**April 24th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- JMRD Maximum Growth Exchange Traded Fund Basket Q1 Update
- NBFM Monthly Economic Monitor
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Maximum Growth Exchange Traded Fund (ETF) Basket: Update and Revisions for the end of Q1 2015
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 the second quarter 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.
The ETF Basket posted an impressive gain of 3.16% for the first quarter of 2015. As you will see below, the year is off to a different start for the financial markets as the U.S. has meandered while many foreign markets have done well. What is interesting to note is the geographic regions that are posting gains (Europe / Asia) and those lagging (S&P 500 / Dow Jones) after the first quarter.
Below you will see the asset allocation for the ETF Basket and time will be spent commenting on specific areas of strength and weakness.
Let’s have a look at how the ETF Basket is positioned going forward.
Current breakdown of the ETF Basket is follows:
Cash and fixed Income: 8.4%
- Cash is 1.4%
- Short Duration High Yield Bonds – 2.6%
- US High Yield Bonds – 4.2%
- 22.4% Canadian
- 37.2% US
- 26.2% Foreign
- 5.8% Other (a diversified hedge fund ETF position)
The main detractors in the above list during the first quarter were: XDV- iShares Select Canadian Dividend ETF. This is comprised mostly of Canadian Banks and other large dividend-paying Canadian stocks. January was not a great month for Canadian Banks due to concern on spillover effects from the energy turmoil. However, XDV is up 4% in April and the performance is now back to flat on the year. The Horizon Morningstar ETF (HHF) has also been flattish year to date after a 13% gain in 2014. This ETF is non-correlated to the equity markets, which is the reason why we increased the weighting in it back in January.
The main contributors to the first quarter performance were: VEE – Vanguard Emerging Market ETF. Emerging markets have almost been an afterthought from an investment standpoint over the last couple years, mainly due to the US dollar increasing in value as money moved from EM’s to US equities. With the USD falling recently, emerging market stocks have recovered. This ETF was up 12% from January to March.
VEF – Vanguard Non-North America ETF. It has benefitted from stimulus measures taken by both the European Central Bank and the Bank of Japan. This stimulus should continue into 2016 which could provide further upside to these regions, but not without volatility.
The ETF Basket currently generates $333 in annual cash flow per basket, which equates to a yield of approximately 1.8%. We consider the ETF Basket a TOP PICK for 2015. The current value of one ETF Basket is approximately $19,600 making the minimum initial position approximately $39,200, which is 2 Baskets. This amount will continuously change as the prices of the ETF Basket components do fluctuate daily. Subsequent purchases can be made in half Basket increments, or approximately $9,800.
NBFM Monthly Economic Monitor – May 2015
- The global economy remains on track to grow at roughly the same pace as last year despite the moderation in China. Other emerging economies (outside of OPEC) will pick up the slack, helped by cheap oil and more competitive currencies versus the USD. Advanced economies should also do better than last year, driven by the US, the Eurozone and Japan. All of that, however, assumes governments manage to stave off major risks, including a Greek debt default, which threaten to derail global growth.
- After a difficult start to the year, the US economy is set for a quick rebound. While trade will remain under pressure from the strong dollar, domestic demand should strengthen further on the back of solid fundamentals particularly for the consumer. Record corporate profits and an improved economic outlook also bode well for business investment. Moreover, the housing market has potential to improve thanks to the reported easing in lending conditions. We continue to expect the world’s largest economy to register close to 3% growth this year.
- Canada’s disappointing first quarter is partly due to temporary factors that will dissipate in Q2. If the oil collapse of 2008 is any guide, one can expect the impact on investment to be somewhat delayed rather than front-loaded as the Bank of Canada seems to believe. So, there may be some downside risks to the central bank’s call for above-potential growth of 2.7% on average in the second half of the year.
(Full report attached)
JMRD Basket Corner
CP Rail (CP) – CP Rail reported Q1 2015 results that continue to support NBF’positive view of very strong earnings growth through our forecast period and a compelling longer-term growth outlook for the company. “Although our target implies a relatively modest 6% upside from the current share price, we consider CP to be one of the more defensive names in our Transportation coverage universe.” (Full report attached)
All Cap Growth Basket
Exco Technologies (XTC) – Exco reported 2nd quarter results with sales up over 50% in the quarter, earnings up 46% in the quarter and EBITDA up 60% to record high of $19.9 million in the quarter. The shares traded higher by 6% on Wednesday following release of the news
U.S. Growth Basket
Hanesbrands (HBI) – Hanesbrands Inc. raised its full-year guidance to take into account its recent Knights Apparel acquisition but posted weaker-than-expected results for the first quarter. The shares slipped by 5% on Friday but have returned 17.5% year-to-date
Morgan Stanley (MS) – Morgan Stanley’s first-quarter profit rose 59% as the bank, like its peers, benefited from a stronger environment for deals and trading. Results beat Wall Street estimates, pushing share up 1.6% to $37.33 premarket as the New York-based bank posted a first-quarter profit of $2.39 billion, compared with $1.51 billion in the same period of 2014. On a per-share basis, Morgan Stanley’s profit was 85 cents when stripping out accounting adjustments. Analysts polled by Thomson Reuters had expected earnings of 78 cents a share. Revenue rose to $9.91 billion, or $9.78 billion excluding accounting adjustments. Analysts had projected $9.17 billion.
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- NBF Hot Charts – Canada: The most overvalued housing market in the world? The magazine The Economist was at it again this weekend, pinning down Canada as one of the most overvalued housing market in the world. From the magazine’s standpoint, our country is anywhere between 35% and 89% overvalued, a clear bubble. As today’s Hot Chart shows, the yardstick used to call a bubble in Canada is the deviation of prices-to-income-per-person from its historical average. We have serious issues with that measure. The index does not tell us anything about the relative valuation vs. other countries. What if a country is just in catch up mode? Despite the massive increase in Canadian home prices in recent years, a comparison between large metropolitan areas of similar characteristics shows that things are really not that bad. The ratio of median home prices relative to household income may be the highest in Vancouver (10.6), but even that is not outsized when compared to San Francisco (9.2). Ditto for Toronto (6.5) which is in line with New-York (6.1). Other major Canadian cities are all still cheaper than Boston. Unfortunately, The Economist again fails to mention that population growth for people aged 20-44 in Canada is one of the fastest in the OECD due to an aggressive immigration policy that is spurring demand for housing in major cities. (Charts attached)
- “World War Z: Movie Theaters Battle for the iPhone Generation so They Don’t Become Zombies” (Bloomberg)
- “How to Design a Roller Coaster That’ll Make You Beg for Mercy” A terrifying ride on the Fury 325 (Bloomberg)
Monday April 27th – U.S. Composite CPI
Tuesday April 28th – U.S. Consumer Confidence Index
Wednesday April 29th – Canadian Industrial Product Price, Canadian Raw Materials Price Index, U.S. GDP Annualized, U.S. Personal Consumption, U.S. Pending Home Sales, FOMC Rate Decision
Thursday April 30th – Canadian GDP, U.S. Personal Income, U.S. Personal Spending, U.S. Initial Jobless Claims
Friday May 1st – RBC Canadian Manufacturing PMI, U.S. Construction Spending, U.S. ISM Manufacturing, U. of Michigan Sentiment
Monday April 27th – Apple Inc, Barrick Gold, PrairieSky Royalty, Restaurant Brands International
Tuesday April 28th – DH Corp, FirstService Corp, Open Text, Yamana Gold
Wednesday April 29th – Cenovus, CGI Group, Constellation Software, Suncor Energy, Valeant Pharmaceuticals
Thursday April 30th – AltaGas, BCE, Canadian Oil Sands, Celgene Corp, Goldcorp, Potash Corp
Friday May 1st – Superior Plus Corp, TransCanada Corp
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Have a good weekend!