In This Week’s Market Observer…
- · Canadian Banks – What is going on in the sector?
- · JMRD All-Cap Growth Basket update
- · NBFM Forex (November 2013) – No exit for now
- · U.S. Economics Digest: FOMC Review – The Fed Gets More Comfortable
- · Retirement Corner
- · Week at a Glance
- · Reads of the week
- · Economic Calendar
- · Earnings Reports
Canadian Banks – What is going on in the sector?
A frequent topic of discussion recently has been the performance in the Canadian Bank sector over the last couple of months. The TSX Bank Equal Weight Index has returned 19.17% year-to-date and all of that performance has actually occurred in the last 3-months, since the sector hit its year low on June 26. At that time, there was plenty of pesimism on the outlook for the Canadian economy and particularly the Canadian housing market. In addition, bond yields were moving higher, driving mortgage rates higher as well and the market was unsure how far this would continue. The forward price-to-earnings multiple on the banks was as low as 10x this Summer, where the banks typically be priced if heading into a recession and a material deterioration in consumer credit quality. Since this oversold period, the banks have recoverd as consumer data has not been as bad as feared. The relief rally has taken the sector a 11x PE for the next 4 quarter earnings. There is still room for PE’s to move higher in a better econoimic environment. As well, the continued strength in Canadian housing prices and lower bond yields have buoyed the sector. Lastly, some investor funds have shifted from the Insurance sector, which had done well with higher rates, back into the bank sector.
At this time, we prefer Bank of Nova Scotia and Toronto-Dominion Bank. BNS typically trades at a 5% premium to its peers but has been trading at only a slight premium. BNS has started to catch-up to the group this week. Banks that look overvalued would be Bank of Montreal with too much optimism on their US platform and CIBC. This week, National Bank Financial’s Bank analyst Peter Routledge was interviewed on BNN. You can view the interview at this link
What’s driving the bank-stock surge:
JMRD All-Cap Growth Basket Update
This week’s introduction to the JMRD All-Cap Basket will focus on a couple of holdings that reported very good Q3 earnings this week, Horizon North Logistics (HNL) and Stantec (STN). Horizon North is one of the largest remote accommodation providers in
Canada. Its largest segment is the camp rental and catering line which was responsible for over 80% of company-wide revenue in 2011. This segment includes the company’s full-service, hotel-like accommodation solutions and drill camp accommodation rentals. Other business lines include matting rental and marine services. Approximately 60% of 2011 revenue was generated from oil sands projects with another 21% coming from the oil and gas industry. This week, the company reported Q3 earnings that were 17% ahead of consensus estimates, with revenue 7% above NBF’s forecast. Lower costs also resulted in better than expected margins. In addition, HNL should benefit from Suncor’s Fort Hills announcement as there is a close working relationship between the two company’s. This project could result in 4,000 – 8,000 beds required. For context, HNL’s entire fleet is currently around 8,500 beds. Not all of the new beds would go to HNL, but directionally positive given some of Horizon North already established oil sands business. HNL has a dividend yield of 3.00% and we expect a dividend increase in 2014.
Stantec is a leading provider of professional consulting, engineering and architecture services, supporting public/ private sector clients, from initial concept/feasibility to project completion and beyond, through ~13,000 employees across more than 190+ N.A. & international locations. This week, STN reported Q3 revenue that 6.6% ahead of consensus as a result of strength in Environmental and Industrial segments. EBITDA was 15% ahead of consensus and EPS a whopping 22% above consensus expectations, the sixth consecutive quarter of double-digit year-over-year EPS growth.
NBFM Forex – No Exit for now
With economic data continuing to disappoint, central banks in the developed world are finding it difficult to exit or even pare back stimulative monetary policies. The tapering of the Fed’s asset purchase program, which until very recently was viewed as imminent, now seems to have been delayed to next year thanks to weak US growth and a deceleration in employment creation. And with economic slack opening up rather than narrowing down in the last couple of quarters, the Bank of Canada finally threw in the towel and abandoned its tightening bias, a feature in its statements for over a year. On the other side of the Atlantic, with credit contraction threatening to derail the recovery, the European Central Bank looks poised to add stimulus rather than withdraw it, more so with inflation continuing to drop. Ditto for the Bank of Japan which has yet to meet its inflation target. We expect Fed tapering to start only in Q1 of next year, something that should allow the US dollar to regain some strength relative to most majors. We have adjusted our near term yuan forecasts to reflect October’s ascent, but have left our other targets largely unchanged. • The Canadian dollar took it on the chin when the Bank of Canada abandoned its tightening bias in October. While the currency should continue to slide towards our end-of-Q1 USDCAD target of 1.06, we remain upbeat about the loonie’s longer term outlook, expecting it to return to stronger than parity with the greenback by the end of 2014.
Credit Suisse US Economics Digest: FOMC Review – The Fed Gets More Comfortable
As anticipated, today’s statement from the Federal Open Market Committee was very similar to that released after the Committee’s previous meeting on September 18. The pace of large-scale asset purchases ($85 billion per month) was unchanged. And there were no adjustments to the economic thresholds for hiking rates.
To the extent there were language changes in the statement, they mainly leaned hawkish, suggesting that last month’s concerns about higher interest rates and the risks they represent have moderated.
Assuming the federal government averts another shutdown in mid-January, we expect a $10bn taper at the January 28-29 FOMC meeting, evenly split between MBS and Treasuries. And we have penciled in an end to QE3 in September 2014, a quarter later than envisioned by the FOMC back in June.
An alternate possibility is that, having whittled down QE3 to about a quarter of its current size by next summer, the Fed may choose to continue small and variable “maintenance doses” of asset purchases through year-end and perhaps into 2015.
This is an idea that warrants more consideration in a Yellen regime, as it is our opinion that she would have a tendency to make smaller, more frequent adjustments to policy than we saw during Bernanke’s chairmanship.
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Reads of the week
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Monday November 4th – U.S. ISM New York, U.S. Factory Orders
Tuesday November 5th – U.S. ISM Non-Manufacturing Composite
Wednesday November 6th – Canadian Building Permits, Canadian Ivey Purchasing Managers Index, U.S. Challenger Job Cuts, U.S. Leading Index
Thursday November 7th – U.S. Initial Jobless Claims, U.S. GDP Annualized, U.S. Personal Consumption
Friday November 8th – Canadian Housing Starts, Canadian Unemployment Rate, Canadian Net Change in Employment, U.S. Unemployment Rate, U.S. Personal Income, U.S. Personal Spending, U. of Michigan Confidence
Monday November 4th – MacDonald Dettwiler & Associates, Pason Systems
Tuesday November 5th – Agrium, Canadian Apartment Properties REIT, Davis + Henderson, Gibson Energy, Keyera Corp, TransCanada
Wednesday November 6th – Calloway REIT, Enbridge, Extendicare, Genivar, Home Capital Group, Intact Financial, Magna International, Whitecap Resources
Thursday November 7th – ARC Resources, Artis REIT, BCE, Canadian Energy Services + Technology Corp, Canadian Natural Resources, CI Financial, Cominar REIT, Crescent Point Energy, Great-West Lifeco, Vermilion Energy
Friday November 8th – Brookfield Asset Management, TELUS Corp