Welcome to the December 2019 issue of Marche Monthly.

What’s an Ovintiv? How do you say Buttigieg? Does the stock market care about Trump’s impending impeachment?

All this – and how to make the most tax-efficient donation this December – in the decade’s last edition of Marche Monthly.

WHAT’S AN OVINTIV?
It’s a company that is leaving Canada, and has pointedly left out the Canadian reference in its original name, Encana.
 
As I mentioned in the November issue of Marche Monthly, in our federal election there was no meaningful policy discussion about Canadian competitiveness. But it is very much an issue, as shown by the departure of Encana’s head office to Denver and the company’s renaming to the rather (OK, completely) perplexing Ovintiv.

Encana was once the largest company in Canada. Not only are they moving their head office to the States, there is a rumour that they will sell their Canadian operations completely.

Why would a company move to the US? Many reasons, including the more favourable regulatory environment and a larger market from which to attract capital, which provides more opportunity to grow. Not to mention more opportunity to get your product to market, considering we have not been building pipelines in Canada.

The Encana story is an important one in terms of our national economy and because of the impact on Calgary and Alberta as a whole, but here is some good news: we are completely unaffected by it. Your friends might need to be concerned about it, but not you, because we tend to avoid owning any companies that are dependent on the price of  Canadian oil (or for that matter, any other commodity). Because we like companies that are stable with predictable recurring revenues, Canadian oil does not fit that profile.

It trades at a discount to West Texas Intermediate, the US benchmark oil, because it is more difficult to refine, has to travel longer distances to US refineries – and again, we have not been building pipelines in Canada.

Will the pressure being applied by Jason Kenney (you may have seen his “I love Canadian oil and gas” hoodie during the coin flip at the Grey Cup) get those pipelines built? It’s a toss-up.

BILL AND DON
I was curious about the effect that the impeachment process might have on the US economy, so I had a look at how it did during the Bill Clinton impeachment of 1998-1999.
 
What I found out is fascinating. From Clinton’s impeachment in the House of Representatives to acquittal in the Senate, a process that ran from October 1998 to February 1999, the US stock market went up 28%, driven by falling interest rates and a reduction of trade tensions with China.

Starting to sound familiar?

Since the start of Trump’s impeachment hearings, the market has risen roughly eight percent, driven by dropping interest rates and phase one of a trade deal with China.

So here is the takeaway: the market does not care about impeachment. Interest rates and the American trade war with China – those are the things that the market cares about.

TRILLION WITH A “T”
And, it cares about the US election next year.
For example, Elizabeth Warren has been falling in the polls ever since the announcement of her Medicare for All plan, costed at…wait for it…$52-trillion. The stock market, which can’t contain its happiness at her receding popularity, has risen as a result.

Joe Biden remains the front runner, which the market seems to be comfortable with. Keep in mind, of course, that the market is very comfortable with Trump.

As a sidebar, everyone is wondering how to pronounce the name of Pete Buttigieg, the mayor of South Bend, Indiana, running for the Democratic nomination and now leading in Iowa. Is it Butt-ee-geeg? Boot-a-judge? Buddha-judge?

Close, but no cigar. Here is an easy way to remember it, according to the candidate’s Twitter bio:
Boot-edge-edge.
WHY WE CARE
Back to a slightly more important question: why do we care about the US election?
 
Because we always own companies that are domiciled in North America, because we prefer to gain access to the world through Canada and even more so the United States. That way, we gain international exposure by owning world-class international companies, but because they are domiciled in the US, they are subject to that country’s regulations – so we can keep away from foreign markets we do not understand or trust.

Think of companies like Alphabet, MasterCard and Johnson & Johnson, all of which we own. Big American-based companies that have global operations, giving us international exposure.

That said, all of the above issues – competitiveness, impeachment, the US election – are macroeconomic, which in the long run, do not impact the earning power of any of the businesses we own. But in the short term, the volatility created by these issues could create opportunities for us to add high-quality companies to our portfolios at favourable prices.

DECEMBER DECISIONS
We have had another very strong year for our clients and their portfolios which means that we don’t have any stocks that are down, that we can sell at a loss, in order to offset capital gains.
But here is the flipside. At a time of year when many people are thinking of making charitable donations, the most tax-efficient way is to donate stocks that have gone way up.

You could simply sell the securities for cash, and then donate the after-tax proceeds – but as this chart shows, that method is not nearly as effective, either for you or the charity.

 

Want to know more? Please do not hesitate to give me a call. And if you want to share this information with someone you care about, please go right ahead and let me know if I can help in any way to communicate the message.

One more note on capital gains. If we need to trigger one, we will do our best to defer it to January if possible, deferring the tax bill to another calendar year. Again please let me know if you’d like to discuss.