The list of assets that investors don’t want to own is pretty long: US stocks, Oil, global stocks, foreign currency, really anything risky. I’m guessing that the US election is the major cause. There are two problems with the presidential election: 1) no matter who wins, the US will have a bad president (although one is worse than the other) and 2) the gap is very narrow and the uncertainty is high. It reminds me of Brexit. Similarly, if someone were to bet on the outcome (which I don’t recommend and is dangerous), using put options to bet that Trump wins and the market falls would have the largest potential payoff. I will note here that my model recommends going to cash.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.43%, the 1 year T-bill rate is 0.48%, the 3 year government bond yield is 0.56%, the 10 year government bond yield is 1.20% and the long government bond yield is 1.85%. 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 1.61%. 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 2.77%. For small caps, it currently appears to be 2.99%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.
guageguage-1guage-2

Currency

Only the Australian dollar (FXA), Japanese Yen (FXY), and Swiss Franc (FXF) are looking strong relative to the US dollar.
The Canadian dollar has been losing value compared to the US dollar.

Equities

US bonds are not in favour, but they are still outperforming US stocks.
guage-3
Canadian bonds are lagging Canadian stocks, although neither is particularly appealing.
guage-4

Global Markets

  • Brazil has changed -5.43% in price since last week’s close.
  • Turkey has changed -6.36% in price since last week’s close.

Comparing national stock markets, Chile (ECH), Peru (EPU), Saudi Arabia (KSA), Austria (EWO), Taiwan (EWT), Japan (EWJ), Norway (ENOR), Spain (EWP) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,085.18. This is -1.93% lower than last week’s price (2,126.15), and -3.18% lower than last month’s price (2,153.74), and -4.43% lower than the price three months ago (2,181.74), and 1.29% higher than the price six months ago (2,058.69), and 1.61% higher than the price one year ago (2,052.23).The average P/E ratio of the S&P 100 (equal weighted) is 19.94. This implies the market is fairly priced. This implies a forward capital return of 5.01% (before dividends).

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

  • Time Warner Inc. New Common Sto (TWX)

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 14,509.30. This is -1.88% lower than last week’s price (14,787.30), and -0.59% lower than last month’s price (14,595.50), and -1.67% lower than the price three months ago (14,755.60), and 6.44% higher than the price six months ago (13,632.00), and 12.28% higher than the price one year ago (12,922.50).The average P/E ratio of the TSX60 (equal weighted) is 25.16. 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 3.97% (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)
  • First Quantum Minerals Ltd (FM.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Kinross Gold Corp. (K.to)
  • Constellation Software Inc. (CSU.to)
  • Saputo Inc. (SAP.to)
  • Silver Wheaton Corp. (SLW.to)
  • Alimentation Couche-tard Inc Cl (ATD-B.to)
  • Suncor Energy Inc. (SU.to)

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

  • Canadian Imperial Bank Of Comme (CM.to)
  • Power Corporation Of Canada, Sv (POW.to)

Other Assets

Crude Oil (HUC.to), Base Metals (ZMT.to), Silver (HUZ.to), Canadian Stocks (ZCN.to), Global Infrastructure (ZGI.to), Gold (IGT.to), Canadian Bonds (XBB.to) are performing better than cash.
The gold price is neutral.

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
  • 4 units (80%) cash
Market Outlook, November 7, 2016

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