Nintendo

The other day, a friend was teasing me for not knowing that the Nintendo stock would take off. Pokemon Go was released in a number of countries worldwide and has proven to be hugely popular. I’ll freely admit that I’ve been playing a lot of Pokemon Go (with and without my kids). It’s a really fun game, well thought out and easy to learn, but broad enough to hold sustained interest. And, unlike the prototype (Ingress), it is monetized. Chances are that Nintendo will do very well from this game.

Their share price (quote) doubled, rising 100% between July 7 and July 22. Wow. The question that I raise is: what is this stock price based on? It’s not based on reported earnings, or anything measurable, it’s based on expectations and a future outlook that seems very rosy. If the stock price doubles, that implies that the earnings will double, based only on a single game. Is that realistic?

Nintendo seemingly didn’t think so. They made a statement, saying that the financial impact from the game will be limited. The market reacted with a 17% drop in Nintendo’s share price on July 25. Some investors still made a huge gain, but I would expect the share price, at this point, to correct back to something more moderate and in-line with real-world earnings.

The stock isn’t easy for investors in North America to buy. It trades on the Tokyo exchange, with ADRs available over-the-counter and on certain European exchanges. On top of that, it’s purely speculative at the moment (and all the gains have probably already been made), I think it’s a very risky stock that isn’t worth my while.

Market Outlook, July 25, 2016

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.57%, the 10 year government bond yield is 1.09% and the long government bond yield is 1.73%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.38%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 2.94%. For small caps, it currently appears to be 3.05%.

Credit Environment

There is almost no preference between government bonds and corporate bonds (top dial). Long bonds are in favour whereas short bonds are not (middle dial). High yield bonds have a small advantage over high quality bonds (bottom dial). Taken altogether, this implies some appetite for risk on the part of investors.
guageguage-1guage-2

Currency

The Brazilian Real (BZF) and Japanese Yen (FXY) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US stocks have the advantage over US bonds:
guage-3
And the same relationship exists in Canada:
guage-4

Global Markets

  • Turkey Investable has changed -15.38% in price since last week’s close. Hardly surprising, given the tumultuous news.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), South Africa (EZA), Indonesia (EIDO), Taiwan (EWT), Chile (ECH), Thailand (THD), Philippines (EPHE), New Zealand (ENZL), Russia (ERUS), Hong Kong (EWH), South Korea (EWY), India (INDA), China (MCHI), Finland (EFNL), UAE (UAE), US S&P 500 (IVV), Australia (EWA), Qatar (QAT), Singapore (EWS), Mexico (EWW), Israel (EIS), Canada (EWC), Norway (ENOR), Spain (EWP), Denmark (EDEN), Netherlands (EWN), Austria (EWO), Switzerland (EWL), Japan (EWJ), United Kingdom (EWU), Poland (EPOL), Belgium (EWK), France (EWQ), Germany (EWG), Sweden (EWD) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,175.03. This is 0.38% higher than last week’s price (2,166.89), and 2.92% higher than last month’s price (2,113.32), and 4.18% higher than the price three months ago (2,087.79), and 14.06% higher than the price six months ago (1,906.90), and 12.09% higher than the price one year ago (1,940.51).The average P/E ratio of the S&P 100 (equal weighted) is 22.71. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.40% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Qualcomm Incorporated (QCOM)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • Biogen Inc. (BIIB)
  • Amazon.com, Inc. (AMZN)
  • Microsoft Corporation (MSFT)
  • Texas Instruments Incorporated (TXN)
  • Cisco Systems, Inc. (CSCO)
  • Morgan Stanley Common Stock (MS)
  • International Business Machines (IBM)
  • Exelon Corporation Common Stock (EXC)
  • Johnson & Johnson Common Stock (JNJ)
  • Simon Property Group, Inc. Comm (SPG)
  • Facebook, Inc. (FB)
  • Lockheed Martin Corporation Com (LMT)
  • Intel Corporation (INTC)
  • Comcast Corporation (CMCSA)
  • Emerson Electric Company Common (EMR)
  • 3M Company Common Stock (MMM)
  • General Motors Company Common S (GM)
  • Union Pacific Corporation Commo (UNP)
  • Pfizer, Inc. Common Stock (PFE)
  • Southern Company (the) Common S (SO)
  • Costco Wholesale Corporation (COST)
  • Caterpillar, Inc. Common Stock (CAT)
  • Amgen Inc. (AMGN)
  • AT&T Inc. (T)
  • Bristol-myers Squibb Company Co (BMY)
  • Duke Energy Corporation (holdin (DUK)
  • Alphabet Inc. (GOOGL)
  • Abbott Laboratories Common Stoc (ABT)
  • Blackrock, Inc. Common Stock (BLK)
  • General Electric Company Common (GE)
  • Alphabet Inc. (GOOG)
  • Exxon Mobil Corporation Common (XOM)
  • Ford Motor Company Common Stock (F)
  • Pepsico, Inc. Common Stock (PEP)
  • Unitedhealth Group Incorporated (UNH)
  • Altria Group, Inc. (MO)
  • Time Warner Inc. New Common Sto (TWX)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company Common S (GM)
  • Ford Motor Company Common Stock (F)
  • Metlife, Inc. Common Stock (MET)

Canadian Stocks

Yesterday’s closing price was 14,600.70. This is 0.47% higher than last week’s price (14,532.40), and 3.32% higher than last month’s price (14,131.40), and 5.83% higher than the price three months ago (13,796.00), and 17.85% higher than the price six months ago (12,389.60), and 9.11% higher than the price one year ago (13,381.60).The average P/E ratio of the TSX60 (equal weighted) is 24.84. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.03% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Teck Resources Limited (TCK-B.to)
  • Yamana Gold Inc (YRI.to)
  • Silver Wheaton Corp. (SLW.to)
  • First Quantum Minerals Ltd (FM.to)
  • Kinross Gold Corp. (K.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Encana Corp. (ECA.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Franco-nevada Corporation (FNV.to)
  • Arc Resources Ltd. (ARX.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Cdn Natural Res (CNQ.to)
  • SNC-Lavalin Sv (SNC.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • Restaurant Brands International (QSR.to)
  • Gildan Activewear Inc. (GIL.to)
  • Dollarama Inc (DOL.to)
  • Metro Inc (MRU.to)
  • Transcanada Corp. (TRP.to)
  • Alimentation Couche-tard Inc Cl (ATD-B.to)
  • Thomson Reuters Corporation (TRI.to)
  • Canadian National Railway Co. (CNR.to)
  • Telus Corporation (T.to)
  • Brookfield Asset Management Inc (BAM-A.to)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), US S&P 500 (SPY), TSX Composite (ZCN.to), MSCI EAFE (XIN.to), FTSE Developed (VDU.to), Gold (IGT.to), Canadian Universe Bond (XBB.to), Natural Gas (HUN.to), Premium Money Market (CMR.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) of gold
  • One unit (20%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks

Market Outlook, July 18, 2016

Whereas June ended on a sour note for stocks, July has seen slow and steady growth. Stocks are more attractive than bonds as an investment at the present, and small caps in Canada look especially strong. The gold price has stopped advancing, and the oil price, which has been falling over the past three weeks, may be stabilizing.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.51%, the 3 year government bond yield is 0.52%, the 10 year government bond yield is 1.05% and the long government bond yield is 1.67%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.38%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 2.99%. For small caps, it currently appears to be 3.10%.

Credit Environment

Government bonds and corporate bonds are equally in favour.
guageLong bonds are far preferred to short bonds.

guage-1

High yield bonds have a bit better momentum than high quality bonds.guage-2

Currency

The Brazilian Real (BZF), Australian Dollar (FXA), Japanese Yen (FXY), and Canadian Dollar (FXC) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
In the US, stocks have the advantage over bonds:
guage-3
And the situation in Canada is similar:
guage-4

Global Markets

  • Austria has changed 6.93% in price since last week’s close.
  • Brazil has changed 5.40% in price since last week’s close.
  • Qatar has changed 5.01% in price since last week’s close.
  • Saudi Arabia has changed 6.23% in price since last week’s close.
  • South Africa has changed 5.40% in price since last week’s close.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), Russia (ERUS), Taiwan (EWT), Indonesia (EIDO), Philippines (EPHE), South Africa (EZA), Thailand (THD), South Korea (EWY), New Zealand (ENZL), Chile (ECH), Australia (EWA), Canada (EWC), Singapore (EWS), China (MCHI), US S&P 500 (IVV), India (INDA), Turkey (TUR), Hong Kong (EWH), UAE (UAE), Israel (EIS), Japan (EWJ), Norway (ENOR), Mexico (EWW), Malaysia (EWM), Finland (EFNL), Qatar (QAT), and Denmark (EDEN) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,161.74. This is 1.15% higher than last week’s price (2,137.16), and 4.03% higher than last month’s price (2,077.99), and 3.22% higher than the price three months ago (2,094.34), and 12.48% higher than the price six months ago (1,921.84), and 3.95% higher than the price one year ago (2,079.61).The average P/E ratio of the S&P 100 (equal weighted) is 22.94. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.36% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Kinder Morgan, Inc. (KMI)
  • Intel Corporation (INTC)
  • Lockheed Martin Corporation (LMT)
  • Amazon.com, Inc. (AMZN)
  • Halliburton Company (HAL)
  • Union Pacific Corporation (UNP)
  • Texas Instruments Incorporated (TXN)
  • Johnson & Johnson (JNJ)
  • 3m Company (MMM)
  • Altria Group, Inc. (MO)
  • Bristol-myers Squibb Company (BMY)
  • Simon Property Group, Inc. (SPG)
  • Pfizer, Inc. (PFE)
  • AT&T Inc. (T)
  • Chevron Corporation (CVX)
  • Comcast Corporation (CMCSA)
  • Medtronic Plc. (MDT)
  • Exelon Corporation (EXC)
  • General Electric Company (GE)
  • Exxon Mobil Corporation (XOM)
  • Emerson Electric Company (EMR)
  • Caterpillar, Inc. (CAT)
  • Unitedhealth Group Incorporated (UNH)
  • Verizon Communications Inc. (VZ)
  • United Parcel Service, Inc. (UPS)
  • Costco Wholesale Corporation (COST)
  • Morgan Stanley (MS)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 14,482.40. This is 0.84% higher than last week’s price (14,361.90), and 4.32% higher than last month’s price (13,882.40), and 5.56% higher than the price three months ago (13,719.80), and 19.95% higher than the price six months ago (12,073.50), and 3.18% higher than the price one year ago (14,036.60).The average P/E ratio of the TSX60 (equal weighted) is 24.74. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.04% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), TSX Composite (ZCN.to), S&P 500 (SPY), Natural Gas (HUN.to), International Stocks (XIN.to) and (VDU.to), Canadian Universe Bond (XBB.to), Premium Money Market C (CMR.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) bonds

Market Outlook, July 11, 2016

Short bonds seem to be going nowhere as investors prefer long bonds. The oil price is dropping, but gold continues to rise. That, along with silver and base metals, is probably what’s supporting Canadian small caps, which are outperforming large caps. Canadian and US stocks are doing okay, but international stocks are not.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.47%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.46%, the 10 year government bond yield is 0.96% and the long government bond yield is 1.55%. The yield curve is inverted in the short end. The Bank of Canada prime rate may rise to slow inflation and economic activity. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.37%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 3.00%. For small caps, it currently appears to be 2.99%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.

Investors presently prefer government bonds over corporate, long bonds over short and high quality bonds over high yield.
guageguage-1guage-2

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian dollar (FXA), and Singapore dollar (FXSG) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US stocks are outperforming bonds:
guage-3
Canadian stocks are also outperforming bonds:
guage-4

Global Markets

Comparing national stock markets, Peru (EPU), Brazil (EWZ), New Zealand (ENZL), Indonesia (EIDO), Philippines (EPHE), Thailand (THD), Russia (ERUS), Taiwan (EWT), Chile (ECH), India (INDA), Singapore (EWS), Australia (EWA), USA S&P 500 (IVV), South Korea (EWY), South Africa (EZA), Canada (EWC), China (MCHI), Turkey Investable (TUR) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,129.90. This is 1.28% higher than last week’s price (2,102.95), and 0.68% higher than last month’s price (2,115.48), and 4.31% higher than the price three months ago (2,041.99), and 9.61% higher than the price six months ago (1,943.09), and 2.10% higher than the price one year ago (2,086.05).The average P/E ratio of the S&P 100 (equal weighted) is 22.61. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.42% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Amazon.com, Inc. (AMZN)
  • Simon Property Group, Inc. (SPG)
  • Halliburton Company (HAL)
  • At&t Inc. (T)
  • Johnson & Johnson (JNJ)
  • Altria Group, Inc. (MO)
  • Verizon Communications Inc. (VZ)
  • Comcast Corporation (CMCSA)
  • Lockheed Martin Corporation (LMT)
  • Exxon Mobil Corporation (XOM)
  • Duke Energy Corporation (DUK)
  • Lowe’s Companies, Inc. (LOW)
  • Southern Company (the) (SO)
  • Medtronic Plc. (MDT)
  • 3m Company (MMM)
  • Costco Wholesale Corporation (COST)
  • General Electric Company (GE)
  • Bristol-myers Squibb Company (BMY)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Metlife, Inc. (MET)
  • Ford Motor Company (F)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 14,259.80. This is 0.01% higher than last week’s price (14,258.90), and 0.14% higher than last month’s price (14,240.00), and 6.24% higher than the price three months ago (13,422.80), and 14.58% higher than the price six months ago (12,445.50), and -0.56% lower than the price one year ago (14,339.50).The average P/E ratio of the TSX60 (equal weighted) is 25.23. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 3.96% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure Etf (ZGI.to), TSX REIT (XRE.to), Natural Gas (HUN.to), TSX Composite (ZCN.to), S&P 500 (SPY), Canadian Universe Bond (XBB.to), Gold (IGT.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
The oil price is falling.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) of gold
  • One unit (20%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) bonds

Forecasting refinement – P/E ratio

The P/E ratio is the ratio of the price of a stock to the earnings of the company. For example, if a share of a company’s stock costs $10 and over the past year the company earnings $1 per share, then the P/E ratio is $10 / $1 = 10. This is then averaged for all companies across a market or index to find the average P/E of the market. If the P/E ratio is high, then people are willing to pay more per dollar of earnings.

In value investing, there is a belief that the P/E ratio is predictive of future stock market performance. When the P/E ratio is high, stock prices are too high and will be expected to decline. When the P/E ratio is low, stock prices will be expected to rise. This assumes that the earning power of corporations drives stock valuations (which seems to be a valid assumption).

However, when looking at the relationship between P/E ratio and stock market performance (the price of the index), there is no correlation from one month to the next. In fact, there is a relatively high correlation in the same month (P is related to P/E, go figure), which isn’t very helpful. It implies that as earnings are announced, almost all investors update their price in less than a month. This result isn’t really surprising. Looking at year-to-year changes didn’t produce a better result.

It could be different for a single company, but for the index average, the earnings only result in simultaneous change, and so have no predictive power.

Market Outlook July 4, 2016

The mood in the market seems pretty somber. We are witnessing a flight to safety, with a clear preference for bonds over stocks, government over corpoI am traveling today, so I’m not able to insert the usual charts and graphics.

Interest Rates

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.55%, the 10 year government bond yield is 1.12% and the long government bond yield is 1.76%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.40%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 2.90%. For small caps, it currently appears to be 3.01%.

Credit Environment
When the dials point left, the credit environment is cautious and risks are priced higher.
Currency
The Brazilian Real (BZF), Japanese Yen (FXY), and Canadian Dollar (FXC) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.
Equities
Where does there appear to be more opportunity right now?
US bonds are in favour more than US stocks

Canadian bonds have greater momentum than Canadian stocks. Canadian small-cap stocks, however, continue to perform really well. I think that’s because of the large number of precious metal producers.

Global Markets
Brazil has changed 9.82% in price since last week’s close.
Chile has changed 5.99% in price since last week’s close.
China has changed 5.75% in price since last week’s close.
Denmark has changed 5.50% in price since last week’s close.
Finland has changed 8.14% in price since last week’s close.
India has changed 5.72% in price since last week’s close.
Indonesia has changed 9.15% in price since last week’s close.
Mexico has changed 6.72% in price since last week’s close.
Norway has changed 6.29% in price since last week’s close.
Russia has changed 5.03% in price since last week’s close.
Singapore has changed 6.33% in price since last week’s close.
South Africa has changed 7.80% in price since last week’s close.
South Korea has changed 5.70% in price since last week’s close.
Spain has changed 8.04% in price since last week’s close.
Sweden has changed 6.02% in price since last week’s close.
Switzerland has changed 5.30% in price since last week’s close.
Taiwan has changed 5.97% in price since last week’s close.
Thailand has changed 5.59% in price since last week’s close.
Turkey has changed 5.49% in price since last week’s close.
United Kingdom has changed 5.49% in price since last week’s close.
Comparing national stock markets, Brazil (EWZ), Peru (EPU), Indonesia (EIDO), Philippines (EPHE), Russia (ERUS), New Zealand (ENZL), Chile (ECH), Taiwan (EWT), Thailand (THD), Singapore (EWS), South Korea (EWY), Canada (EWC) are rising, while other regions appear to be neutral or falling.
US Stocks
Yesterday’s closing price was 2,098.86. This is 3.02% higher than last week’s price (2,037.30), and -0.30% lower than last month’s price (2,105.26), and 1.58% higher than the price three months ago (2,066.13), and 1.72% higher than the price six months ago (2,063.36), and -0.05% lower than the price one year ago (2,099.84).
The average P/E ratio of the S&P 100 (equal weighted) is 22.18. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.51% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

Halliburton Company (HAL)
AT&T Inc. (T)
Verizon Communications Inc. (VZ)
Exxon Mobil Corporation (XOM)
Altria Group, Inc. (MO)
Johnson & Johnson (JNJ)
Duke Energy Corporation (DUK)
Simon Property Group, Inc. (SPG)
Medtronic Plc. (MDT)
Southern Company (SO)
Lockheed Martin Corporation (LMT)
These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

General Motors Company (GM)
Ford Motor Company (F)
Metlife, Inc. (MET)
Conocophillips (COP)
Canadian Stocks
Yesterday’s closing price was 14,064.50. This is 1.24% higher than last week’s price (13,891.90), and -0.51% lower than last month’s price (14,137.00), and 5.46% higher than the price three months ago (13,336.20), and 8.11% higher than the price six months ago (13,010.00), and -3.02% lower than the price one year ago (14,503.00).
The average P/E ratio of the TSX60 (equal weighted) is 24.85. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.02% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

Teck Resources Limited (TCK-B.to)
Barrick Gold Corporation (ABX.to)
Yamana Gold Inc (YRI.to)
Kinross Gold Corp. (K.to)
Silver Wheaton Corp. (SLW.to)
Agnico Eagle Mines Limited (AEM.to)
Franco-nevada Corporation (FNV.to)
Goldcorp Inc (G.to)
First Quantum Minerals Ltd (FM.to)
Eldorado Gold (ELD.to)
Bombardier Inc., Cl. B, Sv (BBD-B.to)
Cdn Natural Res (CNQ.to)
Transcanada Corp. (TRP.to)
Arc Resources Ltd. (ARX.to)
Snc-lavalin Sv (SNC.to)
Fortis Inc (FTS.to)
These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

Power Corporation Of Canada, Sv (POW.to)
Canadian Imperial Bank Of Comme (CM.to)
Other Assets
Crude Oil (HUC.to), Silver (HUZ.to), Natural Gas (HUN.to), Global Infrastructure Index (ZGI.to), TSX REIT (XRE.to), Base Metals (ZMT.to), Gold (IGT.to), Canadian Universe Bond (XBB.to), TSX Composite (ZCN.to), S&P 500 (SPY) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.
Portfolio
A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

One unit (20%) of gold
One unit (20%) real estate
3 units (60%) bonds

 

Stock return forecast for July

In June, I made a forecast for the TSX stock index. I predicted that “there is a 51% chance that the TSX will end the month higher than 14,063.54.” In fact, the TSX finished the month of June at 14,064.54.

For the month of July, I forecast a 62% chance of the market finishing the month higher than 14,064.54. I’m not really going out on a limb, but it’s the best I can do at the moment.

What Brexit taught me about risk

Last week, the UK held a referendum on whether or not to leave the European Union. Setting aside the whole issue of whether or not that was a good idea (I don’t know) or the value of referendums, I learned an investment-related lesson watching the markets react to the surprising news.

I started watching after the voting was complete, but before the count started coming in. I was curious to see what the most likely outcome was, so I looked at polls and the prediction market. The poll that I saw showed that Remain was ahead by 1%, but there was also about 9% undecided. My assumption (erroneous, in hindsight) was that the undecided would be more conservative and would swing toward Remain. The prediction markets made me feel more confident in my assumption. They assigned a probability of approximately 60% to Remain and 40% to Leave. In reality, 6 in 10 isn’t great odds.

Looking at the currency market, after the voting closed but before the results had started to come in, the pound almost immediately began to fall against the US dollar. Either someone (smarter than me) knew something, or nervousness pushed traders to sell off the now-riskier GBP. My conversation with a friend (for your entertainment):

Him “Are you going to bet the farm on the a Remain vote and buy a ton of Pounds?”

Me “I actually would bet on remain. But I don’t think it’s a slam dunk.” Full disclosure: I didn’t bet any money on the outcome.

Him “I think half the results are in and it’s 51.3% leave. Pound is down 14 cents against the dollar. Could it go down 50?”

Me “That’s nuts. It’s hard to believe leave is ahead. The pound could take a serious beating.”

Him “GOOD THING YOU DIDN’T BET THE FARM ON THE POUND”

It’s easy to be overconfident when you have nothing riding on the outcome of a prediction. It made no difference whether I was right or wrong, so I underestimated the uncertainty.

Uncertainty means more than just not knowing the outcome beforehand. Before the vote was counted, we didn’t know which side would win, especially with the polls so close. But uncertainty also means an elevated chance of being wrong. And even with polls that show more concentrated support (eg. Clinton over Trump), there is still the possibility of being wrong (eg. Alberta provincial election 2012).

There is also an asymmetry to the potential outcomes. If Remain had won, the market would have continued it’s slow, positive climb. If Leave had won (as it did), the market would quickly fall (as the UK market did). This is actually typical of the market more generally. Over months and years, it tends to climb slowly, with short period of sharp, quick declines. Because people are generally optimistic and because companies work hard to produce consistent, positive results, the market value of shares climbs slowly over time. There is not much risk of a quick, positive price spike in mature companies. (If it happens, it’s often the result of a miner discovering a large deposit or an innovative manufacturer making a new discovery.)

Because of the market asymmetry and the asymmetry in the expectations for the Brexit outcome in particular, the best strategy, no matter which outcome I thought was more likely, would have been to make a small bet that paid off in the case that Leave won. For example, I could have bought a put option that would allow me to sell the UK index near the current price. If the market rose, I’d lose my small premium. If the market fell (and it tends to fall more aggressively than it rises), I’d get a payoff.

This isn’t a good strategy to follow month-to-month or year-to-year, because it will lead to a “death by a thousand cuts.” It’s also really hard to implement because it requires being constantly pessimistic (which seems to go against human nature) and it will be wrong most of the time (people hate being wrong). But when a big, influential event is on the horizon, or when markets are nervous (elevated volatility) for any reason, this asymmetrical bet on the negative outcome could pay off nicely.

Market Outlook, June 27, 2016

Brexit: 52% of voters in the UK voted to leave the European Union. No one knows how that will shake out, and that’s the real problem. Investors, like all humans, hate uncertainty. The only reason for the price of gold to rise, the price of oil to fall, and the price of most European stocks to fall was uncertainty. There is no immediate reduction in demand or increase in supply, except for traders who don’t want to own risky assets during a period of uncertainty.

I note that North American stocks were affected to a far lesser degree, falling just 1.7% compared to over 8% for Paris. Interestingly, the FTSE 100 (UK index) opened (Friday morning) over 9% lower, but climbed throughout the day and closed only down -3.15% for the day.

At the end of this article, I include a theoretical portfolio. I’ll note here that it shifted out of stocks to all gold and bonds on Thursday morning. This reflects the nervousness in the market, which continues into the coming week.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.54%, the 3 year government bond yield is 0.65%, the 10 year government bond yield is 1.30% and the long government bond yield is 1.92%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.43%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 2.77%. For small caps, it currently appears to be 2.87%.

Credit Environment

The market prefers government bonds, long bonds and high quality bonds. This can be seen as a flight to quality in response to nervousness. Investors are paying more for safety, which means that yields are falling.
guage1guage2guage3

Currency

The Japanese Yen (FXY), Brazilian Real (BZF), Australian Dollar (FXA), Swiss Franc (FXF), Canadian Dollar (FXC), and Singapore Dollar (FXSG) are looking strong relative to the US dollar. The Euro is flat and the British Pound has taken a beating.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds are rising while US stocks are falling:
guage4
Canadian bonds are rising faster than Canadian stocks:
guage5

Global Markets

  • Austria has changed -7.39% in price since last week’s close.
  • Finland has changed -7.53% in price since last week’s close.
  • France has changed -7.36% in price since last week’s close.
  • Germany has changed -5.78% in price since last week’s close.
  • Ireland has changed -5.79% in price since last week’s close.
  • Italy has changed -11.23% in price since last week’s close.
  • Norway has changed -5.31% in price since last week’s close.
  • Qatar has changed -5.53% in price since last week’s close.
  • Spain has changed -12.35% in price since last week’s close.
  • Sweden has changed -8.38% in price since last week’s close.
  • Switzerland has changed -5.60% in price since last week’s close.
  • United Kingdom has changed -6.60% in price since last week’s close.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), New Zealand (ENZL), and Philippines (EPHE) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,037.30. This is -2.21% lower than last week’s price (2,083.25), and -2.53% lower than last month’s price (2,090.10), and -0.86% lower than the price three months ago (2,055.01), and -1.31% lower than the price six months ago (2,064.29), and -3.38% lower than the price one year ago (2,108.63).The average P/E ratio of the S&P 100 (equal weighted) is 21.54. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.64% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Halliburton Company (HAL)
  • Altria Group, Inc. (MO)
  • At&t Inc. (T)
  • Raytheon Company (RTN)
  • Verizon Communications Inc. (VZ)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 13,891.90. This is -0.88% lower than last week’s price (14,015.10), and -1.51% lower than last month’s price (14,105.20), and 3.47% higher than the price three months ago (13,426.20), and 4.57% higher than the price six months ago (13,284.90), and -2.87% lower than the price one year ago (14,301.80).The average P/E ratio of the TSX60 (equal weighted) is 24.55. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.07% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Kinross Gold Corp. (K.to)
  • Yamana Gold Inc (YRI.to)
  • Teck Resources Limited (TCK-B.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Silver Wheaton Corp. (SLW.to)
  • Franco-nevada Corporation (FNV.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Transcanada Corp. (TRP.to)
  • First Quantum Minerals Ltd (FM.to)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)

Other Assets

Silver (HUZ.to), Global Infrastructure (ZGI.to), TSX REIT (XRE.to), Gold (IGT.to), Base Metals (ZMT.to), Canadian Universe Bond (XBB.to), TSX Capped Composite (ZCN.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) of gold
  • One unit (20%) real estate
  • 3 units (60%) bonds

Forecasting refinement – overfitting

In looking to refine my stock market forecasting, I looked at a number of variables to try and find a relationship. I’ve laid them out below, but I’ll spare you the suspense: none of them worked.

That’s not necessarily a bad thing. There are two problems with trying to create a model to forecast stock market movements. The first is that the stock market is where people go to place bets (if you’ll excuse the gambling reference) on the future performance and the future value of stocks. Therefore, the stock market is forward-looking and it is generally considered to be a leading indicator of economic outcomes. The only way to anticipate the stock market is to anticipate business outcomes farther ahead or faster or more accurately than other traders and investors. Those people are professionals and have the resources of large firms at their disposal, so that’s just not going to happen.

The other problem is overfitting. Stock price movements contain information about the aggregate outlook for the company (which changes daily) and for the stock (which fluctuates with supply and demand). The information is a signal, but it is swamped with noise. Stock research, including fundamental and technical, is trying to identify the signal (trend) and ignore the noise. When a model becomes too complex, it is possible for it to capture noise along with (or instead of) the signal, which will lead to faulty interpretation and incorrect forecasting. So I’m happy to rule out potential relationship because it helps me avoid overfitting.

The movement of interest rates affects the financial inputs of businesses, however I found no correlation between interest rate changes and the following month stock market movement.

The change in commodity prices affects the material inputs of businesses, especially manufacturers. There was very little correlation (may explain 2% of change) between commodity price changes and the following month stock market movement. Rather, I found that stock prices and commodity prices tend to move together.

There is a theory that trading volume (supply & demand) produces technical signals. For example, high volume on rising rising prices implies increasing demand and should lead to higher prices. High volume on falling prices implies increasing supply and should lead to lower prices. However, the monthly volume has a low correlation with the following month stock market movement.

The last variable I looked at was employment / unemployment numbers, and I found almost no correlation with the following month stock market movement. Because of the time it takes to compile and publish employment statistics, the numbers are from two months ago, so it would have to influence stock returns three months later, for example through increased savings (from higher employment) or increased selling (from unemployment). This doesn’t appear to be the case.

Model so far:

    • This can be refined, given the month of the year (although it’s been less pronounced recently):
Monthly average increase % positive
January 0.95% 59.46%
February 0.92% 59.46%
March 0.57% 56.76%
April 0.89% 56.76%
May 1.39% 62.16%
June -0.43% 45.95%
July 0.67% 62.16%
August 0.68% 59.46%
September -1.62% 43.24%
October -0.15% 56.76%
November 1.46% 64.86%
December 1.83% 81.08%
 Average monthly increase 0.60%
  • Stocks are likely to rise 59% of the time. May +5%, June -10%, September -15%, October -5%, November +5%, December +15%
  • If last month was positive, this month is 5% more likely to rise (coefficient of correlation of 0.233)
  • If last month was negative, this month is 7% less likely to rise

I freely admit that it’s not a great model. I’d only expect to be right about 3 times out of 5, and that’s only about direction, not magnitude. But sometimes I think it’s better to be aware that we really don’t know, than to think we know and be surprised. It gives us more chance to protect against or prepare for risk.