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    Why the deep freeze is good for your portfolio

    car in the snow21 150x150 Why the deep freeze is good for your portfolioApart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

    That’s because natural gas enjoys attractive qualities as a clean, abundant and (relative to alternatives) cheap form of energy. In recent years, technological advancements and readiness of supply have increased its application for power generation, industrial use, transportation, drilling rigs, etc. In fact in 2013 and 2014 there are more than 350 projects completed or underway in North America that will create demand for more than 1 trillion cubic feet of supply per year.

    The wide and cheap availability of natural gas in North America has led to a mini-manufacturing boom or ‘re-shoring’ of manufacturing facilities back to the U.S. That’s because, unlike oil which is subject to global pricing, natural gas prices have regional differences. In Europe, for example, natural gas trades at approximately $11 per one million BTUs, and $16 in Asia.

    Not surprisingly, industry is moving to fill this void. In 2015, the U.S. will begin exporting LNG (liquefied natural gas) to Asia and Canada will have its program underway by 2017. The LNG export projects approved amount to 25% of annual supply in North America. It’s logical to expect increased demand and reduced supply will have a positive effect on pricing.

    It’s already being played out – with prices having moved up to their current level of $5 in North America. Many in the gas industry claim that to recover all the costs of buying land, drilling, building production facilities, etc. the industry needs a $5+ gas price. Clearly with gas in the $3 to $4 range over the past two years the number of rigs drilling for gas in the U.S. has remained depressed (down 60% from the peak). Industry has not yet allocated additional capital to drill more wells. We will see if the now $5 gas price leads to increased drilling in the year to come.

    Our approach since 2011 has been to overweight natural gas investments in our Newport North American Equity Fund, with our largest holding being Tourmaline (TSX:TOU), also the subject of previous blogs. Tourmaline has grown its gas production 50% a year for six straight years. Its share price has risen over this time reflecting this growth. To date, our thesis has played out as we had hoped and we believe there are a number of years of strong growth to come – albeit with likely some volatility along the way and we manage for that with a diversified portfolio of stable investments.

     

    Is the U.S. market due for a correction?

    Is the U.S. stock market poised for a correction? Is January’s decline of 4% the start of a bigger correction?

    These are perfectly understandable questions. In fact, we hear them repeatedly when meeting with our clients here at Newport Private Wealth. And they are being heavily debated within our Investment Committee and by investment experts whose opinions we value. After all, the S&P 500 has increased by almost 50% in the last two years including 30% in 2013.

    The pessimists are arguing that:

    • the S&P 500 has increased for five consecutive years and a six-year streak has only happened once before (1982-89); and
    • market returns after two consecutive years of double digit returns have typically been modest; and
    • the stock market is expensive at 16x earnings.

    (Source: BMO Nesbitt)

    The optimists have compelling points to make as well. They argue that:

    • stock markets can and have traded well above the current P/E multiple when inflation is under 2%. (inflation is currently less than 1%); and
    • private investors remain very “under-invested” in the stock market. They withdrew $451 billion from 2006-12 and only reinvested $60 billion last year.

    This is a very common dilemma in the life of an investment manager such as Newport Private Wealth. We are repeatedly faced with conflicting facts and viewpoints, most of which are persuasive and compelling on some level.

    Will there be a correction in 2014? We think it’s likely. But corrections are a normal part of the investment cycle and they are often part of a long-term bull market. In fact, corrections are seen by many as a healthy part of the journey. They even provide an opening for those investors who are late to the game to get invested.

    Take a quick look at the chart below. The S&P 500 has doubled in the last five years and there have been four pullbacks along the way, including one correction of almost 20%.

    large decline Jan20141 Is the U.S. market due for a correction?(Source: WSJ Data Group)

    The more important question, in our view, is “are U.S. stocks a good place to make money over the next three or more years?”  We have confidence in our positive view of this question. But we would not be surprised to see one or more corrections along the way.

    However, we do feel that different strategies are in order at this point in the cycle. From our perspective, further gains in the U.S. market will have to be driven more by earnings growth rather than a broad-based market rise. Therefore, we believe that the right approach is to be more selective by way of prudent “stock-picking” as opposed to just owning “the market”. Lastly, we are currently holding healthy cash balances in our equity funds with the hope that we will be able to put the money to work at more attractive prices.

    Risk management is a hard sell!

    Equity mutual funds are getting a late Christmas gift this month: they are finally able to drop return data from 2008  from the calculation of their five-year performance numbers. Why is that important?

    In 2008, global equity markets fell between 30-54% (as if we need reminding!). Given that mutual funds generally report one, three, five and ten year historical performance, dropping 2008 from their critical five-year returns will optically improve the numbers, no question. But what does it tell us about risk? Those better five-year numbers might attract some investors to a level of risk they don’t want — and perhaps don’t understand. Let’s look back for a moment.

    [read more >>]

    Future looks bright for Vision Critical

    vc blog 150x150 Future looks bright for Vision Critical Rarely do we write about specific investments in this blog, however, a recent post by Wellington Financial about one of our private investments caught our attention and we thought to share it with our readers.

    Vision Critical’s $10.5M secondary clears the deck for potential IPO.

    Vision Critical is a fast-growing Canadian tech company that has become a major player in global market research solutions. The company was founded in 2000 by noted entrepreneur, Dr. Angus Reid (former founder of Angus Reid Group, Canada’s largest research and polling group) and his son, Andrew Reid.

    [read more >>]

    10 tax saving tips to do before year end!

    clock 150x150 10 tax saving tips to do before year end!With the arrival of December, our attention often turns to holiday preparations — but it’s not too late to save money on your taxes if you act soon.

    Here are ten tax planning ideas to consider before year end:

    [read more >>]

    A nice problem to have …

    What do you do when you have a great investment manager putting up terrific numbers yet you see something you like better?

    That was the dilemma of our Investment Committee this past summer.

    One of our corporate bond managers, Canso Investment Counsel Ltd., has steadily and soundly trumped the index for the past several years. And in recent months, even as bonds have been under pressure, they’ve continued to deliver positive returns for client portfolios.

    However, as we look forward to the next three to five years, bonds are not our first choice for making money or protecting downside risk.

    For that reason, over the past year, our Investment Committee has been steadily increasing the allocation to global and US equities which we view as being more attractive for the next market cycle.

    Recently we took the additional step of selling a portion of the corporate bond holdings managed by Canso in both our Newport Fixed Income and Newport Yield Funds and moving the proceeds into cash – for a time.

    We did this in anticipation of a buying opportunity in global equities – with a particular eye on the U.S. With the current U.S. debt ceiling discussions looming over equity markets, Fed tapering, global tensions around Syria and the traditional “October effect” (the theory that markets decline in October), it seems to us a small correction is more likely than not and this would provide a good entry point at which to buy.

    I don’t imagine we’ll get the timing perfect, but as an Investment Committee it’s a nice problem to have as we move from one good investment to a potentially better one.

    We have also been deploying some of our cash proceeds into a sector we have favoured for over a year: U.S. real estate. We are very excited about the sources we have for U.S.-based investments in this space: Proven operators buying at distressed prices. Not a bad combination. Through them, we have built and are continuing to add to a broad and diversified portfolio of properties ranging from residential to commercial.

    When tragedy occurs… easing the burden for widowed spouses

    shutterstock 67336159 Adjust 150x150 When tragedy occurs… easing the burden for widowed spousesIt is a sad truth that we all experience loss in our lives at some point. The death of a spouse is a distinctively devastating event that is among the most difficult a person can experience.  One person who knows is our own, Kelly Willis, Vice President of Marketing and Client Relationships here at Newport Private Wealth. Kelly’s husband, Skip Willis passed away in January of 2011 after living with cancer for two years, leaving her to cope with emotional, lifestyle and financial reorganization and adjustment. [read more >>]