July 8, 2016 Newsletter

Dear Friends, 

Tangents:

Prime Numbers:

100,000

Estimated number of people who have fled Crimea since Russia captured it from Ukraine in March 2014.  Many are ethnic Tatars, who settled there centuries ago. 

91

Percentage of people, who, even though they were on the US terrorist watchlist, passed a government background check to purchase a firearm last year.

26.2

Billion : Price (in US dollars) that Microsoft will pay to acquire Linkedin, the business career-oriented social platform.

31,500

Average gunshot deaths in the United States annually from 1968 to 2015.  More Americans died from domestic gun violence during this period than in all the wars America has fought. 

5.5

Billion: Cost (in US dollars) of Shanghai Disney, a new theme part in China that just opened.  This is the fourth Disney theme park outside the US, joining Paris, Tokyo, and Hong Kong.

-0.28

Return on 10-year bonds issued by the German government.  The bonds fell into negative territory for the first time. 

1.366

The 10-year Treasury yield closed at a new low today, yielding just 1.336%/annum – history being made. 

PHOTOS OF THE DAY

Ni, created by La Machine production company, during its presentation in Nantes, France on Friday. Stephane Mahe/Reuters

Prince George wears ear defenders against the roar of aircraft as he and his mother Kate, the Duchess of Cambridge, visit the Royal International Air Tattoo at RAF Fairford in Gloucestershire, England, on Friday. Edward Low/ Crown Copyright/AP

Market Closes for July 8, 2016

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

     (Bloomberg) — Canadian stocks climbed to the highest level in a month, as a resurgence in U.S. job creation in June showed resilience in the economy of Canada’s largest trading partner, offsetting a decline in the domestic payroll.

     The S&P/TSX Composite Index rose 0.9 percent to 14,259.84 at 4 p.m. in Toronto. The benchmark capped a second week of gains, as health-care shares led gains across all 10 industries during the period. Trading volume was 5 percent lower than the 30-day average.

     Canada’s job market weakened in June, completing the worst quarter for payrolls in two years. Employment fell by about 700 in June, short of economists’ forecasts for a 5,000 gain, while the jobless rate unexpectedly dropped to 6.8 percent from 6.9 percent as Canadians left the job market.

     Traders are now pricing in 26 percent odds Canada’s central bank will cut interest rates in December, a little more than half where the probability was on Thursday, according to data compiled by Bloomberg.

     By contrast U.S. payrolls surged by 287,000 last month, topping the highest estimate in a Bloomberg survey and accelerating the most since October. The unemployment rate rose to 4.9 percent as more people entered the workforce. The U.S. is Canada’s largest trading partner by a wide margin, accounting for more than $540 billion in trade last year, according to data compiled by Bloomberg.

     “The weak details reinforce the view that Canada’s job market is struggling to stay above the waterline,” said Douglas Porter, chief economist at Bank of Montreal, in a note to clients. “The consolation prize for the Bank of Canada was the nice, solid comeback in U.S. jobs last month, which suggests our biggest trading partner is still rolling along.”

     Royal Bank of Canada and Bank of Nova Scotia added at least 0.7 percent as financial services rose. Raw-materials producers jumped 2.1 percent for the biggest contribution to gains in the S&P/TSX led by metals producers. Energy producers increased 0.9 percent as a group as crude futures rose in New York to trim a weekly drop.

     Mitel Networks Corp. soared 20 percent, the most in three years, after acquisition target Polycom Inc. agreed to end its merger pact with Mitel in favor of a $2 billion offer from private equity firm Siris Capital Group. Mitel declined to match the offer.

     Empire Co. added 5.1 percent for the biggest increase since June 2013, after the parent of grocery chain Sobeys announced the departure of Chief Executive Officer Marc Poulin. Shares of Empire have sagged 22 percent this year, the worst among its peers in the S&P/TSX Consumer Staples Index.

     Canadian equities have swung between gains and losses since the Brexit vote two weeks ago as investors sought havens from the market volatility. Raw-materials producers remain the top- performing industry in Canada this year with a 60 percent increase, the best such performance for the group in at least 30 years, according to data compiled by Bloomberg. Energy stocks have rallied 18 percent.

     Amid the volatility Canadian stocks remain more expensive than their U.S. peers, with a price-earnings ratio of 21.9 for the S&P/TSX about 11 percent higher than the S&P 500.

US

By Joseph Ciolli

     (Bloomberg) — A week’s evidence that the U.S. economy’s ill health has been overstated and dovish talk from the Federal Reserve combined to briefly catapult the S&P 500 Index above its May 2015 record close, leaving stocks on the brink of ending their longest drought of the bull market.

     Gains on Friday capped an eight-day rebound of 6.5 percent that restored $1.4 trillion of market capitalization to U.S. shares, value that was erased in the aftermath of the U.K. vote to leave the European Union. The S&P 500 advanced more than 1 percent for the fourth time in two weeks, after stronger June payroll growth calmed concerns sown by May’s anemic number. Banks, technology and retailer shares were among the biggest contributors to the rally.

     The benchmark gauge surged as much as 1.6 percent before closing less than a point below the all-time high. It has spent 286 days trading without making a fresh record, the longest stretch outside a bear market since a 361-day drought in 1960 and ’61. The pause came amid concern over rising interest rates and falling profits, after the index more than tripled from its 2009 bottom.

     Starting with a report Wednesday showing service providers expanded in June at the fastest pace in seven months, and continuing with Fed minutes that indicated less urgency in the need to raise interest rates, investors have been treated to enough good news to put the Brexit trauma behind them.

     “We always felt that the Brexit selloff was overstated, so we’re not surprised at the speed of the recovery as we approach all-time highs,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird, which oversees $110 billion. “Stocks have no competition from the bond market. We had 16 straight weeks of outflows, and now the higher price is going to pull people back into the market.”

     The S&P 500 added 1.5 percent to 2,129.90 at 4 p.m. in New York, closing at its highest since May 21, 2015, after briefly exceeding the record of 2,130.82. The Dow Jones Industrial Average rose 250.86 points, or 1.4 percent, to 18,146.74, a 13- month high. The Nasdaq Composite Index advanced 1.6 percent to the highest in four weeks. About 7.1 billion shares traded hands on U.S. exchanges, in line with the three-month average.

     A report today showed America’s job market stirred to life after a two-month lull, as payrolls climbed by the most since October, exceeding the highest estimate in a Bloomberg survey. The jobless rate rose to 4.9 percent as more people entered the labor force, while wages advanced less than projected. Revisions to prior reports subtracted a total of 6,000 jobs to overall payrolls in the previous two months.

     The valuations edge held by stocks over bonds has gotten extreme of late as government debt rallied, with the S&P 500’s earnings yield — profits as a proportion of share price — climbing above 5 percent, or about 3.7 percentage points above the 10-year Treasury rate. The gap is wider than any point during the 2002-2007 rally.

     The jobs data will help reassure policy makers that companies are staying the course on hiring in the face of weaker profits and overseas developments such as Britain’s vote to leave the EU. Federal Reserve officials flagged concern over job creation at their last meeting, signaling fading urgency for the need to increase interest rates.

     “The strength you’re seeing in U.S. equities is a knee-jerk reaction to any kind of big number that comes out,” said Stephen Carl, principal and head equity trader at Williams Capital Group LP. “This will only add to the Fed’s indecision over what to do. The conviction for a Fed rate hike won’t quite be there yet, which could explain why we’re reacting positively.”

     The one-two punch from May’s weak employment report and the U.K.’s vote to secede had all but erased any wagers on a Fed rate increase this month, after probabilities for a move were 55 percent at the beginning of June. Despite the rebound in job gains last month, traders are still pricing in less than even odds of a boost to borrowing costs until December 2017.                         

     As latest bout of global anxiety ebbs, the CBOE Volatility Index sank 11 percent Friday to 13.20, a six-week low. The measure of market turbulence known as the VIX marked the first back-to-back weekly declines since April while slipping 15 percent in the last three days. A Goldman Sachs basket of most shorted shares in the Russell 3000 Index rallied for the seventh time in eight days, rising 12 percent in the period.

     Investors are also waiting for cues on the health of corporate America, with Alcoa Inc. unofficially kicking off the second-quarter earnings season next week. Analysts predict profits will drop 5.7 percent at S&P 500 firms, which would make it the fifth straight quarterly decline, the longest streak since 2009.

     The rally in 2016 has been led by double-digit gains in industries often considered by investors as “defensive” groups. Utility and phone companies are up the most on the year, posting advances of at least 20 percent, with utilities this week reaching a record. In Friday’s trading, all of the S&P 500’s 10 main industries rose, with raw-materials, industrial, financial and consumer discretionary companies adding more than 1.7 percent.

     Raw-materials posted their biggest one-day gain in four months, rising 2.5 percent. Dow Chemical Co. and Monsanto Co. rose at least 2 percent. Alcoa advanced 5.1 percent, the most in two months before its earnings report scheduled for Monday, while Freeport-McMoRan Inc. gained 5 percent.                   

     Financial stocks in the benchmark climbed 1.8 percent, paced by CBRE Group Inc.’s 6.4 percent increase and the biggest gain since January for Synchrony Financial. The private label credit-card issuer’s stock rose 5 percent after its inaugural dividend exceeded analyst estimates. Wells Fargo & Co. and the KBW Bank Index increased at least 1.8 percent.

     All 68 companies in the S&P 500 Industrials Index rose at least 0.4 percent on Friday, sending the group to the highest level since Feb. 20. Acuity Brands Inc. and United Rentals Inc. gained at least 4.3 percent. Delta Air Lines Inc. and United Continental Holdings Inc. climbed more than 2.7 percent as U.S. carriers rebounded for a second day. Caterpillar Inc. gained 3.1 percent, its best since April and strongest in the Dow.

     The stronger job gains resonated in consumer discretionary stocks, with a group of retailers rising to a record. Gap Inc. jumped 5 percent, the most in almost five months. The biggest U.S. apparel-focused retailer posted June sales that topped analysts’ estimates, a sign its long-promised turnaround could be taking hold. Car dealers AutoNation Inc. and CarMax Inc. added more than 4.2 percent, while Home Depot In. advanced 2.4 percent to a seven-week high.

     Among shares moving on corporate news, Juno Therapeutics Inc. plunged 32 percent, the most since going public in 2014, after after three patients died in a trial for its lead cancer therapy and U.S. regulators put the study on hold.

Have  a wonderful weekend everyone.

Be magnificent!

I often ask myself at what point can a man and a beast that cannot talk recognize each other.

From the early paradise, at the dawn of creation, runs the path where their hearts meet.

Although their connection has long been forgotten, traces of their continuing association has not been erased.

And suddenly, in  a wordless harmony,

a dim memory awakens and the beast looks on the face of the man with tender trust

and the man casts his eyes upon the beast with an amused tenderness.

It is as if two friends, both wearing masks, meet

and vaguely recognize each other through their disguises.

Rabindranath Tagore

As ever,

Carolann

Only those who will risk going too far can possibly

find out how far one can go.

                                     -T.S. Eliot, 1888-1965

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