Canadian stocks fluctuated without direction over the past week. They appear expensive and I don’t expect to see them advance much until earnings season proves the run-up in prices either right or wrong.

Interest Rates

The 3 month T-bill rate is 0.42%, the 1 year T-bill rate is 0.51%, the 3 year government bond yield is 0.82%, the 10 year government bond yield is 1.65% and the long government bond yield is 2.26%. 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 1.77%. 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 1.75%. For small caps, it currently appears to be 2.29%.

Credit Environment

These dials show that corporate bonds (higher risk) and high yield bonds (high risk) are producing some positive return, while others fall.

Currency

The Brazilian Real (BZF), Swedish Krona (FXS), Australian Dollan (FXA), Canadian Dollar (FXC), Chinese RenMinBi (FXCH) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds are falling while US stocks push ahead:

Canadian bonds are also negative, and Canadian stocks have some positive momentum:

Global Markets

Comparing national stock markets, Japan (EWJ), Malaysia (EWM), Russia (ERUS), Italy (EWI), Taiwan (EWT), United Kingdom (EWU), Singapore (EWS), Brazil (EWZ), Peru (EPU), South Africa (EZA), Poland (EPOL), Norway (ENOR), Thailand (THD), Austria (EWO), Qatar (QAT), Canada (EWC), Australia (EWA), Germany (EWG), France (EWQ), South Korea (EWY), Sweden (EWD), UAE (UAE), Ireland (EIRL), China (MCHI), Switzerland (EWL), Chile (ECH), Philippines (EPHE), Saudi Arabia (KSA), US S&P 500 (IVV), Netherlands (EWN), Israel (EIS), Denmark (EDEN), Spain (EWP), Finland (EFNL), Belgium (EWK), Hong Kong (EWH), New Zealand (ENZL), Indonesia (EIDO), India (INDA) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,274.64. This is 0.25% higher than last week’s price (2,268.90), and 0.95% higher than last month’s price (2,253.28), and 6.64% higher than the price three months ago (2,132.98), and 5.22% higher than the price six months ago (2,161.74), and 18.61% higher than the price one year ago (1,917.78).

The average P/E ratio of the S&P 100 (equal weighted) is 22.44. 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 4.46% (before dividends).

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

  • Bank Of America Corporation Com (BAC)
  • Morgan Stanley Common Stock (MS)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Jp Morgan Chase & Co. Common St (JPM)
  • American Express Company Common (AXP)
  • Citigroup, Inc. Common Stock (C)
  • Twenty-first Century Fox, Inc. (FOXA)
  • Halliburton Company Common Stoc (HAL)
  • Capital One Financial Corporati (COF)
  • General Dynamics Corporation Co (GD)
  • Boeing Company (the) Common Sto (BA)
  • General Motors Company Common S (GM)
  • Bank Of New York Mellon Corpora (BK)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • U.s. Bancorp Common Stock (USB)
  • Mastercard Incorporated Common (MA)
  • Texas Instruments Incorporated (TXN)
  • Twenty-first Century Fox, Inc. (FOX)
  • Amazon.com, Inc. (AMZN)
  • The Priceline Group Inc. (PCLN)
  • Walt Disney Company (the) Commo (DIS)
  • Comcast Corporation (CMCSA)
  • Caterpillar, Inc. Common Stock (CAT)

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 15,497.30. This is 0.70% higher than last week’s price (15,389.00), and 0.73% higher than last month’s price (15,385.30), and 6.26% higher than the price three months ago (14,585.00), and 6.92% higher than the price six months ago (14,493.80), and 20.44% higher than the price one year ago (12,867.20).The average P/E ratio of the TSX60 (equal weighted) is 29.43. 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 3.40% (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):

Other Assets

Base Metals (ZMT.to), Crude Oil (HUC.to), Canadian Stocks (ZCN.to), Global Stocks (XIN.to), US Stocks (SPY), International Stocks (VDU.to), Real Estate (XRE.to), Silver (HUZ.to), Natural Gas (HUN.to), Gold (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%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) cash
Market Outlook, January 16, 2017

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