The past three months have witnessed an incredible bout of market volatility.  As we look back at the beginning of the year equity market carnage and, as of late, the robust equity market rebound, it has become increasingly clear that markets are being driven by traders trying to jump ahead of a "data dependent" Federal Reserve. 

Despite the recent rally, which has seen markets fully recover all their losses for 2016, a look at market behaviour over the past year paints a very different picture.  North American equity markets were in sell mode through the second half of 2015, and selling accelerated in late December on the Fed's decision to raise interest rates, the first increase in a decade.  By mid-February, many if not all major equity markets were in or near bear territory, off 20% or more in most cases, oil was plumbing $30/bbl, commodity prices were at a multi-year low and the global economy looked to be slowing, led by shrinking activity in China.  In mid-February, the Fed came to the rescue of markets, and softened its aggressive wording with respect to further interest rate increases for 2016.  Just when things looked to be rolling over in late March, the Fed once again made dovish statements and the markets resumed their advance to 2016 highs.

The fact remains, however, that despite hitting 2016 highs, equity markets are generally below the levels seen just prior to the Fed's December action, and still off mid-year 2015 highs.  This technical picture,  when coupled with earnings (and especially revenues) that are showing little to no growth, suggests to us that liquidity is driving traders (especially short sellers), and that investors are hesitant to endorse "the new bull market" mantra that seems to be holding court today.

We began the year with a high level of cash, and put some of it to work taking advantage of the market swoon by adding names we like which were hurt in the general downturn.  Before we commit additional cash we would like to see real evidence of economic sustainability, and not react to traders covering short positions.

During Q1 we added three new names to client portfolios.  We bought Agnico Eagle Mining, seeing gold as the major beneficiary of central bank fears.  A little insurance in these volatile times is always appropriate, especially with U.S. Dollar weakness.  We bought Northland Power, a growing alternative energy provider, on the expectation of significant dividend growth over the next two years coming from its wind operations in Europe.  We bought High Liner Foods, a mid-cap seafood processor, which was trading at exceptional value after a near-term earnings disappointment. 

With interest rates at essentially nil in North America and negative in 1/3 of major world markets, it has become increasingly hard for investors, especially the newly-retired, to live off of the income their portfolios were expected to generate.  This has resulted in a behaviour best described as "yield chasing" which has ended very badly for those companies which have fallen on difficult times.  We like dividend payers, but are very diligent in our selection to make sure that whatever dividend is paid to day can be paid tomorrow. 

Despite holding above-average cash (as much a statement as to the poor return environment for fixed income as a call on equity markets), we went into 2016 with a healthy weighting in the commodity sectors (energy, materials) that were hurt the most in the 2015 market decline.  This positioning helped us in Q1, and, in our view, is not over yet, as large short positions in many of the stocks we own, still need to be covered. 

Our view is that we will deploy cash as we find individual equity bargains.  It is increasingly a stock-picker's market, an environment in which we have historically thrived.

TOP PICKS:

Agnico Eagle Mines (AEM.TO) 

Recent purchase price: $47

This is the second gold stock in our portfolios (after Goldcorp).  After stumbling a few years back, company now on track for adding low cost ounces to its production profile.  Expect All In Costs to decline to mid-$800 level in 2017, and lower thereafter.  While production growth is flat, stability is key.  Solid balance sheet, history of dividend paying.  1% Dividend yield.

Northland Power Inc. (NPI.TO)

Recent purchase price: $21

Fast growing alternative energy producer.  NPI is soon to benefit from its significant investments in European offshore wind production.  Nordsee (Netherlands) is producing ahead of schedule, and Gemini (Germany) is tracking for 2017 production.  Impact will be a doubling of cash flow, which should track into dividend growth.  5% dividend yield.

High Liner Foods (HLF.TO)

Recent purchase price: $21

Turnaround story in food processing space.  Stock has been hit as HLF suffered a disappointing 2015 because of an appreciating USD. However, it is managing its costs and shut one of its U.S. processing facilities.  The Canadian leader in seafood processing, and #2 player in the U.S., HLF is expected to see an earnings recovery over the next few years resulting from lower fish costs and processing efficiencies.  Room for multiple expansion on resurging earnings.  3% dividend yield. 

Past Picks: July 13, 2015

TransCanada (TRP.TO)

CIBC (CM.TO)

Goldcorp (G.TO)

Total Return Average : +9.72%