**July 4th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- DIG Basket Quarterly Update
- NBF Equity Monitor – July/August 2014
- NBF Asset Allocation: Another record high
- JMRD Basket Corner
- Retirement Corner
- Reads of the week
- Economic Calendar
- Earnings Reports
The Diversified Income & Growth (DIG) Basket: Second quarter better than first quarter!
Some big news for DIG Basket holders as the year to date return to the end June is 13.64%.
An even more impressive number is the 1 year return (July 1st 2013 to the end of June 2014) of 30.15% for DIG! The TSX Composite Index had a total return of 27.72% for the same 12-month period.
As you can see, the DIG Basket performed well in the first half of 2014 and we feel it is positioned extremely well for the balance of the year.
Before getting into specifics, we wanted to point out some milestones for the Basket as of the end of June:
- Total assets exceeded $62,500,000 for the first time
- Number of holders hit a new record of 550
For new clients and for those not familiar with DIG Basket, we provide some historical returns:
- 2009 return of 41.51% versus the TSX Total Return of 35.05%.
- 2010 return of 17.27% versus the TSX Total Return of 17.61%.
- 2011 return of 6.35% versus the TSX Total Return of -8.71%.
- 2012 return of 8.70% versus the TSX Total Return of 7.19%.
- 2013 return of 16.4% versus TSX Total Return of 12.99%.
Compound returns have been very good as well. Below are results as of the end of December 31st, 2013:
- 3 year compounded average return of 10.35%, versus the TSX Total Return of 3.40%
- 4 year compounded average return of 12.04%, versus the TSX Total Return of 6.79%
- 5 year compounded average return of 17.40%, versus the TSX Total Return of 11.92%
We also wanted to highlight the risk-adjusted returns of the DIG Basket versus the TSX Total Return Index and the S&P 500 since January 2009. Risk adjusted return is an important concept that refines an investment’s return by measuring how much risk is involved in achieving that return. An ideal situation is when an investment has a lower standard deviation (volatility) but a higher return than what it is being compared to. As you can see from the attachment, the DIG Basket achieved both a higher rate of return and a lower standard deviation over this period.
Below is a snapshot of the current holdings. The current annual cash flow is $544 for a yield of 3.2%. The yield is lower than usual due to two factors. The first factor is that the underlying securities have increased in value which results in a lower yield. The second factor is the 10% cash weighting that is currently in the DIG Basket. The Team feels that there could be a pullback at some point in the coming months and feel it prudent to have some cash to take advantage of this situation. Remember that 90% of the Basket is currently invested in blue-chip, dividend paying securities.
We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting. The current value of one DIG Basket is approximately $17,000 making the minimum initial position approximately $34,000, which is 2 Baskets. This amount will continuously change as the prices of the DIG Basket components do fluctuate. Subsequent purchases can be made in one Basket increments
NBFM Monthly Equity Monitor – July/August 2014
• Global equities ended Q2 higher for an eighth straight quarter, the longest run since 1996-97. In June, for the first time since 2007, they reached a new record. At this point, equity valuations remain fairly close to their historical averages. The forward P/E ratio of the MSCI AC index assumes global earnings growth of 9.8% over the next 12 months. This target is attainable, but much depends on geopolitical developments in the Middle East.
• First-quarter U.S. GDP growth, first estimated by the Bureau of Economic Analysis at 0.1% annualized and downgraded to −1.0% in the second estimate, was revised down to −2.9% in the third estimate. That makes it the worst quarter since the recession. Profits were not spared: a decline of 2% year-over-year on a national-accounts basis, the worst in almost five year. In our view, the strength of some reports for Q2 so far means that a quick rebound of U.S. growth remains in the cards.
• While Q1 earnings were under pressure in the U.S., the Canadian story was dramatically different. Statistics Canada reports a jump in operating profits of 33.3% annualized in Q1, the best showing in three years. Somewhat more than a third of the increase came from oil and gas extraction. Most important, the contribution of manufacturing was even larger.
• Our asset mix is unchanged this month. Our recommendation to continue overweighting equities relative to fixed income is based on a combination of growth acceleration and very accommodative monetary policy in H2 2014. In light of better-than-expected earnings in Canada, we are raising our yearend target for the S&P/TSX to 15,700 (from 15,000) and our target for the S&P500 is also raised to 2,010 (from 1,930). In sector rotation, we are moving gold stocks from market weight to overweight this month. Current U.S. monetary policy and a tangible liquidity injection by the European Central Bank later this fall will improve the outlook for the price of bullion. Our decision to upgrade the gold sector is coming at the expense of consumer discretionary (downgraded to underweight). Elsewhere, we continue to favour energy over the more defensive sectors as we continue to assume a moderate rise in long-term interest rates.
NBF Asset Allocation Strategy – July 2014: Another record high!
Despite risks linked to the turmoil in Ukraine and Iraq, global equity markets posted new highs in June propelled by a fresh round of monetary policy easing from the European Central Bank (ECB) and a dovish tone from the Federal Reserve. With rising oil prices and a rebound in the value of gold, Canadian equities were amongst the leaders in June with a 4.1%-gain for the TSX and a 7%-gain for small caps. U.S. small caps also did well with a monthly rise of 5.2%, outperforming larger caps by a wide margin. After hitting a new annual low at the end of May, U.S. 10-year Treasury yields rebounded early in June, but the rise was very limited due to the uncertainty linked to the Middle-East and the weakness of the economic recovery.
Asset allocation strategy
Equities: In the longer term, equities will continue to offer the best expected returns. Therefore, we are maintaining our asset allocation recommendations over the 12 to 18-month horizon. In the shorter-term however, with the summer months upon us, the probability of a pullback in risk assets is rising. As such, we are reducing our overweight position in equities until economic data firm up a little bit or the ECB officialises some form of an asset purchase program.
Fixed income: In the same vein, we suggest taking profits on the high-yield fixed income position that we recommended some time ago. While government nominal yields are not appealing at current levels, supply and demand dynamics, as well as a lower neutral rate suggest that moving the duration of the bond portfolio closer to neutral is probably a prudent bet under current circumstances. If inflation begins to rear its ugly head, investors may want to hedge risks with real return bonds or gold.
Commodities: Because of their very low price-to-book valuation, we continue to expect gold mining stocks to outperform the raw commodity.
JMRD Basket Corner
Bellatrix (BXE) – BXE reported that the majority of its unscheduled third-party plant downtime is now behind it, and production has been restored to approximately 40,000 boe/d (65% gas) with 4,000 boe/d behind pipe (expected on-stream in July) and 10 wells awaiting completion. Full-year guidance remains intact to deliver average production of 41,000 boe/d with an associated exit rate of 48,000 boe/d (20% Y/Y growth), however due to the impact of the downtime Q2 production volumes will be lower than forecast at 36,600 boe/d (vs. prior guided 38,000 boe/d).The company will soon increase drilling activity, with 14 rigs active post break-up (up from 5).
Canadian Energy Services (CEU) – Announced the acquisition of two private companies, Rheotech and Canwell. Established in 1987, Rheotech is a Western Canadian Sedimentary Basin (WCSB) based private drilling fluids company that provides drilling fluid solutions for several leading oil and natural gas companies with a focus on both steam-assisted gravity drainage and deep long-reach horizontal drilling. Canwell was established in 1985 and specializes in the delivery of comprehensive, full service H2S scavenging programs to the WCSB oil and gas industry with a particular focus on the oilsands. Canwell’s core product offering is a line of scavengers which are formulated, and blended from its in-house facility in Nisku, Alberta and marketed under the brand name Cansweet. Customary to previous acquisitions completed by CEU, key employees of both companies have agreed to employment contracts along with non-compete and non-solicit commitments. Based on the Rheotech and Canwell acquisitions and results of operations to-date, Canadian Energy Services updated its expected guidance for the twelve months ended December 31, 2014. CESTC’s expected range of consolidated gross revenue for 2014 will be approximately $820 million to $880 million and expected consolidated EBITDAC will be approximately $145 million to $160 million. Following the news, CEU traded higher by 5% on Thursday
1) “A Rental Property for Retirement Income? Is it Worth it?” (Globe and Mail) /
Week at a Glance
Reads of the Week
“How to Win By Doing Less” (Motley Fool)
“The Outlook for Yields” (Guggenheim Partners) As U.S. economic growth gathers pace, yields on 10-year U.S. Treasuries should shift higher over the next two to three years, eventually moving as high as 3.75-4 percent.
“World Cup Mania Shows How Sports Is Driving Biggest Mergers” (Bloomberg) More Americans have watched the U.S. soccer team in this World Cup than ever before. The two biggest announced acquisitions in the world this year are for U.S. pay-TV operators. Yes, there is a connection.
“Inside Monsanto, America’s Third-Most-Hated Company” (Business Week) d
“Uber: The Company Cities Love to Hate” (Business Week)
“Today’s Titans Can Learn from the Fall of U.S. Steel” (New York Times)
Monday July 7th – Canada Building Permits
Tuesday July 8th – None
Wednesday July 9th – Canada Housing Starts; US FED Minutes
Thursday July 10th– Canada New Home Price Index; US Initial Jobless Claims
Friday July 11th – Canada Unemployment Rate
Monday July 7th – Alimentation Couche Tarde
Tuesday July 8th – Alcoa
Wednesday July 9th – None
Thursday July 10th– None
Friday July 11th – Wells Fargo