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Terry Broaders

Weekly Update November 22 2016

“All The War Propaganda, All The Screaming And Lies And Hatred Comes Invariably From People Who Are Not Fighting” -George Orwell

TSX Edges Higher While New York Stock Markets Fall

The Toronto Stock Exchange made a slight advance Friday, while New York stock markets shed some of their worth following a tumultuous period after the U.S. presidential election. A lot of the post-Trump impact has now been priced in markets. The markets are now trying to digest what the long-term impact will be and whether this is the beginning of a new major trend based on Trump’s proposed policies.  Stock markets made modest movements in either direction on Friday.  In Toronto, the S&P/TSX composite index gained 37.94 points at 14,864.03. Meanwhile south of the border, markets registered modest declines. The Dow Jones industrial average fell 35.89 points to 18,867.93, the Nasdaq composite slid 12.46 points to 5,321.51, and the broader S&P 500 shed 5.22 points at 2,181.90.
The price of oil made meagre gains. The December contract rose 27 cents to US$45.69 a barrel. The January contract for crude oil, which traded at a higher volume, gained 38 cents to US$46.36 per barrel.  The price of gold, on the other hand, has plummeted to its lowest level since mid-February. The December gold contract fell $8.20 to $1,208.70 per ounce. It last closed below that on Feb. 16 at US$1,208.20.  Rising bond yields and increased expectations that the U.S. Federal Reserve will raise rates, potentially at a faster pace than previously anticipated, is putting pressure on gold prices. On Thursday, Fed chairwoman Janet Yellen hinted at a December interest rate hike when the central bank meets for two days starting Dec. 13. The Canadian dollar fell 0.04 of a U.S. cent at 74.00 cents US.

 

3 Ways Trump’s Victory Could Affect Canada

A Donald Trump administration, combined with a Republican-controlled Senate and House of Representatives, could have reverberations that will be felt by the Canadian economy for years. Here’s a look at what Trump’s victory could mean for various sectors of our economy.
Impact on energy
Remember Keystone XL and the plans to build the 1,900-kilometre pipeline from Alberta to Nebraska?  Trump has said he would “absolutely approve it, 100%.”  Still, when considering Trump’s propensity for categorical statements, one should keep in mind the details. He has said he wants a greater cut of the profits, but hasn’t explained what that means. There’s also TransCanada’s outstanding request for US$15 billion in damages after Obama’s rejection.  Trump is also regarded as a friend of U.S. fossil fuels, on record as favouring oil and gas drilling on federal lands. That could stifle appetite for Canada’s oil and gas production.
What about trade?
Our largest trading partner will soon be led by someone who has committed to ripping up NAFTA if it isn’t renegotiated. Any country can withdraw from the free trade agreement with six months’ notice. And with Republican control of both the legislative and executive branches, Trump is better positioned than past presidents who’ve made similar threats.  But some say he could face resistance from legislators in states that have reaped the benefits of the deal.
Softwood lumber
One of the first trade irritants that could test U.S.-Canadian relations is softwood lumber. A 10-year-old agreement that removed U.S. duties on Canadian softwood lumber expired last month. That paved the way for the possibility of steep taxes, which could result in layoffs throughout Canada’s forestry sector. Trump can expect to face pressure from the U.S. lumber lobby to implement such duties. In an era of rising protectionism, he may be emboldened to oblige.

 

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 14864, up 309 points or 2.12% over the past week. YTD the TSX is up 14.44%.
The DOW closed at 18868, up 20 points or 0.11% over the past week. YTD the DOW is up 8.28%.
The S&P closed at 2182, up 17 points or 0.79% over the past week. YTD the S&P is up 6.75%.
The Nasdaq closed at 5322, up 85 points or 1.62% over the past week. YTD the Nasdaq is up 6.29%.
Gold closed at 1209, down -81.00 points or -1.23% over the past week. YTD gold is up 14.16%.
Oil closed at 45.61, up 2.20 points or 5.07% over the past week.YTD oil is up 23.10%.
The USD/CAD closed at 1.350679, down -0.0035 points or -0.26% over the past week. YTD the USD/CAD is down -2.38%.

Europe/Asia
The MSCI closed at 1707, up 6 points or 0.35% over the past week. YTD the MSCI is up 2.65%.
The Euro Stoxx 50 closed at 3021, down -9 points or -0.30% over the past week. YTD the Euro Stoxx 50 is down -7.56%.
The FTSE closed at 6776, up 46 points or 0.68% over the past week. YTD the FTSE is up 8.55%.
The CAC closed at 4504, up 15 points or 0.33% over the past week. YTD the CAC is down -2.87%.
DAX closed at 10665, down -3.00 points or -0.03% over the past week. YTD DAX is down -0.73%.
Nikkei closed at 17967, up 592.00 points or 3.41% over the past week. YTD Nikkei is down -5.61%.
The Shanghai closed at 3193, down -3.0000 points or -0.09% over the past week. YTD the Shanghai is down -9.78%..

 

Sources: Bloomberg; Investment Executive;  advisor.ca

Odette Morin

What to expect with Trump as the new US President?

New York, NY USA - July 16, 2016: Donald Trump speaks during introduction Governor Mike Pence as running for vice president at Hilton hotel Midtown Manhattan

After a long and bitter campaign, the Donald Trump Republican party has firmly taken control of Capitol Hill, winning the Presidency, the Senate and the House of Representatives. While portfolio managers were positioned for a Hillary Clinton victory, the markets have been positive to a clear, uncontested election result and a pro-business president.

The market rally that followed the election, was almost as shocking as Trump’s win.  The Dow futures were 700points down as the Trump majority was forming up.  However, U.S. stocks rose sharply at market opening the next day on speculation that Donald Trump and a Republican-controlled Congress will pursue business-friendly policies.  The markets will be watching closely to see how Trump starts putting policy specifics to his broad plans.

President-elect Trump’s policies will be very different from President Obama’s. The primary beneficiaries of the Trump victory will be defence, infrastructure, engineering/construction and more domestically focussed companies. We also expect Trump’s victory to be slightly positive for oil prices.

The markets will be closely watching now for signs that Trump adopts a statesmanlike tone and selects a credible cabinet. . Remember that while Trump is president, he does not have a free reign.  He is constitutionally constrained by congress consisting of the senate and the house of representatives.

We expect higher volatility than normal as we go through the end of the year and into the first quarter. That’s where remaining disciplined with your asset allocation is really important.

Don’t hesitate to contact us should you want to discuss this event as it relates to your portfolio.  Either myself, Terry, Anthony or Frank will be happy to speak with you.

Below are the before and after November 8 election markets numbers.

Nov 8             Nov 10        Percentage Change
TSX             14,656            14,744            +0.60%
Dow Jones  18,332             18,807            +2.59%
S&P 500       2139                2167             +1.31%
Gold            $1247               1258             -1.26%
CDN$          $0.7516USD    $74.22USD     -1.25%

 

 

 

 

Terry Broaders

Weekly Update October 18 2016

“What Kills A Skunk Is The Publicity It Gives Itself ” – Abraham Lincoln

Toronto’s S&P/TSX Dragged Down By The Gold Sector

Toronto’s main stock index fell Friday, dragged down by weakness in the gold sector. The S&P/TSX composite index dropped 58.72 points to 14,584.99, as gold stocks shed nearly 3%. The December gold contract fell $2.10 to US$1,255.50 an ounce.  The Canadian dollar was at 76.07 cents US, up 0.34 of a U.S. cent.  U.S. stocks ended little changed on Friday, losing ground late after Federal Reserve Chair Janet Yellen’s comments on the economy.  Financial shares finished up, giving the S&P 500 its biggest boost after stronger-than-expected bank results, but gave up most of their early gains. Healthcare shares led declines. Yellen, in a speech at a conference of policymakers and academics, laid out the deepening concern at the Fed that U.S. economic potential is slipping – and may need aggressive steps to rebuild it. In New York, the Dow Jones industrial average was up 39.44 points at 18,138.38, the S&P 500 gained 0.43 points at 2,132.98, and the Nasdaq composite rose 0.83 points at 5,214.16.

For the week, the TSX was up slightly by 0.12 per cent, the Dow was down 0.6 per cent, the S&P 500 was down 1 per cent and the Nasdaq fell 1.5 per cent.

 

Housing Starts Pick Up In Most Regions

The pace of Canadian housing construction starts picked up nationally in September despite a decline in Ontario. The Canada Mortgage and Housing Corp. says the seasonally adjusted annual rate of starts was 220,617 in September, up from 184,201 units in August. CMHC says construction of urban multiple-unit dwellings such as townhouses, condominiums and apartments were the main reason for the increase in most regions, such as in Quebec. Quebec saw the largest gain in housing starts last month, due to the development of new rental apartments for seniors.

There were also increases in British Columbia, the Prairies and Atlantic Canada. However, Toronto was an exception: its seasonally adjusted rate dropped to 30,232 units from 40,406 units in August, mainly as a result of fewer apartment starts. Plus, several smaller cities across the province also recorded declines from one month to the next. As a result, Ontario’s overall activity fell to 67,426 housing starts in September, from 70,262 units in August.

Sources: Bloomberg; Investment Executive;  advisor.ca, CMHC

Odette Morin

Vancouver’s Housing-Bubble Risk Unmatched on the Planet, says Swiss Bank

There is currently a certain fatigue felt in Vancouver regarding our Real Estate market. We get bombarded daily now by shocking news of unethical shadow sales deals, risky shadow lending, money laundering, property bought and sold like commodities, empty properties that could ease the scarce rental market and foreign buyers avoiding capital gains taxes on real estate gains. Many younger Vancouverites have given up hoping to ever own a home, while others have become instant millionaires recently by selling their west-end condos as a group to developers.

While this is happening, you can see cranes and construction at every corner of the city. Building towers are going up, and single family homes are being torn down to be replaced by multi-family dwellings. It’s everywhere and it is scary to see prices continue to go up, despite the common wisdom that this does not make sense. One of my clients is an architect for one of the prominent Vancouver developers. I asked him recently what his firm was doing right now in view of the current market. He responded: “We continue to build as fast as we can go”.

The recent foreign buyer taxes introduced by our city and government to attempt to cool it off seem to be working somewhat. It is still too early to tell, but this Greater Vancouver Real Estate sales price graph shows that prices have come down in August. Numbers of sales are also down.

gvrd-real-estate-graph

To gain some perspective, I looked at the Toronto real estate crash in the late 80s. I found a lot of similarities to our current situation.

According to Toronto Real Estate Board data, between 1985 and 1989 the average price of a house in the Greater Toronto Area (GTA) increased by 113%. Low unemployment, large inflow of immigrants and investment speculation helped to inflate the bubble.

“In (the) late 80s everyone thought that the housing prices were going to rise indefinitely. More people jumped into the market hoping to make a fortune causing an artificial increase in demand. Suddenly housing became scarce, which further increased the price. Developers decided to profit on this illusive scarcity by building condos left and right – many of them in downtown Toronto. During the peak of the bubble the borrowing cost started increasing and the 5-year fixed mortgage reached 12.7%. Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 the  average price of a house in GTA  declined by 40% adjusted for inflation. Downtown of Toronto was hit the worst with over 50% decline in value of a home. Unaccounted for inflation, it took 13 years for the average house price to recover in the GTA.” (*)

Looking at the graph above, similar drops happened in Vancouver in the 80s and 90s.

Real estate markets are tightly influenced by interest rates. While current interest rates are far from the double-digits of the early 90s, a rise of 2% or 3% can have a dramatic impact, as I described in my interest rate article. When interest rates start rising, our real estate market will cool off, hopefully gradually.

So what can you do to prevent financial hardship? It is impossible to know if, and when, the real estate market will crash. The market could tumble next year or it could simply cool off gradually. We just don’t know.

So, to avoid financial distress, make sure to buy real estate for the long-term. Think with a 10-year window to make sure you can ride the potential downturn. Make sure that you can afford your mortgage, even if rates go up to 5% or 6%. Finally, only buy if your job is secure or you have sufficient short-term savings to be able to meet mortgage payments for at least 6 months in the event of a job loss or sickness.

Talk to us before buying a property. We can help you confirm whether your cash flow can safely cover the mortgage, property taxes, insurance, lifestyle and savings for retirement and children’s education.

 

(*) Read the full story here about the Toronto Real Estate bubble in the late 80s.

 

 

 

Odette Morin

How Much is Too Much Equity?

how-do-you-feel-about-your-finances

When you come in for your annual review meeting, we tell you that you have 80% equity and – in some cases – you get concerned. Is that too much to be investing in the stock market, you ask? Shouldn’t you have more of safer fixed income especially as you get closer to retirement? These are valid questions.

The old investing rule of thumb was to have an equal amount of fixed income to your age.  So if you are 50, you should have an equal proportion of fixed income and equity.  This is now thought to be too conservative because of three main reasons:

  • We live longer, and we therefore have a longer time horizon and need more money to fund a longer retirement. Many now live now live beyond the 80-85 year life expectancy.
  • Fixed-income yields have plunged in past years, and are likely to stay very low in this low interest rate environment. If inflation is higher than the saving rate you get, you are actually “losing” money with a safer investment.
  • Dividends keep up with inflation, which is very important over the long-term, and also because many pension plans no longer guarantee inflation adjustments.

While stocks are more volatile in the short-term, they tend to rise over the long-term. The longer the holding period, the higher the probability that you will come out ahead. Morningstar data service, shows that the S&P500, for example, has produced positive returns in about 95% of rolling monthly 10-year holding periods from 1926 to 2015. For 15-year periods, the return was positive 99.8% of the time. That is why we always buy quality, diversify, and hold regardless of market sentiments.

So, how much equity and fixed income should you hold in your own portfolio?  It highly depends on your personal risk tolerance, as rated when you first became a client; also, it depends on whether you are retired & need income from your portfolio, or are still in the accumulation phase.

Other factors include how much other liquid savings you have on hand in case of an emergency, and if you also are part of a pension plan. Typically, we like our retired clients to have a minimum of 30% fixed income, and our younger clients only 20%. Therefore, 70% to 80% equity is normally what we recommend.

These are general guidelines. We look forward to discussing your personal asset allocation at your next annual review meeting.

 

 

 

Anthony Sabti

The 2016 Presidential Election: How Will Markets Be Affected?

the important moment of political choice, Democrats or Republicans

General Impact of Elections to Markets

In 2000 and 2008, the last two elections where we knew we were getting a new president, markets were in the midst of a downward correction. In November 2000, the S&P 500 was three months into the Dotcom bubble correction that wouldn’t bottom out for almost another two years. Similarly, in 2008, the S&P was one year into the financial crisis that wouldn’t hit bottom for another four months.

Investors are fortunate enough to not have experienced any such bad luck since then. American markets are trading at market highs, and aren’t defined by any one sector, or a highly leveraged consumer. Fiscal policy is still very accommodating, with interest rates at historical lows.

Although studies show that no one party (Democrat or Republican) is better for the markets, change and uncertainty usually lead to short-term market volatility.  Certainly, the potential of a Trump win could bring a Brexit-like shock to the markets. Frank and I will examine the potential impacts of a Clinton vs. Trump win:

Anthony – What Happens If Clinton Wins?

The research shows that since the 1950’s, whichever candidate leads the polls in October usually goes on to become president. Going by this trend, it seems Hillary Clinton has the better chance of winning the election. The Republicans are expected to maintain control over the Congressional House of Representatives.

This “status quo” outcome would have lesser economic and market impact. Two major policy actions of a Clinton presidency could benefit the economy: changes in corporate tax laws to promote repatriation of corporate profits held overseas to fund infrastructure spending, and immigration reform. Both of these could garner bipartisan support and have a high possibility of enactment.

Possible risks to business of a Clinton win include executive orders on drug pricing, antitrust enforcement, and restrictions on fracking for domestic oil & gas production. Inflation and interest rates will likely remain lower for longer.

Frank  What Happens If Trump Wins?

As Anthony astutely points out, there is no historical evidence in favour of either a Republican or a Democrat presidency, in terms of the effect on the markets. However, the prospect of a Donald Trump presidency does introduce one key variable into the equation: uncertainty.

Opting out, or “ripping up” of NAFTA, and other free trade agreements, could hurt emerging markets (e.g. China, Mexico, etc) who have benefitted greatly from free trade with the U.S.  Trump’s intention to put America First could lead to a shift away from globalization and would represent a risk to all asset classes, at least in the short term, similar to the market corrections post-Brexit.

Introducing stiff tariffs would have the effect of increased prices of goods, leading to lower discretionary income for Americans. This would naturally lead to decreased spending on entertainment, luxury items, etc. Increasing government spending on the military and on infrastructure could be bad for the bond market.

Conclusion

A Clinton presidency would certainly offer – in many ways – a “status quo” for the economy and the markets. There would be little chance of serious reform or change, as a projected Republican-controlled House would work to oppose Mrs. Clinton’s policy reform bills. As far as the markets go, they’d likely continue to be unaffected in any meaningful way in the long term. This would continue the historical trend of economic cycles ebbing and flowing independently of the Presidential election winner.

Trump, on the other hand, would be the more unpredictable president, and the uncertainty surrounding many of his platform policies could have a negative affect on the markets for an unforeseen length of time.

In the long term – regardless of the outcome – markets historically have shown resiliency and eventually adapt to the events at hand.