Hap Sneddon, chief portfolio manager, founder, Castlemoore Inc.
FOCUS: Technical Analysis and Macro Portfolio Strategy 
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MARKET OUTLOOK
The die is cast. The US central bank, and by and large its global peers, has determined that interest rate normalization at this time is a beneficial course to pursue.
Higher rates, it is expected, will actually respond to and bring about lasting inflation and growth, raise worker wages and productivity, and very importantly, spurn business investment. 

In the coming months, the rate rise push driven primarily by the Fed’s balance sheet reduction, may go against the grain of soft economic data and seem at odds with the normal remedy for it, but it will happen nonetheless, as any such future periods are now being deemed as only being transitory.  

On the corporate level, companies will be forced to assume more risk through capital spending, and rely less on low cost share buybacks to build equity. This will provide investors with a seemingly longer term perspective on growth and less at the money analysis using quarter to quarter earnings.

The technical picture had been evolving over the last 6 months showing relative strength in pro-cyclicals sectors and relative weakness in interest-rate sensitive and defensives sectors. This rotation was telegraphing these fundamental developments occurring now setting up a very bullish investment environment today for the next six months anyway that would only get stronger from potential changes to the U.S. tax code. 

The challenge for investor lies in recognizing what impact rising long term rates has on markets as we leave one experiment in monetary policy and embark on another.

TOP PICKS

TD BANK (TD.TO)
In a sector that will benefit from rising rates, TD is expected to be a market leader. Its personal and corporate business lines recently showed thirteen per cent earnings and seven percent revenue growth; it improved its efficiency (overhead as a percentage of its revenue fell); and it raised its share buy back from 15mm to 35mm shares this improving its capital ratios. Though I don’t expect this pace to continue in the next six months the bank is showing both strong fundamental and technical attributes best in a sector with a big tailwind.  Target $83.00

iSHARES NASDAQ BIOTECHNOLOGY ETF (IBB.O)
Healthcare, and biotech in particular is one of the few sectors in a secular bull market (began in 2012).  Instead of picking what at any given point in time may be the best couple biotech stocks investors will benefit from the move in the entire space through an ETF. The sector on a company level can be quite volatile based on individual results, and too on the whole, with political developments, particularly around pricing –safety in numbers. There are few areas that have the potential to have as significant impact on humanity as biotech. Target $395USD

iSHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO)
The base metal sector is a clear net beneficiary of expectations of higher rates shown through improvements in commodity prices such as zinc and copper.  In addition to support from global monetary policy, including a weaker USD, there is additional positive bias from a weak advanced stage project pipeline and the possible rise of a structural deficit for many years in the sector. Target $14.75

DISCLOSURE PERSONAL  FAMILY PORTFOLIO/FUND
TD  Y Y Y
IBB Y Y Y
XBM Y Y Y

PAST PICKS: June 30, 2016

BAXTER INTERNATIONAL (BAX.N)

  • Then: $45.22
  • Now: $63.36
  • Return: 40.11%
  • Total return: 42.02%

iSHARES U.S. TELCOMMUNICATIONS ETF (IYZ.US)

  • Then: $33.30
  • Now: $30.60
  • Return -8.10%
  • Total return: -5.49%

FAIRFAX FINANCIAL (FFH.TO)

  • Then: $695.83
  • Now: $633.79
  • Return: -8.91%
  • Total return: -6.96%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
 BAX N N Y
IYZ  N N N
FFH Y Y Y

 

TOTAL AVERAGE RETURN: 9.85%

TWITTER: @CastleMoore  
WEBSITE: www.castlemoore.com