**July 11th Issue of The JMRD Market Observer**

July 14, 2014

**July 11th Issue of The JMRD Market Observer**

In This Week’s Market Observer…

  • JMRD Strategy Note
  • All-Cap Growth Basket Quarterly Update
  • Telecom Sector update
  • JMRD Basket Corner
  • Retirement Corner
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

JMRD Strategy Update

After three years of underperforming the U.S., the Canadian Market had an excellent first half of 2014 with a return of 6.41% in Q2 and 12.8% year-to-date. Interest rates have remained low along with a pick-up in risk appetite. As well, good corporate earnings and stronger commodity prices have supported the TSX. After a strong period of performance, it is a good time review portfolios and ensure an investor is not overweight in a particular holding or asset class. Going into the third quarter, investors will be looking towards the upcoming economic meetings at Jackson Hole in August, where the Federal Reserve is expected to signal to markets when interest rates might begin to rise. In a late June interview, St-Louis Federal Reserve President James Bullard said that – in his view – rates should begin to rise at the end of the first quarter of 2015. Volatility has largely been absent this year and the Volatility Index remains at historically low levels. While this could continue for a period of time, we caution that investors should not be complacent. The number of Q2 Canadian earnings reports will sharply increase next week, providing a mid-year update for investors of company’s results as well as a looking towards 2015. The summer is also a good time for investors to have a mid-year review to ensure they are following their asset allocation mix and meeting their investment goals.

 JMRD ALL-CAP GROWTH BASKET (ACB) Update

JMRD Wealth Management Team is excited to provide our Q2 update for the ACB Basket – a strong quarter and on-going great start to 2014!

We officially purchased the ACB portfolio on October 7th of last year and we are pleased with the 15.08% return for the first half of 2014. For the same period, the TSX Composite Index Total Return was up 12.86%. The Basket was launched to all clients in the Market Observer around the same time and since then we have been providing comments on the holdings within ACB.  We hope you found the company descriptions timely and useful.

Below we will re-launch the Basket for those who aren’t familiar with it.  Since we have done this a few times, this will be the final time we provide this level of detail and will instead focus on holdings and changes in up-coming quarterly reviews.

There were 4 primary reasons for the launch of ACB:

1)  A great complement to the DIG Basket

  • Our flagship portfolio is the Diversified Income & Growth Basket (DIG) and is currently held by over 550 clients.
  • We featured DIG in last week’s Market observer
  • Clients who don’t own DIG own some or all of the holdings so exposure to DIG is even larger.
  • Clients have been asking for some new names and we listened!

2) DIG is getting bigger

  • A combination of solid returns and more clients buying have increased total assets in the DIG Basket to an all-time high which makes making changes more difficult to execute – record assets and record number of holders.
  • The larger ‘size’ makes it difficult to add smaller names to DIG from a liquidity point of view.
  • However, there are several of these ‘smaller’ or ‘less liquid’ companies that we like and we needed to have a mechanism for all clients to invest in these names – A NEW BASKET was the answer and the short term results have been encouraging.
  • All-Cap means that we are able to invest in any company regardless of size (cap is short for market capitalisation).
  • We are excited to get these new companies in more client accounts.

3) The investment environment has changed and we need to adjust; interest rates are no longer declining meaning that growth trumps income

  • We will always look for great companies paying solid dividends but just buying yield won’t work in a rising interest rate environment.
  • JMRD All-Cap Growth Basket will have less focus on low-growth / high income companies. Rather, the priority will be to a higher growth / lower dividend strategy.
  • We have added another new twist in that stocks selected for the JMRD All-Cap Basket do not need to pay a dividend to be eligible for inclusion.
  • We continue to favour those companies that have a history of increasing their dividends and the majority of the stocks in the Basket will pay a dividend.
  • Full list below for your information

 

4)  Timing is good

  •  Our base case is that the global economy is slowly gaining traction and this improving environment will be favorable for equities.
  • When we combine this stronger outlook with the inevitable rise in interest rates, we feel clients need to be positioned to take advantage of the potential for attractive equity gains.
  • A mix of growth and income would be ideal.

Additional notes and other things in the works:

  •  For clients interested in the new Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up
  • The minimum purchase for the new Basket is 4 Baskets or just over $50,000, with subsequent purchases of 1.5 Baskets, or $19,000 at current prices.
  • We are working with NBF to lower the minimum purchase amount

New info:

As you can see, the ACB Basket performed well in the first half of 2014 and we feel it is positioned extremely well for the balance of the year.

We wanted to point out some milestones for the Basket as of the end of June:

  • Total assets of $4,000,000
  • Number of holders sits at 41
  • All-Cap is currently 100% invested – no cash
  • Dividend yield is 2.3%

A current snapshot of the JMRD All-Cap Growth Basket is below:

ACB Snapshot

Telecom Services: Renewed Pressure On Wireless Stocks Over Past Month, Despite De´ja` Vu We Don’t Expect Same Declines As 2013

 

The news this week that the Canadian Federal Government will continue to push for another “made-in-Canada” wireless entrant in 2015 caused some pressure on the Telecom sector this week. While this is not expected to be a replay of 2013 when rumors of Verizon’s entry into Canada caused significant downside pressure in the sector, it may cause an overhang on the shares. Thee CRTC hearings are later this Fall and a final decision will not be announced until later this year or next year. It is important to note that BCE and TELUS have since recovered their losses to trade at all-time highs and still provide steady income. Valuations do appear full and we would recommend monitoring exposure to the sector.

JMRD Basket Corner

 All-Cap Basket

 Canyon Services (FRC) – Canyon announced a small purchase of coiled tubing assets for $19.7M this week. After pulling back from recent highs, the stock provides a good entry point for investors as the company is expected to have a strong second half of 2014 with improved pricing in the fracking sector
Inter Pipeline (IPL) – Announced an $110M expansion of its mid-Saskatchewan pipeline system which is expected to generate an additional $25M-$30M in incremental EBITDA on an annual basis. Throughput volumes have doubled to over 70,000 barrels per day (b/d) over the last two years with much of the Mid-Saskatchewan system operating at or near full capacity which has necessitated the expansion of the pipeline

Retirement Corner

1) Estate Preservation: Are you sure your family cottage will stay in your family?

Tax Liability

2) “Will your retirement cash last for the rest of your life?” (Globe and Mail)

Week at a Glance

Week at a Glance

 

Reads of the Week

“Corn Avalanche Coming as Rain Trumps U.S. Planting Slide” (Bloomberg)

Two excellent on columns on why investors should expect corrections but timing a correction is very difficult to do: “A Correction Is Coming” (Bloomberg)  and “5 reasons not to watch for a stock market correction” (Financial Post)

“Are you the best trader ever?” (The Irrelevant Investor)

“Why trading volume is tumbling, explained in 5 charts” (Marketwatch)

Profile of retired Hedge fund titan Jim Simons: Seeker, Doer, Giver, Ponderer: A Billionaire Mathematician’s Life of Ferocious Curiosity (New York Times)

“Bill Gates’s Favorite Business Book” (Wall Street Journal) John Brooks’s 1960s collection ‘Business Adventures’ still offers many insights into running a strong business

Economic Reports

Monday July 14th – Canadian Teranet/National Bank Home Price Index

Tuesday July 15th – Canadian Existing Home Sales, U.S. Retail Sales

Wednesday July 16th – Canadian Manufacturing Sales, Bank of Canada Rate Decision, U.S. Industrial Production, U.S. Federal Reserve Releases Beige Book

Thursday July 17th– U.S. Housing Starts, U.S. Building Permits, U.S. Initial Jobless Claims

Friday July 18th – Canadian Wholesale Trade Sales, U.S. Leading Index, University of Michigan Confidence

Earnings Reports

Monday July 14th – Citigroup

Tuesday July 15th – Goldman Sachs Group, Intel, Johnson & Johnson, JP Morgan

Wednesday July 16th – Bank of America

Thursday July 17th– CP Rail, Google, IBM, Morgan Stanley

Friday July 18th – General Electric, Honeywell International

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