**December 12th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- JMRD Conference Call
- Investment Management Consultants Association (IMCA) 2014 Annual Conference
- Markets Review – November 2014
- NBF Asset Allocation 5-minute market review
- 2014 Tax Reminders
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Conference Call
Thanks to those who joined us for the conference call this afternoon at 3:00. We wanted to mention that if you missed the call or have interest in listening to a recording you can dial 1 800 408-3053, and enter 467742341# as the passcode.
This recording will be active for a period of 30 days and will expire on 2015/01/11. If you have technical issues, please call 1 800 667-3678.
Investment Management Consultants Association 2014 Annual Conference: Intro from Paul
Reg and I are rarely out of the office at the same time but both were excited to attend the Investment Management Consultants (IMCA) winter conference in Phoenix. This organization is affiliated with the Wharton School of Business and Reg and I have had the Certified Investment Management Analyst (CIMA) designation for over 10 years. Of interest, we were two of only four Canadians in attendance among 300 investment consultants. The theme of the conference was “the evolution of Investment Advice.” There was a good mix of speakers and we came away with the following main conclusions;
1. Technology is changing many traditional businesses and is starting to impact the investment business in positive ways. One of the most interesting speakers was a young lady by the name of Alexa Von Tobel who is the founder and CEO of Learnvest.com. This is an entirely online financial planning service for US consumers. She was very passionate about improving the basic financial planning habits of the American public and I think her company’s successes can be used within our practice with respect to always striving to improve the technology improvements to give clients the information they need in the way they wish to receive it.
As an aside, many of the speakers used the car service “Uber” as an example of how technology can disrupt an entire industry, in this case, the traditional taxi business. Reg and I used this service 4 times during our visit and we can both confirm the easy to use features, the lower cost, the transparency and most importantly, the convenience.
2. Financial planning and its application to multi generations of families will continue to be important now and in the future. We have always worked hard to provide high level financial planning to our clients and their families. Clearly, this focus will become more important as the baby boom generation continues to move into the later stages of planning with respect to their investments. Smart spending and generating retirement income will be front and centre in terms of importance and not just the accumulation and growth of their investments.
Some other things we noted in our travels were;
1. Phoenix is again growing and money is being invested in commercial and residential construction. As many know, this area was one of the hardest hit during the 2009 recession and the large new corporate offices recently completed or under construction near their football stadium and airport are evidence that things are growing again. The crowded planes and restaurants are further evidence that this area and the US overall are growing.
2. US residents are happy that gas is cheaper. We had quite a few discussions with various people who are noticeably relieved that gas prices have stopped increasing and that should provide a more favourable environment for US growth. Although painful for energy investors, there are some key beneficiaries of the dramatic drop in oil prices.
3. While in Arizona, we spent time with one of our Canadian clients who is spending some down here and it reminded us that we have great clients who put their trust in us and then spend their time doing what they want to do with their time and are not watching the minute to minute and day to day changes in the financial markets. It makes us feel good that we can help them focus on what they find most important to them and their families.
During the conference, we focused on the technology and financial planning speakers more than the market pundits. However, with the on-going weakness in the financial markets, it was impossible to not follow the market moves on what seemed a minute-by-minute basis.
We also took time to keep in constant contact with the Team back in Canada – thanks again to technology. This contact resulted in the development of our inaugural JMRD Client Conference Call. We hope you had a chance to listen in.
To wrap up, we did find another of the featured speakers to be particularly good. Below, we share his story.
‘Economic and Investment Outlook: Where We’ve Been, Where We’re Headed’
This was one of the best presentations we participated in as it was very timely and left us with many great data points. The speaker was Robert C. Doll, Jr from Nuveen Asset Management – www.nuveen.com. He is a well-regarded portfolio manager and shares his views in many publications. He has been managing money for over 30 years and has a good track record. Below, we will do our best to pass along some of his thoughts with added commentary from JMRD.
Mr. Doll kicked things off by pointing out that one of his 2014 themes was that there will be ‘less fear and more confidence’ when it comes to the economy and the financial markets. Of particular interest was how he summed this theme up with regard to last year, this year and next year (2015):
- 2013: had the feeling that we had a muddle-through economy and a grind-higher equity market
- 2014: more of a grind higher economy and muddle-through stock market
- 2015: expecting a better economy, rising rates and OK stock market
So, nothing terribly surprising here but let’s look at the three points for the outlook of 2015. Before proceeding, Mr Doll is based in the United States so this has more of an American flare in terms of opinions and facts.
He is expecting a better economy.
It is easy to support this with economic statistics.
Let’s start with a look at the consumer:
- Household debt service ratios are very manageable. In 2007, debt payment as a percent of disposable income was 13.2%. By the fourth quarter of 2014, this has dropped to 9.9%. More money to spend on ‘stuff’!
- Consumers are spending less of their income on food and energy than any time since 2008. Again, more money left over to spend elsewhere and that keeps the economy growing by way of various multiplier affects.
- Consumer net worth is now back beyond the 2007 peak – consumers like to spend when they feel more comfortable with their overall financial situation.
These points certainly show a strong consumer ready to spend and spending leads to strength in the economy. Coupling this with the following positive drivers leaves us in agreement that the economy in the US and Canada is improving.
- An improving job market.
- In fact, manufacturing employment in the US is growing at the fastest rate in 30 years and this is resulting in modest wage growth for the average American worker.
- We are in the camp that we will see interest rates start to creep higher in mid to late 2015 both in the US and Canada.
- Our expectation is that rates move higher in the US first. A stronger economy naturally leads to higher rates – this is normal.
- However, be aware of the inverse relationship between bond prices and interest rates. When interest rates rise, bond prices fall and vice versa. This leads to the risk of investors incurring losses in their bond portfolios.
An ‘OK’ stock market.
The most powerful statement Mr Doll made was that he sees ‘corporate America’ being the strongest it has EVER been. This is exciting and the economic strength should result in positive equity returns.
When we add this to a key conclusion from one of the other great speakers we heard, we conclude that that both the US and China will be growing enough to offset the general weakness in the other major economies and still result in positive global growth. Commentators seem to focus on the fact that China is “only” growing at 7% rates per year compared to it’s past growth rates of 10%. What they fail to remember is that the 7% growth is on a much larger overall economy and that is still more than enough to help with contributing to global growth in a meaningful way.
There are also some seasonal factors working in favour of higher equity markets
- The S&P 500 has been positive in the 12 months following a mid-term election since 1946
- Stocks tend to have rally in the third year of a presidential cycle.
The markets are by no means cheap, but equities seem to be the best game in town. Mr Doll is projecting equity returns of 8% for 2015 which is derived from 6% earnings growth and another 2% from the dividend yield. Certainly not what we have been accustomed to over the past few years but a high single digit rate of return is still very acceptable and far closer to the long term average.
JMRD is in agreement with these thoughts and portfolios have been designed to take advantage of the points outlined above.
MARKETS’ REVIEW – NOVEMBER 2014
November ended on a positive note and investors are surely going into the last month of the year with holiday cheer on their minds. After what turned out to be an erratic month of October – one that saw most major stock indices pull back – equity markets resumed their uptrend and in some cases hit new all-time highs. Bonds also trended higher in November as oil prices hit fresh four year lows and deflation worries intensified.
Oil prices once again took center stage, as they continued their dramatic descent in November. The commodity slumped below $70/barrel as global growth prospects waned and the U.S. dollar continued to rise against most major currencies.
Global oil supply has been fairly abundant and this has put downward pressure on prices. On the demand side, sluggish growth in Europe and China has also played a role in keeping prices low. Europe’s Purchasing Managers Index (PMI) reading in November declined to 50.1, signaling obvious weakness in the euro zone. While the reading came in slightly higher than the threshold (a PMI under 50 indicates a contraction), investors surely looked to this as yet another reason for the European Central Bank to consider further measures of intervention. Persistent problems in France and Italy (coupled with unexpected service sector weakness in Germany) impacted activity in the euro zone while the economies of Ireland, Spain and Netherlands were stronger. Elsewhere, China’s PMI reading also contracted, possibly playing a role in prompting further intervention from its central bank. The People’s Bank of China cut rates for the first time in two years, just a day after the lacklustre data surfaced.
In the U.S, the economy continued to gain momentum. In October and November, improvements were seen in the areas of consumer spending, manufacturing and employment. With regards to manufacturing, the automotive and aerospace industries largely contributed to gains while demand for farm and mining equipment faltered. In the employment space, while the labour market has strengthened, wages have remained somewhat stagnant.
The renewed vigour of the U.S. economy has also spilled onto Canada, which has seen its economy strengthen as things gradually improve on the export front. However, declining oil prices continue to pose a problem for western oil-producing provinces such as Alberta and Saskatchewan, along with Canada’s equity markets.
(See Attachment Below)
NBF Asset Allocation 5-minute market review
This week’s 5-minute market review from Martin Lefebvre, NBF’s Asset Allocation and Investment Strategist.
2014 Tax Reminders
- Last day for Tax Loss selling of Canadian Equities – Wednesday December 24, 2014
- Last day for Tax Loss selling of U.S. Equities – Thursday December 26, 2014 (Canadian Markets closed December 26)
- 2014 TFSA contribution deadline – Monday December 31, 2014 – contribution limit $5,500.00
- Note, if you are planning a TFSA withdrawal in early 2015, consider withdrawing the funds by December 31, 2014. The advantage is that you will not have to wait until 2016 to re-contribute that amount.
- 2014 RSP contribution deadline – Monday March 2, 2015. The 2014 maximum RRSP contribution limit is 18% of “earned income” in 2013, to an annual maximum $24,270. The 2015 contribution limit is a maximum of $24,930.
- The last date to make an RESP contribution is Wednesday December 31, 2014. As a reminder, in order to benefit from the entire government grant, the contribution per child per year is $2,500. If by chance, there are unused grants from the past, $5,000 can be contributed and still receive the full 20% grant.
JMRD Basket Corner
Gibson Energy (GEI) – Despite the recent correction in Gibson Energy shares, the Midstream company looks very attractive at current levels. Gibson provided strong capex guidance and is well positioned to weather the downturn in crude prices. Gibson has just 10% of its cash flow directly exposed to crude oil prices through its Marketing segment. GEI now trades with an attractive 5.0% dividend yield with a low payout ratio of 54% vs the group average of 68%
(See Gibson Energy Attachment Below)
Keyera (KEY) – Keyera announced on Friday that it had agreed to acquire a 70.79% ownership interest in the 221 mmcf/d (156 mmcf/d net) Ricinus deep-cut gas plant in west central Alberta for $65 million. Given the relative size of the transaction (<1% of EV), combined with the plant’s utilization at just ~25% of current operational capacity, NBF’s pipeline analyst Pat Kenny calculates modest accretion to near-term estimates. However, this announcement combined with the recent Keyera / Bellatrix deal reaffirms his thesis that the pullback in crude prices through 2015 may in fact present a rare opportunity for Midstream companies to strike deals with E&P companies finally inclined to sell infrastructure (namely gas processing plants) in order to protect balance sheets, capital programs and/or dividends
All-Cap Growth Basket
U.S. Growth Basket
Delta Air Lines (DAL) – Delta announced on Thursday that it projects its pretax income will jump 11% to $5 billion next year, as the airline expects to benefit from lower fuel prices and increasing capacity. As part of its investor-day presentation, Delta said low fuel prices could result in a $1.7 billion benefit for the company next year. Delta expects its fuel prices to be between $2.40 and $2.50 a gallon next year, down from a projected $2.63 to $2.68 a gallon in its December quarter.
Nike (NKE) – Credit Suisse increased their forecast for the Athletic retailer this week heading into Nike’s F2Q15. CS noted that they have “increased conviction in the company’s ability to drive 20% EPS growth in FY15 driven by: 1) continued market share capture in the U.S.; 2) strong demand trends in China; and 3) benefits from Western Europe’s restructuring initiatives and subsequent EBIT margin recapture. We model for double-digit topline and EPS growth (2Q $0.73, consensus $0.70; FY15 $3.64, consensus $3.60).”
“Retirement: It’s not all about the money” (Globe and Mail) But those who do leave their careers early face a nagging fear: What if they spend too much too soon?
Week at a Glance
(See Week at a Glance Attachment)
Reads of the Week
- “Stock selloff brings out the bargain hunters” (The Globe and Mail)
- “Apple Returns Cash To Shareholders Because It’s Out Of Ideas On How To Invest It” (Forbes)
- A level-headed look at important numbers about the energy industry: “Some Crucial Facts about Energy” (A Dash of Insight)
- “Some People Will Never Learn” (A Wealth of Common Sense)
- “The Future’s so Bright …” (Calculated Risk) The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012. The good news is the prime working age group has started to grow again, and should be growing solidly by 2020 – and this should boost economic activity in the years ahead.
Monday December 15th – Canada Existing Home Sales; US Industrial Production
Tuesday December 16th – Canada Manufacturing Sales; US Housing Starts and Building Permits
Wednesday December 17th – US Inflation, US FED Interest Rate Decision
Thursday December 18th – US Initial Jobless Claims; US Leading Index
Friday December 19th – None
Monday December 15th – None
Tuesday December 16th – None
Wednesday December 17th – FedEx, Oracle
Thursday December 18th – Nike
Friday December 19th – Blackberry
Have a good weekend!