**November 8th Issue of The Market Observer**
In This Week’s Market Observer…
• JMRD Market Strategy Comment • Year-end Tax Tips • JMRD All-Cap Growth Basket update • Asset Allocation Strategy November 2013 • Retirement Corner • Week at a Glance • Reads of the week • Economic Calendar • Earnings Reports
JMRD Strategy Comments
It was an interesting week for the financial markets with some good days and some bad days – it was truly risk-on one day and risk-off the next. In general, the trend of the market is still upwards but there is a daily tug of war between investors believing the economy will strengthen and force the US authorities to allow interest rates to increase and others who see economic weakness and lower interest rates for longer. Both of these outcomes can be good for equities in the long run but can cause short term volatility as large investors change their positions. Our view is that this trend will continue until early in the New Year and we are relatively optimistic overall with an eye towards realizing some of the gains that have been seen over the past two months. It seems there is never a dull day in the markets and it makes our daily duties fascinating.
Year-end Tax Tips
As we head into the month of November, it is time to start reviewing your tax situation. Whether it’s harvesting capital losses to offset realized capital gains or splitting income with a spouse, we have provided some suggestions for you as you begin your year-end tax planning.
One question we have been asked a lot lately pertains to being employed and earning income in your age 71 year. If you have “earned income” in 2013 (income from employment, self-employment or net rental income); are converting your RRSP by the end of the year to a Registered Retirement Income Fund (“RRIF”), instead of collapsing it or buying an annuity with the proceeds, and do not want to lose your 2013 contribution room forever, then consider making one last contribution to your RRSP in December.
You won’t be able to do so come 2014 because the RRSP will be gone, replaced by your RRIF, to which contributions cannot be made. By the end of 2014, you must instead withdraw at least your minimum amount and declare it as income. After all those deductions for your payments in, it’s time to pay CRA when you’re forced to take the money out.
This “advance contribution” in December will put you offside with Canada Revenue Agency if you have already made a contribution before March 1, 2013 based on your earned income for the prior year of 2012. But do not fear. Pay your penalty of 1% of the advance contribution for the month of December and smile all the way to the bank when you file your tax return. You will have a hefty deduction because the penalty disappears when your RRSP does.
Another scenario is that if you have already converted your RRSP to a RRIF and also have earned income as per above, there is a way to shelter some income if your spouse is under 71 years of age. You can contribute money to a spousal RSP which will lower your tax liability from your employment and RRIF income. When your spouse converts his/her RSP to a RRIF, there is no attribution of income back to you if only the minimum RRIF payment is taken.
We have attached more helpful tax tips below and have also provided the key dates in 2013 to keep in mind for tax loss selling.
If you have any questions on the preceding points or anything that is included in the Year-end Tax Strategies attachment, please contact your tax advisor.
- Last day for Tax Loss selling of Canadian Equities – Tuesday December 24, 2013
- Last day for Tax Loss selling of U.S. Equities – Thursday December 26, 2013 (Canadian Markets closed December 26)
Taking advantage of tax-loss selling http://www.marketwatch.com/story/how-to-cash-in-on-year-end-selling-2013-11-01
- 2013 TFSA contribution deadline – Monday December 31, 2013 – contribution limit $5,500.00
Note, if you are planning a TFSA withdrawal in early 2014, consider withdrawing the funds by December 31, 2013. The advantage is that you will not have to wait until 2015 to re-contribute that amount. 2014 TFSA contribution limit is $5,500.00.
- 2013 RSP contribution deadline – Monday March 3, 2014. The 2013 maximum RRSP contribution limit is 18% of “earned income” in 2012, to an annual maximum $23,820.
ETF Trade Ideas: Tax Loss Strategy Using ETFs
As year-end approaches with the market up 10.29%, we again identify this year’s tax loss sell candidates •94 out of the Composite’s 239 stocks had negative price returns, with 79 having more than a 5% decline •These stocks with a greater than 5% decline represent potential tax loss sell candidates •For a subset of these stocks where possible we identify the best ETF to provide an approximate exposure
Related: How to cash in on year-end selling: Taking advantage of tax-loss selling http://www.marketwatch.com/story/how-to-cash-in-on-year-end-selling-2013-11-01
Asset Allocation Strategy – November 2013
Monthly review Stock markets around the globe enjoyed a hefty rebound in October reflecting a change in market expectations for future monetary policy in the USA, the nomination of Janet Yellen at the head of the Fed, and a partial resolution of the debt ceiling debate. Emerging markets led the pack with a 4.9%-gain in US dollar terms, just a tad above the S&P 500 (+4.6%). Canadian equities gained 4.7% during the month, but the 1.2%-fall in the loonie leaves the TSX somewhat short of the month’s leading performance in US dollar terms.
After rising in the first half of October due to the uncertainty linked to a possible default on U.S. government debt, 10-year treasury yields fell in the second half of the month to a low of close to 2.5%.
Asset allocation strategy As the Fed continues to keep its excess liquidity backdrop in place and since we expect growth to accelerate in 2014, we remain overweight equities with both the short and long term in mind, with a preference for developed markets over emerging markets. We are reducing our emerging markets weighting to neutral and raising exposure to EAFE equities to an overweight position.
In the short-run, our approach is to adopt a more defensive equity stance by rotating from early cyclical to counter cyclical sectors. Our preferred sectors remain consumption stocks (both staples and discretionary). Financials remain a favorite in the long-run, but should be underweighted until the Fed signals anew its intention to taper its bond purchases program.
A softening of growth in emerging market, combined with declining commodity prices, doesn’t bode well for Canadian equities on a relative basis. Moreover, the fall in commodity prices and a more dovish stance on the part of the Bank of Canada should exert downward pressure on the loonie which could result in foreign capital outflows.
JMRD All-Cap Growth Basket Update
This week’s introduction of the JMRD All-Cap Growth Basket continues with AutoCanada (ACQ) and Badger Daylighting (BAD). AutoCanada Inc., through its subsidiaries, operates franchised automobile dealerships in Canada. The company offers various automotive products and services, such as new and used vehicles, vehicle parts, vehicle maintenance and collision repair services, vehicle protection products, and other after-market products. It sells various new vehicle brands, including Chrysler, Dodge, Jeep, Ram, Fiat, Chevrolet, GMC, Buick, Hyundai, Nissan, Infiniti, Volkswagen, Mitsubishi, and Subaru. The company also arranges financing for customers through third-party financial institutions, as well as facilitates the sale of third party insurance products to customers comprising credit and life insurance policies, and extended service contracts. As of March 26, 2013, it operated 28 franchised dealerships in British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Nova Scotia. AutoCanada Inc. is headquartered in Edmonton, Canada. The company reported Q3 results this week that included a 5% dividend increase, the eleventh consecutive quarter the company has increased the dividend. The shares traded up 8% to a new year as they also announced they have added 11 dealerships.
Badger Daylighting Ltd., together with its subsidiaries, provides non-destructive excavating services for contractors and facility owners in the utility, transportation, industrial, engineering, construction, and petroleum industries in Canada and the United States. Its Badger Hydrovac technology uses a pressurized water stream to liquefy the soil cover, which is then removed with a vacuum excavation system and deposited into a storage tank. The company offers daylighting and potholing services for visual confirmation of buried lines, service and splice pits, directional drilling test holes, cathodic anode installation, pipeline and utility crossings, and subsurface utility engineering; slot trenching services for pipeline tie-ins, investigative slot trenching, installation slot trenching, drain tile trenching, and line fault repairs; and debris removal and environmental restoration services for road and box culvert cleanouts, pipe-rammed casing cleanouts, and material removal from inside structures and buildings. It also provides maintenance and installation service pit excavation services for water meter pits, communication industry, maintenance pits, installation service pits, and service pits for line fault repairs and tie-ins. In addition, the company offers pole and piling hole excavation services for utility poles, traffic signals, light standards, and sign posts; pole removals and replacements; end-bearing piles; pilot holes for friction piles; spread footing piles; and well monitor installations, as well as engages in the design, engineering, and supply of excavation shoring systems to ensure safe access to buried infrastructure. As of December 31, 2012, it operated a fleet of 630 Badger Hydrovacs comprising 307 units in Canada and 323 units in the United States. The company was incorporated in 2010 and is headquartered in Calgary, Canada.
Reads of the week
NBF Hot Charts
Canada: Oil spreads widening . for now: As we had pointed out in November’s edition of Forex, the throne speech gave more reasons to be optimistic about a deal on pipeline projects in Canada. Today, the British Columbia and Alberta governments finally announced “a framework agreement between the two provinces on moving energy resources to new markets”. That’s good news for Canada. True, there is still work to be done to satisfy various stakeholders, and benefits won’t accrue immediately to energy exporters given that it will take time before the infrastructure is built. But the message to international investors is a powerful one — Canada will eventually have the ability to diversify its oil exports away from the US, and hence get a “world price” for its products. Recall the shortage of pipeline capacity has cost our oil exporters dearly as they have been forced to accept rock bottom prices at the US border, as evidenced by large oil spreads for WCS relative to other blends. The agreement between the two Western provinces is a long-term positive for the Canadian economy and its currency, not only because it will reduce the spreads, but also because it makes foreign direct investment into the oil sands more likely. This reinforces our view that the Canadian dollar, after suffering from some near term headwinds, has potential to return to stronger than parity with the greenback by the end of next year.
Monday November 11th – REMEMBRANCE DAY
Tuesday November 12th – None
Wednesday November 13th – Canada Teranet/National Bank Home Price Index; US Monthly Budget Statement
Thursday November 14th – Canada New Home Price Index; US Initial Jobless Claims
Friday November 15th – Canada Existing Home Sales, Canada Manufacturing Sales; US Empire Manufacturing Index, US Industrial Production
Monday November 11th – Legacy Oil and Gas
Tuesday November 12th – Allied Properties, Shoppers Drugmart,
Wednesday November 13th – Loblaw, Element Financial, Rona, Aimia, Cisco
Thursday November 14th – Alaris Royalty, Algonquin Power, CGI Group, Power Corp, Applied Materials, Walmart,
Friday November 15th – Onex Corp