Happy Canadian Thanksgiving! Stock prices and oil prices are rising, and interest rates along with them, which has caused bond prices to fall. Oil prices have risen from around $47 to over $51. And the US dollar has risen in comparison to the Canadian dollar, which is helpful for exporters.

Interest Rates

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The 3 month T-bill rate is 0.49%, the 1 year T-bill rate is 0.52%, the 3 year government bond yield is 0.58%, the 10 year government bond yield is 1.15% and the long government bond yield is 1.80%. 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 1.51%. 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 2.86%. For small caps, it currently appears to be 2.96%.

Credit Environment

Bonds are currently unattractive. Government and corporate bonds both have negative momentum; short bonds and long bonds both have negative momentum; only high yield bonds really have a positive outlook.
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Currency

The Brazilian Real (BZF), Australian dollar (FXA), 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

US bonds are as unattractive as Canadian bonds. US stocks, however, have a somewhat positive outlook.
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The same is true in Canada: stocks appear to present better opportunity than bonds.
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Global Markets

Comparing national stock markets, Brazil (EWZ), Norway (ENOR), Taiwan (EWT), Russia (ERUS), China (MCHI), South Korea (EWY), Indonesia (EIDO), Australia (EWA), Mexico (EWW), Hong Kong (EWH), Austria (EWO), Finland (EFNL), Japan (EWJ), Belgium (EWK), Netherlands (EWN), Germany (EWG), India (INDA), Sweden (EWD), Poland (EPOL), France (EWQ), Canada (EWC), Chile (ECH), Peru (EPU), USA S&P 500 (IVV) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,163.66. This is 0.61% higher than last week’s price (2,150.49), and 0.21% higher than last month’s price (2,159.04), and 0.52% higher than the price three months ago (2,152.43), and 4.94% higher than the price six months ago (2,061.72), and 5.75% higher than the price one year ago (2,045.97).The average P/E ratio of the S&P 100 (equal weighted) is 21.19. 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 4.72% (before dividends).

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

  • Halliburton Company (HAL)
  • Amazon.com, Inc. (AMZN)
  • Qualcomm Incorporated (QCOM)
  • Caterpillar, Inc. (CAT)
  • Bank Of America Corporation (BAC)
  • Fedex Corporation (FDX)
  • Metlife, Inc. (MET)
  • Morgan Stanley (MS)

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)

Canadian Stocks

Yesterday’s closing price was 14,566.30. This is -0.84% lower than last week’s price (14,689.00), and 0.18% higher than last month’s price (14,540.00), and 1.42% higher than the price three months ago (14,361.90), and 8.73% higher than the price six months ago (13,396.70), and 9.18% higher than the price one year ago (13,341.90).The average P/E ratio of the TSX60 (equal weighted) is 24.93. 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 4.01% (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)
  • First Quantum Minerals Ltd (FM.to)
  • Constellation Software Inc. (CSU.to)
  • Saputo Inc. (SAP.to)
  • Arc Resources Ltd. (ARX.to)
  • Blackberry Limited (BB.to)
  • Canadian National Railway Co. (CNR.to)
  • Magna International Inc (MG.to)
  • Cdn Natural Res (CNQ.to)
  • Canadian Pacific Railway Limite (CP.to)
  • Brookfield Asset Management Inc (BAM-A.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)
  • Cameco Corp (CCO.to)

Other Assets

Crude Oil (HUC.to), Natural Gas (HUN.to), Base Metals (ZMT.to), International Stocks (XIN.to), Global Stocks (VDU.to), Canadian Stocks (ZCN.to), USA Stocks (SPY), Global Infrastructure (ZGI.to), and Gold (IGT.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
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%) of gold
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) cash
Market Outlook, October 11, 2016

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