Opinions Jon CaseA Comment -- General Comments From an ExpertA CommentaryCOMMENTJun 17, 2015
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Leverage and credit expansion
Leverage is often blamed for the 1987 stock market crash, about 38 years ago. Rising use of borrowed money, such as margin debt in equities or high loan-to-value ratios in real estate, amplifies gains during bull phases and magnifies losses afterward. Easy credit or relaxed lending standards frequently accompany bubbles. Currently, there is a lot of concern about margin debt. According to the U.S. Financial Industry Regulatory Authority (FINRA), margin debt is at about US$1.1 trillion. Sure, it is a big number, and is at a record. It represents two per cent of total S&P 500 market value, and is up 35 per cent in the past year. But again, it may not be as bad as it sounds. The S&P 500 is up about 15 per cent in the past year so some margin expansion is expected. Lower interest rates also help investors manage their debt exposure. And, two per cent of the S&P 500 does not sound like a lot, considering expected earnings growth forecasts in the 10 per cent or more range for next year. Still, margin debt is certainly something to watch, and may be a sign of future troubles.
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Watching for US Treasury announcements this week on quarterly refinancing needs. Appears requirements will be less than originally planned for. Upcoming US Fed meeting will also be indicative of US economy. If US Fed starts to issue more bonds than expected, not a good sign for markets (need to raise capital is bad). Widely expected that US Fed will keep rates flat, and appears rate cuts are on the horizon. Reduction of US Fed balance sheet will also be interesting to watch. Upcoming earnings from big tech companies will be defining on direction of markets (could break momentum of markets).
Best place to get growth in portfolio that is not tech oriented is ETF called PAVE. Offers investors an option to get infrastructure spending exposure. As globalization reduces, more spending will occur "at home" in North America. Bricks & mortal syple business' also provide traditional cash flows. Not a cheap valuation, but would recommend buying on share price weakness. PAVE ETF also pays a nice dividend yield for defensive investors.
Case for Owning Equities Over the Long Term:
This might make the prophets of doom quiver a bit. We ran a Bloomberg screen this week, using Jan. 9’s closing market prices, on every stock in North America. The market at that time had been open for a grand total of six trading days, yet we found 21 stocks that were up more than 20 per cent this year, ranging from a high of 106 per cent for Athena Bitcoin Global to 20.6 per cent for Structure Therapeutics Inc. Since we are on the topic of pie-in-the-sky news, how about annualizing those returns? Wow, that would be something.
For our screen, we only used companies with a market capitalization of more than $100 million. The two companies noted above are more than $1 billion each. If we take off our market cap restriction, we get even more early winners.
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Garner predicts a surprising but sharp uptick in grain prices though agriculture has been hated. Tech has made farmers more efficient. New production came online after the grain shortage following Russia's initial invasion of Ukraine. But demand from China has softened. However, the bears/pessimists have sold by now until we're now seeing a floor/bottom. Garner predicts corn rally to $5.50. Don't buy wheat now, only on dips. He expects wheat to rally with corn. Wheat's chart shows an inverse head-and-shoulders, so wheat is pointing up and could rebound to the neckline of $6.60; a breakout could touch $7.60. Soybeans could see short-term weakness, but a breakout past $13 could see the price reach $14, and can bottom at $11-11.80.
Historically it is a good sign that U.S. markets keep hitting record highs after 18 months of not making new highs. Also we are in an election year after a negative mid-term (presidential) market. This is good too, historically. There has been 5 new net term highs in January which predicts well for the rest of the year. A number of global markets have woken up after 15 years, including Japan after 30 years. There is a substantial improvement of the breadth of the market and in putting new money to work. Along these lines there could be a fair bit of money coming back into Canadian stocks. Also there are a lot of Canadian companies not just focused on the Canadian domestic economy, especially in industrials. Latin America and parts of Asia are interesting - not just the U.S. U.S. earnings are improving after a contraction - could be up 15% by the 4th quarter. There are corporations and individuals with high cash rates.
Gold. There are 4 things he looks for to gauge the short term direction on the gold price and where he goes. The 1st is yield and what the Fed does, 2nd is the US$, 3rd how the ETF is positioning, and 4th how the futures market is shaping up, with speculators being either Long or Short gold. The perception is that higher rates will be a headwind for gold, which has kept a lid on gold recently. However, going back to 1994, there have been 31 rate hikes by the US Fed, and on average gold has performed well, a little bit more often than not. Given how depressed the gold price is and the fundamentals, he feels that it is very difficult for even an interest rate hike to push gold lower. A headwind for gold is the US$. The US has propped up the dollar which makes gold more expensive to own for consumers in other countries. The consumers who talk about gold are China and India, where there is a cultural attachment in owning gold. Demand there continues to be strong, but has tapered off as of late. As those countries emerge and wealth grows he expects gold demand to rise, particularly in China, as they move from an investment driven economy to a consumer driven economy. This should be the 1st year that we see supply taper off in 7 years. Psychologically that is an important milestone in the gold market, which should really put a floor underneath the gold price. Looking at all the variables, he thinks gold should be at about $1250, and we are currently at $1180. Sees the upside versus the downside ratio for gold being about 3 to 1. A good risk/reward to him in the short term. We have been in a bear market for 3 years and they don’t last forever. While it is difficult to put a finger on a catalyst in precious metals, all the elements are there that tell us we are bottoming. If we go to $1150 or below, the real industry fundamentals will take hold, which will help put a floor under the gold price and prop it up. Supplies should peak this year.