**October 2nd Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- JMRD Strategy Comments
- Toronto Portfolio Manager’s Offsite
- NBFM Monthly Equity Monitor – October 2015
- NBFM Forex – Will labour market deceleration deter the Fed?
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Strategy Comments
For much of the week investors, economists and analysts had been anticipating today’s employment report in the United States. This report is looked at as a gauge to forecast economic growth in the US economy. Over the past month, each US economic data point has been closely scrutinized because of the questions surrounding the growth in other key areas of the world. The final tally was an increase of 142,000 jobs for the month of September versus expectations of a gain of 201,000. At the start of trading, the market viewed the report as a negative for the US economy and both the Dow Jones Industrial Average and TSX were down anywhere from 1.2% to 1.5%. The tone of the markets improved as the morning progressed, and the US and Canadian markets entered positive territory around the noon hour, building on these gains right through to the market close. The question on everybody’s mind is when will Janet Yellen of the US Federal raise interest rates? Although the consensus has been for rates to move higher sometime before the end of the year, this morning’s employment report may have pushed the timing out until next year. Only time will tell but from the equity market reversal this afternoon, investors see a low interest rate environment for longer which again is a positive backdrop for continued, gradual US economic expansion.
If you add it all up, this week has been no different than recent weeks. The short term equity market turbulence remains as evidenced by the 370 point drop in the TSX on Monday, the 270 point gain on Wednesday, and a 250 point reversal from the lows today. On the week, the TSX was down about 0.3% and the Dow Jones Industrial Average was up about 1%.
Toronto Portfolio Manager’s Offsite
Two weeks ago we mentioned that members of the JMRD Team were travelling to Toronto for an offsite strategy session. During this session we discussed a number of things surrounding our Team processes and how we could improve upon them. One of the key takeaways was developing and using model portfolios. As you know, we manage four different JMRD Baskets – The Diversified Income and Growth, The All Cap, The Exchange Trade Fund and the US Growth baskets. Each has its own investment policy statement and objectives. We are currently working on a models-based approach that would allow us to combine all of our baskets, plus our other best equity and fixed income ideas into ‘model’ portfolios to match each investor profile – Income, Conservative, Balanced, Growth and Maximum Growth. Stay tuned for further updates on the JMRD Model Portfolios.
NBFM Monthly Equity Monitor – October 2015
- Global equities continue to struggle. In Q3, the MSCI AC index is down for a second consecutive quarterly decline – a first in four years. A deteriorating earnings backdrop is exacerbating the downward pressure on the index.
- We still think earnings growth is possible in 2016, provided of course that a few things go right. First, the global economy needs to get out of its funk. After a challenging first half of the year, world industrial output is picking up. Otherwise, USD appreciation needs to be kept in check to break the disinflationary trend that is currently dogging the earnings outlook. The threat of a Fed rate hike notwithstanding, there are policies that could offset USD strength. One would be to include the Chinese yuan in the IMF’s basket of reserve currencies.
- Our asset mix is unchanged this month, with equities still overweighted relative to bonds and a regional bias towards the United States. The key to avoidance of a bear market is a combination of continued U.S. growth and a low-inflation environment that allows the path of monetary normalization to be gradual. That is the environment today and in our view it is likely to persist for some time. We would reconsider our asset mix if credit market spreads were to increase to the point of undermining the 2016 profit outlook.
- Our sector allocation for the S&P TSX is unchanged this month. We remain comfortable with our current recommendation to overweight bank stocks as the economy is growing again and recent gains in full-time employment continue to support the housing market.
NBFM Forex (October 2015) – Will labour market deceleration deter the Fed?
- Thanks to further gains in September, the trade-weighted dollar has now appreciated more than 18% since June last year, the fastest 15-month appreciation ever. There’s little mystery behind this surge. The Fed has repeatedly warned it will be raising interest rates this year, and that’s in sharp contrast to the expected continuation of loose monetary policy by other major central banks. While odds are good for the extension of USD strength through 2016, the greenback may nonetheless face headwinds if the Fed doesn’t walk the talk. The observed deceleration of the labour market and the absence of inflation certainly give the FOMC reason to delay hikes to later. Another potential negative for the USD is the likely inclusion of the Chinese yuan in the IMF’s Special Drawing Rights.
- The European Central Bank’s stimulus has had mixed results. While stimulus has been somewhat helpful with regards to credit growth, it has been much less effective in chasing away the threat of deflation. The annual inflation rate fell to -0.1% in September according to Eurostat’s preliminary estimates, but the ECB will be mostly concerned about the relapse in inflation expectations. Weakness in emerging markets (a big customer for Europe) and the fallout from the emissions scandal by a major German automaker both present downside risks to an already sluggish eurozone economy. Expect the central bank to stick to its QE program ─ which is slated to last until at least September next year ─ or even increase its size to give itself a better chance of defeating deflation. That will put pressure on the euro to depreciate further against the USD over the coming quarters.
- Improving Canadian economic data hasn’t helped the loonie much lately. A fifth consecutive monthly depreciation relative to the USD in September means the C$ is now down more than 12% against the greenback this year. Foreign investors remain skeptical about Canadian economic prospects for good reasons. There are still huge uncertainties with regards to the impacts of the oil shock not only in the present but also on the future outlook, e.g. via the observed collapse of investment spending. With the Bank of Canada likely to err on the side of caution, expect relative yields to be unfavourable to the C$. Adding to the loonie’s woes are downside risks to the energy sector in light of further USD strength, the Iranian nuclear deal, and a weak global economy, all of which are negative for oil prices. Further uncertainty comes courtesy of this month’s federal elections which, according to latest polls, may deliver a minority government. Expect C$ weakness to persist for a while.
JMRD Basket Corner
Emera (EMA) – Emera announced that it had closed the financing for its $2.2B, 4.0% convertible debenture offering (12.0% based on 33% first instalment) – convertible into common shares at $41.85/sh following closing of the US$10.4 bln acquisition of TECO Energy by mid-2016. Attached is an update on the transaction. Emera Inc.
All-Cap Growth Basket
Element Financial (EFN) – Element announced that it has closed the acquisition of General Electric Capital’s fleet management operations in Mexico and their fleet management operations in Australia and New Zealand doing business as Custom Fleet. Element previously acquired the Canadian operations of GE Capital’s fleet management business in June of 2013 and acquired GE Capital’s US fleetmanagement operations on August 31, 2015. Element’s combined fleet management business now accounts for approximately $13.0 billion or 70 percent of the Company’s $18.6 billion in total earning assets as at September 30, 2015.
Fiera Capital (FSZ) – “Fiera’s Desjardins charts pockets of opportunity” five years from now, the firm could double in size and dabble in new investment spaces (see attached article) Fiera Capital
Restaurant Brands (QSR) – “Burger King Takes on McDonald’s in France with Quick Purchase”
- “Forget 70%: How to calculate your actual retirement income target” (Financial Post)
Week At a Glance
See Week At a Glance Report.
- “How to turn your life insurance policy into a TFSA on steroids” If you want to hike your investment returns and pay less in taxes, life insurance might be able to help.
Reads of the Week
- “Tyranny of the Calendar” (The Motley Fool) A good read on the misplaced focus on one-year returns.
- “Fee-based financial advice: Defeat Bay Street secrecy” (The Globe and Mail)
- “Selling is the Easy Part” (A Wealth of Common Sense)
- “Jim Treliving on how to get along with your business partner” (Canadian Business) CBC’s longest-serving Dragon talks about Boston Pizza, cracking new markets and why he’ll never, ever wear jeans on the job
- “David Rosenberg: U.S. recession? The numbers say no, even if the market says otherwise” (Financial Post)
Monday October 5th – U.S. Markit U.S. Composite PMI, ISM Non-Manufacturing Composite, U.S. ISM Non-Manufacturing Composite
Tuesday October 6th – Canadian Ivey Purchasing Managers Index
Wednesday October 7th – Canadian Building Permits
Thursday October 8th – Canadian Housing Starts, Canadian New Housing Price Index, U.S. Initial Jobless Claims, U.S. Fed Releases Minutes from Sept 16-17 FOMC Meeting
Friday October 9th – Canadian Unemployment Change, Canadian New Change in Employment, U.S. Wholesale Inventories
Monday October 5th – None
Tuesday October 6th – Pepsi Co
Wednesday October 7th – Jean Coutu
Thursday October 8th – Alcoa
Friday October 9th – None
Have a good weekend!