Bonds and gold continue to hold up. Normally, they move opposite to the direction of stock prices, so this calls into question the recent gains by stocks. Perhaps that was a temporary movement and cannot be relied on to continue. Having said that, the outlooks for stocks is still positive for the moment, especially small cap stocks in Canada.

Interest Rates

yieldcurve

The 30-day T-bill rate is 0.46%, the short government bond yield is 0.59% and the long government bond yield is 1.84%. 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.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.
guage1guage2guage3

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Canadian Dollar (FXC), Swedish Krona (FXS), Singapore Dollar (FXSG), and Euro (FXE) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

It’s surprising to see both stocks and bonds with a positive outlook at the same time, but stocks have a little more momentum than bonds, both in the US and in Canada.
US bonds vs. US stocks:
guage4
Canadian bonds vs. Canadian stocks:
guage5

Global Markets

  • Brazil has changed -7.42% in price since last week’s close.
  • Canada has changed -6.34% in price since last week’s close.
  • China has changed -5.04% in price since last week’s close.
  • Italy has changed -5.66% in price since last week’s close.
  • Malaysia has changed -5.91% in price since last week’s close.
  • Mexico has changed -6.46% in price since last week’s close.
  • Peru has changed -8.05% in price since last week’s close.
  • Qatar has changed -5.29% in price since last week’s close.
  • Russia has changed -6.40% in price since last week’s close.
  • South Africa has changed -10.88% in price since last week’s close.
  • Turkey has changed -12.27% in price since last week’s close.

Comparing national stock markets, Peru (EPU), Brazil (EWZ), New Zealand (ENZL), Chile (ECH), Russia (ERUS), Norway (ENOR), Australia (EWA), Canada (EWC), Germany (EWG), Saudi Arabia (KSA), USA S&P 500 (IVV), Spain (EWP), Belgium (EWK), Denmark (EDEN), Thailand (THD), India (INDA), France (EWQ), Austria (EWO), Japan (EWJ), Netherlands (EWN), Mexico Inve (EWW), and United Kingdom (EWU) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,057.14. This is -1.17% lower than last week’s price (2,081.43), and 0.47% higher than last month’s price (2,047.60), and 10.99% higher than the price three months ago (1,853.44), and -2.15% lower than the price six months ago (2,102.31), and -2.45% lower than the price one year ago (2,108.86).The average P/E ratio of the S&P 100 (equal weighted) is 21.39. 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 4.67% (before dividends).

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

  • California Resources Corporatio (CRC)
  • Amazon.com, Inc. (AMZN)
  • Norfolk Southern Corporation (NSC)
  • Facebook, Inc. (FB)
  • Bristol-myers Squibb Company (BMY)
  • Lockheed Martin Corporation (LMT)
  • Unitedhealth Group Incorporated (UNH)
  • Chevron Corporation (CVX)
  • Bank Of New York Mellon Corpora (BK)
  • Occidental Petroleum Corporatio (OXY)
  • Halliburton Company (HAL)
  • Blackrock, Inc. (BLK)

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)

Canadian Stocks

Yesterday’s closing price was 13,701.50. This is -1.18% lower than last week’s price (13,865.60), and 2.28% higher than last month’s price (13,396.70), and 9.30% higher than the price three months ago (12,535.40), and 1.05% higher than the price six months ago (13,558.80), and -7.98% lower than the price one year ago (14,889.00).The average P/E ratio of the TSX60 (equal weighted) is 24.46. 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 4.09% (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)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Teck Resources Limited (TCK-B.to)
  • First Quantum Minerals Ltd (FM.to)
  • Yamana Gold Inc (YRI.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Silver Wheaton Corp. (SLW.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • Franco-nevada Corporation (FNV.to)
  • Restaurant Brands International (QSR.to)
  • Arc Resources Ltd. (ARX.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Snc-lavalin Sv (SNC.to)
  • Cenovus Energy Inc. (CVE.to)
  • Canadian Tire Corporation, Cl. (CTC-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)
  • National Bank Of Canada (NA.to)
  • Potash Corp Of Sask Inc (POT.to)
  • Bank Of Nova Scotia (BNS.to)

Other Assets

Silver (HUZ.to), Base Metals (ZMT.to), Natural Gas (HUN.to), Crude Oil (HUC.to), Gold (IGT.to), REITs (XRE.to), TSX Capped Composite (ZCN.to), USA S&P 500 (SPY), Global Infrastructure (ZGI.to), Canadian Universe Bond (XBB.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$), US stocks (XUS in US$), 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
  • 1 unit (20%) bonds
Market Outlook, May 9, 2016

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