I don’t like the look of bonds or oil prices, or even gold. The bond yield curve is quite flat, which seems to be in response to lower long-term yields. I find it surprising to see that Canadian, American and International stocks are all pretty evenly balanced in their potential. Small caps have better momentum than large caps, and the momentum style is outperforming the value style. We’re likely moving into a period that is good for stock ownership.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.50%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.54%, the 10 year government bond yield is 1.05% and the long government bond yield is 1.64%. 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 2.89%. For small caps, it currently appears to be 3.05%.

Credit Environment

Government bonds are in greater favour than corporate bonds:
guage

Long bonds are more popular than short bonds:guage-1High yield bonds are outperforming high quality bonds:
guage-2

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), and Australian dollar (FXA) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

While bonds haven’t quite gotten to the point where they’re losing money, stocks are in a much better position, both in the US and in Canada.

US bonds vs. US stocks:
guage-3
Canadian bonds vs. Canadian stocks:
guage-4

Global Markets

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

US Stocks

Yesterday’s closing price was 2,182.87. This is 0.55% higher than last week’s price (2,170.84), and 2.49% higher than last month’s price (2,129.90), and 6.03% higher than the price three months ago (2,058.69), and 16.11% higher than the price six months ago (1,880.05), and 11.81% higher than the price one year ago (1,952.29).The average P/E ratio of the S&P 100 (equal weighted) is 21.92. 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 4.56% (before dividends).

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

  • Biogen Inc. (BIIB)
  • Qualcomm Incorporated (QCOM)
  • Texas Instruments Incorporated (TXN)
  • Microsoft Corporation (MSFT)
  • Alphabet Inc. (GOOGL)
  • Amazon.com, Inc. (AMZN)
  • Merck & Company, Inc. (MRK)
  • Kinder Morgan, Inc. (KMI)
  • Cisco Systems, Inc. (CSCO)
  • Apple Inc. (AAPL)
  • Alphabet Inc. (GOOG)
  • The Priceline Group Inc. (PCLN)
  • Bank Of America Corporation (BAC)
  • Celgene Corporation (CELG)
  • Abbott Laboratories (ABT)
  • E.i. Du Pont De Nemours (DD)
  • Amgen Inc. (AMGN)
  • Caterpillar, Inc. (CAT)
  • Blackrock, Inc. (BLK)
  • American International Group (AIG)
  • Morgan Stanley (MS)
  • International Business Machines (IBM)
  • Facebook, Inc. (FB)
  • Dow Chemical Company (DOW)
  • Intel Corporation (INTC)
  • Monsanto Company (MON)
  • MasterCard Incorporated (MA)
  • JP Morgan Chase & Co. (JPM)

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 14,648.80. This is 0.45% higher than last week’s price (14,582.70), and 3.64% higher than last month’s price (14,134.50), and 6.91% higher than the price three months ago (13,701.50), and 14.67% higher than the price six months ago (12,774.50), and 8.25% higher than the price one year ago (13,531.90).The average P/E ratio of the TSX60 (equal weighted) is 25.41. 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 3.94% (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)
  • First Quantum Minerals Ltd (FM.to)
  • Silver Wheaton Corp. (SLW.to)
  • Yamana Gold Inc (YRI.to)
  • Encana Corp. (ECA.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Barrick Gold Corporation (ABX.to)
  • Kinross Gold Corp. (K.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Restaurant Brands International (QSR.to)
  • Blackberry Limited (BB.to)
  • Cgi Group Inc., Cl.a, Sv (GIB-A.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Snc-lavalin Sv (SNC.to)
  • Dollarama Inc (DOL.to)
  • Franco-nevada Corporation (FNV.to)
  • Constellation Software Inc. (CSU.to)
  • Magna International Inc (MG.to)
  • Arc Resources Ltd. (ARX.to)
  • Cdn Natural Res (CNQ.to)
  • Transcanada Corp. (TRP.to)
  • Shaw Communications Inc., Cl.b, (SJR-B.to)
  • Husky Energy Inc. (HSE.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Saputo Inc. (SAP.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), Base Metals (ZMT.to), Silver (HUZ.to), US S&P 500 (SPY), TSX Capped Composite (ZCN.to), FTSE Developped All Cap Ex US (VDU.to), Global Infrastructure (ZGI.to), MSCI EAFE (XIN.to), TSX REIT (XRE.to), Natural Gas (HUN.to), 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%) cash
Market Outlook, August 8, 2016

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