Posts Tagged ‘Canadian’
Thursday, May 9th, 2013
For this weeks edition of the SIA Equity Leaders Weekly, we will update our outlook on the Canadian Equity market looking specifically at the channel the TSX Composite has been in for the last 21 months and comparing the Canadian Equity index to the U.S. Equity index to see if the relative strength relationship has changed.
S&P/TSX Composite Index (TSX.I)
Updating the S&P/TSX Composite Index since we last looked at it a quarter ago on Valentines Day shows that the TSX.I has actually pulled back to the support level we highlighted at 11733.33, most likely tied to the Commodities sell-off in early April. Below this is further support at 11056.58 should the weakness continue. To the upside, resistance can be found at 12954.55, a level it also failed to move above in April of 2012 and 2013. A break through this level could see some potential upside towards rechallenging the high from June of 2010 at 14302.87.
So while the TSX Composite has been range bound between 11000 and 13000 over the last 21 months with no growth, the U.S. Equity indexes (S&P 500 Composite, Nasdaq, Dow) have all moved on to new all-time highs. With a neutral SMAX (near-term strength) score of 5 out of 10, we continue to monitor closely these asset class comparisons (see comparison below) and if the TSX Composite can break out of the channel it is currently in.
S&P 500 Composite Index vs. S&P/TSX Composite Index (SPX.I vs. TSX.I)
This chart shows the continued outperformance we have seen from the S&P 500 Composite index over the S&P/TSX Composite index with the green arrow showing the relative outperformance since October of 2011. Since the last time we looked at the TSX.I three months ago, the SPX.I has comparatively outperformed by around 10%. If we look at the past 21 months where the TSX.I has been range bound like indicated above, the S&P 500 Index is up around 33% while the TSX Composite is down around 2%. We continue to see relative strength of U.S. Equity over Canadian Equity at this time with the ‘VS SMAX’ score (comparison score) of 7 in favor of the SPX.I over the TSX.I.
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Tuesday, May 7th, 2013
By Tom Bradley, Steadyhand Investment Funds
In Saturday’s Report on Business, there was a remarkable table embedded in Rob Carrick’s article (How to Shelter Your Portfolio From a Housing Decline). It showed the top 10 Canadian equity funds (by assets) and the top 10 Canadian dividend income funds.
What struck me was the puny size of the biggest Canadian equity funds. Outside of the iShares S&P/TSX 60 Index Fund ($11.5 billion), which is an ETF that’s used mostly by institutional investors, the next largest fund was RBC’s Canadian Equity Fund at $2.3 billion. The 10th largest fund was under a billion dollars.
The list of dividend funds, on the other hand, was considerably deeper and shows where Canadian mutual fund investors have focused their portfolios. The largest fund was again RBC’s (RBC Dividend – $10 bln), followed by TD Dividend Growth ($5.5 bln), Scotia Canadian Dividend ($3.5 bln), BMO Dividend ($3.3) and Sentry Canadian Income ($2.5 bln).
I recognize that conventional mutual funds are in decline, but the lists confirm a point we’ve been making over the last year – with the steady shift to stable, income-oriented stocks, Canadian portfolios have become less diversified. For example, the dividend income funds in the table are heavily tilted toward financial services stocks and own few resource, technology and industrial stocks.
With the solid past performance of income-oriented stocks, it’s easy for investors to lose track of where their portfolios have crept. I say that because I firmly believe a portfolio narrowly focused on Canadian banks, pipelines and REITs will significantly underperform a well-rounded one that includes small, medium and large companies in a range of industries and geographies.
Friday, January 25th, 2013
by Don Vialoux, TechTalk
Editor’s Note: Don Vialoux is scheduled to appear on BNN Television at 4:50 PM EST on Monday)
Pre-opening Comments for Friday January 25th
U.S. equity index futures are higher this morning. S&P 500 futures are up 5 points in pre-opening trade. Index futures are responding to higher than consensus fourth quarter results by Starbucks, Halliburton, Procter & Gamble, Kimberly Clark, KLA Tencor and TempurPedic.
Other companies to report fourth quarter results included AT&T, Microsoft, Juniper, ETrade, Samsung, Honeywell and Hasbro.
Canada’s December Consumer Prices were significantly lower than expected. Consensus was a decline of 0.2% from November. Actual was a decline of 0.6%. On a year-over year basis, Canada’s Consumer Price Index increased 0.8%.The Canadian Dollar dropped 0.45 cents U.S. on the news.
Goldman Sachs slipped $0.80 to $144.16 after Citigroup and Deutsche Bank downgraded the stock from Buy to Hold.
Ford eased $0.01 to $13.86 after Barclays downgraded the stock from Overweight to Equal Weight.
Canadian Pacific dropped $0.40 to $112.67 after Canaccord downgraded the stock from Hold to Sell.
JP Morgan added $0.54 to $46.91 after Deutsche Bank upgraded the stock from Hold to Buy.
Oracle (ORCL $34.94) is expected to open lower after Goldman Sachs downgraded the stock from Conviction Buy to Buy.
Amgen added $0.71 to $83.33 after Argus upgraded the stock from Hold to Buy.
EBay improved $0.71 to $55.90 after Susquehanna initiated coverage with a positive rating.
Rentech Nitrogen, Agrium and CF Industries are expected to open higher after Dahlman Rose upgraded them from Hold to Buy based on improving nitrogen pricing.
Halliburton Co. (NYSE:HAL) – $39.59 added 4.7% after reporting higher than consensus fourth quarter results. The stock has a positive technical profile. Intermediate trend is up. The stock broke above resistance at $37.90 on Wednesday and is expected to break above resistance at $38.76 at the opening to reach a 14 month high. Next resistance at $39.88 is about to be broken. The stock has formed a massive reverse head and shoulders pattern. The stock remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has been positive since mid-November. Short term momentum indicators are overbought. Seasonal influences have just turned positive for a move into May. Preferred strategy is to accumulate the stock at current or lower prices.
Despite major U.S. equity indices closing at new highs (Dow Industrials, Dow Transports, Russell 2000, S&P 500), selected sectors are struggling on a real and relative basis.
Gold equities are leading the Mines and Metals sector on the downside.
The Technology sector also is leading on the downside thanks mainly to weakness in Apple.
Updates on Sector Season Trades
Seasonal trades preferably have a technical score of 3 based on (1) trending up, (2) trading above its 20 day moving average and (3) outperforming the market.
Technical score for the forest product equity ETF is 3.0. End of the period of seasonal strength is mid-February and (if extended) the first week in April.
Technical score for the TSX Mines and Metals sector fell from 1.0 to 0.0 when the Index closed below its 20 day moving average yesterday. Short term traders are taking profits. The sector has a history of underperformance between now and mid-February.
Technical score for the Industrial sector is 3.0. The Index and its related ETF closed at another all-time high yesterday. Seasonal influences are positive until early May.
Technical score for the Consumer Discretionary sector and related ETFs is 3.0. The Index closed at an all-time high yesterday. Seasonal influences are positive until mid-April.
Technical score for the Agriculture ETF is 3.0. The period of favourable seasonality has passed, but technical remain strong. Hold until technical scores start to decline.
Technical score for the Semiconductor sector is 3.0, but strength relative to the S&P 500 is close to turning negative for a possible downgrade to 2.0. Seasonal influences are positive until the first week in March.
Technical score for the Materials sector is 3.0. Seasonal influences currently are favourable, but turn more positive at the end of February. The Index is heavily weighted in chemical stocks.
Technical score for the Homebuilders ETF remains 3.0. Its period of seasonal strength ends in the first week in February.
Copper maintains a technical score of 2.0. Relative strength has yet to turn positive. Seasonal strength is positive until May.
Silver maintained its technical score of 3.0 despite weakness yesterday. Its period of seasonal strength is positive until at least the first week in March.
Ditto for Platinum! Technical score is 3.0.
Ditto for Palladium! Technical score is 3.0
Technical score for Canada’s energy sector changed from 2.0 to 3.0 thanks to confirmation that strength relative to the TSX Composite has turned positive. Seasonal influences are positive until at least early May and possibly mid-June on an extension.
Technical score for the U.S Oil & Gas Exploration and Development sector is 3.0. Seasonal influences are positive until the end of April.
Technical score for the Oil Services sector is 3.0. Seasonal influences are positive until May 9th
Thackray’s 2013 Investment Guide
Thackray’s 2013 Investor’s Guide is here. Order through www.alphamountain.com , Amazon, Chapters or Books on Business.
Special Free Services available through www.equityclock.com
Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.
To login, simply go to http://www.equityclock.com/charts/
Materials Sector Seasonal Chart
Eric Wheatley’s Weekly Column
Hello to all you as-yet unthawed readers,
I remember when the VIX was still a new and extremely esoteric index. Volatility is a vague concept at its simplest (the standard deviation of a randomly chosen data set), so a 30-day annualised implied volatility index – actually based upon a variance swap, which is important to know – shouldn’t intuitively have become a cornerstone index for market commentators everywhere. Yet here we are: you can now buy or sell numerous ETFs and futures on the index and you can even buy or sell options on the products based upon an index which measures options prices [which pretty much just resembles the pivotal scene from Being John Malkovitch in terms of circular reasoning].
Given that Mr. Vialoux has always granted me editorial freedom in this forum, I’ll take a stab at formulating my opinion of the VIX and its application to regular people: it’s like planning your summer 2015 wedding and choosing the date based upon average temperatures and rainfall in Winnipeg over the past ten years. To wit: the VIX measures implied volatility in the first two expiries of S&P 500 index options. If you own the S&P 500 or its proxies (e.g. SPY or XSP), it’s like living in Winnipeg in our example; that is, the data can be a little relevant. If your holdings are geographically diversified, focused on certain industries or hedged, then it would be like living in Halifax and using Winnipeg data. Not to say that the information has NO relevance, but it certainly isn’t ideal.
As long as you understand that index options are different animals from stock options (Reference: I used to trade index options and futures primarily and stock options off of our index positions) and that the data come from a small corner of the markets, then yes, the VIX can be relevant. Since it is based on one of – if not the – most liquid options classes in the world and is used by most every type of market participant, it can give you some insight into whether people are buying or selling options more generally. This, in turn, can help you get some instinctive feel for market sentiment. What I get a little bent out of shape about is that people place just a little too much credence in the number.
To get back to our previous weeks’ subject, on December 31st the VIX spiked. This was a very good coincident indicator of the market’s going a little goofy ahead of the uncertain fiscal situation in the States. Since then, the index has dropped back into its regular dozy little underpriced groove. For many months now, people have been stating quite confidently that this means that the market is about to experience a major reversal of fortune, because the VIX is KNOWN to be a contrarian indicator and it’s at record lows. In fact, the market has been quite volatile (or at least it was a few months ago), but yield-hungry options sellers are keeping volatilities particularly low, much like bond or dividend yields which are also extremely unyielding nowadays.
As with everything else, you have to get to know what you’re studying and understand its behaviour. On a charting website, I’ve no lessons to give to people who, by their very nature, understand the subjectivity and ambiguity of certain indicators and their occasional false signals.
In this week’s French-language blog: gods in machines, Algerian memories and the seventh circle of hell.
Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
Blogue en français : gbsfinancier.blogspot.ca
Little known fact about John Charles Hood #58
John Charles Hood is well acquainted with Dante’s œuvre. Luckily, he’s remained extremely limber and will do well in limbo.
Tech Talk’s Weekly ETF Column
(Published yesterday at www.globeandmail.com )
Headline reads, “Beat the U.S. indexes with these Canadian ETFs”. Following is a link to the report:
Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC January 24th 2013
Copyright © TechTalk
Friday, January 25th, 2013
Real-Life Example of Finding Upward Surprises (NFLX)
and Avoiding Downward Surprises (AAPL) with SIACharts
by Paul Kornfeld, SIA Charts
You may have been noticing SIACharts has been providing daily technical analysis charts on Advisor Analysis for a couple months now, but maybe you have never taken the time to really see the value the charts are showing you or that the full SIA system provides to many investment advisors across Canada. This morning, we are going to take a look at two U.S. Equities, Apple and Netflix, that everyone is hearing about in the news. This technical viewpoint might show you something different than what many media sources are saying and is a timely example on how relative strength and technical analysis can help you in the future for when to get in and out of different stocks you may own or are looking to own.
Downward Surprise: APPLE
Apple Inc. (AAPL) has been a holding that SIA has recommended as a Buy and Hold for almost four years since March of 2009. On March 11, 2009, AAPL moved into the favored zone of the SIA S&P 100 Report at $92.68 and hit our buy opportunity on March 15, 2009 at $95.42. It stayed in the favored zone until just two and a half months ago as you can see in the chart below.
But, the SIA system saw relative weakness against its peers when Apple moved out of the Favored zone and hit our technical stops to sell Apple on November 7, 2012 at $558.00 as seen in the chart below.
Since this time, Apple has continued to fall and had its largest one day loss in five years on January 24supth/sup, 2013 losing over 12% and an estimated $65.8 billion dollars in market cap. Since our SIA sell signal on November 7supth/sup, Apple has fallen another 19.3% to $450.50.
So what does the future hold for Apple from a technical standpoint? Well, the long-term relative strength is weak for Apple compared to its peer group as it is now found near the bottom of all SIA Relative Strength Reports for an outlook of the next 6-18 months. In the Point and Figure chart seen below, support can be found above $412.83 and above $396.80. If needed, another level of support can be found at $359.39. To the upside, resistance is found at $493.37 and at $534.04 should the weakness reverse. The near-term indicator (SMAX score) has a score of 0 out of 10 giving no indication that the strength will reverse in the next 1-90 days without a fundamental change.
So should you buy into Apple in this period of weakness and hope it turns around? The short answer is NO according to the SIA Relative Strength Reports. These reports and Relative Strength technology can help give you a system and a set of rules to follow to know when the right time is to help reduce your risk of the downward surprises that we just saw with Apple. If you had been using the SIA system over the last five years and entered into the Apple at $95.42 when our system suggested it and got out at $558.00, you would have captured a 484.8% return in just under four years and saved the recent downfall by 19.3% protecting your clients.
Upward Surprise: NETFLIX
Around the same time period that our system was suggesting to sell Apple, Netflix (NFLX) began to move up the SIA Reports and entered the Favored zone of the SIA S&P 500 Report on Oct 31, 2012 at $79.24.
You can see on the chart below that the momentum has not slowed down and on January 24, 2012, NFLX had a 42.2% run after better than expected earnings. Although technical analysis doesn’t take into account the earnings, what the SIA Relative Strength system can do for you is help you find stocks like Netflix that increase your chance of a positive report coming out as the technicals can help show the positive or negative money flow before these announcements.
What does the future look like for Netflix? Is it too late to buy in? Well, many people get stuck on the notion that they have missed the big opportunity or the big run and that stock can only go down because it is overbought. Although, sometimes this may be true (buyouts, mergers, acquisitions are prime examples usually), using the point and figure chart below, we can see that there is still positive indication that the run with NFLX may not be done. Resistance above is found at $173.14 and above this at $206.92 which is the target objective. Support to the downside is found at $133.85 and at $121.23. The near-term (SMAX score of 10) and all other secondary indicators on our system also show positive.
Although SIACharts never recommends the buying/selling of any investment, hundreds of advisors across North America rely on SIACharts to help them with finding the best investments to be in and more importantly when to possibly exit the position and look for better opportunities. Using these examples above, in just two and half months, SIACharts could have helped you with a strong104.6% swing/strong (+85.3% in NFLX trade and -19.3% in AAPL trade). span style=”text-decoration:underline”Using SIA’s system, you can help increase your odds of finding these positive upward surprises and help decrease your chances at the negative downward surprises like these two examples showed today/span.
Contact SIACharts today at firstname.lastname@example.org to learn more or sign up for a FREE two-week trial to get full access to the system and have a personal walk-through with one of the Support staff to help you understand how it can be fully customized to fit your unique investment practice.
SIA Charts Daily Stock Report (siacharts.com)
The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the S&P/TSX 60, S&P/TSX Completion and S&P/TSX Small cap We overlay these powerful reports with our extensive knowledge of point and figure and candlestick chart signals, along with other western-style technical indicators to identity stocks as they breakout or breakdown. In doing so we provide our Elite-Pro Subscribers with truly independent coverage of the Canadian stock market with specific buy and sell trigger points.
Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices (e.g. Income Trusts, Precious Metals), and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian ETFs, ETF Families by issuer (iShares, Horizons, BMO) or as components of Equally Weighted ETF Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).
APPLE INC (AAPL) NASDAQ – Jan 25, 2013 (SIA Daily Stock Report)
GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone
APPLE INC (AAPL) NASDAQ – Jan 25, 2013 – Since leaving the Favored zone (on November 8, 2012) of the SIA S&P 100 Report, Apple (AAPL) has continued to move down the rankings and had its biggest one-day ossinfive years dropping an estimated $65.8 billion dollars in market cap with the slide while in the Unfavored (Sell) zone of SIA Reports. Support can be foud $412.83 and above $396.80. To the upside, resistance is at $493.37 and at $534.04. The SMAX score is a 0 out of 10.
November 8, 2012 – Apple (AAPL) finished October on weakness which has continued on now into November. As a result, AAPL has fallen out of the Favored zone (November 8, 2012) in the SIA S&P 100 Report yesterday and hit our secondary stops. Support is now at $523.57 and again below that at $474.21. Overhead resistance is at $589.62 and again above that $638.23.
Since leaving the Favored zone (on November 8, 2012) of the SIA S&P 100 Report, Apple (AAPL) has continued to move down the rankings and had its biggest one-day ossinfive years dropping an estimated $65.8 billion dollars in market cap with the slide while in the Unfavored (Sell) zone of SIA Reports. Support can be foud $412.83 and above $396.80. To the upside, resistance is at $493.37 and at $534.04. The SMAX score is a 0 out of 10.
SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.
Copyright © siacharts.com
Thursday, January 17th, 2013
by Bob Simpson, Synchronicity Performance Advisors
In this article, I am going to focus on a less glamorous subject – the fixed income component of your client portfolios.
Most of you probably don’t know that I was Fixed Income Strategist in one of my roles at Midland Walwyn Capital during the 1990s, before I changed my path into branch and national sales management. Before that I was a fixed income portfolio manager for a publicly traded insurance company.
For the last 15 years, I have been coaching financial advisors, primarily in practice management with an emphasis on client relationship management and business development. In 2012, I expanded that to investment management because there seems to be a demand from advisors to build more structured, disciplined and profitable client portfolios.
To help me with this, I have formed a relationship with SIACharts, a Canadian-based firm that provides industry-leading technical analysis research tools exclusively for financial advisors. In this relationship, I will be helping them with distribution and helping advisors to implement the program in their businesses.
Although fixed income is much less glamorous than equities, especially with interest rates near zero, you probably have a relatively high percentage of your client assets in fixed income or income generating investments.
If you use laddered strategies for the fixed income portions of your portfolios and are very careful with quality, this article may be of little use to you. If you build five-year ladders, you are protected if rates decline because 4/5th of your portfolio is invested and if rates rise, you can roll your maturities into new positions at higher rates. If you use a 5-year laddered ETF, you accomplish much the same result without the maintenance. The iShares 1 – 5 Year Laddered Government Bond Index (CLF.TO) has a current weighted yield to maturity of 1.54%.
If on the other hand, you use longer-term maturities to help generate return through the purchase of 10-year or longer bonds, ETFs like iShares DEX Universe Bond Index Fund (XBB.TO), bond funds or you get your bond allocation through balanced funds, you should keep a close eye on price and yield movements in the bond market.
Some advisors have turned their focus to lower investment quality bonds or income trusts to pick up some extra yield. I am not a big fan of this practice. When I was an advisor at Nesbitt in the 1980s, my manager tried to get me to take down a position in BCE Development retractable preferred. I sent him back to syndication to confirm that it was guaranteed by BCE and when I heard “NO”, I declined. This preferred share never paid a single dividend and investors lost their entire investment within months.
Here are some thoughts on how you could use SIACharts to manage your bond strategies:
Let’s start by looking at the longer-term bond market. The chart below is a point a figure chart for XBB.TO:
Point & Figure (P&F) charts are relatively simple to read – if you are in a column of Xs, buyers are in control and if you are in a series of Os, sellers are in control. Letters and numbers other than Xs and Os represent the month of the year (1 – 9 for Jan to Sept and A,B,C for Oct to Dec). You don’t change columns unless there is a three-box reversal, so XBB.TO would have to trade down to 30.30 before you change to the Os column. There is more to this but this is a quick overview. You can get comfortable with P&F in a couple of hours.
So it has been a very comfortable ride holding bonds since 2008.
Next, let’s look at holding bonds vs holding equities.
This chart compares price movements of Canadian equities vs. Canadian bonds. When this chart is in a column of Xs, stocks are the stronger asset class and when in a column of Os, bonds are stronger (based on XIC.TO – TSX 60 and XBB.TO). Bonds was the stronger asset class from the end of 2010 through mid 2012.
May 1, 2011 to
September 4, 2012
September 4, 2012 to January 12, 2013
|Bonds (XBB.TO)||8.55% compounded annually||0.12% compounded annually|
|Canadian Equities (XIU.TO)||- 8.51% compounded annually||6.14% compounded annually|
Be careful not to get too complacent about longer-term bond positions. Bonds have been in a bull market since 1981 and long-term yields have dropped from 16% to close to 2% today. If you were an advisor in 1994, you will remember the pain inflicted on clients’ bond portfolios and that was when rates were considerably higher than they are today. These occurrences have been few and far between. If you hold bonds, rather than bond funds, you can mature your mistakes.
You can use a similar approach to monitor the quality risk of your fixed income positions. A point & figure chart could have helped you to see that Yellow Media preferred shares were in trouble or a relative strength analysis may have pointed you to stronger investments.
So what do you do with your longer-term bond, bond fund or longer-term bond ETFs? As the first chart in this article shows, there is still some short-term strength in bonds today. If I analyze the Canadian mutual funds section of the SIACharts program, Canadian Long Term Fixed Income is number 2 ranked of 45 sectors. Canadian Dividend & Income Equity is number 4 ranked and High Yield Fixed Income is number 7. The SIACharts ETF portfolio holds a 20% position in bonds, behind US equities and International equities and ahead of Canadian equities.
From a fundamental approach, would I buy or hold government bonds to yield slightly more than 2%? Or phrased another way, would I lend money to the Government of Canada at 2% for 10 or more years and pay a fee to have that managed? I would choose a shorter-term ladder instead. But the technicals remain strong for the time being on longer maturities.
Bob Simpson is President of Synchronicity Performance Consultants, a firm that has been providing consulting services to financial advisors for the past 15 years, focusing on the Core Stabilizers of successful advisor practices (Client Relationship Management, Investment Management and Business Development). He is an independent contractor (distribution, advice and consulting) for SIACharts, a Canadian-based firm that provides industry-leading technical analysis research tools exclusively to financial advisors.
For more information about SIACharts, please contact Bob at 905-502-0100 or email@example.com. Contact Bob to arrange a free one-hour discussion with Bob and a member of the SIACharts team and a free 14-day trial.
Bob Simpson, Synchronicity Performance Advisors, Synchronicity Business Coaching Inc., and SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Bob Simpson, Synchronicity Performance Advisors, Synchronicity Business Coaching Inc. SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Back tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to indicate historical performance had SIA Report portfolio(s) been available over the relevant period. Past performance does not guarantee future results. Investment returns and principal value will fluctuate, so that investors’ shares, when sold, may be worth more or less than their original cost. Investing in any investment process, does not guarantee that an investor will make money, avoid losing capital, or indicate that the investment is risk-free. There are no absolute guarantees in investing so when reviewing any back tested performance information on the Synchronicity.com or SIACharts.com website, email content, or other materials, ensure that you do not use to make investment decisions.
Copyright © Synchronicity Performance Advisors
Friday, January 11th, 2013
January 10, 2013
By Tom Bradley, Steadyhand Investment Funds
Having been early and loud with my concerns about Canadian housing prices, I’m following with interest the daily coverage of the residential real estate market. I have a few thoughts on what I’ve read so far.
Not a big deal … yet
Despite all the front page coverage, the weakness in the market hasn’t amounted to much yet. A few markets, or pockets, are down meaningfully, but the overall price declines can’t be described as anything worse than a ‘flat’ market. I expect it will get a lot weaker, but the declines so far are no worse than some of the lulls we’ve had during this long run.
More interesting to me is the lower sales volumes. When houses aren’t moving, it’s often a precursor to lower prices. But again, we shouldn’t read too much into the current slowdown. Recent volumes are being compared to some pretty rarified levels. I’m sure my real estate agent friends won’t agree, but today’s turnover isn’t that bad. There are still houses selling in less than a week.
In every article about the softening market, the changes to the mortgage insurance rules by CMHC are mentioned in the first five or six paragraphs. Finance Minister Flaherty is always being blamed for the slowdown. Well, certainly the changes have prevented some transactions from getting done, but let’s not forget, a mortgage with a 25-year amortization and 2-3% interest rate is a pretty sweet deal. I think the real estate industry needs to give its head a shake. Does our housing market really need 35-40 year mortgages and near-zero rates to stay healthy?
There are a few other reasons why the market might be slowing down. Even if CMHC reversed the rules tomorrow, we’d still be in a situation where:
- House prices have grown much faster than incomes for more than a decade.
- The buy vs. rent ratio is out of whack (in favour of renting).
- Consumer debt levels are at all-time highs.
- And the housing affordability index is on the expensive side, even though near-zero rates are being used in the calculation.
The only thing we should blame Mr. Flaherty for is not doing something sooner. Former Bank of Canada governor David Dodge had it right when he went ballistic in 2006. When CMHC increased the allowable amortization period to 35 years and permitted interest-only mortgages, he said, “Particularly disturbing to me is the rationale you [CMHC] gave that ‘these innovative solutions will allow more Canadians to buy homes and to do so sooner.’” Mr. Dodge said that these new practices were more likely to drive up prices and make houses less affordable.
Recovery from what?
I think it’s telling that although we really haven’t had any meaningful weakness yet, there are already some industry people calling for a recovery. It’s telling because it reveals how programmed we are for steadily rising prices. To call for a turnaround when prices only started weakening a few months ago is absurd. As of December 31st, Toronto condo prices are up 7% year over year, not down.
An overvaluation in the housing market can play out in any number of ways. Higher unemployment and rising mortgage rates would likely mean a significant, early 90’s type fall. An okay economy and continued low rates might allow prices to stay near current levels for a number of years. And there are all kinds of other possible scenarios.
The ‘prices leveling off’ scenario is the consensus right now. In the paper yesterday there were two bank CEO’s and the head of a real estate company predicting “relatively stable” price levels, a “soft landing” and “flat sales volumes” year over year. As I’ve said before, long-running, extreme economic cycles very rarely end without a severe reversal. In fact, I can’t think of any. Of all the possible scenarios, I think it’s heroic to predict that house prices are going to flatten out after they’ve been rocketing up for more than a decade.
What I said in a June, 2006 blog posting about the U.S. housing market seems apropos for Canada in 2012: “I thought the U.S. housing boom would have ended a couple of years ago. I’ve been wrong on that. But by going on longer and climbing to greater heights than many of us expected, it has made a long and ugly retrenchment all the more likely.”
My views may prove to be early or just flat out wrong, but the point here is that we shouldn’t be too hasty in drawing any conclusions, especially based on short-term stats and self interested predictions. We’re in the early innings of a fascinating game.
Copyright © Steadyhand Investment Funds
Thursday, January 10th, 2013
TD Waterhouse’s Portfolio Advice and Investment Research Team has released its Technical Outlook for 2013.
Attached is their 2013 Technical Outlook, which they will be presenting in today’s morning conference call. Highlights include:
· Given our belief that U.S. equity markets remain in a long-term sideways trading range, we believe the S&P 500 Index (S&P 500) will be capped on the upside at 1,550-1,575 in 2013. On the downside, we believe the S&P 500 could find support at 1,265-1,275. Key levels to watch on the downside include 1,380-1,390 (intersection of the long-term uptrend and 50-week moving average), and 1,343 (November 2012 lows). Overall, we expect volatility to increase in H1/13 as investors refocus their attention on U.S. politics, with U.S. lawmakers having to address the debt limit and sequestration in February/March. Improving seasonality and increased clarity around these issues could lead to a stronger second half of the year, resulting in modest gains for U.S. equities in 2013.
· With our expectations for modest economic growth and range-bound trading for commodity prices, we see the S&P/TSX Composite Index (S&P/TSX) trading in a range of 13,500-11,250, with the index posting modest gains for the year.
· Favoured U.S. sectors include Health Care and Financials, and in Canada, Industrials and Consumer Staples. At risk U.S. sectors include Telecommunications and Energy, and Utilities and Health Care in Canada.
· The key to the equity markets this year will be what unfolds in the bond market, in our view. Following the release of the December Federal Reserve (Fed) minutes, which hinted that Quantitative Easing (QE) could end in 2013, the 10-year U.S. Treasury yield surged to 1.91%, resulting in the benchmark bond breaking above its long-term downtrend. We believe the 10-year Treasury yield will continue to trade range bound between 1.60% and 2.40% through 2013.
· Gold has been in a short-term downtrend since hitting an important technical resistance level of roughly US$1,800/oz. in September 2012. We attribute some of the recent weakness to the December Fed minutes, which captured an increasing concern from some Fed officials over its asset purchases. Overall, we believe gold will make another attempt at the US$1,800/oz. level, and possibly the all-time high of US$1,900/oz.
· U.S. stock picks include Ford Motor Co. (F-N), Pfizer Inc. (PFE-N), Qualcomm Inc. (QCOM-N), and Norfolk Southern Corp. (NSC-N). Canadian stock picks include Precision Drilling Corp. (PD-T), Franco-Nevada Corp. (FNV-T), Alimentation Couche Tard (ATD.B-T) and Goldcorp Inc. (G-T).
You can read or download the complete report below:
Wednesday, January 9th, 2013
BMO ETF Portfolio Strategy Report
A New Year, and More Market Resolutions
by Alfred Lee, CFA, CMT, DMS
Vice President, BMO ETFs
Portfolio Manager & Investment Strategist
BMO Asset Management Inc.
In this report, we highlight our strategic and tactical portfolio positioning strategies for the first quarter using various BMO Exchange Traded Funds.
• The fiscal cliff drama finally came to an end on New Year’s day. A compromise deal was reached that prevented an end to spending cuts and an increase in taxes to the middle class. The House of Representatives voted 257-167 to approve the fiscal cliff bill, which allows tax increases to individuals and households making US$400k and US$450k respectively. Over the quarter, the focus of investors will shift towards the already breached U.S. debt ceiling, giving Congress roughly two months to raise its legal borrowing limit.
• The Federal Reserve Board (Fed) announced a fourth round of quantitative easing1 (QE4) at its December FOMC2 meeting, to replace Operation Twist3 which expired at the end of 2012. This rendition of the monetary easing measure was given thresholds, allowing the Fed to keep rates low as long as unemployment remained above 6.5% and inflation expectations remained below 2.5%.
• The power transition in China was also completed over the quarter, paving the way for the country’s new regime. While modernizing China’s infrastructure will continue, it is unlikely it will occur at the same rapid pace of 2009-2010, potentially placing headwinds on commodity related sectors of the S&P/ TSX Composite Index (S&P/TSX). As a result, we continue to favour the lower beta trade for Canadian exposure. The failure of the S&P/TSX in following the 4.3% one day surge of the Shanghai Composite Index on December 14 may provide evidence for this thesis.
• With the growing middle class in emerging markets, the focus of their economic policies continues to shift towards consumer consumption and away from commodity intensive projects. Direct exposure in emerging market equities may therefore be more favourable than indirect exposure through Canadian equities. It is possible that the correlation between the S&P/TSX and emerging market equity stocks will decline in coming years, as developing nations have less of a demand for our base metal exports. Many investors have also started reallocating to emerging market equities, which could lead to tailwinds for the asset class.
• Although the European economies continue to remain in a malaise, there have been some positive developments. The OMT4 programme has been a game changer over the short-term, as most European sovereign credit spreads remain well below their one-year averages. Certainly, European stocks can outperform in the first quarter of 2013 and even throughout the year, however from a portfolio management context, returns in this area could come with heightened volatility, particularly since it is the region that is most likely to produce a tail-risk event5. The post crisis era, has favoured more defensive-oriented investments with higher risk-adjusted returns. For that reason, we continue to avoid direct exposure to European stocks, despite the opportunities. Similar to the theme we highlighted back in 2011, we believe multi-nationals provide indirect exposure to the European economy.
Things to Keep an Eye on…
Despite the high debt to GDP ratio of the U.S., the U.S.’s low interest rate policy will continue to encourage carry-trades, where investors borrow in U.S. dollars to fund purchases in riskier assets. During market sell-offs, the U.S. dollar rallies as carry-trade borrowings are paid back. For this reason, the greenback will likely remain inversely correlated to risk assets, making non-currency hedged U.S. equity ETFs less volatile over the long-run.
Recommendation: We have recommended an overweight to U.S. equities since the end of 2010. In that time, U.S. equity indices have outperformed and we continue to believe they provide the best risk-adjusted opportunities amongst broad based equity areas. We now recommend switching from the BMO S&P 500 Hedged to CAD Index ETF (ZUE) to the non-currency hedged exposure to U.S. equities through the BMO S&P 500 Index ETF (ZSP) as a way to lower overall portfolio volatility.
The Fed’s recent announcement of QE4 likely means a prolonged period of low interest rates. This will partially dictate the Bank of Canada’s monetary policy, which will cause yielding assets to continue outperforming growth related investments. A quicker than expected North American recovery, however, could place upward pressure on interest rates. With yields at historic lows, investors should also look for interest rate protection in rate sensitive yielding investments.
Recommendation: Preferred shares have been in high demand given their tax efficient yield and low volatility attributes. With the risk of rising rates, albeit low, we recommend rate reset preferred shares, which provide better protection to rising rates than straight perpetual preferred shares. Investors can obtain diversified exposure to a portfolio of rate resets through the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR).
As previously mentioned in this report, we believe commodity related sectors of the S&P/TSX may continue to face heightened volatility with emerging markets being less reliant on reflationary policies. Our core position in Canadian equities, the BMO Low Volatility Canadian Equity ETF (ZLB) has significantly outperformed the S&P/TSX. Since the launch of ZLB on October 27, 2011, its 17.5% total return has easily outpaced the 4.3% total return of the S&P/TSX over the same time period.
Recommendation: Outside periods of unconventional monetary policy, particularly quantitative easing, lower beta trades have outperformed those of a more cyclical or higher beta nature. Our 9.0% position in ZLB has been one of our most efficient equity exposures, offering high risk-adjusted returns. We recommend defensive oriented ETFs over traditional market-cap weighted ETFs for broad based Canadian equity exposure.
Changes to the Portfolio Strategy:
• With continued geo-political risk stemming from a number of regions, in addition to continued macro-economic headwinds, asset allocation remains important in the portfolio construction process. Our strategy for the first quarter of 2013 remains predominantly defensive in the equity portion of our portfolio, with targeted positions in key cyclical areas for growth opportunities. Our view remains that higher yielding non-Canadian credit plays will continue to provide better risk-adjusted returns than certain areas in equities. Fixed Income:
• Our strategy for fixed income remains unchanged for the first quarter of 2013. The BMO Aggregate Bond Index ETF (ZAG) provides low cost exposure to the broad Canadian bond universe, while more targeted fixed income ETFs provide a further tilt toward our preferred duration and credit exposure. We continue to favour corporate bonds as a slowly strengthening Canadian economy could result in a tightening of corporate spreads. With interest rate futures currently pricing in a zero probability of rates increasing by 0.25% or more in the next six-months, we recommend overweighting mid-term corporate bonds for higher yield. Until rates look close to rising, we continue to recommend the BMO Mid-Corporate Bond Index ETF (ZCM) as a tactical tilt in the fixed income portion of our portfolio. Equities:
• The underlying macro-economic backdrop in the U.S. continues to improve. Economic data in unemployment and housing in the U.S. has shown signs of improvement. We remain positive on U.S. equities, but are switching our 10.0% exposure in the BMO S&P 500 Index Hedged to CAD (ZUE) to an 8.0% position in the non-currency hedged BMO S&P 500 Index (ZSP), as the currency exposure of the U.S. dollar will provide us with an inverse correlation to risk assets. We have pared back our exposure to U.S. equities by 2.0%, as we have increased our exposure to emerging markets.
• We are slightly decreasing our exposure to the BMO Covered Call Canadian Banks (ZWB). Overall, the Canadian banks are more stable than their global counterparts, but have gone on a considerable run since early June. Consequently we are decreasing our position in ZWB by a slight 1.0%. Our position in preferred shares also provides us with exposure to the Canadian banks, but higher up the capital structure. Although financials remains our largest sector overweight, Canadian banks account for a small position of this allocation.
• The Shanghai Composite Index, an emerging market laggard in terms of equity performance over the last two years, had a one day gain of 4.3% on stronger manufacturing data. Lower inflation in many emerging market countries, may allow for more accommodative monetary policy. Should we get a soft-landing in China, this will be positive for the broader emerging market countries. Though Chinese stocks may face headwinds, there are attractive opportunities in the broader emerging market equities. We are initiating a small position of 3.0% in the BMO Emerging Market Equity Index ETF (ZEM).
• The fourth quarter of the year has historically been a seasonal strong period for technology stocks. However, tech stocks continue to run up against headwinds. While the longer-term potential for technology stocks remain positive, from a tactical perspective, we our eliminating our 3.0% position in the BMO Nasdaq-100 Hedged to CAD Index ETF (ZQQ) as its underlying index, the Nasdaq-100 Index, registered a double-top formation, which usually precedes a short-term sell-off. Non-traditional/Alternative:
• Preferred shares have many characteristics that are beneficial to a portfolio, such as non-correlated returns to bonds and equities, tax efficient yield and lower volatility compared to bonds. As mentioned on the previous page, we prefer rate resets given they are less sensitive to rising interest rates. We are initiating a 5.0% position in the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR). In addition to being a portfolio of only rate resets, the portfolio utilizes a laddered approach, where the portfolio is divided in five equal term buckets, organized by reset year. The laddered structure allows an equal portion of the portfolio to reset to the current interest rate environment each calendar year, providing an additional layer of protection against rising rates. • We continue to like gold given the ongoing expansionary monetary policy and lower relative interest rates in the U.S. However, the seasonality for gold tends to be the most significant in the last two quarters of the year. Consequently, we are trimming our position in the BMO Precious Metals Commodity Index ETF (ZCP) by 2.0% to 5.0%, still leaving us with a sizable position.
1. Quantitative easing: An unconventional monetary policy used by some central banks when traditional measures have not produced the desired effect. Money supply is typically increased in an effort to promote increased lending and liquidity.
2. Federal Open Market Committee (FOMC): A committee within the U.S. Federal Reserve that is in charge of determining monetary policy for the country. It makes key decisions on interest rates, money supply and unconventional monetary measures through open market operations.
3. Operation Twist: A program initiated by the U.S. Federal Reserve (Fed) to push down long-term rates by reinvesting the proceeds of selling short-term U.S. Treasuries in issues of longer maturity. By doing so, the Fed aims to stimulate the economy by lowering long-term borrowing costs by flattening the yield curve.
4. Outright Monetary Transactions: A European Central bank program, which enables them to purchase sovereign bonds issued by European member states in the secondary market.
5. Tail-risk: The risk of an outlier or improbable event occurring. Statistically, the event is said to be three standard deviations away from the mean under a normally distributed curve.
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Tuesday, January 8th, 2013
by Axel Merk
Sidetracked by the discussion over the “fiscal cliff” and possibly a New Year’s hangover, it’s time to face 2013 in earnest. Is the yen doomed? Will the euro shine? What about Asian and emerging market currencies? Will gold continue its ascent? And the greenback, will it be in the red?
Before we look too far forward, let’s get some context:
- “Central banks hope for the best, but plan for the worst” was our theme a year ago. With everyone afraid of the fallout from the Eurozone, printing presses in major markets were working overtime. We argued this would benefit currencies of smaller countries – be that the so-called commodity currencies or select Asian currencies – that feel less of a need to “take out insurance.”
- While we were positive on the euro when it approached 1.18 versus the U.S. dollar in 2010, arguing the challenges are serious, but ought to be primarily expressed in the spreads of the Eurozone bond market. Then in the fall of 2011, we grew increasingly cautious because of the lack of process: just as it is difficult to value a company if one doesn’t know what management is up to, it’s difficult to value a currency if policy makers have no plan. In the spring of 2012, when we were most negative about the euro, we lamented the lack of process in a Financial Times column. European Central Bank (ECB) chief Mario Draghi appeared to agree with our concerns, imploring policy makers to define processes, set deadlines, hold people accountable. After his “do whatever it takes” speech in July 2012, he took it upon himself to impose a process on European policy makers in early August 1. We published a piece “Draghi’s genius” where we called for a bottom in the euro. We were inundated with negative feedback in the immediate aftermath of our analysis from professional and retail investors alike, confirming that were not following the herd, nor buying something that’s too expensive.
- While we liked commodity currencies in the first half of the year because of printing presses in larger economies working overtime, we grew a little cautious as the year moved on, partly because of valuations. Each commodity currency has its own set of dynamics, as well as their own Achilles heel: in the case of the Australian dollar, we had some concerns about its two tier domestic economy (not all of Australia was benefiting from the commodity boom), but also about the perceived slowdown in China.
- We studied the Chinese leadership transition with great interest; while 2012 may have been a year in transition, more on the dynamics as we see them play out below.
- Back in the U.S., we squandered another year to get the house in order. The fiscal cliff was a distraction; we need entitlement reform to make deficits sustainable. Europeans have no patent on kicking the can down the road. But unlike Europe, the U.S. has a current account deficit, making it more vulnerable should investors demand more compensation to finance U.S. deficits (that is, higher interest rates).
- Japan: the more dysfunctional the Japanese government has been, the less it could spend, the less pressure it could exert on the Bank of Japan. Add to that a current account surplus, and all this “bad news” was good news for the yen. Countries with a current account surplus don’t need inflows from abroad to finance government deficits; as a result, the absence of economic growth that keeps foreign investors away is of no detriment to the currency. Conversely, countries with current account deficits tend to pursue policies fostering economic growth to attract capital from abroad. However, in late 2012, we published a piece “Is the Yen Doomed?” What happened? Japan was about to have a strong government. More in the outlook below.
- We believe the yen is indeed doomed. We remove the question mark. Prime Minister Abe’s new government sets the stage, but key to watch are:
- Abe’s government will appoint the three top positions at the Bank of Japan, as the governor and both deputy governors retire. Recent appointees have already been more dovish. Japanese culture is said to prefer talk over action, but the time for dovish talk may finally be over (despite their dovish reputation, the Bank of Japan barely expanded its balance sheet since 2008; in many ways, of the major central banks, only the Reserve Bank of Australia has been more hawkish).
- Japan’s current account is sliding towards a deficit. That means, deficits will start to matter, eventually pushing up the cost of borrowing, making a 200%+ debt-to-GDP ratio unsustainable.
- Abe’s government is as determined as it is blind. Abe believes a major spending program is just what Japan needs. As far as the yen is concerned, Abe may be getting far more than he is bargaining for.
- But isn’t everyone negative on the yen already? Historically, it’s been most painful to short the yen; as such, many have not walked their talk. We expect some fierce rallies in the yen throughout the year. Having said that, the yen looks a lot like Nasdaq in 2000 to us. Not as far as technicals are concerned, but as far as the potential to fall without much reprieve.
- The euro may be the rock star of 2013. Boring is beautiful. Sure, there are plenty of problems, but the euro is morphing into yet another currency, but is still priced as if it had a contagious disease. While the Fed, the Bank of England, the Bank of Japan are all likely to engage in further balance sheet expansion (we refer to it as “printing money” as assets are purchased by central banks, paid for by entries on computer keyboards, creating money out of thin air), there’s a chance the ECB balance sheet may actually shrink. That’s because some banks have indicated they will pay back early part of the €1 trillion in 3-year loans taken from the ECB. Some suggest the ECB might print a boatload of money should the “Outright Monetary Transaction” (OMT) program be activated to buy the debt of peripheral Eurozone countries. Keep in mind that the OMT program would be sterilized, likely by offering interest on deposits at the ECB. As such, the OMT would lower spreads in the Eurozone and, through that, act as a massive stimulus. In our assessment, however, such a stimulus is far less inflationary than central bank action in other regions. It’s no longer a taboo to be positive on the euro, but most we talk to are at best “closet bulls.”
- The British pound sterling. The Brits are getting a new governor at the Bank of England (BoE) in the summer, the current head of the Bank of Canada (BoC), Carney. One of the first speeches Carney gave after his appointment was made public was about nominal GDP targeting. Carney will have a chance to replace many of the current BoE board members. That’s the good news, as the old men’s club is in need of a makeover. The not-so-good news is for the sterling. British 10 year borrowing costs have just crossed above those of France. We’ll monitor this closely.
- As the head of the BoC, Carney was particularly apt at talking down the Loonie, the Canadian dollar, whenever it appeared to strengthen. If Macklem, his current deputy, is appointed, we may get a real hawk at the helm of the BoC. We are positive on the Loonie heading into 2013, but will monitor developments closely, as there are economic cross-currents that, for now, Canada appears to be handling very well.
- Staying with commodity currencies, we are cautiously optimistic on the Australian dollar (China better than expected; monetary policy more hawkish than priced in) and New Zealand dollar (more hawkish monetary policy on better than expected growth). We continue to stay away from the Brazilean real and leave it for masochistic speculators looking for excitement.
- We are positive on Norway’s currency (joining the above mentioned rock star, with greater volatility), yet cautious on Sweden’s (priced to perfection is not ideal when things are not perfect, even in Sweden).
- China: the new leadership has indicated that liquidity for the Chinese yuan may be their top currency priority. That’s great news, as we believe it implies policies that attract investment, not just from the outside, but also with regard to a development of a more vibrant domestic fixed income market. We are more positive on China than many; more on that, in an upcoming newsletter (click to sign up to receive Merk Insights)
- Korea, Malaysia, Taiwan: all positive, benefiting from both internal forces, but also beneficiaries of actions in other large economies. If we have to pick a favorite today, it would be Korea, but keep in mind that the Korean won is the most volatile of these currencies.
- Singapore: we continue to like the Singapore dollar. A year ago, we started using it as a substitute for the euro (rather than using the U.S. dollar as the safe haven currency). The currency may well lag the euro’s rise, but the lower risk profile of the currency makes it a potentially valuable component in a diversified basket of currencies.
- Gold. We expect the volatility in gold to be elevated in 2013, but consider it good news, as it keeps the momentum players at bay. We own gold not for the crisis of 2008, not for the potential contagion from Europe, but because there is too much debt in the world. We think inflation is likely a key component of how developed countries will try to deal with their massive debt burdens, even as cultural differences will make dynamics play out rather differently in different countries. Please see merkinvestments.com/gold for more in-depth discussion on our outlook on gold.
- Investors in the U.S. should fear growth. The spring of 2012 saw the bond market sell off rather sharply as a couple of economic indicators in a row came out positively. Bernanke wants to keep the cost of borrowing low, but can only control the yield curve so much. That’s why, in our assessment, he is emphasizing employment rather than inflation, in an effort to prevent a major sell-off in the bond market before the recovery is firmly established. Growth is dollar negative because the bond market would turn into a bear market: foreigners’ love for U.S. Treasuries might wane, just as it historically often does during early and mid-phases of an economic upturn as the bond market is in a bear market.
- Good luck to Bernanke to raising rates in 15 minutes, as he promised he could do in a 60 Minutes interview. Sure he can, but because there’s so much leverage in the economy, any tightening would have an amplified effect. At best, we might get a rather volatile monetary policy. But we are promised by the Fed that this is not a concern for 2013.
- Both of these, however, suggest volatility will rise in the bond market. Remember what got the housing bubble to burst? An uptick in volatility. That’s because leveraged players, momentum players run for the hills when volatility picks up. And a lot of money has chased Treasuries, praised as the best investment for over two decades. We don’t need foreigners to sell their U.S. bonds for there to be a rude awakening in the bond market; we merely need a return to historic levels of volatility. Why is this relevant to a dollar discussion? Because a bond market selloff makes it more expensive for the U.S. to finance its deficits. Please see our recent analysis of the risks posed to the dollar by a bond market selloff for a more in-depth discussion on this topic.
We believe the currency markets are well suited for decision-making based on macro-analysis. Just as throughout 2012 the themes were evolving, please keep in mind that our 2013 outlook may be outdated the moment it is published, as we update our views based on new information or a new analysis of old information. Still, those who have followed us over the years are well aware that we like to shift our views within a framework. Please consider our 2013 outlook in this context:
And what about the U.S. dollar? While much of the discussion above is relative to the U.S dollar, the greenback itself warrants its own analysis:
Please sign up for our Webinar on Tuesday, January 15, 2013, that focuses on our outlook for this year. Please also sign up for our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.
Axel Merk is President and Chief Investment Officer, Merk Investments.
Tuesday, January 8th, 2013
by Jeff Rubin
Consider the tale of Suncor and Canadian Natural Resources, two of the largest oil sands producers in Alberta. Outwardly, they may appear quite similar. Each produces hundreds of thousands of barrels a day from the oil sands. And most of that oil eventually ends up in the same place—gas tanks across the continent. The path it takes to get there, however, is another story. The difference is a microcosm of the predicament Canada’s energy industry currently faces.
Over the last few years, Suncor’s emphasis has shifted from exponential production growth to milking the full value of what it digs out of the ground. Fortunately for Suncor, it processes nearly all of the bitumen it pulls from the oil sands in its own refineries.
On the other hand, CNRL, like most oil sands producers, exports raw bitumen to the United States. In so doing, however, the company also transfers an enormous amount of wealth from its Canadian operations to American refiners in the Midwest.
In the refining business, the difference between what a refinery pays for its inputs (like crude or bitumen) and the price it gets for finished products (like gasoline or diesel) is known as a crack spread. The glut of oil coming from Canadian producers means Midwest refineries are enjoying crack spreads up to five times larger than those seen by American coastal refineries, which pay world prices for their feedstock.
Investors have certainly noticed what such large crack spreads mean for the bottom line. CNRL, which lacks its own refineries, is forced to sell its raw product at a heavy discount, thereby missing out on those juicy refining margins. Suncor, on the other hand, is able to capture the huge crack spreads through its downstream refining operations. In 2012, CNRL’s stock fell more than 20 percent, while Suncor’s gained more than 10 percent.
The issue is writ large in the price differential between West Texas Intermediate (WTI) and Brent crude. Although WTI is often quoted in North America as the price of oil, Brent is actually the global benchmark for crude. Unfortunately for Canadian producers, lately the spot price of Brent has been as much as $25 a barrel higher than that of WTI.
While Canadian oil sands producers are the main victims of this price gap, they’re also, somewhat ironically, its principal cause. Without more pipeline infrastructure to offload oil to other markets, oil sands crude, as well as shale oil from the Bakken play in North Dakota, has no where else to go. More production from these places only boosts supply, further lowering the price of WTI.
Aside from a few hundred thousand barrels a day from wells offshore Newfoundland that get Brent prices, virtually all of Canada’s 2.4 million barrels a day are priced off WTI.
An even bigger concern for Canadian oil producers than the discount between WTI and Brent is the price differential between WTI and Western Canadian Select—the benchmark price for western Canadian oil exports to the US. It’s trading around $60 a barrel, a third less than WTI and 45 percent lower than Brent.
Do the math on some 2 million barrels a day of heavily discounted oil exports and suddenly you’re talking about an enormous wealth transfer from Canadian oil producers to American refineries. (Note, the subsidy is pocketed by US refiners, not motorists, who don’t see the Canadian discount when filling up at the pumps.) What if Canadian oil was getting world prices? At the current Brent-Western Canadian Select spread of roughly $50 a barrel, you’re in the neighbourhood of $100 million a day. That equates to foregone revenues of more than $35 billion over the course of a year.
It’s not just shareholders of companies like CNRL who are getting squeezed by this wealth transfer. The Alberta government loses royalties, while Ottawa (and the rest of Canada by extension) misses out on cash from corporate income taxes.
The rest of the oil sands industry may need to take a page from Suncor’s playbook. Before rushing ahead to double oil sands production to 3 million barrels a day—and sending billions more in de facto energy subsidies to US refiners—investors and the Canadian economy may be better off if producers figure out how to capture more value from what they’re already digging out of the ground.
Copyright © Jeff Rubin’s Smaller World