January 23, 2014 Newsletter

Dear Friends,

Tangents:

We spent an entertaining evening last Thursday night at an “Armagnac Tasting”.  A couple of friends invited us to join them – one of whom loves Armagnac, however she says it is difficult to find  easily in Victoria, so this was going to be a treat.  To be honest, I didn’t even know what Armagnac is, so Karen did a little sleuthing for me before the event. For those who, like me, aren’t well versed on Armagnac, I learned that it is a distinctive kind of brandy produced in the Armagnac region in Gascony, southwest France.  According to Wikipedia, it is distilled from wine usually made from a blend of grapes including Baco 22A, Colombard, Folle blanche and Ugni blanc; the resulting spirit is then aged in oak barrels.  It is the oldest brandy distilled in France, but the overall volume of production is far smaller than Cognac production and therefore is less known outside Europe.  Also, they are for the most part made and sold by small producers, whereas in Cognac production is dominated by big-name brands.

One generous member at the Union Club offered up a sampling of nine different vintages that he had acquired – it turned out to be so much fun.   No prior research was necessary though because the sommelier from Lure Restaurant, Jacques Lacoste, had such a scope of knowledge on the subject  – he is truly amazing.  The tasting included a 1961 Amagnac de Montal that fetches $408/bottle, a 1973 Marie Duffau, a 1973 Domaine D’Ognoas, a 1974 Damblat, a 1975 Marcel Treput, A 1978 Armagnac de Montal, a 1985 Domaine de Baraillon, A 1986 Armagnac du Miquer and a 1993 Armagnac de Montal that can be had for a more reasonable $115/bottle.  All tasted very different – all were good.  Mr. Treput gave a wonderful introduction about the history, the region and even anecdotal comments about t the families who produced the vintages we tasted.

I am now a fan.

Photos of the day

Russian women enjoy a skating rink along a boulevard in Moscow’s Sokolniki Park. Pavel Golovkin/AP

A female leopard runs inside a snow-covered enclosure at Dachigam Wildlife Sanctuary on the outskirts of Srinagar, Indian-Administered Kashmir. Wildlife authorities are making special efforts to provide food to the endangered leopards as they face difficulty in finding vegetation following heavy snowfall. Dar Yasin/AP

Market Closes for January 23^rd, 2014

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Callie Bost

Jan. 23 (Bloomberg) — Canadian stocks declined, led by technology, financial and health-care shares, after a measure of China’s manufacturing contracted. Mining companies gained after gold reached a two-month high.

BlackBerry Ltd. dropped 3.1 percent after yesterday reaching the highest price since September. Penn West Petroleum Ltd. retreated 4 percent, bringing its loss this week to 14 percent. Gold mining stocks soared 3.1 percent as a group with OceanaGold Corp. and China Gold International Resources Corp. jumping more than 5 percent.

The Standard & Poor’s/TSX Composite Index decreased 55.23 points, or 0.4 percent, to 13,932.97 at 4 p.m. in Toronto after earlier rising above 14,000 for the first time since May 2011.

The gauge is about 2.4 percent lower than a three-year high of 14,270.53 in April 2011. Trading in S&P/TSX stocks was 8 percent higher than the 30-day average at the close.

“Investors are letting the market take a pause,” Bob Decker, a fund manager with Aurion Capital Management Inc. who helps manage about C$6 billion ($5.7 billion), said by phone from Toronto. “There’s a general wait-and-see attitude. Other than gold stocks mitigating the decline, we’re seeing a negative tone in the equity markets.”

Chinese factory output may shrink this month, a preliminary survey from HSBC Holdings Plc and Markit Economics indicated today as the People’s Bank of China injected more funds to the financial system to ease a cash shortage. In the U.S., applications for unemployment benefits rose in the latest week.

The S&P/TSX has advanced 2.3 percent this year for the 10th best performance among 24 developed markets tracked by Bloomberg. The gauge trades for about 18.4 times its companies’ reported earnings, the highest valuation in almost three years.

The Canadian index is starting the year off stronger than the S&P 500 Index, the U.S. benchmark gauge, for the first time since 2009. The S&P 500 is down 1.1 percent this year, more than the MSCI All-Country World Index’s 1 percent decline.

The Canadian dollar, the worst performer among the Group of 10 countries in the past six months, slid 0.8 percent to C$1.1174 per U.S. dollar, the weakest level since July 2009.

Global stocks fell today as a survey from HSBC Holdings Plc and Markit Economics signaled that Chinese factory output may contract this month. The preliminary reading of 49.6 for the Purchasing Managers’ Index compared with a final figure of 50.5 in December and a 50.3 median estimate of 19 analysts in a Bloomberg survey.

Canadian retail sales in November increased 0.6 percent to C$41.0 billion ($36.8 billion), Statistics Canada said today in Ottawa, three times faster than the 0.2 percent median of a Bloomberg survey with 18 responses. Motor vehicle and parts sales rose 1.2 percent to C$9.63 billion in November as an early onset of winter boosted demand for seasonal items, Statistics Canada said.

Nine of the 10 main industries in the index retreated.

Health-care companies dropped 1.2 percent, while technology, financial and consumer-staples stocks lost at least 0.5 percent.

Producers of raw materials advanced 1 percent.

Manulife Financial Corp. rose 1.9 percent to C$21.80 and Alaris Royalty Corp. slipped 1.8 percent to C$26.51. Home Capital Group Inc. decreased 1.6 percent to C$78.75.

BlackBerry dropped 3.1 percent to C$11.59. Yesterday, the smartphone maker jumped to the highest level since September after it disclosed plans to sell most of its Canadian real estate for cash.

Penn West lost 4 percent to C$7.89. Yesterday, the oil and gas explorer fell to the lowest level since 1999 after AltaCorp Capital Inc. analyst Jeremy McCrea said Penn West may have a higher risk of missing expected production rates.

RBC Capital Markets analyst Greg Pardy said yesterday the company should divest assets with “modest” output to improve its balance sheet.

The S&P/TSX Gold Index increased 3.1 percent as OceanaGold jumped 9.7 percent to C$2.14 and China Gold International Resources Corp. surged 5.7 percent to C$3.36, leading gains among mining stocks in the gauge. Pretium Resources Inc. climbed 2.1 percent to C$6.97 and NovaGold Resources Inc. rose 4.5 percent to C$3.46.

Gold futures for February delivery rose 1.9 percent to $1,262.30 an ounce in New York. Earlier, the price of gold touched $1,267.10 an ounce, the highest level since Nov. 20.

Agnico Eagle Mines Ltd. increased 7.2 percent to C$33.91, the highest level since August. Sterne, Agee and Leach Inc. analyst Michael Dudas raised the gold producer’s rating to buy from neutral with a 12-month price target of $38 a share.

USA

By Nick Taborek and Nikolaj Gammeltoft

Jan. 23 (Bloomberg) — U.S. stocks fell, with the Dow Jones Industrial Average tumbling to a one-month low, after a gauge of China’s manufacturing contracted and investors analyzed corporate earnings.

Cliffs Natural Resources Inc. slipped 4.3 percent, following European commodity producers lower. JPMorgan Chase & Co. and American Express Co. slid at least 1.9 percent to pace losses among financial firms. American Eagle Outfitters Inc. lost 7.8 percent after saying its chief executive officer is leaving. Netflix Inc. surged 16 percent as it projected customer growth that topped analysts’ estimates.

The Standard & Poor’s 500 Index declined 0.9 percent to 1,828.46 at 4 p.m. in New York. The Dow lost 175.99 points, or 1.1 percent, to 16,197.35. About 7.4 billion shares changed hands on U.S. exchanges, 22 percent above the three-month average.

“U.S. equities were at the intersection of full valuations and increasingly positive sentiment and that combination has made them vulnerable to less than perfect news,” Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, which oversees $63 billion, said in a phone interview. “We set the stage this morning with the data from China for the market to be a little bit nervous and the data points from the U.S. didn’t help to stem that anxiety.”

The S&P 500 has fallen 1.1 percent for the year while the Dow has tumbled 2.3 percent, after the broader gauge jumped 30 percent to a record last year, the most since 1997. Three rounds of Federal Reserve monetary stimulus have helped the S&P 500 rise 170 percent from a 12-year low in 2009.

The rally has boosted equity valuations to near the highest level since 2009. The S&P 500 trades at 15.5 times the estimated earnings of its members, more than the five-year average multiple of 14.1, data compiled by Bloomberg show.

Data today showed applications for U.S. unemployment benefits held near a six-week low, showing firings remain muted following the holidays. U.S. house prices advanced 0.1 percent in November from October, slowing growth that indicates the real estate recovery may be losing strength, the Federal Housing Finance Agency said in another report.

Separate releases indicated purchases of previously owned homes climbed in December for the first time in four months, while the index of U.S. leading indicators rose.

Fed officials have been scrutinizing economic data to determine the timing and  pace of any reductions to their stimulus. The central bank, which next meets Jan. 28-29, decided at its December meeting to start cutting its monthly bond purchases by $10 billion to $75 billion.

In China, a report today indicated factory output may contract this month, based on a preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics.

“China has been the growth story for the better part of 10 or 15 years, and all of a sudden we’re starting to see contraction,” Chris Bouffard, chief investment officer of the Mutual Fund Store in Overland Park, Kansas, which oversees $8.5 billion, said in a phone interview. “That’s going to take a while for market participants to get comfortable with.”

The U.S. equities benchmark had gained 0.3 percent in the previous two sessions as investors assessed corporate earnings.

Some 20 members of the index report results today, including Microsoft Corp. and McDonald’s Corp. Of the 109 index members that have released earnings so far this season, 74 percent have beaten estimates for profit and 67 percent have exceeded sales projections, according to data compiled by Bloomberg.

Per-share profit for companies in the index probably climbed 6 percent in the fourth quarter, while sales increased 2.2 percent, according to analysts surveyed by Bloomberg.

The Chicago Board Options Exchange Volatility Index rose 7.2 percent today to 13.77, the highest in three weeks. The gauge of S&P 500 options known as the VIX has gained 0.4 percent this year.

Nine of the 10 main groups in the S&P 500 retreated at least 0.3 percent today. Financial stocks dropped 1.7 percent, as JPMorgan Chase fell 1.9 percent to $56.47 and Citigroup Inc. slid 2.3 percent to $50.72. American Express lost 2.2 percent to $89.17 for the biggest loss in the Dow.

Berkshire Hathaway Inc. Class B shares fell 1.5 percent to $113.50. Regulators are starting to scrutinize Warren Buffett’s conglomerate to determine whether it is important enough to the financial system to require Fed supervision, according to two people with knowledge of the matter.

KeyCorp slid 3.3 percent to $13.68. The Cleveland-based bank today said noninterest expenses in the fourth quarter were $712 million, surpassing its guidance of $680 million to $700 million, including one-time charges. Profit rose 21 percent.

Materials producers declined 1.5 percent as a group after commodity stocks retreated in Europe. Prices for industrial metals sank as the manufacturing data from China, the world’s biggest consumer, fell below economists’ forecasts.

DuPont Co. fell 2 percent to $61.75. Alcoa Inc., the largest U.S. aluminum producer, dropped 1.2 percent to $12.07.

Cliffs Natural Resources, the biggest U.S. iron-ore producer, dropped 4.3 percent to $20.29, the lowest since October.

Noble Corp. fell 8.6 percent to $33.13 for the steepest decline in the S&P 500. The oil driller said the offshore industry may be due for a cyclical pause. Diamond Offshore Drilling Inc. fell 5.2 percent to $51.88 and Rowan Cos. lost 2.6 percent to $32.78.

American Eagle Outfitters lost 7.8 percent to $13.19 after the teen-apparel retailer said Chief Executive Officer Robert Hanson is leaving the company and Executive Chairman Jay Schottenstein will replace him on an interim basis.

Herbalife Ltd. tumbled 10 percent to $65.92, a two-month low. The nutrition company that hedge fund manager Bill Ackman has accused of being a pyramid scheme fell the most in a year after a U.S. senator called for a probe into the company’s operations.

Zhone Technologies Inc. tumbled 26 percent to $4.62 after the provider of network products for voice, data and video services reported fourth-quarter revenue of $32.3 million, missing an estimate for $32.5 million.

Netflix surged 16 percent to $388.72. The world’s largest subscription streaming service forecast customer growth ahead of analysts’ estimates and saying it may charge new users more to share accounts.

Netflix predicted 2.25 million new domestic subscribers this quarter. The Los Gatos, California-based company also estimated first-quarter profit of $48 million, or 78 cents a share, compared with analysts’ projections of 75 cents.

AT&T Inc. gained 1.4 percent to $33.80 and Verizon Communications Inc. added 1.1 percent to $47.86, as phone stocks were the only group to advance in the S&P 500.

Union Pacific Corp. climbed 3.3 percent to $174.12. The biggest U.S. railroad reported fourth-quarter profit that beat analysts’ estimates after a record corn crop increased shipments of agricultural products. Shipments of automobiles and industrial products also rose.

McDonald’s rose 0.5 percent to $95.32. The world’s largest restaurant chain posted fourth-quarter profit that was little changed from a year earlier even as U.S. same-store sales fell amid shaky consumer confidence and increased competition.

Have a wonderful evening everyone.

Be magnificent!

The human voice can never reach the distance

that is covered by the still small voice of conscience.

Mahatma Gandhi, 1869-1948

As ever,

Carolann

The least I can do is speak out for those who cannot

speak for themselves.

-Jane Goodall, 1934-

Carolann Steinhoff, B.Sc., CFP®, CIM, FCSI

Senior Vice-President &

Senior Investment Advisor

Queensbury Securities Inc.,

St. Andrew’s Square

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7