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Energy markets have been in turmoil since the OPEC announcement Wednesday last week that the group would not be cutting production. Although it was widely expected that OPEC would not take any production cuts at the meeting, the markets’ reaction to the actual announcement was drastic with oil prices declining 7% that day and continuing to slide to the now below $60. The tone of the market has shifted dramatically and there are talks about the possibility of $60-70ish oil for the next 6-9 months if not longer. The fundamental issue is that the oil market is oversupplied.

The vast majority of Energy sector experts’ comments this week indicate that OPEC will likely revisit its stance on production cuts over the next 6-9 months. “For many OPEC members, including Libya, Iraq, Algeria, and Venezuela, $60-70 oil poses a huge problem. The majority of OPEC countries need $90+ Brent oil prices in order to fund their social programs and are at high risk of social instability if these programs are cut. Even Saudi Arabia, which has significant foreign currency reserves to cover any shortfall in revenues has a huge population to support and high committed program costs which would eat through those reserves quickly at current oil prices (according to the IMF). “ wrote the BMO Energy sector team this week. (1)

“We continue to believe that the marginal cost of the majority of new oil production (full-cycle) is north of $80. Oil is a depleting resource and, over time, oil prices must migrate back to the marginal cost of supply in order to support new production. However, that does not mean that oil cannot trade below marginal cost for a period of time. We would expect that supply/demand fundamentals will improve through the back half of 2015 and become more balanced as we move into 2016. However, the oil market is complex and highly unpredictable and conditions can change very quickly. The imbalance in the market is not huge and history has taught us that supply disruptions are common. “ (1)

The Franklin Templeton Energy Sector team wrote a similar analysis this week. They too believe that low oil prices are not here to stay for the long term. “The marginal barrel-of-oil production growth cannot be profitably brought to market in the current oil price environment by private industry, nor can OPEC members balance their budgets, in our view necessitating higher prices in the future. In the short term, we may see various energy companies contend with low oil prices through a combination of reduced capital spending, asset dispositions and adjustments to dividend levels as necessary. “ (2)

To put things into perspective, from December 2nd to December 9^th, 2014, the TSX has dropped 2.9%; while for the same period our average client account has dropped 0.9% or less. So highly diversified managed funds are doing better now of course.  Even if the Canadian Market took a big hit, your portfolios would not.

Take a look at the recent results of different sectors. This clearly shows the benefit of diversification.

see the chart here

(1)BMO Energy Sector team Commentary Dec 7, 2014

(2)Franklin Templeton Bissett Energy Sector team Commentary Dec 10, 2014

Aah-eeh-ah-eeh-aaaaaah-eeh-ah-eeh-aaaaah! -Tarzan of The Apes

TSX  Down After Six Straight Weeks of Gains

On a day when Canada’s GDP figures showed better than expected growth for the economy the Toronto Stock Exchange should have been surging but energy stocks are once again under pressure. Statistics Canada reported that third-quarter gross domestic product ran ahead at an annualized pace of 2.8%. That was much higher than the 2.1% rise that economists had expected. Despite this otherwise great news the S&P/TSX composite index dropped 177.69 points to 14,744.75 after OPEC left its daily output unchanged despite a global glut in supplies rather than cut production to put a floor under prices that have fallen 35 per cent since mid-summer  because of a higher U.S. dollar, lower demand and most particularly, a glut of global supply.

U.S. indexes were little changed at the end of a shortened session, benefiting from lighter exposure to resource companies versus the TSX. The Dow Jones industrials gained 0.49 of a point to 17,828.24, the Nasdaq added 4.31 points to 4,791.63 while the S&P 500 index faded 5.27 points to 2,067.56.

Bank of Canada To Raise Rates In May Says OECD

The Organisation for Economic Co-operation and Development ECD forecasts the Bank of Canada will begin hiking its key interest rate in May 2015;  months ahead of what economists have been predicting. In its latest Economic Outlook, the Paris-based group says the central bank will eventually need to raise the currently low 1% to “counter inflationary pressures,” with the rate to rise steadily afterwards.

“Monetary policy has been highly accommodative for some time,” says the 236-page report. “Given the uncertainty surrounding the amount of economic slack, the Bank of Canada should maintain its current policy stance for the time being. But it will have to start to withdraw stimulus as remaining slack is progressively taken up.”  Most economists have been predicting the BoC won’t make a move on interest rates until at least late 2015. The bank has maintained its trend-setting rate at 1% for more than four years. The OECD also projects that Canada’s economy will grow by 2.6% next year, and 2.4% in 2016, largely driven by export demand from the U.S. economy.

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Market Update as of November 28 2014

The TSX closed at 14745, down -363 points or -2.40% over the past week. YTD the TSX is up 8.24%.

The DOW closed at 17828, up 18 points or 0.10% over the past week. YTD the DOW is up 7.55%.

The S&P closed at 2068, up 4 points or 0.19% over the past week. YTD the S&P is up 11.90%.

The Nasdaq closed at 4792, up 79 points or 1.68% over the past week. YTD the Nasdaq is up 14.72%.

Gold closed at 1176, down -24.00 points or -2.00% over the past week. YTD gold is down -2.33%.

Oil closed at 66.26, down -10.27 points or -13.42% over the past week. YTD oil is down -32.81%.

The USD/CAD closed at 1.142601, up 0.0188 points or 1.67% over the past week. YTD the USD/CAD is up 7.47%.

Sources: Bloomberg; Investment Executive; advisor.ca; Statistics Canada

Signs that major pillars of the global economy may be in better shape than thought along with strong earnings reports, sent North American stock markets sharply higher last week.

But analysts have warned there is no assurance that markets have reached bottom in the course of this correction and volatility will be a factor for a while yet.

“The market now is trying to settle at the new normal,” said Kash Pashootan, portfolio manager at First Avenue Advisory in Ottawa, a Raymond James company. And the new normal is one where valuations are not deeply discounted, they’re fairly valued and the new normal is one where there will be month-to-month volatility.”

A major reason for the decline on stock markets in September and October was worry about the state of the global economy and, more particularly, fears that the euro zone was about to slip back into recession.

As far as we are concerned, as long as we have a Balanced portfolio and own Quality, we can all weather this correction.

“Don’t Find Fault, Find A Remedy” -Henry Ford

TSX Ends Higher Friday On U.S. Data, Oil Prices

Canada’s main stock index reached its highest level in a week on Friday as positive U.S. economic data and a rise in oil prices boosted the energy sector. The TSX jumped 174.71 points to 14,227.68, as traders bought up stocks badly beaten down over the course of a string of market jolts. There was also speculation that the U.S. Federal Reserve might extend a key stimulus program.

Data showing that U.S. housing starts and permits rose in September signaled the economic recovery might be on track. Upbeat quarterly earnings from major U.S. banks fueled the positive sentiment further. Stock markets have been in a corrective phase over the past month, weighed on by worries over global economic growth, oil demand and the direction of U.S. Federal Reserve policy.

U.S. stocks climbed more than 1% on Friday, with the S&P 500 posting its biggest gain in over a week as earnings offset concerns about the impact of weak global demand on corporate America. The Dow Jones industrial average rose 263.1 points, or 1.63%, to 16,380.34, the S&P 500 gained 23.98 points, or 1.29%, to 1,886.74 and the Nasdaq Composite added 41.05 points, or 0.97%, to 4,258.44.

Canadians Are Paying Down Mortgages At a Fast Rate

Canadians are paying down their mortgages at a record rate, significantly lowering the risk of default should interest rates rise, finds a new report from CIBC World Markets. “Canadian households did not only resist the temptation of low rates, they used those low rates to pay down debt at a pace not seen before,” says Benjamin Tal, Deputy Chief Economist, CIBC. “Despite a lethargic labour market and an unemployment rate that is still too high for the Bank of Canada’s liking, debt service performance in Canada has almost never been better.”
Homeowners are taking advantage of prolonged low interest rates to pay off their mortgages by accelerating their principal payments. In effect, they are voluntarily shortening their amortization periods. As a result, Mr. Tal estimates the average amortization period in the Canadian mortgage market is now closer to 20 years rather than the implicit assumption of 25 years the Bank of Canada uses in its calculations. Instead of spending their disposable income, Canadians are making sacrifices, choosing to make extra payments on their mortgage to get out of debt faster. This ultimately makes Canada’s mortgage market more stable because in the event of a rate hike, homeowners would simply return to their regular amortization period, he says.
“Canadian households are paying back an additional $11 billion a year in principal that’s not being officially recognized,” says Mr. Tal. “That extra cushion is sufficient to absorb the first 100 basis point increase in the effective mortgage rate, with households simply re-amortizing to offset the payment increase.”

Market Update As of October 17 2014

The TSX closed at 14228, up 1 points or 0.01% over the past week. YTD the TSX is up 4.45%.

The DOW closed at 16380, down -164 points or -0.99% over the past week. YTD the DOW is down -1.19%.

The S&P closed at 1887, down -19 points or -1.00% over the past week. YTD the S&P is up 2.11%.

The Nasdaq closed at 4258, down -18 points or -0.42% over the past week. YTD the Nasdaq is up 1.94%.

Gold closed at 1239, up 16.00 points or 1.31% over the past week. YTD gold is up 2.91%.

Oil closed at 82.96, down -2.57 points or -3.00% over the past week. YTD oil is down -15.87%.

The USD/CAD closed at 1.127825, up 0.0067 points or 0.60% over the past week. YTD the USD/CAD is up 6.08%.

Sources: Bloomberg; CIBC; Investment Executive; advisor.ca

“I’m Drove Off Me Head!” -Newfoundland Expression

Stocks Ahead On Strong U.S. Employment Data

The Toronto stock market closed with a modest gain Friday even as a rebound in American job creation boosted confidence in the U.S. economy. The S&P/TSX composite index gained 29.14 points to 14,789.78 after the U.S. Labor Department reported that the American economy created 248,000 jobs last month, which handily beat expectations of about 215,000.  The U.S. jobless rate also ticked down 0.2 of a point to 5.9 per cent, the lowest level since July 2008. August job creation was revised upward to 180,000 from 142,000.  Toronto gains were held back by lower resource stocks as the strong U.S. dollar continued to punish commodity prices. Gold miners fell as bullion closed under $1,200 (U.S.) – its lowest close since February 2010. U.S. indexes registered solid gains with the Dow Jones industrials ahead 208.64 points to 17,009.69, the Nasdaq gained 45.42 points to 4,475.62 and the S&P 500 index climbed 21.73 points to 1,967.9. A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals which are dollar-denominated.  Losses were severe on the TSX this week because the Toronto market is heavily weighted by the resource sector. It fell 237 points or 1.6 per cent.

Federal Deficit To Be Smaller Than Earlier Projected

Prime Minister Stephen Harper says last year’s federal deficit will be more than $10 billion smaller than forecast, but he’s refusing to predict the rapidly improving bottom line will mean balanced books this fiscal year. Harper dropped the new, $5.2 billion deficit figure for 2013-14 — down from the $16.6 billion shortfall projected in last February’s federal budget — during a presentation to a business audience last week in Brampton, Ont. Harper insisted there won’t be a surplus until the 2015-16 election year. “The government has no plan or no intention to move this year into a surplus,” Harper said.

Downplaying the Conservative government’s fiscal position may be more about politics than bookkeeping. Economists and budget watchers, including the independent Parliamentary Budget Office, had calculated Ottawa may already be en route to a surplus this fiscal year, which ends next March 31, before the prime minister’s announcement further improved the bottom line.  A surplus would trigger a series of 2011 Conservative election promises that were contingent on balanced books, including a pricey and controversial plan to allow income splitting for tax purposes by couples with children under 18. Doubling the annual Tax Free Savings Account maximum to $10,000, doubling the children’s fitness tax credit and implementing a new adult fitness tax credit were also Conservative pledges tied to a surplus.

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Hold On  To Your Hat, We May Be Having A Market Correction

Market Update As Of October 3 2014

The TSX closed at 14790, down -237 points or -1.58% over the past week. YTD the TSX is up 8.57%.

The DOW closed at 17010, down -103 points or -0.60% over the past week. YTD the DOW is up 2.61%.

The S&P closed at 1968, down -15 points or -0.76% over the past week. YTD the S&P is up 6.49%.

The Nasdaq closed at 4476,  -36 points or -0.80% over the past week. YTD the Nasdaq is up 7.16%.

Gold closed at 1195, down -23.00 points or -1.89% over the past week. YTD gold is down -0.75%.

Oil closed at 87.94, down -3.98 points or -4.33% over the past week. YTD oil is down -10.82%.

The USD/CAD closed at 1.125678, up 0.0102 points or 0.92% over the past week. YTD the USD/CAD is up 5.88%.

Sources: Bloomberg; advisor.ca; Investment Executive.