**August 28th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- Relative Strength Investing & Dividend ETFs
- NBF Monthly Economic Monitor
- NBF Monthly Equity Monitor
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Relative Strength Investing & Dividend ETFs
Relative strength investing uses comparative technical analysis of one, or a group of securities against one another over time. Used in conjunction with fundamental analysis, we believe it is an added tool that JMRD can use to invest in stronger sectors and stocks and to help us avoid weaker companies. Despite the popular notion that such a simplistic approach to security analysis can never beat the market, relative strength has been shown time and time again by portfolio managers and academic studies to be a viable methodology for outperforming the market over time. By building a portfolio of strong relative strength stocks, the investor is allowed to participate in long term trends.
Relative strength measurements are not distorted by emotion or personal bias. It is not necessary to interpret whether or not a stock is exhibiting strong relative strength – either it is or it is not. Only stocks with strong relative strength are candidates for inclusion in our portfolios.
Whether the market is favoring mid-sized growth company stocks, dividend-paying stocks, blue chips, stocks with high fundamental valuations, etc., our relative strength screens will reflect those stocks being rewarded most by the market, with the probability that these stocks will continue to be good performers in the future.
We can use relative strength to screen for equities, ETFs and mutual funds. As an example, a common question we have received from clients recently is: What are the best U.S. and International Dividend ETFs at the moment? We have attached a screen of the 92 U.S. listed ETFs that fit this criteria. While the sector is underperforming other ETF sectors, if we were to select from among the strongest, we would recommend:
WisdomTree Midcap Dividend Fund (DON)
WisdomTree Small Cap Dividend Fund (DES)
WisdomTree Europe Small Cap Dividend Fund (DFE)
First Trust Value Line Dividend Fund (FVD)
The WisdomTree Europe Smallcap Dividend ETF is owned in JMRD’s ETF Basket. We have attached a list of the dividend ETFs that we screened for this example. Let us know if you have any further questions on ETFs or relative strength investing. (See attached list of U.S. Dividend ETFs) U.S. Dividend ETFs
NBFM Monthly Economic Monitor – September 2015
- The commodity slump is no accident. It’s a reflection of weak global growth, something that’s all the more concerning considering monetary policy remains highly stimulative worldwide. China’s rebalancing act is proving to be painful and weighing enough on its economy as to prompt a mini U-turn from Beijing via an unexpected loosening of the currency peg. Following the yuan’s devaluation, other emerging economies also saw their currencies sink. Whether the latter was intentional (via central bank action) or not (capital flight) is moot. The US dollar continues to appreciate and that presents downside risks for the world economy given the massive amounts of USD-denominated debt particularly in emerging markets. World GDP growth should be no better than 3.2% this year, the worst performance since 2009.
- After a difficult start to the year, the US economy is bouncing back nicely. Upward revisions to the first quarter, and probably Q2 as well, put the world’s largest economy on track to grow roughly 2.5% this year. Such above-potential rate of growth and the continued strength in employment get us ever closer to a first interest rate hike by the Fed in almost a decade. That, however, assumes financial markets stabilize and Congress doesn’t torpedo the economy again via a potential shutdown of government in the Fall.
- While it’s too early to conclude that the Canadian economy is in a recession, it’s safe to say that the narrative isn’t positive. The energy sector continues to adjust to the oil shock, and there’s evidence of some spillover to the rest of the economy. The labour market’s resilience is welcome news but things could change quickly for the worse if growth doesn’t pick up in the second half of the year. There is downside potential even to our recently downgraded forecast for GDP growth for 2015. The investment collapse is far from over and not much can be expected from housing and consumption after the prior years’ heroics. That leaves trade as the best hope for the economy. The cheap loonie and the US resurgence give reason to be hopeful that Canada will avoid an outright recession. Still, if we’re correct about the extent of the investment slump that would equate not only to weak growth this year but also to lower potential growth for 2016 and beyond. That explains why our GDP growth forecast for next year has been lowered to just 1.6%.
NBFM Monthly Equity Monitor – September 2015
- The summer of 2015 has turned out to be anything but relaxing for investors. Global financial markets continue to struggle in the wake of China’s August 11 surprise devaluation. Though it will take a few more weeks or months to fully assess the situation, we need to be vigilant about a regime change in China’s exchange-rate policy. In the meantime, we take solace from the fact that China is becoming more aggressive in its attempts to stimulate the domestic economy.
- After a brief upswing in Q1, the Energy sector in Canada is again under attack. Could it go lower? Perhaps, but that scenario supposes a further deterioration of the global economy. As if this were not enough, the gloom has spread to bank equities, the other heavyweight of the S&P/TSX. Current fears of a Canadian economic meltdown and surging credit losses are exaggerated. Except for the energy sector, growth resumed in Q2 and Q3 should be even better on the strength of the fiscal stimulus announced in last spring’s federal budget. Labour-market resilience in the three largest provinces continues to support household formation and home prices.
- Our asset mix is unchanged this month, with equities still overweight relative to bonds and a regional bias towards the United States. The key to avoidance of a bear market is continued U.S. growth together with a low-inflation environment that allows the path of monetary normalization to be gradual. This said, uncertainty about Chinese economic policies will remain a concern for the next few months and we will be keeping an eye out for signs of contagion in the all-important corporate bond market – the main source of external financing for U.S. corporations. We would reconsider our asset mix if China devalued its currency more than 5% from current levels.
JMRD Basket Corner
Diversified Income & Growth Basket
Toronto-Dominion Bank (TD) – TD reported Q3 f2015 core cash EPS (excluding IFRS dilution) of $1.20 on Thursday. This compares with $1.14 last quarter and $1.15 one year ago. Earnings exceeded NBF’s forecast of $1.16 and the consensus estimate of $1.17. “In so doing, TD reached a crucial milestone, at least in relation to our thinking about the bank’s earnings prospects and valuation. The bank has demonstrated an ability to moderate the still intense revenue headwinds confronting its retail platforms in the United States and Canada and protect earnings in a benign credit environment. In effect, we see the restructuring initiatives as a moderate enhancement of cost control across the bank. But, we also think that by launching and progressing these initiatives, TD has also established the management infrastructure for a more draconian cost reduction effort if indeed the credit environment abruptly turns malignant. We will try to remember this viewpoint if, and when, that outcome arrives.” (Full research note attached) Toronto-Dominion Bank
WSP Global (WSP) – On Wednesday, WSP announced that it had entered into an arrangement to acquire the MMM Group Limited, one of the largest privately-owned engineering consulting companies in Canada with approximately 2,000 employees. Under the terms of the Arrangement Agreement, WSP will pay an aggregate purchase price of $425M, subject to certain closing and post-closing adjustments. WSP Global’s CEO Pierre Shoiry, was on BNN this week to discuss the acquisition: WSP Global To Acquire MMM Group Ltd.
- “Canadians unprepared for unexpected retirement” (Winnipeg Free Press)
- “How employers can help retirees stretch their pension dollars” (Financial Post)
Week at a Glance
(See attached Week at a Glance report)
Reads of the week
- “Five things you need to know about this week’s market crash” (Financial Post)
- “What Investors Must Know About China” (A Dash of Insight)
- “What Happens Next?” (The Motley Fool) Historical Context
- “Should Investors Stay the Course?” (The Irrelevant Investor)
- NBF Hot Charts – Canada: Tourism benefiting from cheaper loonie. Exporters may still be waiting for the benefits of a much-depreciated Canadian dollar, but the tourism sector is already cashing-in from the loonie’s slump. The number of non-resident travellers into Canada soared in June to roughly 2.4 million, or 9% above year-ago levels. Moreover, the depreciating C$ seems to be encouraging many Canadians to spend their vacation budget at home as evidenced by the 12% drop compared to June last year of the number of Canadians returning from trips abroad. And with the loonie sinking further since June, those positive trends likely continued for the tourism industry. As today’s Hot Charts show Ontario, Quebec and BC are seeing the highest growth in the number of international visitors and also the largest declines in outbound travel by locals. While those numbers are encouraging, don’t expect the tourism sector, which accounts for less than 5% of GDP, to fully offset the damage caused by the oil shock. (Full note attached)
- “Stock Choker: figure out what you could’ve made on a past investment” A fun tool to see how certain stocks have performed. For example, $10,000 invested in Royal Bank on Aug 28, 2003 would have returned 12.43% annually – or enough to buy 40,831 cups of lemonade from a stand.
Monday August 31st – Canadian Current Account Balance
Tuesday September 1st – U.S. ISM Manufacturing
Wednesday September 2nd – Canadian GDP, U.S. ADP Employment Change, U.S. Factory Orders, U.S. Federal Reserve Releases Beige Book
Thursday September 3rd – U.S. Initial Jobless Claims, U.S. ISM Non-Manufacturing Composite
Friday September 4th – Canadian Ivey Purchasing Managers Index, Canadian Unemployment Rate, Canadian Net Change in Employment
Monday August 31st – None
Tuesday September 1st – Alimentation Couche-Tard
Wednesday September 2nd – None
Thursday September 3rd – Canadian Western Bank, Joy Global
Friday September 4th – None
Have a good weekend!