Market Outlook Dec 15, 2014

The sky is falling. The US stock market finally suffered similarly to other markets around the world and dropped precipitously. The only assets that are looking up are gold and bonds. That is a very bad sign (in the short term). As a side note, small caps (as could be expected) are doing worse than anything. I noticed a while ago that small caps were “cheaper” than large caps and bought in. Now I hate my stocks.

For the near future, bonds are the place to be, when compared to any other asset class. I no longer expect a Santa Claus rally, and I expect this rout will last (in Canada, at least) until oil prices look prepared to recover. This may be a general correction of the previously optimistic outlook to a stance of greater pessimism. Animal spirits, what?

Market Outlook December 8, 2014

Last week was not a good one for investors. Stocks fell by 1.5% and bonds fell by 0.5%. This week appears to be off to a rough start, and may be no better. My view of the market indicates that this will not be a good week to be invested in stocks. Which is unfortunate for me, because I don’t always take my own advice (I’m invested in stocks).

Amongst the various markets and asset classes that I compare, the Chinese stock market (FXI) has taken the lead. Other indices that have a positive outlook include European stocks CDN$ (XIN), US large caps (SPY) and small caps (IWM), gold (IGT) and bonds (XBB). When gold and bonds present good momentum, it doesn’t bode well for stocks.

Market Outlook December 1, 2014

Well, that was not a fun week to own stocks. Small caps were particularly painful (from experience), large caps didn’t do very well in Canada and even gold fell. US large caps (SPY) continue to carry the day. Bonds also rose while interest rates fell. Momentum has shifted from stocks (which I thought were improving) back in favour of bonds. I would maybe not act immediately on this new signal, but stocks could produce a rough ride over the next couple weeks. I’m buckling up and shutting my eyes tight until next week…

Market Outlook November 24, 2014

Inflation jumped higher last week. Actually, it was last month that the increase took place, since the measurement is not only backward-looking, but it is delayed. Inflation for October (year-over-year) was 2.4%, an increase from 2.0% in September. That’s not too much higher than the Bank of Canada target, so it probably won’t result in policy or quantitative tightening. But it does indicate that the economy has been heating up, which is a nice change. Besides August, the last time the reading from interest rates and inflation was this robust was in June 2012. It’s nice to think that this might indicate the return of economic strength.

Stocks were positive for the fifth week in a row, rising 6.97% over that time. Just to clarify, I’m referring to Canadian large-cap stocks, using XIU as a proxy. That doesn’t quite make up for the correction, as they’re still down 2.17% below the level in mid-September. Small caps are faring worse, but I still believe that stocks present a better outlook than bonds. Between the various asset classes, US large-caps (SPY) still have the advantage.

I sold my momentum stocks to buy a stock that I know and have a long history with, that’s been beat up. I’m betting that it will recover, and will pay me a nice dividend in the meantime. For the moment, however, it feels a little like catching a falling knife, something that I’ve experienced more often than I’d like to admit.

Trading on margin may force you to sell low

I’ve been investing with margin. In my account, I used all the cash to buy stocks. Then, I applied for the bank to extend me margin in my account. As an example, I bought 1000 shares of Artis REIT (AX.UN) with cash. Then, I was able to buy another 3000 shares of Artis REIT (although it could have been any shares with an equal dollar value) on margin, because I only need to provide cash for 30% of the share purchase (of TSX-listed shares over $5.00).

The market has been volatile over the past couple weeks. I bought another stock that cost around $7.00 per share. And to be safe, I didn’t use all my margin. But the problem was that the stock fell in price. When stocks fall, there is less margin available, which could result in a margin call (a requirement to deposit more cash). But worse yet, the shares fell below $5.00, at which point I need to provide 50% of the value in cash (not just 30%).

Suppose I had invested $49,000 in a $7.00 stock by buying 7000 shares. I deposit $15,000 and make the purchase, using $34,000 margin. If the shares fall in price to $6.00, I have $42,000 of stocks, but my $15,000 (that I deposited in cash) is now worth only $12,857. The proportion remains the same, so there’s no margin call, unless I also had other stocks fluctuating. But if the stock falls to $4.00, the “cash” portion is only worth $8,571 and the shares only qualify for 50% margin, so I can only own $17,142. However, I would hold $28,000, so I either need to deposit another $10,858 or sell shares at a loss.

A margin call can either be triggered by shares of a single company losing value within a portfolio, or by share prices descending below $5.00 (on the TSX) and not providing as much marginable value. The same could happen for shares that are de-listed from the TSX and moved to the TSX-Venture.

Market Outlook November 17, 2014

It’s been a frustrating week for me in the market, and I don’t mind admitting that it’s got me down.

Looking at the market objectively, as a whole, stocks had a decent week and appear to be solidly in place ahead of bonds. While the outlook is never certain, it seems that the worst may be behinds and with some luck, we may experience a “Santa Claus rally.” US stocks still seem to be top of the heap, with large caps (SPY) edging ahead of small caps (IWM).

That’s all I’m going to say for now. I have to decide on trades to place in my accounts to try and right this ship.


Investment Ideas

Canadian Stocks

BlackBerry (BB) is a maker of electronic devices (that’s still around). It has a market cap of $6.6 billion. It has cash on its balance sheet, so it has a positive price/book of 1.79, but it is losing money (negative profit), so there’s no PE. It also has debt, with a debt/equity ratio of 43.4%.

Agrium (AGU) is a crop, seed and agronomics company with worldwide operations. It has a market cap of $16 billion, a PE of 20.5, price/book of 2.24 and debt/equity ratio of 71.5%. I sold Canadian Tire to buy Agrium this week.

US Stocks

Amgen (AMGN) is a biotechnology company that develops human therapeutics. It trades on the NASDAQ and presently has strong momentum. The stock came out of the recent correction really well. It has a market cap of $123 billion, a PE of 25.5, price/book of 4.81 and debt/equity of 130%.

VISA (V) is a well-known credit card and electronic payments company. It has good momentum, although it may have been just a recovery from the correction and it may go no further, but it has better momentum than other US large caps with the exception of Amgen. It’s larger, with a market cap of $154 billion, a PE of 35.2 (less room for price growth), price/book of 7.2 (same problem) and no debt (very good for stability).

General Dynamics (GD) is an aerospace and defence company. In short, they build missiles and I won’t invest in this type of company (but that’s my personal choice). Market cap of $46.77 billion (larger than most Canadian companies), a PE of 21, price/book of 3.57 and debt/equity of 30%. Based on these statistics, it looks more attractive than Amgen.

Texas Instruments (TXN) is the one that I’ve bought for this week (based on momentum). Its momentum put it ahead of Gilead, which I sold. Its market cap is $54.4 billion and its PE is 22.7 with price/book of 5.1. I calculated debt/equity ratio of 70%.

Market Outlook November 10, 2014

The stock market barely moved over the past week, while bonds produced some positive growth. That is a little surprising, seeing as interest rates are unchanged from a week ago. But as a result, stocks and bonds have roughly equivalent momentum.

What I’ve noticed in my portfolios is that large caps have done okay, but small caps have still not recovered from the market correction, and continue to have reduced prices. If anyone is shopping for sales, look at Canadian small cap stocks.

Amongst the asset classes / markets that I compare, US small caps (IWM) and US large caps (SPY) continue to lead. Canada continues to trail and Brazil is a basket-case.

Market Outlook November 3, 2014

Bonds fell back slightly over the past week, while stocks made some progress. As a result, the narrow advantage the stocks enjoyed in momentum over bonds, has now improved somewhat. It appears to be a good time to invest in stocks, and to shift portfolio weightings to favour stocks.

Another indicator that stocks are poised to do well is the positive performance of US stocks. Small caps (IWM) have particularly good momentum, compared to other asset classes, with large caps (SPY) not too far behind. Most other asset classes are now neutral or slightly positive, with the notable exceptions of Canadian small caps and gold.

Over the coming week, I will continue to own Gilead (GILD-US), which has served me well. However, General Dynamics  (GD) and Amgen (AMGN) both may warrant a look. In Canadian stocks, Agrium (AGU) looks attractive.

Market Outlook October 27, 2014

I’m satisfied that the market correction is over. From the top to bottom, the TSX composite fell by almost 11%. It is very normal to experience a correction of this magnitude every year or two. (And very normal for it to arrive in October, for whatever reason.) Stocks have regained their momentum, although not universally across market segments. Real estate seems to have the advantage at present, which is a defensive stance.

The positive week that stocks experienced, gaining 2.56%, doesn’t undo the damage of the correction. That makes it a good time to buy, as everything is (likely) on sale. In a balanced portfolio, stocks should be target-weighted, compared to bonds, for the present.

Real estate stocks (XRE) have the best momentum among asset classes that I track. Only Hong Kong stocks (EWH) and bonds (XBB) also have positive momentum, and they are roughly equal at this point. As a side note, Brazil stocks are in the toilet. How do you say “Sorry, guys” in Portuguese?

Among individual stocks, Gilead (GILD) in the US continues to appear attractive. I sold it for cash during the correction, but that turns out to have been a mistake. I initially bought it at $90.40 (in mid-July), then sold at $102.06 on Oct 17, when it was clear that markets were correcting. I avoided the bottom ($96.16), but I also missed the rebound and it closed at $110.71. Not only did I miss out on 8.5% growth, I also paid a transaction fee to get out, and I’ll pay another to get back in. In this case, buy-and-hold would have served me better.