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Frank Mueller

Weekly Update – October 13, 2017

“Try not to become a (wo)man of success. Rather become a (wo)man of value” – Albert Einstein

TSX Hits 7-1/2-Month High on Rising Commodity Prices

The Toronto Stock Exchange’s S&P/TSX composite index rose by 64.97 points (0.41%) on the day to close at 15,807.17. This represents a gain of 78.85 points (0.50%) over last week’s 15,728.32 finish.

Gains were driven primarily by commodities & resources, with helpful assists from telecoms & financials.

Gold rose by about $20 USD per ounce week-over-week, boosted by a Friday gain of $9.60 per ounce, to finish the week at $1,306.10 per ounce.

Encouraging Chinese import data, as well as tensions in the Middle East – and President Trump’s ominous tones regarding the Iran Nuclear Deal – all played a part in driving oil prices. Brent crude jumped nearly a dollar per barrel to settle at $57.17 (USD) per barrel.

The Loonie rose 27 basis-points for the week, rising from an even 80 cents (USD) to 80.27 cents.

NASDAQ Hits Another Record High; S&P 500 and Dow Jones Industrial Average All Gain on the Week

NASDAQ struck another record high on Friday, as technology sector shares experienced healthy gains. Settling at 6,605.80, the NASDAQ saw a weekly increase of 0.24%.

The S&P 500 and the Dow Jones Industrial Average also enjoyed gains week-over-week, with 0.15% and 0.43% jumps, respectively. The S&P 500 finished Friday up 2.24 points (0.09%) at 2,553.17; meanwhile, the Dow Jones Industrial Average rose by 30.71 points (0.13%) to settle at 22,871.72.

Retail sales numbers for September experienced their highest jump in nearly 3 years, helping push indices higher. Residual demand for consumer goods on the heels of Hurricane’s Harvey and Irma also pushed prices higher, helping markets.

Sources: Globe Advisor

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

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

Frank Mueller

Weekly Update – September 8, 2017

“Every day is a good day to be alive, whether the sun’s shining or not” – Marty Robbins

Bank of Canada Raises Overnight Rate to 1.00%, TSX Drops for Fifth Straight Day

The Toronto Stock Exchange’s S&P/TSX composite index continued its retreat on Friday. On the day, the TSX finished down 39.21 points (0.26%), dipping below 15,000 in the process to settle at 14,985.32. 6 of the 10 main index sectors dropped for the day.

For the week, the TSX was down 207 points, or 1.36%, from last week’s finish of 15,191.60.

The week’s big news came on the Bank of Canada announcement to raise the overnight rate by 25 basis points to 1.00%. You can read a bit more about the announcement here.

The announcement – as expected – pushed the Loonie higher against the Greenback, finishing the week at an even 82 cents, up 1.32 cents (1.63%) for the week. The Loonie is now at its highest mark against the US Dollar since May 2015.

Gold finished higher this week, as investors move to safe haven assets, rising to $1,351 (USD) per ounce.

Hurricane Irma Threatens Southern States, Geopolitical Concerns Add to Worries

On the heels of Tropical Storm Harvey comes Hurricane Irma, expected to hit Florida on Sunday. Irma is one of the most powerful Atlantic storms (if not THE most powerful) in over a century. Investors are taking caution, as Irma’s damage and destruction could be catastrophic.

The S&P 500 ended lower on Friday; however, the Dow Jones Industrial Average (DJIA) managed to finish in positive territory, with a modest 13.01 point (0.06%) gain. The NASDAQ was down 37.68 points, or 0.59%.

North Korea tested another nuclear missile this week, their 6th such test. South Korea is bracing for another possible missile test on Saturday. This situation, coupled with the repeated storms hitting the U.S., to say nothing of the intense flooding and storms in Southeastern Asia, has pushed concerns onto the trading floor. Many major markets across the world finished down for the week.

Major Markets Year-To-Date (YTD)

North America
The TSX closed at 14985, down -207 points or -1.36% over the past week. YTD the TSX is down -1.91%.
The DOW closed at 21798, down -190 points or -0.86% over the past week. YTD the DOW is up 10.30%.
The S&P closed at 2461, down -16 points or -0.65% over the past week. YTD the S&P is up 9.92%.
The Nasdaq closed at 6360, down -75 points or -1.17% over the past week. YTD the Nasdaq is up 18.15%.
Gold closed at 1351, up 23.00 points or 2.35% over the past week. YTD gold is up 18.72%.
Oil closed at 47.58, up 0.29 points or 0.61% over the past week. YTD oil is down -8.89%.
The USD/CAD closed at 0.8229, up 0.0147 points or 1.82% over the past week. YTD the USD/CAD is up 10.92%.

Europe/Asia
The MSCI closed at 1965, down -1 points or -0.05% over the past week. YTD the MSCI is up 12.09%.
The Euro Stoxx 50 closed at 3448, up 4 points or 0.12% over the past week. YTD the Euro Stoxx 50 is up 4.77%.
The FTSE closed at 7378, down -61 points or -0.82% over the past week. YTD the FTSE is up 3.29%.
The CAC closed at 5114, down -9 points or -0.18% over the past week. YTD the CAC is up 5.18%.
DAX closed at 12304, up 161.00 points or 1.33% over the past week. YTD DAX is up 7.17%.
Nikkei closed at 19275, down -417.00 points or -2.12% over the past week. YTD Nikkei is up 0.84%.
The Shanghai closed at 3365, down -2.0000 points or -0.06% over the past week. YTD the Shanghai is up 8.41%.

Fixed Income
The 10-Yr Bond closed at 2.06, down -0.1000 points or -4.63% over the past week. YTD the 10-Yr Bond is down -15.92%.

Sources: Dynamic Funds, Thomson Reuters DataStream, Globe Advisor, BNN, Advisor.ca