Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.57%, the 10 year government bond yield is 1.09% and the long government bond yield is 1.73%. 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 1.38%. 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 2.94%. For small caps, it currently appears to be 3.05%.

Credit Environment

There is almost no preference between government bonds and corporate bonds (top dial). Long bonds are in favour whereas short bonds are not (middle dial). High yield bonds have a small advantage over high quality bonds (bottom dial). Taken altogether, this implies some appetite for risk on the part of investors.
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Currency

The Brazilian Real (BZF) and Japanese Yen (FXY) 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 have the advantage over US bonds:
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And the same relationship exists in Canada:
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Global Markets

  • Turkey Investable has changed -15.38% in price since last week’s close. Hardly surprising, given the tumultuous news.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), South Africa (EZA), Indonesia (EIDO), Taiwan (EWT), Chile (ECH), Thailand (THD), Philippines (EPHE), New Zealand (ENZL), Russia (ERUS), Hong Kong (EWH), South Korea (EWY), India (INDA), China (MCHI), Finland (EFNL), UAE (UAE), US S&P 500 (IVV), Australia (EWA), Qatar (QAT), Singapore (EWS), Mexico (EWW), Israel (EIS), Canada (EWC), Norway (ENOR), Spain (EWP), Denmark (EDEN), Netherlands (EWN), Austria (EWO), Switzerland (EWL), Japan (EWJ), United Kingdom (EWU), Poland (EPOL), Belgium (EWK), France (EWQ), Germany (EWG), Sweden (EWD) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,175.03. This is 0.38% higher than last week’s price (2,166.89), and 2.92% higher than last month’s price (2,113.32), and 4.18% higher than the price three months ago (2,087.79), and 14.06% higher than the price six months ago (1,906.90), and 12.09% higher than the price one year ago (1,940.51).The average P/E ratio of the S&P 100 (equal weighted) is 22.71. 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 4.40% (before dividends).

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

  • Qualcomm Incorporated (QCOM)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • Biogen Inc. (BIIB)
  • Amazon.com, Inc. (AMZN)
  • Microsoft Corporation (MSFT)
  • Texas Instruments Incorporated (TXN)
  • Cisco Systems, Inc. (CSCO)
  • Morgan Stanley Common Stock (MS)
  • International Business Machines (IBM)
  • Exelon Corporation Common Stock (EXC)
  • Johnson & Johnson Common Stock (JNJ)
  • Simon Property Group, Inc. Comm (SPG)
  • Facebook, Inc. (FB)
  • Lockheed Martin Corporation Com (LMT)
  • Intel Corporation (INTC)
  • Comcast Corporation (CMCSA)
  • Emerson Electric Company Common (EMR)
  • 3M Company Common Stock (MMM)
  • General Motors Company Common S (GM)
  • Union Pacific Corporation Commo (UNP)
  • Pfizer, Inc. Common Stock (PFE)
  • Southern Company (the) Common S (SO)
  • Costco Wholesale Corporation (COST)
  • Caterpillar, Inc. Common Stock (CAT)
  • Amgen Inc. (AMGN)
  • AT&T Inc. (T)
  • Bristol-myers Squibb Company Co (BMY)
  • Duke Energy Corporation (holdin (DUK)
  • Alphabet Inc. (GOOGL)
  • Abbott Laboratories Common Stoc (ABT)
  • Blackrock, Inc. Common Stock (BLK)
  • General Electric Company Common (GE)
  • Alphabet Inc. (GOOG)
  • Exxon Mobil Corporation Common (XOM)
  • Ford Motor Company Common Stock (F)
  • Pepsico, Inc. Common Stock (PEP)
  • Unitedhealth Group Incorporated (UNH)
  • Altria Group, Inc. (MO)
  • Time Warner Inc. New Common Sto (TWX)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company Common S (GM)
  • Ford Motor Company Common Stock (F)
  • Metlife, Inc. Common Stock (MET)

Canadian Stocks

Yesterday’s closing price was 14,600.70. This is 0.47% higher than last week’s price (14,532.40), and 3.32% higher than last month’s price (14,131.40), and 5.83% higher than the price three months ago (13,796.00), and 17.85% higher than the price six months ago (12,389.60), and 9.11% higher than the price one year ago (13,381.60).The average P/E ratio of the TSX60 (equal weighted) is 24.84. 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 4.03% (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)
  • Yamana Gold Inc (YRI.to)
  • Silver Wheaton Corp. (SLW.to)
  • First Quantum Minerals Ltd (FM.to)
  • Kinross Gold Corp. (K.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Encana Corp. (ECA.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Franco-nevada Corporation (FNV.to)
  • Arc Resources Ltd. (ARX.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Cdn Natural Res (CNQ.to)
  • SNC-Lavalin Sv (SNC.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • Restaurant Brands International (QSR.to)
  • Gildan Activewear Inc. (GIL.to)
  • Dollarama Inc (DOL.to)
  • Metro Inc (MRU.to)
  • Transcanada Corp. (TRP.to)
  • Alimentation Couche-tard Inc Cl (ATD-B.to)
  • Thomson Reuters Corporation (TRI.to)
  • Canadian National Railway Co. (CNR.to)
  • Telus Corporation (T.to)
  • Brookfield Asset Management Inc (BAM-A.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 (HUC.to), Silver (HUZ.to), Base Metals (ZMT.to), Global Infrastructure (ZGI.to), Real Estate (XRE.to), US S&P 500 (SPY), TSX Composite (ZCN.to), MSCI EAFE (XIN.to), FTSE Developed (VDU.to), Gold (IGT.to), Canadian Universe Bond (XBB.to), Natural Gas (HUN.to), Premium Money Market (CMR.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
  • One unit (20%) international stocks
Market Outlook, July 25, 2016

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