There was good news for oil prices (if you like them higher) over the past week. OPEC promised to cut production, and the price rose over $50. While that’s reassuring for producing nations like Canada, it’s still nowhere near the peak. Interest rates and bond yields continue to rise.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.54%, the 3 year government bond yield is 0.81%, the 10 year government bond yield is 1.66% and the long government bond yield is 2.25%. 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 1.82%. 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 1.87%. For small caps, it currently appears to be 2.50%.

Credit Environment

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

Currency

The US dollar currently appears to be the strongest currency.
The Canadian dollar seems to be holding its own against the US dollar.

Equities

In both the US and Canada, stocks are poised for growth and have a pronounced advantage over bonds.

USA:
guage-3
Canada:
guage-4

Global Markets

  • Saudi Arabia has changed 6.48% in price since last week’s close.

Comparing national stock markets, Japan (EWJ), Malaysia (EWM), Russia (ERUS), Singapore (EWS), Taiwan (EWT), United Kingdom (EWU), Italy (EWI), Saudi Arabia (KSA), Canada (EWC), US S&P 500 (IVV), Australia (EWA), Norway (ENOR), Peru (EPU), and Thailand (THD) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,191.95. This is -0.44% lower than last week’s price (2,201.72), and 4.95% higher than last month’s price (2,088.66), and 0.25% higher than the price three months ago (2,186.48), and 3.91% higher than the price six months ago (2,109.41), and 14.04% higher than the price one year ago (1,922.03).The average P/E ratio of the S&P 100 (equal weighted) is 21.56. 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 4.64% (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)
  • Bank Of America Corporation Com (BAC)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Metlife, Inc. Common Stock (MET)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Halliburton Company Common Stoc (HAL)
  • General Dynamics Corporation Co (GD)
  • Caterpillar, Inc. Common Stock (CAT)
  • Capital One Financial Corporati (COF)
  • Unitedhealth Group Incorporated (UNH)
  • Citigroup, Inc. Common Stock (C)
  • Union Pacific Corporation Commo (UNP)
  • Target Corporation Common Stock (TGT)
  • Wells Fargo & Company Common St (WFC)
  • U.s. Bancorp Common Stock (USB)
  • Time Warner Inc. New Common Sto (TWX)
  • Fedex Corporation Common Stock (FDX)
  • Lockheed Martin Corporation Com (LMT)
  • General Motors Company Common S (GM)
  • Conocophillips Common Stock (COP)
  • Celgene Corporation (CELG)
  • Bank Of New York Mellon Corpora (BK)
  • Emerson Electric Company Common (EMR)
  • Raytheon Company Common Stock (RTN)
  • Boeing Company (the) Common Sto (BA)
  • Comcast Corporation (CMCSA)
  • Chevron Corporation Common Stoc (CVX)
  • Schlumberger N.v. Common Stock (SLB)
  • American International Group, I (AIG)
  • American Express Company Common (AXP)
  • United Parcel Service, Inc. Com (UPS)
  • Kinder Morgan, Inc. Common Stoc (KMI)

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 15,052.50. This is 0.25% higher than last week’s price (15,015.40), and 3.74% higher than last month’s price (14,509.30), and 1.62% higher than the price three months ago (14,813.00), and 5.80% higher than the price six months ago (14,226.80), and 20.95% higher than the price one year ago (12,445.50).The average P/E ratio of the TSX60 (equal weighted) is 28.35. 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 3.53% (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)
  • Encana Corp. (ECA.to)
  • Manulife Fin (MFC.to)
  • Sun Life Financial Inc. (SLF.to)
  • Cdn Natural Res (CNQ.to)
  • Suncor Energy Inc. (SU.to)
  • National Bank Of Canada (NA.to)
  • Cenovus Energy Inc. (CVE.to)
  • Potash Corp Of Sask Inc (POT.to)
  • Agrium Inc (AGU.to)
  • Canadian Imperial Bank Of Comme (CM.to)
  • Canadian National Railway Co. (CNR.to)
  • Snc-lavalin Sv (SNC.to)
  • Royal Bank Of Canada (RY.to)
  • Husky Energy Inc. (HSE.to)
  • Restaurant Brands International (QSR.to)
  • Arc Resources Ltd. (ARX.to)

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

Other Assets

Base Metals (ZMT.to), Crude Oil (HUC.to), Natural Gas (HUN.to), US Stocks (SPY), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), Gold Trust (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
  • 2 units (40%) cash
Market Outlook, December 5, 2016

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