Also available in PDF: MIR Portfolios May 2019
Investment Commentary May 2019
Asset Mix Changes
I am not making any asset mix changes this month. Equity markets have rebounded sharply year to date, far outpacing the muted earnings growth. This has resulted in the US market multiple rising to 17.5 times, considerably higher than the long-term average of 15-16 times. At current levels the US equity market is technically overbought and a short-term correction is possible.
My current recommended cash levels of 35% and 30% for the Income and Growth portfolios respectively provide a sufficient cushion from any market volatility. For those of you with limited cash, it is not too late to take some profits.
While the majority of US companies have beaten consensus earnings estimates, it is important to point out that estimates have already been ratcheted down sharply as a result of the weak global economy.
Year over year comparisons are also challenging with the major benefit of last year’s tax cuts incorporated in last year’s numbers with very little incremental improvement this year.
Ed Yardeni, a US economist and strategist, anticipates a drop in the US operating earnings growth rate from 22.7% in 2018 to only 3.1% this year. The growth rate in 2017 was still a respectable 11.8%.
Probability of an Impending US Recession
The domestic US economy grew last quarter at a solid 3.2% annual rate with employment growth remaining strong.
The US yield curve turned positive once again indicating that the likelihood of a recession in the near term is unlikely in the US. However, the curve is still relatively flat.
Both investment grade and high yield corporate bond spreads relative to US Treasuries have come down and remain at levels that do not indicate any probability of a recession.
The Governor of the Federal Reserve indicated that the current low level of US inflation is most likely temporary. The Central Bank decided not to reduce interest rates despite pressure from Trump and the Republican administration. This can be viewed as a sign that they are not worried about a domestic recession in the immediate future. Unless inflation rises sharply it is not likely the Central Bank will increase rates any time soon.
China and its Ongoing Trade War with the US
The Chinese economy is responding favourably to its recent stimulus program. Excluding this week there had been positive rhetoric about some type of agreement being signed as early as this Friday.
However, Trump’s recent tweets, indicating that the current level and amount of US tariffs will go up sharply unless a trade deal is signed, have taken everyone by surprise, including all global equity markets and the Chinese officials. Trump has always been highly unpredictable. These tweets may only be a ploy to force China to the negotiating table faster. However, if no trade deal is signed and the higher tariffs go into place, the negative effect on the Chinese domestic economy will be devastating. As we all know a weaker China economy does not bode well for all global equity markets.
While it is difficult to determine the final outcome of these trade wars, Trump and the Republicans do want a signed trade deal before the next election in 2020. Furthermore, import tariffs would increase US domestic inflation more than warranted and would negatively affect Trump’s electoral support base.
I remain overweight: Technology, Industrials, Communication Services, Reits and Consumer Staples
I remain market weight Financials, Energy, Utilities and Healthcare
I remain underweight Materials and Consumer Discretionary
Please note that I have materially reduced my underweight for the Consumer Discretionary sector as a result of the strong US economy with its solid employment growth.
Common Equity Changes
The only stock change is the deletion of Sleep Country from both portfolios in the Consumer Discretionary sector. Proceeds can be redirected back into the other recommendations in this group including Amazon, Home Depot and Canadian Tire. Sleep Country’s same store sales have declined for four quarters in a row and the company is facing stiff competition.
Please note that there have been several dividend increases in my recommended stock list as follows:
Raytheon raised quarterly dividend by 8.6%
Air Products raised its quarterly dividend by 5.5%
Paychex raised its quarterly dividend by 10.7%
Straumann raised its annual dividend by 6%
Pembina Pipe raised its monthly dividend by 5.3%
Alimentation Couche-Tard raised its quarterly dividend by 25%
RBC raised its quarterly dividend by 4.1%
TD raised its quarterly dividend by 10.4%
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (May 2019)|
|Cash||Alterna Bank – High Interest Savings (2.35% current rate)||Alterna Bank – High Interest Savings (2.35% current rate)|
|EQ Bank – High Interest Savings ( 2.30% current rate)||EQ Bank – High Interest Savings ( 2.30% current rate)|
|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||3.82||Royal Bank RY||3.82|
|Bank of Montreal BMO||3.78||Bank of Montreal BMO||3.78|
|Bank of Nova Scotia BNS||4.72||Bank of Nova Scotia BNS||4.72|
|Intact Financial IFC||2.78||Intact Financial IFC||2.78|
|TD TD||3.87||TD TD||3.87|
|Sun Life SLF||3.61||Sun Life SLF||3.61|
|JP Morgan JPM US||2.78||JP Morgan JPM US||2.78|
|Bank of America BAC US||1.97||Bank of America BAC US||1.97|
|Citibank C US||2.56||Citibank C US||2.56|
|Morgan Stanley MS US||2.52||Morgan Stanley MS US||2.52|
|T. Rowe Price TROW US||2.87||T. Rowe Price TROW US||2.87|
|Keycorp KEY US||3.85||Keycorp KEY US||3.85|
|PNC Fin’l PNC US||2.79||PNC Fin’l PNC US||2.79|
|Energy||Suncor SU||3.90||Suncor SU||3.90|
|Freehold FRU||7.22||Freehold FRU||7.22|
|Torc TOG||5.67||Torc TOG||5.67|
|Pembina Pipe Lines PPL||5.05||Pembina Pipe Lines PPL||5.05|
|Enbridge ENB||5.98||Enbridge ENB||5.98|
|Trans Canada TRP||4.76||Trans Canada TRP||4.76|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.23||Agnico Eagle AEM||1.23|
|Franco Nevada FNV||1.35||Franco Nevada FNV||1.35|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.21|
|Industrials||Toromont TIH||1.68||Toromont TIH||1.68|
|Air Products APD US||2.25||Air Products APD US||2.25|
|WSP Global WSP||2.11||WSP Global WSP||2.11|
|Canadian Pacific CP||0.87||Canadian Pacific CP||0.87|
|Raytheon RTN US||2.09||Raytheon RTN US||2.09|
|Aecon Group ARE||3.17||Aecon Group ARE||3.17|
|Guggenheim Eq WT IND RGI US||1.36||Guggenheim Eq Wt IND RGI US||1.36|
|Honeywell HON US||1.90||Honeywell HON US||1.90|
|TFI Int’l TFII||2.19||TFI Int’l TFII||2.19|
|Consumer Discretionary||Home Depot HD US||2.73||Home Depot HD US||2.73|
|Canadian Tire CTC.A||2.72||Canadian Tire CTC.A||2.72|
|Amazon AMZN US||0.00||Amazon AMZN US||0.00|
|Lowes LOW US||1.72||Lowes LOW US||1.72|
|Communication Services||Rogers B RCI.B||2.92||Rogers B RCI.B||2.92|
|Facebook FB US||0.00|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.63||Alimentation Couche Tard ATD.b||0.63|
|Loblaws L||1.91||Loblaws L||1.91|
|Constellation Brands STZ US||1.27||Constellation Brands STZ US||1.27|
|Unilever PLC UL US||2.93||Unilever PLC UL US||2.93|
|Technology||Apple AAPL US||1.48||Apple AAPL US||1.48|
|Microsoft MSFT US||1.44||Microsoft MSFT US||1.44|
|Open Text OTEX||1.73||Open Text OTEX||1.73|
|Paychex PAYX US||2.93||Paychex PAYX US||2.93|
|Cisco CSCO US||2.56||Cisco CSCO US||2.56|
|ETFMG Prime Cyber Sec. HACK US||0.15|
|Visa V US||0.64|
|Utilities||Algonquin Power AQN||4.50||Algonquin Power AQN||4.50|
|Northland Power NPI||5.04||Northland Power NPI||5.04|
|Fortis FTS||3.63||Fortis FTS||3.63|
|Healthcare||Abbott Labs ABT US||1.62||Abbott Labs ABT US||1.62|
|Becton Dickinson BDX US||1.29||Becton Dickinson BDX US||1.29|
|Merck MRK US||2.77||Merck MRK US||2.77|
|US Healthcare iShares ETF IYH US||1.90||US Healthcare iShares ETF IYH US||1.90|
|United Healthcare UNH US||1.50||United Healthcare UNH US||1.50|
|Danaher DHR US||0.51|
|Thermo Fisher Scientific TMO US||0.27|
|Straumann ADR SAUHY US *||0.65|
|IBB Biotech ETF IBB US||0.30|
|Real Estate||Cdn Apt. REIT CAR.un||2.83||Cdn. Apt. REIT CAR.un||2.83|
|InterRent REIT IIP.un||2.13||InterRent REIT IIP.un||2.13|
|Dream Industrial DIR.un||6.04||Dream Industrial DIR.un||6.04|
|Summit REIT SMU.un||4.28||Summit REIT SMU.un||4.28|
|European Equity||iShares MSCI Europe XEU||2.98||iShares MSCI Europe XEU||2.98|
* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.
|McMurtry Investment Report – Sector Weights (May 2019)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix (May 2019)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Regular||20.00||10.00|
|Bonds – High Yield||5.00||5.00|