Full report attached)
JMRD Insurance Corner
Please see the attached article on how newly introduced tax legislation may affect your life insurance.
JMRD Basket Corner
Pembina Pipeline (PPL) – On June 23rd, Pembina hosted an on-site tour of its Musreau I & II gas processing plants and Kakwa pump station – i.e., key components of the company’s Cutbank Complex. Located just south of Grand Prairie, Alberta, PPL’s Cutbank Complex is capable of processing 773 mmcf/d (net) comprised of four sweet gas plants with operating shallow cut processing capacity of 468 mmcf/d (net) and deep cut processing capacity of 205 mmcf/d (net), along with ~350 km of gathering pipelines and ~23,000 bpd of NGL extraction capacity. Of note, the Cutbank Complex processes gas for over 50 customers (~75% investment grade credit rating) targeting up to nine formations (primarily Wilrich, Falher C, Dunvegan and Cardium) in the surrounding Kakwa, Resthaven and Red Rock regions. (full note attached) Pembina Pipeline
All Cap Basket
Element Financial – Element Financial closed on US$1.21 billion third-party ABS offering this week. The three tranche transaction – backed by 49 Boeing and Airbus manufactured commercial passenger aircrafts with an appraised value of $1.57 billion and leased to 38 airlines – is the largest aircraft ABS deal in a decade. EFN will act as administrator to ECAF I Ltd., while BBAM Aviation Services Limited has been retained as service under a multi-year contract. Element structured the deal and sourced the third-party institutional financing to complete the transaction, for which EFN will earn structuring and placement fees. EFN will also earn equity returns from its ongoing participation in the syndicate (less than 20% of the holdings) and ongoing administration fees. (full note attached) Element Financial
U.S. Growth Basket
HCA Holdings (HCA) – The Supreme Court’s decision to uphold ACA subsidies provided a lift to hospital stocks, which are seen as big beneficiaries. The thinking is a bigger pool of ACA patients will reduce the number of unpaid bills and uninsured visits and also increase health care use. The big for-profit hospital operators including HCA traded higher by 9% on the news Thursday.
Nike (NKE) – Nike traded to an all-time high on Friday, up 4% following Q4 2015 results. Nike recorded a 4.8% increase in quarterly sales though continued pressure from a stronger dollar weighed on revenue growth and future orders. Nike derives most of its income from North America, but more than half of its sales are further afield, where economic and foreign-exchange pressures weighed on its performance. World-wide orders of Nike apparel and footwear for delivery from June through November grew 2% from a year earlier, including currency changes. That is well below the 11% increase that the company reported for the year-earlier period but unchanged from the last quarter. Excluding currency fluctuations, future orders rose 13% from a year ago. Revenue rose to $7.78 billion in the three months ended May 31, from $7.43 billion a year earlier. Excluding the impact of a stronger dollar, sales improved 13%.
- The Irrelevant Investor — How Should We Think About a 60/40 Portfolio?
- “New Job, New Retirement Benefits…Now What?” (Globe and Mail)
- “How much will you spend in retirement?” (Financial Post)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- NBF Hot Charts: Canada: Earnings revisions turn positive for banks Canada’s banking sector (21% of the S&P/TSX) may be poised for better days. Full-time employment in Canada surged to a new record in May, with much of the gain accruing to central provinces. This development is key to household formation and continued vigour of the housing market. Expect a further boost to disposable income from previously announced tax relief enhancing universal child care benefits as of July 2015. Stronger growth of household disposable incomes combined with the prospect of stronger business investment outside the Energy sector and a relatively steep yield curve is not a bad environment for banks. As today’s Hot Charts show, earnings revisions for the Canadian banking sector have recently turned positive for the first time in 2015. Even with these revisions, the bottom-up consensus of equity analysts remains conservative – estimated earnings growth of 5% over the next 12 months. Against this backdrop, we remain comfortable with our recommendation to overweight bank stocks. (full note attached with chart) Hot Charts
- “You’re only human: An economist explains how it hurts your portfolio” (Washington Post)
- Why Walmart crushed Target in Canada” (Financial Post)
- “Dividends a No-Go” (Bespoke Investment Group) The recent rise in long-dated risk-free interest rates has hurt the performance of stocks that have high dividend yields.”
- Searching for Volatility in All the Wrong Places (Bloomberg)
- “The CEO Of A Billion-Dollar Startup Uses A Simple System To Nail Work-Life Balance Every Week” (Business Insider)
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Monday June 29th – Canadian Industrial Product Price, U.S. Pending Home Sales
Tuesday June 30th – Canadian GDP, U.S. Consumer Confidence Index
Wednesday July 1st – Canada Day – Canadian markets closed, U.S. ADP Employment Change, U.S. Construction Spending, U.S. ISM Manufacturing
Thursday July 2nd – U.S. Change in Nonfarm Payrolls, U.S. Unemployment Rate, U.S. Initial Jobless Claims, U.S. Factory Orders
Friday July 3rd – U.S. Markets closed
Monday June 29th – None
Tuesday June 30th – None
Wednesday July 1st – None
Thursday July 2nd – None
Friday July 3rd – None
Have a good weekend!
Categorised in: JMRD Updates