**December 4th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- NBFM Forex- A rate hike for Christmas
- Asset Allocation Strategy: Looking forward to a hike?
- NBF Monthly Equity Monitor – December 2015
- JMRD Insurance Corner
- JMRD Basket Corner
- 2015 Tax Season Reminders
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
NBFM Forex (December 2015) – A rate hike for Christmas
It has been a very busy week with important economic data, central bank and policy decisions in the U.S. and Europe and the inclusion of the Chinese Yuan into the Special Drawing Rights basket by the IMF. Below is a summary of these events and the outlook going forward.
- A December interest rate hike isn’t fully priced-in by markets and as such there is upside potential for the USD if the FOMC delivers on its repeated warnings that rates will go up before year-end. But the greenback may struggle next year. If, as we expect, inflation remains tame and growth slows, the Fed will be forced to quickly move back to the sidelines, something that will weigh on the currency. The IMF’s recent decision to include the yuan in its Special Drawing Rights could also take some steam out of the USD.
- The European Central Bank’s decision to increase monetary stimulus in December isn’t surprising given the dull economic outlook for the zone and continuing threats of deflation. While we expect EURUSD to be under pressure over the near term due to diverging monetary policies in the US and Europe, the common currency could stabilize or even appreciate somewhat in 2016 as the Fed takes a pause.
- This year is one to forget for holders of the Canadian dollar. The 2015 average for USDCAD is about 1.28 (i.e. 78 US cents for a C$) or 15% weaker than last year, the worst annual loss in over four decades. After that rout, things can only get better in our view. Besides an expected Fed-induced weakening of the USD, the loonie could also benefit from commodities which arguably have more upside than downside following this year’s collapse. The C$ could also benefit from investment inflows if foreigners manage to see through the barrage of negative news on Canada, and make the most of a rare opportunity to snap up Canadian assets at a discount. We continue to expect USDCAD to come close to the lower end of the 1.25-1.35 trading range in 2016.
(Full report attached)
Asset Allocation Strategy: Looking forward to a hike?
Not all months can be up like this past October. Most indices seemed to lack direction in November while assessing how to react to an increasing possibility of a Fed rate hike in December. According to the futures market, the chance of a hike rose sharply, now standing at 74%. The U.S. dollar also reacted to these improved odds by increasing by 3.3% to close out the month at a 12‐year high.
On the fixed income side, yields reached on the U.S. 2‐year notes increased to levels unseen since 2010 as they closed out the month at 0.93% (+0.2%) while their 10‐year counterparts started strong but weakened gradually to finally close at 2.22% (+0.07%).
Asset allocation strategy
- With important international source of risks now in check, only domestic issues could prevent Fed chair Janet Yellen from fulfilling her promise to raise rates before the end of the year.
- In theory, monetary policy tightening would be considered detrimental to stocks. This is not always the case. Though all periods following the initial hike witnessed some choppiness in the first six months, the following semester performed much better.
- In light of the recent U.S. dollar performance and the current market positioning, we think it’s time to take some profits and gradually increase our currency hedge.
- Even if we think the Fed’s tightening will have a minimal impact on U.S. stock returns, we believe their European counterparts may offer better prospects on a relative basis.
- On the bond side, we expect yields to react to the tone set by the Fed after the initial
(Full report attached)
NBFM Monthly Equity Monitor – December 2015
- After grinding higher through October, global equities paused in November. Stock market volatility has abated, credit market stress has receded and the U.S. dollar is showing less lift.
- At this writing the fed funds futures market puts the odds of a rate hike in December at 72%, up from only 26% on October 14. But is the initial phase of Fed tightening necessarily a threat to an advance of equity markets? We do not think so.
- In emerging markets, economic surprises have just turned positive for the first time since the beginning of the year. China’s slowdown seems to be abating, easing the need for further currency devaluation. With the IMF granting reserve currency status to the renminbi, Beijing’s new five-year plan is better positioned to deliver the structural reforms that are much needed to enhance the Chinese economy.
- Our asset allocation is slightly modified this month. In our eyes, the value of the USD has now largely discounted anticipations of divergent monetary policies in the coming months. If the Fed’s rate rises are gradual and the European and emerging economies still surprise on the upside a greenback depreciation seems likely. For this reason we are eliminating our leaning to U.S. equities and raising our ante in emerging-market and Canadian equities, which are likely to gain lift in an environment more favourable to commodity prices. Our 12-month targets remain 15,000 for the S&P/TSX and 2,200 for the S&P 500. Our sector allocation is unchanged this month.
(Full report attached)
JMRD Insurance Corner
Avoiding the claw back of Old Age Security (OAS) benefits is top of mind for some retirees. Please see the attached article on how insurance strategies can help reduce or eliminate the OAS claw back. Avoiding the OAS Clawback
JMRD Basket Corner
Toronto-Dominion Bank (TD) – TD reported Q4 f2015 core cash EPS of $1.14 this week. Earnings were in line with NBF’s forecast of $1.15 and the consensus estimate of $1.13. Overall, NBF’s Canadian bank analyst Peter Routledge views TD’s operating performance this quarter favourably. Canadian P&C exceeded expectations, while Wholesale Banking and Canadian Wealth & Insurance demonstrated resilience despite severe market volatility. U.S. Retail missed NBF’s forecast noticeably this quarter, but non-recurring items factored materially into this outcome and the growth outlook for this segment appears to be strengthening.
All-Cap Growth Basket
Alimentation Couche-Tard (ATD.b) – Alimentation signed an agreement to acquire Ireland’s leading convenience and fuel retailer. ATD will purchase the majority capital of both Topaz Energy Group Limited and Resource Property Investment Fund plc in addition to the entire share capital of Esso Ireland Limited; the acquisition will be financed using available cash and existing credit facilities. (2) The purchase price and profitability of the acquisition was not disclosed. The deal is expected to close in Q4/F16, subject to regulatory approval/closing conditions; management does not anticipate issues given that ATD does not have operations in the region. Through the acquisition, ATD will acquire 464 fuel stations across Ireland, including Topaz’s recent acquisition of the Esso station network (transaction recently closed). In addition, ATD will also acquire a commercial fuels operation with over 30 fuel depots and 2 owned terminals. (2) Of the acquired retail sites, 162 are company owned while 302 are dealer owned and operated
Exco Technologies (XTC) – Exco announced that its fourth-quarter profit rose 27%, sales were up 18% and its EBITDA was up 41% to $21.9M in the quarter. Exco supplies technologies for the die-cast, extrusion and automotive industries.
New Flyer Industries (NFI) – New Flyer of America Inc., a subsidiary of New Flyer Industries Inc., the leading manufacturer of heavy-duty transit buses in the United States and Canada, announced on Tuesday that the Greater Lafayette Public Transit Corporation awarded a contract to New Flyer of America Inc. for up to 159 urban transit buses to be purchased over the next five years.
U.S. Growth Basket
Facebook (FB) – Facebook Is Changing The Game — Are Publishers Ready? (Forbes)
2015 Tax Season Reminders
As we recently turned the page on another month and are now getting closer to the end of 2015, we thought it would be a good idea to get everybody thinking about TAXES again. You will find below some key dates and figures to have in the back of your mind when preparing for the upcoming tax season. Like last year, we will also feature a special “Tax Edition” email in the New Year which will include tax slip information as well as other helpful tax tips.
- Last day for Tax Loss selling of Canadian Equities – Thursday, December 24th, 2015 (Canadian Markets are closed December 28th in lieu of Boxing Day)
- Last day for Tax Loss selling of U.S. Equities – Monday, December 28th,2015
- 2015 RSP contribution deadline – Monday, February 29, 2016. The 2015 maximum RRSP contribution limit is 18% of “earned income” in 2014, to an annual maximum $24,930. The 2016 contribution limit is a maximum of $25,370.
- 2015 TFSA contribution deadline – Thursday December 31, 2015 – contribution limit $10,000.00
- Note, if you are planning a TFSA withdrawal in early 2016, consider withdrawing the funds by December 31, 2015. The advantage is that you will not have to wait until 2017 to re-contribute that amount.
- The last date to make an RESP contribution is Thursday December 31, 2015.
- 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. If your child turns, or already turned 17 in 2015, this will be your last year to receive the government grant, which makes the December 31st deadline all the more important for you.
- What’s Mom’s password? How online accounts cause estate-planning headaches (The Globe and Mail)
- Why you shouldn’t retire from exercising in your golden years (The Globe and Mail)
- Five mistakes to avoid when writing your will (The Globe and Mail)
Week at a Glance
See Week at a Glance Report.
Reads of the Week
- “David Rosenberg: Canada is ‘unloved, undervalued and under appreciated’ — and history proves it” (Financial Post)
- Bank of Canada happy to stay on the sidelines As widely expected, the Bank of Canada left its overnight rate at 0.50% at its meeting today. The central bank implied there were still major uncertainties ahead: “The economy continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade.” While the energy sector continues to face headwinds, hurting business investment in the process, non-resource exports are picking up, particularly in exchange rate-sensitive categories. The BoC again said that vulnerabilities in the household sector are edging higher but overall risks to financial stability are “evolving as expected”. With regards to inflation, the central bank says it is evolving in line with the Bank’s October outlook. Bottom line: The Bank of Canada gave itself a pat on the back by saying that monetary policy stimulus (and hence the lower Canadian dollar) has helped in the economy’s adjustment to the terms of trade shock. With inflation remaining close to target, and the adjustment process expected to be “lengthy”, the central bank is likely to remain on the sidelines for some time. Considering the uncertainties with regards to the impacts of the oil shock and the extent of Canada’s ability to capitalize on the US recovery, we remain of the view that the BoC will err on the side of caution by keeping the overnight rate at 0.50% at least through next year. (full report attached) Bank of Canada Policy Monitor
- Ultimate Stock-Pickers: Top 10 Buys and Sells (Morningstar)
- NBF Hot Charts: Canada: FDI inflows on the rise The year 2015 is one to forget for holders of the Canadian dollar. The average this year for USDCAD is about 1.28 (i.e. 78 US cents for a C$) or 15% weaker than last year, the worst annual loss in over four decades. The oil shock and a dovish Bank of Canada largely explain the C$’s troubles this year. But the way the large current account deficit is being financed is also behind the loonie’s woes. In Q3, for the third time in the last four quarters, the external deficit was financed primarily by “other” flows such as loans, currency and deposits. Those are relatively unstable flows which have potential to quickly reverse and hurt the Canadian dollar. But odds are that 2016 will be better for the loonie. The USD looks stretched and we expect it to weaken in 2016 as the Fed’s upcoming tightening cycle proves to be short-lived. Moreover, the downside for commodity prices (and hence the C$) seems to be limited after this year’s collapse. The loonie could also benefit from investment inflows if foreigners manage to see through the barrage of negative news on Canada, and make the most of a rare opportunity to snap up Canadian assets at a discount. There is some encouragement in that regard with third quarter data showing net positive inflows from foreign direct investment for the first time in a year. As today’s Hot Charts show, that was made possible by the largest jump in inflows since 2007 (courtesy of M&A activity), which more than offset Canadian direct investment abroad. (full report attached) Hot Charts
- “These Canadians Own Your Town” (Fortune) An Ontario pension plan has earned huge returns with big investments in Main Street, USA.
- “Five reasons it’s still too early to buy commodities stocks” (Financial Post)
Monday December 7th – None
Tuesday December 8th – Canadian Housing Starts, Canadian Building Permits
Wednesday December 9th – U.S. Wholesale Inventories, U.S. Wholesale Trade Sales
Thursday December 10th – U.S. Initial Jobless Claims, U.S. Monthly Budget Statement
Friday December 11th – None
Monday December 7th – None
Tuesday December 8th – Transcontinental, Costco Wholesale
Wednesday December 9th – Dollarama, Empire Co, Laurentian Bank of Canada
Thursday December 10th – U.S. Monthly Budget Statement, U.S. Initial Jobless Claims
Friday December 11th – U.S. Retail Sales Advance, U.S. PPI Final Demand, U of Michigan Sentiment
Have a good weekend!