**June 19th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- Timing The Market
- Fed Policy Monitor- Fed keeps tapering its asset-purchase program
- JMRD Basket Corner
- Retirement Corner
- Reads of the week
- Economic Calendar
- Earnings Reports
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Timing the Market
One question we are often asked is should a client sell a profitable stock position and attempt to buy the stock back at a lower price? While it is ‘easy’ to sell a stock and take some gains off the table, this question actually requires two things to go your way – timing BOTH the sale AND the buy correctly. This is not easy to do. For one, there is the emotional side of trading. After selling a stock and seeing it start to move lower, investors will usually look for the share price to go even lower before re-buying. However, oftentimes the stock turns around and heads higher before being purchased again and the initial strategy doesn’t play out as ‘expected’. In addition, one has to take into consideration fees, missed dividends and tax consequences – if the shares are sold in a taxable account.
Another reason that timing the sale is not as easy as it appears is that strong stocks can continue to move higher than many expect. Several things can work in a stock price’s favour for further appreciation; maybe the company is undergoing a positive fundamental change or perhaps the sector is undergoing a sea change in sentiment. There could also be industry changes related to regulation, technology or costs that are resulting in an upward revaluation in the company. Lastly, when an investor sells a security with thoughts of buying it back lower, there is a buyer on the other side of the trade looking for the stock to continue higher. Is there new information that the buyer has which is causing the stock to move to new highs? Don’t sell just because a stock is doing well – this falls into the camp of selling your winners and hanging onto your losers.
A good example of the above is AutoCanada Inc., a publicly traded company that owns and operates car dealerships across Canada . We recently trimmed the stock in our All Cap Basket after it had a very good run up from $40 to above $60 from March to May. This was a 50% gain on the original purchase price. Fortunately we kept most of the position because the stock price, despite a brief downturn, has risen to $89 at the time of writing. This doesn’t happen with every stock, of course, but in a rising market, there is no reason why the leading stocks can’t continue to move higher.
Lastly, there are many pundits who try to time the markets or call market tops. This year we saw Emerging Market equities drop in January/February and U.S. Growth stocks correct in March/April. Emerging Markets are hitting new highs and US Growth stocks have recovered their lost ground. Last month, there was the seasonal trade to ‘sell in May and go away’. This adage did not prove true in 2014. Is a three month trade a legitimate reason to abandon one’s investment plan? Do the market seers or prognosticators mention when they will get back into the market or particular stock? Is their investment horizon the same as yours? If a fund manager is trading a market or a stock with a short-term trade of only a few weeks in mind, should an investor with a longer term time horizon be listening to this advice?
There are times to trade or take some profits on a position, for example, if the weighting in a portfolio is too big. However, sticking to one’s investment plan, rebalancing at regular intervals and suppressing the urge to time the market is often the best route to LONG TERM investment success.
The following link, which alludes to Warren Buffet’s Berkshire Hathaway stock, is a great reference to the effectiveness of timing the market correctly, or not.
Fed Policy Monitor- Fed keeps tapering its asset-purchase program
The Fed maintained its stance with regards to tapering of its asset purchases by another $10 bn/month, i.e. it will now buy Treasuries at a pace of US$20 bn/month and MBS at a pace of $15 bn/month starting July. The FOMC also left intact its forward guidance with regards to the fed funds rate: “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” The FOMC remains of the view that it will likely be appropriate to maintain the current target range for the federal funds rate for a considerable time after QE ends. The decision was unanimous for the second consecutive meeting.
JMRD Basket Corner
Enerplus (ERF) – Enerplus provided a thorough asset overview in its Williston Basin Investor Presentation in Calgary on June 18. Overall it reinforced our view that the Fort Berthold, North Dakota core area is a top tier oil asset and the company has additional running room in the Bakken / Three Forks core area increasing its drilling inventory to 329 locations (from 145 previously). Additionally, the company announced a 250% increase to its net contingent resource estimate to 136 mmboe (from 39 mmboe). NBF analyst Kyle Preston believes that re-rate is warranted and recommend investors accumulate the stock given its sustainable dividend and attractive valuation in the midcap yield space. ERF traded to a new 52-week high following the news release.
Bellatrix (BXE) – An intermediate producer fast-tracks its drilling program through joint-ventures: http://www.albertaoilmagazine.com/2014/06/bellatrix-exploration/
Canyon (FRC) –Canyon announced they are buying a private-company, Fraction Energy Services Ltd. The price is estimated at $101.7M and includes $93.3 mln equity (5.4 mln shares), $4.9 mln cash and assumption of $3.5 mln debt. Fraction generated $12.1 mln EBITDA in the five months ended May 2014. The deal is expected to close July 1, 2014, whereupon 25% of the shares issued will be freely tradable with 75% on graded three-year vesting. Fraction provides full-service frac fluid management systems including sourcing, logistics, containment and transfer. Canyon traded higher by 5% to a new 52-week high.
Walgreen (WAG) – WAG Could Top $100 if Inversion Happens: Walgreen (WAG) is near the top of the S&P 500 amid Barclays’ upgrade to overweight. The investment bank had essentially been bearish when looking at its prior $56 price target, which is now $92. The drugstore’s officials “appear to have begun to internalize the constructive criticisms of increasingly vocal shareholders. We believe the board is actively considering changes that could materially boost earnings and the stock price,” including cost cuts, capital returns and inversion. If the latter happens, Barclays says WAG could become a triple-digit stock.
1) “Living in retirement: why we worry about our grown children” (Globe and Mail)
2) “How much can you safely withdraw in retirement” (Globe and Mail)
Reads of the Week
Midyear checkup: Five questions to test your financial fitness – (Globe and Mail) –
“Enbridge plans next steps in wake of pipeline approval” (Globe and Mail)
“Russian $8.2 Trillion Oil Trove Locked Without U.S. Tech: Energy” (Bloomberg) Even as the decision to stop gas supplies to Ukraine aggravates tensions with the U.S. and Europe, Russia faces a dilemma: it still needs Exxon Mobil Corp. (XOM), Halliburton Co. (HAL) and BP Plc to maintain output from Soviet-era oil fields and develop Arctic and shale reserves.
“Business built on water heaters trading near six-year high” (The Globe and Mail)
“Gold Miners Feel Lucky in Search for Nevada Buried Riches” (Bloomberg) It’s not just gamblers, celebrity chefs and brides-to-be that find Nevada irresistible. About 400 miles north of the Las Vegas strip, the world’s two biggest gold producers are doing some prospecting too.