Dec 19, 2016

Peter Brieger's Top Picks: December 19, 2016

BNN Bloomberg

Peter Brieger , BNN

Peter Brieger, chairman and managing director at GlobeInvest Capital Management
Focus: North American Large Caps
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MARKET OUTLOOK
The market has been remarkable and for the most part unexpected. From Nov. 4 to Dec. 16, the TSX was up 5.1 per cent, the S&P 500 8.3 per cent, the Dow 10.9 per cent and the NASDAQ 6.5 per cent. While some have suggested that markets have prematurely greeted ‘Trumponomics’ as an outstanding success, I would like to take perhaps a more balanced view that reflects some potential on going risks and what may be some unexpected positives.

THE NEGATIVES

Geo-political accidents: I have outlined many in the past but heading into ’17 the main ones in my view are: ongoing mischief by Russia, China and North Korea.
Brexit: We will have to wait until January to hear the UK Supreme Court’s decision about the appeal that Prime Minister May can proceed without Parliament’s approval. At the end of the day it is suggested that Parliament and the Prime Minister will reach an accommodation but it may delay implantation of negotiations with Europe.
The latest 1.7 per cent U.S. CPI is in my view on track to a 2.5 per cent - 3.0 per cent number by late 2017 or early 2018.
This implies a continuing rise in interest rates i.e. Canadian government 10 year yields were 1.83 per cent on Dec. 16 compared to 1.13 per cent Nov. 4 and UST yields 2.59 per cent compared to 1.73 per cent. If that spike across all maturities was to continue at that pace, it would likely negatively impact the U.S. economy, price earnings’ ratios and stock prices.
Rising interest rates will put upward pressure on the $US, thus negatively impacting US corporate exports;
As for oil prices going forward, some suggest a retreat to as low as $40.00 WTI as any pre-agreed production disciplines fall apart and US shale producers restart production even at lower price levels based on a vastly improved cost structure.
President-Elect Trump, against advice to the contrary rushes to impose tariffs thus impacting trade and world economies.

REBUTTALS

I don’t propose to deal with any potential geo-political accidents or Brexit discussions because it is impossible to guess if and when they might occur. President-Elect Trump will be tested in a number of arenas. As for Brexit, as opined in my Oct. 24 comments, Brexit’s outcome may be totally unrecognizable from what is expected today;
As for worries about future tariffs, we can only hope that when in the breach, President-Elect Trump will listen to his advisors. That said, the President-Elect will prove to be a tough negotiator.
I remain optimistic that enlightened OPEC and non-OPEC self-interests will support production disciplines. If right, my best guess is for US$50.00 - US$55.00 oil in 2017 and in 2018, a possible run towards $60.00.
Interest rates will rise but at a reasonable pace. The yield curve has steepened so higher rates in moderation should not impact the economy.
Should a further rise in rates put further upward pressure on the U.S dollar, the Fed among others, would regard that as de facto tightening, which might reduce their current forecast of three rate hikes in 2017.

POSITIVES

One of our key advisors, Ed Yardeni suggests it would be wrong to dismiss the possibility that President Trump will succeed beyond the wildest dreams of anyone with the exception of Kellyanne Conway.
Assuming that the Senate and House pass a key reduction in corporate taxes from the 2016 effective tax rate of 27.5 per cent to 15 per cent that could add a permanent increase in the S&P 500 earnings.
For example, his previous estimate of $129.00 per share for 2017 would increase to $142.00 and his previous estimate of $136.75 for 2018 would increase to $150.00.
As of last Dec. 16 the PER for his prior estimates for 2017 was 17.5 and for 2018, 16.5.
Assuming his revised estimates come to pass, for 2017, the PERs of 17, 16 and 15 would produce S&P levels of 2,485, 2,272 and 2,130 respectively.
For 2018 the same PERs would produce levels of 2,550, 2,400 and 2,250 respectively.
Even prior to these revised estimates, the economic and corporate earnings data were improving thus already adding considerable support for equity markets.

SUMMARY
As previously stated, I thought the 2008 – 2009 episode severely damaged the American Psyche not only because of job losses but also in particular, the decline in the value of their homes. Today the picture has improved dramatically. Based on U.S. Fed data, the total value of Household real estate holdings has recovered to its 2006 – 2007 levels. Homeowners’ equity has more than doubled and mortgage debt as a percent of the value of Household real estate has plunged from about 64 per cent to about 43 per cent. The foregoing plus the improved job and disposable income outlook further supports a major rise in consumer confidence.

President-Elect Trump is not in the White House yet. Once he is there, Murphy’s Law will no doubt show up in one form or other. So I would not rule out a modest short-term correction given the markets’ recent run. Any weakness should be used to add to positions.

TOP PICKS

ARC RESOURCES (ARX.TO)
ARC is a mid-size gas weighted producer with a main focus on production in North East BC and Alberta (the Montney) and the Cardium in Alberta. It also focuses on NGLs. CIBC expects 2017 production to reach 130,000 b/d up from 119,650 in 2016. The company has aggressively cut costs during the past three years and maintains a pristine balance sheet. I expect dividend increases going forward.

INTER PIPELINE (IPL.TO)
IPL has engaged in two key transactions. It has acquired the last minority interest in its Cold Lake Pipeline. While it is expected to be modestly accretive immediately it becomes more valuable, as other production is added to the system. Also it will construct a 25 km pipeline on a take or pay contract with CNQ for its Kirby North SAGD project. Finally it received a $200 million royalty credit from the Government of Alberta to support a potential propane/propylene project and a potential polypropylene project. I expect further dividend increases in the future.

CRESCENT POINT (CPG.TO)
CPG is a premier Canadian and US oil weighted producer. Forecast 2017 production is 172,000 b/d with an exit rate of 183,000 b/d (89 per cent liquids). It currently has about 8085 potential drilling locations or about 12 years inventory in what are perceived to be low risk, highly prospective areas. Enhancing per well production are two developments. The first is the addition of water flood techniques which has increased per well recoveries from about 15 per cent to 25 per cent – 30 per cent. To date only about 250 existing wells have been converted thus providing very strong positive future leverage. The second is in the incubation stage. Initial testing of a Multiple Stage Section Strings, which by adjusting the water flow to different fracs in a well can further increase recovery levels (90 boe/d up from 40 boe/d) and reduces the decline rate.