A Companion Piece To Last Week's Market Watch Weekly: Active vs Passive Portfolio Management (April 27, 2017)

If you haven't had a chance to read our Market Watch Weekly from last week, please do so when you have a free moment. The compelling theme centered on our take on the on-going discussion around active versus passive portfolio management. With four Portfolio Managers at Dekker Hewett Group, it should come as no surprise that we are strong proponents of active portfolio management. For those of you who have already read it, we'd like to add a few additional comments.

Any discussion on passive management has to start with Vanguard Investments and their recent explosive growth. In the last three years, Vanguard has attracted $800 billion in equity funds in comparision to only $79 billion to another 4,000 Mutual Fund companies. Vanguard's total assets under management just crossed $4.2 trillion, up from $2.0 trillion three years ago.

A recent study by Kathleen Kahle (University of Arizona) and Rene Stulz (Ohio State) focussed on the "top-heaviness" of corporate America. The percentage of total income for all publicly traded US corporations coming from the largest 100 firms on the S&P 500 was 49% in 1975, 53% in 1995, and has exceeded 84% by 2015. These bigger companies fit nicely into Vanguard's wheelhouse when it comes to passive investing.  Where else can they invest the large amount of funds in their no-load mutual funds and ETFs? If not in the largest companies on the exchanges, they have to invest in the largest sector indices themselves.

Just this week, the NASDAQ enjoyed three consecutive record session closes, breaching 6,000 for the first time in history. The DOW and the S&P 500 were just shy of their own records. In addition to fund flows, it is individual company earnings that move these indicies higher. Just this week, 40% or 190 members of the S&P 500 are due to report first quarter earnings, including the likes of Google's parent Alphabet, Amazon, and Exxon Mobile to highlight a few. Currently, Information Technology is dominated by Apple, Facebook and Alphabet, Consumer Discretionary is lead by Amazon and Netflix, and Financials in the US are no different with Citigroup, JP Morgan and Morgan Stanley dominating the investment landscape. It is not hard to see a positive feedback loop developing as earning's beats for individual companies draw in more buying into their respective stocks and indices they influence. As the DOW advanced strongly following the election of President Trump, it was not uncommon to see the vast majority of the moves higher attributed to no more than two or three companies.  Just look at the price activity in Caterpillar, McDonalds and Goldman Sachs.

Mergers and acquisitions have added to the trend towards larger, more dominate players in a number of industries. But we can save that for a future blog. Suffice to say for now that we've seen mergers as broad ranging as in the paintmaker industry (America's PPG for the Dutch AkzoNobel) through to the luxury goods sector  (LVMH, the world's largest luxury goods company is buying the stake in Christian Dior that it doesn't already own).

We are not saying that as active managers we are not involved in these companies or their stories, we're simply saying that we have the flexability to be somewhat more nimble when constructing our discretionary portfolios. Diversification and correlation in our portfolios are key, as is asset allocation and our ability to hold meaningful amounts in cash. All in the context of what's best for our clients.

Until next time,
Dekker Hewett Group

Keep An Eye On the Ten-Year US Treasury Yield: A Low Of 2.169% This Week Is A Far Cry From Year End Forecasts of 3% (April 20, 2017)

Going back just a few short months when the enthusiasm around the Trump Administration's corporate and personal tax cuts was seemingly front and center, only to be followed by substantial planned infrastructure spending, the yield on US ten-year treasuries had settled in at 2.65% and seemed destined to trend higher. The lion share of fixed income pundits were pronouncing the death of a generation long bull market in bonds and an inflection point had certainly been reached. Moreover, with the Federal Reserve’s plan for three rate increases through 2017, year-end targets for US ten-year treasuries at a full 3% seemed practical at the time. Purchasing Managers Index (PMI) readings in both Emerging and Developed Economies were showing coordinated strength for the first time in years, and inflation had either reached most central bank targets of 2% or was in fact slightly higher.

But a funny thing happened on the "Road to Rome". Yields seemed stuck in the 2.60%-2.65% range and eventually began to fall. Cash continued to flow into fixed income securities, mutual funds and ETFs, and resistance levels on US ten-year treasury yields were broken at 2.40%, again at 2.31%, and earlier this week after a few "Bullet Bid" days, a near term low was set at 2.169%. We all know the difficulties that have plagued the first few months of the Trump Administration; a stalled repeal of Obamacare, a tax reform package to reach Congress well after August, and an infrastructure plan that’s in its infant stage. Most recently, heightened political uncertainty surrounding Syria and North Korea have had their usual outcome; a flight to safety into gold (as it approached US$1,300) and US bonds.

So why are we so focused on a single yield, of a single bond maturity, of a single currency? Simply put, because the US ten-year treasury yield is the benchmark for ten-year yields internationally. It is used extensively in equity valuation models, and it influences REIT prices on a monthly basis. It was no surprise that when the US ten-year treasury yield dipped below 2.2% earlier this week, numerous North American REITs enjoyed 52-week highs.

We'll continue to pay close attention to where the US ten-year treasury yield is headed as Gross Domestic Product (GDP) numbers are released (US Q1 looks weakish), as inflation numbers come in either above or below the stated 2% targets, and as ever, how corporate earnings results hit the tape. We are early in the reporting season and already analysts are revising their estimates lower. Misses by Goldman Sachs (on fixed income, commodities and currencies), IBM (their 20th consecutive quarterly decline in sales) and Blackrock (the world’s biggest asset manager) have certainly caught the bond market's attention. Where is the ten-year yield headed? Stay tuned, as it really does matter.

Until next time,
Dekker Hewett Group

Release Of Federal Reserve Minutes Causes Biggest One Day Reversal In 14 Months (April 6, 2017)

The most relevant release yesterday was the minutes from the March 15th FOMC meeting that caught market participants quite off guard. North American equities started Wednesday on an extremely strong footing, with the print of private payrolls data from ADP Employment Change and Moody's Analytics showing 263,000 private sector jobs added in March against estimates of 185,000. The March report was in fact better than the revised February release of 245,000, and maintains the terribly strong start to 2017, with a consistent, positive trend away from service-oriented positions that have dominated the past.

Then came the FOMC meeting minutes an hour before the close that were interpreted by the market as being somewhat less dovish than Fed Chair Yellen's post meeting news conference a short three weeks ago. The key takeaway was that the Fed is starting to discuss various paths to the unwinding of the central bank's massive $4.5 trillion balance sheet. Coming out of the 2008 recession, the balance sheet was a modest $1.0 trillion. With quantitative easing and Fed tapering firmly in the rear view mirror in the US, it was only a matter of time before the Fed addressed the policy of reducing its balance sheet. To keep the concept as simple as possible, the Fed can let its holdings of US Treasuries and Mortgage Backed Securities (MBS) fall off their balance sheet as these bonds mature, and not roll them over into longer term positions. The majority of the Fed officials at the meeting believed that this reinvestment shift would be warranted later in the year, with further discussions to take place at upcoming meetings. The pace of the reinvestment shift over time and whether or not it would immediately include both Treasuries and MBS at the outset will be key determinants in their interest rate policy moves and the resulting shape of the yield curve. At the close, Fed Funds Futures markets were pricing in a 63.8% chance of an interest rate hike at their June 13-14 meeting.

Equity markets turned cautious immediately after the release of the minutes, as concern grew that this policy shift of reducing their asset holdings would come into effect just when the market has been concluding that there may be a delay in the timing of the Trump Administration's fiscal policy stimulus.  It also didn't help that a few Fed officials held the view that equity prices were "quite high” and that the economy was very close to their goal of inflation just above 2%.

Now, as important as ever, the market will be concentrating on the upcoming quarterly earnings release season that may well be the strongest since 2011. Estimates for earnings per share growth range between 9.1% to 10.2%. Numbers as strong as these may well be needed if the current stock market rally has further room to run.

Until next time,
Dekker Hewett Group

The 2017 Canadian Federal Budget : Few Surprises Amid US Policy Uncertainty (March 23, 2017) 

Yesterday, the Federal Finance Minister Bill Morneau released his second budget which did not have a great deal of difference from Budget 2016. Entitled "Building a Stronger Middle Class", the budget focused on providing fairness to Canada's middle class through spending and tax changes. It expanded on last year's "tax and spend" budget, while highlighting investments the federal government will be making in six key economic sectors: digital, clean energy, agri-food, advanced manufacturing, bio-sciences and clean resources. Inching its way towards the economy of the future, critics have already argued that Budget 2017 is a stay-the-course budget that continues to target export growth with ample reference to innovation and addressing Canada's infrastructure deficit (engineering, construction and transportation projects were all mentioned). The commitment of $96 billion in infrastructure spending from 2016 to 2028 is on its way and closer to disbursement.

Bay Street in particular breathed a collective sigh of relief as the Liberal government backed away from making any feared changes to the capital gains tax inclusion rate (now at 50%), and they left unchanged the tax treatment on dividends and employee option packages. The Honourable Bill Morneau did however caution Canadians that "further review of these tax credits" is ongoing, so this issue may well be back on the table shortly. Given the current uncertainty in the US with respect to planned changes in their corporate and personal income taxes, repealing Obamacare, and expected adjustments to cross border taxes / trade agreements, it was somewhat prudent for the Finance Minister to stand pat on present policies until we get a clearer indication of where the Trump administration is headed.

The deficit for 2017-2018 is predicted to come in at $28.5 billion, followed up by $27.4 billion for 2018-2019. Detailed projections on the deficit were made out to the fiscal year 2021-2022 at $18.8 billion, but unfortunately no reference was made by the Liberal government as to when a balanced budget would occur. As always with Budgets, "the devil is in the detail" so we're providing a link to an excellent report on the Federal budget put out by Canaccord Genuity Wealth Management.  Please click on the link below to access the full report.

2017 Federal Budget

Until next time,
Dekker Hewett Group

Federal Reserve Chair Yellen Clearly A Star For The Day (March 16, 2017)

Both the equity and fixed income markets reacted favourably yesterday, as the Federal Reserve completed its two day meeting with the announcement of a 25 basis point increase in their short-term interest rate to a range between 0.75% and 1%. This is the Fed's third interest rate hike in a decade, but the second in the past quarter as the Fed begins their process of normalizing Monetary Policy. The 25 basis point increase was entirely priced in and takes the lower band of their target interest-rate corridor to 0.75%; the highest level since before the collapse of Lehman Brothers in 2008. The balance of the official release was slightly less hawkish than last December's, with economic projections largely unchanged and GDP growth expected to hover around 2% for the next three years. The Fed is confident that inflation will fully reach its 2% target by year end, and remain around that level throughout 2018. Moreover, the market was pleased to see that only two more rate increases are expected through the Fed's "Dot Plots" over the balance of the year.

Fed Chair Janet Yellen also successfully stickhandled her way through the post meeting press conference. Gold futures advanced by over 2%, and we saw subsequent moves in Japanese (Nikkei)  and European shares which both closed at 15-month highs. Notably, the Fed stated that they will be taking a cautious approach to dealing with the massive collection of debt (US Treasuries and MBSs) that it currently owns, with no immediate plans to cut or reduce the current size of its balance sheet.  In our view, the two additional expected rate hikes leave the summer open to keep only one eye on the Fed, until potential increases in September and December (data dependent of course). It allows us at DHG more time to focus on corporate earnings growth, relative sector performance, and the current dilemma on whether Oil at US$50 per barrel will be a floor or a ceiling for the next few months. Also, European elections will grab headlines through the summer months in both France and Germany. Just yesterday, The Netherlands elected Prime Minister Mark Rutte to form a coalition as his center-right liberal VVD party took 33 seats of the 150 available, distancing himself from the anti-immigration firebrand Geert Wilders.

For those of you who want to dive deeper on the Fed releases from yesterday, please see the two links below:

Full statement here:

Updated Statement of Economic Projections (SEP) here:

Until next time,
Dekker Hewett Group

Wall Street's "Fearless Girl" Statue Defiantly Stares Down Bull (March 10,2017)

Earlier this week, surrounding the March 8th celebration of International Women's Day, State Street Global Advisors unveiled a bronze "Fearless Girl" statue that defiantly stares down the famous charging Wall Street Bull (Google "Fearless Girl" for more information). It was installed as part of their campaign to increase the number of women on their clients' boards. Here at Dekker Hewett Group, we may view the statue as further reason to question recent elevated levels in equity indices around the world and the continuing surge in animal spirits in the US economy.

Stateside this morning, we saw an impressive February jobs report with a solid 235,000 print; well ahead of the 190,000 consensus, and the strongest gain since September of last year. The release fully validated the mid-week ADP private sector payroll report which showed a gain of 298,000 jobs, and makes the March 15th Federal Reserve rate hike of 25 basis points a virtual certainty. Further good news was evident out of Europe yesterday, when ECB head Mario Draghi painted a rosy scenario with unemployment down, euro-area inflation approaching its 2% target, and economic growth within the bloc exceeding that of other major advanced economies. Draghi, however, asserted that it was still too soon to change the course of its Quantitative Easing program, therefore will continue with the pace of its current bond buying.

There are a few cautionary notes out there that have caught our attention. US crude prices this week have made their way below US$50.00 per barrel (a decline of 8%) amidst a growing build in domestic inventories. If the build in American inventories does not reverse itself soon, OPEC may have to extend its cuts beyond six months to counter the resurgent shale production. Also, the expectation of the Fed interest rate hike has placed a renewed bid in the US Dollar and has adversely affected commodity markets. A market cliché making the rounds this past week is "Three steps and a stumble", where equity markets have historically taken a pause after the third consecutive interest rate hike. After the expected increase next week, the Fed still has two or three more increases planned as part of their Dot Plots.

We are also closely watching the continuing strength of the Trump Bump, and are concerned that it may be wearing thin. Even Bill Gross has warned us "don't be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation". There is a growing realization that personal and corporate tax reform could be particularly difficult to achieve in the current economic environment, especially when it is going across party lines. Health care reform can be extremely complicated, and infrastructure programs have a pronounced lag affect. To date, we are still awaiting fuller details on the Administration's plans. And as for the hoped-for stronger GDP growth, the most recent Atlanta Fed growth model is only projecting an annualized rise of just 1.8% in the first quarter.

While we have become marginally more defensive in our portfolios this week, it's simply to keep our powder dry as opportunities present themselves (Refer to this week's Market Watch Weekly for more comprehensive discussion). We are always on the lookout for financially strong companies that have a long track record of generating sustainable cash flows. Our eyes are wide open.

Until next time,
Dekker Hewett Group

You Can't Always Get What You Want... (March 1, 2017)

Most of us know the second part to that chorus..."But if you try sometimes, well you might find you get what you need". Written by Jagger and Richards in 1968 and recorded with 60 children from the London Bach Choir, it is one of those truly classic songs that you simply have to sing along to. Perhaps we can apply the song's subdued enthusiasm to the market reaction following last night's long-awaited, keenly anticipated speech by President Trump before the joint session of Congress. Going into the speech, the DOW closed at record highs 12 days in a row; the longest winning streak for the index of blue-chip stocks since January 1987. The streak was only broken yesterday going into Trump's address, as market participants were cautiously seeking further details about planned tax cuts and infrastructure spending. Here is where the "we can't always get what we want" comes in, as his speech was somewhat short on specifics but the tone and broad strokes were noticeably more moderate; especially when compared to the apocalyptic thrust of his inaugural address. Trump addressed plans to repeal Obamacare, highlighted his strong desire to reduce both corporate and personal income taxes, and championed the need to increase both infrastructure and military spending. On a very conciliatory note, Trump began and ended his speech with a passionate call for unity, a plea to move beyond "trivial fights", and asked fellow Americans what they envision the state of the union being when it turns 250 years old in nine years' time. All in all, the speech gave us the "but if you try sometimes, well you might find you get what you need" side of the equation, with the equity markets on a tear this morning.

The US Dollar is also heading higher this morning against a basket of currencies, less to do with Trump in our view and more as a result of two relatively hawkish speeches from the San Francisco and New York Fed Presidents. With unemployment in the US already at 4.8% and the PCE deflator approaching 2%, the Fed is in a position to raise rates sooner rather than later. Trump's speech, again while short on specifics, continued to telegragh the runway ahead for increased fiscal spending. Only a week ago, Fed Fund Futures were indicating a one-in-three chance of a March hike when they meet on March 14th and 15th. Immediately after the "Fed Speak" yesterday, the futures jumped to a 70% chance of a rate hike, advancing further this morning to an 82% chance. Fed Chair, Janet Yellen, speaks this coming Friday so stay tuned. The expectation of rising short-term interest rates has not only led to a stronger US Dollar, but has drawn in further buying of North American banks and insurance companies. Raising rates in March does not commit the Fed to increasing rates more than three times this year, but rather gets them ahead of the curve and adds credibility to their desire to remove some of the excessive accommodation in current monetary policy.

Until next time,
Dekker Hewett Group

Markets Reacting More Favourably To The Recent Fed Testimony (February 20, 2017)

The sunrise photo below was taken earlier this month by one of our partners on a glorious Vancouver morning. On days like that, it is terribly easy to get to work early and be excited about following the markets and helping our clients with their portfolios. It also helps when equity markets continue reaching new highs in North America, which we experienced for 5 days prior to Friday. It was just a matter of time before the markets would take a breather, with a brief stumble going into a long weekend ahead of Family Day (in most of Canada) and Presidents' Day in the US. In last Thursday's news conference, when President Trump argued that "I inherited a mess", he was clearly not refering to his domestic economy and equity market behavior. While his proposed fiscal policies and deregulation plans have created more confidence in the investing and business communities, we would argue that his administration has "inherited" an already growing domestic economy coupled with a re-accelerating global economy. This synchronized global recovery in both Developed and Emerging Economies has been a central theme for the past few months by Canaccord Genuity's North American Portfolio Strategist, Martin Roberge. We also continue to experience Q4/16 earnings beats through the current corporate reporting season. Close to 70% of S&P 500 reporting issuers have beaten expectations, led by Technology, Health Care and Financials. So the Trump Bump has had some help!

What we did learn this past week, is that market participants are far more comfortable with a more hawkish Federal Reserve in stark contrast to the market reaction a full twelve months ago. North American equity markets all reached new highs ahead of Federal Reserve Chair Janet Yellen's two day semi-annual Humphrey- Hawkins testimony on Capital Hill in front of the Senate Banking Commitee. While nothing major came out of Yellen's testimony and concentrated Q&A, it is worth noting the major highlights for future reference as the Fed sets the table for their planned three rate hikes in 2017. The first immediate takeaway is that a March rate hike is definitely on the table. Prior to the meeting, the probability of a March hike stood at 26% and has since crept up to 40% as implied by the Fed Funds futures market. Yellen has continued to argue that "waiting too long to remove accommodation would be unwise". Other key points have been noted by Jesse Drapkin from Canaccord Genuitiy's Bond Desk, with some additional commentary from DHG:

  • Probably appropriate to lift rates if economy progresses. US GDP has not exceeded 3% annually since 2009, but is likely to be above that rate in 2017.
  • Every FOMC meeting is live.
  • Our expectation is rate increases in 2017 are appropriate with recent Dot Plots targeting three increases. Our view is that these planned increases will not panic the market in contrast to the violent negative reaction we witnessed in early 2016.
  • Not basing rate decisions on fiscal policy speculation.
  • Don't see any reason to raise 2% goal for inflation. Mid-week headline US CPI printed a year-over-year rate of 2.5% with the energy component accounting for 40% of the move.
  • Close to achieving its employment objective without currently overheating the economy.

At DHG we will continue to closely watch inflation and inflation expections across North America and abroad, while paying close attention to Central Bank comments on rates. Keep the above key points in mind as they will be relevant through the year ahead.

Until next time,
Dekker Hewett Group

North American Equity Markets Blazing To New Highs (February 10, 2017)

The "Trump Bump" and rekindling of animal spirits was in full force throughout the week, with the three major US indices ascending to all-time highs. Retail investor enthusiasm has been fairly consistent throughout this entire near-eight year bull market. Closer to home, the TSX also reached record territory, breaching its previous high set in September 2014, and is now 30% higher than the lows set in February 2016. Strengthening oil and copper prices lifted equities domestically, and a number of Canadian banks reached individual highs as the appearance of a Goldilocks economy took hold. Earnings season continues to bring upside surprises, resulting in a number of companies rewarding their equity holders with dividend increases.

Positive momentum built through the week, with President Trump grabbing two major headlines. Taking to Twitter, he promised that his long-awaited tax cutting plans were only weeks away. Expect a "phenomenal tax plan" was his boast, and should we expect anything less? In addition, in their first phone call since the Inauguration, Trump told China's president Xi Jinping to expect the US to fully respect the "One China" policy, thereby withholding support for the formal independence of Taiwan.

And how strong is the US economy? This morning, the daily Economist Espresso also highlighted the fact that one measure of US unemployment dropped to its lowest level since 1973. Specifically, the four-week moving average of claims for jobless benefits was 244,250. Weekly figures hit a three month low and are well below the symbolically important 300,000 level. New jobs announced earlier this week for January were 227,000. On Friday in Canada, we also saw an unexpected, fairly robust labour market release. Please have a look at today's Market Watch Weekly for a concise summary of the details of this report.

So we are ending the week on a high note. Not wanting to be caught buying at elevated prices, we at Dekker Hewett Group are watching for a temporary pause in the equity run-up as the market works off its overbought condition. In a mid-week Market Strategy flash update, our US strategist, Tony Dwyer, expressed concern that there are presently too many bullish newsletter writers out there and that volume at these new highs is relatively low. Complacency is evident, with the VIX index that measures short-term volatility (also a proxy for fear in the market) trading at 10.73, clearing in the lower part of its 52-week range of 9.97 to 30.90. It has been two and a half years since we've seen the VIX consistently trading below 11. Given that we are committed to managing our client's risk in their portfolios, a modicum of caution is currently warranted. We never want to feel like Pollyanna caught in a shark pool.

Until next time,
Dekker Hewett Group

Amid Political Uncertainties, The Federal Reserve Is Staying On The Sidelines (February 3, 2017)

While most market participants were expecting a more hawkish tone from the Federal Reserve on Wednesday, the US Central Bank left their key interest rates unchanged, as widely expected, but presented us with a sparse post meeting communiqué that was a watered down, sideways announcement, essentially in line with their December comments. On a positive note, the Fed acknowledged rising consumer confidence among consumers and businesses, and noted that inflation had increased in recent quarters but was still below their 2% long run target that they hope to reach in the medium term. They were also upbeat with the nation's recent solid job gains and an unemployment rate near its recent low. In fact, the latest ADP jobs report had private payrolls growing at 246,000 in January, well above the estimated 165,000, with most of the hiring concentrated in goods-producing companies (the highest in over two years), construction and manufacturing, and not in the services sector. The strong ADP jobs report coupled with the most recent ISM Manufacturing survey now has the Atlanta Fed GDP Forecast Model seeing US first quarter growth estimated at 3.4%.

If we recall, last December's rate hike, only the second in the past ten years, came with the well-publicized "Dot Plots" that signaled the possibility of three rate hikes in 2017; a surprise increase from two given the improved sentiment. In Wednesday's release, the FOMC repeated that rates will rise gradually, although they were unwilling to provide any direction as to when the next hike may be. Following the market, however, we see that participants are only pricing in two increases, with the March 13/14 meeting definitely on the table with Fed Funds Futures currently pricing in a 32% chance of a rate hike.

One of the casualties of the less hawkish Fed has been the US Dollar which has slipped to a 12-month low after the FOMC communiqué was released with their mildly upbeat view of the world. Specifically, through January, the US Dollar fell 2.6% against a basket of currencies; the worst start to the year in nearly three decades. Adding to the mix are US President Trump’s continuous tweets on how China and now even Germany are artificially keeping their currencies low to stimulate their exports. The protectionist verbiage will continue to blast back and forth between countries like a five set tennis match.

On the equity front, at DHG we'll continue to focus on economic growth and earnings per share growth of the companies we invest in and hold. Accelerating growth in the euro zone in the fourth quarter helped the euro zone economies grow at a 1.7% level for 2016, exceeding the US rate of 1.6% for the first time since 2008. The Euro block also had their unemployment rate fall to its lowest level since 2009. In addition, given a cheerier outlook for their exporters, the Bank of Japan raised its 2017 fiscal year growth forecast from 1.3% to 1.5%. As we mentioned last week, on average, quarterly financial releases continue to surprise on the upside. Siemens, a German industrial giant that makes one third of its revenue selling equipment to the energy sector, had a jump in year over year profits of 25% while increasing guidance for 2017. South of the border, we have had blow-out releases for both Apple and Facebook. These results are viewed in a very bullish light as they reflect the consumer, a large part of the economy, to be in great shape. After a five year absence, Apple is back holding the crown as the world's biggest seller of smartphones over its South Korean rival Samsung. As for Facebook, they ended 2016 with 1.86 billion active monthly users, and CEO Zuckerberg told analysts that he expects a major ramp up in hiring and spending in 2017 as it invests in video and other priorities.

For a more detailed and complete view on corporate earnings, make sure to set some time aside to read today's Market Watch Weekly.

Until next time,
Dekker Hewett Group

DJIA Breaks Psychological 20,000 Level : Higher Levels Ahead (January 26, 2017)

The Dow Jones Industrial Average exceeded and then closed above 20,000 for the first time on Wednesday. Since the election of Donald Trump, this 30 blue-chip stock index has calmly advanced a full 9% in anticipation of his administration's projected policies to cut corporate and personal income taxes, dismantle regulations and press ahead with an aggressive infrastructure package. Market sentiment held strong, as Trump signed a number of executive orders including one that may finally see the Keystone XL pipeline get approved. The DJIA index rose above 19,000 as recently as November 22nd 2016, and a number of analysts have argued that this "celebrity benchmark" has not been relevant for a long time; therefore there was no cause for celebration. It sure feels different though this time around. World stocks also hit a 19-month high with Canada's main stock index achieving its highest close since the record established in March 2014.

While just two stocks, Boeing and Goldman Sachs, accounted for the bulk of the DOW's move through 20,000, all three major US indices managed to close yesterday in record-breaking territory. Technically, American equities broke out above a rather dull six-week trading range. Elevated consumer confidence and in a worrying sense, investor complacency, are of particular interest as the CBOE Volatility Index (VIX), the recognized gauge of fear in the market, hit its lowest level in more than two years at 10.9% on Wednesday. With the next US Federal Reserve meeting as far out as March 14/15, market participants will continue to focus on the Q4 earnings season along with real GDP growth and inflation releases. Speedbumps ahead for the markets will guarantee volatility through 2017. We need to be aware of  the potential for rising rates, particularly in the US, and their effect on currencies (on a trade weighted basis the US Dollar has risen 4% since the election and 7% since last August). European elections will also occupy headlines, as will the upcoming Brexit negotiations and how the Trump administration deals with China and Russia. Just hours ago, we found out that the Mexican leader, Pena Nieto, has already scrapped his scheduled NAFTA meeting with Trump next Tuesday. Never an easy ride.

At DHG, we'll concentrate on what affects our equities the most...earnings. As of this morning, 30% of S&P 500 companies have already reported, with 70% exceeding analyst expectations on the bottom line and 56% beating sales estimates. The Canadian quarterly financials are just starting to be released. Our eyes are wide open.

Until next time,
Dekker Hewett Group

Are We Experiencing An Inflation Revival? Should We Be Concerned? (January 19, 2016)

In our last two DHG Blog posts, along with monitoring the growth in corporate earnings, we have paid particular attention to the growth in real GDP in North America and Europe, with the view that following "growth" will be a central theme for 2017. With that being said, we'll be keeping a close eye on inflation and inflationary expectations moving forward. After over two years of unduly low inflation in the world's largest economies, price inflation appears to be picking up. To start the year, Germany reported an increase in inflation for December from 0.8% to 1.7% which may well be a harbinger of releases to come. Admittedly, year over year inflation releases over the next few months will be heavily influenced by the oil price change. Early in 2016, oil was below US$30 per barrel, only to bounce back to recent levels above US$50 per barrel. But higher energy costs are not the only factors influencing inflation. Weaker domestic exchange rates vis-a-vis the strengthening US Dollar increase the price of imports across a number of countries. A strengthening labor market (US unemployment @ 4.7%) along with hourly wages inching higher (plus 2.9% for 2016) and increases in capacity utilization all factor into measures of inflation.

While recent official comments from both the Bank of Canada (from their Monetary Policy Review) and the Federal Reserve (from the World Economic Forum in Davos) have downplayed key measures of inflation and wage increases, current statistics are beginning to run above the respective central bank's 2% inflation target. Moreover, inflation expectations have ratcheted higher since Brexit and President Trump's anticipated pro-growth policies.

The world's second largest economy also appears to be on the mend. A few key considerations concerning the Chinese economy were highlighted in David Shambaugh's excellent book "China's Future". Most recently, in early 2016, China accounted for 16% of global GDP, contributed to roughly 35% of global growth, and dominated approximately 11% of global trade. A year back, there were fears that China was "exporting" deflation to the rest of the world as the price of goods leaving their factories had fallen for 54 straight months before ticking up this past September. For the full year to December, prices at the factory gate rose by 5.5% as China's supply glut is shrinking. On the growth front, the IMF recently raised its forecast for China's economic growth this year by 0.3% to 6.5%.

In the recent Monthly Chartbook for January 9th, Martin Roberge, Canaccord Genuity's North American Portfolio Strategist, argued that inflation is still falling across emerging economies even while commodity prices are firming. With this backdrop, emerging market central banks should be able to maintain their accommodative monetary policy stimuli, as long as the US Dollar doesn't move too quickly to the upside. Roberge also noted that when it comes to the rally in base metals from a duration point of view, we are only 12 months into what is on average a 24 month rally.

No concern here that "inflation is rearing its ugly head", a legitimate worry that has plagued us in the past. For 2017, we are not troubled to see inflation running a tad hotter, as it is far better than the past issues surrounding deflation. An uptick in inflation is in fact good news. Inflation in moderation is what's needed to grease the wheels of a balanced economy worldwide. We'll be closely monitoring inflation data as the year unfolds.

Until next time,
Dekker Hewett Group

A Matter of Increasing Interest : Banks in North America (January 13, 2017)

Stock markets in North America shook off any fear of "Friday the 13th" and were trading at or near all-time highs this morning. The fourth quarter earnings season began this week, with profits expected to rise by a steady 3%; a welcomed return to growth after earnings fell in 2015 and through the first half of 2016. Top line sales are also projected to expand by 5%, notably the strongest growth since 2012. Earlier this morning, quarterly results for Bank of America, JP Morgan Chase and Wells Fargo hit the wire. For the most part, results were expected to be good, as financials are one of the best-positioned industries to benefit from rising interest rates. Specifically, along with loan volumes, the spread between their cost of funds and what banks charge for loans is expected to swell, resulting in fatter margins and higher sales. In fact, since Trump's election, the US bank shares index (KBW) is up roughly 25%. One theme to monitor closely in 2017 is the dynamic between earnings growth and equity valuations.

First on the block was Bank of America which posted better than expected results: a large 46.8% rise in quarterly profit, an increase in net income from $2.95 billion a year earlier to to $4.34 billion, and a jump in earnings per share from 27 cents a year earlier to 40 cents (against expectations of 38 cents). Meanwhile, JP Morgan Chase beat analyst expectations on both the top and bottom line, with double-digit growth in deposits and record credit card sales. Wells Fargo on the other hand, the third largest US bank by assets, had results that disappointed as it continued to extract itself from its painful bogus-accounts scandal. Multiple law suits and a sharp drop in account openings led to its fifth straight drop in quarterly profit.

On the domestic front, DHG Blog readers are encouraged to look back at our August 25th blog post entitled "Best Managed Banks in the World - Canadian You Say!". Since then, not accounting for dividends, Canadian bank stocks have advanced on average between 14% and 17%. Just yesterday, our financial banking analyst, Gabriel Dechaine, published his latest report with increased target prices on Canadian Banks and Lifecos. His earnings per share estimates have been revised higher, and he maintains his preference for Canadian Banks over Lifecos. Please call in to our office to get a copy of his latest report. First quarter financial results are still a full month away in Canada, an industry that we monitor closely and always have an opinion on.  Stay tuned for further updates.

As a quick follow up to last week's blog post on GDP growth, an estimate out of Germany's statistics office had Europe's largest economy expanding at its strongest rate of growth over the past five years at a lively 1.9%, surpassing expectations. In addition, industrial output in the euro zone in November rose 3.2% year over year, and consumer confidence in December hit a twenty month high.

Until next time,
Dekker Hewett Group

Growth Is Key : GDP Growth, Financial Growth, Growth In Earnings (January 6, 2017)

Hopefully the bi-line above doesn't sound too repetitive, but for 2017 the buzz-word may well be the old fashion "just follow the growth". Although it is too early to call, this year is starting out wildly different on the investment front than what we experienced in the first five or six weeks at the beginning of 2016. Only four trading days into the New Year and we have already seen record highs reached in Britain's FTSE equity market led by miners and housebuilders. Mid-week, our own TSX market reached its highest level since September 2014, and this morning, we have the US DOW a fraction of a point away from 20,000 as another technical milestone is being reeled in. In addition, with the CES Consumer Technology Association meeting in full force in Las Vegas, "FAAA" stocks (Facebook, Amazon, Alibaba and Alphabet) lead NASDAQ to its all-time high. Decent start to the year indeed!

Market enthusiasm and the Trump infused animal spirits are alive and well. But we, along with other market analysts, would argue that the momentum in the equity markets was firmly established well before the US Presidential election results hit the wire. Earnings were beginning to head higher as the pressure from the collapse in energy prices began to reverse, resulting in a healthier tone for a broad list of companies. US consumer confidence was already at its highest point since 2001, and both candidates were promising a combination of tax cuts on corporations and individuals. The Trump administration, working alongside a Republic Congress, will however be in a better position to renegotiate more constructive trade agreements and be better equipped to dismantle onerous regulation of financial and energy companies. Along with expected improvements in labour productivity for the first time since 2014, forecasts for real growth in the US economy for 2017 are starting to top the 3% mark.

Moreover, expectations by economists of fiscal stimulus have ratcheted up real growth projections for both China and Japan. The first economic news out of Europe for the year has also been positive, with their purchasing managers' indices pointing to the fastest growth in manufacturing output since April 2011. Optimism abounds, with the entrepreneurial spirit alive and well. At times, equity markets are not rational (when reaching new highs with arguably stretched valuations), but market participants have a way of successfully "rationalizing" the moves higher.

Earlier today, we received the latest American labour market update with the unemployment rate inching higher to 4.7%. Job creation came in at a positive 156,000, although analysts were expecting payrolls to swell by roughly 175,000 in December. The overall labour participation rate held steady at 62.7%, well below the more standard 65% to 68% range, and probably allows the Federal Reserve some initial breathing room on their planned interest rate hike schedule for 2017. Impressively, the Canadian economy unexpectedly added 53,700 new jobs in December, mostly full time positions, while the unemployment rate edged up as more people entered the work force to find suitable employment.

For the equity markets to continue moving higher, we firmly believe that we need to see positive news to the upside relating to "growth" on all fronts. A high bar to exceed on a monthly basis, but this will be the key story for 2017. Closer to home, we are keeping a vigilant eye on Canadian financials as the sector weighting within the S&P / TSX Composite Index is a full 34.5% (as opposed to only 14.7% for US financials within the S&P 500 Index). This morning, our in-house Canadian Bank analyst, Gabriel Dechaine, published a management question "cheat sheet" that he would like to put in front of Canadian bank CEOs. Key, insightful questions revolving around:

  • Canada's mortgage market
  • The regulatory environment
  • The impact of rising interest rates
  • The outlook for credit quality
  • The growth outlook

There's that "growth" theme again. Stay posted!

Until next time,
Dekker Hewett Group

Outlook 2017: Key Macro Factors To Follow (December 30, 2016)

We are glad to see the topsy-turvy, tumultuous year that was 2016 come to a close. The year started on a fraught note, with worries about sustained economic growth in China, declining equity share values, plunging oil prices, and even the alarming worry that the US Federal Reserve could potentially raise short-term interest rates four times throughout 2016. Come December, all four concerns had for the most part been reversed. We touched upon "the year that was" in our most recent blog post and past two Market Watch Weeklies, and for the most part, reviewing the past year is only useful to us as money managers in trying to determine how we could have better performed. Although we're extremely pleased with the performance of our client accounts in 2016, looking in the rear view mirror in financial markets can be useful in trying to learn from our mistakes.

The past year has taught us a few new words and previously unfamiliar terms: Brexit, Trumpquake and the Trump Bump, "fake news", and the Alt-Right movement come to mind. Our favorite, however, has been a social media darling with stories surrounding "hygge"...a centuries old Danish cultural practice that focuses on the art of coziness, creating a circle of warmth and a feeling of belonging to the moment. Pronounced as (hue-gah), "hygge" refers to the sense of happy ease found in entertaining company, and it may explain the post US election equity market rally that has taken us well through 19,000 on the DOW, with an expectation that the 20,000 milestone will be reached in the first few days or weeks of 2017. In the past, we used to refer to it as the Alfred E Neuman's Mad Magazine "What Me Worry" catch phrase. 2017 will let us know if the recent equity rally is based on hope or hype, and here are a few of the key Macro Economic factors we'll be keeping a close eye on:

  • Economic Growth: After a run of more than seven years, the likelihood that the economic expansion will be sustained is high, as productivity growth replaces liquidity-infused growth. World GDP growth estimates from the IMF and OECD are in the 3.2%-3.4% range, roughly up 0.3% over 2016. Estimates for the US Economy are slightly lower at approximately 2.5% (higher by 1.0% over 2016), but the miss, if any, could be to the upside given the Trump Administration's / Republican Congress' desire to implement personal and corporate tax cuts as well as planned infrastructure spending. All this bodes well for Canada given that our largest trading partner is the US and that we have the lowest net debt/GDP amongst the G7 countries. Also, Federally we continue to experience both fiscal and monetary stimulus. Worldwide, the risk of recession is very low.
     
  • US Policy: Where will Trump take us, indeed! The new administration is still a bit of a wild card with the January 20th Inauguration just three weeks away. Usually at this stage, we have a better understanding of the new administration's policy proposals, but we can "expect" the aforementioned tax cuts (especially as the US moves its corporate tax structure more in line with other countries - see chart below), some additional infrastructure spending, and immediate help through financial deregulation.


     
  • Monetary Policy: Worldwide, while most Central Banks remain dovish, the US FOMC has adopted a more hawkish stance. We believe that US interest rate increases will be slow and data dependent, with the latest Dot Plots signaling a minimum of three hikes throughout 2017. It is the outlook for bonds that has currency and equity markets on edge, along with growing inflation expectations. It can be argued that the recent surge in bond yields has less to do with Fed policy and increased inflation expectations, and more to do with the improving outlook for growth. Either way, we believe US yields will drift higher in 2017, with most other countries holding theirs down as long as possible. Our view is that the US Dollar can only go higher over the next twelve months.
     
  • And Then There's China: Arguably the most consequential question in global affairs given that China has enjoyed unprecedented levels of growth in the recent past. The country is at a crossroad where its own policy will determine if there economy stalls or continues to develop and prosper. This autumn, they will convene for the 19th National Congress of the Communist Party of China that will develop policies for the next five years. Before that, we should have a clearer picture on how President Trump will deal with China on trade policies and their military buildup in the South China Seas.

Clearly, there are no guarantees on what will happen next year. We certainly learned that lesson in 2016. But for DHG and our investors, we aim to expect the unexpected. Planning is better than predicting, hence why we spend so much time on wealth preservation and risk management. One thing we know for certain is that market volatility will be front and center in 2017, and volatility, coupled with market dislocation, favors active managers who construct fully diversified portfolios. As always, our clients should expect to receive unbiased investment advice rendered solely for their benefit.

From all of us at Dekker Hewett Group, we wish you a happy, healthy and safe New Year.

Until next time,
Dekker Hewett Group

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The Year That Was : 2016, Soaring Highs and Lows (December 23,2016)

Regular readers of our DHG blog and Market Watch Weekly are fully up to speed on "the year that was" in 2016, but a quick review of some of the highlights may be in order. The volatility and market emotions we've seen in the past twelve months have been almost unprecedented. For us, it has never been about being on the right side of the market, but rather building portfolios that let our clients sleep easy at night. Our discretionary Growth and Income portfolio has had a great year, as we continue to target current income, dividend growth, and modest capital appreciation with less risk than the broader equity and fixed income markets.

  • The year on the equity front got off to one of its worst starts ever, with North American indices down between 8% and 12% by early February (with inflation stubbornly low and negative interest rates appearing), only to end the year with all four major US equity markets repeatedly hitting record highs through December. The DOW flew through 19,000 and traded within 15 points of 20,000 earlier this week. The Trump Bump was in full swing, with the Canadian equity market in close pursuit.
     
  • Central Bank activity dominated the news on a quarterly basis. The Bank of Japan maintained their Quantitative Easing (QE) stance and began targeting a zero interest policy for their ten year government bonds. The European Central Bank extended their QE past March 2017 through to the end of the year, albeit at a reduced monthly rate. But the real headline grabber occurred on December 14, when the FOMC raised their Fed Funds target range by 25 basis points for only the second time since the 2008 financial crisis. Their DOT PLOTS for 2017 moved from two to three rate increases, and immediately market pundits wondered if in fact three would be enough.
     
  • Ten year US Treasury yields reached a trough at 1.358% on July 8th, perhaps ending a 35-year bull market in government bonds, before climbing as high as 2.608% by mid-December. Investors are hoping that the new Trump administration may usher in a new golden era for the banking sector. Accommodative Monetary Policy in North America appears to be finally coupled with an easier Fiscal Policy stance. Expected faster economic growth, higher interest rates, lower US corporate taxes and regulatory relief may result in a new financial services paradigm south of the border, and US banking stocks rocketed higher. Domestically, all five Canadian major banks reached new 52-week highs in the past few weeks, with all having increased their dividend rates through the year.
     
  • Throughout 2016, we repeatedly saw Economics winning out over Politics. Equity volatility spikes after large political surprises were short lived: the UK Brexit Leave victory lasted only weeks, the US Presidential election merely hours overnight, and the recent Italian NO constitutional referendum essentially a non-event in North America. Already the Italian government has approved a 20 Billion Euro safety net to underwrite the stability of its wobbly banking sector.
     
  • "And the beat goes on"... with news today worth reporting. The official crown for the hottest year ever on record being 2016, stealing the top spot held by 2015. Since the start of the millennium, we have had 16 of the 17 most sweltering years on record. The Climate Change Debate is just beginning. One last tidbit announced this morning is that Deutsche Bank has agreed to a $7.2 billion settlement with the US Department of Justice over its sale of toxic mortgage securities leading into the 2008 financial crisis. The settlement was approximately half of what was intitally targeted by the authorities this past September. Credit Suisse and other international banks agreed in principle to a lesser amount.

As the year comes to a close, we are also drawn into remembering lost friends and family members. We miss them dearly. On the global stage in the sporting world, we lost Muhammad Ali in boxing, Arnold Palmer in golf, and our own Gordie Howe, forever Mr. Hockey. Lost to us musically were David Bowie (Major Tom / Ziggy Stardust / The Thin White Duke), Prince (a master of all musical genres and performer supreme), and Canada's greatest poet and songwriter Leonard Cohen.

It has been just over 36 years since John Lennon passed away, but one of his songs instantly became a Christmas classic and certainly one of our favorites. We would like to leave you with the opening paragraphs to "So This Is Christmas" also known as "Happy Christmas (War Is Over).  Click here to listen to the full song:

So this is Christmas / And what have you done / Another year over / And a new one just begun
And so this is Christmas / I hope you have fun / The near and the dear ones / The old and the young
A very Merry Christmas / And a Happy New Year / Let's hope it's a good one / Without any fear.

From all of us at Dekker Hewett Group, we wish you a heart-warming Holiday Season and a wonderful, joyous, healthy 2017.

Until next year,
Dekker Hewett Group

FOMC Increases Fed Funds By 25 Basis Points, Foresees Three More Rate Hikes In 2017 (December 14, 2016)

As almost unanimously expected mid-day today, the Federal Open Market Committee increased their fed funds target rate by 25 basis points: the range has moved to 0.50% to 0.75% from 0.25% to 0.50%.  It is only the second rate increase since the global financial crisis in 2008, with the first increase occurring last December when the Fed departed from their zero interest rate policy. More importantly, this meeting was a comprehensive version, followed up with a full Q&A and update to the Fed's economic projections. The overall tone of the release was slightly more hawkish than the default market consensus. With unemployment at just 4.6% and core inflation marginally below their 2% longer run objective, rate followers were only slightly surprised with the more aggressive tightening stance from the committee. The recorded vote was a convincing 10-0. Expectations for rate increases through 2017, initially pegged at two increases as recently as September, have ratched up to three rate increases from today's closely watched "dot-plots".

Clearly we are still in a data dependent environment, with the Fed stating that risks to their outlook are "roughly balanced" and forward guidance is for "only gradual increases". In the Fed's view, their Monetary Policy stance is still in fact accommodative and supportive of further strengthening in labor market conditions. Moreover, as president-elect Trump and the congressional Republicans prepare for fiscal stimulus through tax cuts and infrastructure spending, the outlook for an expanding US economy seems to be on an upswing. The market's view of a more hawkish Fed was apparent at the close, with the TSX down 188 points, the DOW off 118 points and gold lower at US$ 1,144 (- US$ 13.80). The reaction in the fixed income markets, while less dramatic, still had ten year US Treasuries yielding 2.576% at the day's close, up roughly 10 basis points. Already market partipants were wondering if the projected three rate increases for 2017 would be enough.

Until Next Time,
Dekker Hewett Group

The ECB Is In Fact Tapering, But In A More Dovish Way (December 8, 2016)

No taper tantrum yet out of Europe this morning as the European Central Bank (ECB) continued their generous asset buying program, although at a reduced pace. In a surprising move, the ECB announced a 25% reduction in its bond buying program starting in April 2017; from 80 billion Euro to 60 billion Euro on a monthly basis. With the NO vote in the Italian referendum behind them and inflation firmly stuck well below the central bank's target of close to 2%, most analysts expected no change from the ECB's governing council and in their monetary policy approach within the euro zone. As expected, the ECB extended their program of quantitative easing (increasing the money supply through bond buying) by nine months, beyond March 2017 to the end of the year. Benchmark interest rates, however, were left unchanged.

To date, the ECB has already spent 1.4 trillion Euros buying bonds, with regular purchases from European high-debt countries, such as Italy, which has helped to keep bond yields at tolerable levels. Underlying inflation this year remains below 1% throughout the Euro zone, with the ECB forecasting it to move higher to 1.3% in 2017 and 1.5% in 2018. In the follow up ECB press conference, boss Mario Draghi refused to call their move "tapering", and argued that if the economic outlook for the zone becomes less favorable, the governing council reserves the right to increase the QE program in terms of size and/or duration.

Earlier in the week, the Bank of Canada announced no change to their monetary policy stance. Some would argue that the meeting was a non-event as they left rates unchanged. Concern still centered on the lack of robust activity in the export sector and the below 2% inflation rate. Next on the docket is the US FOMC two-day meeting next week, December 13 and 14. Currently, expectations of a rate increase to be announced on December 14th have reached a full 100%. The key will be their forward guidance for potential rate increases through 2017. Here are 5 Things to Watch For in Next Week's Fed Meeting.

Until next time,
Dekker Hewett Group

OPEC Agrees to First Output Cut Since 2008 : Oil Jumps More Than 8%,  Equities Higher Still (November 30, 2016)

Oil prices and their respective equities surged this morning on optimism that OPEC and other producers would reach an agreement to limit output. As we discussed below in an earlier BLOG on September 29 , OPEC has been written off many times in the past, so the meeting today in Vienna had immense market scrutiny. The expected brinkmanship between Saudi Arabia, Iran and Iraq had the oil market on tender hooks, and a failure to reach an agreement could have sent oil prices plummeting lower. Oil prices were off 4% yesterday, amidst nervousness that an agreement would not be reached.

News this moring out of Vienna, however, was very positive. The oil producing cartel had all 14 OPEC members agreeing to curtail oil production by 1.3 million barrels a day (b/d) for the first time since 2008. The secured deal will lower oil production from 33.8 million b/d to 32.5 million b/d in an effort to prop up prices. In addition, the Saudi oil minister was expecting a number of non-OPEC  members to commit to cutting 600,000 b/d, with Russia alone reducing their oil production by 300,000 b/d. The full 14 member OPEC cartel will be meeting the non-OPEC members on December 9th to secure these cuts. The reduced production limits are expected to come into effect on January 1, 2017.

Once the deal was formally announced this morning, Brent Crude prices spiked over 8% to $50.12 a barrel, while WTI advanced a full 9% to $49.23. Energy equity holdings at Dekker Hewett Group responded in kind, with Crew Energy (+12%), Suncor Energy (+8%), TORC Oil & Gas (+17%), and Vermillion Energy (+7%) all advancing favorably. This move to lower crude oil production targets is expected to speed up the market supply imbalance caused by the current global oil glut.

Until next time,
Dekker Hewett Group

Tax-Loss Selling 2016 - 'Tis The Season (November 21, 2016)

Earlier last week, Canaccord Genuity Wealth Management published its Tax-Loss Selling document that will be of interest to all of our clients. Tax-loss selling is simply a tax strategy to minimize capital gains as they apply to investments outside registered accounts (RRSPs, RESPs, TFSAs etc). The resulting capital loss can be applied to capital gains from mutual funds, stocks, bonds, and property other than your primary residence, like rental property, family cottages and second homes.

While we strive to have our investors sell assets that realize capital gains at DHG, in a truly diversified portfolio, we will at times feel compelled from an overall strategy point of view to exit positions that generate a loss. Proper tax planning may allow us to turn that loss into a win through the execution of a well-timed tax loss selling strategy.

The enclosed document has an excellent year-to-date TSX sector performance chart (as of November 10, 2016) on page 5, and a revealing Best to Worst table on page 9. Tax loss selling can provide our clients with a great opportunity to upgrade the quality of their portfolio. In addition, the enclosed document spells out an efficient tax loss strategy that utilizes Exchange Traded Funds... all well worth reviewing.

Given the complexity of tax rules and regulations, please consult us at DHG along with your tax professional before considering any tax-loss related strategies. As always, as partners we are here to help.

Canaccord Genuity Wealth Management | Tax-Loss Selling 2016: ‘Tis The Season

Until next time,
Dekker Hewett Group

A Spotlight On Doctor Copper: Metal Reaches A Year High On Trump Presidency (November 14, 2016)

In a somewhat surprising fashion, the American public has voted Donald Trump as the 45th President of the world's largest economy. Market reaction has been swift on the equity side with the DOW and S&P reaching new highs while the tech heavy NASDAQ companies experienced consistent profit taking. Through the latter part of last week, uncertainty surrounded the full impact of Trump's platform and how he'll be supported by his Republican colleagues. In particular this uncertainty led to extreme volatility in the prices of copper, coal, oil and gold (pretty much all commodities). Excitement abounded over Trump's potentially reflationary policies in America with his infrastructure plans and "America First" stance versus fears that protectionism could harm growth in the rest of the world economy. Perhaps the most surprising move was around spot gold where most pundits were expecting a Trump victory to lead to a spike higher in the precious metal. In fact the exact opposite happened with gold falling from US$ 1,305 per ounce as of November 4th to US$ 1,225 this morning. This phase of liquidation is best explained by the relative strength in the US currency and the extreme back up in interest rates: the yield in ten year Treasurys over the week advanced from 1.82% to 2.21%.

We feel that the potential for higher infrastructure spending in the US may best translate in to the demand for copper prices which increased by 11% last week: on November 4th copper traded at US$/lb 2.26 and is currently at US$/lb 2.52 this morning. Often called Doctor Copper, this industrial metal is used in everything from automobiles to air conditioners, from construction to electrical wiring. Copper also has antimicrobial properties that kill 99.9% of bacteria on its surface within two hours. Copper prices have fallen by roughly half since they peaked above $4.60 per pound in 2011 as growth in China, the world's largest consumer, has slowed. Most recently, however, we have seen growth pick up incrementally in China and with copper inventories at historical lows, we have an ideal environment supporting copper prices. The multiweek rally in this metal has only picked up steam as the Trump presidency is expected to boost infrastructure spending throughout the US. Whereas the media constantly updates us on where spot gold is trading, certainly on a daily basis, we may as investors have a clearer vision on the health of the world's economies if we follow the trading activity of copper.

Until next time,
Dekker Hewett Group

Liberty Moves North / The Last Liberals. The Economist's Cover (November 2 , 2016)

In the current weekly edition of The Economist, Canada as a nation is front and center in the newspaper's Leaders and Briefing sections. Here are the links to both excellent articles:

The Economist was founded 173 years ago with a primary focus of advancing the case for Free Trade. We have been reading this weekly since our days in university, and their articles and editorials are as relevant today as they have ever been. Please take a moment to read through both articles, and remember how proud we should be to call ourselves Canadians.

Here are a few quotes that stood out for us at Dekker Hewett Group:

  • "In this depressing company of wall-builders, door-slammers and drawbridge-raisers, Canada stands out as a heartening exception" 
  • "Irredeemably dull by reputation, less brash and bellicose than America, Canada has long seemed to outsiders to be a citadel of decency, tolerance and good sense"
  • "This mixture of policies - liberal on trade and immigration, activist in shoring up growth and protecting globalisation's losers - is a reminder that the centrist formula still works"
  • "The world owes Canada gratitude for reminding it of what many people are in danger of forgetting; that tolerance and openness are wellsprings of security and prosperity, not threats to them"

A dominant theme in both articles centers on the Canadian government's ability, given available low interest rates, to ramp up investment in infrastructure as a feature of its pump-priming economic policies. In yesterday's fall fiscal update, Finance Minister Bill Morneau added further color to his government's plans to lift the sluggish economy with the help of a new infrastructure bank. He pledged to contribute $35 billion to the bank with public money as a way to bring in foreign capital. Morneau also announced an "Invest In Canada Hub" program aimed at attracting more talented immigrants to Canada, with a mandate to lure in more foreign investment. And let's not forget how hard Canada fought to finally save CETA (the comprehensive economic and trade agreement) this past week. GO CANADA GO!

Until next time,
Dekker Hewett Group

Export Led US GDP Growth Likely Not To Last (October 28, 2016)

Through the first half of the year, shrinking business investment kept America's annualized economic growth at just 1.1%. We were expecting a dramatic improvement this morning in the third quarter GDP release, and the headline number did not disappoint. The initial print had Q3 GDP increase at 2.9%, well ahead of analyst expectations of 2.5%. It was at its fastest pace in two years, and the best rate since the 5% posting in Q3 2014. While the Federal Reserve focuses more closely on employment and inflation data releases, market attention on the positive surprise was front and center as the Fed contemplates its second interest rate hike in more than ten years (fed funds futures are telegraphing a 75% chance of a December hike). Also, as the US Presidential election is just days away, Democratic surrogates quickly portrayed the increase as further evidence that the Obama and continuing Clinton economic policies are on the right track.

Digging a bit deeper, however, we see that the lionshare of the positive 2.9% print came from a surge in exports of 10%. Soybean exports in particular helped shrink the trade deficit, although economists also noted that exports of capital and consumer goods have been growing of late. While consumer spending still increased at a 2.1% rate for Q3, it was well below the second quarter's robust rate of 4.3%; it should be noted that consumer spending currently accounts for more than two-thirds of US economic activity. Other concerns were expressed when looking at the 6.2% decline in investment in residential construction (down for the second straight quarter), and equipment purchases which declined by 2.7%. Stripping out a few of the "transitory" effects, especially the soybean bonanza which is likely to be reversed next quarter, would have the actual growth rate come in at closer to 1.5%. So in fact, not as strong as initially reported.

North American equity markets had initially started stronger Friday morning, but fully reversed by mid-day as analysts further sifted through the release. The fixed income sector greeted the 2.9% print with a yawn, with the 10-Year US Treasury yield holding fairly stable at 1.85%; still noticeably higher than the 1.37% low reached earlier this year, and above its 200 day moving average of 1.72%. As an aside, our bond desk in its morning comment today noted that 10-Year German yields have backed up from a negative 14.5 basis point level recorded on September 28th, to a positive 17 basis points this morning; a 31.5 basis point swing in a very short period of time. To reiterate our stance on fixed-income for the past few months, buyer beware if and when we see a legitamate strong pick up in growth.

Until next time,
Dekker Hewett Group

Bank of Canada holds Key Interest Rate Steady at 0.50%, Lowers Growth Forecasts (October 19, 2016)

As expected, this morning the Bank of Canada left its key overnight rate unchanged at 0.50% where it has been since July 2015. In its quarterly Monetary Policy Report, Governor Stephen Poloz cut their GDP forecast due to the two-prong effect of a looming slowdown in housing and a weaking outlook for exports. For the second half of the year, the Bank expects third quarter GDP growth to come in at a fairly robust 3.2%, but down from the July forecast of 3.5%; fourth quarter growth now at 1.5%, down from the July estimate of 2.8%. This is welcome news after a painful second quarter that saw particularly weak growth given the serious drag from the Alberta oil sands being shuttered because of the Fort McMurray wildfires. Looking forward a few months from now, current fiscal stimulus, accommodative monetary policy and a strenghtening US economy should all be beneficial in attaining this growth.

Yearly forecasts, however, have yet again been trimmed lower. The Bank is now expecting 2016 growth to come in at 1.1%, revised lower from the July estimate of 1.3% and the expectation earlier in the year of 1.7%. For 2017, they are targeting GDP at 2.0%, lowered from 2.2% three months ago. Against this backdrop, the Bank expects that further downward pressure on inflation will continue while the economic slack in aggregate demand persists: current estimates have this gap between 1% and 2%. The Bank however is expecting core inflation to settle in near its 2% target early next year. It should be noted that through their forecast period, the Bank is using an average price for the Canadian Dollar at 76 cents and WTI / oil at US$ 46 per barrel.

Growth headwinds identified by the Bank centered on two specific issues as their fresh growth projections zeroed in on dampening expectations for real estate activity and exports. Firstly, the Bank highlighted the expected slowdown in near term housing resale activity due to the most recent tightening in mortgage rules (which took effect this past Monday) and 15% foreign purchaser tax. In the past, housing has been a pillar of economic strength, but the expected restraint in residential investment could reduce the level of GDP by as much as 3% by the end of 2018. Secondly, their lower expected trajectory for exports, particularly in the energy sector, was due to reduced estimates of global demand and the ongoing competitiveness challenges facing domestic companies. To date, the Bank's expected recovery in non commodity exports has failed to materialize. International uncertainties affecting Canadian exports has resulted in the Bank lowering its 2018 GDP forecast by 0.6%.

On our morning call today and in recent client presentations, Canaccord Genuity's Global Strategist, Robert Jukes, has argued that a number of developed economies are at risk of experiencing a "secular stagnation" that may need more than just monetary policy stimulus to counteract. He has argued over the past few months that governments in the future will have to play a bigger role in infrastructure spending, more of a concentrated fiscal boost. Central Banks cannot be expected to be the only force in increasing aggregate demand; fiscal policy must also play a major role. In the meantime, one can only hope that the Canadian consumer continues to keep on spending!

Until next time,
Dekker Hewett Group

Reflecting On The Quest To Build The Perfect Team (October 13, 2016)

A few weeks back, three members of our group attended a three hour evening workshop hosted by the CFA Vancouver Society. The guest speaker and facilitator was Sam Thiara, who covered topics that ranged from relationship building to personal branding. We came away from the evening with numerous useful ideas, and would highly recommend Sam as an event leader. The workshop got us to thinking about what makes Canaccord Genuity such a special place to work at, and more importantly for our clients, how we are always striving to make Dekker Hewett Group the best wealth management team possible.

Placing the core values of Canaccord Genuity front and center is relatively straightforward and can be found on the front page of our website. All employees collectively view the importance of these six key priorities that corporately define us. It is who we are and why we work here:

  • We are partners
  • We are entrepreneurial
  • We are collegial
  • We work hard
  • We operate with integrity
  • We are earnings focused

Within our own group, team dynamics are of paramount importance. As a nine person team, we aim to be authentic and genuine, and when dealing with clients, our first goal is to listen and observe. We encourage each other to work together, which allows us to be more innovative in finding the best solutions to the challenges our clients face. Always receptive to our clients financial objectives and needs, we work together as a team to achieve better results. Active two way communication is critical, with the avoidance of mircromanagement. As a group, we strive to be compassionate, impactful and purposeful, while recognizing how fulfilling working with our clients can be.

A few weekends back, Mark Hewett came across a rather lengthy article from the New York Times that we would like to share with you through this blog. It's entitled "What Google Learned From Its Quest to Build the Perfect Team". So many of the concepts explored in the article reasonate within Dekker Hewett Group. If you are as interested in team building as we are, we would recommend reading the article.

The graphic above illustrates the key charateristics of teamwork and co-operation. At last month's annual La Merce festival in Barcelona, numerous teams competed in building a "castell", the Catalan word for castle. These human towers can reach ten stories high, and are as hard to build as they are to take down. Check out this You Tube video for the full effect. Truly a towering achievement!

Until next time,
Dekker Hewett Group

After A Rather Dull VP Debate...Expect Fireworks This Coming Sunday (October 5, 2016)

Luckily, last night we had an exciting one-game elimination baseball game to entertain us, with Canada's team, the Blue Jays, downing an excellent Orioles sqaud 5-2 on a three run home in the bottom of the 11th inning. Earlier in the evening, we were exposed to a rather dull VP debate between Democratic Tim Kaine and Republican Mike Pence. The nod seems to have gone to a calm and determined Pence, but no one expects the results from this debate to materially alter the outcome of the presidential election just over a month away.

The first debate on September 26th, however, was one of the most widely watched political broadcasts in American history, with close to 100 million viewers. This coming Sunday, we have the second of three Presidential debates, with another record viewership expected. Latest polls have Clinton with decided voters at 47% approval, Trump at 42%, and smaller amounts for Libertarian Gary Johnson (7%) and the Green Party's Jill Stein (2%). The race appears to be closer still when we consider that 18% of polled voters claim to be undecided; three times the usual number at this stage in the election cycle. Given the tightness and exceptionally wide policy divide separating the two candidates, we are in the middle of a US election that has the makings of a "classic". The perceived wisdom is that presidential debates usually do not change the course of a campaign...but biting our tongue, we believe that this time it may be different. Political pundits and party surrogates will dominate spin rooms immediately after the debate, and fact checkers will have their say. Worth watching indeed to see who will be installed in 1600 Pennsylvania Avenue this January.

The second debate takes place at Washington University in St. Louis, Missouri, on Sunday, October 9th, starting at 9:00 pm EST. Moderators will include CNN's Anderson Cooper and ABC News anchor Martha Raddatz. The town hall setting will have an audience of undecided voters, and will focus heavily on public interest. This new format will invite the public, through a dedicated website, to ask questions from one of ten categories, ranging from civil rights, foreign policy, the military, health and infrastructure policy, and technology advancements.

Until next time,
Dekker Hewett Group

Surprise Preliminary Agreement by OPEC to Curb Oil Production: It's First in Over Eight Years (September 29, 2016)

Mid-day yesterday, energy markets received a surprise announcement out of the 14-member OPEC cartel with their agreement to cut oil production from the 33.2 million barrels per day pumped in August, to between 32.5m and 33m barrels per day going forward. The immediate reaction had crude oil prices end the day up 5.3% in WTI and over 6% for Brent crude. Energy stocks in Canada advanced between 5% and 10% on average, with one of our largest energy holdings, Vermillion Energy, trading this morning to a 52-week high. An initial report out of a prominent US investment bank has suggested that the agreement to curb production, the first since 2008, could add $7 -$10 to the price of oil in the first half of 2017.

Excitement surrounding the deal this morning is somewhat tempered, as analysts try to determine if the agreement will be enough to rebalance the heavily over-supplied market. OPEC members will have until their next meeting on November 30th, to determine who will cut and by how much. Caution flags have appeared and enthusiasm has waned, as not all OPEC members signed the agreement. Clearly more detailed specifics are needed. In addition, members have had a past history of ignoring limits when it suits their needs. Over the coming weeks, the market will seek out clarity on the agreement to determine if it has a chance of reducing the current slupply side glut.

We do have oil trading up over a dollar this morning, currenty at US$48.20 per barrel. This is welcome news for the Canadian dollar that was trading lower yesterday before the surprise announcenment, right on it's 200 day moving average of 75.62. It has since recovered to 76.40. It is also welcome news to RBC CEO David McKay, who earlier in the week was adding his voice in asserting the importance of a healthy and expanding energy sector to the Canadian economy.

On a lighter note, please have a glance at a posting we circulated through social media earlier in the week on "What you can make from one barrel of oil". Quite entertaining.

 

Source: Visual Capitalist

Until next time,
Dekker Hewett Group

New Policy Language From The Central Banks (September 21, 2016)

Both the Bank of Japan and the Federal Reserve met today to update markets on their monetaty policy stance. Through the first half of September, both fixed income and equity markets have experienced moves well in excess of what became the norm through most of the summer. Jitters returned in full force. Earlier pronouncements from the Bank of Canada and The European Central Bank left policy unchanged, although forward guidance implied that current low rates would be with us for the immediate future. Given encouraging economic data, The Bank of England kept their interest rates on hold and continued their asset-purchase program, but Governor Carney contiued to suggest that a further interest rate cut was a strong possibility before year-end.

First off, Wednesday morning we had new language out of The Bank of Japan. Markets were disappointed after its last meeting in July, as no new monetary policy initiatives were announced to complement the new government stimulus package on the fiscal policy side. However, Governor Haruhiko Kuroda promised a "comprehensive review" for today's meeting as Japan struggles to bring inflation up to its 2% target. Analysts were looking for new initiatives (pushing interest rates further into negative territory/buying more government bonds), or even a change upwards in the inflation target, but the BOJ somewhat surprised markets by adopting a target for longer term interest rates. They left their main policy rate unchanged at negative ten basis points, but announced a new policy initiative calling it "QQE With Yield Curve Control" which appears to shift the bank's focus from monetary stimulus to targeting the yield curve. This yield curve control component will have them targeting both the short end and long end of the yield curve. They hope to keep ten year government bond yields where they currently stand around 0%.

Second up was the September FOMC rate announcement, and the follow-up press conference from Janet Yellen. The Fed has been extraordinarily patient this cycle as their desire to hike rates has been hampered by soft economic fundamentals. Going into the meeting, markets gave the chance of a rate hike at one in five, just under 20%. In the end no real excitement occured as the FOMC voted 7-3 in favor of leaving their key interest rate range unchanged at 0.25%-0.5%; up from a 9-1 vote at the last meeting. This is the most votes in favor of an interest rate hike since December 2014, and makes the case for a tighteneing hike before year-end all the more compelling. The last time the Fed hiked rates was when they raised them by a single quarter point last December; its only move higher in more than ten years.

Until next time,
Dekker Hewett Group

If Only Federal Reserve Officials and Traders in Financial Markets Communicated Better (September 13, 2016)

Over the past week, officials at the Federal Reserve and traders in financial markets have been talking past each other. At best, this miscommunication had them resemble a quarrelsome couple. In the 1980s and 1990s central bankers used to think that their job was best done in secrecy. They felt that their semi-annual Humphrey-Hawkins report to Congress was all the transparancey that was required. Today, we have Fed officials brainstorming around the country between meetings giving speeches that often are a poor guide to the thinking of the monetary policy committee as a whole.

Last Friday, Fed policy makers appeared to be divided on whether a rate rise was warranted at the upcoming September 20-21 FOMC meeting. Dovish comments from Governor Daniel Tarullo suggested that there was no immediate need for an interest rate tightening until we see inflation get closer to their 2.0% target. It is currently hovering around 1.6%. Conversely, Boston Federal Reserve President (and voting FOMC member) Eric Rosengren was far more hawkish, expressing concern that recent job creation numbers over the past quarter had the US economy approaching full employment. His comments were taken by traders as increasing the likelihood of a Septemmber move, and the DOW ended the day lower by 394 points.

Monday had another three Federal Reserve speakers on the docket before they head into today's blackout period ahead of the September 21 rate announcement. Again, our data-dependent Fed sent out conflicting messages. Atlanta Fed President, Dennis Lockhart, opened up with a warning that a rate hike warrants "serious discussion" at the upcoming meeting, and equity markets initially recorded early declines. By mid-morning, our saviour came in the form of another Fed Governor, Lael Brainard, as her speech focussed on the need to keep monetary policy loose. With inflation still muted, she offered cautionary tones against moving too fast towards any further rate tightening. She championed the cause for the "new normal" of slow but positive growth and the low level of inflation expectations. Market participants liked what they heard, and the DOW ended the day up 240 points. On Monday, expectations for a rate rise this September fell from 21% to 15%.

Are we seeing a relationship between market volatilty and Fed speculation? With apologies to the Tremeloes 1967 hit "Silence Is Golden", we may be better served with less frequent Fed speeches that are more coherent and more forthright, and ones that more clearly represent the overall view of the monetary policy committee as a whole. In the meantime, we'll follow the Fed's every word as they try and telegragh the possibility/probability of their next move through the balance of the year.

Until next time,
Dekker Hewett Group

Bank of Canada Holds Its Key Rate Unchanged at 0.50% (September 7, 2016)

As expected, earlier this morning the Bank of Canada announced their intention to leave their key interest rate unchanged at 0.50%. The Bank is still very concerned about the weak export led recovery (ex-oil) and the most recent Q2 GDP decline of 1.6%. The link below, however, suggested that the Bank is expecting a substantial rebound in economic growth in the second half of the year.

 

Bank of Canada holds rates, warns household imbalances still rising

 

South of the border, we've noted the release of August ISM non-manufacturing index which fell sharply to 51.4% (vs expectations of 54.9%) from the 55.5% posted in July. It was the lowest reading since February 2010. Coupled with last Friday's US August jobs report of 151,000 (of which 150,000 was generated by private services firms), our view is that the Fed is firmly on hold through to the end of the year. This week alone, a few US Investment Banks have pushed back their forecast for the next move to December. Specifically, the Fed Funds Futures market is signalling a similar stance : a move higher in September is slated at 24%, Novenber at 27.3% and December at 51.8%.

On tap for tomorrow is an update from the European Central Bank. We'll keep you posted if there is any market-moving surprises.

Until next time,
Dekker Hewett Group

Hey, Teacher! These Are The Lessons We Learned This Summer. Our Back-To-School Edition (September 2, 2016)

It has been a while since we had to tell our teachers what we did over our summer vacation...decades in fact, and not always the fondest of memories. Alan Berge recalls the Jesuits at Loyola High School in Montreal having him read eight books over the summer vacation, and having to write a one page book report on each to present to his class the first week of September. One of his books was the 551 page "Peloponnesian War"; hard enough to get through, but imagine having to write a one page summary on the 27 year ancient Greece city-state struggle between Athens and Sparta.

It's far easier today to report back to our readers on what we've learned over the past few months, so here we go:

  1. The markets were rife with uncertainty, and volumes picked up across all asset classes. We have had to deal with Brexit, an "entertaining" ongoing US Presidental election campaign, and prospects of the eventual increase by the data-dependent Fed in US short term interest rates (most likely this December). Jackson Hole 2016 has come and gone, and central banks around the world are finding it hard to see a way out of the Rabbit Hole they have all fallen into. Volatility has been the norm in spot energy and commodity prices, with currencies and equities following suit.
  2. Interest rates, especially away from North America, continued to decline. Negative and ultra-low interest rates have become the norm, and a "lower for longer" view is taking hold. All of a sudden, the fixed income asset class seems a tad more risky, and a future blog will deal with our concern surrounding "Does Safe Income Still Exist?"
  3. Two acronyms have surfaced again to explain a perceived herd instinct in buying equities; particularly dividend paying stocks and dividend growers. FOMO (fear of missing out) and TINA (there is no alternative) has made this a crowded trade. In recent blogs, we have highlighted our reasoning for holding bank stocks and REITs to generate income while coupling this strategy with growth companies (Alphabet and CGI Group have no dividend / Cott's is less than 1.5%). Chasing yield in this market is fraught with risk, so we continue to rely on fundamental analysis in selecting our equity positions.
  4. Back to Central Banks and their preference for targeting inflation and their quantitative easing tools, a paradigm shift is beeing discussed. A number of economists and one of our favorite newspapers, "The Economist", are arguing for the advantages of targeting Nominal GDP. Staid old Monetary Policy may never be the same again.
  5. More than ever, seeing through the noise and focusing on the long-term, we at DHG have been dilligent in constructing well diversified portfolios through active managent and a goals based approach for our clients.  During the February low, we were fully invested based on fundamentals, while the emotional gut reaction was to sell. Sound financial advice in these markets has handsomely rewarded our clients and is worth every penny.

We live in interesting times, and can only make our way through the vagaries of financial markets if we are in constant contact with the goals and aspirations of our clients. Regular conversations on the phone and face-to-face meetings are of paramount importance, but reaching out through our social media platform ensures that we keep our clients up to speed on current events affecting the capital markets and steps we're taking to ensure their success.  Be sure to follow us on Twitter, LinkedIn, and Facebook for regular updates from the DHG team.

Until next time,

Dekker Hewett Group

Declining Oil Discoveries "Trumps" Higher Crude Oil Inventories (August 31, 2016)

As we begin the last trading day of August, we are seeing US crude oil prices decline another 1.5% to US$ 44.93 per barrel. This morning, the Energy Information Administration announced its third weekly uptick in crude oil inventories as they rose 2.3 million barrels to 25.9 million barrels, a historically high level that has depressed spot prices. We have always found that trying to forecast and react to any weekly number can at times be more of a mugs game than serious analysis.

More thoughtful analysis leads us to be concerned with the intermediate and longer term effects of declining oil discoveries as highlighted in this excellent article from Bloomberg (Click here to access Bloomberg Article). Their analysis is showing that oil discoveries are at a 70-year low which is likely to trigger a supply side shortfall in the months ahead. Over the past two years, oil prices have fallen by more than half, prompting drillers to cut their exporation and capex budgets to the bone. With no abatement in the demand for oil, this decline in oil exploration & discoveries and its supply side consequences has us being somewhat bullish on the energy sector going forward.

Until next time,

Dekker Hewett Group

How to Take Advantage of Global Opportunities in Our Equity Allocations (August 30, 2016)

Please allow us to make a quick addendum to our blog post from last week as we continue to have Canadian banks delivering impressive growth on a quarterly basis on both the top and bottom line. Fuelled by lower than expected credit loan loss provisions, especially internationally, and higher revenues through all operating segments, earlier today, Bank of Nova Scotia reported earnings per share of $1.55 which handily beat the consensus estimate of $1.48. With higher operating margins, BNS had their International Banking group increase earnings a full 9% year-over-year, while the Scotia Capital unit had earnings advancing 12% Y/Y and 30% Q/Q.

Bank of Nova Scotia's strong and improving capital base allowed the bank to increase its dividend by 3% to $2.96 for the year, which equates an approximate 4.2% dividend yield based on the current share price. Today alone, four of Canada's biggest banks traded to their respective 52-week highs, and it is fair to say that operating results for TD, BMO and BNS were led by solid performances outside of Canada.

This presents a perfect segue to a short discussion on how to best approach investing on a global basis, keeping in mind the Canaccord Genuity mantra of "To Us There Are No Foreign Markets." We could spend hours writing pages in the DHG Blog on foreign investing and the home bias dilema, but that fuller, more proper discussion would be better served in a face-to-face environment. With that being said, allow us to make a few quick observations. The "home country" bias in investing has been a common theme in behavioral economics literature for decades, and Canadian retail investors have been "poster boys" of the hazards that present themselves out there. As of June 30, 2016, Canadian stocks accounted for only 3.3% of global equity market capitalization, yet a recent Vanguard study has shown that Canadian investors held 59% of their equity investments domestically within Canada; a multiple of 18 times which seems rather excessive. At DHG, with our active management and diversification-first philosphy, we are always on the lookout for a more balanced approach when we are assisting our clients in working towards their financial goals.

There are many avenues available to us when trying to invest abroad. Individual Canadian equities that have strong international operating units can be selected, including our banks as discussed above. Properly priced and best in class ETFs and mutual funds also play a major role in our carefully constructed portfolios. Certain sectors like technology, health care and consumer discretionary have a far broader universe available to us when we look abroad. In addition to our internal Canadian research analysts and portfolio strategy team, we have award winning analysts and portfolio strategists abroad,  both in the US and UK. Lastly, our in-house Investment Counselling Program has a number of excellent mandates that specialize in foreign holdings. This is where a face-to-face meeting with DHG would begin.

In Canada, we have a number or world-class pension plan managers who are constantly broadening their investment horizons geographically and across asset classes, who reduced their percentage ownership of Canadian equities in a material fashion between 2012 and 2015. During that stretch, the Canada Pension Plan Investment Board reduced their Canadian equity exposure from 8.4% to 5.4%, Ontario Teachers from 9.0% to 1.6%, and lastly the Caisse de Depot from 12.6% to 9.0%. The sophisticated or smart money is not always right, but let's start a discussion.

Until next time,
Dekker Hewett Group

Best Managed Banks in the World---Canadian You Say! (August 25, 2016)

It is not by any means a stretch to say that Canada's top banks are the best in the world. Coming out of the credit crunch in 2008-2009 and right up to our current "lower for longer" super low interest rate environment, Canadian banks have for the most part enjoyed an estimate-defying profit streak. This week has been no exception, with our first four chartered banks all reporting earnings well ahead of expectations. They have proven to be great allocators of capital and are at the core of a business that is pretty much recession proof.

BMO kick started the banks' earnings season, blowing past profit expectations when they reported cash earnings per share of $1.94 versus consensus of $1.81. The bulk of the beat came from stronger-than-expected net revenues in their Capital Markets division, and lower-than-forecast expenses. Well managed indeed. Earnings on the insurance side (so far prevalent across the first four banks reporting) was the only blemish with a small year over year decline of 4%. BMO's healthy share capital position provides them with solid defense / optionality flexibility to absorb any potential negative developments.

Second up was RBC with a credit-driven beat on estimates mostly attributed to lower than forecast PCLs (provisions for credit losses)...again another recurring theme across the industry. Net income from the bank's wealth management division advanced by 38% with an exceptionally strong contribution from their recent City National acquisition, dubbed LA's "bank to the stars". RBC's European Capital Markets division in fact profited from the post-Brexit uncertainy posting a 21% Y/Y increase in trading revenues in what is normally a quiet quarter. These positive fundamentals allowed the bank to increase its dividend by 2.5% to $3.32 per share.

Earlier this morning, we had two more releases from CIBC and TD with the stocks trading just below their 52 week highs. The CIBC crushed estimates with EPS coming in at $2.67 versus consensus of $2.34 on a 47% increase in third quarter profit. The bank experienced a sharp improvement in credit performance, especially in its oil and gas portfolio, and a superior performance in Canadian retail banking. CIBC left its dividend flat for the first time in seven quarters as it played catch up with its peers. Lastly, TD, Canada's second biggest lender reported Q3 earnings well ahead of market expectations. Their US retail and wholesale banking business had earnings advance 14% Y/Y. Not to be out done, their Capital Markets group had earnings up 26% Y/Y led by strong trading and advisory revenues.

We have to wait until next week to see the Bank of Nova Scotia results, but with their stock trading to a new 52-week high this morning we can only expect a positive report. Hard not to love our Canadian bankers and clearly owning a few in a well diversified equity portfolio makes perfect sense.

When looking at banks away from Canada, the investing landscape is far more muddied. In the US, increased banking regulations have created well capitalized, too big to fail entities that present at best "utility-like" investment opportunities. Fines and reprimands for internal control failures and trading improprities have surfaced from time to time. In Europe, where interest rates are lower than in North America (if not negative), banks have faced resistence from depositors when they try to charge them for the privilege of having money in their accounts. Commercial banks abroad that own portfolios of low interest government bonds are also being challenged.

Earlier this month, the world's largest bank, HSBC headquartered in London, reported disappointing results as profits fell 45%. The bank said it would freeze dividends at their current level and abandon its 10% return on equity target. In a single day, Italy's largest bank, UniCredit, had its stock fall 7.2% while the woegegone Monte dei Paschi di Siena (the world's oldest bank) was off more than 16%. Also, in a "Stress Test" exercise of 51 European banks which were subjected to a simulated financial shock, two of Germany's largest banks (Deutsche Bank and Commerzbank) were in the bottom 12. As we cautioned in an earlier blog...Mind The Gap...stay close to home, preferably with our world class Canadian banks, and invest wisely.

Until next time,
Dekker Hewett Group

Catching the Best Wave...and Getting Safely Back to Shore (August 18, 2016)

For our second DHG Blog posting, we would like to discuss how much cash we feel comfortable holding in our portfolios through August and September, two months that have historically been challenging for equity investors. In a short six months, North American equity markets are a full 20% above their February lows. When we consider that the S&P 500 was down a full 10% after the first 28 days of 2016, the worst start to a year ever, this rebound is all the more impressive. Once again, this past week we saw all three US stock market indices hit record highs on the same day. So with just under 100 trading days left in 2016, there may be a tendency or a temptation to try and lock in profits and partially move to the sidelines through the balance of the year. However, by staying invested through the very tough start to the year, we clearly dodged a bullet.  Our clients resisted the inpulse to sell into the abyss and practiced prudent wealth management. If you remember, the respected Portfolio Strategist for Royal Bank of Scotland shouted out in early January to "Sell Everything" with the exception of high quality bonds, and that investors shoud brace themselves for a catactlysmic year. He also argued that oil could plummet to $16 a barrel. In the end, not the right call.

More recently throughout the summer, we've had additional market pundits express extreme caution. Ex-PIMCO bond guru Bill Gross has causually noted that "I don't like any fixed income", and that only a small number of equities appeal to him. Both George Soros and Jeffery Gundlach are willing to hold gold bullion / gold stocks and not much else. So many informed people are calling for much lower prices. At Dekker Hewett Group, we view these comments as simply what they are... as aggressive trading tactics and not as a well thought out investment strategy.

From a macro point of view, we at DHG like to focus on nominal GDP growth, particularly within North America. Nominal growth drives corporate revenue, business spending and capex. The overall health of the economy greatly impacts inflation and inflation expectations, wage growth, consumer spending and the level of interest rates. On all fronts, we do not see any major red flags or warning signs. Presently, economic growth may be spotty or subdued, but with current policy initiatives in place, we would expect higher nominal growth for the remaider of the year and through 2017. Corporate earnings should also show improvement year over year.

How is this relevant to our portfolios? Remembering that this is a blog and we want to have some fun with it from time to time, allow us to use a surfing analogy. While we will have to wait until the 2020 Tokyo Summer Olympics before surfing becomes an Olympic sport, we are drawn back to one of the classic investing cartoons from days gone by. In the 1980s, Stan Salvigsen at Merrill Lynch published an article called "Surf's Up", with a cartoon showing a number of surfers standing on the beach watching perfect waves rolling in. His tag line was, "if you want to catch a wave, you need to grab a board and get in the water." We believe that today's best surfing is in Northern California at Mavericks. So think of Mavericks as our prefered asset class: high quality equities with an above average growth profile, and ones that we would consider to be dividend growers. Think of the perfect wave as our selection of the best available individual holdings that we have included in our portfolios. We believe that the internal dynamics of North American stocks are showing strong technicals, favorable market breadth and an improving Advance / Decline ratio. With that being said, we expect North American markets to close higher than current levels by year end.

We are definitely not in the bubble camp, but with cash balances currently running in the 7% to 8% range, we have grown more cautious about the state of the stock market. You may even see our cash balances inch a tad higher over the next few weeks. This prudent stance will allow us to take advantage of market volatility that presents mispriced securities that we can add to our portfolios. In any market climate, we are always looking at ways to improve upon the quality of our holdings. So back to the surfing analogy, we are always on the lookout for the best waves and getting YOU, our clients, safely back to shore.

Until next time,
Dekker Hewett Group

Our Inaugural Posting – Welcome to Dekker Hewett Blog (August 11, 2016)

As an additional service to our valued clients and current prospects, we at Dekker Hewett Group (DHG) are initiating an on-going blog that can be accessed through our web site. We view this as a complement to our Market Watch Weekly and daily postings on various social media platforms.

We’ll strive to be effective, truthful and authentic when communicating through this forum. More importantly, we hope that you as our readers will find this blog to be conversational, interesting, fun and at times even inspirational. A very broad scope of topics will be considered, but as always the postings will need to be relevant to you, our clients. With that being said, we are very open to your suggestions!

Comically, our first challenge when approaching the blog was “what are we going to call it?”  DHG Insights was an early favourite followed closely by DHG Wake Up Call…but we are currently leaning towards “Mind The Gap”.

Having travelled to London on numerous occasions, we have always been impressed with the considerate and cautionary warning in the London Underground (the TUBE) when getting on and off their subway cars. The gap between the car and platform can at times be fairly wide, particularly in some of the larger curved stations. At DHG, we are constantly drawing on all our internal and external resources when helping our clients with wealth management and wealth preservation. We have Wealth Management divisions throughout Canada, Australia, the UK and Europe. We are based on a culture of ideas and “to us there are no foreign markets.” So we are here for our clients to “Mind The Gap” in the investing world out there. Our portfolios are constructed to select the best positions available to us across all asset classes and geographies.

So let’s start…our first somewhat feel-good comment for this blog. We are currently enjoying solid equity returns in Canada, a full 20% off their lows reached this past February. Similar price performance has been recorded south of the border, with theDow, NASDAQ and S&P 500 stock market indices all closing at record highs on Thursday, the first time since December 1999. What makes this 20% bounce special, is that it took place over just six months (roughly 125 trading days). The move has not been accompanied by the usual jump in margin financing (retail leveraging) and the market breadth continues to improve. The rally has been fuelled by a broad advance in equities across all industries, sectors and cap-sizes.

At DHG, however, we have been raising cash over the past few weeks, as much as 7.5%. Seasonally, August and September have not been terribly kind to equity investors, and the additional cash gives us the ability to improve the overall quality of our portfolios when the opportunity arises. We are somewhat cautious on recent non-farm productivity in the US: it fell in the second quarter of the year, the third consecutive quarterly decline and the longest period of declining productivity since 1979. Labour productivity growth is necessary in underpinning rising wages and living standards and is a main ingredient in corporate profitability and earnings. The declining productivity numbers may allow the Federal Reserve to stay on the sidelines through the balance of 2016, but they are not ideal for advancing equity prices. Mind The Gap.

Until next time,
Dekker Hewett Group