**May 6th Issue of the JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- Mother’s Day Weekend
- The CDN/US Dollar
- Paul Manders – My Family Road Trip to Omaha to see Warren Buffett
- NBF Asset Allocation Strategy
- Retirement Corner
- JMRD Basket Corner
- Week at a Glance
- Reads of the Week
- Economic Calendar
- Earnings Reports
Mother’s Day Weekend
The JMRD Team would like to wish a Happy Mother’s Day to all the mothers out there. Be sure to spoil our mother’s on Sunday!
The CDN/US Dollar
The CDN/US dollar has been a hot topic over the past six months. After hitting a low of 68 cents in January, the CDN dollar rebounded briefly back to the 80 cent level last week. It is currently sitting around 77 cents. We do not know (nor does anybody know) the exact direction the CDN dollar will take over the course of time, but we suggest, for those frequently travelling to the US, considering converting some CAD to USD in light of the impressive CDN dollar rally since January. A strategy that we think makes sense is to convert some of you CDN money to USD a little bit at a time, say each month over the next number of months, in order to replenish your US dollars for your next winter’s sojourn south of the border. Buying in installments allows you to smooth out the fluctuations of the dollar and essentially takes the guesswork out of making the right currency call, which is very difficult to do. Let us know if you have any questions on this.
From Bloomberg: Our Loonie may have just peaked
Paul Manders – My Family Road Trip to Omaha, Nebraska to see Warren Buffett
In the spirit of Reg’s recent 20 year work anniversary comments, I have put together some thoughts on my recent family trip ago to Omaha to hear Warren Buffett and his partner, Charlie Munger at their Berkshire Hathaway Annual Shareholder’s meeting (my first trip to Omaha for this event was over 15 years ago).
Like Reg, this is my 20th year in the financial advice business. My first few years were spent with Home Hardware’s financial services company. It was a great experience with some amazing people and a really great culture. In 1998 I joined Reg at our previous firm and we have been partners ever since. When I joined the firm with Reg, and it was weeks after I got married, the firm sent “Rookies” for training for 6 weeks straight in Toronto. My new wife was not all that happy about it but I was excited to get up to speed with the firm and meet other “Rookies.” There were almost 40 people in that training class and when I last checked, I believe fewer than 5 are still financial advisors.
One great friend I met there was a successful accountant from Vancouver who looked like he would for sure make a good investment advisor. We made a pact to each buy shares of Berkshire Hathaway (run by Warren Buffett) and then meet up each year for the annual shareholders meeting held in Omaha. The next year, 1999, was my first trip there and I have a picture attached of me with Warren that year. There were less than 5000 people attending and you could line up and get a photo and autograph with him at a local minor pro baseball game. You may not be able to see it but he has mustard on his shirt from eating a hot dog. Even billionaires enjoy a good hot dog!
In that first year of the pact with my friend, he made an excuse that he could not attend. He was busy with his business and had developed a specialty with technology companies that had been doing well so he could not get away. He told me to keep an eye on Nortel and a newer company called JDS Uniphase. The next year, I again went to Omaha and my friend made the same excuse and was pretty confident as he and his clients were almost exclusively in Nortel Networks, JDS Uniphase and other similar companies like Cisco and Sun Microsystems, which in May 2000 were doing incredibly well. I remember that year that there were fewer people attending than the year before because Warren did not own any technology companies and the performance of the Berkshire Hathaway shares were lagging shares of technology companies. I think many of you will know what happened next. 2000 marked the top of the technology sector. Almost every investor in Canada was affected in some way by the long decline in Nortel Networks and other similar companies, including us, but the point I am trying to highlight is that these types of companies cannot be all an investor holds. Unfortunately for my friend, he never did attend a meeting with me and was out of the business before his 5th year. He is now a great business teacher, and when I last checked in was happy not dealing with the uncertainty of the financial markets.
I mention this as it highlights something that I know I have learned from attending these meetings over the year. Investing well is a marathon and not a sprint. Building a business that, at its core, is about investing money for others is an even longer marathon. Warren’s #1 rule is do not lose the money and his second is to not forget rule #1. We have learned that there are times when it is our job to manage the risk and not the returns of portfolios for our clients in order to follow Rule #1. It is nearly impossible not to have the value of equities in a portfolio go down over the short term, but over the medium and long term, equity investments have historically trended higher. The only problem is that it is hard for investors to think in the medium term and even harder to only think long term. We believe it is our job to coach our clients through this process knowing that is the only way to success. After 20 years, we are still enjoying the responsibility.
Since that first meeting in 1999, I have been to Omaha a total of 7 times with friends in the business, clients and team members. After realizing that Warren Buffett was 85 and his partner Charlie was 92, I thought it was time to have my kids hear the Berkshire Hathaway story before it was too late. They would get to see another one of their dad’s role models in the process. So we packed up the truck and drove the 1500 kilometers to Omaha last weekend with a stop in the great city of Chicago. You will see another photo taken by my son of the family waiting for Warren at the meeting Saturday morning. I lined up at 5:30 in the morning with 40,000 others in the pouring rain. At 8 AM, after a great company video that plays for about an hour and highlights the many companies owned through Berkshire Hathaway, Warren and Charlie answer questions for the next 7 hours with only a break for lunch. It really is a sight as their age has not slowed them down at all with respect to their answers on everything from detailed business questions, philanthropy and even some US politics and other world events.
I am happy to say that I think my family definitely took some good information and lessons away from the meeting. It also helped that we had over 20 hours in the car so that I could pepper them with all sorts of information and trivia. They were bound to absorb some of it. For me, it was a reminder of the basic principles of rule #1 mentioned above as well as the long term benefit of investing in companies that we can understand, waiting for the more obvious long term opportunities, while not chasing the short term excitement. He has also been good for the philanthropy sector in the last few years with him spearheading the giving pledge movement. This is an idea he had where billionaires commit to a pledge to give away at least half of their net worth before or on their passing. This is an extension of his belief that a lot of his success was due to the fact he was born at the right time and in the right country to take advantage of the many opportunities available. He has stated many times that he would only give his kids enough to do want they want and not enough for them to be able to do nothing.
I took a great deal of detailed notes throughout the meeting and will be sharing those with the portfolio management team here. Feel free to contact me if you want any additional commentary on some of the discussion at the meeting.
For a reference, I have attached below a short list of some of the companies that Berkshire either fully owns, or ones in which they have a meaningful share ownership.
Large Ownership positions
% of Co. Owned Cost Market value
American Express Company . . . . . . . . . . . . . . . . . 15.6 $ 1,287 $ 10,545
AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 1,283 1,603
Charter Communications, Inc. . . . . . . . . . . . . . . . . 6.6 1,202 1,367
The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . 9.3 1,299 17,184
DaVita HealthCare Partners Inc. . . . . . . . . . . . . . . 8.8 843 1,291
Deere & Company . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 1,773 1,690
The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . 2.7 654 2,053
International Business Machines Corp. . . . . . . . . . 8.4 13,791 11,152
Moody’s Corporation . . . . . . . . . . . . . . . . . . . . . . . 12.6 248 2,475
Phillips 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 4,357 4,530
The Procter & Gamble Company . . . . . . . . . . . . . . 1.9 336 4,683 ***
Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,701 1,896
U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 3,239 4,346
Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2.0 3,593 3,893
Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . 9.8 12,730 27,180
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,276 16,450
Other Recognizable, Wholly-Owned Private Companies
GEICO Auto Insurance
BNSF – Burlington Norther Santa Fe Railroad
International Dairy Queen, Inc.
Benjamin Moore & Co.
Borsheims Fine Jewelry
Fruit of the Loom Companies
NBF Asset Allocation Strategy: Stuck in Neutral
A positive month is a good month. Even an abysmal quarterly earnings reporting season combined with some resistance from certain technical levels couldn’t stop the S&P 500 from generating a small but respectable 0.4% for the period. Bolstered by a rebound in energy prices (WTI up 20%), the S&P/TSX fared much better, recording 3.7% in April.
On the fixed income and currency side (despite some uncertainty regarding the Fed’s next step), yields remained fairly tame. The U.S. 10-year bonds closed the month at 1.8% (up 0.1%) while their Canadian counterparts generated a much stronger reaction to the rate decision by increasing 0.3% to end the period at 1.5%. The continued energy rebound also impacted the loonie, up by 4.5 cents in April.
Asset allocation strategy
- In crude, a lot of operational problems across the world added up to significantly reduce output.
- We believe the speculators and ETF investors, who can quickly change their views, got ahead of themselves on that front.
- We fear this rebound will prove self-defeating as physical re-balancing is still not complete.
- While investors were looking for some indication with regard to the central bank’s intentions at the last rate decision date, the committee remained non-committal.
- Expectations are currently pricing a “no hike” for June’s meeting and are on the fence for one potential hike in 2016 (chart 9). However, the fact that the FOMC somewhat reduced its concern about international risks makes us think that the committee wanted to remove a hurdle for more an aggressive policy, should the situation justify it.
(Full report attached)
JMRD Basket Corner
Canadian Natural Resources (CNQ) – CNQ reported Q1 results ahead of expectations, with substantial improvements to the overall costs structure, while also making a minor adjustment to FY16 guidance, as the company responds to weak gas prices. (Full report attached) CNQ
All-Cap Growth Basket
CCL Industries (CCL.b) – Announced record quarterly basic and adjusted basic earnings per Class B share of $2.57 and $2.65, up 30.5% and 33.2% respectively; includes $0.13 currency tailwind. Sales increased 22.8% supported by 7.3% CCL Label organic sales growth. Operating income increased 28.0% driven by strong performances across CCL Label, Avery and CCL Container. Closed five bolt-on acquisitions during the quarter in addition to the planned transaction to acquire Checkpoint Systems, Inc. (Full report attached)
Uni-Select (UNS) – Uni-Select announced the acquisition of Gladwin Paint Company, one of the largest distributors of automotive finishes in the U.S. Southwest. Founded in 1954, Gladwin serves customers (high concentration of MSOs) from eight locations in key metropolitan markets in Texas including Austin, Dallas, Houston and San Antonio. (Full report attached) UNS
U.S. Growth Basket
CVS Health (CVS) – CVS announced better-than-expected results for its first quarter, as recent acquisitions helped push prescription volumes higher. The drugstore chain made two acquisitions last year, looking to bring in more patients to counter the effect of falling reimbursement rates. Such rates are under pressure as more drugs are dispensed through the federal Medicare and Medicaid programs, which carry lower margins than private insurers. The company has folded in Omnicare Inc., which dispenses drugs to places like nursing homes, in addition to Target Corp.’s pharmacy business. In the first quarter, CVS said sales at stores open at least a year rose 4.2%, below the 5.3% clip analysts expected but up from 3.5% in the fourth quarter. The increase came as front-of-store sales — makeup, food and over-the-counter medicine — rose 0.7%, a result Chief Executive Larry Merlo said was in-line with expectations. While eroding traffic continues to hurt sales at the front of the store, an extra day from leap year helped offset that impact in the first quarter.
Facebook (FB) – “Facebook has 50 minutes of your time each day. It wants more”
1) “Understand executor compensation rules” (Advisor.ca)
2) “How to make 2016 the year you don’t get a tax refund — and why that’s a good move” (Financial Post)
3) “How to position employees for the psychological impact of retirement” (Benefits Canada)
Week at a Glance
Full report attached
Reads of the Week
- “Nestlé’s Sugar Empire Is on a Health Kick” (Bloomberg)
- “Michael Lewis: The Book That Will Save Banking From Itself” (Bloomberg)
- “Jamie Dimon wants to protect you from innovative startups” (New York Times)
- “Let’s Say It All Together: Nobody Knows Anything” (Bloomberg)
- “The Business Case for Relinquishing AAA Credit Ratings” (Bloomberg)
- “How Millennials Ended the Running Boom” (Wall Street Journal)
Monday May 9th – Housing Starts (CAD)
Tuesday May 10th –
Wednesday May 11th – MBA Mortgage Applications,
Thursday May 12th – Initial Jobless Claims, New Housing Price Index MoM (CAD)
Friday May 13th – Retail Sales Advance MoM, Business Inventories
Monday May 9th – Emera Inc, Inter Pipeline Ltd
Tuesday May 10th – George Weston Ltd, Keyera Corp, Sun Life Financial Inc, WSP Global Inc, Walt Disney Co/The
Wednesday May 11th – Element Financial Corp,
Thursday May 12th – Crescent Point Energy Corp, Enbridge Inc,
Friday May 13th – Boyd Group Income Fund,
Have a good weekend!