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Second Quarter 2014

July 1, 2014 • Print This Article

The Markets

It is often said that markets climb a wall of worry. If so, markets have much to concern them: Iraq and Libya; escalating problems in Gaza and the ongoing civil war in Ukraine. Sanctions against Russia and counter sanctions against EU and North America could cause economic disruption in Russia, especially in companies dealing with Russia and countries reliant on Russian energy exports.

One would have expected these events to roil markets. Instead they were largely ignored as markets moved higher. Economic expansion in North America appears to be continuing at a sustainable rate. Inflation remains under control and although there are indications that inflation is accelerating, central bankers believe that increases will be short lived. Corporate profits continue to grow driving equity valuations. With no major event on the horizon to derail earnings momentum, P/E multiples are beginning to expand.

There hasn’t been a significant correction in North American equity markets for well over two years. Technically markets appear to be over extended. There are concerns that sustained and artificially low interest rates over time will form asset bubbles. Low interest rates and relatively easy credit have driven real estate valuations in major cities across Canada, and to some extent in the US and Europe. Consumer debt levels remain relatively high. Investors, burned by the market meltdown in 2008/2009 are still nervous and have yet to become fully invested. There still appears to be plenty of cash on the sidelines. There are some signs in recent market activity that retail investors are beginning to reenter the equity market. The retail investor will probably drive the equity markets higher in the later stages of this Bull Market. History indicates that individuals will likely become fully committed before the next Bear Market will begin.

Strategy

There is an old saying that "you can’t beat the tape". Equity markets appear to have higher targets. There are no storm clouds on the immediate horizon that appear to have the ability to derail the North American equity markets. That said, the current advance appears to be long in the tooth and a pause or correction occurring in the near term cannot be discounted. Any pull back in equity valuations, we believe, will be a correction, not the beginning of a Bear Market. We are not market timers and we tend to hold the course during short term market turbulence. We are of the belief that retail investors will be forced into equities to obtain income not available from bonds, GICs or Money market vehicles. It appears that the retail investor is still sitting on cash and has yet to capitulate. The memories of 2008-2009 are still too fresh.

Bonds have been a big performance surprise. Interest rates have been persistently low driving bond valuations higher. Eventually, as stimulus continues to be removed, interest rates should begin to rise and bond prices fall. As long as interest rate increases are not too rapid or severe, dividend paying equities with potential for dividend hikes could remain in favour.

As a result, we remain relatively underweight and at the short end of the bond market and long equities. We believe that as in the past dividends will make up much of the ultimate return of equity markets and will mitigate any inevitable market declines.

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.

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