Ryan Lewenza: TD Wealth 2014 Technical Outlook
Transcript of Ryan Lewenza: TD Wealth 2014 Technical Outlook
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Report prepared by:
Ryan Lewenza, CFA, CMT
Table of Contents:
Market Cycles ....................................... 2
U.S. Equity Outlook .............................. 5
U.S. Sector Recommendations ............ 7
Canadian Equity Outlook ...................... 9
Canadian Sector Recommendations .. 10
International Equity Outlook ............... 12
Intermarket Picture ............................. 14
U.S. Stock Recommendations............ 18
Canadian Stock Recommendations ... 20
This Document is for distribution to Canadian clients
only.
Please refer to Appendix A in this report for
important information.
2014 Technical Outlook
The technical profile for the S&P 500 Index (S&P 500) remains very bullish, in our opinion. The S&P 500 has
been in a long-term uptrend since its 2009 lows, consistently making higher highs and higher lows. We
believe the S&P 500 is poised to move higher in 2014; however, we see the potential for a pullback in H1/14,
before entering the seasonally strong Q4.
From a cycle perspective, both the four-year cycle low and Presidential Cycle are forecasting modest gainsthis year. From a secular perspective, we believe the 13-year bear cycle for the U.S. equity markets could be
over. If we are correct, the U.S. stock market could post above-average returns in the years ahead.
Preferred U.S. sectors include the industrials and health care. At risk sectors include telecommunications
and utilities.
We believe the Federal Reserves (Fed) tapering of its asset purchases will lead to a stronger U.S. dollar
and higher long-term bond yields. The stronger U.S. dollar could provide a headwind to commodity prices.
The S&P/TSX Composite Index (S&P/TSX) broke above key resistance at 12,900, potentially opening the
door to more upside in 2014. However, we see headwinds for commodity prices and with the resource
sectors (materials and energy) representing roughly 40% of the S&P/TSX, upside for the index could becapped around 14,300-14,600 in 2014.
Preferred Canadian sectors include industrials and financial services. At risk sectors include the utilities and
telecommunications.
The emerging markets continue to struggle and underperform relative to the developed markets. We believe
emerging markets will remain range-bound and underperform the developed markets in 2014.
U.S. stock recommendations include Huntington Bancshares Inc. (HBAN-Q), Honeywell International
(HON-N), CSX Corp. (CSX-N), andMedtronic Corp. (MDT-N). Canadian stock recommendations include
Manulife Financial Corp. (MFC-T), Enerplus Corp. (ERF-T), Davis + Henderson Corp. (DH-T) andAecon Group Inc. (ARE-T).
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10
100
1000
10000
100000
'09 '14 '19 '24 '29 '34 '39 '44 '49 '54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09
Dow Jones Industrial Averagelog scale
The DJIA broke out of its 13year range, thus potentially
ending its secular bear market.
Market Cycles
I. Long-Term (Secular) View
Equities tend to trade in long-term (secular) bull and bear
cycles, lasting on average 14-15 years.
Since the 2000 market peak, the U.S. equity market has been in
a secular bear market, with both the Dow Jones Industrial
Average (DJIA) and S&P 500 range-bound and essentially
unchanged.
In 2013 the DJIA and S&P 500 broke out of their long-term
trading ranges and made new all-time highs.
We believe the break above key long-term resistance levels
could mark the end of the 13-year secular bear market and the
beginning of the next secular bull market. If we are correct, the
stock market could post above-average returns in the years
ahead.
The pushback on this thesis is that historically, secular bear
markets have ended with single-digit P/E ratios. For example,the S&P 500 P/E troughed at 7x in the late 1970s versus the
trough of 10x in 2009. From our perspective, the 10x P/E trough
in 2009 was close enough, and we prefer to focus on price, withthe U.S. equity markets clearly breaking out of their 13-year
trading range.
Source: Bloomberg Finance L.P. As of January 3, 2014
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100
10000
'50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Dow Jones Industrial Average
log scale
?
II. Four-Year Cycle Low
Another market cycle we track is the four-year cycle low, which
captures the tendency of the U.S. stock market to decline and
put in a low roughly every four years.
This fairly consistent pattern was identified by Charles Dow,
founder of the Wall Street Journal, when he referenced the
existence of the market cycle in 1900 stating, we have
frequently demonstrated that the stock market, while full of short
fluctuations, has a continuing main movement, which often runs
in one direction for three or four years at a time.
The four-year cycle low is largely driven by the business cycle,
which captures the ebbs and flows of the U.S. economy.
In the accompanying chart we illustrate this market pattern, witharrows indicating the cycle lows. It is important to emphasize
that: 1) the lows do not occur exactly every four years, asnothing, especially the stock market, is that predictable; and 2)
there are occasions, notably 1986 and 2006, when the cycle
was delayed, with the correction occurring 1-2 years later than
anticipated.
This cycle low is projected to occur in 2014, so it is possible the
equity markets could experience a pullback (i.e., 5-10%)sometime this year.
However, as outlined in the following pages, we would view thisas a buying opportunity.
Source: Bloomberg Finance L.P. As of January 3, 2014
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6.35.3
16.1
6.1
15.4
3.0
15.2
10.2
-1.8
7.4
17.0
2.6
-5
0
5
10
15
20
Year 1 Year 2 Year 3 Year 4
S&P 500 Y/Y % Chg Based on Presidential Term
All Presidents
Democrats
Republicans
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
Stylized Presidential Four-Year Cycle
Year 1 Year 2
We're here!
Year 3 Year 4
III. Presidential Cycle
Finally, we also monitor the Presidential Cycle, which captures
the tendency for the stock market to perform poorly in the earlyyears of a Presidential term and stronger in the later years of
the term.
The rationale behind this phenomenon is that the President andhis party implement policies to boost the economy in an effort to
secure re-election.
While some dispute this theory, largely on the belief that
markets are efficient and therefore not susceptible to recurring
trends, we believe it has some merit, as statistical evidence
seems to support the thesis.
As illustrated in the accompanying chart, the stock market tends
to underperform during the second year of the Presidential term,
with average gains of 5.3%, which is below the long-term
annual average return of 7.5%, and the lowest return over the
four-year Presidential Cycle. Moreover, for the period studied,
the market has experienced a positive return 53% of the time in
the second year of the Presidential term, which is the lowest
level of occurrences of positive returns over the full cycle.
In the second chart we illustrate the typical or stylized return
pathway over the four-year Presidential Cycle.
Typically year 2 begins strong before declining into the fall andthen rallying in Q4.
Interestingly, this is our expected path for the equity markets in
2014.
Source: Bloomberg Finance L.P. As of January 3, 2014
Period is 1945-2013
Source: Bloomberg Finance L.P. As of January 3, 2014Period is 1945-2012
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U.S. Equity Outlook
S&P 500 Index
The technical profile for the S&P 500 remains very bullish, in our
opinion. The S&P 500 has been in a long-term uptrend since its2009 lows, consistently making higher highs and higher lows.
This uptrend is captured by the bullish upward channel as
defined by the blue dotted lines. The S&P 500 is trading above
its rising 50-week simple moving average (SMA) and its 65-
week exponential MA (EMA), which provide additional signs of
technical strength. These MAs have proven to be important
support and resistance levels for the S&P 500 over the years.
We believe the S&P 500 is poised to move higher in 2014;
however, we see the potential for a pullback in H1/14, before
entering the seasonally strong Q4.
Our call for a pullback in H1/14 is predicated on the following: 1)
from an Elliot Wave perspective, we believe the S&P 500 is
currently in a primary Wave 3, which if correct, could result in a
Wave 4 pullback; 2) investor sentiment remains heavily skewedto the bullish side, which from a contrarian perspective could
precipitate a pullback; 3) the S&P 500 is technically overboughton a weekly basis; and 4) the U.S. Federal Reserve announced
that it will begin tapering its asset purchases in January, and
there could be an increase in volatility around this event.
Although we could see a pullback in the coming months, we
would view this as a buying opportunity as we expect the S&P
500 to hold above its rising 50-week SMA and 65-week EMA.
Following the expected pullback, we believe the S&P 500 could
ultimately rally to new highs and are targeting 1,900-1,950. This
range is the convergence of resistance levels from the upward
channel off the November 2012 low and an Andrews Pitchfork
channel.
Key levels on the downside that could cause us to re-evaluate
our bullish stance are a break below key weekly MAs (currently
around 1,650) and 1,575, which was resistance in 2007 but has
become support.
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NYSE Advance/Decline Line
Supporting our constructive stance are two observations. First,
the NYSE Advance-Decline (A/D) line continues to make new
highs, thus confirming the new price highs on the major U.S.
equity indices. The A/D line captures the cumulative sum total of the advancers
less decliners. Essentially it captures market breath, and often isa leading indicator of the U.S. stock market.
The A/D line is making new highs which reflects the broad
participation in the equity market and is a sign of market
strength.
The A/D line tends to peak before the stock market, and we are
watching it closely. At present, it remains bullish and supportive
for the stock market.
Dow Theory
Another bullish technical confirmation is the Dow Theory buy
signal that was registered in December 2013.
The recent new high on the Dow Transports confirms the new
highs on the Industrials, which according to Dow Theory is abuy signal for the U.S. equity market, and a sign of market
strength.
According to Dow Theory, the market remains in a primary
uptrend with no signs of a divergence.
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U.S. Sector Recommendations (Preferred)
S&P 500 Industrials Sector Index
The technical profile for the S&P 500 Industrials sector remainspositive. The sector is trading in a well-defined upward channel
and continues to be supported by its rising 50-day MA. On a
relative basis it broke to new highs in 2013 and continues totrend higher.
With a supportive macro backdrop, and a constructive technical
profile, the U.S. industrials sector looks set to outperform in2014.
S&P 500 Healthcare Sector Index
Despite the U.S. healthcare sectors very strong performance in
2013 (up 38.7%), the technical profile remains bullish and we
see it outperforming in 2014.
The sector is trading in a well-defined upward channel, is above
its rising 50- and 200- day MAs and is exhibiting strong relativeperformance. In addition, with it trading at new all-time highs, the
healthcare sector will not have to contend with overhead
technical resistance as it moves higher.
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U.S. Sector Recommendations (At Risk)
S&P 500 Telecommunications Sector Index
In 2013 we adopted a cautious stance with respect to the U.S.telecommunications sector, which given the sectors poorrelative performance proved to be the correct call. We remain
cautious on the sector and expect continued underperformance.
The sector is in a long-term price uptrend. However, it is forming
a triangle pattern and quickly approaching the apex. We expect
this technical pattern to be resolved soon, likely to the downside.
Other negatives include: 1) the sector has been encounteringresistance at its 50-day MA in recent months; 2) there is a
potential long-term head and shoulders top forming; and 3) the
sectors relative strength remains weakand it has been making
new relative lows (red circle).
S&P 500 Utilities Sector Index
We also expect the U.S. utilities sector to underperform in 2014.
The sector remains in an intermediate downtrend and iscurrently finding resistance at its 50-day MA. Moreover, on a
relative strength basis, the sector remains in a confirmeddowntrend. We recommend an underweight in the sector.
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Canadian Equity Outlook
S&P/TSX Composite Index
The S&P/TSX recently broke above a key resistance level,potentially opening the door to more upside in 2014.
12,900 has been a key resistance level for the S&P/TSX over
the last two years and it broke above this in Q4/13.
More importantly, it subsequently broke above its long-term
downtrend (green circle), with next resistance at the 14,300
level. The break above the downtrend completes a large triangle
formation. With triangles typically continuation patterns, this
breakout points to further upside.
However, we see headwinds to commodity prices, and with theresource sectors (materials and energy) representing roughly
40% of the S&P/TSX, upside for the index could be capped at14,300-14,600 in 2014.
On the downside, a break below the 12,775-12,900 range would
likely cause us to re-evaluate our upside technical target. 12,900
represents previous resistance, which is now support and
12,775 is the 200-day MA. Additionally, the 50-week SMA and
65-week EMA are around 12,800. Therefore, we consider the
12,775-12,900 range to be critical and it needs to hold on any
short-term weakness.
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Canadian Sector Recommendations (Preferred)
S&P/TSX Capped Industrials Index
We are reaffirming our bullish outlook for Canadian industrials.
The sector remains in a long-term uptrend, is trading above itsrising 50-day MA, and is exhibiting good relative strength.
It outperformed in 2013 and we believe this could happen again
in 2014.
S&P/TSX Capped Financial Services Index
Our technical outlook for the Canadian financials sector is also
constructive. It is trading in a well-defined upward channel,continues to move higher with its rising 50-day MA, and is
outperforming the broader market.
Recently, there have been some notable short-term trend breaksamong the Canadian banks, which could be foreshadowing
short-term weakness. However, the long-term trend remainsconstructive and we would view any short-term weakness as a
buying opportunity.
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Canadian Sector Recommendations (At Risk)
S&P/TSX Utilities Capped Index
Similar to our U.S. sector recommendations, we remain cautiouson the Canadian interest-sensitive sectors.
The Canadian utilities sector continues to trade in a downward
channel and is showing weak relative strength.
The sector has rallied from its September lows and is findingresistance at its upper channel line and the 50-day MA. There isalso stiff resistance in the 210-215 range. Given the confluenceof resistance levels and continued weak relative strength, werecommend investors underweight the sector in portfolios.
S&P/TSX Capped Telecommunication Services Index
We also expect the Canadian telecommunications sector to
underperform in 2014.
The sectors long-term uptrend was broken in June 2013, on
concerns of increased competition. Although the sector hasrecovered most of its losses from the summer, it is now
approaching significant overhead resistance in the 120-122.5
range.
Its relative strength remains in a downtrend, capturing its trend
of underperformance since April 2013.
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International Equity Outlook
Vanguard European ETF
European equities, as measured by the Vanguard EuropeanETF (VGK-N), posted strong gains in 2013, but are quickly
approaching significant technical resistance, which should leadto a pause in the uptrend.
Using VGK as a proxy for Europe, the ETF is trading in a solid
uptrend, but is quickly approaching stiff resistance at $60 to $65.
This resistance dates back to its 2007 highs, which we suspect
will lead to some consolidation in the coming months.
Positive technical observations include: 1) volume increased
significantly in H2/13, which reflects the strong positive funds
flows; 2) the ETF is exhibiting strong momentum; and 3) is
trading above its rising 50-week SMA and its 65-week EMA. Negative technical observations include: 1) it remains in a long-
term relative downtrend versus the S&P 500; and 2) the stiff
technical resistance in the $60 to $65 region.
Overall, we see further gains for European equities, but upside
could be muted, given the overhead resistance.
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iShares MSCI Emerging Markets ETF
The emerging markets continue to struggle and underperform
relative to developed equity markets.
Using the iShares MSCI Emerging Markets ETF (EEM-N) as a
proxy for emerging markets equities, the ETF has been range-
bound between roughly $35 and $44 over the last two years.
The weak technical profile leads us to believe that emerging
markets will continue to lag developed equity markets based on:
1) EEM remains range-bound, with stiff resistance up to $47.50;
2) momentum remains weak; and 3) it remains in a clear relative
downtrend versus the S&P 500.
Overall, we believe EEM will remain range-bound. For traders,
an attractive entry point for EEM is $35.50.
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Intermarket Picture
I. Interest Rates
We see the potential for long-term bond yields to move higher
this year, but expect the benchmark U.S. 10-year bond yield to
be capped in the 3.5% to 3.9% range.
This view is predicated on three key factors. First, the
components of the nominal 10-year bond yield (real yield andinflation) should remain contained as U.S. GDP growth remains
subdued, and inflation remains muted. Second, the long-term
trendline comes in around 3.8%, which should provide stiff
resistance. Finally, with the short-end of the curve likely to stay
fixed at very low levels through 2014, the long-end of the curvecan only move up so much, based on the historical relationship
between the long and short ends of the yield curve. In the lower
panel we chart the yield curve (2s and 10s) and note that the
spread has historically peaked in the 2.5% to 3% range.
Therefore, assuming this relationship holds, the 10-year bond
yield can only move so high, with the short-end of the curve
remaining fixed.
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II. Currencies
U.S. Dollar Index The U.S. dollar was up modestly in 2013, but was essentially flat
over the last two years. We expect it to grind higher in 2014, on the back of the Feds
taper of its asset purchases.
We believe it will retest its 2013 highs around the 84 level, and
possibly break above this level in 2014.
On the downside the U.S. dollar needs to hold the Q4/13 low of79.26 to maintain its bullish technical profile. A break below this
level could signify a major trend change.
Canadian Dollar The Canadian dollar declined 6.5% in 2013 and the technical
outlook remains weak.
The Canadian dollar broke below key technical support of
US$0.95.
In the near term, we believe the Canadian dollar is oversold,and is setting up for a bounce.
However, if the Canadian dollar cannot break back above the
key US$0.95 level, it is likely to head lower, possibly to next
support at US$0.85.
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III. Commodities
CRB Commodity Index
The CRB Commodity Index remains in a long-term downtrend,and below its declining 65-week EMA.
It is quickly approaching an important support level at 268,
which represents the 2012 lows.
A break below this level would be bearish for the commoditycomplex, with next supports coming in at 249, followed by 220.
To become more bullish on commodities, we would need to see
the CRB Index break above its downtrend and 65-week EMA,
which converge around the 285 level. Until then, we remain
cautious.
West Texas Intermediate (WTI) Oil Price
Similar to 2013, we expect the WTI oil to trade in a rangebetween US$85/bl and US$110/bl in 2014.
The WTI oil price is at important uptrend support, which if
broken, would open the door for a retest of the next support atUS$85/bl.
With oil prices typically weak in January and February, we see
the potential for WTI to break below its uptrend and decline into
the US$80s/bl before staging a rally in the early spring, ahead of
the U.S. driving season.
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IV. Gold
At the beginning of 2013 we had a constructive technical
outlook for gold, however, we turned negative on the metal in
mid-2013. On an intermediate and short-term basis, gold remains in a
confirmed downtrend since hitting a peak of US$1,798/oz. in
Q4/12. On a daily chart it continues to trend lower while finding
resistance at its declining 50-day MA. Only a break above its
short-term downtrend and 50-day MA, which converge in the
US$1,250/oz. to US$1,275/oz. range, would cause us to revisit
our negative technical view.
On a long-term basis, we view US$1,180/oz as the line in thesand for gold. This is the convergence of its long-term uptrend
from its 2001 lows and its July/December 2013 lows. In our
opinion, a decisive break below this level would open the doorfor significant downside, and likely the end of the long-term bull
market in gold. If this occurs, we would target a decline toUS$1,072/oz., which represents a 50% retracement of its entire
move since 2001.
Overall, our technical view on gold remains negative. Webelieve it is quickly approaching an inflection point which could
determine whether the 13-year bull market has more room to
run, or is at its terminus.
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U.S. Stock Recommendations
Huntington Bancshares Inc. (HBAN-Q)
We remain bullish on U.S. regional banks and believeHuntington Bancshares Inc. (HBAN-Q) has one the strongest
technical charts in the industry.
HBAN is trading in an upward channel, is above its rising 50-
and 200-day MAs, and is exhibiting strong price momentum.
On a relative basis, HBAN continues to outperform the market,
showing strong relative strength.
Honeywell International (HON-N)
Honeywell International (HON-N) is a high-quality industrial
company, with a strong technical profile.
The stock is trading in an upward channel, continues to find
support at its rising 50-day MA, and is trading above its 200-dayMA.
HONs relative trends have flat lined since the summer 2013,
with the stock moving up in-line with the overall market.
However, its price trends remain bullish and we believe it couldmove higher, and possibly begin to outperform the broader
market again in 2014.
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CSX Corp. (CSX-N)
In our 2013 Technical Outlook we recommended Norfolk
Southern Corp. (NSC-N). Given our continued bullish view on
the U.S. rails, we are recommending CSX Corp. (CSX-N) this
year. CSX has been trading in a year-long uptrend, following its base
building in 2012. The stock is trading above its rising 50- and
200-day MAs, and its relative strength is slowly improving.
We see CSXs uptrend continuing and the stock outperforming
in 2014.
Medtronic Inc. (MDT-N)
We recommend an overweight in the U.S. healthcare sector,
and see the medical device industry delivering strong returns in
2014.
Medtronic Corp. (MDT-N) is an attractive stock within the
medical device industry. The stock is trading in a long-term upward channel, and is
above its rising 50- and 200-day MAs.
Its relative trends remain bullish, with the stock recently making
a new relative high.
We see the potential for new highs for MDT in 2014.
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Canadian Stock Recommendations
Manulife Financial Corp. (MFC-T)
Manulife Financial Corp. (MFC-T) is one of our top picks for2014, based on its strong technical profile.
MFC is trading in a well-defined upward channel and is trading
above it rising 50- and 200-day MAs.
Its relative strength remains strong, with it registering a new
relative high in Q4/13.
Additionally, its volume trends remain very supportive, with thestock advancing on heavy volume, and its On Balance Volume
(OBV) indicator moving higher.
The stock is overbought in the short term which could result in
some backing and filling. We would buy the stock on any short-
term weakness.
Enerplus Corp. (ERF-T)
Enerplus Corp. (ERF-T) has a bullish technical profile, and we
see it moving higher in 2014.
The stock is trading in an upward channel, and is above its
rising 50- and 200-day MAs. It continues to outperform the
broader market, a sign of positive relative strength.
Next technical resistance comes in at the low $20s to mid $20s,
which is our technical target in 2014.
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Davis + Henderson Corp. (DH-T)
Davis + Henderson Corp. (DH-T) has significantly outperformed
the S&P/TSX over the last few years, and we see this
continuing in 2014.
The stock is trading in a strong upward channel, is above itsrising 50- and 200-day MAs, and continues to exhibit strong
relative strength.
Volumes trends remain supportive, with the OBV indicator
continuing to trend higher and making higher highs.
Despite the strong returns in 2013, we believe the technical
profile for DH remains attractive.
Aecon Group Inc. (ARE-T)
Aecon Group Inc. (ARE-T) broke out of a long-term base in the
fall of 2013, and we see the potential for additional upside.
The stock is trading in an upward channel and is above its rising
50- and 200-day MAs.
Its relative strength remains solid, with it making a new relative
high (green circle) in December 2013.
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Appendix AImportant Information
Full disclosures for all companies covered by TD Securities Inc. can be viewed at
https://www.tdsresearch.com/equities/coverage.disclosure.actionPlease note TD Securities Inc. research and disclaimers are available in English only.
______ _________________ _________________ ______ ______________________ _________________ ________
Company Ticker Disclosures_____________________________________________________________________________________________
Huntington Bancshares Inc. HBAN-Q n/a
Honeywell International HON-N n/a
CSX Corp. CSX-N n/a
Medtronic Corp. MDT-N n/a
Manulife Financial Corp. MFC-T 1, 2, 4, 9, 10
Enerplus Corp. ERF-T 2, 4, 9
Davis + Henderson Corp. DH-T 1, 2, 4, 9
Aecon Group Inc. ARE-T 2, 9
1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12 months with respect to the
subject company.2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12 months with respect to the
subject company.
3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the next three months with respect to
the subject company.
4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject company.
5. A long position in the securities of the subject company is held by the research analys t, by a member of the research analysts household, or in an account over which the research
analyst has discretion or control.
6. A short position in the securities of the subject company is held by the research analyst, by a member of the research analysts household, or in an account over which the research
analyst has discretion or control.
7. A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analysts household, or in an account over which the
research analyst has discretion or control.
8. A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analysts household, or in an account over which
the research analyst has discretion or control.
9. TD Securities Inc. and/or an affiliated company is a market maker, or is associated with the specialist that makes a marke t, in the securities of the subject company.
10. TD Securities Inc. and/or affiliated companies own 1% or more of the equity securities of the subject company.
11. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the preparation of this report has, during the preceding 12 months,
provided services to the subject company for remuneration.
12. Subordinate voting shares.
13. Restricted voting shares.
14. Non-voting shares.
15. Common/variable voting shares.
16. Limited voting shares.
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