**July 24th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- Universal Child Care Benefits – is the increase actually a good thing?
- NBFM Forex – Loonie hit by structural headwinds
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Universal Child Care Benefits – is the increase actually a good thing?
This week, parents with children under the age of 18 received a lump sum child care benefit. Mackenzie Investment’s Tax and Estate team wrote this timely summary on what the net benefits are to Canadian with children.
For those of us who have young children Monday was a great day – or so I thought. The Universal Child Care Benefit (UCCB) was increased from $100 to $160 for children under 6 years of age and a new benefit of $60 was added for children between ages 6 and 17 effective January 1, 2015. Due to the time it takes to update their systems the government paid a lump sum on Monday. Depending on what someone is eligible for they received either $420 or $520 per child. On the surface this seems like a great thing, the economy could be stimulated because of this influx of $3 billion.
This increase came at a cost, there are two important points you need to be aware of.
- The existing child tax credit of $2,255 which is worth $337.50 per child annually was eliminated January 1, 2015.
- The UCCB is taxable both provincially and federally. Depending on the tax bracket someone is in it could really decrease the benefit of the increased payment. If for example someone has a combined marginal tax rate of 31.15% the extra $720 UCCB must be included as income and will incur additional taxes of $224.28.
Those two factors alone causes the $720 benefit to drop to $158.22 – this is only $13.18 per month net. Depending on the individual’s tax bracket and the province they live in they could end up with even less than this.
On a positive side, the government increased the exemption for childcare expenses to $8,000 from $7,000 for children under 6 years of age and to $5,000 from $4,000 for children over 6 years of age. This exemption must be used by the lower income earning spouse.
The last point your clients need to consider is whether this $3 billion payment will affect the projected surplus. Due to worse than expected economic growth that was posted by the Bank of Canada last week the government is expected to take in about $4 billion less than expected when the budget was drawn up. When you take taxes into consideration the $3 billion payout will actually cost Canadian $1.5 billion with the reduced expected revenue this payout may affect the surplus. The government feels this payout is a form of stimulus and will increase spending. Whether that happens or not will depend on each family’s situation. Generally, wealthier families use this money to pay down debt while lower income families will use it to meet their current needs which will stimulate the economy.
By Jackie Power, Mackenzie Investments
NBFM Forex (July/August 2015) – Loonie hit by structural headwinds
- Enhanced uncertainties about the global economy don’t seem to be enough to alter the Federal Reserve’s resolve in raising US interest rates this year. US growth is indeed expected to bounce back sharply in the second semester and employment should be well supported. Divergence in monetary policy between the Fed and the rest of the world leaves plenty of room for USD to continue appreciating against most majors.
- The “deal” reached between the European Commission and Greece was nothing more than the usual can-kicking exercise by policymakers on the old continent. Greece was asked to swallow more austerity in exchange for loans which it will never be able to repay. The extension of this European charade cannot end well for the eurozone and its currency. We continue to expect EURUSD to sink to parity by the end of next year.
- The loonie is flying through the perfect storm and is bound to lose some feathers. The oil shock was more brutal that first thought and there is little relief in sight for producers in light of further USD strength and the Iranian nuclear deal, both of which are negative for crude prices. China’s transition to a more service-oriented economy is another structural headwind for commodities. Monetary policy is also not favourable to the currency ― the downgraded economic outlook from the Bank of Canada confirms the output gap will take longer to close with the resulting US-Canada yield differential likely to hurt the loonie. And last but not least, the upcoming federal elections promise to add a dose of uncertainty. Our revised currency forecasts, which show a significantly weaker Canadian dollar over the forecast horizon, reflect those new realities.
JMRD Basket Corner
Diversified Income & Growth Basket
DH Corp (DH) – “DH Seeks Deals as 140-Year-Old Printer Turns Tech Leader”
All Cap Basket
Constellation Software (CSU) – This week, it was announced that Constellation Software will be added to the S&P/TSX 60 index, which is Canada’s 60 largest companies. The substitution becomes effective after the close on Friday July 24th. The expected indexer demand is ~650k shares benchmarked to this Friday’s close, representing 11x the company’s average daily volume.
U.S. Growth Basket
Apple (AAPL) – Apple reported F3Q15 results that were strong with revenues growing 32.5% y/y to $49.6bn and EPS of $1.85. However, there was some disappointment in the stock due to the lower scope for positive revisions ahead. Given high retention rates, a superior ecosystem, and multi-product compute advantage, Credit Suisse’s tecj analyst believes such elevated level of earnings and FCF of around $64bn per annum should be sustainable long term. The company’s relative strength profile remains positive and we continue to own in the US Basket.
Celgene (CELG) – Celgene announced this week that adjusted earnings soared in its latest quarter, driven by sales of the cancer-drug company’s blockbuster drug. Celgene, which earlier this month announced plans to buy autoimmune-drug company Receptos for $7.2 billion, has been trying to diversify beyond its foothold in drugs treating multiple myeloma. About 65% of its $7.6 billion in 2014 total product sales came from just one of these drugs, Revlimid. In the latest quarter, Revlimid sales grew 19% to $1.44 billion, on higher volume in the U.S. and abroad and because of increased duration of therapy. This year, Celgene expects $5.6 billion to $5.7 billion in Revlimid sales. Celgene traded to a new high this week and the shares are now up 22% year-to-date.
Lockheed Martin (LMT) – “Lockheed Martin is Getting even bigger by buying Sikorski”
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- “Oil prices are down, gasoline prices are not. What gives?” (CBC) It’s a good summer to be selling gasoline, not a great one to be buying it
- “It’s OK to Ignore Your Portfolio” (ETF.com) Often, not following the daily, weekly or even monthly market movements is the best plan for a portfolio
- “At 78, Scientist Is Starting a Hedge Fund” ‘Quant’ hedge fund would be launched later this year
Monday July 27th – None
Tuesday July 28th – Canadian Industrial Product Price Index, Canadian Raw Materials Price Index, U.S. Consumer Confidence Index
Wednesday July 29th – U.S. Pending Home Sales, FOMC Rate Decision
Thursday July 30th – U.S. GDP, U.S. Initial Jobless Claims
Friday July 31st – Canadian GDP, U. of Michigan Sentiment
Monday July 27th – Prairiesky, Restaurant Brands International
Tuesday July 28th – DH Corp
Wednesday July 29th – CGI Group, Constellation Software, Open Text, Suncor, Facebook
Thursday July 30th – AltaGas, Potash Corp, Superior Plus, Sealed Air
Friday July 31st – CCL Industries, Enbridge, Fortis, Gildan Activewear, RioCan REIT, Chevron, Exxon Mobil
Have a good weekend!