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First Quarter 2014

March 1, 2014 • Print This Article

The Markets

Markets continued to advance in spite of reasons for investor concern in both Canada and the United States. Volatility increased over the quarter as markets became fixated by each new data point.

Positives:

It appears that economic recovery and growth in North America is becoming entrenched. Although GDP growth has moderated, inflation and interest rate pressure appears to be contained. Sabre rattling in Europe is constructive for energy prices. The inclement weather in the 1st quarter of 2014 drained natural gas inventories. The resulting higher pricing environment is supportive to oil and gas exploration and development companies. The cold weather also contained economic activity (housing, auto sales, consumer spending). GDP is predicted to have grown modestly during this period indicating a more robust underlying economy. It is anticipated demand and economic growth should pick up in the second quarter. Although unemployment is falling, there does not appear to be conditions consistent with wage push inflation. As more people find work, it should be supportive of housing prices and consumer spending.

There still appears to be considerable cash sitting on the sidelines in money market and short-term bond funds. Although there seems to have been some rotation away from fixed income into equities, there are many institutional and individual investors waiting for a correction to invest. This mindset has sidelined cash and could be the reason why the equity markets seem so well supported. Events, like the annexation of Crimea by Russia, should have created far more turmoil in equity markets.

Looking past the headlines, it appears that there is a firm base for equity valuations. Central banks may continue to reduce stimulus, tighten money supply and regulations. However, tightening is targeted, gradual and appears to be able to be absorbed with only brief market turbulence.

The low interest rate environment is gradually causing investors to look beyond bonds and money market funds in a search for yield. We believe that this rotation is still very tentative. The recent outperformance of utilities could be an early indication of this investment shift. Financial services are in a sweet spot with interest rates low enough to constrain default levels in a moderating housing price environment.

Concerns:

China, the growth engine that helped keep markets afloat during the dark days of the financial crisis, has an economy that appears to be cooling. Growth rates have been dropping toward 7% from over 10% a couple of years ago. China appears to be tightening its money supply and putting restrictions on lending practices to contain growth and to avoid a lending bubble and credit collapse. As previously stated, the Chinese economy is in transition to a consumer driven economy as the growing middle class becomes entrenched. The slowing Chinese economy could signal headwinds for commodity prices, especially base metals.

The incursion by Russia into the Ukraine is potentially destabilizing if it points to a resurgence of soviet style imperialism. Europe is dependent upon natural gas which flows through the Ukraine. Europe will likely not support meaningful sanctions and/or a military response for fear of having gas supplies interrupted. Any significant disruption of gas could possibly throw Europe back into recession. Russia is very codependent on gas sales. Any disruption would also have a devastating impact on the Russian economy, likely leading to a stalemate and de-escalation. Although equity valuations on both sides of the border appear reasonable, they are no longer depressed. In addition, there has not been a meaningful correction in several years. Second tier and concept stocks are attracting investor attention. There have been many high flying technology stocks that have used their inflated capital values to make acquisitions of companies that have little or no revenue. Each earnings announcement results in sharp market moves as bets are placed. The market is beginning to act as if it is top heavy and in need of a correction.

Strategy

The investment bias toward dividend paying equities remains in place. Interest rates remain artificially low. Central bankers on both sides of the Border have indicated that rates will remain low for an extended period. Funds sitting on the sidelines should continue to be attracted to equities in a search for yield. Although there appears to be some investor interest in lower cap equities, we anticipate a strong case can still be made for high dividend paying senior equity holdings.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

Fourth Quarter 2013

February 6, 2014 • Print This Article

As 2013 has come to a close and we are now thinking of RRSP and TFSA contributions, here's a quick summary of the markets last year and where we believe markets will go for the year to come.

The Canadian market had a good year, rising 9.6% 1. However, that performance paled in comparison to the market action south of the border. The stable, boring Canadian economy did not produce either the fear that drove down and depressed US equities or the value of the US Dollar, nor has it produced the extended relief rally that occurred in US equity markets last year. If you look at the markets long term, perhaps the S&P and Dow Jones Industrials were playing catch up after 10 years of relative under performance. The Canadian equity market does not appear to be over extended. As the global economy grows there should be increased demand for resources benefiting Canadian producers. Canadian financial companies operate in the global arena and should benefit from growth. The recent weakness of the Canadian dollar, as a result of the slowdown of QE and growing consensus that the US economic growth is now entrenched, should benefit manufacturers and Canadian companies that have US and foreign operations and assets.

At the beginning of 2013, few professionals predicted the remarkable performance of US Equities. Equity valuations were fuelled by artificially low interest rates, continued downward pressure on wages and benefits, recovery in the housing market and robust corporate profits. As interest rates for longer maturity bonds began to back up, due to scaling back of quantitative easing (QE), bond prices fell and investors began to move from the bond market to invest in equities, further adding fuel to the rally. Toward the end of 2013, portfolio managers heavily weighted in cash moved more into equities creating a powerful "Santa Claus Rally". The US equity markets have not had a correction of 10% since May 2012 2. There is concern that a correction in the US markets is overdue. Longer term, US equity indices should move higher.

Looking forward to 2014, we anticipate a constructive year for equities. Moderate global expansion appears to be firming and inflation should remain low. Bond markets may remain under pressure as extraordinary stimulus is gradually removed leading to modestly higher interest rates. Weakness in the $CDN is translated into US returns. For the full year we anticipate higher US markets, but do not anticipate the level of returns reached last year. As always, if we can be of any assistance please don't hesitate to give us a call!

1: from Ndex ROR for TSX300

2: from Dow and S&P500 charts on ThomsonOne

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

Third Quarter 2013

October 14, 2013 • Print This Article

There are indications that the US economy is beginning a sustained recovery. Home prices are rising, employment, although still well below prerecession levels is stabilizing, credit although tight appears to be loosening. IPOs and underwritings are picking up. Europe appears to have begun recovery and China and Japan's economies seem to be accelerating. Equity markets on both sides of the border have been rising, but do not seem overvalued at this time. Corporate earnings are at record highs. Corporations are cash heavy. The S&P 500 and Dow Jones Index have breached previous high water marks last reached in 2008 and the TSX is trending higher and has the potential to play catch up as resource prices should begin to rise with economic activity. Economic growth on both sides of the border is high enough to continue a long uptrend for equities but not high enough to spur inflation.

Despite the positive signs, gridlock in the United States between the Senate controlled by Democrats and the US House of Representatives has led to brinkmanship. The result has been the partial closing of the government due to an inability to pass a Budget. The recent debt limit standoff revealed how ineffective the US government has become. The decision was delayed in the hopes of reaching a "Grand Bargain", however this appears unlikely and another showdown will likely occur in the New Year.

We do not believe that the US Government will allow a default on its debt. However the partial closure of the US Government was estimated to cost 0.2% of GDP per week. In addition, there was very real damage done to the global reputation of the US as foreign governments shook their heads at how remarkably dysfunctional the US system of government was revealed to be. It is after all a system that was developed to deal with conditions in the 18th century. There is growing debate that it may not be a suitable form of government for the 21st century.

In an environment of probable economic growth and political uncertainty and current interest rate policy, it is likely that mid to long term bonds will underperform.. Many prognosticators have stated that the Bond bull market is over. We remain as underweight as we are allowed and we remain in short-term durations. The S&P 500 has performed extremely well and has outperformed Canadian Equity Indexes by a wide margin.

The Canadian equity market has underperformed. It should be noted that the majority of all our exports go to the US. As the US economy heals, Canadian exports should grow, benefiting our economy and equity valuations. As bond yields began to track higher in the US, funds have gone into equities, leading to P/E expansion. This has not happened to the same extent in Canada. It is not unreasonable to assume that the S&P TSX will at some point play catch up to the S&P 500.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

Second Quarter 2013

July 15, 2013 • Print This Article

There appears to be growing disconnects between the US and the Canadian equity markets.
The US equity market has been driven by quantitative easing (QE). Interest rates have been pushed down to a level where there are negative real returns. This has fueled a buying spree in equities, driving markets to record highs. The yield curve has begun to steepen as the Fed contemplates removing QE at some point in the future when economic conditions warrant. The increase of yield in longer maturity bonds may be a signal that the 30 year bull market in bonds may be winding down. Some of the money leaving the bond market appears to be slowly flowing into equities further driving the rally. The US Dollar has been very strong which appears to be contrary to current debt and monetary policies. However, as the largest most liquid global currency it is seen as the currency of last resort and has benefited from continuing problems in Europe, unrest in the Mideast and a drop in gold and commodity prices.

In Canada, investors appear to be suffering as a result of our Government's prudent management. Canada's fiscal books are in much better order than virtually any country in the developed world. The Harper government looks to balance its budget by 2015. Ontario appears to be committed to budgetary balance by 2018. Without the jet fuel of monetary stimulus, the Canadian equity markets have under-performed even though economic indicators appear to be somewhat stronger than those south of the border (GDP and employment). The predicted softening in the housing market has not occurred. Home sales, housing starts and pricing remain stable. Commodity markets have cooled dramatically as China's economy slows. Gold prices have retreated in anticipation of higher bond yields and economic recovery. Although oil prices have rallied to 15 month highs, due to global political unrest and surprise draw downs in US oil inventories, the value of Canadian oil stocks are less than they were the last time oil prices were at these levels. This is partly due to discounted Canadian oil prices.

The steepening yield curve is a major benefit to banks which tend to borrow short and lend long and to insurance companies as they match premium maturities. It is somewhat negative for REITS which typically borrow long and have benefited recently by being able to roll maturing bonds and debt at lower rates. Rising interest rates are also harmful to homeowners as the interest cost of mortgages and consumer debt increase. It is thought that interest rates will have to rise at least 1.5%-2% to significantly impact the US housing recovery and or the stability of the Canadian housing market. However, we do not anticipate a rapid increase in rates.

We continue to remain underweight and at the short end of the bond market. We believe that interest rates, over the longer term, should rise as economies improve and stimulus is gradually removed. We are of the opinion that the greatest risk to portfolio values currently lies in long maturity bonds which are heavily influenced by interest rates.

We remain committed to the Canadian equity market. We believe, as the US and global economies recover, Canada will continue to benefit as a provider of essential goods. The weakness in China we think is a soft landing and growth should re-accelerate in 2014. The US still accounts for the majority of Canadian exports. It is not unreasonable to believe that a US recovery should be good for the Canadian economy and Canadian equity valuations.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

First Quarter 2013

April 15, 2013 • Print This Article

We believe that the environment for equities will continue to be moderately positive over the mid-term. Uncertainty could lead investors into large cap companies. Second tier stocks and junior companies (especially resource related juniors) could have a very difficult time raising capital. Dividends will continue to be critical as investors seek income in an environment of negative real returns in the bond market. Companies that have the ability to raise dividends should be rewarded. Those forced to cut dividends could be punished severely. Canadian banks, telco's and pipelines should be a focus for the Canadian portfolio in this environment provided that interest rates do not rise quickly.

The Canadian equity market is heavily weighted in resources. This can be a boon when global economies and demand for commodities are growing. In a period of weaker growth, resource stocks can be a drag on Canadian equity market performance. The US market is far more diverse and should outperform the Canadian market during a period of weak international growth.

Looking forward, over the next few months, we see growth continuing to climb the wall of worry. Quantitative easing and low interest rate policies should continue south of the border. The relative tight policies of the Government of Canada, although creating a platform for long term stability and flexibility, should act as a headwind to Canadian GDP growth.

The housing market recovery continued in the United States. The trend of improving prices, sales and new building appears to be entrenched. As housing prices rise owners see their net worth increase allowing them to access credit. This "wealth effect" has a positive impact on large ticket item spending, automobiles, appliances, furniture, home renovations etc. which spurs manufacturing, hiring, leading to a loop of increased house purchasing, rising house prices, etc.

The perceived stability of Canada and the strength of the Canadian financial system made Canada a safe haven and attracted international investment during the recent global recession. This elevated the value of the Canadian dollar relative to our trading partners. The high dollar made Canadian manufacturing less competitive as a result. It should be remembered that the US is still our largest market for exports. A growing US economy should, over the long term, be positive for Canada.

To conclude, we remain bullish on the US and Canadian markets and we maintain our preference for well capitalized quality equities over fixed income.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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