McCreath Group - January 2018 Client Newsletter

James McCreath - Jan 12, 2018

Semper Anticus – January 2018 – Client Newsletter

Hello to all:
Happy New Year. We hope the holiday season gave you a chance to spend time with friends and family and reflect on another year gone by.
Welcome to the latest version of our client newsletter (PDF version attached). For the collective 170 years the McCreath Group has been working in the investment industry, we continually strive to put clients in a better financial and personal situation and this newsletter is an extension of our efforts to communicate ideas, trends and investment themes with clients.

As we enter 2018, our stance remains aligned with our last newsletter in October 2017. We’re not overly concerned by an imminent market or macroeconomic event that will adversely impact investment portfolios. However, in the coming months clients should expect us to recommend investment positions that are defensive and may include the inclusion of cash balances beyond what we typically suggest. It remains a stock pickers market, highlighting the importance of identifying great ideas and then making them count.
Whichever journey you’re taking – retirement, home purchase, education savings, etc. – we’re here to help, so please email or call any time. And most importantly, we thank you for being clients … Alison, Ashley, Rob, Lila, Steve, Brendon, James and Scott  
Included in this edition is information on:

  • Registered Account Contribution Limits and Deadlines

  • Online Tax Documents

  • Commentary from BMO Nesbitt Burns’ Portfolio Advisory Team: Positioning for 2018

  • McCreath Group Market Overview: Thoughts on Bitcoin

  • The Last Word from Scott: The Speculative Abyss

  • Who’s Helping Managing Your Financial Journey … Updates from the McCreath Group

  • Referrals: We have the capacity to assist new clients


Registered Account Contribution Limits and Deadlines

Registered Retirement Savings Plan (RRSP) contribution details

  • The deadline for making your 2017 RRSP contribution is March 1, 2018.

  • Your 2017 RRSP contribution limit is based on any unused contribution room carried forward from 2016, plus your 2017 contribution amount (the lesser of $26,010 or 18% of your 2016 earned income less any applicable pension adjustments).

  • If you’ve already made your 2017 RRSP contribution, consider making your 2018 RRSP contribution early and benefit from the tax-deferred growth of your RRSP. The maximum RRSP contribution limit for 2018 is $26,230, again, less any pension adjustments.

Tax-Free Savings Account (TFSA) contribution details

  • The annual TFSA contribution limit for 2018 is $5,500. There is no deadline for when this contribution is required to be made.

  • Unused contribution room – dating back to 2009 when TFSAs were first introduced – carries forward and can be used in any future year. The lifetime contribution limit for TFSAs is $57,500.

  • You can gift funds to your spouse/common law partner or adult child to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). Income earned within a spouse’s/partner’s or adult child’s TFSA will not be attributed back to you.

Registered Education Savings Plan (RESP) contribution details

  • There is no minimum annual contribution limit that you must make. However, there is a maximum lifetime contribution limit of $50,000 per beneficiary. The number of years over which contributions can be made to an RESP is 31 years.

  • The federal government’s Canada Education Savings Grant (CESG) helps ensure students have enough money to fund their higher education. The grant pays 20 per cent of annual contributions per beneficiary to an RESP, up to a maximum of $500 per beneficiary. The maximum lifetime CESG is $7,200 per beneficiary.


Online Tax Documents

To help simplify your tax-preparation efforts, BMO Nesbitt Burns is introducing Online Tax Documents. Starting in mid-January 2018, you’ll have simple and secure access to your 2017 tax documents on Gateway. You will also continue to receive your 2017 tax documents through regular mail.
Your 2017 tax documents will be posted on Gateway under the eDocuments tab as they become available. Once posted, you can view, download, or save your tax slips. Your tax slips will also be stored on the site for seven years, starting with your 2017 tax documents.
It is important to review any Authorized Users on your Gateway account as they will now have access to your tax documents, which include your Social Insurance Number. To review/add/remove Authorized Users, please contact the office.
If you’re not currently signed up for Gateway, now is the time to get online. Gateway’s eDocuments offer now includes statements, trade confirmations and tax documents. You also have access to account information, holdings, and quotes anytime, anywhere through your computer, tablet or mobile device.
Remember, it’s important to ensure you receive all required tax slips before preparing your tax return to prevent having to file an amendment (T1-ADJ form) to amend your tax return. As a reminder, the deadline for most people to file your 2017 personal tax return is May 1, 2018.

McCreath Group Market Overview: Positioning for the Year Ahead

Contributions from the BMO Nesbitt Burns’ Portfolio Advisory Team
We believe a number of factors should provide a tailwind to stock markets at least through the first half of 2018. Most importantly, we are witnessing a synchronized global recovery with the world’s four largest economies showing either accelerating economic momentum (in the U.S., Eurozone and Japan) or a stabilization (in China).
This should continue to support corporate sales, profit margins and earnings growth. With most indices at or near record highs and valuations increasing in all major markets, stocks no longer have the margin of safety they did years ago, but equities remain the best option. As we are entering the later phase of the economic cycle, increasing the quality of portfolios (companies with recurring revenues, strong balance sheets, essential products/services and high-quality management teams) remains our focus.  
Generally speaking, we continue to see better value in economically sensitive (i.e. cyclical) stocks, particularly in the financial, industrial and energy sectors. On the other end of the spectrum, pockets of value still exist in defensive sectors: consumer staple stocks, real estate and utilities.
We continue to advocate for diversification outside of Canada, primarily through exposure to American domiciled multinationals in industries where Canada has limited market depth. These industries include, but are not limited to: health care, technology, industrials and consumer products. We also obtain global diversification through Canadian companies who generate significant revenues outside of Canada.
Should a ~5% correction occur, we would be buyers of high quality stocks on weakness since we do not think the macro setup portends anything resembling a bear market. Typically bear markets are associated with recessions and BMO Nesbitt Burns models and favourite indicators show a low probability of such an event for the next year, at least in North America. Still, risks are always on the horizon. Geopolitically, North Korea – with its multiple missile tests – remains a wildcard and in Canada the NAFTA renegotiations are a risk for a number of sectors. Also, with unit average hourly earnings accelerating in the U.S. (especially for full time workers), inflation could become a headwind to stock valuations down the road, although we think this is more likely to become a problem in 2019.
Offsetting this inflation risk, however, is the rapid technological innovation we are witnessing. The substantial investments being made in technology have the potential to increase efficiency and productivity. This could in turn raise the potential economic growth rate while restraining inflationary pressures (by rolling out automated chat bots for customer service or using blockchain technology to vastly increase the efficiency of trade finance or insurance for example).

A Quick Word on NAFTA Negotiations – The Elephant in the Room

The growing threat to NAFTA, and all the uncertainty that possible termination entails, has prompted a myriad of questions on what this would mean for the North American economy, financial markets and monetary policies. BMO Economics published a report that delves into those issues, and explores the impact by sector and by region, looking at where the greatest vulnerabilities lie. Below are key takeaways:
The overriding conclusion is that while the termination of NAFTA would clearly be a net negative for the Canadian economy and a mild negative for the U.S., it is a manageable risk that policymakers, businesses, and markets would adjust to in relatively short order. It is critical to note that policy would not stand still in the event of a negative outcome for NAFTA. Monetary policy would be looser than it would otherwise be, the Canadian dollar would adjust lower, trade policy would be aggressively aimed at securing new arrangements, and even fiscal policy would potentially adjust. All of these factors would work to mitigate the economic damage.
Over the span of five years, BMO Economics estimates that real GDP would be up to 1% smaller than it otherwise would have been. That’s a relatively moderate impact on an economy that is expected to expand by close to 9% over that period. To estimate the economic cost of a NAFTA breakdown, a number of assumptions are required. BMO Economics assumes a “bad-but-not-worst-case scenario”, where the former Canada-U.S. Free Trade Agreement (CUSFTA) is not revived, and all parties revert to WTO-level tariffs. Underlying this assumption is the expectation that Canada would reject a U.S. requirement that the dispute settlement mechanism be eliminated or significantly weakened. Other sticking points could be U.S. demands for a sunset clause and the termination of supply management in Canada’s agricultural sector. U.S. demands for minimum automotive content and procurement in public projects would also impede a CUSFTA revival.
It’s worth noting, 33 American states rely on Canada as their largest export market and much lobbying is occurring beneath the media headline bluster to ensure trade relations between the US and Canada are not excessively damaged.

McCreath Group Insight: Thoughts on Bitcoin

We have received a number of calls in the last few months on Bitcoin. At this stage of its development, we would equate bitcoin to gambling. It’s hard to know what the evolution of cryptocurrencies will be, but there is considerable hype in the space and that hype always makes us nervous.
There are merits to some of the underlying aspects of the technologies used for cryptocurrencies; however our biggest concern is there are no barriers to entry for cryptocurrencies. If someone wanted to start a cryptocurrency that was better than bitcoin (which we’re sure already exists or multiple parties are already working to develop), what does that do to the value of bitcoin? There is literally an unlimited number of cryptocurrencies that could be created.

The world Economic Forum recently circulated an article on bitcoin: In 2020 Bitcoin will consume more power than the world does today. Highlights from the article include:

  • Bitcoin requires a truly staggering amount of energy. The electricity used in a single Bitcoin transaction, for instance, could power a house for a month.

  • Bitcoin mining (the process of generating a bitcoin) now consumes the same amount of electricity every year as Denmark — 33TWh, according to one recent report.

  • Bitcoin mining’s energy use is reportedly growing at a rate of 25% per month. At that rate of growth, it will consume as much electricity as the US in 2019.

  • And by 2020, bitcoin mining could be consuming the same amount of electricity every year as is currently used by the entire world.

US investment firm Ned Davis Research published a mid-December research report outlining their skepticism about the future of bitcoin for the following reasons:

  1. Increased competition;

  2. Government intervention;

  3. Fails the test of money; and

  4. Concentration of ownership.

Below are excerpts from the Ned Davis report.
1. Increased competition. Although bitcoin itself is limited to 21 million coins, there is no shortage of other digital coins, or altcoins. There are hundreds of other cryptocurrencies out there or being developed. Being first does not necessarily mean being the best. How many people still use AOL or Netscape? Products that have low barriers to entry and high competition tend to see lower prices.
Ned Davis believes the Fed and other central banks will eventually issue their own digital currencies, reducing some of the appeal of private cryptocurrencies, particularly reduced settlement times and supposedly lower transaction costs.
2. Government intervention. There are three aspects to government intervention. The first has to do with the central banks’ loss of control over the money supply. The extreme outcome would be the outright ban of bitcoin, similar to the U.S. ban on holding gold from 1933 to 1974. Rather than an outright ban, governments can create a centralized ledger rather than the distributed system that blockchain uses. The second aspect is taxation. With governments strapped for cash, digital transaction fees could be an easy way to collect revenue. Also, in the U.S., bitcoin is treated as a capital asset, and therefore subject to the rules that govern capital gains and losses. The third aspect is regulation. For example, the SEC is concerned that ICOs resemble security offerings.
3. Fails the tests of money. With extremely high volatility, bitcoin is a poor store of value and lacks a stable unit of account. It is also a weak medium of exchange, given its volatility and lengthy processing times. A recent Bloomberg interview cited that the typical credit card company processes about 30,000 transactions per second compared with seven for Ethereum (the #2 cryptocurrency). Finally, it is not widely accepted. The anonymous nature of blockchain creates a significant compliance hurdle.
4. Concentration of ownership. A recent Bloomberg report said about 1,000 entities control 40% of the bitcoin. Such high concentration of ownership is reminiscent of the Hunt brothers trying to corner the silver market in 1980. That didn’t end well.

The Last Word from Scott: The Speculative Abyss

Markets have a history of periods where there are excessive bubbles in asset classes. We see this evidence today in securities of companies focused on cryptocurrencies (bitcoin, Ethereum, etc.), cannabis and pockets of technology (ex. Tesla). These areas of the market currently show little evidence of the core fundamentals we use to assess companies: dividends, positive earnings, barriers to entry, etc.
The press and promoters supporting these sectors are enticing investors to participate in this speculation. Our clients are no exception and we find ourselves, almost daily, spending time trying to keep clients free of the extraordinary risks associated with this gambling.
History shows that speculation and market timing are wealth destroyers. Investing in a diversified portfolio of great companies which grow their businesses and share their success by paying dividends consistently offer the best performance and the least volatility. This also means protection on the downside.
When markets turn negative, a company that has an excessive price-to-earnings multiple or that has never made a profit will often experience a dramatic correct in the value of its shares. This traditionally has not happened to our clients’ portfolios unless we lose the discipline and wander into the speculative abyss.

Who’s managing your financial journey … updates from the McCreath Group

  • In December, James was approved by BMO Nesbitt Burns as a Portfolio Manager. Having been with the McCreath Group for nine years, James has passed 10 industry exams including a handful of exams to receive the Chartered Investment Manager (CIM) designation in 2013. This designation allows James to manage client accounts on a discretionary basis.

  • Both Lila and James have their CIM designation, which gives them the ability to make investment decisions for clients without the need for verbal confirmation prior to completing trades. We will be discussing discretionary management with appropriate clients as the year progresses.

Referrals: We have the capacity to assist new clients

In all our collective years in the investment industry, we’ve learned that finding an investment advisor to assist investors on their financial journey is difficult. Clients are looking for three key elements from advisors:

3. Trust and integrity
2.  Portfolio advice and development
1. Service

These three elements are ingrained in the McCreath Group mission statement. Should you know of any family members, colleagues or friends in need of investment advice, we have the capacity to assist new clients.

Thank you for being clients ... and please contact us any time with questions, concerns or feedback ... The McCreath Group … (403) 261-9552

BMO Nesbitt Burns Inc. (“BMO NBI”) provides this commentary to clients for informational purposes only. The information contained herein is based on sources that we believe to be reliable, but is not guaranteed by us, may be incomplete or may change without notice. The comments included in this document are general in nature, and professional advice regarding a individuals position should be obtained. ®”BMO (M-bar roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence. ® “Nesbitt Burns” is a registered trade-mark of BMO Nesbitt Burns Inc. BMO Nesbitt Burns Inc. is a wholly-owned subsidiary of Bank of Montreal. The comments included in the publication are not intended to be a definitive analysis of tax law. The comments included in the publication are not intended to be a definitive analysis of tax law. The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be obtained in respect of any person's specific circumstances. BMO Nesbitt Burns is a Member- Canadian Investor Protection Fund Member of the Investment Industry Regulatory Organization of Canada.