Category Archives: Blog Post

US Protectionist Trade Policies Escalate

Today the US Administration has slapped import tariffs on steel and aluminium from Canada, Mexico and the European Union.

Both Canada and Mexico have retaliated by implementing their own import tariffs on a dollar for dollar basis.

These events make any NAFTA renegotiations much less probable.

Nobody wins in a trade war.

Short term effects are higher domestic inflation globally and a lower loonie.

Justin Trudeau has exhibited very strong leadership this week both on the Trans Mountain pipeline issue and by retaliating from the US punitive tariffs.

Removing Sienna Senior Living from both portfolios

A class action lawsuit was recently filed against Sienna and Extendicare for failure to provide proper care in some of their Long Term Care facilities.

While any possible settlement will be paid for by their insurance protection, this will lead to an increase in government intervention.

More government regulation in the Long Term care area will lead to higher costs and even lower operating margins.

All industry players will be attempting to diversify away from Long Term Care into the higher margin Retirement Home segment.

Even after their recent acquisition in the Retirement area, Sienna will still derive 56% of their net operating income  from their lower margin Long Term Care facilities.

I have just reduced my REIT exposure to 1.15% of the total North American equity exposure and selling Sienna will help to accomplish this objective.

 

Equity Sector changes – Increasing Energy to Market Weight

  • 2018 global oil demand expected to continue to outpace global supply, despite rising US shale production
  • Almost 50% of global supply is subject to restraint
  • Total oil stocks have been falling steadily since May of last year and are now very close to five year average levels
  • Energy sector is very underowned in both Canada and the US
  • Equity sector rotation into cyclicals is happening now
  • Energy sector weight for TSX is 18.5% and for S & P 500 is 5.7% in April
  • Using my 60% US and 40% Canada exposure, the benchmark weights are 10.82%
  • My recommendation is to increase the weight to 10.82% benchmark from my former 9%

Adding Vermilion Energy to both portfolios

  • Vermilion currently pays a dividend just shy of 6%
  • The company did not cut the dividend in the last crude price downturn
  • Vermilion has just made an offer to acquire Spartan Energy, a light oil producer in Saskatchewan for $1.4 billion
  • The purchase will be immediately accretive to Vermilion as Spartan is trading at a much lower valuation
  • Analysts do not expect another competing bid for Spartan as there is a $40 million breakup fee if the deal falls through
  • This purchase will add an additional 23,000 barrels per day of oil equivalent taking its new output to 95,000 barrels per day
  • Vermilion currently operates in France, Holland, Germany, Ireland and Australia where it receives the higher Brent crude price

Trade Wars – Nobody wins

  • 1929’s US trade protectionist policies extended the Great Depression by ten years
  • Trade Wars result in domestic inflation
  • Positive effects of US tax reform muted by threat of trade wars
  • Robert Shiller, an American Nobel laureate and Yale economics professor, said that US  trade wars with China would result in an economic crisis if they continue to escalate.
  • The US needs China to help negotiate with North Korea in regards to their nuclear arms
  • The US needs China to continue buying their government debt to finance the American’s massive $1 trillion annual budget deficit.
  • The ongoing trade rhetoric between China and the US will get worse before any agreement is reached

Buy US Bank Stocks

  • Rising interest rates are resulting in improving net interest margins
  • The strength in the US economy helping to propel both mortgage and overall loan growth higher, while keeping default rates low
  • The recent pickup in market volatility will lead to stronger capital market profits
  • Rising security markets positive for wealth management divisions
  • Less Government Regulations will improve profitability

Trump’s new import tariffs a threat to global growth

  • Trump imposes massive steel and aluminium import tariffs
  • This is a threat to global economic growth, affecting Canada and the European Union as much as it does China
  • May lead to a global trade war with other countries imposing import tariffs on US exports
  • US protectionism will lead to higher domestic prices and rising US domestic inflation
  • This can mitigate all the positive growth drivers from US tax reform

What to do after recent stock market selloff

Use recent market drop to increase equity exposure

  • Restrict new purchases to US equities
  • No signs of an impending recession.
  • Market Valuation correction only

Headwinds affecting Canadian equities

  • Ongoing NAFTA uncertainty
  • US corporate tax reform makes Canada less competitive
  • Canadian pipeline disputes between BC and Alberta causing Western Canadian Select crude prices to trade at a very large discount relative to West Texas Intermediate
  • Crude prices trending down once again on increasing US shale production

Reduce Canada’s North American equity weight to 40% with the US increasing to 60%

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Is the current stock market selloff a buying opportunity?

What to consider:

    • Probability of Recession remains low
    • US Corporate Earnings and Revenue Growth expanding
    • S&P 500 Market 2018 PE at 19.5 times, only marginally higher than 17 times long term average
    • US yield curve steepening
    • US Corporate bond spreads over Treasuries remain low

Conclusion:

  • Ensure that you are well diversified by: Asset Mix, Currency, Equity Sectors
  • Always maintain a cash reserve to minimize volatility
  • Gradually use market declines to buy quality companies that have solid earnings, cash flow, dividend and revenue growth
  • Do not be tempted to buy bitcoin and pot stocks despite their price declines
  • Buy equity sectors like banks and insurance companies that benefit from rising interest rates.
  • Take your time investing your cash surplus. You will have plenty of opportunity to look at the fundamentals of companies. Do not just look at the companies’ share price.

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I’ll also send you a complimentary copy of my latest newsletter and model portfolios.

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Reduce your portfolio’s volatility

Beta is a measure of a stock’s volatility relative to the overall market.

A stock with a beta of 1.5 indicates its share price is 50% more volatile than the market

If the market goes down by 20%, this high beta stock will fall by 30%

Recommendation:

Rotate out of high beta stocks into lower beta ones to minimize portfolio volatility

PNC Financial – Adding this large US Regional Bank

The US banking sector is operating on all cylinders and is greatly benefiting from the following:

  • Higher interest rates and steepening of yield curve
  • Wealth Management operations aided by strong equity markets
  • Rising loan demand aided by stimulative tax reform policies
  • Less Government Regulations in the financial services sector

PNC is one of the largest US Regional banks and acquired all of RBC’s divestiture of its US branches in 2008-2009.

PNC  is well positioned to benefit from the above industry trends and its equity interest in Blackrock is another positive.

Dividend growth is strong and this is expected to continue in a period of increasing profits and a low dividend payout ratio.

Sell Apple and Knowles

iPhone X sales for the first half of this year are expected to fall significantly and much more than analysts had been predicting

This is based on research obtained from interviews with its suppliers

The price of the iPhone X is just too pricey for most cunsumers

Knowles derives a large percentage of its annual revenues from Apple

My recommendation is to take profits in both Apple and Knowles at this time.

Gold Investments – Is this the time to buy?

There are several very positive developments for gold bullion as follows:

    • Continuing US $ weakness relative to Euro and Yen
    • Increasing US trade protectionist policies will lead to higher US inflation
    • Rising commodity prices – especially crude oil and base metal prices
    • Tight US labour market that should result in rising labour rates
    • Stimulative US tax reform policy passed

Recommendation : Increase your gold exposure

 

Canadian Banks – Best Performers

Based on a Total Return basis, income plus capital gains, the returns are as follows as of  the January 12th, 2018 close.

Bank

1 Yr          3yr          5yr         

10yr

National Bank

20.84

17.29 15.65

14.93

RBC

16.32

15.50 15.98

12.08

TD

13.21

16.31 16.57

12.04

CIBC

16.07

14.93 13.51

10.86

BMO

8.43

14.22 15.12

11.13

BNS

10.58

14.55 11.88

9.69

The performance numbers for periods more than one year are annualized.

The two most consistent out performers in this group are National Bank and RBC.

The two most consistent under performers over the time frames are BNS and Bank of Montreal

For a fairly cohesive group, these above performance numbers have produced wide differences over time.

In today’s world computer algorithms are frequently used to assume what investment performance is expected based on similar industry factors that affect all sector players.

These major performance differences must be explained by other factors such as:

  • Consistency and Quality of Management over time
  • Location and Performance of non domestic operations

 

 

Deleting Aphria from my model Growth Portfolio

I am advising the sale of Aphria from my Growth Portfolio.

The share price has risen by 268 percent over the last 12 months.

At the current valuation, the stock is more than discounting the upcoming legalization of recreational marijuana in 2018.

While the company has done all the right things, the industry is still in its infancy and will most definitely experience some growing pains in the future.