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Terry Broaders

Weekly Update October 6 2014

“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.

Odette Morin

Hold on to your hat, we may be having a market correction.

After more than 1000 days without a 10% or greater market correction, it looks like we are headed for one.  The S+P500(USA) is down 4.28% as of today Oct 2, 2014 from its peak on Sept 17.  The TSX (Canada) is down just over 5% from its peak on Sept 2.  We are experiencing a lot of volatility due to the Iraq issues, the protest in China and the Ebola crisis.

When markets have such a run up, a correction is expected.  Any kind of uncertainty can quickly spur jitters and this is exactly what we are seeing now.

Should you be concerned? No, you should not be concerned.  The indicators do not point to a recession. For reasons outlined in my previous market blog, data shows that we are still in the recovery and early expansion phase, not in the recession or downturn phase.

Take a look at the chart below compiled by IA Clarington from data obtained from Morgan Stanley research, Bloomberg and NBER.  Most of the U.S. cycle indicators show that we are in the recovery phase with no indicators in the downturn phase.

What should you do?  Sit tight and do nothing.  This will pass eventually and we should see the recovery continue.  Or, you can exploit this volatility and make an investment if you have the funds available and are in your saving years.

Read our last blog here on What if we are wrong.

Terry and I are heading to a 3 day investment conference where we will be listening to many managers, analysts and economists.  Stay tuned for a full report when we return.

Don’t hesitate to contact me or email hidden; JavaScript is required should you have any questions or concerns.

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Terry Broaders

Weekly Update September 30 2014

“In The Future Everyone Will Be Famous For 15 Minutes” -Andy Warhol

 

 

TSX Snaps Five Day Losing Streak

The Toronto stock market ended its five-day losing streak Friday, rebounding strongly in a session helped by energy and infotech stocks, particularly BlackBerry whose shares surged five per cent after beating expectations on earnings. The S&P/TSX composite index soared 133.20 points to 15,026.77, while the Canadian dollar dipped 0.38 of a cent to 89.65 cents US. Wall Street also snapped back from deep losses from the previous day. The Dow Jones industrials added 167.35 points to 17,113.15, the Nasdaq gained 45.44 points to 4,512.19 and the S&P 500 index saw an uptick of 16.86 points to 1,982.85. It’s been a wild week for investors, who saw the Toronto market plunge more than 200 points Thursday, capping a fifth day of declines. The U.S. indexes did even worse, sporting the steepest declines in two months as the Dow shed nearly 250 points.

 

Fewer Underwater U.S. Home Owners

U.S. homeowners’ negative equity tumbled last quarter, with the second greatest drop in underwater properties since data tracking started, according to a September 25 release. Last quarter there were about 5.31 million homes with negative equity  ( owners owing more on a mortgage than a property was worth ) down 946,000 from the prior quarter according to CoreLogic, an Irvine, California based analysis firm. That drop for underwater homes was the second sharpest since data collection started in 2009, and far greater than a decline of about 352,000 in the prior quarter. The share of mortgaged U.S. properties in negative equity fell to 10.7% in the second quarter from 12.7% in the first quarter and 14.9% in the year-earlier period.

Rapidly rising home prices have enabled troubled homeowners to regain equity. Having positive equity can help owners to refinance or sell a home, further firming their pocketbooks. Financial stability will likely also provide some psychological relief to owners, and could support.  Certain markets are doing much worse than others when it comes to underwater properties, with just five states accounting for almost one-third of negative equity across the U.S. These states included Nevada, where 26% of mortgaged homes were underwater in the second quarter, followed by Florida, where the share was 24%, Arizona, where it was 19%, and Illinois and Rhode Island, which both had a share of about 15%.

 

Market Update as of September 26 2014

The TSX closed at 15027, down -253 points or -1.66% over the past week. YTD the TSX is up 10.31%.

The DOW closed at 17113, down -167 points or -0.97% over the past week. YTD the DOW is up 3.23%.

The S&P closed at 1983, down -27 points or -1.34% over the past week. YTD the S&P is up 7.31%.

The Nasdaq closed at 4512, down -68 points or -1.48% over the past week. YTD the Nasdaq is up 8.02%.

Gold closed at 1218, down -9.00 points or -0.73% over the past week. YTD gold is up 1.16%.

Oil closed at 91.92, down -0.53 points or -0.57% over the past week. YTD oil is down -6.78%.

The USD/CAD closed at 1.11543, up 0.0204 points or 1.86% over the past week. YTD the USD/CAD is up 4.91%

 

BLOG LINKS

Retirement Fulfilment and Fear of Running Out of Money

Should I Delay CPP ?

GrandParents Help With RESPs ?

Men, Women & Importance of a Good Manicure

Are We Headed For a Correction ?

 

Sources: Bloomberg; Investment Executive; advisor.ca

Odette Morin

Are we headed for a correction in this amazing three year market run

Market fearI have not been writing a lot this summer because we know you were busy enjoying the amazing sunshine we have been having.  We sure have been busy too, keeping abreast of market developments even if things have been fairly stable and positive.

Specifically, we have been evaluating where this market is going.  Many of you have been asking whether some actions are required after such a strong market recovery.  Is it time to sell?  Should we be reducing exposure to equity?  Are we heading for a crash?  These are the kind of questions I get every day. Honestly, I too ask myself the same questions.

Here is a brief summary of our analysis:

The markets will likely continue to go up because of four main factors:

1.      External Liquidity

Even though the U.S. Federal Reserve is reducing Quantitative easing, it’s still putting money into the system and it’s still a few months away from withdrawing liquidity and raising rates. That external liquidity tends to drive stocks.

http://www.advisor.ca/investments/market-insights/tsx-run-isnt-done-say-experts-157245

2.      Internal Liquidity

Companies balance sheets still holds lots of cash and there has been an increase of capital within investors cash holdings. But, as the Fed tapers, there will likely be a movement of cash from retail investors as they move towards stocks.

3.      Cheap valuations

This is a tough one but valuation metrics appear to be fine, relative to historic mediums and means.  Equities are cheap relative to interest rates.  We think that equities and interest rates have to rise a lot more in order to correct the major undervaluation relative to interest rates.

http://www.bespokeinvest.com/thinkbig/2014/5/20/sp-500-historical-pe-ratio.html

4.      Global stability

The U.S. economy is improving. At the same time, China has the monetary and fiscal policy firepower to ensure a soft landing. Europe has bottomed. We are in a sweet spot we feel.

http://www.advisor.ca/news/economic/global-economy-braced-by-central-banks-159936

What if we are wrong?

Well, even if we are wrong, it does not matter.  What?!  Of course, when the markets drop you also see a drop in the market value of your account but you keep getting your dividends.  In good and bad times, there are dividends.

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.  Dividends are like rent income for a rental property.  The market value of your real estate might go down but your rent will stay the same.  Of course, nor dividends or rent cheques are guaranteed.  This is just a basic analogy to illustrate that historically even when the stock markets drop, mosts dividends will continue to be paid.

Warren Buffet calls dividend paying stocks, Equity Bonds.  http://equitybondtheory.com/

Investors and especially retirees need not only income, but also cost of living adjustments (known as COLA). Otherwise, inflation can erode their purchasing power as the years go on.

Dividends are very important and the investor’s best friend mainly, because with time they rise, and keep up with inflation.  When we have inflation, the price of goods and services go up.  The companies that deliver these goods or services are making more money and will in turn pay more dividends.  If you invest in bonds or GICs, the purchasing power of your interest will go down when we have inflation but if you hold equities, you will own dividends which rise with inflation.  Dividends are you best friend over time.

If you are retired and fortunate enough to derive income from a pension, the cost of living adjustment can still be a sore subject because they are rarely guaranteed.  Even with the government pension, you may be subject to politicians’ whims on how much of an annual increase, if any, you can expect.

But an increasing number of retirees don’t have traditional pensions and must rely on a combination of investment income, RRSP savings and government pensions.

Therefore, even if equities are volatile with market sentiments, they are your best ally over time to counter inflation.  You should hold equities at all times regardless of where the market is heading.

Relying on dividend figures alone is not enough however. You must do additional research to make sure the company can comfortably support the dividend from its cash flow, and then go further and consider whether the firm is in a position to increase its dividend.

That is precisely why we rely on our dividend fund managers to research and identify companies with ability to continue paying dividends and or even raise them.  Free cash flow yield is often talked about. Free cash flow is a company’s remaining cash flow after capital expenditures. The free cash flow yield is free cash flow divided by market capitalization.  Analysts look at the difference between the dividend yield and the free cash flow dividend. The greater the difference, the easier it is for a company to raise dividends.

Like I say often, always remember that equity investment returns are closely tied to corporate earnings growth and the price you pay for those earnings. Historically, over the long term corporate earnings have been fairly stable and have grown along with productivity gains and inflation. Stock valuations though are more volatile than earnings since they are influenced by investor sentiment, which swings between optimism and pessimism.

Some will say that this view is optimistic.  I would say that this view is realistic.  A rational optimist is usually a successful investor.  Over the long term, and if we need money until age 90 or more, we sure are in for the long term, we need an adequate portion of our investments in equities to meet and exceed inflation.  Staying invested in good quality income investments will protect your lifestyle and peace of mind.

 

Terry Broaders

Weekly Update

September 19 2014

“There Is No Such Uncertainty As A Sure Thing” – Robbie Burns, Scottish Poet

 

Scotland Stays, TSX Falls

The Toronto stock market pulled back sharply Friday, weighed down by metals and mining, gold and materials stocks. The S&P/TSX composite index dropped 199.1 points to 15,266.40, while the Canadian dollar dipped 0.13 of a cent to 91.29 cents (U.S.). The gold sector was down by 2.53% as bullion lost $10.30 to $1,216.60 an ounce.  The big decline in the Toronto exchange came despite optimism in most global markets following Scotland’s decision to remain part of the United Kingdom. Fifty-five per cent of Scots voted against independence in the referendum Thursday, compared with 45% in favour of separation. The news gave relief to investors because it avoids uncertainty in the U.K economy and markets over the future value of the pound and public debt, among other issues. Meanwhile, U.S. markets were mixed amid the stability from the vote and the IPO involving Chinese e-commerce company Alibaba. The Dow Jones Industrial was ahead 14.52 points at 17,280.51 after closing at an all-time high on Thursday. The Nasdaq dipped 13.64 points at 4,579.79, and the S&P 500 index lost 0.86 of a point to 2,010.50.

 

Inflation Remains Unchanged

The rise in the cost of living held steady in August with the annual inflation rate coming in at 2.1%, Statistics Canada said Friday. That was unchanged from July, when the federal agency’s consumer price index also rose by 2.1% over a 12-month period. Statistics Canada says prices were higher in all 12 categories it looks at, with shelter costs leading the way, up 2.8% in August, down slightly from the 3.0% increase seen in July. Food prices were up 2.2%. Fresh fruit and vegetables recorded smaller increases in August than they did in July, but meat cost 9.3% more than it did a year ago. As well, prices were up in every province, with Saskatchewan seeing the highest gain and Prince Edward Island the smallest. Core inflation, the number the Bank of Canada closely monitors and which excludes some items from the volatile energy and food categories, rose by 2.1%, after an increase of 1.7% in July. Economists had expected a gain of 1.8%, according to Thomson Reuters. On a seasonally adjusted basis, inflation was up 0.1% in August compared with the previous month, when it fell by 0.1%. The latest read on inflation came as Statistics Canada also reported that wholesale sales fell 0.3% to $52.9 billion in July. Economists had expected a gain of 0.6%, according to Thomson Reuters.

 

Market Update As Of September 19 2014

The TSX closed at 15280, down -252 points or -1.62% over the past week. YTD the TSX is up 12.17%.

The DOW closed at 17280, up 292 points or 1.72% over the past week. YTD the DOW is up 4.24%.

The S&P closed at 2010, up 24 points or 1.21% over the past week. YTD the S&P is up 8.77%.

The Nasdaq closed at 4580, up 12 points or 0.26% over the past week. YTD the Nasdaq is up 9.65%.

Gold closed at 1227, down -13.00 points or -1.05% over the past week. YTD gold is up 1.91%.

Oil closed at 92.45, up 0.33 points or 0.36% over the past week. YTD oil is down -6.25%.

The USD/CAD closed at 1.09502, down -0.0141 points or -1.27% over the past week. YTD the USD/CAD is up 2.99%.

 

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

Terry Broaders

Weekly Update September 2 2014

“Remember That You Are Absolutely Unique, Just Like Everyone Else” -Margaret Mead

 

Mining Stocks Take TSX Higher

The Toronto stock market erased early losses to close higher Friday as investors bought into beaten-down mining stocks. The S&P/TSX composite index closed 67.56 points higher at 15,625.73. The Canadian dollar was down 0.22 of a cent at 91.97 cents US amid data that also showed stronger than expected Canadian economic growth. U.S. indexes were modestly higher while traders played it cautious going into the long Labour Day weekend amid fears of a wider Russian incursion into Ukraine and a big letdown in U.S. consumer spending data. The Dow Jones industrials climbed 18.88 points to 17,098.45 as other data showed consumer spending dropped 0.1% last month, against the gain of 0.3% that generally had been expected, with weakness most pronounced in the auto sector. The Nasdaq ran ahead 22.57 points to 4,580.27 and the S&P 500 index was up 6.63 points to 2,003.37. Toronto and New York markets both gained ground this past week. The Dow industrials posted a 97- points or 0.57% advance, while the TSX gained 90 points or 0.6%, led by consumer staples, industrials and telecoms. But the TSX was held back by the financial sector, down 1.15% this week despite a steady parade of earnings news from the big Canadian banks that largely beat expectations.

 

Canadian Economy Expands At Fastest Rate in Nearly 3 Years

Canadians sent the economy growing at an annual pace of 3.1% in the second quarter of this year. Statistics Canada says the sharp increase in the gross domestic product was the strongest growth rate in nearly three years and compared with a 4.2% rise in GDP south of the border. The jump came as the agency updated its result for the first quarter to an annual pace of 0.9% compared with an earlier reading of 1.2% in the first three months of the year. Economists had expected a growth rate in the second quarter of 2.7%. On a monthly basis, the Canadian economy grew in June by 0.3% compared with economist expectations for growth of 0.2%.  Statistics Canada said there was growth in every sector during the quarter, save for non-profit institutions serving households. Consumers led the increase, with household consumption up by 0.9% for the three month period ended June 30. Canadians spent 1.2% more on goods in the second quarter, and 0.7% more on services. Spending on housing showed a marked increase with investment in residential structures up 2.9% by quarter and home ownership transfer costs up by a full 9.0% after two previous quarters of decline.  Exports were also up by 4.2% in the second quarter — the strongest performance since the third quarter of 2011 — after declining by 0.2% in the first three months of the year.  Significant increases were seen in exports of vehicles, farm and fishing products, forestry products and packaging materials.  As well, business capital spending was up by 0.8% after two consecutive quarterly declines.

 

Market Update August 29 2014

The TSX closed at 15626, up 90 points or 0.58% over the past week. YTD the TSX is up 14.71%.

The DOW closed at 17099, up 98 points or 0.58% over the past week. YTD the DOW is up 3.15%.

The S&P closed at 2003, up 15 points or 0.75% over the past week. YTD the S&P is up 8.39%.

The Nasdaq closed at 4580, up 41 points or 0.90% over the past week. YTD the Nasdaq is up 9.65%.

Gold closed at 1288, up 7.00 points or 0.55% over the past week. YTD gold is up 6.98%.

Oil closed at 95.85, up 2.28 points or 2.44% over the past week. YTD oil is down -2.80%.

The USD/CAD closed at 1.087169, down -0.0074 points or -0.68% over the past week. YTD the USD/CAD is up 2.25%.

 

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