**November 27th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- Canada’s Big Six Banks Earnings Preview Q4 2015
- NBFM Monthly Economic Monitor – December 2015
- JMRD Basket Corner
- 2015 Tax Season Reminders
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
Canada’s Big Six Banks Earnings Preview Q4: Walking the Tightrope
Next week, the big 6 Canadian Banks will report their year-end results. We have included a recent preview report from NBF’s Canadian Bank analyst Peter Routledge and what to expect from the results
Following Q3 f2015 results, we warned investors that those strong results did not represent an accurate prologue for f2016. With the fourth quarter now complete, we detect a number of developments which substantiate our prior concerns regarding the earnings prospects for the Big Six Canadian banks.
Specifically, two of the banks in our coverage universe raised expensive equity capital, market volatility increased measurably (particularly in fixed income markets), and several of the Big Six Canadian banks have embraced expense restructuring measures. Yet, the state of household credit, the most important valuation driver for the sector in our view, remains benign. In this context, we asked what implications do these drivers have for Q4 f2015 and for the upcoming fiscal year (f2016)?
Ultimately, the outlook for the Big Six Canadian banks has largely deteriorated in our view. In assessing the developments above, we concluded:
1) Bank capital issues appear to have re-emerged and will be magnified by the forthcoming recapitalization regime which will require the banks to add more capital, translating into a negative earnings headwind;
2) Trading revenue appears poised to fall sharply due to market volatility;
3) Competitive challenges from Fintech will offset the benefits of cost reductions; and
4) Leading, coincident & lagging indicators all suggest that credit conditions remain benign…for now.
Of these developments, three of them (bank capital issues, trading revenue headwinds and competitive challenges from Fintech) have already started to put downward pressure on bank valuations. Meanwhile, the fourth (Canadian household credit) is so historically strong, it can only get worse. In fact, three other trends give us pause in relying too heavily on recent, positive credit data: (a) house prices continue to appreciate faster than household income; (b) the employment environment appears weak; and (c) present conditions are conducive to unproductive risk-taking in mortgage underwriting.
The Big Six Canadian banks begin reporting their Q4 f2015 results on Dec. 1, 2015. At present, our price targets rest, on average, 3% below consensus. We base our cautious outlook on: (1) headwinds stemming from the re-emergence of bank capital issues; (2) downward pressure on trading revenues (particularly from fixed income trading); and (3) competitive challenges from Fintech. While favourable credit performance has sustained itself in a benign environment, conditions may become less benign in f2016 and f2017. Canadian households are vulnerable to adverse changes in house prices and employment; so too are the Big Six Canadian banks.
(Full report attached)
NBFM Monthly Economic Monitor – December 2015
- The global economy remains on track to grow in 2015 at the slowest pace in six years. It was always going to be difficult to overcome the rough start to the year, with bad weather wreaking havoc in the US, and China’s rebalancing in full swing. The appreciating US dollar didn’t help either, given the large amounts of USD-denominated debt held outside US borders. But amidst the challenges, there is hope the year will end better than it started for the world economy. Trade volumes seem to be picking up, raising the odds of a decent handoff to 2016.
- America is likely to get a rate hike for Christmas. The Fed will point to a strengthening US economy and solid labour market to support its decision. But there may be a long pause early in the new tightening cycle given the lack of inflation and a likely deceleration of growth next year. In addition to the continuing drag exerted on the economy by the strong dollar, consumption and housing are likely to moderate in synch with a softer labour market after this year’s employment surge. We remain comfortable with our forecast of just 2.3% for 2016 US GDP growth.
- After a difficult start to the year, Canada’s economy is finally growing again. Trade has turned into a major contributor thanks to the US resurgence, while domestic demand is also on the mend after a disappointing first half. Consumers seem to be making the most of rising disposable incomes courtesy of a resilient labour market and low pump prices. However, the rebound comes too late to save 2015 which is set to register the weakest growth in six years. And given the weak potential for growth and likely delays in implementing fiscal stimulus, don’t expect a significant improvement in 2016.
(Full report attached)
NBF Monthly Fixed Income Monitor – December 2015
- We expect the FOMC to deliver a first rate hike in December but only two further rate increases in 2016. We see the target range for the fed funds rate reaching 0.75%–1.0% by the end of the second quarter and left unchanged in the second half of the year as U.S. economic growth softens. For the 10-year Treasury yield, upward pressure in the first half of 2016 will also fade in the second half.
- Bank of Canada governor Stephen Poloz sees monetary policy-making as a risk-management exercise requiring flexibility in steering toward an inflation target. We believe that our economic scenario projects a balance of risks that will favour keeping the current policy stance unchanged in 2016. Finance minister Bill Morneau has updated the federal government’s fiscal projections to show an underlying fiscal position of deficits rather than surpluses extending from fiscal years 2015-16 through 2018-19. We now see 10-year Canadas trading at around 1.96% in June 2016, compared to last month’s forecast of 1.81%.
(Full report attached)
JMRD Basket Corner
U.S. Growth Basket
Apple (AAPL) – “Apple Could Make $24 Billion From Winning The NFL’s Thursday Night Football Rights” (Forbes)
Celgene (CELG) – “Will Celgene Raise Its 2020 Outlook?”
JetBlue Airways (JBLU) – “JetBlue Eyes Flying-Time Rules With New Pilot-Training Program” Curriculum aims to show novices can gain proficiency more quickly than current rules allow
Pinnacle Foods (PF) – “Pinnacle Foods (PF) Stock Soars on Boulder Brands Acquisition”
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.
- “The three stages of retirement spending: When not to be stingy” (Globe and Mail)
Week At a Glance
See Week At a Glance Report.
Reads of the Week
- “What History Says About Fed Rate Hike Cycles And Stocks” (See it Market)
- “The Lingering Effects of the Financial Crisis” (A Wealth of Common Sense) How our views and decisions can be affected by our past experiences in the markets.
- “Would you let a mystic manage your investment portfolio?” (Washington Post)
- “Preparing For Lower Returns” (The Irrelevant Investor)
- “Brazil Hedge Fund Star Looks Elsewhere for His Next Big Bet” (New York Times)
- “Black Friday Sales Numbers Are Useless And Wrong” (FiveThirtyEight) And you should ignore them.
Monday November 30th – Canadian Current Account Balanced, U.S. Pending Home Sales
Tuesday December 1st – Canadian GDP, RBC Canadian Manufacturing, U.S. ISM Manufacturing, U.S. Markit US Manufacturing PMI
Wednesday December 2nd – Bank of Canada Rate Decision (no change expected), U.S. ADP Employment Change, U.S. Nonfarm Productivity, U.S. Federal Reserve Released Beige Book
Thursday December 3rd – U.S. Initial Jobless Claims, U.S. Factory Orders, U.S. Durable Goods Orders, U.S. Composite PMI
Friday December 4th – U.S. Change in Nonfarm Payrolls, U.S. Unemployment Rate, U.S. Trade Balance
Monday November 30th – None
Tuesday December 1st – Bank of Montreal, Bank of Nova Scotia
Wednesday December 2nd – National Bank of Canada, Royal Bank
Thursday December 3rd – Canadian Imperial Bank of Commerce, Toronto-Dominion Bank
Friday December 4th – None
Have a good weekend!