After taking a break, stocks appear ready to continue their climb. Bonds are also producing gains. Canadian small caps have done really well over the past few weeks, but appear to be slowing down and are starting to look riskier. Not many companies appear cheap (on sale) at the moment, but that is based on past earnings, which have not been very strong. Investors are watching for an economic recovery, of which the first sign was the US Fed saying that interest rates could be raised.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.54%, the 3 year government bond yield is 0.69%, the 10 year government bond yield is 1.35% and the long government bond yield is 1.99%. 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.The equity risk premium for large caps, in Canada, currently appears to be 2.94%. For small caps, it currently appears to be 0.73%.

Credit Environment

Government bonds are slightly more attractive than corporate bonds.
guage1

Long bonds are in much greater favour than short bonds.guage2

High quality and high yield bonds both appear equally profitable at the moment.guage3

Currency

Wisdomtree Brazilian Real Strat (BZF), Singa (FXSG), Briti (FXB) 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? Bonds and stocks are both in favour, with stocks showing more promise for price gains.
US stocks have the advantage over bonds.
guage4
As do Canadian stocks.
guage5

Global Markets

  • India has changed 5.66% in price since last week’s close.
  • Taiwan has changed 5.06% in price since last week’s close.

Comparing national stock markets, Philippines (EPHE), Peru (EPU), India (INDA), Denmark (EDEN), New Zealand (ENZL), Ireland (EIRL), Belgium (EWK), US S&P 500 (IVV), Netherlands (EWN), Russia (ERUS), Norway (ENOR), Japan (EWJ), Switzerland (EWL), Canada (EWC), Australia (EWA), United Kingdom (EWU), France (EWQ), Taiwan (EWT), Thailand (THD), Finland (EFNL), and Germany (EWG) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,099.06. This is 2.49% higher than last week’s price (2,048.04), and 1.63% higher than last month’s price (2,065.30), and 6.10% higher than the price three months ago (1,978.35), and 0.49% higher than the price six months ago (2,088.87), and 1.07% higher than the price one year ago (2,076.78).The average P/E ratio of the S&P 100 (equal weighted) is 22.52. 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 4.44% (before dividends).

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

  • Monsanto Company (MON)
  • California Resources Corporation (CRC)
  • Amazon.com, Inc. (AMZN)
  • Devon Energy Corporation (DVN)
  • Accenture Plc (ACN)
  • Texas Instruments Incorporated (TXN)
  • Halliburton Company (HAL)
  • Lowe’s Companies, Inc. (LOW)
  • Qualcomm Incorporated (QCOM)

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 14,105.20. This is 1.33% higher than last week’s price (13,919.60), and 1.58% higher than last month’s price (13,886.40), and 9.68% higher than the price three months ago (12,860.40), and 5.24% higher than the price six months ago (13,403.40), and -3.08% lower than the price one year ago (14,553.30).The average P/E ratio of the TSX60 (equal weighted) is 23.29. 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 4.29% (before dividends).

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

  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Snc-lavalin Sv (SNC.to)
  • Eldorado Gold (ELD.to)
  • Yamana Gold Inc (YRI.to)
  • First Quantum Minerals Ltd (FM.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Teck Resources Limited (TCK-B.to)
  • Cdn Natural Res (CNQ.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Kinross Gold Corp. (K.to)
  • Brookfield Asset Management Inc (BAM-A.to)
  • Cenovus Energy Inc. (CVE.to)
  • Transcanada Corp. (TRP.to)
  • Canadian Tire Corporation, Cl. (CTC-A.to)
  • Sun Life Financial Inc. (SLF.to)
  • Thomson Reuters Corporation (TRI.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)

Other Assets

Crude Oil (HUC.to), Global Infrastructure (ZGI.to), TSX REIT (XRE.to), TSX Composite (ZCN.to), US S&P 500 (SPY), FTSE Developed All Cap ex US (VDU.to), Natural Gas (HUN.to), MSCI EAFE (XIN.to), and Canadian Universe Bond (XBB.to) are performing better than cash.
The gold price is neutral.
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, May 30, 2016

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