The stock market reached a new high (since August 2015) last Wednesday, at 14,432.95. But some investors must have felt that was overdoing it, because the market dropped on both Thursday and Friday, ending the week down -1.33%.

Visa shares are going to open lower this week: Walmart Canada to stop accepting Visa cards

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.55%, the 10 year government bond yield is 1.18% 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.

Expected (forward-looking) inflation is 1.49%. 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 3.16%. For small caps, it currently appears to be 0.81%.

Credit Environment

The advantage currently goes to government bonds over corporate:
guageLong bonds over short:guage (1)And high quality bonds over high yield:
guage (2)

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Singapore Dollar (FXSG), Canadian Dollar (FXC), and Swiss Franc (FXF) 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 stocks have the advantage over bonds:
guage (3)
And Canadian stocks over bonds:
guage (4)

Global Markets

Comparing national stock markets, New Zealand (ENZL), Peru (EPU), South Africa (EZA), Taiwan (EWT), Canada (EWC), Philippines (EPHE), Hong Kong (EWH), India (INDA), Belgium (EWK), South Korea (EWY), Thailand (THD), Finland (EFNL), Indonesia (EIDO), US S&P 500 (IVV), UAE (UAE), Chile (ECH), China (MCHI), Russia (ERUS), Singapore (EWS), Norway (ENOR), Ireland (EIRL), and Brazil (EWZ) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,096.07. This is -0.63% lower than last week’s price (2,109.41), and 1.55% higher than last month’s price (2,064.11), and 3.78% higher than the price three months ago (2,019.64), and 2.37% higher than the price six months ago (2,047.62), and -1.33% lower than the price one year ago (2,124.29).The average P/E ratio of the S&P 100 (equal weighted) is 22.32. 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 4.48% (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)
  • Halliburton Company (HAL)
  • Devon Energy Corporation (DVN)
  • Monsanto Company (MON)
  • Amazon.com, Inc. (AMZN)
  • Unitedhealth Group Incorporated (UNH)
  • Texas Instruments Incorporated (TXN)
  • Wal-mart Stores, Inc. (WMT)
  • Anadarko Petroleum Corporation (APC)
  • Pfizer, Inc. (PFE)
  • Raytheon Company (RTN)
  • Union Pacific Corporation (UNP)
  • Medtronic Plc. (MDT)
  • Cisco Systems, Inc. (CSCO)

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 14,037.50. This is -1.67% lower than last week’s price (14,276.20), and 1.81% higher than last month’s price (13,787.80), and 4.16% higher than the price three months ago (13,477.50), and 8.50% higher than the price six months ago (12,937.60), and -4.26% lower than the price one year ago (14,662.30).The average P/E ratio of the TSX60 (equal weighted) is 23.07. 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 4.34% (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)
  • Kinross Gold Corp. (K.to)
  • Yamana Gold Inc (YRI.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Silver Wheaton Corp. (SLW.to)
  • First Quantum Minerals Ltd (FM.to)
  • Pembina Pipeline Corporation (PPL.to)
  • Franco-nevada Corporation (FNV.to)
  • Transcanada Corp. (TRP.to)
  • Inter Pipeline Ltd (IPL.to)
  • National Bank Of Canada (NA.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 Etf (HUC.to), Natural Gas Etf (HUN.to), Silver Etf (HUZ.to), Global Infrastructure Etf (ZGI.to), S&p/tsx Capped Reit (XRE.to), S&p/tsx Capped Composite E (ZCN.to), Spdr S&p 500 (SPY), Canadian Universe Bond (XBB.to), S&p/tsx Eqwt Glb Bm Hdgd T (ZMT.to), Gold Trust (IGT.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
  • 2 units (40%) bonds
Market Outlook, June 13, 2016

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