Oil prices have risen somewhat; no higher than they were a couple months ago, but better than last week. The past week was negative for stocks, but of the one-step-forward-one-step-back variety. Canadian small caps continue to shine. And the Canadian dollar has picked up a little momentum in relation to the US dollar.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, 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 1.04% and the long government bond yield is 1.66%. 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 1.39%. 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 3.03%. For small caps, it currently appears to be 3.12%.

Credit Environment

There is a clear preference among investors for long-term bonds (middle dial).
guageguage-1guage-2

Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Australian Dollar (FXA), Canadian Dollar (FXC), Swiss Franc (FXF), Euro (FXE), Swedish Krona (FXS), and Singapore Dollar (FXSG) 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 stocks have the advantage over bonds:
guage-3
And Canadian stocks are outperforming Canadian bonds:
guage-4

Global Markets

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

US Stocks

Yesterday’s closing price was 2,183.87. This is -0.29% lower than last week’s price (2,190.15), and 0.41% higher than last month’s price (2,175.03), and 6.63% higher than the price three months ago (2,048.04), and 12.25% higher than the price six months ago (1,945.50), and 13.02% higher than the price one year ago (1,932.24).The average P/E ratio of the S&P 100 (equal weighted) is 21.83. 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 4.58% (before dividends).

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

  • Texas Instruments Incorporated (TXN)
  • Halliburton Company (HAL)
  • Biogen Inc. (BIIB)
  • Merck & Company, Inc. (MRK)
  • Caterpillar, Inc. (CAT)
  • Apple Inc. (AAPL)
  • The Priceline Group Inc. (PCLN)
  • Kinder Morgan, Inc. (KMI)
  • Amazon.com, Inc. (AMZN)
  • Raytheon Company (RTN)
  • Morgan Stanley (MS)
  • Abbvie Inc. (ABBV)
  • Amgen Inc. (AMGN)
  • Intel Corporation (INTC)
  • Qualcomm Incorporated (QCOM)
  • United Technologies Corporation (UTX)
  • Union Pacific Corporation (UNP)
  • Alphabet Inc. (GOOGL)
  • Fedex Corporation (FDX)

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 14,687.50. This is -0.61% lower than last week’s price (14,777.00), and 0.84% higher than last month’s price (14,565.80), and 5.52% higher than the price three months ago (13,919.60), and 14.63% higher than the price six months ago (12,813.40), and 9.74% higher than the price one year ago (13,383.70).The average P/E ratio of the TSX60 (equal weighted) is 24.56. 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 4.07% (before dividends).

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

  • Encana Corp. (ECA.to)
  • Teck Resources Limited (TCK-B.to)
  • First Quantum Minerals Ltd (FM.to)
  • Silver Wheaton Corp. (SLW.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Barrick Gold Corporation (ABX.to)
  • Yamana Gold Inc (YRI.to)
  • Blackberry Limited (BB.to)
  • Franco-nevada Corporation (FNV.to)
  • Kinross Gold Corp. (K.to)
  • Saputo Inc. (SAP.to)
  • Restaurant Brands International (QSR.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Cdn Natural Res (CNQ.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Cenovus Energy Inc. (CVE.to)
  • Husky Energy Inc. (HSE.to)
  • Cgi Group Inc., Cl.a, Sv (GIB-A.to)
  • Transcanada Corp. (TRP.to)
  • Snc-lavalin Sv (SNC.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 (HUZ.to), US stocks (SPY), Canadian stocks (ZCN.to), Natural Gas (HUN.to), Global Infrastructure (ZGI.to), World stocks (VDU.to), International stocks (XIN.to), Canadian Universe Bond (XBB.to), and Canadian Real Estate (XRE.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
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%) bonds
Market Outlook, August 22, 2016

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