JMRD Market Observer for November 28th, 2014 – Canadian Banks Earnings Preview‏

November 28, 2014

**November 28th Issue of The JMRD Market Observer**

In This Week’s Market Observer…

  • Energy Sector – What is Going On?
  • Canadian Bank Earnings Preview
  • 2014 Tax Reminders
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

Energy Sector – What is going on?

 

Despite the slide in oil and gas prices over the past few months, OPEC surprised the markets and announced that it was leaving its production unchanged at 30 million barrels per day.  The main issue is that OPEC is currently producing 1 million barrels per day above this quoted number as a result of additions from member nations Iraq and Libya.  Production from non-OPEC countries like the US, Russia and Canada is rising as well, which exacerbates the problem.  Once the news broke, oil dropped to its lowest level since 2008, closing Friday at $66 per barrel.  Oil stocks and also energy infrastructure stocks fell on the news as well.  Quality companies such as Crescent Point Energy, Whitecap Resources, Keyera Corp and Pembina Pipelines all suffered meaningful losses this week.  The selling was widespread and indiscriminate in a thin market with the U.S. Thanksgiving holiday. The reason why we are highlighting these companies is because they are all held in the JMRD DIG Basket.  When we selected these companies for the DIG basket, we looked at the companies abilities to maintain dividends under stressful circumstances, which we found ourselves in this week.  These companies all use hedging programs (selling their future production in advance at a set price) to limit to effects of falling commodity prices.  We still feel that we have invested in the best names in their sectors, both from an operations standpoint and from a management perspective.

 

Where does oil go from here?  Of course that question is impossible to answer.  We do know, however, that most OPEC countries rely on oil to fund their social programs and may have trouble balancing the books if oil stays at current levels. As history has shown, when prices fall, more wells become uneconomical, and production drops, eventually leading to higher prices.  The lower prices go, the more exploration budgets will be reduced. Low prices are a good cure for low prices. Even at $80 oil, a large group of producers cannot make money. At $60, the price is well below many producers’ marginal cost of production.  We are following the situation closely and will make any necessary adjustments as events continue to unfold.

 

 Canadian Banks – Earning Preview

Next week, Canadian Banks will report their year-end results starting with Bank of Montreal on Tuesday. NBF’s bank analyst Peter Routledge recently wrote a thorough report on what to expect from the banks and a look ahead to 2015. As of Monday, the Canadian banks average return this year was 13.4%

In Q4 f2014 we expect total revenue among the capital markets segments of the Big Six banks to decline 4% q/q. This reflects a projected 13% q/q drop in trading revenues, while we anticipate that non-trading revenues will increase 1% sequentially, but remain at cyclically high levels.Market volatility in October put a dent in expected q/q revenue growth, but we consider this a transient outcome due to the positive influence of the low interest rate environment and rising economic growth in the U.S. In fact, on a year-over-year basis, we forecast capital markets revenue growth at the Big Six banks of 19% and pre-tax earnings growth of 24%. Therefore, our thesis that the Big Six banks will realize robust capital markets revenue growth through f2015 remains intact.

 

Looking ahead to f2015, we have fairly conservative revenue and earnings growth estimates built into our forecast for this business line across the Big Six banks. Contingent on commentary from the heads of the banks’ capital markets segments, we believe our forecasts are more susceptible to upside risk than downside risk.

(See attached for the full report)

Canada’s Big Six Earnings Preview

2014 Tax Reminders

  • Last day for Tax Loss selling of Canadian Equities – Tuesday December 24, 2014
  • Last day for Tax Loss selling of U.S. Equities – Thursday December 26, 2014 (Canadian Markets closed December 26)
  • 2014 TFSA contribution deadline – Monday December 31, 2014 – contribution limit $5,500.00
  •   Note, if you are planning a TFSA withdrawal in early 2015, consider withdrawing the funds by December 31, 2014. The advantage is that you will not have to wait until 2016 to re-contribute that amount.
  • 2014 RSP contribution deadline – Monday March 2, 2015. The 2014 maximum RRSP contribution limit is 18% of “earned income” in 2013, to an annual maximum $24,270.

 Retirement Corner

1)     “Good news: You’ll likely live to 100. Bad news: You’ll need to start to save a lot” (The Globe and Mail)

 

Week at a Glance

(See Week at a Glance Attachment)

 Week at a Glance

 

Reads of the Week

Anatomy of a $2-billion deal: Class A office towers meet bus terminal” (Globe and Mail) 

The $400 Billion Bond Mismatch Keeping Bears at Bay Endures 

Oil Boom Triggering Cowboy Shortage Across Canada 

Best Books for Investors: A Short Shelf (Wall Street Journal) 

INSIDE ELON MUSK’S $1.4 BILLION SCORE (Fortune) 

 

 Economic Reports

Monday December 1st – US ISM Manufacturing Index

Tuesday December 2nd – US Total Vehicle Sales

Wednesday December 3rd – Bank of Canada Interest Rate Decision; US ADP Employment Change, US ISM Non-Manufacturing Index

Thursday December 4th – US Initial Jobless Claims

Friday December 5th – Canada Unemployment Rate; US Unemployment Rate

 

Earnings Reports

Monday December 1st – None

Tuesday December 2nd – Bank of Montreal

Wednesday December 3rd – Royal Bank, Canadian Western Bank

Thursday December 4th – CIBC, TD Bank

Friday December 5th – National Bank, Scotiabank

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