The American dollar is strengthening, compared to most other currencies. Although the Canadian dollar continues to trade favourably compared to the American dollar, this is likely related mainly to the rising oil price. Bonds and stocks are both performing well, because interest rates are low and the economy is expected to begin its recovery.

There was some volatility over the past week, with certain markets (I forget which) dropping by over 5% and recovering within a couple days. Many national markets are rising, but not nearly as many as a week or two ago. There are far fewer large-cap stocks in the US market that have strong price momentum. In Canada, a number of large-caps still have positive momentum, but they are mainly oil & gas producers and miners. The TSX has risen 11% over the last three months, but the past month has been essentially flat; it seems like investors are watching and waiting.

Interest Rates

yieldcurve

The 30-day T-bill rate is 0.47%, the short government bond yield is 0.60% and the long government bond yield is 1.83%. 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

Corporate bonds are performing better than government bonds. I’m not clear whether this is a normal situation of the higher risk investment paying a higher interest rate, or whether the rates on riskier bonds are falling, causing capital values to rise.
guageLong bonds are in favour compared to short bonds:

guage-1

High quality bonds are favoured over high yield bonds:

guage-2

Currency

The Brazilian Real  (BZF), Japanese Yen (FXY), Canadian Dollar (FXC), and Euro (FXE) 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 and US stocks are both providing positive returns.
guage-3
Canadian bonds are profitable, but less than Canadian stocks:
guage-4

Global Markets

  • Philippines has changed 7.73% in price since last week’s close.

Comparing national stock markets, Peru (EPU), Brazil (EWZ), Russia (ERUS), New Zealand (ENZL), Norway (ENOR), Philippines (EPHE), Denmark (EDEN), Canada (EWC), Belgium (EWK), Australia (EWA), USA S&P 500 (IVV), Thailand (THD), and Saudi Arabia (KSA) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,046.61. This is -0.59% lower than last week’s price (2,058.69), and -1.64% lower than last month’s price (2,080.73), and 7.97% higher than the price three months ago (1,895.58), and -1.37% lower than the price six months ago (2,075.00), and -3.52% lower than the price one year ago (2,121.24).The average P/E ratio of the S&P 100 (equal weighted) is 22.10. 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 4.53% (before dividends).

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

  • California Resources Corporation (CRC)
  • Amazon.com, Inc. (AMZN)
  • Facebook, Inc. (FB)
  • Monsanto Company (MON)
  • Lockheed Martin Corporation (LMT)
  • Emc Corporation (EMC)
  • Halliburton Company (HAL)
  • 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)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 13,748.60. This is 1.36% higher than last week’s price (13,563.80), and 0.82% higher than last month’s price (13,637.20), and 9.51% higher than the price three months ago (12,555.00), and 4.73% higher than the price six months ago (13,127.20), and -6.68% lower than the price one year ago (14,733.00).The average P/E ratio of the TSX60 (equal weighted) is 22.03. 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 4.54% (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)
  • National Bank Of Canada (NA.to)
  • Bank Of Nova Scotia (BNS.to)

Other Assets

Oil (HUC.to), Base Metals (ZMT.to), REITs (XRE.to), Silver (HUZ.to), Gold (IGT.to), Global Infrastructure (ZGI.to), Natural Gas (HUN.to), TSX Canadian stocks (ZCN.to), US S&P 500 (SPY), and 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$), US stocks (XSP hedged to Cdn$), 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
  • 1 unit (20%) bonds
Market Outlook, May 16, 2016

Leave a Reply

Your email address will not be published. Required fields are marked *