**June 13th Issue of The JMRD Market Observer**

June 13, 2014

**June 13th Issue of The JMRD Market Observer** In This Week’s Market Observer…  Energy Rally Continues; Identifying top picks 2H 2014

  • NBF Markets Review – June 2014
  • Thackray Market Letter – June 2014    
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

Energy Rally Continues; Identifying top picks 2H 2014 The strongest sector in Canada this year has been the energy sector and the strength continued this week with oil prices trading to a year high of $107 following intensified hostilities in Iraq. WTI Oil prices begin the year at $96.45, traded down to $90.62 before moving higher over the last few months. The strength in Canadian energy equities had been lead by the Natural Gas producers with the cold winter in North America. In addition, a lower Canadian dollar and narrower discount for Canadian oil prices along with an increased in transporting rail-by-crude. NBF’s Large Cap Oil analyst Kyle Preston highlighted his top picks for the 2nd half which included JMRD DIG Basket holdings Crescent Point Energy, Enerplus and Whitecap Resources.  Comparing Past Energy Rallies As we approach the midpoint of the year we thought we would take a step back to review the performance of energy stocks year-to-date and identify the best opportunities for the second half of the year. We have limited our discussion and analysis to the large and midcap energy yield names as most have been around long enough to compare historical performance. The S&P TSX Energy Index is up 16% year-to-date, representing the fourth best YTD return over the past decade. There are several key drivers behind this performance including the recovery in natural gas prices, improved market access for Canadian heavy oil and a general improvement in overall market sentiment. Given this strong YTD performance the logical question is whether this rally has more upside or if investors should consider taking profits. Looking back at the equivalent YTD performance over the past 10 years we note four particular years (‘05, ’07, ‘08, and ‘09) where the YTD energy performance exceeded 10%. If we track the performance over the balance of those particular years we note that the rally only continued for two of those years. However, if we look at just the June – December performance over the past decade, we note the index increased by an average of 16% in 6 of the years including a 41% rally in 2005, and decreased by an average 17% in 4 of the years, including a 47% drop in 2008 when the financial crisis began. Assuming the bullish trend continues we see potential for an additional ~10-15% upside while a bearish scenario suggest the market has ~5-10% downside potential. ENERGY INDEX PERFORMANCE While there is never any harm in taking profits we can’t help but feel there is more upside in select names given the supportive underlying fundamentals (commodity prices, market access etc) and the ongoing improvements in drilling technology which is supporting a more robust and sustainable growth model for oil and gas producers. The companies that screen best from a valuation, growth and catalyst perspective and have further upside in our opinion include ARX, BNP, BTE, CPG, CNQ, ERF, PEY, SU, WCP and VET. Within this note we provide a more detailed discussion and analysis on how we came up with these conclusions. Oil and Gas Exploration and Production  NBF MARKETS’ REVIEW – MAY 2014 Momentum carried markets higher in May on additional signs that the global economy is continuing to heal and despite persisting uncertainty stemming from the situation in Eastern Europe. Equity markets were propelled higher by good corporate earnings, positive economic news and low interest rates that retreated back to levels not seen in almost a year. Yields on most bonds declined to multi months lows in May, buoyed by continued geopolitical uncertainty, persistent investor demand, low inflation and continued central bank interventions in Japan, Europe and China. In May also, a number of countries that are of interest to the markets went to the polls to elect new leaders. In Ukraine, the electorate opted for the candidate that represents stability, in South Africa, the outcome reflected the people’s choice for legacy, while in India, the people chose change. Needless to say, the outcome in all three was positive for stocks, as was the message that was reiterated by central bank officials in the U.S. and Europe. In the U.S., Federal Reserve officials went out of their way to assure investors that interest rates will remain low for long after the end of Quantitative Easing, citing structural issues within the labour market. Across the pond, the European Central Bank reiterated its willingness to increase monetary policy stimulus. Experts suggest that the ECB could end sterilization, introduce negative deposit rates or simply do another Long-Term Refinancing Operation (LTRO) that would directly target financially troubled sectors. In the commodities market, gold prices weakened, but oil prices continued to rise ahead of the all important driving season. However, most of the action continued to unfold in the food commodity arena, where prices continued to climb in reaction to the drought that is gripping California and which is being described by many as the worst that the state has experienced in decades. The drought has caused the local government to declare an emergency across the entire state. Markets Review Thackray Market Letter 2014 June June update from Horizons Seasonal Rotation ETF (HAC), an ETF Basket holding. The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities and currencies during periods that have historically demonstrated seasonal trends. The Thackray Market Letter is for educational purposes and is meant to demonstrate the advantages of seasonal investing by describing many of the trades and strategies in HAC.In May, HAC returned 0.2% vs -0.3% for the TSX Composite Index and 2.1% for the S&P 500, with lower volatility than the indexes. Since November 19 2009 inception date, HAC has returned 46.7% vs the TSX Composite return of 25.9% and S&P 500 return of 75.7%. This month’s update includes a discussion of current holdings and seasonal trades in Biotech, Gold, Bonds and individual companies that have upcoming seasonal tendencies. Thackray_market_letter_2014_june (2) JMRD Basket Corner  DIG Basket Crescent Point Energy (CPG) – CPG announced on Thursday the acquisition of a private co in the Viking play in Saskatchewan for ~$334M. The acquisition was a complimentary tuck-in deal but not overly material given the relative size to CPG’s overall asset base and non-core focus. Nonetheless, it is expected to contribute free cash flow which should support its organic growth and income. The company was also featured in Alberta Oil Magazine and discussed its recent new discovery: New discoveries and waterflooding boost Crescent Point Energy: http://www.albertaoilmagazine.com/2014/06/crescent-point-energy/ Newalta (NAL) – NAL held a site visit for analysts this week to tour NAL’s on-site recovery facility located within Suncor’s MacKay River SAGD project. Newalta has a 10 year contract at the facility that commenced operation in late 2008, the first of what is now a number of on-site heavy oil contracts. NAL has become an integral part of Suncor’s operation, with strong availability and safety performance. The company is well positioned for growth in the Athabasca region and should have a good Q2 as a result of higher commodity prices. Newalta’s strategic review process is still ongoing for a sale of its industrial division which could be worth $200-$315M Newalta Whitecap Resources (WCP) – New NBF Energy analyst Brian Milne picked up coverage of Whitecap this week. No change in view, Whitecap offers one of the more compelling investment opportunities within the energy sector, driven by the sustainability of its business model, the attractiveness of its relative valuation and potentially positive upcoming catalysts including a dividend increase, delineation successes across recently acquired/emerging properties (Imperial Oil assets and Dunvegan lands) and further noteworthy well results. The shares traded to a year high of $16.34 this week. All-Cap Basket  Canadian Energy Services (CEU) – An interview with CEU’s CEO Tom Simons discussing how they have reduced costs and drilling times for customers and the tremendous growth for production chemicals: Canadian Energy Services and Technology looks to production chemicals for growth http://www.albertaoilmagazine.com/2014/06/canadian-energy-services-technology/ Surge Energy (SGY) – From insider filings, CEO Paul Colborne bought a total of 270,450 shares this week between $7.07 and $7.59 and a director also bought 121,200 shares in the market @ $7.22 U.S. Basket Micron (MU) – On Monday, Credit Suisse increased its Micron target to $50 from $30, saying that Big Data “is setting the foundation for significant upside to Enterprise DRAM demand.” CS said the last time enterprise demand was an important driver for memory was about 20 years ago, when corporate PC penetration was accelerating, Microsoft (MSFT) introduced Windows 95 and Intel (INTC) “enabled multi-tasking with Pentium.” CS says SAP and Oracle (ORCL) have introduced in-memory database tools architecture “with an absurd amount of DRAM,” and ORCL’s in-memory announcement underscores “our uber bullish view on enterprise demand.” Retirement Corner 1) “Retirement planning: How not to outlive your money” (Globe and Mail) h Reads of the Week  “Still in Money Market Funds? Here’s a better way to park your cash” (Globe and Mail) Note that the Altamira High Interest Cash Performer account current pays 1.25% and there is no fee to buy or sell the fund Buffett to Expand Energy Wager ‘As Far as the Eye Can See’ (Bloomberg) “I’d Choose Emerging Markets, Wouldn’t You?” (Research Affiliates) “War on Cornfield Pest Sparks Clash Over Insecticide” (Bloomberg) Pesticide use is surging among U.S. corn farmers who are worried that some insects have become resistant to genetically modified versions of the crop. Ho-Hum stocks like GE help market grind to new highs. Can it last?”  (Yahoo Finance) “Why Elon Musk Just Opened Tesla’s Patents to His Biggest Rivals” (Business Week)  “The VIX Is Not A Great Way to Measure Complacency” (Bloomberg) “As chaos spreads, oil market risks are rising: Kemp” (Reuters)  Economic Reports Monday June 16th – Canadian Existing Home Sales, U.S. Industrial Production Tuesday June 17h – U.S. CPI, U.S. Housing Starts, U.S. Building Permits Wednesday June 18th – Canadian Wholesale Trade Sales Thursday June 19th – U.S. Initial Jobless Claims, U.S. Leading Index Friday June 20th – Canadian Retail Sales Earnings Reports Monday June 16th – None Tuesday June 17h – None Wednesday June 18th – FedEx Corp Thursday June 19th – Blackberry, Oracle Friday June 20th –None

Categorised in: