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

 

Market Outlook July 4, 2016

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