Hap Sneddon, Chief Portfolio Manager and Founder, CastleMoore. His focus is technical analysis.
Top Picks:
Open Text (OTC.TO)
Open Text fell from a high just below $80 in the spring and recently is making a base in the $60 range. Recent earnings were strong even with FX headwinds. The above-consensus print, larger than expected share buyback, and strong forward guidance make the world's largest Enterprise Content Manager a good holding, representing a pro-cyclical investment in the defensive/pro-cyclical market dichotomy.
Powershares Financial Preferred Portfolio ETF (PGF.N)
This ETF made up of mostly U.K. and U.S. bank preferred shares is a steady performer with a yield of 5.62 per cent. Its risk-to-reward is more favourable than pure fixed-income plays such as bonds. For conservative, absolute return-focused investors this position would be part of a core holding.
Saputo (SAP.TO)
Saputo, as an example of a consumer staple investment, and hence a defensive security, peaked in the spring. It found its technical footing over the summer and now is moving higher from a base at $30.00 from commodity stabilization, increased efficiencies and volume growth. Technically, the risk-to-reward is favourable, with downside risk limited to 6 per cent. The stock shows strong and improving relative performance to both the TSX and S&P.
Past Picks: November 28, 2014
iShares China Large-Cap ETF (FXI.N)
Then: $40.60 Now: $37.97 -6.48% Total return: -4.82%
Exelon (EXC.N)
Then: $36.17 Now: $27.70 -23.42% Total return: -20.41%
Consumer Staples Select Sector SPDR ETF (XLP)
Then: $49.30 Now: $49.77 +0.95% Total return: +3.60%
Total Return Average: -7.21%
Market outlook:
"The Push and Pull"
There is a tug-of-war of competing forces in three clearly defined — yet connected — areas. The tie that binds all three is U.S. interest rates and whether we are at a watershed moment in terms of their direction. The last time the Fed raised short term rates was in June 2006. Raising interest rates is normally done to combat rising inflation from strong housing and employment data.
U.S. Central Bank vs. Global Central Banks
While this divergence in policies is not necessarily harmful, it certainly will continue to strengthen the U.S. dollar against all other major currencies. The Fed has been talking about raising short-term interest rates since 2013, while most other central bankers are lowering interest rates to stimulate their economy. Large brokerages, institutions and the media have been trying to do the Fed's bidding, with the former two taking up the Fed funds' futures rate before each meeting, only to have it collapse just before. Rinse and repeat. Today, 70 per cent expect a rate rise at the Dec. 16 meeting will put pressure on global commodities and resourced-based markets like Canada's and also reduce profit margins on U.S. multinational companies (earnings repatriation) and U.S. exporters (increased prices to customers).
U.S. Central Bank vs. U.S. Economic Data
U.S. data has been highly inconsistent after so many years of stimulus. Of late, since the full effect of the official end to quantitative easing is now felt by stock markets, it has been softening. This is at odds, too, with the expected rate rise.
U.S. GDP came in at 1.5 per cent in Q3, below Q2's 3.9 per cent but above Q1's -0.2 per cent. Over the last 5 years, this quarterly figure has been in a band between slightly negative at times and modestly positive for the most part. U.S. inflation averaged 2.07 per cent in 2012, 1.47 per cent in 2013, 1.62 per cent in 2014, and for 2015, through September, it is averaging 0.0022 per cent. Many other metrics for determining the strength of the U.S. economy are also soft, such as retail and capital spending, hourly earnings and hours worked, and manufacturing and new orders (at a two-year low).
In the positive column is a recently strong monthly jobs report (270k vs. 183k consensus), leading to an unemployment rate of 5.0 per cent, despite the number of workers as a percentage of the population being at its lowest point since 1977. In its December decision on rates, the Fed will cite the November jobs report .
Defensive vs. Pro-cyclical Investments
Defensive investments tend to do well when interest rates are falling and economic conditions are soft or declining. Examples of these include utilities, infrastructure, bonds, and consumer staples. Pro-cyclical investments, on the other hand, do well when economic conditions are strong or rising. Examples of these include banks and financials, consumer discretionary and industrials. Our list of top-ranked strong relative performers at the end of October consists of telecom, consumer staples, consumer discretionary, 20-year bonds, financials and technology. Investors have not made a full commitment to growth with so many defensive areas scoring well and the pro-cyclicals still hanging around. Much of this contradiction and subsequent volatility can be laid at the feet of the Fed for its on/off position with regards to rates. If we are on a new trajectory of higher interest rates, investors should own more pro-cyclical and less defensive investments.