August 9, 2016 Newsletter

Dear Friends,

Tangents:

August 9, 1815, Charles Lamb wrote to Robert Southey:

I am going to stand godfather; I don’t like the business; I cannot muster up decorum for these occasions; I shall certainly disgrace the font.  I was at Hazlitt’s marriage, and had like to have been turned out several times during the ceremony.  Anything awful makes me laugh.  I misbehaved once at a funeral.  Yet I can read about these ceremonies with pious and proper feelings.  The realities of life only seem the mockeries. 

TODAY IN HISTORY

August 9, 1945: The United States exploded a nuclear device over Nagasaki, Japan, instantly killing an estimated 39,000 people.  The explosion came three days after the atomic bombing of Hiroshima.

We have guided missiles and misguided men. –Martin Luther King, Jr.

August 10, 1945, James Lees-Milne, Diary:

My delight in Churchill’s defeat, disapproval of the Socialists’ victory, detestation of the atom bomb and disgust with the Allies’ treatment of Germany are about equal.  Muddle. 

Remember that no one loses any other life than this which he now lives, nor lives any other than this which he now loses.

                                                                                                        -Marcus Aurelius,121-180, Meditations, ll, 14.

PHOTOS OF THE DAY

William Fox-Pitt of the United Kingdom rides Chilli Morning in the individual equestrian jumping final at the Olympics in Rio de Janeiro, Brazil, on Tuesday. Tony Gentile/Reuters

Marco Fichera (l.) of Italy competes against Japan’s Kazuyasu Minobe during a men’s preliminary fencing match at the Olympics in Rio de Janeiro, Brazil, on Tuesday. Issei Kato/Reuters

Market Closes for August 9, 2016

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

     (Bloomberg) — Canadian stocks rose to the highest level in 13 months as Valeant Pharmaceuticals International Inc. surged the most in two decades on its forecast and commodities producers advanced.

     The S&P/TSX Composite Index climbed 0.3 percent to 14,801.23 at 4 p.m. in Toronto, extending a five-day rally to 2.3 percent. Trading volume was 9.4 percent lower than the 30- day average.

     The Canadian equity benchmark is up 14 percent in 2016, rebounding from a slump last year that was the worst for the S&P/TSX since the 2008 financial crisis. The rally has made Canadian stocks more expensive than their U.S. peers, with a price- earnings ratio of 23.5 for the S&P/TSX, about 15 percent higher than the S&P 500 Index.

     While mining and energy stocks have propelled Canada to the second-best performance among developed markets this year, it was health-care companies and banks that drove gains Tuesday. Valeant soared 25 percent for the biggest gain since September 1995, contributing almost one-third to the broader index’s advance. Royal Bank of Canada and Toronto-Dominion Bank rose at least 0.3 percent to lead banks higher.

     Valeant maintained its full-year targets given in June, including adjusted Ebitda or earnings before interest, taxes and other items of $4.8 billion to $4.95 billion. To do so Valeant will need to significantly improve its results, after posting second-quarter adjusted profit of $1.40 a share, well short of the $1.47 average estimate. Sales plunged 11 percent.

     Elsewhere in corporate earnings, Ritchie Bros. Auctioneers Inc. tumbled 11 percent for its worst loss in seven years after second-quarter earnings and sales missed estimates, blamed on a sudden decline in global equipment pricing in June. Ritchie Bros. also boosted its dividend. Premium Brands Holdings Corp. added 5.5 percent, closing at the highest in three months.

     Raw-materials producers added 0.3 percent as a group as gold advanced in New York to halt a brief two-day slide. Iamgold Corp. slumped 11 percent after selling shares in a bought deal to raise $200 million. The gold mining company plans to use the cash to reduce debt and fund internal growth projects. While second-quarter revenue missed estimates, the company said it expects to complete several acquisitions this year.

     Energy producers slipped 0.1 percent as crude prices ended the day lower in New York, falling from the highest close in two weeks. Oil advanced yesterday after OPEC said it will hold informal talks next month in Algiers.

     Inter Pipeline Ltd. lost 2.2 percent after agreeing yesterday to buy the Canadian assets of Williams Cos. for C$1.35 billion ($1 billion) including extraction and processing facilities in the Alberta oil sands, as well as about 260 miles of pipelines.

US

By Joseph Ciolli

     (Bloomberg) — Professional speculators are making record bets in volatility markets that U.S. stocks will keep rallying.

     Hedge funds and other big traders tracked by the Commodity Futures Trading Commission have pushed net short positions on CBOE Volatility Index futures to 115,000 contracts, the most since 2013, data compiled by Bloomberg show. Shorting volatility is effectively a bet equity prices will rise since the VIX and stocks move in opposite directions 80 percent of the time.

     The wagers were mixed Tuesday as the VIX climbed 1.4 percent to 11.66 after wiping out a 4.2 percent drop. The S&P 500 rose less than 0.1 percent to 2,181.74 at 4 p.m. in New York. The benchmark gauge for American equity climbed in four of the last five days to push its 2016 increase to 6.7 percent and its gain from February’s low to 19 percent.

     The index was little changed near an all-time high as declines in commodity shares and retailers offset gains in health-care and technology stocks spurred by corporate earnings. The Nasdaq Composite Index increased 0.2 percent to a record for the second time in three sessions, and the Dow Jones Industrial Average added 3.76 points to 18,533.05. About 6 billion shares traded hands on U.S. exchanges, 14 percent below the three-month average.

     Even with the advance, moves in stocks over the last month have been muted. The S&P 500 has failed to rise or fall more than 1 percent in either direction for 22 straight days, the longest such streak since 2014. The lack of price swings had sent the CBOE Volatility Index to a more than two-year low amid a better-than-expected corporate earnings season and economic data that showed signs of improvement.

     “Each time volatility starts coming out, you have policy makers coming and crushing it back down,” Michael Kelly, New York-based global head of multi-asset strategy at PineBridge Investments, which oversees over $80 billion, said in an interview. “People are learning, you have protection underneath you.”

     The drop in volatility has created such a downdraft in the prices of VIX-linked exchange-traded products that two securities carried out a reverse split Tuesday to increase their per-share value. The iPath S&P 500 VIX Short-Term Futures ETN and the iPath S&P 500 VIX Mid-Term Futures ETN both enacted 1- for-4 splits after shares tumbled 54 percent and 14 percent this year, respectively.

     In the past 30 days, four VIX-related ETPs have declared reverse splits, the most in history, according to data compiled by Sundial Capital Research Inc.

     “VIX positioning went from incredibly bullish back in February, when the world was coming to an end, to shorts at all time lows,” Michael Purves, chief global strategist at Weeden & Co LP in Greenwich, Connecticut, said by phone. “It’s crazy.”

     While Purves largely attributes the VIX’s current suppressed level to the Federal Reserve’s willingness to reassure the market in times of turbulence, he also cites improving economic data. Citigroup Inc.’s U.S. Economic Surprise Index late last month hit its highest level since September 2014.

     A report today showed productivity of American workers unexpectedly declined for a third quarter, consistent with lackluster efficiency that’s characterized the economic expansion. July payrolls data that beat estimates on Friday bolstered confidence in the U.S. economy, calming concerns following recent disappointing readings on growth in the first half of this year.

     Stocks have also benefited from better-than-forecast earnings this season, particularly among technology companies. With about 90 percent of S&P 500 members having posted results, 77 percent have beaten profit predictions and 56 percent have topped sales projections.

     Analysts have tempered their estimates for a decline in second-quarter net income to 2.7 percent, from a 5.8 percent drop less than a month ago. Forecasts for the current quarter ending in September have turned negative, indicating a sixth straight period of falling profits, the longest since the financial crisis. Sliding earnings are causing valuations to jump, with the benchmark’s price-earnings ratio last month climbing above 20 for the first time since 2009.

     Among shares moving on corporate news, Endo International Plc soared 22 percent, the steepest climb since November 2013, after the drugmaker’s results beat analysts’ estimates. Microchip Technology Inc. added 7.1 percent to a record as its sales and profit outlook exceeded predictions.

     Gap Inc. lost 6.3 percent, the most in three months, after comparable sales last month missed analysts’ estimates and the company provided some cautious commentary on the second half of the year. Target Corp. fell 3.2 percent after Cleveland Research lowered its estimates for the retailer’s same-store sales and earnings, saying customer traffic softened in July.

 –With assistance from Camila Russo, Oliver Renick and Lu Wang.

Have a wonderful evening everyone.

Be magnificent!

The characteristic of my nation is this transcendentalism,

this struggle to go beyond, this daring to tear the veil off the face of nature

and have at any risk, at any price,

a glimpse of the beyond.

Swami Vivekananda

As ever,

Carolann

If you go on with this nuclear arms race, all you are going to do

is make the rubble bounce.

                                        -Sir Winston Churchill, 1874-1965

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