The market is closed for the Labour Day holiday today. My outlook is a bit more cautious than in the past. Oil and gold prices appear to have stalled, and real estate looks shaky. The equity risk premium is slightly higher, implying that investors are looking for more safety.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.44%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.56%, the 10 year government bond yield is 1.00% and the long government bond yield is 1.62%. 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 1.41%. 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 3.02%. For small caps, it currently appears to be 3.13%.

Credit Environment

Corporate bonds are starting to appear more highly sought-after compared to government bonds, probably for the higher yield.
guage

Long bonds remain in much greater favour than short bonds.

guage-1

And even high yield bonds are slightly preferred to high quality bonds.guage-2

Currency

The Brazilian Real (BZF), Canadian dollar (FXC), Japanese Yen (FXY), and Australian dollar (FXA) 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 bonds vs. US stocks are close to even:
guage-3
Canadian bonds vs. Canadian stocks give the latter an advantage:
guage-4

Global Markets

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

US Stocks

Yesterday’s closing price was 2,179.98. This is -0.02% lower than last week’s price (2,180.38), and -0.13% lower than last month’s price (2,182.87), and 3.21% higher than the price three months ago (2,112.13), and 8.90% higher than the price six months ago (2,001.76), and 8.27% higher than the price one year ago (2,013.43).The average P/E ratio of the S&P 100 (equal weighted) is 21.77. 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 4.59% (before dividends).

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

  • Morgan Stanley (MS)
  • Kinder Morgan, Inc. (KMI)
  • Bank Of America Corporation (BAC)
  • Texas Instruments Incorporated (TXN)
  • Intel Corporation (INTC)
  • Amazon.com, Inc. (AMZN)

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 14,795.70. This is 0.77% higher than last week’s price (14,682.00), and 1.00% higher than last month’s price (14,648.80), and 3.64% higher than the price three months ago (14,276.20), and 11.98% higher than the price six months ago (13,212.50), and 6.69% higher than the price one year ago (13,868.40).The average P/E ratio of the TSX60 (equal weighted) is 24.88. 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 4.02% (before dividends).

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

  • Teck Resources Limited Cl B (TCK-B.to)
  • Encana Corp. (ECA.to)
  • Silver Wheaton Corp. (SLW.to)
  • Alimentation Couche-tard Inc Cl (ATD-B.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Saputo Inc. (SAP.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Restaurant Brands International (QSR.to)
  • Bank Of Nova Scotia (BNS.to)
  • Dollarama Inc (DOL.to)
  • Cdn Natural Res (CNQ.to)
  • Valeant Pharmaceuticals Intl In (VRX.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), Canadian Stocks (ZCN.to), EAFE Stocks (XIN.to), US Stocks (SPY), Global Infrastructure (ZGI.to), International Stocks (VDU.to), Canadian Bonds (XBB.to), and Gold (IGT.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%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) bonds
Market Outlook, September 5, 2016

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