Also available in PDF: MIR Portfolios November 2018
Investment Commentary (November 2018)
This week the US midterm elections occur on Tuesday. It is anticipated that the Republicans will win the Senate with the Democrats expected to take the House of Representatives.
Regardless of my political distaste for Donald Trump and his extreme right wing Republican backers, the following outcomes will most likely determine the short term outlook for the equity markets.
If the Republicans win both houses of government, the market will rise.
If the Democrats win both houses, the markets will fall.
If there is a split vote, markets will probably trade within a narrow range.
I was listening the other night to Ian de Verteuil, CIBC’s market strategist. He feels that regardless of who wins the midterm elections markets will refocus on the ongoing trade war between the US and China.
This current trade war is showing no signs of getting resolved anytime in the immediate future. In fact many are now calling it a cold war comparable to what happened between the US and the Soviet Union many years ago when JFK was president.
Ongoing trade wars, higher interest and labour rates continue to create headwinds for equity markets.
Despite these factors, the recent equity correction, which may not be completely finished, has now provided much better market valuations. In the US PE multiples have come down from over 18 times to 16 times earnings. Corporate earnings growth remains very strong but is expected to come down from 20% year over year to a more sustainable 10% level.
Asset Mix Changes
As I still do not anticipate an economic recession within the next 18 months, I am now recommending a reduction of 5% cash for both portfolios with the monies directed back into equities. Please keep in mind that we remain in the latter stages of an economic cycle and the cyclical upturn is not expected to last nearly as long as was the case 3-4 years ago.
Prices of preferred shares have been all over the map in the last few months with some resets falling sharply in the midst of a rising interest rate environment.
My advice is to stay the course with rate reset preferreds as long as the interest rates continue to rise.
I am recommending the addition of Royal Bank rate reset preferred J that has a reset option within the next few years. It offers a solid yield and is trading below par value.
In terms of sector weights I am recommending the following:
Overweight Financials, Industrials, Technology and Consumer Discretionary
Market Weight Healthcare, Communication Services and Reits
Underweight Energy, Materials, Consumer Staples and Utilities
In terms of the Energy sector, I am switching from a slight overweight to an underweight.
World crude oil prices are being negatively affected by Trump’s threats against Saudi Arabia to increase production. The Saudis are being extra compliant with the US with the embarrassing Khashoggi incident hanging over their heads.
In addition the fully anticipated US oil sanctions against Iranian production are now in question with seven countries receiving exemptions. It appears to me that Trump is totally preoccupied with keeping crude prices low before the midterm elections.
In regards to the Canadian crude price discount over WTI, today’s extra wide discount is expected to shrink meaningfully over the next 6-12 months with a US refinery coming back into production and Enbridge’s Line 3 pipeline replacement project looking more likely to be approved by the Minnesota Public Utilities Commission.
I am switching to an underweight position until the short term headwinds are resolved, but want to maintain a reasonable exposure nevertheless should the situation turn positive.
I am advising selling Vermillion Energy and redeploying the proceeds into Parex, another Canadian producer that receives the higher Brent pricing. Differing from Vermillion, Parex has no long term debt making it a much stronger company financially. However it does not pay a dividend.
In the Materials sector, I am advising the purchase of the iUnits Global Gold ETF XGD for the Growth portfolio only. This will benefit when inflationary expectations start to escalate from the ongoing trade war and higher labour rates.
In the Consumer Discretionary area, I am recommending the deletion of Stanley Black and Decker. The company’s earnings growth rate is declining and they are facing stiff competition in their markets.
Early last month I sent out a blog recommending switching out of SNC into Aecon in the Industrials sector. Aecon is benefitting from many new projects while SNC is facing a major lawsuit regarding their business practices.
The recent market decline is providing buying opportunities in companies and sectors like Amazon, Google, Visa in addition to the Canadian and US banks.
McMurtry Investment Report – Portfolios (November 2018)
|Cash||Alterna Bank – High Interest Savings (2.05% current rate)||Alterna Bank – High Interest Savings (2.05% current rate)|
|EQ Bank – High Interest Savings ( 2.30% current rate)||EQ Bank – High Interest Savings ( 2.30% current rate)|
|Bonds||iShares XSB Short Term||iShares XSB Short Term|
|iShares XFR Floating Rate||iShares XFR Floating Rate|
|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|
|Preferreds||Security||Dividend Yield %||Security||Dividend Yield %|
|Enbridge Pfd V Enb.pr.V US||6.52||Enbridge Pfd V Enb.pr.V US||6.52|
|Horizons Active Mgt. Pfd HPR||3.94||Horizons Active Mgt. Pfd HPR||3.94|
|Royal Bank RY.PR.J||3.71||Royal Bank RY.PR.J||3.71|
|Industrial Alliance IAG.PR.G||4.11||Industrial Alliance IAG.PR.G||4.11|
|Common Stocks||Security||Dividend Yield %||Security||Dividend Yield %|
|Financials||Royal Bank RY||4.11||Royal Bank RY||4.11|
|National Bank||4.15||National Bank||4.15|
|TD TD||3.68||TD TD||3.68|
|CIBC CM||4.79||CIBC CM||4.79|
|Sun Life SLF||3.94||Sun Life SLF||3.94|
|JP Morgan JPM US||3.00||JP Morgan JPM US||3.00|
|Bank of America BAC US||2.24||Bank of America BAC US||2.24|
|Citibank C US||2.79||Citibank C US||2.79|
|Goldman Sachs GS US||1.46||Goldman Sachs GS US||1.46|
|T. Rowe Price TROW US||2.91||T. Rowe Price TROW US||2.91|
|iUnits US Regional Banks IAT US||1.93||iUnits US Regional Banks IAT US||1.93|
|Keycorp KEY US||2.81||Keycorp KEY US||2.81|
|Paychex PAYX US||3.47||Paychex PAYX US||3.47|
|PNC Fin’l PNC US||3.05||PNC Fin’l PNC US||3.05|
|Energy||Suncor SU||3.31||Suncor SU||3.31|
|Freehold FRU||6.59||Freehold FRU||6.59|
|Whitecap WCP||5.20||Whitecap WCP||5.20|
|Torc TOG||5.22||Torc TOG||5.22|
|Pembina Pipe Lines PPL||5.27||Pembina Pipe Lines PPL||5.27|
|Enbridge ENB||6.70||Enbridge ENB||6.70|
|Centennial Resources CDEV US||0.00|
|Step Energy STEP||0.00|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.17||Agnico Eagle AEM||1.17|
|Franco Nevada FNV||1.53||Franco Nevada FNV||1.53|
|BMO Global Base Metal ETF ZMT||1.65||BMO Global Base Metal ETF ZMT||1.65|
|iShares Global Gold ETF XGD||0.23|
|Trevali Mining TV||0.00|
|Industrials||Toromont TIH||1.50||Toromont TIH||1.50|
|WSP Global WSP||2.30||WSP Global WSP||2.30|
|Canadian Pacific CP||0.98||Canadian Pacific CP||0.98|
|Raytheon RTN US||1.91||Raytheon RTN US||1.91|
|Aecon Group ARE||2.67||Aecon Group ARE||2.67|
|Guggenheim Eq WT IND RGI US||1.13||Guggenheim Eq Wt IND RGI US||1.13|
|Honeywell HON US||2.29||Honeywell HON US||2.29|
|Finning FTT||2.90||Finning FTT||2.90|
|TFI Int’l TFII||1.96||TFI Int’l TFII||1.96|
|Fedex FDX US||1.20|
|Consumer Discretionary||Home Depot HD US||2.34||Home Depot HD US||2.34|
|Sleep Canada ZZZ||3.10||Sleep Canada ZZZ||3.10|
|Canadian Tire CTC.A||2.45||Canadian Tire CTC.A||2.45|
|Amazon AMZN US||0.00||Amazon AMZN US||0.00|
|Magna MG||2.68||Magna MG||2.68|
|Lowes LOW US||2.03||Lowes LOW US||2.03|
|Communication Services||Rogers B RCI.B||2.83||Rogers B RCI.B||2.83|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.62||Alimentation Couche Tard ATD.b||0.62|
|Loblaws L||1.80||Loblaws L||1.80|
|Constellation Brands STZ US||1.49||Constellation Brands STZ US||1.49|
|Unilever PLC UL US||3.35||Unilever PLC UL US||3.35|
|Technology||Apple AAPL US||1.41||Apple AAPL US||1.41|
|Microsoft MSFT US||1.77||Microsoft MSFT US||1.77|
|Open Text OTEX||1.83||Open Text OTEX||1.83|
|Nvidia NVDA US||0.30|
|ETFMG Prime Cyber Sec. HACK US||0.01|
|Visa V US||0.72|
|Utilities||Algonquin Power AQN||5.06||Algonquin Power AQN||5.06|
|Fortis FTS||4.17||Fortis FTS||4.17|
|Healthcare||Abbott Labs ABT US||1.65||Abbott Labs ABT US||1.65|
|Johnson & Johnson JNJ US||2.56||Johnson & Johnson JNJ US||2.56|
|Merck MRK US||3.04||Merck MRK US||3.04|
|US Healthcare iShares ETF IYH US||1.10||US Healthcare iShares ETF IYH US||1.10|
|United Healthcare UNH US||1.39||United Healthcare UNH US||1.39|
|Eli Lilly LLY US||2.08||Eli Lilly LLY US||2.08|
|CVS US||2.76||CVS US||2.76|
|Danaher DHR US||0.65|
|Thermo Fisher Scientific TMO US||0.29|
|IBB Biotech ETF IBB US||0.30|
|Real Estate||Cdn Apt. REIT CAR.un||2.89||Cdn. Apt. REIT CAR.un||2.89|
|InterRent REIT IIP.un||2.12||InterRent REIT IIP.un||2.12|
|Summit REIT SMU.un||5.72||Summit REIT SMU.un||5.72|
|European Equity||iShares MSCI Europe XEU||2.72||iShares MSCI Europe XEU||2.72|
McMurtry Investment Report – Sector Weights (November 2018)
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||60 % US / 40% CDN|
McMurtry Investment Report Asset Mix (November 2018)
|Asset Mix – Income and Growth Portfolios|