Market Watch Weekly - August 15, 2014

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This week has gone by with pretty much the same fanfare as last. Global capital markets have been relatively flat on a week over week basis. The individual days did have some more significant ups and downs, but on the whole have remained where they started the week. We would expect more of the same for the next few weeks as we are into the “dog days” of summer heading into the Labour Day long weekend.

 

Within Canada corporate earnings have continued to expand, with earnings coming in on average 5.2% ahead of analyst expectations, with six of our ten market sectors posting double digit gains. The energy and technology sectors have each shown year over year earnings growth of nearly 40%, with our Industrial, Discretionary and Financial Services sectors reporting strong earnings growth as well. Each of these sectors have been well represented within our client portfolios for quite some time and we have recently been increasing our Technology and Financial services ownership over the past quarter, while at the same time increasing our cash as we await further opportunities to present themselves over the remainder of the third quarter.

 

While the equity prices within the capital markets have not followed suit to the same degree, it is our firm belief that companies with strong earnings growth should also show strong return on equity (ROE) for investors over time. In a note recently published by Scotiabank it was noted that earnings have been rising faster than revenues, thus profit margins have expanded over the year and are expected to continue to do so as earnings and revenues appear well supported. Therefore we expect to see a good 12 to 18 month period in front of us for the equity investor.

 

Jason Donville, of Donville Kent Asset Management, recently wrote in his quarterly note to investors that Warren Buffett had developed a knack for finding high ROE stocks that have not reverted to their average valuation or have done so very slowly thus providing above average growth for his investors over a very long period of time. Now it is our job as advisors and Portfolio Managers to search out these companies and make some kind of prediction as to the sustainability of the competitive advantage these companies enjoy. While this is far from a perfect science we spend a considerable amount of time doing exactly this and look to be actively discussing these companies with you as we all get back from holiday after Labour Day.

 

On top of the growth we have seen from corporate Canada, we also continue to see broad gains in US economic activity. In a report from Bloomberg this morning, we saw that factories in July were the busiest in five months; manufacturing saw a 1% gain, and total industrial production, which included mining and utilities, advanced 0.4% for a second consecutive month. In a note this morning from Millan Mulraine, deputy head of U.S. research at TD Securities, it was stated that the manufacturing sector now appears to be firing on all cylinders and, if anything, that’s an indication that momentum in the U.S. economy is gathering steam.

 

As we look into our crystal ball, manufacturing activity appears to be remaining strong.  With the good macroeconomic fundamentals that we have observed after a weak first quarter, along with an improving labour market, we expect to see continued earnings growth within both Canada and the United States.

 

Like we said earlier, this is an imperfect science, because you just never know what geo-political headline might cross the tape one morning, or some piece of data out of Europe could signal that their still fragile recovery weakens. But as for now we remain optimistic, just with a bit more cash on hand than normal.

 

This week has gone by with pretty much the same fanfare as last. Global capital markets have been relatively flat on a week over week basis. The individual days did have some more significant ups and downs, but on the whole have remained where they started the week. We would expect more of the same for the next few weeks as we are into the “dog days” of summer heading into the Labour Day long weekend.

 

Within Canada corporate earnings have continued to expand, with earnings coming in on average 5.2% ahead of analyst expectations, with six of our ten market sectors posting double digit gains. The energy and technology sectors have each shown year over year earnings growth of nearly 40%, with our Industrial, Discretionary and Financial Services sectors reporting strong earnings growth as well. Each of these sectors have been well represented within our client portfolios for quite some time and we have recently been increasing our Technology and Financial services ownership over the past quarter, while at the same time increasing our cash as we await further opportunities to present themselves over the remainder of the third quarter.

 

While the equity prices within the capital markets have not followed suit to the same degree, it is our firm belief that companies with strong earnings growth should also show strong return on equity (ROE) for investors over time. In a note recently published by Scotiabank it was noted that earnings have been rising faster than revenues, thus profit margins have expanded over the year and are expected to continue to do so as earnings and revenues appear well supported. Therefore we expect to see a good 12 to 18 month period in front of us for the equity investor.

 

Jason Donville, of Donville Kent Asset Management, recently wrote in his quarterly note to investors that Warren Buffett had developed a knack for finding high ROE stocks that have not reverted to their average valuation or have done so very slowly thus providing above average growth for his investors over a very long period of time. Now it is our job as advisors and Portfolio Managers to search out these companies and make some kind of prediction as to the sustainability of the competitive advantage these companies enjoy. While this is far from a perfect science we spend a considerable amount of time doing exactly this and look to be actively discussing these companies with you as we all get back from holiday after Labour Day.

 

On top of the growth we have seen from corporate Canada, we also continue to see broad gains in US economic activity. In a report from Bloomberg this morning, we saw that factories in July were the busiest in five months; manufacturing saw a 1% gain, and total industrial production, which included mining and utilities, advanced 0.4% for a second consecutive month. In a note this morning from Millan Mulraine, deputy head of U.S. research at TD Securities, it was stated that the manufacturing sector now appears to be firing on all cylinders and, if anything, that’s an indication that momentum in the U.S. economy is gathering steam.

 

As we look into our crystal ball, manufacturing activity appears to be remaining strong.  With the good macroeconomic fundamentals that we have observed after a weak first quarter, along with an improving labour market, we expect to see continued earnings growth within both Canada and the United States.

 

Like we said earlier, this is an imperfect science, because you just never know what geo-political headline might cross the tape one morning, or some piece of data out of Europe could signal that their still fragile recovery weakens. But as for now we remain optimistic, just with a bit more cash on hand than normal.

 

For those of our readers looking for something on the different side of life to do this weekend, head up to Whistler Blackcomb for “The Canadian Cheese Rolling Festival.” For those of you asking yourself what in the world cheese rolling is, here is how their website describes it:

 

“Cheese Rolling is deceptively simple: an 11-pound wheel of cheese is rolled down a hill and everyone chases it, slipping, tripping and tumbling on the way down. The lucky winner gets to keep the cheese, and get two ski season passes to Whistler Blackcomb!” “Helmets will be provided”

 

The origin of this festival apparently dates back centuries, as the English have been chasing cheese down Cooper’s Hill in Gloucestershire for quite some time.

 

There will also be tasting seminars by cheesemakers and plenty of activities for kids as well.

 

For those wanting to stay a little closer to home, there is the Glotman Simpson Challenge tomorrow as well. Cyclists from across the lower mainland will be racing up Cypress Mountain Road all in the name of charity, as all proceeds raised will be going towards Pancreatic Research. Our own Mark Hewett and Erik Dekker will be participating, along with several others from Canaccord Genuity.

 

Have a great weekend.

 

Thank you for your trust.

As always, we welcome any feedback.

 

The Dekker Hewett Group

 

 

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