2015: A Year to Forget


By Rob Edel, CFA

 Highlights This Month 

Read this month’s commentary in PDF format

The NWM Portfolio

Returns for NWM Core Portfolio increased 0.6% for the month of December.  The NWM Core Portfolio is managed using similar weights as our model portfolio and is comprised entirely of NWM Pooled Funds and Limited Partnerships.   Actual client returns will vary depending on specific client situations and asset mixes.

The Canadian yield curve continued to flatten slightly last month, but more importantly was the direction of yields, which were lower.  2-year Canada yields decreased from 0.63% at the beginning of the month to 0.48% at the end of the month; while 10-year Canada’s fell 1.57% to 1.39%.

The U.S. yield curve also flattened, but yields moved in the opposite direction, with 2-year treasuries starting the month at 0.93% but finishing at 1.05%; while 10-year treasury yields ended the month at 2.27%, up 6 basis points.  NWM Bond Fund under-performed in this environment, down 0.2%, mainly due to the poor performance of one of our alternative managers.  The PH&N Short Term Bond Fund was up 0.4%, reflecting gains from the decline in interest rates.

High yield bonds were weaker in November, with NWM High Yield Bond -1.0%.  Higher interest rates in the U.S. likely contributed to the decline, but credit spreads continue to be the main driver for returns (or lack thereof) in the high yield market.  As it has all year, the weak Canadian dollar offset some of the decline as the loonie depreciated nearly 4% during the month.

The weak Canadian dollar also continues to help global bonds, with NWM Global Bond up 2.5% in December.

The mortgage pools continued to deliver consistent returns, with NWM Primary Mortgage and NWM Balanced Mortgage both returning 0.5% in December.  Current yields, which are what the funds would return if all mortgages presently in the funds were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.4% for NWM Primary Mortgage and 5.9% for NWM Balanced Mortgage.  Due to three loan repayments, the Primary ended the month with $4.5 million, or 2.8%, in cash.  The Balanced had $12.4 million, or 3.3%, in cash.

In preferred shares, the 2.5% return for rate resets for the last month of the year reveals little in terms of the roller coaster v-shaped recovery experienced by the market. In the first 14 days of the month, rate resets sold off by more than 10% before recovering 14% in the second half of the month.

NWM Preferred Share returned 1.2% for December. The month was highlighted by extreme tax loss selling as most trading occurred with smaller sized trades versus large block trades which are more indicative of institutional trading. The market slid further down when two banks came to market on the same day. The new rate resets came with attractive rates and created over $1 billion of supply that the market needed to absorb.  Although investors had until December 24 for tax loss selling, in keeping with historical trends, selling pressure abated mid-month allowing the markets to take a breather.

Canadian equities were weaker again in December, with the S&P/TSX down 3.1% (total return, including dividends).  NWM Canadian Equity Income (former NWM Strategic Income) and the NWM Canadian Tactical High Income declined 3.5% and 2.1% respectively last month.  NWM Canadian Equity Income continues to favour the industrial and consumer discretionary sectors and has a positive bias to stocks with lower valuations.  We sold our position in Quebecor in December and used the proceeds to add to existing positions in Bank of Nova Scotia, Enbridge, and Royal Bank.  As for NWM Canadian Tactical High Income, no new positions were added, but we continued to add to our holdings in KP Tissue while trimming CCL Industries and Milestone REIT.

Foreign equities were stronger in December, but only when translated back into Canadian dollars.  NWM Global Equity was up 1.5% compared to a 1.8% increase in the MSCI All World Index and a 1.9% advance in the S&P 500 (all in Canadian dollar terms).  Of our external managers, Pier 21 Carnegie led the way +4.2%, followed by new manager Value invest +3.5%, BMO Asia Growth & Income +2.4% and Lazard Global Small Cap +2.0%.  Edgepoint was the sole manager in the red in December, down 2.3%.

NWM U.S. Equity Income was down 2.5% in U.S. dollar terms and NWM U.S. Tactical High Income declined 4.2% versus a 1.6% decrease in the S&P 500 (all in U.S. dollar terms).  In NWM U.S. Equity Income, we established a new position in Walmart and switched out of our position in Teekay and added Teekay LNG.  As for the NWM U.S. Tactical High Income, we added Franklin Resources (an investment management firm and manager of the Templeton mutual fund family) and also switched out of Teekay (which we were assigned during the month) and into Teekay LNG.

Real estate was weak in December; although, NWM Real Estate managed to end the month +0.7% while the iShares REIT ETF was down 3.4%.

NWM Alternative Strategies was up 1.3% in December (these are estimates and can’t be confirmed until later in the month).  Of the Altegris feeder funds Winton, Brevan Howard, Millenium, and Citadel were up 1.9%, 0.2%, 4.8%, and 4.9% respectively.  Again, the decline in the Canadian dollar was a nice tail wind for these managers last month, though the sharp reversal in trend, particularly in the Euro, provided a challenging investment environment, particularly for trend followers. The performances of our other alternative managers were mixed in November, with RP Debt Opportunities +0.3% and MAM Global Absolute Return Private Pool -0.8%, RBC Multi-Strategy Trust -2.8% and Polar North Pole Multi Strategy -0.3%.

Precious metals had a good month, with NWM Precious Metals up 2.4%, with bullion increasing 3.2% in Canadian dollars.

December In Review 

Markets were generally weak in December, with Canadian and U.S. equity markets down 3.1% and 1.6% (in local currency terms) respectively.  Overall, the poor performance in December capped off a pretty tough year, in which only a few foreign equity markets provided positive returns.  Canadian equities and the Canadian dollar were among the biggest losers, as weak energy and commodity prices continued to weigh on global markets. Even the typical Santa Claus rally, which usually sees stocks rallying during the final 5 to 15 trading days of the year, failed to materialize this year.

More ominously, stocks continued to come under pressure in early January, which according to the Stock Trader’s Almanac has historically proven to be a negative barometer for the rest of year.  Since 1950, when the first five trading days have been in the red, returns for the year have been negative 46% of the time.  What’s weighing on the market?  It’s all the usual suspects, which we will review in varying degrees below, but China tops the list.

MMC1

It’s hard to get too excited about equities given earnings are forecast to decline and valuations are above historical averages.  2015’s fourth quarter S&P 500 earnings, in fact, are expected to be -4.6%, which would mark the third quarter in a row earnings have contracted; the first time this has happened since great recession plagued 2009.

The dramatic decline in the energy and materials sectors has really skewed overall earnings to the downside, however.  Also, while it is true equities are hardly cheap, it doesn’t mean the market has to go down.  Barclays’ strategist Jonathan Glionna points out that since 1985, every time the S&P 500 has been valued where it is currently, at a 17 times P/E multiple, returns have been positive over the subsequent 12 month period.

On a rolling 10-year return basis, Fundstrat’s Tom Lee believes the 6-year bull market is just getting started and typical secular bull markets can last 20 to 25 years with gains upward of 500% on a rolling return basis.  But be prepared for big swings in prices returns.  While the average return for U.S. stocks has been 10% since 1926, Vanguard makes the point that it is rare for the market to actually deliver returns anywhere close to average.  In only 6 of the last 89 years, in fact, have stocks returned between 8% and 12%.  And so far, 2016 is looking far from average.

MMC2

High yields bond returns were also negative in 2015; the first time since 1983 (when the high yield market was established) junk bonds have lost money when the economy was not in recession. Yes, we are making the case the economy is not in recession.  But like stocks, most of the damage was done in the energy and materials sectors.

Overall, corporate America looks in good shape from a credit perspective, with very little near term refinancing risk.  And unlike stocks, high yield bonds appear attractively valued with yields trading above levels seen during the Eurozone crisis in late 2011.

MMC3

So if oil is mainly to blame for lower corporate earnings and widening credit spreads, how much longer must we endure this pain?  Has oil finally hit bottom?  Probably not quite yet.  Morgan Stanley, Goldman Sachs, and Citigroup now all expect oil to break $30 a barrel, with Morgan Stanley indicating $20 is not out of the question if the U.S. dollar were to make a big move to the upside. Some grades of crude, particularly heavy oil from Western Canada, are already approaching these levels, or lower.  This puts downward pressure on crude oil inventories, which are currently at record levels. Energy consulting firm PIRA Energy Group estimates markets will run out of available onshore storage capacity in the first quarter of 2016.  Sensing the downside momentum, traders have taken out record short positions against crude.

MMC4

The decline should be short lived; however, prices could rebound sharply. Non OPEC supply is expected to decline this year, with the International Energy Agency forecasting U.S. shale oil production will shrink by more than 600,000 barrels per day if prices stay at current levels; while Wood Mackenzie, an energy consultant, believes North Sea oil could lose a third of its current production if oil remains below $85 a barrel.  Wood Mackenzie believes 1.5 million barrels of current oil production is uneconomic at $40 a barrel oil.  With many oil producers slashing exploration budgets, the impact on future production could be significant.

Tudor, Pickering & Holt has counted 150 future projects that have been shelved by oil producers representing an estimated 13 million barrels per day of future production.  Demand will also play a role.  With a gallon of gasoline cheaper than milk, Americans are driving more and buying bigger cars and trucks; same with China.  Chinese authorities, in fact, are concerned that gasoline prices are too low and that increased consumption could make a bad pollution problem even worse.

MMC5

Oil is going to move higher.  It has to.  Prices are just too low to keep production at current levels.  The question is when, and how low does it go in the meantime?  Most analysts didn’t forecast the decline in crude, nor did they correctly predict prices would stay so low for so long.

According to the Wall Street Journal, a survey of ten banks in March 2015 predicted oil could average $50 a barrel in Q4 2015.  A year ago, December 2015, oil futures were trading over $63 a barrel.  Both were woefully optimistic.   The very fact that most believe prices have to go higher is a big reason why prices have refused to do so.

Companies that should have packed up and called it a day long ago, continue to pump oil and gas knowing that a recovery is imminent.  Everyone knows it; even the banks are hesitant to call loans.  Investors are just waiting to pour more capital into the sector, with an estimated $100 billion of private equity capital waiting to pounce.  Yes, many will go bankrupt, but this will only wipe out the debt, and not necessarily reduce production.  With a re-capitalized balance sheet many will actually lower their costs and be able to pump oil at even lower prices.

There are a lot of variables at play, which makes it very hard to forecast where oil is headed in the short term, and this is just North America.  We haven’t even talked about all the geopolitical issues with oil producing countries around the world and what OPEC might or might not do.  Try predicting what Saudi Arabia will do over the next 12 months, or Russian President Putin for that matter.  Oil is extremely hard to forecast. Be wary of anyone claiming they know where oil is going in the short term.

MMC6

If oil is tough to forecast; China is a nightmare.  Nobody trusts economic data coming out of China.  It’s bad, but most fear the real numbers are even worse.  Autonomous Research’s Charlene Lu believes the production and construction sectors, which comprise nearly half of  China’s economy, have already suffered a hard landing, growing a mere 1.2% year over year in the third quarter.

Unfortunately, these industries are also responsible for a majority of China’s outstanding debt.  Bank of America Merrill Lynch believes since 2008, Chinese and Hong Kong companies have added debt equivalent to 100% of GDP.  The Bank points out that historically, any country growing debt this quickly has encountered problems with their financial system, including currency devaluation, high inflation, and bank bailouts.  Even worse, investors are beginning to lose faith in the Chinese government’s ability to safely navigate a rebalancing of the economy towards consumer spending and away from investment and manufacturing.

It’s not just in the financial markets where Chinese leaders are feeling the pressure.  According to Chinese magazine, Caixin, factory employment has been falling for 25 months, and as a result, labour protests and strikes have been on the rise.  Workers, you see, have an implied deal with Chinese rulers. In exchange for working long hours and living in less than ideal conditions far from home, migrant workers expect a more prosperous future. Chinese leaders are terrified of the consequences if workers start to realize they have been sold out.

MMC7

It’s not that Chinese officials aren’t trying to stabilize the economy, it’s just that they are pretty new to the whole free market game, and quite frankly they have been making a few mistakes.  In trying to stabilize both the stock market and the Yuan, Chinese officials put policies in place, only to quickly backtrack once the market reacted counter to what they intended.

With the stock market, trading rules were set such that if the market were to fall 7% intraday, trading would be halted for the day.  This rule was in force for only a few days before it was scrapped as investors scrambled to fill sell orders before trading was halted for the day, which on one day in early January occurred only 15 minutes after the opening bell.

But it’s the Yuan that most investors are focused on.  Most believe China will be forced to devalue their currency in an attempt to help slow the decline in the industrial economy, and they’re probably right.  Chinese officials want to remain in control, however, and a slow methodical decline is preferred, especially given China has over $1.5 trillion in foreign debt, with more than two thirds coming due in less than a year.

At the same time China is trying to move towards a freely trading currency, which is why they announced in August that the Yuan would trade in a 2% band around the daily fix.  The idea was that the daily fix would be set based on the close of the previous day, which it was until early January when volatility in the Yuan (mostly to the downside) compelled the Bank of China to go back to their old ways and set the daily fix at a level they wanted, and not what the market thought it should be.  As a result, no one knows where the Yuan or the Chinese economy is really going, though like oil, we suspect it’s headed lower.

The level of the Yuan is probably the first thing traders look at when they turn on their screens in the morning right now.  In particular, traders are watching the spread between the state controlled onshore currency and the freely trading offshore version. A widening of the spread, along with a declining stock market, is a sign Chinese officials are losing control.

MMC8

Given all the uncertainty around oil prices and China, one might expect central banks to be ultra-cautious, which is why it was somewhat surprising the Federal Reserve increased overnight interest rates 25 basis points on December 16.  Really, it wasn’t surprising at all, as the Fed had dropped some pretty strong hints the U.S. economy was ready for higher interest rates and it was ready to move.  The real question is what comes next?  The Fed is guiding markets to expect an additional 100 basis points increase in overnight interest rates during 2016, while the financial markets believe it will be half that amount.

Growth in the U.S. is on the mend, but it is hardly robust, and inflation is stubbornly low.  As detailed above, China is a concern, as are the Japanese and Euro-zone economies. Very stimulative monetary policies in both countries appear to have stabilized growth, especially in the Euro-zone, but real economic reform is a work in progress, at best.

If the Fed is right and rates increase 1% in 2016, the U.S. dollar, which is already over bought, will move even higher.  While trade is a relatively small component of U.S. GDP, it will become a lot less if the dollar continues to appreciate; which it will if the U.S. is the only country in the world increasing rates.  If this happens, many feel rate increases will be quickly followed by cuts as the Federal Reserve will be forced to reverse their course and bring rates back down only months after deciding to tighten, thus joining what Deutsche Bank’s Torsten Slok refers to as the “central bank hall of shame.”

MMC9

The Fed basically has to choose between the risk of a hard landing in the Chinese economy and a resurgent domestic economy as evidenced by a strong labour market.  The first increase in interest rates was just the buy in.  The next round of betting is where the real action starts.

If China stabilizes and the U.S. inflation moves back towards the 2% level, more rate increases are in the cards.  If a weak Chinese and global economy takes a toll on the U.S. economy and corporate earnings, not only are rate increases off the table, but a cut, or even a new round of quantitative easing, could be the Fed’s next move.

Weak oil prices may cause some short term weakness in the U.S. economy and provide an additional source of market volatility, but we believe China remains the key.  The fact that it is very hard to determine what’s really happening with the Chinese economy, or oil for that matter, only adds to the fun.  Expect 2016 to be a volatile year.

The U.S. Economy

MMC10

U.S. economic growth has slowed, and the industrial sector is the main culprit.  Third quarter GDP growth was revised down slightly to 2%, but it was the decline in November industrial production and December purchasing managers’ indices that got our attention.  All show a contracting manufacturing sector, especially in the Chicago region.

To put this in perspective, manufacturing only comprises 12% of the U.S. economy, but it still has negative implications for the overall GDP, and the fourth quarter in particular.  The Federal Reserve believes Q4 GDP decelerated to only +0.7% versus previous estimates of +1.3%, while J.P. Morgan cut their 2% forecast in half.  A contracting manufacturing sector doesn’t necessarily mean recession, however.   At 48.2, the ISM Manufacturing Index remained below 50 for the second month in row, but historically, only when it breaks 45 do the odds of recession become prohibitive.

MMC11

The services sector is what really drives the U.S. economy, and consumer spending, at 3% growth in Q3, is still decently strong.  U.S. companies are long overdue to start ratcheting up capital spending, and continued strength in consumer confidence could finally persuade corporate America that it is time to invest in the future again.

Slow global growth is a head wind; however, so are low oil prices.  It is estimated reduced capital spending in the oil patch detracted 0.44% from Q1 GDP growth, 0.88% from Q2, and 0.33% from Q3.  Given what’s been happening lately in the oil patch, we would suggest Q4 isn’t looking too good either.  Fortunately, government spending has been gradually making a comeback and is forecast to add to growth for the first time since 2010.

MMC12

We admit the economy provided a bit of a mixed picture in December, and the weakening manufacturing sector is a concern.  Companies are cautious and are drawing down inventories.  However, services and consumer spending should carry the day resulting in upside momentum in the second half of 2016.

MMC13

As disappointing as manufacturing growth was last month, employment growth more than made up for it.  The U.S. added nearly 300,000 jobs in December with November and October’s releases revised 50,000 higher.  For all of 2015, the U.S. averaged 221,000 new jobs a month, slightly lower than last year’s 260,000 average, but remains the second best year for job growth since 1999.

About the only negative one could say about the labour market was that wage growth remains sluggish.  At 2.5% in December, wage growth hit its highest level in five years, but is still well below pre-recession levels of nearly 4%.

Of course inflation has also been unusually sluggish this cycle, and the slack in the labour market is likely greater than represented by the 5% unemployment rate.  When marginally attached and involuntarily part time workers are added, the unemployment rate soars to nearly 10%, and that doesn’t even include those that have left the labour market altogether, as evidenced by the low labour participation rate.  Still, the job market is the best news we saw all month, and the biggest reason the Fed felt it was time to raise interest rates.

MMC14

MMC15

Year over year, the core Consumer Price Index (CPI) finally hit the Fed’s 2% target, but most other inflation indicators show little signs of inflation brewing in the U.S. economy.  The Fed is convinced the impact of low oil prices, moderating health care costs, and a strong dollar are largely responsible for the current low inflationary environment and should prove transitory.  Along with higher wages, the Fed believes a recovering economy will result in prices moving higher, not lower, in 2016.

Globally, inflation has been stubbornly low, despite the best efforts of central banks to move it higher.  Many countries have been effectively exporting deflation by allowing their currencies to weaken.  If we don’t see some progress on the inflation front in 2016, the Fed might want to re-examine their higher inflation thesis.  We think the Fed is right, and believe inflation will make a comeback, but so far, the numbers disagree.

MMC16

MMC17

A stronger job market and low inflation was likely responsible for the increase in consumer confidence spending in December.

MMC18

Retail spending in November increased at its quickest pace since July and an early read on December spending appears to indicate consumers were in good holiday spirits.  Not all retailers benefited, however.  Cars and gasoline did well, as did grocery stores, restaurants, warehouse clubs, home improvement, and off-price retailers.  Department stores and apparel retailers fared poorly.  Online shopping was also a winner, with many Americans preferring to avoid crowed malls and shopped from the comfort of their living rooms.  According to research firm Slice Intelligence, Amazon was the clear leader, capturing nearly 43% of all online sales in November and December.  The next 10 competitors managed less than a combined 25% share.

MMC19

While we are happy with total consumer spending, we do have some concerns with how it is being split up.  Big ticket items, like cars dominated, with Americans purchasing over 17 million vehicles in 2015, a number that will be hard to beat in 2016.  Auto sales are very interest rate sensitive, and if the Fed follows through with plans to hike rates 1% over the next 12 months, auto sales will suffer.  Already there are signs of a slowdown, with higher inventories, especially in the luxury segment, and an increased use of discounts and incentives in December.  If consumers buy fewer cars and trucks, will they buy more clothes and electronics instead?  Maybe, but the fact that most are not spending the extra money they are saving from lower gasoline prices might indicate Americans are becoming tighter with their cash.

MMC20

We still believe job growth will lead to wage growth, and higher wages mean more discretionary income.  Low oil prices and a strong dollar should also help.  More money and lower prices, what more could consumers want? While trends at the end of the year were uninspiring, the stars appear to be aligning for a strong year for merchants.

MMC21

Though slower than we would like, the recovery in the housing market remains on track.  Existing home sales fell 10.5% in November, but mainly due to new federal rules that added about five days to the time it takes to close a home purchase.  Housing starts and building permits were very strong, as were new home sales.

MMC24

The U.S. trade deficit narrowed in November as both imports and exports again decline.  Imports, in fact, fell to levels last seen February 2011.   This bodes poorly for fourth quarter GDP.

The slowdown in manufacturing is a concern.  The strong dollar and weak global economy are taking a toll.  Services, however, drive the domestic economy and job growth along with a recovering housing market should more than compensate.  Economic growth will likely be revised lower, but we don’t see a recession on the new term horizon.

The Canadian Economy

MMC25

Canadian economic growth failed to bounce back from September’s contraction as October GDP was unchanged and below expectations of +0.2%.  Disappointingly, the manufacturing sector contracted 0.3% despite the decline in the Canadian dollar.  RBC economist Craig Wright cited weaker domestic demand and continued uncertainty in the energy sector as responsible.  Purchasing manager indices also point to future weakness in Canada’s industrial sector.  A recent Bloomberg survey found economists believe the Canadian GDP slowed to +1.2% in 2015 versus 2.5% in 2014 and will manage only 1.8% growth this year and +2.1% in 2017.

Does this mean the Bank of Canada  going to lower interest rates?  Most economists believe they will, but we don’t think so, or at least we don’t think they should.  In our opinion, interest rates are low enough.  Consumer debt is already too high in Canada.  Canadian’s don’t need to be enticed to borrow more.  More fiscal policy (government spending), perhaps, but monetary policy is not the answer.

The only reason a central bank would lower interest rates now would be to weaken their currency.  Well thanks to low oil prices, mission accomplished.  The Canadian dollar has always been strongly correlated to the price of oil, but the correlation has recently hit peak levels as traders bet on continued momentum to the downside.  The currency market is extremely liquid, and traders have likely been using bets against the loonie as an alternative to shorting oil itself.

MMC27

But oil isn’t the only factor that impacts the Canadian dollar.  Interest rates, or more specially the spread between 2-year Canadian government bond yields and 2-year U.S. treasuries, have historically reflected an even tighter correlation to the loonie.  The more Canadian 2-year interest rates fall versus U.S. 2-year rates, the more the Canadian dollar depreciates.

Unemployment rate differentials are also strongly correlated to the U.S./Canada exchange rate.  The more our unemployment rate exceeds U.S. rates, the lower our dollar has historically fallen.  Granted, all three are related, but this is only because oil has become such an important component of the Canadian economy.  This is changing very quickly, and we would expect manufacturing and other exchange rate sensitive industries to continue replacing oil as the main driver of economic growth in Canada if oil continues to decline.  Don’t get us wrong, the Canadian dollar could very well trade lower, maybe even much lower, if oil continues to decline, but it would appear over sold to us and an opportunity for patient long term investors.

MMC28

Canada added a better than expected 22,800 jobs in December, though the quality was poor as all were part time positions.  For the year in total, Canada created 158,000 jobs representing a 0.9% increase in the labour force, higher growth than in both 2013 and 2014.  Not bad given the carnage in the oil patch and weak economic growth expected in 2015.  While it is true employment is a lagging indicator and more job losses should be expected in the coming months, the employment market has so far weathered the storm pretty well.

MMC29

Core CPI moved slightly lower in November and is presently sitting right on the Bank of Canada’s 2% target.  The weaker loonie means food inflation will continue to move higher, especially fruits and vegetables, of which 81% are imported and expect to cost Canadians 4.5% more in 2016.  Meat, which was up 5% last year, is also expected to increase 4.5%, with fish and other seafood estimated to rise 3%.  Inflation remains alive and well, and living in Canada.

MMC31

Canadian consumer confidence has finally started to reflect the weakening Canadian economy and retail sales in October came in lower than expected.  Excluding motor vehicles, retail sales were actually unchanged versus the previous month.  This is bad for economic growth in the short term, but good for the long term as Canadians have too much debt.  Not all Canadians, mind you, but those that have over leveraged could find themselves in a tough spot if interest rates rise or if they become unemployed.

Eight percent of Canadians, or 720,000 households, have debt equal to 3.5 times their annual income.  These spendthrifts owe $400 billion, or 21% of total household debt.  The typical profile is young (under 35 years old), lower to middle class, less educated, and usually westerners.  Nearly 14% of British Columbians are highly indebted, in fact.  Hardly surprising given mortgage debt is the largest component of household debt at 77%.  It’s a good thing we don’t see interest rates increasing anytime soon, because a weakened energy sector and a correcting housing market would be catastrophic for the Canadian economy.

MMC32

MMC33

Housing starts and permits fell more than expected in December, but the market was running too hot and some easing is a good thing.  For 2015, Canada averaged 194,000 new starts a month, 10,000 greater than last year, and well above what is needed to keep pace with population growth.

In a move aimed to cool the red hot Vancouver and Toronto housing market, the new Liberal government increased the minimum down payment for new insured mortgages to 10% from 5% for homes priced above $500,000 in early December.  Every bit helps, but unless the flow of offshore capital slows, prices will continue to move higher.

China is a concern.  It’s possible that a continuation of the current environment will result in an increased flow of capital into Canadian real estate, but China is such a black box.  Who is to say it couldn’t go the other way?  If Chinese leaders shut the door on capital leaving the middle kingdom then Vancouver home prices could plummet.

Home prices in Vancouver make little economic sense.  Case in point, the Huffington posted recently reported one optimistic Vancouver seller listed a west side home in December on Craigslist for a cool $4.5 million.  Doesn’t sound too outlandish?  It was a single square foot and made of gingerbread.  Even worse, the baking sheet it was sitting on was not included in the deal.  Apparently it was a tear down.  Rumor has it the home was scheduled to be demolished January 1st.

MMC34

The deficit narrowed in November with a broad based increase in exports, particularly to the U.S., leading the way.  Given the magnitude of the decline in the Canadian dollar, however, an even greater increase in exports could have been expected.  Either global economic weakness is diminishing the historical relationship between exports and the dollar, or the Canadian export industry has been decimated by a strong Canadian dollar.  Either way, we expect trade to be a positive influence on economic growth in 2016.

Expect Canadian economic growth to be challenged in the first half of 2016.  The oil industry continues to contract and it will take time for the manufacturing industry to take up the slack.  Having said that, there is more to the Canadian economy than oil and a cheap loonie and stronger U.S. economy will help get Canada back on track.

What did you think of December’s economic activity?  Let us know in the comments below!

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. NWM fund returns are quoted net of fund level fees and expenses but before NWM portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value.