McMurtry Investment Report Portfolios – October 2018

Also available in PDF: MIR Portfolios October 2018

Investment Commentary (October 2018)

Equity markets continue to digest a multitude of headwinds that are causing a lot of market volatility.

Despite the very strong corporate earnings growth, markets are looking beyond these numbers into next year. The combination of rising materials, energy and labour will put a lid on operating margins. The annual benefits of the US corporate tax cuts will diminish over time.

Rising interest rates are now becoming a real threat to the economic expansion. The US / China trade war is escalating with no signs of any agreement in the near future.

Economic growth is slowing in Europe, China and India. In addition the rising US dollar is putting enormous pressure on Emerging Market economies where their debt is mainly in US dollars. The threat of contagion in this region is a real possibility and this could cause equity markets to fall even more.

Taking all these factors into consideration, I am recommending an additional 5% in cash with a corresponding reduction in equities.
As the Canadian equity market has lagged the US one and may begin to play catch up, I am changing my North American benchmark equity weight to 60% US 40% Canada from the previous 65% US 35% Canada. Both the signing of a new NAFTA combined with the $40 billion LNG plant will provide some benefit to the domestic economy and remove a lot of uncertainty.

Currently I think we are in a short term correction phase of the market and not in a full bear market yet. We may easily see a 10-15% market pullback. If I believed we were in the beginning of a bear market, I would have even more cash and much less equities than I am currently recommending.

However this is not the time to take on more market risk. It is a time to take profits and batten down the hatches.

We are in the latter stages of the economic cycle and within 12-18 months we will most likely be in a recession. The stock market usually anticipates a recession at least six months in advance. I recommend keeping fixed income maturities short until interest rates stop going up. In this environment preferred shares will continue to do well.

In terms of equity sectors, I remain overweight my new 60% US 40% Canada benchmark Technology, Financial, Consumer Discretionary, Industrials and Energy. Please note that I am reducing my overweight in the Consumer Discretionary sector based on rising rates.

I remain underweight Materials, Utilities, Consumer Staples and the new Communications Services sector.

This new revamped Communications Services sector contains both the phone companies but also companies such as Disney, Facebook, Twitter, Netflix and Alphabet that were previously in other sectors.
The technology sector is now smaller with the exit of Alphabet, Facebook and Netflix.

I remain market weight Healthcare and Real Estate. I am deleting Chartwell Retirement from both portfolios. The company is experiencing greater competition and will not benefit from higher rates. Proceeds can be placed in the remaining REIT’s that are apartment and logistics ones.

In the financial services area, I am removing Blackrock. While this is a great company and is an innovator in its field, falling equity markets hurt passive index funds more than active managed portfolios.

In the Industrials space, I am removing Dow Dupont. The company’s earnings growth rate is slowing and it is also been hit by rising input costs. However I am adding CNR to both portfolios. The company is benefitting from improving year over year comparisons and has recently signed a long term contract with Cenovus for transporting crude oil. I am also adding TFI International to both portfolios. This is the old TransForce company that is involved in both transportation and logistics. The company is experiencing strong earnings and cash flow growth and rising dividends. Finally I am recommending a switch out of General Dynamics into Raytheon. The latter company has better growth prospects and has lower overall debt levels.

In the materials sector, I am removing Lundin Mining and Hudbay and recommend the proceeds be placed in BMO’s Global Base Metals ETF ZMT. This ETF is also hedged to the Canadian dollar and offers lower volatility than individual base metal company names. I am keeping Trevali Mining for now as the stock is extremely cheap.

In the Consumer Discretionary sector, I am removing both Carnival Cruise Lines and Kohl’s Department Stores. Rising rates combined with ongoing trade wars do not bode well for these companies. There is an oversupply in the leisure cruise industry at the moment.
I also removed Dollarama earlier in the month with a slowing in same store sales.

I am keeping a small overweight in Energy despite its current problems with the widening discount of Western Canadian Select crude prices. The long term price outlook for both WTI and Brent pricing remains favourable.

McMurtry Investment Report – Portfolios (October 2018)

	Income		Growth
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	6.22	Enbridge Pfd V Enb.pr.V US	6.22
	Horizons Active Mgt. Pfd HPR	3.79	Horizons Active Mgt. Pfd HPR	3.79
	Industrial Alliance IAG.PR.G	3.92	Industrial Alliance IAG.PR.G	3.92
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.79	Royal Bank RY	3.79
	National Bank	3.84	National Bank	3.84
	TD TD	3.41	TD TD	3.41
	CIBC CM	4.49	CIBC CM	4.49
	Sun Life SLF	3.70	Sun Life SLF	3.70
	JP Morgan JPM US	2.84	JP Morgan JPM US	2.84
	Bank of America BAC US	2.04	Bank of America BAC US	2.04
	Citibank C US	2.51	Citibank C US	2.51
	Goldman Sachs GS US	1.43	Goldman Sachs GS US	1.43
	T. Rowe Price TROW US	2.56	T. Rowe Price TROW US	2.56
	iUnits US Regional Banks IAT US	1.82	iUnits US Regional Banks IAT US	1.82
	Keycorp KEY US	2.51	Keycorp KEY US	2.51
	Paychex PAYX US	3.04	Paychex PAYX US	3.04
	PNC Fin’l PNC US	2.79	PNC Fin’l PNC US	2.79
Energy	Suncor SU	2.88	Suncor SU	2.88
	Freehold FRU	5.66	Freehold FRU	5.66
	Whitecap WCP	4.13	Whitecap WCP	4.13
	Torc TOG	3.99	Torc TOG	3.99
	Pembina Pipe Lines PPL	5.19	Pembina Pipe Lines PPL	5.19
	Enbridge ENB	6.44	Enbridge ENB	6.44
	Vermilion Energy VET	6.48	Vermilion Energy VET	6.48
			Centennial Resources CDEV US	0.00
			Step Energy STEP	0.00
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.25	Agnico Eagle AEM	1.25
	Franco Nevada FNV	1.55	Franco Nevada FNV	1.55
	BMO Global Base Metal ETF ZMT	2.53	BMO Global Base Metal ETF ZMT	2.53
			Trevali Mining TV	0.00
			Roxgold ROXG	0.00
Industrials	Toromont TIH	1.38	Toromont TIH	1.38
	WSP Global WSP	2.12	WSP Global WSP	2.12
	Canadian Pacific CP	0.95	Canadian Pacific CP	0.95
	CNR	1.57	CNR	1.57
	Raytheon RTN US	1.68	Raytheon RTN US	1.68
	SNC Lavalin SNC	2.18	SNC Lavalin SNC	2.18
	Guggenheim Eq WT IND RGI US	1.01	Guggenheim Eq Wt IND RGI US	1.01
	Honeywell HON US	1.97	Honeywell HON US	1.97
	Finning FTT	2.54	Finning FTT	2.54
	TFI Int’l TFII	1.90	TFI Int’l TFII	1.90
			Fedex FDX US	1.08
Consumer Discretionary	Home Depot HD US	1.99	Home Depot HD US	1.99
	Sleep Canada ZZZ	2.57	Sleep Canada ZZZ	2.57
	Stanley Black and Decker SWK US	1.80	Stanley Black and Decker SWK US	1.80
	Canadian Tire CTC.A	2.38	Canadian Tire CTC.A	2.38
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Magna MG	2.53	Magna MG	2.53
	Lowes LOW US	1.67	Lowes LOW US	1.67
Communication Services	Rogers B RCI.B	2.89	Rogers B RCI.B	2.89
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.62	Alimentation Couche Tard ATD.b	0.62
	Loblaws L	1.78	Loblaws L	1.78
	Constellation Brands STZ US	1.37	Constellation Brands STZ US	1.37
	Unilever PLC UL US	3.30	Unilever PLC UL US	3.30
Technology	Apple AAPL US	1.29	Apple AAPL US	1.29
	Microsoft MSFT US	1.61	Microsoft MSFT US	1.61
	Open Text OTEX	1.61	Open Text OTEX	1.61
			Nvidia NVDA US	0.21
			ETFMG Prime Cyber Sec. HACK US	0.01
			Shopify SHOP	0.00
			Visa V US	0.56
Utilities	Algonquin Power AQN	5.01	Algonquin Power AQN	5.01
	Fortis FTS	4.06	Fortis FTS	4.06
Healthcare	Abbott Labs ABT US	1.53	Abbott Labs ABT US	1.53
	Johnson & Johnson JNJ US	2.61	Johnson & Johnson JNJ US	2.61
	Merck MRK US	2.71	Merck MRK US	2.71
	US Healthcare iShares ETF IYH US	1.02	US Healthcare iShares ETF IYH US	1.02
	United Healthcare UNH US	1.35	United Healthcare UNH US	1.35
	Eli Lilly LLY US	2.10	Eli Lilly LLY US	2.10
	CVS US	2.54	CVS US	2.54
			Danaher DHR US	0.59
			Thermo Fisher Scientific TMO US	0.28
			IBB Biotech ETF IBB US	0.26
Real Estate	Cdn Apt. REIT CAR.un	2.79	Cdn. Apt. REIT CAR.un	2.79
	InterRent REIT IIP.un	2.30	InterRent REIT IIP.un	2.30
	Summit REIT SMU.un	5.75	Summit REIT SMU.un	5.75
European Equity	iShares MSCI Europe XEU	2.71	iShares MSCI Europe XEU	2.71

McMurtry Investment Report – Sector Weights (October 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	60 % US / 40% CDN
Financials	24.00	34.30	13.30	21.70
Energy	11.75	19.10	6.00	11.24
Materials	4.00	10.10	2.40	5.48
Industrials	11.06	10.60	9.70	10.06
Consumer Disc.	8.25	4.40	10.30	7.94
Comm. Services	7.60	5.30	10.00	8.12
Consumer Staples	4.00	3.40	6.70	5.38
Technology	15.28	4.10	21.00	14.24
Utilities	2.00	3.70	2.80	3.16
Real Estate	2.86	3.10	2.70	2.86
Healthcare	9.80	2.00	15.00	9.80
Totals	100.60	100.10	99.90	99.98

McMurtry Investment Report Asset Mix (October 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	42.50	37.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	32.50	47.50
CDN	11.00	17.00
US	16.50	25.50
Europe	5.00	5.00
Emerging Markets	0.00	0.00

Also available in PDF: MIR Portfolios April 2019

Investment Commentary (April 2019)

Asset Mix Changes

Last week both the Canadian and US yield curve inverted where short rates exceeded longer maturities. For most of the past economic recessions, an inverted yield curve occurred 6-18 months before the onslaught of an economic slowdown. Consequently, this signal should not be taken lightly and brushed off as is frequently the case with economists stating that things are different this time.

This week the inversion of the curve went away in both Canada and the US with longer rates now slightly exceeding shorter maturities. However, the negative yield curve is still present in Europe where their economy continues to suffer.

US corporate bond spreads for both investment and High Yield securities had been creeping up in late December. However, year to date corporate spreads over US Treasuries have been coming down once again. Historically when corporate spreads widen this is a danger signal for an economic slowdown. The recent reduction is spreads is a positive sign that the economy may not be as weak as many pundits are saying.

Overall economic activity is definitely slowing globally. This is also true in the US but their economy is still growing on a relative basis much faster than Europe and Canada. Economic growth in the Chinese economy had been coming down sharply, but this week an announcement came out stating that their domestic industrial production started to revive after nearly nine months of decline. Several months ago the Chinese authorities began stimulating their domestic economy by lowering corporate taxes and increasing government spending. Once again this is a positive development.

The Federal Reserve has stopped increasing rates by emphatically stating that there will be no more rate increases for the remainder of the year.

US corporate profit growth has slowed dramatically from last year, while equity prices have rebounded sharply year to date. Equity valuations are no longer cheap as they were in late December.

This week the US / China trade talks have taken a more positive tone which is good for markets.

Taking all these factors into consideration, I have decided to leave the asset mix for both portfolios the same as last month. The jury is still out if an economic recession is imminent or only years away.

McMurtry Investment Report Asset Mix (April 2019)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	35.00	30.00
Bonds – Regular	20.00	10.00
Bonds – High Yield	5.00	5.00
Preferreds	0.00	0.00
Equities	40.00	55.00
CDN	15.75	22.50
US	19.25	27.50
Europe	5.00	5.00
Emerging Markets	0.00	0.00

Equity Sectors

The main change to my equity sector recommendations is to reduce the Financial equity exposure from overweight to market weight the 55% US 45% Canada benchmark. This works out to a new weight of 21.25% of my North American equity exposure.

The reason for my reduction in weight for the Financial sector is all to do with interest rates and the slope of the yield curve. Lower rates combined with either a flat or inverted yield curve is not positive for the bank’s net interest margins. A slowing economy normally results in an increase in loan losses, another possible headwind.

For the other groups I remain market weight Energy, Utilities and Healthcare.

I remain overweight Technology, Industrials, Real Estate, Communication Services and Consumer Staples

I remain underweight Materials and Consumer Discretionary.

McMurtry Investment Report – Sector Weights (April 2019)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.25	31.70	12.70	21.25
Energy	11.07	18.00	5.40	11.07
Materials	5.66	11.20	2.60	6.47
Industrials	10.40	10.90	9.50	10.13
Consumer Disc.	6.40	4.10	10.10	7.40
Comm. Services	8.50	5.80	10.10	8.17
Consumer Staples	6.25	3.90	7.30	5.77
Technology	14.00	4.50	21.20	13.69
Utilities	3.71	4.20	3.30	3.71
Real Estate	3.75	3.50	3.10	3.28
Healthcare	9.02	2.20	14.60	9.02
Totals	100.00	100.00	99.90	99.95

Common Equity Changes

In the Financial Services sector, I am replacing National Bank with Intact Financial for both portfolios. Intact is the largest property / casualty company in Canada and will benefit from the recent departure of AIG, a large US competitor from the Canadian market. Intact is raising insurance rates in Ontario and this will help to increase operating margins. Differing from life insurance companies, property and casualty insurance companies have much shorter term liabilities and are consequently not as negatively affected from flat to falling interest rates as the life companies are.

In the Technology sector, I am deleting Nokia from both portfolios. Huawei, the Chinese company and major competitor to Nokia has been continuously lobbying the global wireless providers to encourage them to continue buying their products. It is only in the US that the Chinese company has been banned with its alleged cybersecurity activities. Thus, Nokia has not been as much of a beneficiary from the 5G wireless ramp up as originally expected. In addition, a law firm has recently alleged that Nokia’s Alcatel – Lucent division has some very serious potential claims for security law violations. This creates a lot of uncertainty. My recommendation is to sell your Nokia shares and use the proceeds to purchase more Cisco, which will be a major beneficiary from the upcoming 5G implementation.

In the healthcare sector I am adding the Swiss dental implant company, Straumann Holdings ADR to my Growth portfolio. This American Depositary Receipt is not very liquid in the US market, so please always use limit orders when buying and selling this security. Despite this shortfall, this is a good quality company and one of the global leaders in the dental implant industry. The company is experiencing strong annual revenue and gross profit growth in addition to record EBITDA margins. The company has strong organic growth and operates in 100 countries globally. The global dental implant market is expected to grow at 4-5% globally this year and Straumann’s organic growth is sharply outperforming its competitors.

Lastly in the Materials sector, I am adding Osisko Metals to my Growth portfolio. The company is a small cap zinc exploration company that operates in both the Far North and in New Brunswick. The company has no long term debt and the level of insider buying is unusually high. Normally I do not even discuss insider buying, but the level of insider buying for this company is extraordinary. The supply / demand situation for zinc is the most favourable for all the base metals with inventory stockpiles at very low levels. Should the Chinese economy rebound the demand for zinc will increase accordingly.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (April 2019)

	Income		Growth
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	4.05	Royal Bank RY	4.05
	Bank of Montreal BMO	4.00	Bank of Montreal BMO	4.00
	Bank of Nova Scotia BNS	4.89	Bank of Nova Scotia BNS	4.89
	Intact Financial IFC	2.69	Intact Financial IFC	2.69
	TD TD	4.08	TD TD	4.08
	Sun Life SLF	3.90	Sun Life SLF	3.90
	JP Morgan JPM US	3.16	JP Morgan JPM US	3.16
	Bank of America BAC US	2.17	Bank of America BAC US	2.17
	Citibank C US	2.89	Citibank C US	2.89
	Morgan Stanley MS US	2.84	Morgan Stanley MS US	2.84
	T. Rowe Price TROW US	3.04	T. Rowe Price TROW US	3.04
	Keycorp KEY US	4.32	Keycorp KEY US	4.32
	PNC Fin’l PNC US	3.10	PNC Fin’l PNC US	3.10
Energy	Suncor SU	3.85	Suncor SU	3.85
	Freehold FRU	7.43	Freehold FRU	7.43
	Torc TOG	5.62	Torc TOG	5.62
	Pembina Pipe Lines PPL	4.55	Pembina Pipe Lines PPL	4.55
	Enbridge ENB	6.04	Enbridge ENB	6.04
	Trans Canada TRP	4.91	Trans Canada TRP	4.91
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.15	Agnico Eagle AEM	1.15
	Franco Nevada FNV	1.29	Franco Nevada FNV	1.29
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.20
Industrials	Toromont TIH	1.55	Toromont TIH	1.55
	Air Products APD US	2.44	Air Products APD US	2.44
	WSP Global WSP	2.06	WSP Global WSP	2.06
	Canadian Pacific CP	0.94	Canadian Pacific CP	0.94
	CNR	1.79	CNR	1.79
	Raytheon RTN US	2.03	Raytheon RTN US	2.03
	Aecon Group ARE	3.33	Aecon Group ARE	3.33
	Guggenheim Eq WT IND RGI US	1.35	Guggenheim Eq Wt IND RGI US	1.35
	Honeywell HON US	2.07	Honeywell HON US	2.07
	TFI Int’l TFII	2.45	TFI Int’l TFII	2.45
Consumer Discretionary	Home Depot HD US	2.80	Home Depot HD US	2.80
	Sleep Canada ZZZ	3.77	Sleep Canada ZZZ	3.77
	Canadian Tire CTC.A	2.88	Canadian Tire CTC.A	2.88
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Lowes LOW US	1.75	Lowes LOW US	1.75
Communication Services	Rogers B RCI.B	2.78	Rogers B RCI.B	2.78
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.64	Alimentation Couche Tard ATD.b	0.64
	Loblaws L	1.79	Loblaws L	1.79
	Constellation Brands STZ US	1.69	Constellation Brands STZ US	1.69
	Unilever PLC UL US	3.06	Unilever PLC UL US	3.06
Technology	Apple AAPL US	1.54	Apple AAPL US	1.54
	Microsoft MSFT US	1.56	Microsoft MSFT US	1.56
	Open Text OTEX	1.58	Open Text OTEX	1.58
	Paychex PAYX US	2.79	Paychex PAYX US	2.79
	Cisco CSCO US	2.59	Cisco CSCO US	2.59
			Kinaxis KXS	0.00
			ETFMG Prime Cyber Sec. HACK US	0.15
			Visa V US	0.64
Utilities	Algonquin Power AQN	4.58	Algonquin Power AQN	4.58
	Northland Power NPI	5.12	Northland Power NPI	5.12
	Fortis FTS	3.64	Fortis FTS	3.64
Healthcare	Abbott Labs ABT US	1.60	Abbott Labs ABT US	1.60
	Becton Dickinson BDX US	1.23	Becton Dickinson BDX US	1.23
	Merck MRK US	2.65	Merck MRK US	2.65
	US Healthcare iShares ETF IYH US	1.84	US Healthcare iShares ETF IYH US	1.84
	United Healthcare UNH US	1.46	United Healthcare UNH US	1.46
			Danaher DHR US	0.52
			Thermo Fisher Scientific TMO US	0.28
			Straumann ADR SAUHY US *	0.63
			IBB Biotech ETF IBB US	0.28
Real Estate	Cdn Apt. REIT CAR.un	2.76	Cdn. Apt. REIT CAR.un	2.76
	InterRent REIT IIP.un	2.03	InterRent REIT IIP.un	2.03
	Dream Industrial DIR.un	5.83	Dream Industrial DIR.un	5.83
	Summit REIT SMU.un	4.35	Summit REIT SMU.un	4.35
European Equity	iShares MSCI Europe XEU	2.96	iShares MSCI Europe XEU	2.96

* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.

McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – October 2018

Investment Commentary (October 2018)

McMurtry Investment Report – Portfolios (October 2018)

McMurtry Investment Report – Sector Weights (October 2018)

McMurtry Investment Report Asset Mix (October 2018)

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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