Market Watch Weekly - December 12, 2014

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In the past number of weeks we have been witness to considerable volatility within the North American capital markets. While this can present considerable emotional challenges for many investors, now is the time when we must look past these challenges, as difficult as that can be, and keep our focus on the long term investment goals we have established.

 

In a nutshell, this is not the financial crisis of 2008 and 2009 where North America entered into a recession. The North American financial system is healthy and both Canadian and American GDP are showing growth. Within this context we do not foresee Canada or the United States entering a recession, and thus would utilize this time to take advantage of certain opportunities south of the border to strengthen investment portfolios.

 

Within Canada, lower energy prices continue to weigh on our capital markets causing some consternation as talk of a short term oversupply situation dominates the headlines. However, longer term North American and Global energy demand continues to increase, which should see the oversupply worked off during the first half of next year, thus supporting higher longer term fundamental values. While nobody has a working crystal ball, our belief is that, over time, we will see oil prices stabilize and move higher over the course of next year. Having said this, as noted last week, we did modestly reduce our overall energy ownership over the past quarter, shifting those allocations towards the US Consumer sector.

 

The negative market activity we have seen thus far in December has not been confined to the Canadian markets, as we have also seen the S&P 500 pullback 2% so far this month.  As we wrote throughout  August and September we were looking for a pullback in the markets to deploy built up cash balances, particularly towards increasing our US investments. Just as we took advantage of the October pullback in the American markets we will again be taking advantage of this one to increase our ownership in the strengthening American economy, in particular the Consumer Staples, Consumer Discretionary and Information Technology sectors.

 

While the short term correction in the Canadian markets has been stronger than anticipated, with the S&P TSX seeing nearly a 15% decline over the past two and a half months, we do not see a recession developing in Canada, and thus we expect to see our Canadian investment holdings provide our clients with stronger returns over 2015. During this period the increasing shift towards greater US economic ownership unfortunately has been overshadowed by Canada, however we remain confident that as we move through the current pessimism, high quality Canadian assets that we continue to own will once again perform alongside our American asset counterparts. We are keeping our focus firmly on the longer term even as difficult as that feels.  The portfolio adjustments that are being made today will bear fruit over the coming months.

 

On a separate note, many of our readers hold the RP Debt Opportunities fixed income fund as part of their portfolio. Recently a letter was forwarded to each unit holder outlining changes that are taking place within the fund as a result of regulatory changes announced in 2013 by the federal government. We did find the letter a little difficult to understand and thought a clearer description of the letter would be welcomed.

In the past number of weeks we have been witness to considerable volatility within the North American capital markets. While this can present considerable emotional challenges for many investors, now is the time when we must look past these challenges, as difficult as that can be, and keep our focus on the long term investment goals we have established.

 

In a nutshell, this is not the financial crisis of 2008 and 2009 where North America entered into a recession. The North American financial system is healthy and both Canadian and American GDP are showing growth. Within this context we do not foresee Canada or the United States entering a recession, and thus would utilize this time to take advantage of certain opportunities south of the border to strengthen investment portfolios.

 

Within Canada, lower energy prices continue to weigh on our capital markets causing some consternation as talk of a short term oversupply situation dominates the headlines. However, longer term North American and Global energy demand continues to increase, which should see the oversupply worked off during the first half of next year, thus supporting higher longer term fundamental values. While nobody has a working crystal ball, our belief is that, over time, we will see oil prices stabilize and move higher over the course of next year. Having said this, as noted last week, we did modestly reduce our overall energy ownership over the past quarter, shifting those allocations towards the US Consumer sector.

 

The negative market activity we have seen thus far in December has not been confined to the Canadian markets, as we have also seen the S&P 500 pullback 2% so far this month.  As we wrote throughout  August and September we were looking for a pullback in the markets to deploy built up cash balances, particularly towards increasing our US investments. Just as we took advantage of the October pullback in the American markets we will again be taking advantage of this one to increase our ownership in the strengthening American economy, in particular the Consumer Staples, Consumer Discretionary and Information Technology sectors.

 

While the short term correction in the Canadian markets has been stronger than anticipated, with the S&P TSX seeing nearly a 15% decline over the past two and a half months, we do not see a recession developing in Canada, and thus we expect to see our Canadian investment holdings provide our clients with stronger returns over 2015. During this period the increasing shift towards greater US economic ownership unfortunately has been overshadowed by Canada, however we remain confident that as we move through the current pessimism, high quality Canadian assets that we continue to own will once again perform alongside our American asset counterparts. We are keeping our focus firmly on the longer term even as difficult as that feels.  The portfolio adjustments that are being made today will bear fruit over the coming months.

 

On a separate note, many of our readers hold the RP Debt Opportunities fixed income fund as part of their portfolio. Recently a letter was forwarded to each unit holder outlining changes that are taking place within the fund as a result of regulatory changes announced in 2013 by the federal government. We did find the letter a little difficult to understand and thought a clearer description of the letter would be welcomed.

The forward agreement currently in place within the RP Debt Opportunities Fund will be eliminated effective January 1st 2015 and the strategy will be moving to a master-feeder structure reducing overall fund expenses by approximately 35 basis points. What this means for our investors is that the costs incurred by the fund manager to run this exceptional fixed income fund will decline, to the benefit of investors.

A second major point within that letter was that this new structure will allow the fund to utilize an attractive tax election whereby there will be a small amount of income annually and then capital gains. The benefit to investors is that you will now hold a very tax efficient fixed income fund, where much of your returns will be classified as capital gain and not fully taxable interest income.

 

Thank you for your trust.

 

As always, we welcome your feedback.  Have a great weekend.

The Dekker Hewett Group

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