JMRD Market Observer for October 9th, 2015 – JMRD U.S. Growth Basket & JMRD ETF Basket Q3 Update

October 9, 2015

**October 9th Issue of The JMRD Market Observer**

In This Week’s JMRD Market Observer

 

  • JMRD U.S. Growth Basket Q3 Update
  • JMRD ETF Basket Q3 Update
  • NBF Economics and Strategy Group ranked 3rd Overall FX Forecaster by Bloomberg
  • Geopolitical Briefing – The Economic and Geopolitical Impact of the Trans-Pacific Trade Agreement
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

 

The third quarter can only be described as volatile with the financial markets around the globe posting multi percentage moves on what seemed to be a daily basis.  There are many headlines adding to the heightened volatility and we do expect continued uncertainty.  When looking at the VIX, or volatility index, which is a gauge measuring market expectations in the near term (typically the VIX moves higher when the markets are falling), the rally in equities this week has pushed the VIX down to below 20, from over 50 on August 24th.   Prior to that, the volatility benchmark had spent 30 days above 20, the longest streak of elevation since 2012, data compiled by Bloomberg show. The prolonged reading above 20 showed that investors were still somewhat reluctant to enter back into the markets.

 

With that, we wanted to provide our customary quarterly Basket updates.  This week will we review the JMRD US Growth Basket and the JMRD Exchange Traded Fund Basket.  Next week we will discuss our Canadian Baskets: the JMRD Diversified Income and Growth Basket (DIG) and the All Cap Basket.

 

JMRD U.S. Growth Basket Q3 Update:

 

JMRD continues to recommend that clients have exposure to the US equity markets and have a portion of their investments in US dollars – more below.

 

Launched on January 1st, 2014, the year to date return is -0.60% on the JMRD U.S. Growth Basket, after a 15.0% return in 2014.  Our benchmark, the S&P 500 Total Return, is down 5.29% in 2015 to date after being up 13.7% in 2014.  As you can see the JMRD Basket return has eclipsed the benchmark by more than 4% in 2015 and over 1% in 2014.

 

This compares to the following returns from other benchmark indices:

Table 1

 

As you can see from the chart below and to our point on volatility above, virtually all asset classes, even bonds, were negative in September.  However, at the time of writing, most major markets were up over 4% in the first few trading days of October.

 

Some clients own the US Basket in accounts denominated in Canadian dollars which has resulted in gains due to the appreciation of the US dollar.  The USD added to the yearly gains in Q3, up another 6%.  With the uncertainty surrounding the United States Federal Reserve’s interest rates policy – will they increase rates before the year end? – the USD has fallen 2% versus the CAD in October.  From the NBF Forex report included in last week’s Market Observer, NBF expects the USD to approach the $1.38 level by Q4 of 2016.

 

We launched the JMRD U.S. Growth Basket after we received numerous requests for a portfolio of US companies trading in US dollars.   Diversification by asset class and currency is important and at the time of launch, the Team was expecting the US dollar to strengthen making for a timely start.

 

We will focus on five questions you may have on the new Basket as a way of re-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 Basket.
  • The Team was being proactive in this Basket launch as NBF has just recently rolled out US dollar RSP accounts. The U.S. Growth Basket can be purchased in this new USD RSP.
  • Remember, if you don’t have US dollars, a new buyer would first need to convert to US dollars.
  • With the weakness in the Loonie over the past year, it takes more Canadian dollars to buy US dollars
  • NBF’s current forecast for 2015 for the USD/CDN dollar is to end the year at $1.34.
  • The rate at the time of writing was $1.2950.

 

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 Bank of Canada has lowered interest rates twice in 2015 and a third cut cannot be ruled out completely yet, although Canada’s economy expanded in the both June and July which could be enough to keep the central bank on hold for the next meeting.

 

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 an annual fee basis similar to our other offerings.

 

What is in the Basket?

 

  • We continue to include company updates on the holdings in our Market Observers so you can become more familiar with the individual positions.
  • You will find below a full snapshot of all holdings.

 

Table 2

 

The top performers this year in the basket have been Global Payments, Facebook, Sealed Air, Lockheed Martin and Nike. Despite the overall market weakness, each company has delivered returns of 10% or better this year. Global Payments deserves special mention as this week they increased its full-year outlook following better-than-expected results in its latest quarter, and the transaction processor company announced a two-for-one stock split. The shares moved higher by 10% on Wednesday as a result

 

New positions to the Basket in the quarter were Pinnacle Foods, which through its subsidiaries, manufactures, markets, and distributes branded convenience food products in North America. It operates through three segments: Birds Eye Frozen, Duncan Hines Grocery, and Specialty Foods. The Birds Eye Frozen segment offers frozen vegetables, frozen complete bagged meals, frozen prepared seafood, frozen and refrigerated bagels, frozen pizza for one, full-calorie single-serve frozen dinners and entrées, and frozen pancakes/waffles/French toast under the Birds Eye, Birds Eye Voila!, Van de Kamp’s, gardein, Mrs. Paul’s, Lender’s, Celeste, Hungry-Man, and Aunt Jemima brand names. Shortly after the quarter we bought Home-Depot, JetBlue Airways and L Brands, a position that we had previously sold. During the quarter, we also sold Synchronoss Technologies, Tableau Software, Illumina Corp, and Morgan Stanley. At this time, we are underweight the U.S. Financials sector.

 

How do we 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.

 

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

 

  • The current value of the JMRD U.S. Growth Basket is approximately $11,800. (all figures in US dollars).
  • The initial minimum position mandated by is 5 Baskets, or approximately $59,000.
  • Subsequent purchases can be made in increments of 1.5 Baskets, or about $17,700.

 

Notes:

 

  • The minimum and subsequent purchase amounts are mandated by National Bank Financial’s Baskets department, not by JMRD.
  • The returns above are before fees.

 

 

JMRD Maximum Growth Exchange Traded Fund (ETF) Basket Q3 Update

 

As many clients know, we have an Exchange-Traded Fund Basket which we will provide a full update on below.  We will focus on how we are positioned going into Q4 of 2015 to take advantage of the ever changing financial markets.  The ETF Basket is managed by the JMRD Wealth Management Team and is invested solely in exchange traded funds.  This Basket is meant to provide a diversified portfolio that can be used as a long term core holding.

 

To the end of September, the ETF Basket has posted a year to date loss of 6.00%.  This portfolio is predominantly an equity portfolio, and as evidence by the chart above, the major global equity markets are all in negative territory year to date, with the losses in Q3 erasing the returns to date.

 

Let’s have a look at how the ETF Basket is positioned going forward.

 

Current asset allocation of the ETF Basket is follows:

 

Cash and fixed Income: At the end of Q2 – 3.5%, now at 7.1% as we wait to add to positions.

 

Equities: 96.5%

 

Geographic breakdown:

 

15.2% Canada

41.2% United States

30.5% International

6.0% Other (a diversified hedge fund ETF position)

 

As we alluded to above, not many areas of the equity markets were spared last month.  The Volkswagen ordeal affected The German DAX and filtered through other European bourses and resulted in the EAFE (Europe Australasia Far East) portion of the portfolio being affected the most.  Now that the news has died down, Europe has rebounded well in the first few days of October.  Throughout the quarter, we raised our cash balance by lowering the emerging market and Canadian equity exposure.  We felt and still feel that there are better opportunities in US equities and EAFE equities. Looking at sectors, the US Healthcare sector came under some pressure after a report that Hillary Clinton, as she campaigns to become the Democratic Party leader, made a negative comment about pharmaceutical companies’ pricing practices.  We hold the BMO US Health Care ETF in the Basket and we are monitoring the situation closely.

 

The ETF Basket currently generates $258.00 in annual cash flow per basket, which equates to a yield of approximately 1.43%.   We consider the ETF Basket a TOP PICK for the final quarter of 2015 to take advantage of recent price weakness globally. The current value of one ETF Basket is approximately $18,000 making the minimum initial position approximately $36,000, which is 2 Baskets.  This amount will continuously change as the prices of the ETF Basket components fluctuate daily.  Subsequent purchases can be made in half Basket increments, or approximately $9,000.

 

Note that ETFs have underlying costs.  The blended annual Management Expense Ratio (MER) for the ETFs in the Basket is 0.37%.

 

A portfolio snapshot is provided below.

 

Table 3

 

NBF Economics and Strategy Group ranked 3rd Overall FX Forecaster by Bloomberg

 

NBF Economics and Strategy team led by Chief Economist Stefane Marion was ranked 3rd Overall in the latest Bloomberg FX Rankings for the 4 quarters ended in Q3 2015. JMRD extends our congratulations to Stefane and his team on another milestone award! (See attached note) NBF Sept 2015 Bloomberg FX Ranking

 

On Friday morning, Stefane was on BNN to discuss Friday’s Canadian employment numbers. Stefane on BNN

 

 

The Economic and Geopolitical Impact of the Trans- Pacific Trade Agreement

 

Introduction

Winners, losers and many still unanswered questions – the heated public debate goes on – but there can be no denying that the Trans-Pacific Partnership (TPP) has now moved a big step closer to becoming a reality. An agreement has been reached that will likely be ratified and thus usher in what would be the largest regional trade pact in history. The TPP would include 12 countries that together have an annual GDP of almost $28 trillion, accounting for about 40% of the world’s GDP and one-third of its trade.

 

(Full report attached)

Geopolitical Briefing

 

JMRD Basket Corner

 

DIG Basket

 

Brookfield Asset Management – Brookfield announced that it intends to spin off approximately 35% of Brookfield Business Partners L.P. (“BBP”) by distributing to shareholders a special dividend estimated to be worth US$0.50 per share, or approximately US$500 million, in the form of units of BBP. BBP will be the primary vehicle through which Brookfield will own and operate the business services and industrial operations of its private equity platform. BBP’s initial businesses will include substantially all of Brookfield’s business services and industrial operations. BBP will be focused on owning and operating high-quality businesses that are low-cost producers and/or benefit from high barriers to entry. In aggregate, based on Brookfield’s proportionate ownership interest, these businesses generated approximately $200 million of funds from operations for Brookfield last year and had an equity value of approximately $2 billion as at June 30, 2015.

 

All-Cap Growth Basket

 

CCL Industries (CCL.b) – CCL Industries announced this week that it has acquired certain assets of Sennett Security Products LLC and the equity of its wholly owned subsidiary, Banknote Corporation of America Inc., based in Greensboro, NC. The new business will become the Security Products division of CCL Label and change its trading identity with immediate effect. The acquired operation manufactures specialty labels and other high security cards & documents for government applications, including postage stamps; passport components, identity cards, as well as anti-counterfeit track & trace labels for high value items in the durable goods industry. Sales for 2015 are estimated at $35 million with forecast adjusted EBITDA of approximately $9 million. The debt free, all cash purchase price consideration is subject to certain customary post-closing adjustments and estimated at approximately $45 million.

 

Parkland Fuel (PKI) – Parkland’s Management hosted an update for company stakeholders, providing an operational blueprint and initiatives for its four verticals (retail, commercial, sales/trading/wholesale & Parkland USA), 2016e adjusted EBITDA guidance and five-year growth projections, additional disclosure and KPI targets that will now be reported alongside financial results, and an update on the acquisition pipeline and balance sheet plans. (full note attached) PKI

 

U.S. Growth Basket

 

Global Payments (GPN) – Global Payments on Wednesday increased its full-year outlook after better-than-expected results in its latest quarter, and the transaction processor announced a two-for-one stock split. For its first fiscal quarter, GPN earned $86.6 million, or $1.32 a share, up from a year-earlier profit of $75.4 million, or $1.10 a share. Excluding certain items, per-share profit rose to $1.57 from $1.26 in the year-before quarter. Revenue grew 6.2% to $748.8 million. Analysts, according to Thomson Reuters, projected earnings per share of $1.43 on revenue of $519.1 million.

 

Lockheed Martin (LMT) – Lockheed traded at a new year high on Friday. RBC Capital Markets noted that the defense sector is attracting more investor attention, which may be a defensive reaction as the prospects for other sectors worsens. In addition, Investors seem to be hopeful of revenue improving for arms makers, though there appear to be concerns about margins

 

Retirement Corner

 

 

Week At a Glance

 

See Week at a Glance Report.

Week At a Glance

 

JMRD Insurance Corner

 

As Thanksgiving weekend is upon us and some cottages are being closed up for another year, we thought it fitting to provide the second article, in the three part series, discussing other factors to consider when passing on your cottage or vacation property to other family members.  Please see the “Cottage Succession Planning 2” attachment for more information. Cottage Succession Planning 2

 

Reads of the Week

 

  • Hot Charts – Canada: Are “free trade” agreements worth the hype?  While the Trans-Pacific Partnership (TPP) has been promoted as a positive deal by the twelve negotiating countries, including the US and Canada, we’re not popping the champagne bottle just yet. For starters, the deal has to be ratified by parliaments in negotiating countries, something that will not only take time but also provides no guarantee of passage. Recall that it has now been well over a year since Canada and the EU penned a trade deal, the Comprehensive Economic and Trade Agreement, and the latter is still under review by European parliaments. Moreover, even if the deal is approved, the benefits from the TPP will not be symmetric across the Canadian economy. In other words, there will be winners and losers and there’s no guarantee net benefits will be positive. Previously protected industries will be under siege from foreign imports, while our exporters will only be able to take advantage of the TPP’s lower tariffs if they are offering better value than the competition. To give the TPP a better chance of being a net positive for Canada, the loonie will have to remain competitive. As today’s Hot Chart shows, benefits from a trade deal become apparent when the currency weakens, i.e. the share of exports going to countries with which Canada has a trade deal tends to rise when the C$ depreciates. And as the 2003-2011 period illustrates, the opposite is true when the loonie appreciates. (full note attached) Hot Charts

 

  • “Smart Beta ETFs – Getting a lot of attention” BNN’s ETF report looks at Smart Beta ETFs with Daniel Straus, Head of ETF Research & Strategy, National Bank Financial. Strauss says they’ve been attracting strong inflows – more than $2 billion so far this year in Canada – and some have been the among the best performing ETFs in the country. Straus also notes more ETFs were closed in Canada in August than were launched.

 

 

 

Economic Reports

 

Monday October 12th – Canadian markets closed for Thanksgiving day

Tuesday October 13th – U.S Monthly Budget Statement

Wednesday October 14th – U.S. Retail Sales Advance, U.S. PPI Final Demand, U.S. Federal Reserve Releases Beige book

Thursday October 15th – Canadian Existing Home Sales, U.S. Initial Jobless Claims, U.S. CPI

Friday October 16th – Canadian Manufacturing Sales, U.S. Industrial Production, U. of Michigan Sentiment

 

Earnings Reports

 

Monday October 12th – None

Tuesday October 13th – Johnson & Johnson, JP Morgan Chase & Co

Wednesday October 14th – Bank of America, Wells Fargo & Co

Thursday October 15th – Citigroup, Goldman Sachs Group

Friday October 16th – None

 

Have a good long weekend!

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