Also available in PDF: MIR Portfolios July 2019
Investment Commentary July 2019
Asset Mix Changes
I am not making any asset mix changes at this time. There remains enough political and economic uncertainty to maintain a high cash surplus. While Trump has temporarily backed off increasing the amount of Chinese goods subject to tariffs, nothing has yet been resolved. In addition, he is now considering increasing car import tariffs on European producers.
US corporate earnings growth rates continue to ratchet down to 3-4% from double digits last year. Market valuations on 2019 earnings are at 17 times, not cheap by historical measures and up considerably from the low last December of under 14 times.
Global economic growth remains challenged with both Germany and Japan having negative interest rates. US manufacturing ISM numbers fell for the third straight month to the lowest level since September 2016.
Inflationary expectations continue to remain historically low causing a great deal of uncertainty at the Federal Reserve Bank.
Given the weak global economic outlook combined with the ongoing trade war between the US and China, the probability of several interest rate cuts in the US this year has gone up dramatically.
Probability of an Impending US Recession
The yield cure in the US remains either inverted or at very flat levels depending on the maturities reviewed. As I mentioned previously, this does not automatically indicate that a recession is imminent.
Us Corporate spreads over Treasuries remain relatively low implying that the threat of an impending recession is low at this time.
Slow global economic growth, especially in industrial production, does not mean that we are heading into a recession. The US consumer remains healthy with low unemployment and plenty of job opportunities available in most industries.
US / China Trade War Continues
This trade war remains ongoing but the rhetoric over the last week has become more conciliatory.
Prospects of lower rates
At least two or three interest rate cuts are widely anticipated in the US for the balance of this year. The Bank of Canada Governor does not appear nearly as dovish, but he does not have Trump breathing down his neck at every opportunity. I think it would be unlikely that Canada would not follow the US in further interest rate cuts because doing so would only cause the loonie to rise vs the American greenback and make our country less competitive.
I remain overweight Industrials, Consumer Staples, Technology, Utilities and REIT’s.
I remain market weight Financials, Energy, Healthcare and Communication Services.
I remain underweight Materials, and Consumer Discretionary but am reducing my Materials underweight with the prospect of both falling US interest rates and a US dollar.
I continue to have a barbell approach in regards to equity sectors by remaining overweight the cyclical sectors Technology and Industrials, while also keeping my overweight in the interest sensitive sectors Reits, Utilities and Consumer Staples.
Interest sensitive stocks continue to perform well in this period of flat to falling interest rates.
Financial stocks continue to have difficulty with the combination of an inverted yield curve, falling net interest margins and rising non performing loans.
Common Equity Changes
In the Energy sector, I am deleting Torc Resources from both portfolios. Despite its high yield, the company’s dividend is not covered by operating cash flow after deducting for capital expenditures.
In the Industrial sector I added Logitech, a Swiss producer of computer keyboards, computer mice and video gaming hardware to both portfolios in a blog late last month. The company has no long term debt and is benefitting from the secular trend towards video gaming, E-sports and video collaboration devices used in business.
In the Consumer Staples sector I am adding Sysco, the US food distributor to restaurants, hospitals, governments, schools, nursing homes and hotels to both portfolios. It is twice the size of its next largest US competitor, US Foods. The company is aggressively lowering its operating costs which is helping operating margins. The company is a strong generator of free cash flow and expects EPS growth in fiscal 2020 to be around 10%. Its fiscal year end for 2019 is June 29th.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (July 2019)|
|Cash||Alterna Bank – High Interest Savings (2.05% current )||Alterna Bank – High Interest Savings (2.05% current)|
|EQ Bank – High Interest Savings ( 2.30% current)||EQ Bank – High Interest Savings ( 2.30% current)|
|Bonds -Regular||iShares XSB Short Term||iShares XSB Short Term|
|iShares CBO 1-5 Ladder Corp||iShares CBO 1-5 Ladder Corp|
|iShares CLF 1-5 Ladder Gov’t||iShares CLF 1-5 Ladder Gov’t|
|Bonds – High Yield CORP||iShares XHY US High Yield CDN$||iShares XHY US High Yield CDN $|
|Common Stocks||Security||Dividend Yield %||Security||Dividend Yield %|
|Financials||Royal Bank RY||3.92||Royal Bank RY||3.92|
|Bank of Montreal BMO||4.16||Bank of Montreal BMO||5.16|
|Intact Financial IFC||2.51||Intact Financial IFC||2.51|
|TD TD||3.87||TD TD||3.87|
|Sun Life SLF||3.87||Sun Life SLF||3.87|
|JP Morgan JPM US||2.86||JP Morgan JPM US||2.86|
|Bank of America BAC US||2.07||Bank of America BAC US||2.07|
|Citibank C US||2.57||Citibank C US||2.57|
|Morgan Stanley MS US||2.74||Morgan Stanley MS US||2.74|
|T. Rowe Price TROW US||2.77||T. Rowe Price TROW US||2.77|
|PNC Fin’l PNC US||2.77||PNC Fin’l PNC US||2.77|
|Energy||Suncor SU||4.11||Suncor SU||4.11|
|Canadian Natural Resources CNQ||4.25||Canadian Natural Resources CNQ||4.25|
|Freehold FRU||7.44||Freehold FRU||7.44|
|Pembina Pipe Lines PPL||4.92||Pembina Pipe Lines PPL||4.92|
|Enbridge ENB||6.24||Enbridge ENB||6.24|
|Trans Canada TRP||4.62||Trans Canada TRP||4.62|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.01||Agnico Eagle AEM||1.01|
|Franco Nevada FNV||1.18||Franco Nevada FNV||1.18|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.00|
|Industrials||Toromont TIH||1.74||Toromont TIH||1.74|
|NFI Group NFI||4.61||NFI Group[ NFI||4.61|
|Air Products APD US||2.05||Air Products APD US||2.05|
|WSP Global WSP||2.08||WSP Global WSP||2.08|
|Canadian Pacific CP||1.08||Canadian Pacific CP||1.08|
|Raytheon RTN US||2.17||Raytheon RTN US||2.17|
|Aecon Group ARE||3.03||Aecon Group ARE||3.03|
|Guggenheim Eq WT IND RGI US||1.38||Guggenheim Eq Wt IND RGI US||1.38|
|Honeywell HON US||1.88||Honeywell HON US||1.88|
|TFI Int’l TFII||2.42||TFI Int’l TFII||2.42|
|Consumer Discretionary||Home Depot HD US||2.62||Home Depot HD US||2.62|
|Amazon AMZN US||0.00|
|Canadian Tire CTC.A||2.91||Canadian Tire CTC.A||2.91|
|Lowes LOW US||2.18||Lowes LOW US||2.18|
|Communication Services||Rogers B RCI.B||2.85||Rogers B RCI.B||2.85|
|Facebook FB US||0.00|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.61||Alimentation Couche Tard ATD.b||0.61|
|Loblaws L||1.88||Loblaws L||1.88|
|Constellation Brands STZ US||1.52||Constellation Brands STZ US||1.52|
|Sysco SYY US||2.17||Sysco SYY US||2.17|
|Unilever PLC UL US||2.85||Unilever PLC UL US||2.85|
|Technology||Apple AAPL US||1.56||Apple AAPL US||1.56|
|Microsoft MSFT US||1.37||Microsoft MSFT US||1.37|
|Open Text OTEX||1.70||Open Text OTEX||1.70|
|Paychex PAYX US||3.01||Paychex PAYX US||3.01|
|Cisco CSCO US||2.56||Cisco CSCO US||2.56|
|Logitech Int’l LOGI US ADR||1.75||Logitech Int’l LOGI US ADR||1.75|
|ETFMG Prime Cyber Sec. HACK US||0.21|
|Visa V US||0.58|
|Utilities||Algonquin Power AQN||4.61||Algonquin Power AQN||4.61|
|Northland Power NPI||4.62||Northland Power NPI||4.62|
|Fortis FTS||3.45||Fortis FTS||3.45|
|Healthcare||Abbott Labs ABT US||1.49||Abbott Labs ABT US||1.49|
|Becton Dickinson BDX US||1.21||Becton Dickinson BDX US||1.21|
|Merck MRK US||2.53||Merck MRK US||2.53|
|US Healthcare iShares ETF IYH US||1.79||US Healthcare iShares ETF IYH US||1.79|
|United Healthcare UNH US||1.76||United Healthcare UNH US||1.76|
|Danaher DHR US||0.47|
|Thermo Fisher Scientific TMO US||0.25|
|Straumann ADR SAUHY US *||0.58|
|IBB Biotech ETF IBB US||0.10|
|Real Estate||Cdn Apt. REIT CAR.un||2.77||Cdn. Apt. REIT CAR.un||2.77|
|US Real Estate SPDR XLRE US||3.23||US Real Estate SPDR XLRE US||3.23|
|InterRent REIT IIP.un||2.05||InterRent REIT IIP.un||2.05|
|Dream Industrial DIR.un||5.80||Dream Industrial DIR.un||5.80|
|Summit REIT SMU.un||4.09||Summit REIT SMU.un||4.09|
|European Equity||iShares MSCI Europe XEU||3.42||iShares MSCI Europe XEU||3.42|
* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.
|McMurtry Investment Report – Sector Weights (July 2019)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix (July 2019)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Regular||20.00||10.00|
|Bonds – High Yield||5.00||5.00|