J.C. HOOD INVESTMENT COUNSEL INC.

 

 

Monthly Newsletter - July 2014

 

Hello Everyone:

 

African Follies:  After 20 hours flight time and a 6 hour drive north of Johannesburg, our guide mentioned that the camp cook had been attacked in camp by a hippo a few days earlier.  He had been walking with his infant daughter when the hippo charged.  He tossed the little girl into the bushes, which thankfully saved her, but his legs were badly mangled.  Hippos are nasty beasts that kill more people in Africa than any other animal.  T he cook is lucky to have survived and is recovering.  Shortly afterwards, our guide shot the hippo.  On our first night in camp, we dined on hippo hors d’oeuvres prepared by the cook’s wife.  Not bad really--hippos are about 6000lbs. of bacon!  Our tent was set up on a riverbank so we could watch the local flora and fauna; that is listening to screeching baboons and watching the crocks with their sinister smiles glide by. Three days later, we found the tracks of another hippo that had meandered through camp at night.  Did I mention the snake tracks?

 

We had, of course, been prepared to keep in touch with you and NBCN through our emails and iphone.  Well nothing worked.  We couldn’t access our emails through Rogers and the damn iphone didn’t work except to run up roaming charges and cancel subsequent emails.  Fortunately, I had bought a Samsung tablet just before leaving and it worked with WIFI at the main lodge, and the camp had a satellite phone so we were able to call NBCN and keep in touch.

 

Markets:  Shortly after getting back, I was invited onto BNN again. Clearly markets were being driven by geopolitical fears: Hamas, Ukraine, Syria, Iran and the Malaysian Airlines catastrophe. These events, however, while tragic, have not stopped the S&P500 from reaching record highs; indeed the index looks to break 2000 for the first time.  Geopolitical events often appear to be portentous but often are not what they seem.  Russia, for example, does not need to take over Eastern Ukraine.  Putin has already achieved his objectives of keeping Ukraine out of the EU and NATO thereby keeping Ukraine weak and decentralized subject to more Russian influence. Obama’s backing down over Syria last year makes him look feckless and U.S. foreign policy has suffered.  None of this however has mattered much to markets except for near term volatility. What does matter is that the markets will continue to be fueled by low interest rates.

 

Prudence; Reduced US Asset Allocation Rebalancing:  Could this lead to a ‘market meltdown’?  Quite possibly yes, as the P/E ratios are at comparatively high levels and the market is way overdue for a 10% correction.  It has been over1000 days since the last one. Everyone has been waiting for a ‘pullback’ since last summer but the Fed’s policy of easy money continues to prod the market.  The longer the rally is extended, the more likely the correction and the greater the ferocity of a decline. The down stroke, we believe, will be brief since this is in fact a real recovery in the U.S. and earnings will grow into the P/E ratio. Nevertheless, I have been ‘pruning’ some of our U.S. and Global equities.  This is what rebalancing is all about; it doesn’t just come into play during bear markets, i.e. selling bonds to add to equities.  In this instance, U.S. equities have climbed beyond our app. 25% allocation, and therefore, need to be sold off and return to the portfolios’ original asset mix.  Clients who have been with us for several years have had excellent growth in U.S. equities, and I have therefore been selling portions of ZQQ (Nasdaq) and to a lesser extent XSP (S&P500CDN$ hedged).  I have also been selling underperforming equities, e.g. ZMT (metals) and some interest sensitive REITs and preferreds. In non-registered taxable accounts, I have tried whenever possible to match gains with losses. For our clients who have been with us for one year or less, I have not made any significant changes as they are ‘underweight’ U.S. equities and I am waiting for a buying opportunity post correction.

 

Canada: We face many headwinds, especially job creation and a declining manufacturing sector; however, that does not mean that markets will not thrive particularly with increased demand for commodities from Asia.  Any increase in economic growth in the U.S. bodes well for Canada as usual.  Banks, telcos and energy are all doing well and even mines are showing signs of life after gold collapsed.  According to Leo De Bever, CIO at Aimco (Alberta), tensions in Europe make Canadian energy more attractive; that is as a secure and friendly source of supply.  Similarly, Asian countries look upon Canada for fertilizers (potash) and other agricultural products, i.e. grains and proteins.  We continue to maintain our same asset allocation in Canada.

 

Thank you for your business.

 

John

 

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John Hood, B.A., M.A., FCSI
Pres. & Portfolio Manager
J.C. HOOD INVESTMENT COUNSEL INC.
505 Bella Vista Drive,
Pickering, Ontario L1W 2A7
Tel:  905-492-4444
Fax: 905-492-4444
http://www.jchood.com
email: jchood@rogers.com
Member of the Portfolio Management Association of Canada