The market has been flat, or rather one step forward one step back, over the past week. Nothing really shows signs of movement. The markets are directionless.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.53%, the 3 year government bond yield is 0.60%, the 10 year government bond yield is 1.18% 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 1.55%. 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 2.83%. For small caps, it currently appears to be 2.93%.

Credit Environment

This week, the premium goes to risky assets, rather than safe assets. This implies a healthier outlook by investors, however the level of momentum is slight.
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Currency

The Brazilian Real (BZF) and Australian Dollar (FXA) 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 vs. US stocks show no advantage:
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Canadian bonds vs. Canadian stocks show a slight advantage to stocks:
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Global Markets

  • South Africa has changed -5.26% in price since last week’s close.

Comparing national stock markets, Brazil (EWZ), Norway (ENOR), Indonesia (EIDO), Taiwan (EWT), Russia (ERUS), Australia (EWA), Mexico (EWW), Austria (EWO), Japan (EWJ), Chile (ECH), China (MCHI), Belgium (EWK), Canada (EWC), Hong Kong (EWH), Germany (EWG), South Korea (EWY), Finland (EFNL), Peru (EPU), and Netherlands (EWN) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,132.98. This is -1.42% lower than last week’s price (2,163.66), and -0.29% lower than last month’s price (2,139.16), and -1.42% lower than the price three months ago (2,163.78), and 1.84% higher than the price six months ago (2,094.34), and 2.37% higher than the price one year ago (2,083.58).The average P/E ratio of the S&P 100 (equal weighted) is 20.91. 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 4.78% (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)

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 14,585.00. This is 0.13% higher than last week’s price (14,566.30), and 0.56% higher than last month’s price (14,503.70), and 0.71% higher than the price three months ago (14,482.40), and 6.71% higher than the price six months ago (13,668.30), and 9.82% higher than the price one year ago (13,280.40).The average P/E ratio of the TSX60 (equal weighted) is 24.94. 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):

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Trans Canadian Fixed Pay Gif – (T.to)
  • Td Us Small-cap Equity – I (TD.to)
  • 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), Canadian Stocks (ZCN.to), Global Stocks (VDU.to), Gold (IGT.to), and US Stocks (SPY) 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%) international stocks
  • 2 units (40%) cash
Market Outlook, October 17, 2016

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