Opinions Jason DonvilleA Comment -- General Comments From an ExpertA CommentaryN/AOct 19, 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.
Markets. Life has been interesting for the last 60 days for growth investors, and in particular, healthcare has been pretty tough. We basically got into some kind of a liquidity event in healthcare. A little bit of it was fundamental, but what we really had was 2 or 3 major groups who were owners of healthcare stocks who were forced to Sell rapidly. The continuous process of smacking the stocks down made everybody else question what was happening. A number of the stocks were down over 50%-60% in just over a month, without any major earnings revisions in the sector. The biggest issue with carrying healthcare stocks was that we got into a retail bubble. For the last 1.5 years, there hasn’t been a lot of growth in energy, mining, financial services, etc. so everybody piled into the one area where there was growth and excitement, which was healthcare. Then all of a sudden when there was a small correction based on some smaller fundamental developments, the selling started to come. When that happened, the selling beget selling. The healthcare companies could not explain why the stocks were going down. Between Valeant (VRX-T), Patient Home (PHM-X) and Concordia (CXR-T) he thinks the Concordia and Valeant margin calls have pretty much come to an end. It hasn’t quite finished with Patient Home.
There are other quick sellers that are in the market. The ETF’s act that way in terms of rebalancing. In North America, we have what are called volatility funds, which are trying to own low beta/low volatility stocks, and when the stock that has been low beta for a while suddenly becomes a high beta stock, because of some kind of a short-term event, it gets pushed out of these funds. The volatility funds have now become massive as hedging strategies, and once they start pushing at a stock or sectors, the selloff can be unreal. For those people who can stomach it, his advice would be to hang in there. A turn is actually starting to occur now, and as people look into the market for growth, there is unbelievable value in the healthcare sector.