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Frank Mueller

Weekly Update – August 4, 2017

“The biggest problem is not to let people accept new ideas, but to let them forget the old ones” — John Maynard Keynes

TSX Rises, Jobs Growth Keeps Rate Hike Door Open

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,257.97, up 0.43%, or 66.01 points on Friday. The Friday closing number represents a 0.85% increase on last week’s finishing mark of 15,128.65.

Decreased energy shipments pulled Canadian exports down in June, further widening the trade gap; however, strong and sustained jobs growth is keeping the door open for further rate hikes in 2017. The export numbers, however, did weigh on the Loonie on the way to a close of 79.02 cents U.S., down .39 of a cent.

Gold futures dropped 1.1% to $1,254.5 per ounce, which weighed on Gold miners both north and south of the 49th.

Crude oil rose by 49 cents (USD) to close at $49.52 per barrel, although the data showed strong U.S. output and rising OPEC output which might usually lead to a drop in oil pricing.

Strong U.S. Jobs Report for July & Notes on Earnings Season

The non-farm payrolls number increased in July by 209,000 jobs, beating the street expectations of 183,000 jobs. In addition, the June jobs numbers were revised upward, from 222,000 jobs to 231,000 jobs.

U.S. unemployment dropped to 4.3%, although it should be noted that “unemployment” figures do not count employable people who are not actively looking, or who have been actively looking for over a year. Still, 4.3% is a respectable figure.

The potential knock-on effect of the strong jobs figures was felt as analysts increased the odds of a December rate hike from 46% to 50%. The Federal Reserve may also consider shrinking its $4.5 Trillion bond portfolio starting in September.

Although the S&P 500 is currently trading at 18 times expected earnings (the 10-year average is 14 times earnings), the strong earnings season has partially mitigated fears of over-valuation. The S&P 500 closed Friday at 2,476.83, a modest increase of 4.67 points, or 0.19%.

The Dow Jones Industrial Average (DJIA) rose above 22,000 for the first time ever on Wednesday, amidst hitting record highs for 8 straight days as of Friday. The DJIA closed Friday at 22,082.12.

Sources: Thomson Reuters DataStream, Globe Advisor

Frank Mueller

Weekly Update – July 28, 2017

“It’s easy to meet expenses – everywhere we go, there they are.” — Anonymous

TSX Flat (Again) as Rising Oil Offset by Financials, Energy and Consumer-Discretionary

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,128.65, a drop of 0.41% for the day. The Friday closing number is a small decrease compared to last week’s finish of 15,180.93. The Loonie was at 79.76 cents to the USD at time of market close. 9 of the 10 main index groups lost ground on Friday.

Fears of oil oversupply tend to wax and wane, and this week they waned. Consequently, Friday saw surge in oil prices, and U.S. crude finished at $49.71 (USD), its highest mark since May. The surge can be attributed not only to a recent demand run but also to potential signals that Saudi Arabia may reduce supply in August; finally, traders also felt some short-covering was at play as well.

S&P Earnings Season Continues

As earnings season continues, now just past the halfway mark, the S&P 500 was weighed down by negative investor reactions of some high-profile companies’ earnings reports. However, the Dow Jones Industrial Average (DJIA) was bolstered by some positive results.

So far, earnings season overall has been strong. In addition, data has shown the U.S. economy accelerated during Q2 on increased consumer spending and increasing business investment in equipment. The DJIA closed at 21,830.31, a modest increase of 33.76%, while the S&P 500 dropped 3.32 points to finish at 2,472.1. The NASDAQ dropped 7.51 points to 6,374.68.

Repeal of Affordable Care Act Fails, Investors Concerned About Tax Cut Agenda

In a stunning turn of events, the Republican-Majority Senate failed to win a simple majority vote to put into effect the so-called “Skinny Repeal” of the Affordable Care Act, dubbed “Obamacare”. It is unusual for a vote to be called without victory already assured, so this public defeat of the repeal was an embarrassing result for the Republicans.

The inability to follow through on what amounts to a 7-year long promise to repeal Obamacare has led investors to question President Trump’s ability to push through other major agendas, such as the Wall Street-friendly tax reform promise.

Naturally, this speculation acted as a counter to the promising Q2 economic data mentioned above.

OSFI Proposes a Conventional Mortgage “Stress-Test”

The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada, was established in 1987 with the task of ensuring a solvent Canadian financial system. They supervise and regulate federally regulated financial institutions as well as private pensions that are subject to federal oversight. “Federally regulated financial institutions” covers a broad base, including all banks in Canada, all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans.

In the face of increasing Canadian household indebtedness, inflated housing markets in Vancouver and Toronto (among others), increasing numbers of new uninsured mortgages (20% down payment or greater) and a higher number of uninsured mortgages coming in at or near the minimum of 20% down, and of course the current low-rate environment, the OFSI has proposed the introduction of a second “stress-test” qualifying rate. The first such stress-test was introduced last year and applied only to high-ratio (less than 20% down payment, thus requiring CMHC default creditor insurance) mortgages.

This month, the OFSI released a set of proposals to tighten the conventional mortgage market. With the new proposals, buyers with greater than 20% down will now have to qualify using a stress-test rate of 200 basis points (2%) higher than the going street rate offered by the lender. For example, a lender offering a 5-year fixed rate of 3.00% would mean that a prospective borrower would need to meet GDS and TDS servicing ratios using a stress-test rate of 5.00%.

We’ll have a more concrete break-down on the new regulations if they come to pass, but in the meantime, an educated guess could see a hypothetical timeline of something like this:

• Federal Government announces new stress-test for uninsured mortgages per above, to take effect on January 1, 2018 (again, purely hypothetical date here)
• Would-be buyers who know they cannot qualify under the new stress-test, but can qualify currently, will most likely flood the market to try to make a purchase prior to the new regulations taking effect
• As a result, a short-term spike in housing prices prior to the new regulations is highly possible
• After the regulations take effect, there would be a natural reduction in demand (due to the stress-test rate introduction). This could lead to a pullback in real estate pricing
• There is the potential of an influx of sellers prior to the new regulation, in anticipation of the demand-side changes outlined above

In reality, it’s anyone’s guess if the OFSI will follow through on their proposal to the Federal Government, and if they do, that doesn’t mean the above hypothetical scenario will play out exactly as we’ve outlined it, but there is certainly a non-zero chance that our hypothetical scenario plays out as-is.

Sources: Thomson Reuters, Globe Advisor

Frank Mueller

Weekly Update – July 21, 2017

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors” – Plato

TSX Flat, Loonie Rise Continues

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,180.93 on Friday, a small increase compared to last week’s finish of 15,174.81, although the TSX was down 83.71 points (0.55%) on the day. The Loonie was at 79.76 cents to the USD at time of market close.

Friday’s drop was broad-based, although the energy sector was particularly hard-hit as benchmark crude futures dropped $1.25 USD to close at $45.67.

Investors moved into Gold and U.S. Treasuries – traditionally seen as safe-haven assets – toward the end of the week. Gold jumped to $1,254.80 USD per ounce to end the week.

Wall Street Indices Remain Near Record Highs, Greenback Slumps

The U.S. Dollar sank to its lowest mark in over a year on Friday, as markets tried to make sense of President Trump’s domestic agenda and how he’ll handle another set of obstacles, including the latest collapse and death of the Obamacare “Repeal and Replace” Bill on the Senate floor.

The S&P 500, the Dow Jones Industrial Average (DJIA) and the NASDAQ all backtracked on Friday.

European Central Bank President Mario Draghi Comments on the Euro

On Thursday, the European Central Bank – headed by Mario Draghi – held their key rate at 0%. However, Draghi’s dovish comments did little to stop the Euro from rising to an 8-month high against the Pound Sterling and a 2-year high against the Greenback. Many analysts felt Draghi may try to talk down the currency, but this didn’t happen.

IG market analyst Joshua Mahony offered the following commentary: “It seems Mario Draghi lost some of his shine today, with markets largely ignoring the fact that the ECB governor failed to mention tapering, instead driving the euro higher despite his attempt to drive home a dovish tone.”

Indeed, if the Euro remains strong, the ECB’s target of 2% inflation may not be met.

European stocks dipped to end the week, affected by the Euro’s relative strength.

Links

CI Preferred Pricing Program – How Does It Work?

Sources: Globe Advisor, The Telegraph

Frank Mueller

CI Investments NEW Preferred Pricing Program – How Does It Work?

Many of our clients hold at least some CI funds, as CI has a stable of strong fund managers who have proven track records of sound fund management and good returns. Indeed, many of the CI funds that we recommend are top performers in their respective sectors.

We are happy to announce that CI is introducing a revamped Preferred Pricing program. Previously, in order to get set up with Preferred Pricing, eligible clients had to sign some documents to authorize the move their fund(s) into the reduced fee fund version(s). Eligible clients will receive a letter in the mail from FundEX about this.

Now, however, eligible clients will automatically have the reduced fee option triggered. Clients don’t need to do anything to receive this lower fee. Your statement will simply show the switch transaction on it.
For clients eligible for reduced pricing within their Non-Registered accounts, rest assured that this automatic switch will not trigger any taxable event and will not receive any other paperwork, such as fund fact documents, as the funds themselves won’t change.

CI is also rolling out an extended family account linking option which can be very beneficial and result in significant savings. Eligible family members who reside in the same address – and now even at different addresses! – can combine family assets for additional savings.

Should you have any questions about these changes, don’t hesitate to contact us at You First. We’re happy to let you know if you qualify for the automatic reduced pricing, as well as if your family qualifies for the family account linking.

Frank Mueller

Weekly Update – July 14, 2017

“Buying at regular intervals eliminates the risk of over-investing at a stock market peak” – Quentin Lumsden

TSX, Loonie Rise on Friday After Bank of Canada Rate Increase

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,174.81 on Friday, a rise of 39.81 points (0.76%) over Thursday’s close, on the back of utility and mining stocks. On the heels of the Bank of Canada Overnight Rate increase this week, the Canadian Dollar rose above 79 cents (USD), up from 76.81 cents at last Friday’s close. Interest rate-sensitive companies experienced losses during the last half of the week on the BoC news.

The BoC acknowledged stronger growth compared to expectations, and they forecast continued growth. In continued efforts to fight off expected inflation, the BoC is generally expected to raise the overnight rate one more time in 2017, and perhaps again in early-2018.
The BoC also hopes to temper the hot Canadian housing markets, particularly in Toronto and Vancouver, as home prices continue to detach themselves from income levels.
A more in-depth analysis of the BoC’s rate increase can be found here.

Dow Jones and S&P 500 Hit Record Highs

A second consecutive month of economic data in the U.S. has dropped expectations of additional rate hikes by the Federal Reserve. In particular, steady consumer prices and decreased retail sales numbers indicate lower-than-expected inflation.

As a result of this data, analysts dropped their expected chance of a December rate hike from 55% down to 48%. Fed Chair Janet Yellen said earlier this week that persistently low inflation could make future rate hikes more gradual.

This news helped buoy S&P 500 to record highs on Friday, and is now trading at 17.3 times forward earnings, above the long-term average of 15 times. The Dow Jones Industrial Average (DJIA) also touched a record high on Friday before dropping to end the day down 0.6%. As expected, U.S. banks experienced drags on their share prices. The NASDAQ rose 40.69 points to close at 6,315.12.

Some heavyweight companies – Bank of America, Goldman Sachs and Morgan Stanley – report their Q2 earnings results next week, and Michael Scanlon, Portfolio Manager at Manulife Asset Management, stated “The bar for earnings is higher this time around, especially after the phenomenal (profit) growth we saw in the first quarter. So companies that miss expectations or guide down will be overly punished”

Links

Bank of Canada Raises Overnight Rate

Sources: Globe Advisor, Fidelity Investments, Thomson Reuters Data

Frank Mueller

Weekly Update – May 19, 2017

“I’m in the business where I can’t ever say there’s no risk associated with someone” – James Comey

Toronto Stock Exchange (TSX) and Other Major Indices Rally to End the Week

The Toronto Stock Exchange’s S&P/TSX composite index rallied to gain 181.3 points on Friday, good for a 1.19% increase, pushed higher by energy and financials, to close out the week at 15,458.46. 9 of the 10 main sectors on the TSX rose on Friday. The energy sector rose by 3.25%. The Loonie jumped by half a cent to finish the week at 73.97 cents US, due partially to the annual inflation rate of 1.6% holding steady throughout April. Gold rose to finish at $1,253.87 per ounce.

The rally followed Wednesday’s dismal performance, as investors worried about the leaked Comey memos from his meeting with Trump in February. Indeed, Wednesday was the worst day for the TSX in 8 months.

South of the 49th parallel, the Dow Jones Industrial Average finished the week at 20,804.84 after a Friday that saw a rise of 141.82 points (0.69%). The S&P500 and NASDAQ also posted gains on Friday, although – like the TSX – all 3 indices were down for the week on the heels of the leaked James Comey memos. The U.S. Dollar lost ground against its counterparts this week, also thanks to the Comey memos. The Greenback lost 0.75% on Friday alone, and over 2% for the week.

Reverberations from Comey Firing Carry into this Week

All eyes are on the White House it seems, with new information coming to light almost hourly. This added attention on the political forum led to some steep drops mid-week, before markets rallied on Thursday and Friday. Looking forward, it doesn’t appear that this story is going anywhere. Democrats and now even some Republicans have uttered the dreaded “I-word” (Impeachment), not yet 5 months into Trump’s presidency.

One thing markets don’t like is uncertainty. With the uncertainty surrounding the White House, there is bound to be some market volatility in the near-future, as more information is dug up.

You can read a more in-depth analysis of our short- and long-term market outlook in our blog “Will Donald Trump Get Impeached?”. The link is at the bottom of this page.

Sources: Globe Advisor

Links

Will Donald Trump Get Impeached?