Short bonds yields are lower and long bond yields are slightly higher. As investments, bonds are currently unattractive. Over the past week, stocks barely moved, until Friday when it seemed like everyone decided they didn’t want to own stocks anymore. Sitting on the sidelines for a little while looks like an attractive option.

Interest Rates

The 3 month T-bill rate is 0.42%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.58%, the 10 year government bond yield is 1.09% and the long government bond yield is 1.70%. 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 1.43%. 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 3.04%.

Credit Environment

Government bond are out of favour, while corporate bonds are in favour.

Both short and long bonds are out of favour.

High yield bonds have momentum, while high quality bonds do not.

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 bonds and US stocks are both going sideways:

Canadian stocks still have a little momentum:

Global Markets

  • Philippines has changed -7.46% in price since last week’s close.
  • Thailand has changed -7.61% in price since last week’s close.

Comparing national stock markets, New Zealand (ENZL), China (MCHI), Brazil (EWZ), Hong Kong (EWH), Russia (ERUS), Austria (EWO), Peru (EPU), South Korea (EWY), India (INDA), Japan (EWJ), Spain (EWP), Taiwan (EWT), Finland (EFNL), Belgium (EWK), Israel (EIS), Canada (EWC) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,127.81. This is -2.39% lower than last week’s price (2,179.98), and -2.65% lower than last month’s price (2,185.79), and 2.34% higher than the price three months ago (2,079.06), and 5.22% higher than the price six months ago (2,022.19), and 6.70% higher than the price one year ago (1,994.24).The average P/E ratio of the S&P 100 (equal weighted) is 21.24. 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 4.71% (before dividends).

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

  • Morgan Stanley Common Stock (MS)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • Bank Of America Corporation Com (BAC)

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)

Canadian Stocks

Yesterday’s closing price was 14,540.00. This is -1.73% lower than last week’s price (14,795.70), and -1.73% lower than last month’s price (14,796.10), and 3.58% higher than the price three months ago (14,037.50), and 8.68% higher than the price six months ago (13,379.10), and 4.79% higher than the price one year ago (13,875.30).The average P/E ratio of the TSX60 (equal weighted) is 24.25. 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 4.12% (before dividends).

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

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 Etf (HUC.to), Sptsx Eql Wgt Glb Metal Hed (ZMT.to), Silver Etf (HUZ.to), Global Infrastructure Index (ZGI.to), Vanguard Ftse Developed Ac Ex U (VDU.to), Sp Tsx Capped Comp Idx Etf (ZCN.to), Msci Eafe Index Etf (XIN.to), Gold Trust (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%) international stocks
  • 3 units (60%) cash
Market Outlook, September 12, 2016

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