January 4, 2016 Newsletter

Dear Friends,

Tangents:

PHOTOS OF THE DAY

Actors perform during a fire and smoke festival as they celebrate Orthodox Christmas in St. Petersburg, Russia, Monday. Russians continue to celebrate the New Year and Orthodox Christmas from Jan. 1 to 10. Dmitry Lovetsky/AP

People look around ice sculptures ahead of the Harbin International Ice and Snow Festival in the northern city of Harbin, Heilongjiang province, China, Monday. Aly Song/Reuters

Market Closes for January 4^th, 2016

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

     (Bloomberg) — At least for one day, Canada’s stock market benefited from its resource-heavy tilt as a rally in gold producers helped minimize damage during the worst global equity selloff to start a year in at least three decades.

     While broad losses among banks and railway operators paced a 0.6 percent drop in the Standard & Poor’s/TSX Composite Index, the benchmark had one of the best performances among developed- nation gauges tracked by Bloomberg. A global stock index tumbled 2 percent for its worst inaugural session since at least 1988, as weak manufacturing figures from the U.S. and China, the world’s two biggest economies, sparked concern that growth will slow.

     Canadian shares still delivered their worst opening day since 2005, with the S&P/TSX falling 82.80 points to 12,927.15 at 4 p.m. in Toronto. The gauge pared earlier losses of 2 percent as energy shares clawed back most of a 2 percent rout and gold miners rallied 4.2 percent as the metal’s price rose on haven demand. Royal Bank of Canada and Toronto-Dominion Bank, the largest lenders, sank at least 1 percent.

     The equities selling started in China, where investors scrambled for the exits after the CSI 300 Index plunged 7 percent, triggering a halt for the day after an earlier 15- minute suspension at 5 percent failed to stop the retreat. European shares lost 2.5 percent and the S&P 500 in the U.S. fell 1.5 percent.

     “If you want to be bearish, there’s a lot to be concerned about,” said Greg Taylor, a fund manager at Aurion Capital Management in Toronto. His firm manages about C$7.2 billion. “It’s certainly not a good headline and it doesn’t help sentiment at all. But it does feel some of the worst news is priced in.”

     The Canadian benchmark index sank 11 percent in 2015, the biggest annual slide since 2008 as a combination of slowing growth in China and Europe, a glut in crude production and the prospect of increasing U.S. lending rates buffeted Canadian stocks.

     The Caixin factory index, a measure of manufacturing, came in at 48.2 in December, short of the median analyst estimate of 48.9 in a Bloomberg survey. The nation’s first official economic report of 2016 on Jan. 1 signaled manufacturing weakened for a fifth month, the longest such streak since 2009. Figures also showed U.S. manufacturing contracting at the fastest pace in six years.

     Canadian stocks may finally be able to outperform their U.S. peer S&P 500 for the first time since 2010 this year if the price of resources from crude to gold rebounds, Taylor said. Geo-political risks such as the rising tension between oil producers Iran and Saudi Arabia, which had taken a backseat to supply and demand concerns in 2015, may return to the forefront, he said.

     “The one thing Canadian investors had been hoping for last year was for a peak in the U.S. dollar,” Taylor said. “The Canadian market is starting to show some strength. Sell the winning trades and a reversion into lagging trades in gold and oil. If this trend were to hold then maybe Canada will start to outperform the U.S.”

US

By Oliver Renick

     (Bloomberg) — U.S. stocks tumbled to begin 2016, with the Standard & Poor’s 500 Index off to its worst start in 15 years as a rout in Chinese equities renewed concern that an economic slowdown there will damp global growth.

     Investors returning to the market after the New Year holiday faced a worldwide selloff sparked by weak factory data in China, while a reading that showed the fastest contraction in U.S. manufacturing in six years bolstered anxiety that slowing growth in the world’s second-largest economy is spreading. A flareup in tension between Saudi Arabia and Iran added to the unease.

     The S&P 500 Index fell 1.5 percent to 2,012.66 at 4 p.m. in New York, after sliding as much as 2.7 percent as equities pared losses in the final 30 minutes of trading. The Dow Jones Industrial Average lost 276.09 points, or 1.6 percent, to 17,148.94. The Nasdaq Composite Index dropped 2.1 percent. The Chicago Board Options Exchange Volatility Index jumped 14 percent, the most in three weeks. About 8.5 billion shares traded hands on U.S. exchanges, 21 percent above the three-month average.

     “We’ve had a number of negatives out there in the U.S., and China is a reminder that there aren’t many things to be bullish about going into this year,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC in Greenwich, Connecticut. “The three catalysts to the bull market were economic recovery, earnings recovery and accommodative policy, and while the economy has gotten better, we’ve lost the other two.”

     Trading was halted in China after a 7 percent drop in the CSI 300 Index of large-capitalization companies listed in Shanghai and Shenzhen amid deteriorating manufacturing data. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.

     The S&P 500’s decline was its sixth-worst start to a year in data compiled by Bloomberg going back to 1927. The biggest rout to open a year was in 1932 when the index sank 6.9 percent, followed by a 2.8 percent slide during the dot-com demise in 2001. In those two instances, the index averaged a full-year loss of 14 percent, though the five worst starts had an average annual gain of 5.1 percent.

     S&P Dow Jones Indices data indicate the first day of trading has no predictive power for the rest of the year. The index ends the year in the same direction it takes on the opening day 50.6 percent of the time, the data show. The first month of the year has proved more telling — the gauge’s return in January determines its direction for the year 72.4 percent of the time.

     After scaling new peaks and enduring its worst selloff in four years, the main U.S. equity index ended 2015 0.7 percent lower. Investor sentiment wavered last year between optimism that the economy was strong enough to handle higher borrowing costs and concern that China’s slowdown will hurt global growth, which exacerbated weakness in commodity prices and raw-material stocks.

     The beginning of 2015 was also rocky, with the benchmark index dropping 2.7 percent in its first three sessions, followed by a two-day, 3 percent rally before eventually finishing January down 3.1 percent.

     Meanwhile, investment strategies premised on buying shares based on their momentum just posted the best year since 2007, which isn’t great news for bulls. Past instances when momentum stocks — defined as the ones showing the biggest gains in the last six to 12 months — won have occurred closer to the end of rallies than the beginning, signaling indiscriminate buying at a time when more traditional share drivers such as earnings growth are starting to wane.

     Escalating tensions between Saudi Arabia and Iran are also adding to worries Monday, according to Robert W. Baird & Co.’s Patrick Spencer. “Middle Eastern concern and the escalation compounded by further issues in China are all adding to short- term weakness,” said Spencer, equities vice chairman at Baird in London. “The outlook still looks reasonable and I would take any weakness to selectively buy, especially in the consumer and housing market recovery area.”

     Focus will turn toward a swath of economic reports this week, including data on factory activity, the monthly jobs report and minutes from the Federal Reserve’s meeting that ended with the first rate increase since 2006. A reading today showed manufacturing in the U.S. contracted in December at the fastest pace since 2009 as factories, hobbled by sluggish global growth, cut staff at the end of 2015.

     All of the S&P 500’s main groups dropped on Monday, with financial, health-care and consumer discretionary shares down at least 1.7 percent. Microsoft Corp., Google parent Alphabet Inc. and Facebook Inc. fell more than 1.2 percent. The Nasdaq Biotechnology Index sank 3.2 percent, the most in a month to weigh on health-care.

     JPMorgan Chase & Co. and Wells Fargo & Co. paced the drop in the financial group, down at least 2.6 percent as 83 of 87 members fell. McGraw Hill Financial Inc. and Huntington Bancshares Inc. fell the most, losing more than 3.2 percent. An index tracking bank stocks slumped 2.6 percent to the lowest since Oct. 21, and traded with volume 58 percent above their 30- day average, according to data compiled by Bloomberg.

     Several of 2015’s biggest winners and losers reversed roles in the first session of the new year. Netflix Inc. and Amazon.com Inc. dropped more than 3.8 percent, among the benchmark’s worst performers today after posting the strongest gains in 2015, up more than 117 percent. Chesapeake Energy Corp. and Consol Energy Inc. were the strongest gainers Monday, rising at least 8.4 percent, after leading declines last year.

     Energy companies in the S&P 500 fell 0.2 percent Monday, the smallest decline among the main industries after posting the biggest drop last year, down nearly 24 percent. Southwestern Energy Inc. and Range Resources Corp. added more than 4.6 percent. Overshadowing those gains, Chevron Corp. and Phillips 66 lost at least 1.2 percent.

     Among companies moving on corporate news, Baxalta Inc. jumped 5.5 percent to an all-time high. Bloomberg News reported that Shire Plc is in advanced talks to acquire the drugmaker for a deal of about $32 billion in cash and stock, excluding debt.

     Chipotle Mexican Grill Inc. dropped 6.5 percent to a more than two-year low after analysts predicted a tough 2016 for the restaurant chain. Chipotle’s reputation was battered in recent months by an outbreak of E. coli that afflicted at least 53 people in nine states. That was followed by a norovirus contagion at a Boston location that sickened more than 140 college students.
 

Have a wonderful evening everyone.

Be magnificent!

          “It is not in the stars to hold our destiny but in ourselves.” William Shakespeare

As ever,
 

Karen

          “Strength does not come from physical capacity. It comes from an indomitable will.” Mahatma Gandhi
 

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

Portfolio Manager &

Senior Vice-President

Queensbury Securities Inc.,

St. Andrew’s Square,

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7