JMRD Market Observer for September 2, 2016 – Asset Allocation Strategy September – FED: Running around in circles

September 2, 2016

In This Week’s JMRD Market Observer

 

  • Asset Allocation Strategy September – FED: Running around in circles
  • NBF Economics and Strategy Morning Comment – A September Rate Hike?
  • JMRD Basket Corner
  • Retirement Corner
  • Reads of the Week
  • Economic Calendar
  • Earnings Report

 

 

Asset Allocation Strategy September – FED: Running around in circles

 

Highlights

 

  • The influence of market reactions pushing the Fed to reassess its policy is hard to break, and the Central Bank needs the perfect combination of economic strength, job momentum, global risk containment, and strong enough inflation numbers to overpower any factors suggesting a delay.

 

  • However, a window of opportunity is starting to open up, especially in light of Fed Chair Yellen’s speech in Jackson Hole on August 26 where she said that employment numbers will remain the key data point going forward. The odds of a rate increase are now steadily increasing and good September 2 employment numbers would greatly accelerate the schedule of monetary tightening, and put the next meeting “live”.

 

  • In light of expectations regarding the US monetary policy, we suggest investing in shorter duration bonds. However, one way to invest in longer durations would be through Treasury Inflation-Protected securities (TIPS). TIPS have the potential to provide some form of protection against the possibility of rising rates because the underlying economic reason for such a scenario would be an increasing CPI.

 

  • As we expect the FOMC to act this year, the early cyclicals, especially financials, would be poised to take the lead performance-wise once the Fed pulls the trigger, as rising interest rates boost profit margins for banks and insurance companies.

 

  • We believe better opportunities lie ahead in equity markets as valuations are not cheap. As a consequence, we suggest keeping some liquidity on hand to invest when they present themselves.

 

Full report attached.

 

Asset Allocation Strategy

 

 

NBF Economics and Strategy Morning Comment – A September Rate Hike? 

 

Mrs. Yellen’s August 26 speech turned out to be slightly more hawkish than expected. While reiterating that the Fed is data-dependent, she said: “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”. The Fed’s tightening bias was clearly communicated. A rate hike cannot be ruled out in September, the odds of which will increase if this Friday’s August non-farm payrolls print is in line or above the 180K consensus is expecting (the actual payroll number, released after this report was written, was +151,000 for the month of August, below expectations). As shown in the attachment, the probability of a rate hike in September jumped from 22% to 42% over the past week and that for December rose from 51.1% to 64.7%.

(Full report attached)

 

Morning Comment

 

 

JMRD Basket Corner

 

DIG Basket

 

Dollarama (DOL) – Dollarama reported Q2/F17 EPS of $0.88, higher than NBF/consensus at $0.82/$0.84 respectively; last year was $0.74.  Key Takeaways: (1) Dollarama delivered another solid quarter predicated on sales growth, efficiency improvements and share repurchases. The EPS beat versus NBF was largely due to a higher than expected gross margin rate, which was partially offset by a higher than expected effective tax rate. (2) Management maintained its F2017 gross margin rate guidance of 37%-38%, despite achieving a strong H1/F17 gross margin rate of 37.7%. Historically, Dollarama achieves stronger gross margin rates in H2. As a result, we believe that Dollarama will exceed gross margin guidance in F2017 (NBF is 38.4%). (3) We have accordingly revised our estimates higher. F2017 EPS goes to $3.56 from $3.44 and F2018 EPS goes to $4.00 from $3.85. (4) Maintain Outperform rating; price target is $112 from $105. (Full report attached)

 

Dollarama

 

All Cap Growth Basket

 

CCL Industries (CCL.B) – CCL Industries Announces Bolt on Healthcare Acquisition in Northern Ireland – CCL Industries, a world leader in specialty label and packaging solutions for global corporations, small businesses and consumers, announced today that it has acquired all the outstanding shares of Labelone Ltd. (“Label1”), a privately held company based in Belfast, Northern Ireland.  Label1 is a leading converter primarily focused on the Healthcare industry in Northern Ireland. Sales for the annualized period ending March 31, 2016, were approximately $10.7 million, with an adjusted estimated EBITDA of $3.0 million. Purchase price consideration, including assumed debt, is approximately $17.7 million, subject to customary closing adjustments, including acquisition of real estate.

 

U.S. Growth Basket

 

Broadcom (AVGO) – Bottom Line. Bottom Line. AVGO reported F3Q Rev/EPS and guided F4Q Rev/EPS ABOVE CS/Street expectations. We are raising our CY16/CY17 EPS from $11.67/$13.34 to $12.08/$14.13. While high expectations into F3Q and YTD stock performance of +21.5% might dampen stock’s reaction NT – we view this as very short sighted – YTD FTM EPS estimates on AVGO have increased ~20% versus aggregate Semis of ~5%, and importantly even though we are raising our CY17 EPS by ~6% this morning, we still see more EPS upside in AVGO from here than any other name in our coverage universe driven by: (1) GM leverage as the Company optimizes its product portfolio, (2) OpM leverage as the Company executes on continued M&A synergies, and (3) lower interest expense as the Company de-leverages. The only blemish in F3Q was Wired (54.3% of Rev), which was flat q/q below guidance of up ~2% q/q as supply constraints in STB prevented AVGO from shipping to demand – we view this as a high class problem. Wireless (26.5% of Rev) content story at AAPL still on track with Wireless up 27.3% q/q in F3Q and guided up >30% q/q. We see Enterprise Storage (13.9% of Rev) and Industrial (5.3% of Rev) guidance of flattish and down 20% q/q respectively as exceedingly conservative – more cushion. The stock is currently trading at P/E w/SBC and EV/EBTIDA on CY17 of 15.5 times and 11.9 times versus peers of 18.9 times and 12.2 times, respectively. Our only legitimate criticism – with Debt to EBTIDA of 1.8 times levered on CY17 EBITDA we see ample “dry powder” to pursue both M&A and an aggressive buyback program especially as SBC has increased from

$57m/Q to $213m/Q with the addition of BRCM. (Full report attached)

 

Broadcom

 

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

 

 

 

 

 

 

Economic Reports

 

Monday September 5th – Canadian and US Markets Closed for Labour Day

Tuesday September 6th – None

Wednesday September 7th – Bank of Canada Interest Rate Decision, Canada IVEY Purchasing Managers Index; US FED Beige Book of US Economic Activity

Thursday September 8th – Canada New Home Price Index, Canada Housing Starts; US August Retail Sales, Us Initial Jobless Claims, US Empire State and FED Philly Index, US Industrial Production

Friday September 9th – Canada Payroll Data and Unemployment Rate; US Inflation Rate, US Consumer Sentiment

 

 

Earnings Reports

 

Monday September 5th – Canadian and US Markets Closed for Labour Day

Tuesday September 6th – Hudson’s Bay Co.

Wednesday September 7th – None

Thursday September 8th – Lumenpulse, Northwest Company

Friday September 9th – BRP Inc., Kroger

 

 

Have a good long weekend!

 

 

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