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Monthly Archives: September 2017

Frank Mueller

Weekly Update – September 29, 2017

“Only when the tide goes out do you discover who’s been swimming naked” – Warren Buffett

TSX Hits 4-Month High, Now Positive for the Year

The Toronto Stock Exchange’s S&P/TSX composite index gained 16.69 points (0.11%) on the day to close at 15,634.94. The TSX gained 180.71 points this week (1.17%) over last Friday’s close of 15,454.23. In the process, the TSX rose to a 4-month high. 7 of the TSX’s main sectors were up on the day.

September saw the TSX gain nearly 3%.

The Loonie dropped to 80.14 cents to the U.S. Dollar, as the Canadian economy was flat for July, ending an 8-month streak of growth. After surpassing the 82-cent mark, the Loonie has started to pull back somewhat; indeed, the July economic numbers weighed on our Dollar.

U.S. Markets Continue to Sizzle

The S&P 500 and the NASDAQ both hit record highs (again) on Friday. Year-to-date returns in the U.S. have been stellar, with the NASDAQ up over 20%, the Dow Jones Industrial Average up 13.37%, and the S&P 500 up a touch over 12.5%. The Technology sector was the top S&P 500 sector – this is not a recording.

However, as mentioned in Anthony’s Year-To-Date Market Recap, Canadian investors have not felt the full impact of these gains due to the rising Canadian Dollar (up 7.83% YTD).

For the month, the S&P 500 posted a 1.9% gain, the DJIA jumped 2.1%, and the NASDAQ increased by 1.05%.

Weekly Market Wrap-Up

North America

The TSX closed at 15635, up 181 points or 1.17% over the past week. YTD the TSX is up 2.34%.
The DOW closed at 22406, up 56 points or 0.25% over the past week. YTD the DOW is up 13.37%.
The S&P closed at 2519, up 17 points or 0.68% over the past week. YTD the S&P is up 12.51%.
The Nasdaq closed at 6496, up 69 points or 1.07% over the past week. YTD the Nasdaq is up 20.68%.
Gold closed at 1282, down -23.00 points or -1.46% over the past week. YTD gold is up 12.65%.
Oil closed at 51.58, up 0.92 points or 1.82% over the past week. YTD oil is down 1.23%.
The USD/CAD closed at 0.8, down -0.0100 points or -1.23% over the past week. YTD the USD/CAD is up 7.83%.

Europe/Asia

The MSCI closed at 1992, up 2 points or 0.10% over the past week. YTD the MSCI is up 13.63%.
The Euro Stoxx 50 closed at 3595, up 54 points or 1.52% over the past week. YTD the Euro Stoxx 50 is up 9.24%.
The FTSE closed at 7373, up 62 points or 0.85% over the past week. YTD the FTSE is up 3.22%.
The CAC closed at 5330, up 49 points or 0.93% over the past week. YTD the CAC is up 9.63%.
DAX closed at 12829, up 237.00 points or 1.88% over the past week. YTD DAX is up 11.74%.
Nikkei closed at 20356, up 59.00 points or 0.29% over the past week. YTD Nikkei is up 6.50%.
The Shanghai closed at 3349, down -4.0000 points or -0.12% over the past week. YTD the Shanghai is up 7.89%.

Fixed Income

The 10-Yr Bond closed at 2.33, up 0.0700 points or 3.10% over the past week. YTD the 10-Yr Bond is down 4.90%.

Sources: Globe Advisor, Dynamic Funds

Frank Mueller

Weekly Update – September 22, 2017

“The stock market demands conviction; it victimizes the unconvinced” – Peter Lynch

TSX Flat to Finish the Week, But Gains 1.25% Overall

The Toronto Stock Exchange’s S&P/TSX composite index finished with a drop of 0.69 points on the day, settling at 15,454.23. For the week, the TSX rose by 281.20 points (1.85%), and hit a 14-week high in doing so. 7 of the 10 main index sectors were up on the day.

The TSX concluded the week on Friday with a 0.31-point rise to settle at 15,173.03. This finish represents a rise of 1.25% over last week’s finish at 14,985.32. Declines in energy and utilities weighed on the TSX, while the consumer discretionary/staples sector gained on the day.

The Loonie barely moved vs the Greenback on Friday, and sat at 81.10 cents USD as of 2:45pm PST, off by about a cent compared to last Friday’s finish of 82.08 cents.

Light, Sweet Crude Oil Barrel futures finished the week above $50 at $50.66 per barrel.

Gold again dropped this week – off $23.00 USD on the week – to finish the week at $1,300.50 USD, as investors eased away from the safe-haven asset.

U.S. Federal Intends to Reduce Balance Sheet, Signals Rate Hike to Close Out 2017

The U.S. Federal Reserve announced its intention to reduce its balance sheet of ≈ $4.2 Trillion (USD) in U.S. Treasury bonds and mortgage-backed securities. Fed Chair Janet Yellen also signaled a rate hike before the end of 2017.

The market pegs the odds of a December rate hike at about 70%. Prior to the Federal Reserve meeting earlier this week, the odds of a December rate hike sat at 51%, according to investors.

The Federal Reserve offered no answers for the inflation decrease this year, and Michael Dowdall – investment strategist at BMO Global Asset Management – offered that “Clearly, the Fed doesn’t have answers on the 2017 low inflation weakness, but they’re still very sensitive to falling behind the curve so they want to stay in front of the inflation curve.”

On the heels of the Fed announcement to hold rates and reduce the balance sheet, valuations spiked. The S&P 500 was trading at 17.6 times expected earnings as of end-of-day Thursday; comparatively, the S&P 500’s 10-year average is 14.3 times expected earnings.

Sources: Globe Advisor, Advisor.ca

Frank Mueller

Trade Settlement Shortened to Two Days

Effective September 5, 2017, the financial industry in Canada and the U.S. has reduced the trade settlement cycle for purchases and redemptions from three business days (“T+3”) to two business days (“T+2”) after the trade date (“T”).

This change stems from a global trend in shortening investment settlement dates. Markets in the European Union and Asia/Pacific have already moved to T+2 settlement.

For example, if we put through a redemption on Monday, the investment company will transfer the proceeds to your bank account on Wednesday. You should have the funds on Wednesday, but some banks have their own processing windows causing delays of 1-2 days.

Money-market fund transactions, which are subject to T+1 regulations, are not affected by this change. If you redeem from a money market fund on Monday, the trade will settle and the funds should be in our account on Tuesday.

Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).

Anthony Sabti

2017 Market Recap – A Tale of Two S&P 500s

Most capital markets around the world registered impressive gains early in the second quarter before moderating in June, reflecting steady global economic growth and supportive business conditions. Unfortunately for Canadian investors, two Bank of Canada rate increases negatively impacted global returns, as the Canadian dollar appreciated relative to global currencies.

This has resulted in global stock market indices like the S&P 500 or Dow Jones Industrial Average (DJIA) having vastly different returns in U.S. dollars compared to Canadian dollars. As of September 1, the S&P 500 Index, a broad measure of U.S. large-cap equity performance, is up 10.6% for the year in U.S. dollar terms; however, when adjusting for the appreciation of the Canadian dollar relative to the U.S. dollar, the S&P 500 is up only 2%.

The same goes for the MSCI World, a global index that represents large and mid-cap equity performance across 23 developed market countries.  It is up 12.3% year-to-date in local currency terms, but only 3.5% in Canadian dollars.

For a simple example, imagine taking $1,000 Canadian and converting it to U.S. dollars (USD) when the exchange rate is at 75 cents, resulting in $750 USD. Let’s say the $750 USD is invested in an equity, which then increases by 10% to $825. The $825 U.S. is converted back to Canadian dollars when the exchange rate is at 82 cents (the inverse of which would be 1.22 Canadian). The $825 thus becomes $1,006 Canadian. The 10% made on the equity is effectively erased by the increase in value of the Canadian currency. This is exactly what is happening with global equity funds right now, unless the managers have taken measures to hedge against currency movement.

The Canadian equity market noticeably lagged many other developed market indexes, despite strong economic output and employment data. The S&P/TSX Composite Index is down 0.6% for the year, based on softening oil prices, weaker financial shares and investor sentiment that was dampened by trade-related issues with the U.S.

Global fixed-income markets, meanwhile, prepared for the gradual end of ultra-low interest rates. As anticipated, the U.S. Federal Reserve Board raised its overnight lending rate by 25 basis-points in mid-June, the second such increase in 2017. The Bank of Canada has also raised rates twice, on July 12th and September 6th. An interest rate increase usually leads to declines in bond prices. The FTSE TMX Canadian Bond Index is up only 1.5% for the year.

What does this mean for you?

With a long-term perspective at mind: with higher interest rates, you can purchase fixed-income investments at a higher yield, and earn a higher return. With the Canadian dollar rally, you can buy global assets at cheaper prices. Any pullback in the Canadian dollar will boost Global equity returns.

Where do we go from here?  Key points to remember:

Global economy is still very strong, and the Canadian economy is expected to moderate

  • Central banks around the world, including the Bank of Canada, are moving from emergency levels to neutral levels. There could be two more interest rate increases in the next year
  • Despite the increases, long term interest rates are still expected to remain “lower for longer
  • Corporate health in equities remains very healthy and earnings growth is robust.

Market Table (as of September 1st, 2017)

Market Level YTD YTD C$
TSX Composite (Canada) 15,192 Down 0.6% Down 0.6%
S&P 500 (U.S.) 2,477 Up 10.6% Up 2.0%
Dow Jones (U.S.) 21,988 Up 11.3% Up 2.6%
DAX (Germany) 12,143 Up 6.0% Up 10.3%
FTSE (U.K) 7,439 Up 4.1% Up 0.9%
MSCI EAFE (Europe & Asia) 1,938 Up 15.1% Up 6.1%
MSCI World 1,966 Up 12.3% Up 3.5%
MSCI Emerging 1,091 Up 26.6% Up 16.7%
FTSE Canadian Universe Bond 1,027 Up 1.5% Up 1.5%
Anthony Sabti

Big Changes Coming for Incorporated Professionals

On July 18, 2017, Federal Finance Minister Bill Morneau released a consultation paper on proposed private corporation tax measures. These measures are designed to close tax advantages used by Canadians who use private corporations for income sprinkling, accumulating passive investment income and converting income into capital gains.

Most of the proposed changes are anticipated to be implemented on a go forward basis, effective for 2018. Many businesses will need to review their corporate and compensation structures and consider planning for changes to be in effect for 2018.

Which practices is the government focusing on?

1. Income-Splitting Using Private Corporations

Perceived Benefit: Shifting income that would otherwise be realized by a high-income individual to family members (usually a spouse) who are subject to lower personal tax rates (e.g., via dividends or multiplication of the lifetime capital gains exemption (LCGE)).

Proposed Measure: Extend the existing “tax on split income” rules that previously applied to minors (“kiddie tax”) to certain adult individuals. The change would effectively impose a tax at the top personal rate on dividends paid to any related individual who provide no labor or capital contributions to the business.

Reasonable payments made to related parties who do help in the business would not be affected by this change.

In addition, a related individual would no longer qualify for the LCGE in respect of capital gains that are realized, or that accrue, before the taxation year in which the individual attains the age of 18 years. Also, there will be restrictions on using the LCGE for gains accruing through family trusts.

2. Holding a Passive Investment Portfolio Inside a Private Corporation

Perceived Benefit: Corporate income tax rates, which are generally much lower than personal rates, may facilitate the accumulation of earnings that can be invested in a passive portfolio, providing the owner with a significant tax deferral advantage.

Proposed Measure: The government is considering changes such that investments held within corporations are taxed at the same effective rate as investments held directly. According to the government, the tax advantage conferred on private corporations – the lower rate of tax –was never intended to be used to realize higher personal savings.

What are the Next Steps?

No decision, consultation only: Until October 2, 2017, the government will accept submissions and comments from Canadians. Those interested in having their say should submit their comments to email hidden; JavaScript is required