JMRD Market Observer for October 6th, 2017 – JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q3 Update

October 6, 2017

In This Week’s JMRD Market Observer

 

 

  • JMRD All-Cap Basket (ACB) & JMRD Diversified Income & Growth (DIG) Basket Q3 Update

  • Asset Allocation Strategy – Reflation 2.0

  • JMRD Basket Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD All-Cap Basket (ACB) & JMRD Diversified Income & Growth (DIG) Basket Q3 Update

 

It’s hard to believe that we’re already into autumn and the fourth quarter is upon us.  As is customary at the end of each quarter, we will discuss the three JRMD Baskets, beginning this week with the JMRD All Cap Basket (ACB) and the JMRD Diversified Income and Growth (DIG) Basket.  Before we get into Basket specifics, we want to again provide the handy table below showing how the various global indices and commodities performed during the month of September and year to date (YTD). 

 

 

At the beginning of September, the TSX was the only major market index in the world in negative territory. We’re still in last place today but at least we’re on the plus side of the ledger thanks to an impressive September rally that took the S&P/TSX Composite to its highest level since April.

 

Why the sudden turnaround? The strength of the Canadian economy in the first half of the year certainly boosted investor confidence. But a likely bigger reason for the September surge was the price of oil, which shot through the US$50 a barrel mark and appears to be holding.

 

There are two main reasons for oil’s surge. The first was increased demand from U.S. Gulf Coast refineries as they restarted after being shut down by Hurricane Harvey. The second was a renewed commitment by OPEC to stick with its production cuts.

 

U.S. and international markets also continue to post solid returns in 2017 and as we head into the final quarter of the year, we are optimistic that the equity markets can move higher from here.  All OECD economies are in expansion territory for the first time since 2004, and this synchronized economic growth bodes well for future market gains, as does being in the seasonally stronger period for the markets, which is Q4.  With all this factored in, we feel that the JMRD All Cap and JMRD DIG Baskets would be great additions to a portfolio as we head into the last few months of the year.

 

With that, let’s take a look at the two JMRD Canadian Baskets.

                                                                                                                    

JMRD All Cap Basket (ACB):  THE ALL CAP BASKET TURNS 4 YEARS OLD!

 

October 2017 marks the four year anniversary of The All Cap Basket (ACB) and we are pleased to report that, despite a somewhat disappointing return of -2.1% for Q3, the ACB is up 9.1% year-to-date (YTD) versus a TSX Total Return of 3.7% and 4.5% over the same periods.  To refresh, the ACB, which can act as a complement to the DIG Basket, invests in both large and small-cap companies, with a focus on growth-oriented businesses that may, or may not, pay a dividend.  Since the Basket was launched in October 2013, the compounded annual return is 13.5% versus the TSX Total Return Index at 8.3%.

 

Notable performers in the quarter were Shopify (SHOP) up another 28% in Q3 after a 25% return in Q2.  Their e-commerce offering continues to attract retailers that are looking for more of an online presence.  Premium Brands (PBH) was up 6.9% as it continues to deliver on its growth-by-acquisition strategy and Cargojet (CJT) was also up over 6% in Q3 after this virtually monopolistic overnight freight company recovered some lost ground after a lacklustre Q2.  Detractors were Seven Generations Energy (VII) whose production numbers were revised lower in their latest quarterly report. We have since sold the position.  Parkland Fuel Corp also struggled in Q3 as it continues to digest two large acquisitions.  We are still quite positive on the company’s prospects with its attractive 4.5% dividend and feel that the acquisitions, once fully absorbed, will be accretive to earnings.

 

Apart from the Seven Generations Energy sale, we initiated a position in Sleep Country Canada (ZZZ) in July and added to the position in August.

 

Below are the current All Cap Basket holdings.

 

 

As mentioned above, The All Cap Basket is more of a growth-oriented investment to complement the DIG Basket.  The minimum purchase for the All Cap Basket is 4 Baskets or ~$66,800 at current prices, with subsequent purchases of 1.5 Baskets, or about $25,000. And again, this amount will continuously change as the prices of its constituents change on a daily basis. 

 

 JMRD Diversified Income & Growth (DIG) Basket: Q3 2017 Update

 

The DIG Basket returned 2.3% in Q2 versus the TSX Total Return index of 3.7%.  Year to date, as at September 30th, the DIG Basket was up 4.9% versus 4.5% for the TSX Total Return Index.  

 

The DIG holding that posted the best return in Q3 was Canadian Natural Resources (CNQ) after the price of oil rose above $50 late in September and money came back into the energy sector.  CNQ was up 11% for the quarter.  Dollarama (DOL) posted another quality quarterly earnings report and continued its march higher, hitting an all-time high of $140.19 in September.  The stock was up 10% in Q3.  TD Bank (TD) was up 7% from the start of June to the end of September after continuing fears of a potential housing bubble were trumped by strong quarterly earnings in both their Canadian and US operations as well as an increase to their share buyback program.  Detractors in the quarter were WSP Global (WSP) and Algonquin Power (AQN), both down just over 3%.  WSP performed quite well in Q2 and was the victim of some profit-taking and AQN, which is an interest-sensitive utility, fell after interest rates rose.

 

It was a very quiet quarter for transactions in the DIG Basket.  We sold our position in Whitecap Energy (WCP) as the price had stalled despite oil prices remaining relatively firm and we added to Algonquin Power and CN Rail (CNR) after modest pullbacks in their share prices.

 

Below is a snapshot of the current holdings.  The current annual cash flow is $485 for a yield of 2.85%.   

 

 

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $17,000 making the minimum initial position approximately $34,000, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components fluctuate on a daily basis.  Subsequent purchases can be made in one Basket increments.

 

Asset Allocation Strategy – Reflation 2.0

 

 

  • At this point in the economic and monetary policy cycle, we believe the S&P/TSX tilt toward pro-cyclical, value companies makes it a good candidate for outperformance. Therefore, we stick to our overweight Canadian equities stance. We also took advantage of the solid outperformance from our currency hedged U.S. investment-grade bonds position to lock-in profits and move fixed-income assets back into the equity market, gradually increasing our exposure to the asset class, and thereby getting back to neutral in U.S. and EAFE equities.

 

  • As inflation is a lagging indicator of the cycle, the sharp acceleration in economic activity that was recorded during the second half of 2016 should gradually give way to an increase in inflationary pressures. As such, we believe the path of least resistance for interest rates is up. In our opinion, non-traditional fixed-income strategies will outperform in the near term and we favour an allocation of global bonds (higher yield to maturity) mixed with credit spreads (without taking duration risk).

 

  • While Fed Chair Yellen has re-calibrated expectations regarding a hike in December to a near-certainty, we believe the medium-term market projections for a hike are still too low. The scenario where the FOMC is more hawkish than expected or the ECB less aggressive than initially assumed is more probable than the contrary. Consequently, we believe the overall bull market for the greenback is not over and might have more room to run.

 

  • Central bank actions are always dependent on the economic situation and, on that front, it seems that expectations for Canada are too high, while the U.S. is set to turn a corner. This puts the loonie in a situation where it could tactically weaken on the short-term horizon. As such, we suggest removing a part of the hedge in your investments south of the border. 

 

See the full article

 

 

JMRD Basket Corner

 

DIG Basket

 

Pembina (PPL)Pembina Announces Closing of Business Combination with Veresen, Declares Increased Common Share Dividend and Provides Business Update

 

All-Cap Growth Basket

 

Parkland Fuel (PKI) – Parkland Completes Acquisition of Chevron Canada’s Downstream Fuel Business

 

US Basket

 

Applied Materials (AMAT) – Applied Materials Stock Could Double

 

Facebook (FB) – RBC analyst: Only 2 scenarios would spur investors to flee Facebook

 

PayPal (PYPL)Will PayPal Get Paid…For Venmo?  

 

Vail Resorts (MTN)North America’s Best Ski Resort Is About to Get Even Better

 

 

Reads of the week

 

 

 

 

 

 

 

 

 

 

Economic Reports

 

Monday October 9th – Canadian Markets Closed for Thanksgiving;

Tuesday October 10th – Housing Starts (CAD)

Wednesday October 11th – MBA Mortgage Applications (US)

Thursday October 12th – New Home Price Index August (CAD) Initial Jobless Claims (US)

Friday October 13th – Retail Sales (US) CPI (US)

 

 

Earnings Reports

 

Monday October 9th – Canadian Markets Closed for Thanksgiving;

Tuesday October 10th – None

Wednesday October 11th – BlackRock Inc.,

Thursday October 12th – Jean Coutu Group (PJC), Citigroup Inc., JP Morgan Chase & Co.,

Friday October 13th – Bank of America Corporation, Wells Fargo & Company

 

 

Enjoy the long weekend!

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