The past week saw a very strong advance by the TSX, rising 1.62%. When it’s hitting new highs, I begin to wonder how long this can last? I’m going to go out on a limb and guess: “a little while longer,” given that the market visited the 15,000 level in 2015, 2014, and 2008. That’s right, we’ve made very little progress over the past nine years. The difference being that the market level reflected a high P/E in 2008, and the economy should have grown since then. Has it? The average P/E is quite high, so earnings reports will be telling.

Interest Rates

The 3 month T-bill rate is 0.41%, the 1 year T-bill rate is 0.50%, the 3 year government bond yield is 0.90%, the 10 year government bond yield is 1.68% and the long government bond yield is 2.35%. 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 1.71%. 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 1.71%. For small caps, it currently appears to be 2.05%.

Credit Environment

Bonds still appear negative and unattractive.

Currency

The Australian dollar (FXA) and Canadian dollar (FXC) 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 are rising:

Canadian bonds are similarly losing ground to Canadian stocks:

Global Markets

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

US Stocks

Yesterday’s closing price was 2,316.10. This is 1.03% higher than last week’s price (2,292.56), and 2.01% higher than last month’s price (2,270.44), and 6.86% higher than the price three months ago (2,167.48), and 5.96% higher than the price six months ago (2,185.79), and 13.50% higher than the price one year ago (2,040.59).The average P/E ratio of the S&P 100 (equal weighted) is 22.26. 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 4.49% (before dividends).

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

  • Apple Inc. (AAPL)
  • Bank Of America Corporation Com (BAC)
  • Morgan Stanley Common Stock (MS)
  • Emerson Electric Company Common (EMR)
  • Philip Morris International Inc (PM)
  • Halliburton Company Common Stoc (HAL)
  • Goldman Sachs Group, Inc. (the) (GS)
  • Allergan Plc Ordinary Shares (AGN)
  • Boeing Company (the) Common Sto (BA)
  • Altria Group, Inc. (MO)
  • Dow Chemical Company (the) Comm (DOW)
  • Allstate Corporation (the) Comm (ALL)
  • International Business Machines (IBM)
  • U.s. Bancorp Common Stock (USB)
  • Jp Morgan Chase & Co. Common St (JPM)
  • The Priceline Group Inc. (PCLN)
  • Time Warner Inc. New Common Sto (TWX)
  • E.i. Du Pont De Nemours And Com (DD)
  • General Dynamics Corporation Co (GD)
  • American Express Company Common (AXP)
  • Costco Wholesale Corporation (COST)
  • Facebook, Inc. (FB)
  • Amgen Inc. (AMGN)
  • Union Pacific Corporation Commo (UNP)
  • Comcast Corporation (CMCSA)

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 15,729.10. This is 1.76% higher than last week’s price (15,456.90), and 1.50% higher than last month’s price (15,497.30), and 8.06% higher than the price three months ago (14,555.40), and 6.31% higher than the price six months ago (14,796.10), and 16.70% higher than the price one year ago (13,478.10).The average P/E ratio of the TSX60 (equal weighted) is 29.52. 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 3.39% (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)
  • Encana Corp. (ECA.to)
  • First Quantum Minerals Ltd (FM.to)
  • Kinross Gold Corp. (K.to)
  • Barrick Gold Corporation (ABX.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • National Bank Of Canada (NA.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Rogers Communications Inc., Cl. (RCI-B.to)
  • Bank Of Nova Scotia (BNS.to)
  • Bank Of Montreal (BMO.to)
  • Silver Wheaton Corp. (SLW.to)
  • Restaurant Brands International (QSR.to)
  • Royal Bank Of Canada (RY.to)
  • Manulife Fin (MFC.to)
  • Canadian Imperial Bank Of Comme (CM.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), Canadian stocks (ZCN.to), US stocks (SPY), Silver (HUZ.to), Real estate (XRE.to), Global stocks (XIN.to), Global Infrastructure (ZGI.to), Natural Gas (HUN.to), and International stocks (VDU.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%) real estate
  • One unit (20%) Canadian stocks
  • One unit (20%) US stocks
  • One unit (20%) international stocks
  • 1 unit (20%) cash
Market Outlook, February 13, 2017

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