Short bonds seem to be going nowhere as investors prefer long bonds. The oil price is dropping, but gold continues to rise. That, along with silver and base metals, is probably what’s supporting Canadian small caps, which are outperforming large caps. Canadian and US stocks are doing okay, but international stocks are not.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.47%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.46%, the 10 year government bond yield is 0.96% and the long government bond yield is 1.55%. The yield curve is inverted in the short end. The Bank of Canada prime rate may rise to slow inflation and economic activity. 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 1.37%. 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 3.00%. For small caps, it currently appears to be 2.99%.

Credit Environment

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

Investors presently prefer government bonds over corporate, long bonds over short and high quality bonds over high yield.
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Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian dollar (FXA), and Singapore dollar (FXSG) 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?
US stocks are outperforming bonds:
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Canadian stocks are also outperforming bonds:
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Global Markets

Comparing national stock markets, Peru (EPU), Brazil (EWZ), New Zealand (ENZL), Indonesia (EIDO), Philippines (EPHE), Thailand (THD), Russia (ERUS), Taiwan (EWT), Chile (ECH), India (INDA), Singapore (EWS), Australia (EWA), USA S&P 500 (IVV), South Korea (EWY), South Africa (EZA), Canada (EWC), China (MCHI), Turkey Investable (TUR) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,129.90. This is 1.28% higher than last week’s price (2,102.95), and 0.68% higher than last month’s price (2,115.48), and 4.31% higher than the price three months ago (2,041.99), and 9.61% higher than the price six months ago (1,943.09), and 2.10% higher than the price one year ago (2,086.05).The average P/E ratio of the S&P 100 (equal weighted) is 22.61. 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 4.42% (before dividends).

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

  • Amazon.com, Inc. (AMZN)
  • Simon Property Group, Inc. (SPG)
  • Halliburton Company (HAL)
  • At&t Inc. (T)
  • Johnson & Johnson (JNJ)
  • Altria Group, Inc. (MO)
  • Verizon Communications Inc. (VZ)
  • Comcast Corporation (CMCSA)
  • Lockheed Martin Corporation (LMT)
  • Exxon Mobil Corporation (XOM)
  • Duke Energy Corporation (DUK)
  • Lowe’s Companies, Inc. (LOW)
  • Southern Company (the) (SO)
  • Medtronic Plc. (MDT)
  • 3m Company (MMM)
  • Costco Wholesale Corporation (COST)
  • General Electric Company (GE)
  • 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)
  • Metlife, Inc. (MET)
  • Ford Motor Company (F)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 14,259.80. This is 0.01% higher than last week’s price (14,258.90), and 0.14% higher than last month’s price (14,240.00), and 6.24% higher than the price three months ago (13,422.80), and 14.58% higher than the price six months ago (12,445.50), and -0.56% lower than the price one year ago (14,339.50).The average P/E ratio of the TSX60 (equal weighted) is 25.23. 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 3.96% (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)
  • Canadian Imperial Bank Of Comme (CM.to)

Other Assets

Crude Oil (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure Etf (ZGI.to), TSX REIT (XRE.to), Natural Gas (HUN.to), TSX Composite (ZCN.to), S&P 500 (SPY), Canadian Universe Bond (XBB.to), Gold (IGT.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
The oil price is falling.

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
  • One unit (20%) bonds
Market Outlook, July 11, 2016

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