Opinions Eric NuttallA Comment -- General Comments From an ExpertA CommentaryN/AOct 22, 2015
You might be interested:
;fill-opacity:1;'/%3e%3cpath%20d='M31%2018.6001V30H8V18.6001L14.1334%2022.4334L19.4999%2014L24.8669%2022.4334L31%2018.6001Z'%20fill='%23EE5432'%20style='fill:%23EE5432;fill:color(display-p3%200.9340%200.3310%200.1956);fill-opacity:1;'/%3e%3c/svg%3e){kind=small}
Premium content
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.
Unlock Premium - Try 5i Free
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.
Unlock Premium - Try 5i Free
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.
Energy. Thinks the market is starting to appreciate that the imbalance in the marketplace is tightening. Their current estimate now is that we are still oversupplied by about 1.5 million barrels per day. Counteracting that, we have had the strongest demand growth this year of any year going back to the great recession. Demand is up about 1.8 million barrels per day this year, and estimated to be up next year by roughly 1.3-1.4 million. The total oversupply next year is roughly equal to 1 year demand growth. Capital expenditure globally is down by around 24%, year-over-year, the biggest drop in the history of oil/gas. Looking out to next year it is likely to be down another 10%. Globally, supply is falling, and the key question is at what pace. Is it going to be quick enough to offset barrels coming out of Iran? Over the past year there have been 3 areas of supply growth. the US, Iraq and Saudi Arabia. The US has gone from a run rate of growth of 1.5 million barrels per day to roughly 500,000 barrels per day from a peak. That rate should continue to drop 100,000 barrels per day per month, until we get a high enough oil price to allow drilling to resume in the US. Believes Saudi Arabia is close to producing at their maximum operational capability of 10.5 million barrels per day, and Iraq is likely to be flat next year. So the 3 primary areas that meet supply this year are at best flat next year. We have record growth in demand this year, and strength should continue into next year. Finally we just have to deal with Iran. It is thought that it is going to be around 300,000-500,000 barrels per day by around Q1-Q2. This coincides with the drop in US production. His belief is that if we do not get a rally in the oil price, the market could actually be undersupplied next year by about 500,000 barrels a day, probably in Q3. We need oil to rally to around $55-$60 versus $45 today. The challenge for energy investors is that a lot of stocks are already discounting that scenario. He thinks investors have gotten more optimistic than the oil market. Money is coming out of the health area and is going into the large underperformer, which is energy. Secondly we saw the oil price for a few days tick up when we saw the US rig count drop. Once the money starts piling in, you get a combination of Short covering, US money coming in and, most importantly, you get generalist investors who manage the multibillion-dollar funds coming in.