JMRD Market Observer for November 7th, 2014 – Tax Loss Selling Edition, Children’s Hospital VisitNovember 10, 2014
**November 7th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- Children’s Hospital of Southwestern Ontario
- Identifying Tax Loss Selling Candidates
- Asset Allocation Strategy – November 2014
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Children’s Hospital of Southwestern Ontario
Back in 2009 the local Children’s Hospital of Southwestern Ontario in London was planning a move to a new location.
At that time we committed to paying for a dedicated playroom for children to use where they could be comfortable knowing there would not be any medical procedures performed.
The idea was to give them a non-threatening environment to escape.
We raised $100,000 with the help of our clients and partners at the London National Bank Financial Office and the room was completed in late 2011 as part of the opening of the new facility.
Paul and his family have committed to funding ongoing maintenance and upkeep of the room to make sure it always stays a fun place for these kids to escape.
This week, Paul and his family visited the hospital and the playroom itself and were happy to see it was being used the entire time they were there. They also were able to see some of the other great programs there including Kids Kicking Cancer and the Art Therapy program.
For any clients who supported that campaign, Thank you and you can be assured that the playroom is and will continue to be a great spot for these children to get healthy.
Identifying Tax Loss Selling Candidates
Tax loss selling is a strategy that involves selling positions to harvest capital losses at the end of the year to offset capital gains realized in the investors’ portfolio throughout the year in order to minimize taxes paid in a given year. These losses can be carried back three years, or be carried forward indefinitely. Notably, tax loss selling only applies to non-registered investments; and the selling transaction must settle before the last business day of the year. Therefore the trade date must be no later than December 24, 2014.
Investors are required to wait 30 calendar days before or after the sale a security for a loss, before buying the same security back to preserve the tax loss in accordance with Canada Revenue Agency (CRA) tax rules. This “Superficial Loss” tax rule also applies when an “affiliated person” including a spouse, a trust of which the investor or its spouse are a majority beneficiary, or corporation controlled by the investor (or spouse) acquires or reacquires the same security within 30 days before or after the sale. If an individual incurs a superficial loss, the loss will be denied by the CRA and cannot be used in the current tax year and the denied loss will be added to the cost base of the security. However, during the 30-day period, investors can access other products, like ETFs, to help provide an approximate exposure to the security sold. Investors can then cycle back into the underlying security when appropriate. The CRA tax rules also prohibit “swapping” which involves the transfer of an investment with an unrealized loss to a registered account or TSFA in order to realize the loss without actually disposing of the investment.
This also provides a higher risk trading strategy to buy the companies that are seeing extra selling pressure due to tax-loss selling. We are working on a list of top tax-loss selling candidates which could provide a good trading opportunity into the new year. Late November through mid-December can be an opportunistic time to pick up some of these companies for a short-term trade into 2015
Asset Allocation Strategy: Rollercoaster Ride
Volatility was the name of the game in October. Rising risks ranging from deflation in Europe, to an Ebola outbreak and unrest in Hong Kong, prompted equity markets to correct in the first half of the month. But a change of tone from certain of the Federal Reserve’s speakers and the start of a new bond-buying program by the European Central Bank (ECB) precipitated a strong turn around in equity prices. In October, the S&P 500 index pulled back as much as 5.6%, but managed to recoup the losses and finish the month up 2.2 %, setting a new record high of 2015 points. Canadian equities also managed to rebound in the second half of the month, but with oil prices still down 25% from their June 2014 peak, the former remained underwater by 2.4% in October.
Asset allocation strategy
- Equities: Canada’s resource-heavy stock market will likely continue to underperform the rest of the world on a relative basis. Equities in the EAFE region look cheap at current levels, and may tactically rebound the most in the short term on a fully-hedged basis. However, our preference continues to lie with U.S. equities, since the economy south of the border is solid and well into expansion mode. Small cap stocks recouped most of the losses they have incurred since September, and they should benefit from a strong domestic economy. However, on a relative basis, they continue to be expensive compared to larger caps and we feel the latter are better positioned to benefit from an information technology-induced rally. Investors should take profits in interest-rate sensitive defensive stocks such as utilities.
- Fixed income: Bond portfolios should have a slightly shorter duration than their reference index. We recommend spread products with higher yields to limit the interest-rate risk exposure. We are underweight government bonds, favouring corporate bonds and equities.
- Currencies: With the ECB and the Bank of Japan (BoJ) eagerly easing their respective monetary policy, the USD will likely continue to appreciate against most major currencies.
(See Asset Allocation Strategy attachement)
JMRD Basket Corner
A very busy week for quarterly earnings reports in JMRD Baskets
CI Financial (CIX) – Announced a 5% dividend increase in conjunction with Q3 results
Keyera (KEY) – KEY reported their second consecutive strong quarter, well above expectations. The company reported adjusted EBITDA of $148 mln, well above NBF’s estimate of $125 mln and consensus of $136 mln on stronger NGL Marketing contributions. Keyera benefitted from higher iso-octane gross profit margins and continues to have a big pipeline of growth projects. Keyera’s President and CEO, David Smith was on BNN to discuss the Q3 results:
Newalta (NAL) – Newalta announced strong Q3 with solid performance across the company. Revenue was $228 mln, $59 mln adj. EBITDA and $0.44 adj EPS which was in line with NBF estimates and slightly ahead of consensus at $56.7 mln EBITDA and $0.40 adj EPS. SG&A fell to 9.5% of revenue, from 10.0% in the previous quarter, benefiting from cost cuts in Industrial. Despite lower oil prices and with only two months remaining in ‘14E, NAL is still calling for a 20% increase in adj. EBITDA y/y (over its normalized ’13 level of $156 mln) to $187 mln.
Whitecap (WCP) – Whitecap announced Q3 results this week following which the shares rebounded 10%. WCP offers investors a defensive business model and a discounted relative valuation among the more sustainable of light oil-focused, yield peers. Whitecap trades at 6.9x on a 2015e EV/DACF basis, which compares to its peers at 7.0x.
All Cap Growth Basket
CCL Industries (CCL.b) – CCL reported Q3 results this week and the shares responded to a record quarter by moving higher by 7% over 2 days to a new high. CEO Geoffrey Martin was interviewed on BNN to discuss the company’s performance and outlook:http://www.bnn.ca/Video/player.aspx?vid=486010
Inter Pipeline (IPL) – Inter Pipel’s Q3 results were just shy of expectations as the company reported EBITDA of $184 mln, shy of NBF’s estimate and consensus of $191 mln on lower than expected realized frac spreads and an unplanned outage within NGL Extraction. However, the company announced a 14% dividend increase to $1.47/sh annually (from $1.29/sh) commencing with the December 2014 payment. The 14% increase represents the largest in IPL’s history and takes the company’s five-year dividend CAGR to 10%. NBF analyst Pat Kenny is forecasting a further 15% dividend increase for Q4 2015. Meanwhile, IPL continues to pursue ~$3 bln of additional oil sands projects post 2016, representing ~$4/sh (~10%) of unrisked upside to current valuation.
Magna (MG) – reported a 47% jump in third-quarter earnings, easily beating analyst expectations, on stronger production sales in North America and Asia. The auto-parts giant also announced plans to buy back up to 20 million shares.
Stella-Jones (SJ) – Announced Q3 sales increased 25.2% y/y to $357.3 million, which was slightly above expectations. Organic growth remained strong at 14.0% thanks to solid industry demand and increased tie pricing. As expected, margins remained affected by higher cost for untreated railway ties but this headwind is diminishing as SJ gradually implements pricing actions. EBITDA of $51.3 million was in line with NBF and consensus estimates. EPS (fd) of $0.43 was slightly below NBF $0.45 due to taxes. The demand outlook remains very favourable in SJ’s core product categories. In railway ties, the economic recovery is driving investments in the rail network. In utility poles, regular maintenance is the driver in the near term before demand expectedly accelerates in the mid-term as more poles approach the end of their normal service life.
US Growth Basket
Halliburton (HAL) – “Halliburton CEO Expects Shale to Reverse Oil Price Slump”: Chief Executive Officer Dave Lesar is joining the chorus of oil executives who say they aren’t worried about falling oil prices, and expect them to climb next year.
1) “Unpacking the 4% rule for retirement-portfolio withdrawals” (Morningstar) It’s a useful starting point for retirement planning, but it’s crucial to understand the assumptions behind it.
2) “Readers pick: Seven great places – yes, in Canada – to retire” (Globe and Mail)
Week at a Glance
(See Week at a Glance Attachment)
Reads of the Week
- “Glory To The New Bond King” (Forbes)
- “Best advice from CEOs: 40 execs’ secrets to success” (Fortune)
- “Historic Flame Out In Energy Stocks” Over the past few weeks, every one of the components of the Energy Select Sector SPDR (XLE)was trading below its 10-week (approximately 50-day) simple moving average. The only other time this occurred was in the depths of the 2008 financial crisis/oil implosion.
- “Don’t Wait For The Fat Pitch”
- “Significance of secular market should not be underestimated” (Washington Post)
- Peter Hodson: “5 reasons to still love the energy sector” (Financial Post)
Monday November 10th – Canadian Housing Starts
Tuesday November 11th – U.S. NFIB Small Business Optimism
Wednesday November 12th – Teranet/National Bank Home Price Index, U.S. Wholesale Inventories, U.S. Wholesale Trade Sales
Thursday November 13th – Canadian New Housing Price Index, U.S. Initial Jobless Claims
Friday November 14th – Canadian Manufacturing Sales, U.S. Retail Sales, University of Michigan Confidence
Monday November 10th – Legacy Oil + Gas, Vermilion Energy
Tuesday November 11th – Allied Properties REIT, Canadian Apartment Properties REIT, WSP Global
Wednesday November 12th – Cisco Systems, Encana, Loblaw Cos, Pason Systems, Silver Wheaton
Thursday November 13th – Alaris Royalty, Boardwalk REIT, Cineplex, Element Financial, Manulife Financial, Wal-Mart Stores
Friday November 14th – Onex Corp, Power Corp of Canada
Categorised in: JMRD Updates