Interest Rates

yieldcurve

The 3 month T-bill rate is 0.47%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.54%, the 10 year government bond yield is 1.04% 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 3.05%. For small caps, it currently appears to be 3.27%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher. Long bonds are in much greater demand than short bonds.
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Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian Dollar (FXA), Singapore Dollar (FXSG), and Canadian Dollar (FXC) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

US stocks have greater momentum than US bonds:
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Canadian stocks also have greater momentum than Canadian bonds:
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Global Markets

  • Mexico has changed 5.16% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,184.05. This is 0.14% higher than last week’s price (2,180.89), and 1.03% higher than last month’s price (2,161.74), and 5.68% higher than the price three months ago (2,066.66), and 17.12% higher than the price six months ago (1,864.78), and 9.74% higher than the price one year ago (1,990.20).The average P/E ratio of the S&P 100 (equal weighted) is 21.91. 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)
  • Amazon.com, Inc. (AMZN)
  • Apple Inc. (AAPL)
  • Merck & Company, Inc. (MRK)
  • Alphabet Inc. (GOOGL)
  • Microsoft Corporation (MSFT)
  • Alphabet Inc. (GOOG)
  • Abbott Laboratories (ABT)
  • Celgene Corporation (CELG)
  • The Priceline Group Inc. (PCLN)
  • Facebook, Inc. (FB)
  • Bank Of America Corporation (BAC)
  • Caterpillar, Inc. (CAT)
  • Amgen Inc. (AMGN)
  • Cisco Systems, Inc. (CSCO)
  • Abbvie Inc. (ABBV)
  • 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)

Canadian Stocks

Yesterday’s closing price was 14,747.50. This is -0.05% lower than last week’s price (14,755.60), and 1.61% higher than last month’s price (14,514.50), and 7.27% higher than the price three months ago (13,748.60), and 22.01% higher than the price six months ago (12,087.40), and 7.15% higher than the price one year ago (13,763.80).The average P/E ratio of the TSX60 (equal weighted) is 24.44. 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 4.09% (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)
  • Encana Corp. (ECA.to)
  • Blackberry Limited (BB.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Yamana Gold Inc (YRI.to)
  • Restaurant Brands International (QSR.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Kinross Gold Corp. (K.to)
  • Husky Energy Inc. (HSE.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Franco-nevada Corporation (FNV.to)
  • Cgi Group Inc., Cl.a, Sv (GIB-A.to)
  • Saputo Inc. (SAP.to)
  • Arc Resources Ltd. (ARX.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Cdn Natural Res (CNQ.to)
  • Dollarama Inc (DOL.to)
  • Transcanada Corp. (TRP.to)
  • Snc-lavalin Sv (SNC.to)
  • Constellation Software Inc. (CSU.to)
  • Shaw Communications Inc., Cl.b, (SJR-B.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), Base Metals (ZMT.to), Silver Etf (HUZ.to), TSX Composite (ZCN.to), US S&P 500 (SPY), FTSE Developped Ex-US (VDU.to), Global Infrastructure (ZGI.to), MSCI EAFE (XIN.to), TSX REIT (XRE.to), Canadian Universe Bond (XBB.to), Natural Gas (HUN.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.

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%) bonds
Market Outlook, August 15, 2016

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