Long bond yields are creeping up, which translates into falling bond prices. The stock market was flat for the week. Oil prices don’t seem to have a clear direction.

Interest Rates

The 3 month T-bill rate is 0.45%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.93%, the 10 year government bond yield is 1.77% and the long government bond yield is 2.43%. 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 1.75%. 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 1.74%. For small caps, it currently appears to be 2.07%.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher.


Currency

The Brazilian Real (BZF), Australian dollar (FXA), Swedish krona (FXS), Canadian dollar (FXC), Chinese yuan (FXCH), and Swiss franc (FXF) 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 vs. US stocks:

Canadian bonds vs. Canadian stocks:

Global Markets

  • Turkey Investable has changed 8.72% in price since last week’s close.

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

US Stocks

Yesterday’s closing price was 2,297.42. This is 0.72% higher than last week’s price (2,280.90), and 1.25% higher than last month’s price (2,269.00), and 9.99% higher than the price three months ago (2,088.66), and 6.15% higher than the price six months ago (2,164.25), and 15.47% higher than the price one year ago (1,989.57).The average P/E ratio of the S&P 100 (equal weighted) is 22.01. 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 4.54% (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)
  • Apple Inc. (AAPL)
  • Jp Morgan Chase & Co. Common St (JPM)
  • Halliburton Company Common Stoc (HAL)
  • Comcast Corporation (CMCSA)
  • U.s. Bancorp Common Stock (USB)
  • Union Pacific Corporation Commo (UNP)
  • Twenty-first Century Fox, Inc. (FOX)
  • Wells Fargo & Company Common St (WFC)
  • Twenty-first Century Fox, Inc. (FOXA)
  • General Dynamics Corporation Co (GD)
  • American Express Company Common (AXP)
  • Kinder Morgan, Inc. Common Stoc (KMI)
  • Emerson Electric Company Common (EMR)
  • Boeing Company (the) Common Sto (BA)
  • Amgen Inc. (AMGN)
  • Capital One Financial Corporati (COF)
  • The Priceline Group Inc. (PCLN)
  • Dow Chemical Company (the) Comm (DOW)
  • International Business Machines (IBM)
  • Conocophillips Common Stock (COP)
  • Allstate Corporation (the) Comm (ALL)
  • Philip Morris International Inc (PM)
  • Texas Instruments Incorporated (TXN)
  • Time Warner Inc. New Common Sto (TWX)
  • Merck & Company, Inc. Common St (MRK)
  • E.i. Du Pont De Nemours And Com (DD)
  • Facebook, Inc. (FB)
  • General Motors Company Common S (GM)

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 15,476.40. This is 0.46% higher than last week’s price (15,405.10), and -0.13% lower than last month’s price (15,496.10), and 6.67% higher than the price three months ago (14,509.30), and 6.52% higher than the price six months ago ($14,528.80), and 15.56% higher than the price one year ago (13,392.90).The average P/E ratio of the TSX60 (equal weighted) is 28.50. 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 3.51% (before dividends).

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

  • First Quantum Minerals Ltd (FM.to)
  • Teck Resources Limited Cl B (TCK-B.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Manulife Fin (MFC.to)
  • National Bank Of Canada (NA.to)
  • Bank Of Montreal (BMO.to)
  • Royal Bank Of Canada (RY.to)
  • Bank Of Nova Scotia (BNS.to)
  • Barrick Gold Corporation (ABX.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), Oil (HUC.to), US Stocks (SPY), Global Stocks (XIN.to), Canadian Stocks (ZCN.to), International Stocks (VDU.to), Natural Gas (HUN.to), Infrastructure (ZGI.to), Silver (HUZ.to), and Real Estate (XRE.to) are performing better than cash.
The gold price is falling, which may indicate bullishness toward stocks.
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%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 2 units (40%) cash

 

Market Outlook, February 6, 2017

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