Dec 22, 2017

Hap Sneddon's Top Picks: December 22, 2017

BNN Bloomberg

Hap Sneddon , BNN

Hap Sneddon, chief portfolio manager and founder of Castlemoore Inc.
Focus: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK

The current market structure reflects a positive pro-growth view with financials, energy, materials and industrials showing strong relative strength, while defensives and interest-rate sensitive sectors such as utilities, consumer staples and consumer discretionary are showing weaker relative strength. Technology and health care are somewhere in the middle for now.

The underpinning for this situation is based in part on economic data and on the cues from global central bankers to investors that rates are going higher. GDP prints in Canada and the U.S. have been decent of late, though we, and now Governor Poloz, expect some weakening ahead in Canada due to the strength of the loonie over the spring and summer months. This said, Deputy Governor Wilkins recently, and again, talked up accelerating future economic activity. And just this week the third look at Q3 U.S. GDP data came in at 3.2 per cent from 3.3 per cent.

Housing has paused in Canada and bounced up under the 2007 highs in the U.S. In both countries, employment gains have been positive, though the data is still underwhelming for both when it comes to wage increases. Net-net, we are still not yet seeing inflation pick up to warrant a continuing full-steam-ahead on rates. However, markets have priced in higher future costs. That, along with the recent passage of the U.S. tax package, is a point to be respected for now.

Eventually, rising rates without clear, persistent and meaningful increases in business activity and wages despite good corporate profits has the potential to negatively impact both businesses and consumers as they adjust. Time will tell how this second phase of central bank experiments plays out. If we are early for rate normalization, there will be opportunities in defensive and interest-rate sensitive securities over the next two quarters.

Intermediate market indicators, including the last holdout and the advance/decline lines, have turned positive. Though short-term indicators are extended and U.S. tax implications — from the bill that favours waiting to sell until 2018 year — makes markets susceptible to near-term downside. Any weakness will be temporary in what will be a robust and surprising run to some through Q2/18.

TOP PICKS

NOTE: The selections are six-month selections, and not our regular one-year, due to our negative forecast of eight months (+/- month) for the overall market

ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO)
At the core of the pro-growth investment theme and global central bank rate increases, industrial or base metals offer one of the best upsides in the next six months as investors growth more bullish on the outlook for supply and demand. Increased infrastructure activity, dwindling stockpiles and low new mine builds provide tailwinds into 2018. Using an ETF reduces individual company execution risk and broadens exposure by region and commodity. Investors seeking alpha may prefer to create a basket of (FM.TO), (HBM.TO), (S.TO), (TECKa.TO) and (LUN.TO). Last purchased on July 14, 2017 at $11.56.

KELT EXPLORATION (KEL.TO)
The energy sector is also showing improving relative strength against other industries and the index itself, and Kelt, a mid-tier company focused on the exploration, development and production of crude and natural gas, offers strong upside through the cycle. Kelt, led by a team that sold Celtic in 2013 to Exxon for $3B, recently showed it is focused on the right things, with robust cash flow and scalable exposure with a basket of emerging plays. Next resistance is around $7.50; passing this will see minor resistance at $8.50 on the way to the intermediate target of $10.00. Investors seeking more safety may look at Suncor, then an ETF in the sector, to capture the sector move albeit with lower volatility and performance potential. Last purchased May 17, 2017 at $7.18.

BANK OF AMERICA (BAC.N)
In the U.S. banking space preference should be given to the large, money-centered, universal banking model, with various silos of growth and increased potential from economies of scale. From the recent quarterly earnings announcement in October, investors saw improved revenue growth and operating leverage, as well as better credit cost increases. A breakout past US$25.80 acts as support with first upside in the mid-30’s. Last purchased on November 27, 2017 at US$26.60.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
XBM	Y	Y	Y
KEL	Y	Y	Y
BAC	Y	Y	Y

PAST PICKS: DECEMBER 28, 2016

AGNICO EAGLE MINES (AEM.TO)
We no longer hold Agnico, preferring to hold one of the strongest in the sector, Kirkland Lake Gold. Bullion is due for a 13-and-a-half month low here in late December.

Then: $54.90
Now: $57.15
Return: 4.09%
Total return: 5.03%

SNC-LAVALIN (SNC.TO)
We continue to hold and purchase SNC amidst an improving commodity backdrop, margin focus and the Atkins integration.

Then: $58.23
Now: $57.47
Return: -1.30%
Total return: 0.72%

FAIRFAX FINANCIAL HOLDINGS (FFH.TO)
We continue to hold Fairfax, based on its improving underwriting business and Watsa’s knack for profiting from market turns as he did in 2008 and, we expect, as he will in 2018.

Then: $647.47
Now: $665.51
Return: 2.78%
Total return: 4.99%

TOTAL RETURN AVERAGE: 3.58%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
AEM	N	N	N
SNC	N	N	N
FFH	N	N	N

FUND PROFILE
Castlemoore Canadian Equity
Performance as of: September 30, 2017

3 Month: 3.08% fund, 2.98% index
3 Year: 13.29% fund, 4.50% index
Average annual return: 9.23% fund, 6.07% index
Drawdown: -4.12% fund, -8.27% index
Recovery speed: 5.2 months- fund, 15.7 months index

*Index: TSX
**Dividends reinvested

TOP HOLDINGS AND WEIGHTINGS