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Market Watch: Global Update

08/22/14

Economic data trumps concerns

Positive US economic data trumped lingering concerns about the pace of global growth and geopolitical tensions this week. The news was particularly good on the housing front, as sales of previously owned homes south of the border rose to their highest level since last September while the number of housing starts reached their highest level since November. Jobs news was also good with fewer people than expected applying for unemployment benefits last week and on Tuesday inflation moved in the right direction with consumer prices rising 0.1% last month. Meantime, representatives of G7 central banks gathered at Jackson Hole, Wyoming Wednesday for a three-day meeting that takes them through today (Friday). Fed Chairwoman Yellen is expected to address the media on Friday but no new policy announcements are expected. ECB Chief Mario Draghi is also expected to take the podium but unlike Yellen, Draghi may reference a policy shift. Minutes from the Fed’s previous meeting were released Wednesday and they showed officials debating whether to move sooner to increase interest rates. Overseas, a Chinese preliminary manufacturing activity index fell to 50.3 in August from 51.7 in July. That’s the lowest read in three months which fits a recent pattern of disappointing numbers out of the world’s second-largest economy.

Markets

Toronto, New York rally

Stocks rallied this week with the TSX and S&P 500 reaching all-time highs. The TSX closed at 15,561pts. Wednesday – a record – while the S&P 500 closed at 1,992 pts. Thursday which matched its intraday high the previous session. For the four-day period covered in this report, the Dow added 377 pts. to close at 17,039, the S&P 500 gained 37 pts. to finish at 1,992, the Nasdaq moved ahead 68 pts. to end at 4,532 and the TSX rose 252 pts. to settle at 15,556.

Our Recommendations

Despite strong Q2 earnings, various risks warrant higher than average cash positions in equity portfolios, in our view

Equities. Himalaya Jain, Director, Portfolio Advisory Group wrote “The not-too-hot, not-too-cold economic pace of many economies has provided the necessary cover for equity markets to rally back from a geopolitically-driven selloff at the end of July. Indeed, the combination of healthy corporate earnings, softer recent economic data and somewhat calmer geopolitical environment have proven to be optimal for equities, fixed income and hybrid securities. With US and Canadian equity markets trading at the high-end of the historical valuation range, and earnings season having ended (except for Canadian banks), short-term investor sentiment will likely be driven by the Fed’s stance on monetary policy and geopolitical hotspots. As we suggested in the last edition, softer inflation data in the US has likely bought the Fed some time before they feel pressured to initiate the rate-hike dialogue that we continue to believe is inevitable and could be a source of volatility. Until then, and assuming that the Ukraine/Russia and Iraq crises don’t flare up again, equity markets could drift modestly higher. We think the selloff in the Canadian energy sector (driven by a drop in oil and natural gas prices) has likely run its course and the sector looks attractive. Other sectors we favour include Financials, Industrials, Technology and Healthcare.”
Preferreds. Tara Quinn, Director, Portfolio Advisory Group wrote “The market has been range bound recently with low volumes. Overall, we continue to see investors search for yield and product but seem to be fixated on a 4.00% yield for investment grade credit. That threshold is difficult to come by in the market as underlying bond yields have moved lower and preferred share yields are now lower also. We encourage investors to look at the relative yield pick-up between corporate bonds and preferred shares as preferred shares are still offering an approximate +2.50% yield pickup (interest equivalent). We continue to recommend that investors build out a laddered preferred share portfolio as it exposes investors to various reset dates in different interest rate environments.”

Global Markets YTD 2014 August 22 USDGlobal Markets YTD 2014 August 22 CAD

Presidential Cycles: Whay stocks could soar from October 2014 to April 2015

08/22/14
Editor’s note: If history is any indication, the stock market is set to soar starting in October. In today’s Digest Premium, Steve Sjuggerud discusses this phenomenon… I (Steve Sjuggerud) like to go with what works in the markets…

 

The simpler the indicator, the better. The more time-tested the indicator, the better. On those two counts, not much can beat investing legend Jeremy Grantham’s Presidential Election Cycle Indicator.
In short, based on history, stocks have not had a losing year during the third year of a U.S. presidential term, as I’ll explain.
 When I first heard of this indicator, I thought it sounded a bit ridiculous – investing based on the presidential election cycle. Surely this couldn’t be useful. The truth is, if Grantham wasn’t so enthusiastic about it, I probably wouldn’t have given it a chance.
But then I crunched the numbers myself… and the results were shocking…
Using Grantham’s way of doing it, with data going back to 1932, it turned out the Election Cycle Indicator is extremely accurate… Take a look:

Year Return* % of losing years
Year 1 -0.7% 50%
Year 2 -3.3% 50%
Year 3 26.2% 5%
Year 4 6.9% 20%
* Not including dividends

The numbers in this table are just crazy…
 The conclusion is, just about all the gains in the stock market come during Year 3 of the election cycle.

The rest of the years are all basically a wash with each other… Years 1 and 2 are both losers… and Year 4 simply makes up for the losers of Years 1 and 2, plus a little bit.
Yes, Year 3′s gains are amazing. But its “win rate” is even better… It has only had one losing year since 1932 – and that was a loss of 1%. That losing year would actually be a winning year if you count dividends. So with dividends, Year 3 has had a perfect track record since 1932. It’s hard to argue with success like that.
 I tell you this because, according to Grantham’s math, the magic Year 3 is about to start
But this is August… so how can I say Year 3 is about to start? In Grantham’s version of the indicator, you start your “years” at the end of the third quarter (instead of at the end of the calendar year).
That means we’re only a few months away from the best time, historically, to own stocks. Grantham’s “Year 3″ starts soon… specifically, on October 1.
 Grantham crunched even more numbers on this indicator… and he found something interesting…
He found that, particularly in the last 50 years, nearly all of the returns in his “Year 3″ came in the first seven months… fromOctober 1 through the end of April.
Astoundingly, Grantham also found that the U.S. election cycle has similar results in Japan and Europe. When OUR election cycle is in Year 3, those foreign markets go up… a lot.
Long story short, Grantham’s Election Cycle Indicator is about to kick in. This Indicator has been flawless since 1932, when you include dividends. And according to Grantham, the majority of the profits happen in the first seven months.
So you really want to be invested in stocks from October 2014 through April 2015.
– Steve Sjuggerud
Editor’s note: Between now and the end of April 2015, Steve believes the stock market will have a big tailwind from the Fed and the election cycle. But what happens next? On Saturday, August 23, he will share his predictions at the S&A Conference Series event in Los Angeles.

Market Watch: Global Update

08/15/14

Growth worries reawaken

Worries about global growth were reawakened this week as key economic engines sputtered overseas. In the euro zone, growth fell to zero in Q2 with the German economy contracting 0.2% and France’s stuck in neutral. The two countries are the biggest economic drivers in the euro zone followed by Italy. With the Italian economy also contracting in Q2 there are fears the region has lost what little momentum it had in Q1. Growth, or the lack of it, was also front and centre in Japan as its economy shrank 6.8% on an annualized basis in Q2. That was the biggest hit to GDP growth since the March 2011 earthquake and Tsunami. The drop was, however, largely anticipated by analysts after the national sales tax was raised from 5% to 8% April 1. In China, the central bank reported a drop in new lending causing some to fret that the recent mini-stimulus efforts undertaken by the second-largest economy may be waning. Turning to the US, the only notable economic releases were retail sales Wednesday and jobless claims Thursday. Both modestly disappointed as retail sales excluding autos moved up 0.1% in July from June versus expectations of a 0.4% rise. Jobless claims, meantime, rose by 21,000 to 311,000 for the week ending Aug. 9; a rise to 295,000 had been expected. Finally, and on a more positive note, geopolitical tensions remained largely contained this week with no new flare-ups.

Markets

Stocks find their way

Despite the less-than-inspiring growth news, North American stocks found their way with major indexes advancing over the four-day period covered in this report. The Dow moved ahead 160 pts. to finish at 16,713, the S&P 500 added 24 pts. to close at 1,955, the Nasdaq added 83 pts. to settle at 4,453 and the TSX rounded out the good news gaining 95 pts. to end at 15,291.

Our Recommendations

Despite strong Q2 earnings, various risks warrant higher than average cash positions in equity portfolios, in our view

Equities. Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Q2 corporate earnings have proven quite strong. Of the 467 companies from the S&P 500 Index that have reported Q2 results to date, 68% have reported positive earnings surprises with Q2 earnings tracking toward $30.12, indicating 11.3% YoY growth versus consensus expectations of 7%. Heading into this week, 68% of companies on the TSX had reported results according to Scotiabank GBM strategists, and results reflected strength across the board with eight of ten sectors reporting a beat. EPS of $239 implied 1% sequential and +22% YOY growth and pushed 12-month trailing EPS to $891, the highest since 2008. The Energy and Insurance sectors were notable contributors to the YOY growth. Nonetheless geopolitical tensions persist, limiting the S&P500 MTD total return to +1.4%, while the S&P/TSX total return has been negative 0.2% (returns in both cases are through August 14, 2014 in local currency terms). With equity market valuations still at the higher end of historical ranges, heightened geopolitical risks, and increasing risks to the European outlook underscored by weaker than expected economic data, we believe equities could remain volatile in the near-term. As such, we continue to hold higher than average cash balances in our equity portfolios, ranging from approximately 8%-12%.”
Fixed Income. Anthony Salvatore, CFA, Associate, Portfolio Advisory Group wrote “Bond markets rallied globally this week as market participants wagered that global central banks will keep rates lower for longer. Bond yields hit 2014 lows after a series of global economic releases sparked demand for safe haven assets. This week the Bank of England drastically cut its wage-growth forecast for the year, decreasing concerns that the bank may raise interest rates sooner than forecast. In Asia, Japan reported that GDP shrank 6.8% on an annualized basis in the April-June quarter while in China, growth in new lending declined sharply in July and housing sales fell by more than 10% in the first seven months of the year. On Thursday, a report out of Germany showed Q2 GDP contracted more than expected. In the US, initial jobless claims printed below expectations at 311k (295k consensus expectation) while retail sales missed expectations for the third straight month in a row. These developments caused bond markets to rally globally as investors wagered that central banks will keep rates lower for longer.”

Understanding the New T1135

05/13/14

CRA’s reviesed Form T1135 requires taxpayers to provide significantly more information about their foreign property.  This article explains the new rules and answers the most common questions.

Who has to file a T1135?

* Canadian resident individuals, corporations and trusts that, at any time during the year, own specified foreign property costing more than $100,000.

* Partnerships that hold specified foreign property costing more than $100,000 and whose non-resident memebers’ share of income or loss is less than 90% during the reporting period.

*An individual does not have to file a T1135 for the first year they are a resident of Canada

Note: The $100,000 threshold isn’t based on the fair market value, but on the adjusted cost base of the asset in Canadian currency.

What is Specified Foreign Property (SFP)?

Subject to exceptions noted below, SFP includes:

* Funds in foreign bank accounts

* Shares of foreign corporations (even if held in Canadian brokerage accounts)

* Interest in foreign mutual funds

* Shares of Canadian corporations on deposit with a foreign broker

* Debts owed by non-residents including bonds, debentures, mortgages and notes receivable

* Interests in a non-resident trust

* Interests in a partnership that holds SFP

* Land and buildings located outside Canada (foreign rental property)

* Tangible and intangible properties located outside of Canada

* Life insurance policies issued by a foreign insurer

* Precious metals, gold certificates and futures contracts held outside Canada

There are many Canadian corporations whose shares are trading on foreign stock exchanges;   the shares of these corporations are NOT considered SFP if held with a Canadian broker.

What matters is not currency of the holding, or the stock exchange where the investment is bought or sold.  Canadian corporations tocks traded on the New York Stock Exchange are still Canadian and therefore not considered SFP.

SFP does NOT include:

*Foreign property held in a Canadian-based mutual fund

* Property used or held exclusively  in the course of carrying on active business

* Foreign property held for personal use and enjoyment, such as a vehicle, vacation property or artwork

* Foreign property held within registered plans like RRSP, LIF, RRIF, TFSA, RESP, RDSP

* Assets held in a foreign  registered pension  account like IRA, 401K

* Interests in a non-resident trust that neither the taxpayer nor a relative had to pay for (for example: an estate)

What must be reported?

On earlier versions of the T1135, there was no need to identify particular foreign assets, or to give the precise cost.

For 2013 and subsequent years, the revised form requires the following for each foreign asset:

* Name of the entity holding the SFP

* Name of the foreign corporation, name of the foreign trust or description of the foreign property

* Country where the SPF is located

* Maximum cost of the SFP during the year

* Cost of the SFP at year end

* Amount of income (or loss) related to the SFP

* Amount of any capital gain (or loss) realized on the disposition of the SFP

Exceptions where T3 or T5 Issued

The new rules provide relief from reporting a SFP when the taxpayer receives a T3 or T5 relating to the property. This means NO additional disclosure for these assets is required.  However, the value of the property for which a t-slip is received is still included in the $100,000 threshold to determine whether a taxpayer is required to file the T1135 for the taxation year.

If a taxpayer holds a portfolio of foreign investments with a Canadian broker, and only some of them report income on a T3 or T5, the taxpayer would still be required to report a detailed information on the investments that didn’t report income on T3 or T5 for the taxation year.

This reporting exclusion should not be confused with the requirement to file a T1135.  The taxpayer is still required to consider the cost of every SFP (including property for which a T3 or T5 was issued) in determining whether the cumulative cost of all properties exceeds $100,000.   The exception only means taxpayers don’t have to disclose income from such property held with a Canadian broker.

Transitional Relief

For the 2013 tax year only, CRA will allow a taxpayer who holds a SFP in an account with a Canadian broker to report the combined cost of all such property, rather than the details of each SFP.

A taxpayer who chooses this transitional reporting method must use it for all accounts with Canadian brokers.  The combined cost should be included in the section: “Other property outside of Canada” on the T1135.

The taxpayer will have the option to use either the T3-T5 reporting exception or the 2013 transitional reporting method.  If the taxpayer uses the latter for any account held with a Canadian broker, they must use this method for all other accounts.  If the taxpayer chooses T3-T5 reporting exception, they’ll be required to report the details of all securities that are SFP for which Tslips have not been received.

As part of the transitional relief measures announced in February 2014, CRA also stated that for the 2013 tax year, the filing deadline for the T1135 is extended to July 31, 2014.

Extension of the Normal Reassessment Period

In the past, unless an omission in a tax return was due to negligence, tax authorities were prevented from proceesing a reassessment for additional tax after the normal reassessment period (generally three years after the day a notice of assessment is sent to a taxpayer).

For 2013 and following tax years, the reassessment period will be exteded by three years if a taxpayer has failed to report income from a SFP on they tax return and the T1135 was not filed, was late-filed or included incorrect or incomplete information.

T1135: Frequently Asked Questions

1. What happens if a taxpayer held an SPF during the year with a cost of more than $100,000 but held less than $100,000 at the end of the year?

As long as they met the $100,000 threshold at any time in the year, they must report on the T1135 all SFP held during the year, even if they sold any or all of it before year end.

2.  Are shares of foreign corporations held through a Canadian broker still SPF?

Yes.  Shares of non-resident corporations are SFP and should be reported, regardless of whether the shares are held through a broker.  However, if you received a T3 or T5 from a Canadian broker, for any of the shares, see the section ” Exceptions” above.

3.  When a taxpayer recieves a T3 or T5 from a Canadian broker for an SPF for a tax year, that property is excluded from T1135 reportfing for that year.  Does that mean the property is also excluded from the calculation of the $100,000 threshold?

If this exception applies, the taxpayer does not have to complete the detailed reporting requirements of the T1135 for that property.  However, he still has to take the property into account in determining whether the total cost amount of all SFP they held at any time in the year exceeds $100,000.

4. If a taxpayer owns a condo in Arizona that has a cost amount of $120,000, is the property SPF for the purposes of the T1135 if the condo is rented out for eight months of the year with a reasonable expectation of profit, and kept for personal use during the other four months?

SPF does NOT include personal-use property. CRA takes the view that “primarily” means more than 50%.  Whether a particular property is primarily for personal use and enjoyment, is determined on a case-by-case basis.  In this particular situation, the property isn’t held primarily for personal use and enjoyment. That means it IS a SFP and must be reported on the T1135.

5. If a taxpayer owns a condo in Arizona that has a cost amount of $120,000, is the property SPF for the purposes of the T1135 if the condo is rented out for part of the year to recover a portion of the condo’s expenses?

In this situation, if there is no reasonable expectation of profit and the individual is merely recovering part of the condo’s expenses, CRA will consider it a personal-use property.  As such, the property is NOT an SFP and is excluded from T1135 reporting requirements.

Penalties

The penalty for not filing the T1135 is $25 per day, up to a maximum of $2,500.  Additional penalties are possible if the taxpayer knowingly or negligently fails to comply.

NOTE: for more information and questions, please refer to a tax professional and the CRA.

(article written by Francois Benier, May 6, 2014 www.advisor.ca)

 

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