**January 9th Issue of The JMRD Market Observer**
In This Week’s Market Observer
- JMRD Maximum Growth Exchange Traded Fund (ETF) Basket: Update
- NBF Asset Allocation Strategy: Stick to the plan!
- NBFM Forex: Can the greenback repeat the feat in 2015?
- Crescent Point Energy: Capital Discipline and Strong Hedging Contributes to Overall Sustainability
- 2015 Tax Reminders
- 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 2015!
The ETF Basket posted a 7.54% gain for 2014.
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 2015 to take advantage of 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.
Changes to the Basket
2014 was a very mixed year for financial markets around the world. The JMRD Team is pleased with the returns of the ETF Basket over the past 12 months.
Last year was certainly a year where consensus opinion was well off the mark. One recent article revealed that 46 of 46 economists predicted this time last year that interest rates would rise in 2014 in the US. It turns out that all 46 were wrong – the ten year yield started 2014 at 3.04% and ended the year at 2.17%. As we enter 2015, the forecasts for what will happen with interest rates are far from consensus. It’s strange that 12 months ago everyone was so certain of ‘tightening’ (rising rates) and now, sentiment is mixed.
Earlier this week, Bill Gross, the former manager of the world’s largest bond fund, said the Federal Reserve won’t raise interest rates until late this year “if at all” as falling oil prices and a stronger U.S. dollar limit the central bank’s room to increase borrowing costs.
With this in mind, it was no surprise that fixed income returns were mixed in 2014 with long term bonds performing well and shorter duration strategies lagging.
More on interest rates below – note that the fixed income weighting in the ETF Basket is targeted at 10%.
Equities, which have a 90% weighting in the ETF Basket, were also mixed last year. One only has to look at a list of various indices to see this.
Let’s have a look at the how the ETF Basket is positioned going into the new year.
Current breakdown of the ETF Basket is follows:
Cash and fixed Income: 12%
- Cash is 5%
- Short Duration High Yield Bonds – 2.7%
- US High Yield Bonds – 4.3%
- 23% Canadian
- 36% US
- 26% Foreign
- 3% Other which is a diversified hedge fund position
See the chart below for a full listing of all positions
The majority of our equity positions performed quite well in 2014 with our top performers being those based on the US markets (technology / financials / health care) and dividend plays.
The ETF Basket currently generates $336 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 $18,500 making the minimum initial position approximately $37,000, 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 one Basket increments.
Related ETF research (see attached for full reports)
Canadian ETF Flow:
· 2014 was a remarkable year for ETFs in Canada, with historic asset growth of $14.5 billion
· Inflows were $10.3 billion in the year, 16% of starting assets, with over 70 new products launched
· December’s ETF inflow of $3.1 billion was the largest month in Canadian history
· Fee cuts and completive innovations from multiple providers continue to drive market growth
See attachment – Canadian ETF Flows December and Full Year 2014 – Biggest Month Ever
U.S. ETF Flow:
· U.S. ETFs finished 2014 strong with assets crossing $2 trln, up from $1.7 trln at the start of the year
· In calendar 2014, ETFs attracted $243 billion in new money, representing 14% of the beginning AUM
NBF Asset allocation strategy – Stick to the plan!
December was marked by increased volatility with most equity indices incurring heavy losses in the first half of the month. But by pledging that it could be patient in the removal of its extraordinary easing measures, the Federal Reserve (Fed) once again saved the day, helping the S&P 500 rise to a new record high towards the end of the period. However, the rising probability that the anti‐austerity party could win the January 2015 Greek elections sent equities into correction mode for the last two trading sessions of the year. The S&P 500 was flattish during the month, but finished the year up 13.7%, outperforming the Canadian (1.3% in USD) and EAFE markets (‐4.5% in USD). Contrary to expectations, fixed‐income securities had a good year, and yields on U.S. 10‐year notes falling from 3% to 2.17% delivered a total return of almost 11% in 2014. However, the biggest surprise was the sharp correction in the price of oil, which fell close to 50% in the second half of the year.
Asset allocation strategy
- We expect global growth to gather some steam but still remain tepid in 2015. The threat of deflation has risen, which will help global monetary policy remain highly accommodative.
- Volatility promises to be the name of the game with risks emanating on many fronts, ranging from high growth expectations in the USA to deflation in Europe and a possible exit of Greece from the Eurozone.
- While prudence is called for in the short‐term, it appears that many possible bad outcomes are priced into current levels. Therefore, we recommend keeping government bond exposure at a minimum, with a corresponding overweight position in riskier issuers. Duration should be kept short, but closer to benchmark.
- We are maintaining an overweight equity position at the expense of fixed income securities. While it would be tempting to bet on underperformers and undervalued securities to start the year, we believe U.S. and EAFE markets will outperform markets linked to commodity prices.
- (See attachment) AA Strategy January 2015
NBFM Forex (January 2015) – Can the greenback repeat the feat in 2015?
Attached is the NBF Economics & Strategy Group’s January 2015 Monthly Forex report. Of note NBF significantly lowered its 2015 WTI oil price forecast which in turn lowered its inflation and growth forecasts for Canada. NBF also not expects the Bank of Canada to hold off raising interest rates into 2016.
- The U.S. dollar just had its best year since 1997 after appreciating nearly 9% in trade-weighted terms. The end of QE by the Fed clearly helped, but so did a further loosening of monetary policy into unchartered territory by central banks in Europe and Japan, which hammered the euro and yen respectively relative to the greenback. Such a divergence of monetary policy will extend through 2015, suggesting further upside for USD, although we expect the overall appreciation to be more modest than last year. A stabilization of oil prices and a patient Fed could restrain somewhat the otherwise soaring greenback.
- Facing the threat of deflation amidst the ongoing deleveraging cycle which is restraining growth and hence prices, the European Central Bank finds itself with little choice other than follow its purchases of covered bond and asset-backed securities with outright quantitative easing. Adding to the euro’s woes is the comeback of political uncertainty thanks to Greece, yet again. EURUSD is still on track to drop to 1.15 by the end of 2015.
- After the recent Japanese elections gave him a new majority government, Prime Minister Shinzo Abe may press ahead with necessary structural reforms. The cheap currency policy will continue as the Bank of Japan ramps up the printing press, allowing the yen to depreciate against the USD to levels not seen since 2002. We remain comfortable with our forecast for USDJPY to reach 128 by the end of 2015.
- We have revised down our projections for WTI oil prices to an average of $70/barrel in 2015 (versus roughly $90 in our previous forecast). The resulting downgrade to both our inflation and growth forecasts explains why we now expect the Bank of Canada to delay interest rate hikes to 2016. We have, accordingly, adjusted our targets, expecting the Canadian dollar (versus USD) to reach 1.20 by the end of 2015. Over the near term, however, the loonie could hold its own against the greenback as oil prices stabilize.
- (See Attachment) Forex Jan 2015
Crescent Point Energy Corp. – Capital Discipline and Strong Hedging Contributes to Overall Sustainability
Crescent Point Energy, a holding in the DIG Basket, announced their 2015 Capital Budget this week. CPG announced a 2015 capital budget of $1.45 bln (-28% Y/Y) with average production guidance of 152,500 boe/d (+9% Y/Y), while maintaining the current monthly dividend of $0.23/share. The company also emphasized that the budget is flexible with a number of levers to manage the balance sheet and the dividend if lower oil prices persist. Contributing to the 2015 outlook was a strong 2014 exit rate which exceeded guidance of 155,000 boe/d.
Following release of this news, JMRD held a conference call with the company to get a corporate update. Trent Stangl, Vice President of Marketing and Investor Relations, discussed the flexibility that they have with their capital budget this year, depending on where oil prices trade. They have always taken a conservative view with their budget as noted by the fact they continue to add to their oil hedges and are now 50% hedged at $90/bbl (C$) this year. Their debt/cash flow level of 1.3x is below the peer avg of 1.8x. Including U.S. companies, the average would be higher near 2.2-2.3x. The last time oil traded at current levels in 2008-2009 was also when the company had the lowest debt/cash flow in their corporate history. They were able to use the distressed energy company values to consolidate their key Shaunavon play in Saskatchewan. In addition, unlike many other producers, they do not drill all of their best wells right away and now have the option to ‘high-grade’ their production in a lower-oil price inventory. They also continue to see success with their waterflood program which has lowered decline rates by up to 10% in the Viewfield Bakken. Crescent Point has core areas in 6 of the 7 lowest cost major Canadian and US light to medium oil plays. The company is well positioned to protect the balance sheet and dividend and will continue to improve efficiencies through cost reductions including new technology and waterflood to provide long-term growth and dividend income. While oil prices traded to new lows this week, Crescent Point shares have moved higher by 25% off the December 15 close. While the shares will trade with the sector, it has provided a flexible budget to ride out the weak price environment and be one of the leaders when the cyclical sector recovers.
- 2015 TFSA contributions – contribution limit $5,500.00 can be made in cash or securities.
- 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.
2) “What Canada Can Teach the U.S. About Retirement Savings” (Wall Street Journal)
3) “How the cost of oil affects the price at the gas pumps” (Financial Post)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
· “The Danger of One Year Performance Numbers” (A Wealth of Common Sense)
· “What Returns Can Investors Expect in Long-Term Treasuries?” (A Wealth of Common Sense)
· “I Knew It All Along” (The Motley Fool)
· “Blackstone’s Byron Wien Releases Top Ten Surprises for 2015” (Street Insider)
· “Disney CEO Bob Iger’s empire of tech” (Fortune)
· “Market Forecasts to Ignore in 2015” (Bloomberg)
Monday January 12th – None
Tuesday January 13th – U.S. Budget Statement
Wednesday January 14th – Teranet/National Bank Home Price Index, U.S. Retail Sales, U.S. Import Price Index
Thursday January 15th – U.S. Initial Jobless Claims, U.S. PPI Final Demand
Friday January 16th – Canadian Existing Home Sales, U.S. CPI, U.S. Industrial Production, U.S. Capacity Utilizaiton
Monday January 12th – Alcoa
Tuesday January 13th – Cogeco Cable, CSX Corp
Wednesday January 14th – JP Morgan Chase, Shaw Communications, Wells Fargo
Thursday January 15th – Bank of America, BlackRock, Citigroup, Intel Corp
Friday January 16th – Goldman Sachs Group
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Have a good weekend!