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It's easy to take one side of a market debate and run with it, reading only research or opinions that agree with that view, but successful investors must be able to carry opposing views in their heads and weigh them against ongoing market results.
In terms of market valuations, for instance, it's a fact that equity markets are hugely expensive relative to history in terms of the cyclically-adjusted Shiller price-to-earnings ratio. It's also the case, however, that equities remain very attractive relative to global bond prices. An investor solely conscious of the Shiller price-to-earnings ratio would have de-risked their portfolio years ago and would now be underperforming dramatically.
Sorting through differing opinions and avoiding tunnel-mindedness is a matter of perspective. Choosing the best historical precedent alone takes significant knowledge and experience – in my case I'm still wondering whether Japanese deflation in the 1990s or the U.S. credit policy and market disaster in 1937 are of any forecasting use at the moment.
The development of perspective is the work of decades, but the good news is there are financial authors who, at least in my case, have provided enormous assistance. Here are five.
Morgan Housel – Collaborative Fund: Former Motley Fool writer and venture capitalist Morgan Housel focuses on productive and effective ways to research and think about markets.
Izabella Kaminska and Matthew Klein – FT Alphaville (free with registration): Ms. Kaminska was recently named lead editor at Alphaville and for good reason. Her work on financialization of commodity markets was groundbreaking and the skeptical view on electric vehicle sales forecasts is continually informative.
Mr. Klein is brilliantly contrarian when it comes to economics. His October post, arguing against globalization as a cause of global wage deflation, is illustrative.
Michael Batnick – Ritholtz Wealth Management: Mr. Batnick's frequent reading lists, "These are the Goods" are great and his investing pieces are even better. In a recent post, he noted "The fact that stocks usually go up makes permabulls look like idiots once in a while and permabears look like geniuses once in a while."
Mark Dow: Behavioural Macro: The former Treasury Department economist, now hedge fund manager Mark Dow has been particularly successful in timing price trends in commodity markets.
In each case, these are people whose intelligence and diligence I respect greatly. They have changed not only what I think but how I think, which is the greatest compliment I think I can offer.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Aurora Cannabis Inc. Shares of Aurora Cannabis Inc. continued their three-day surge on Tuesday The stock closed up 29 per cent to $5.97 on Monday and was up 15 per cent on Friday, after Ottawa outlined its proposal for a tax of $1 a gram for legalized recreational pot. Brenda Bouw takes a look at why this is such a hot stock right now.
Pollard Banknote Ltd. This is a relatively undiscovered small cap consumer discretionary stock that we last featured in the Breakouts report eight months ago. Since then, the share price has rallied 66 per cent. Last week, the company reported strong quarterly financial results and management's outlook suggests the company's track record of solid growth may continue. This little-known growth stock is delivering huge returns, writes Jennifer Dowty. Winnipeg-based Pollard Banknote is a leading provider of lottery products. Management estimates that the company is the largest provider of instant-win scratch tickets in Canada and the second largest supplier of instant tickets worldwide.
AGT Food and Ingredients Inc. The shares of AGT Food and Ingredients Inc. are down 15 per cent this week, setting a new three-year low, and the stockholders are probably lucky. After all, you will likely see few earnings misses as awful as Monday's numbers from AGT, a Prairie producer of pulse crops (lentils, peas, beans). The company's third-quarter "adjusted EBITDA," or adjusted earnings before interest, taxes, depreciation and amortization, was less than half what analysts expected. Sales of $341-million missed by 25 per cent, more than $100-million. Name a key performance measure and AGT blew it, big-time. The fact that the market didn't punish AGT more suggests there may have been an inkling that things were going to be bad. David Milstead reports.
General Electric Co. Its shares got hammered again Tuesday, one day after the industrial conglomerate unveiled a restructuring plan and slashed its dividend by half. "We understand the importance of this decision to our shareowners and we have not made it lightly," chairman and chief executive John Flannery said Monday in a statement. "We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation." A focus on total return would be welcome: on that metric, the past decade has been especially rough for GE shareholders. In fact, the company holds a dubious distinction among its Dow peers: it's the only index member that has a negative total return over the past 10 years. Matt Lundy reports.
Brookfield Asset Management Inc. The real estate unit of Brookfield Asset Management Inc. is spending big money on U.S. shopping malls at a time when bricks-and-mortar retailing is being associated with tumbleweed. If that concerns you, that's good: It reinforces Brookfield's reputation for making unpopular bets at low prices, which is a tactic that has made this stock a very profitable holding for long-term investors. David Berman reports.
Ero Copper Corp. This stock that has rallied sharply, rising 34 per cent since its debut on the Toronto Stock Exchange less than a month ago. Vancouver-based Ero Copper is a base metals mining company focused on developing its key assets located in Brazil. The stock has a unanimous buy recommendation from six analysts with over 20 per cent upside forecast. However, given this significant move in the stock price, the positive price momentum may be due for a pause in the near-term., especially with the price of copper currently under pressure and falling. This is a stock you may want to put on your radar and wait for a potential dip in the share price. Jennifer Dowty reports.
The Rundown
The two most worrisome indicators for markets right now
We have entered an age of idiots. So why aren't markets getting more nervous? The war of words on the weekend between U.S. President Donald Trump and North Korean dictator Kim Jong-un – You're a dotard! Well, you're short and fat! – demonstrates that it may no longer be possible to reliably distinguish between conclaves of global leaders and a typical high-school lunchroom. Add in a Saudi Arabian coup, rising autocracy in China and an aging, expensive bull market in the United States and you might think that global risk indicators would be flashing red. Instead, they're only flashing yellow. Many experts don't seem all that concerned and stock markets are largely taking matters in their stride, dipping only slightly over the past week. Ian McGugan reports.
This leading indicator is saying something very bullish about oil prices
The deepest year over year declines in U.S. gasoline inventories since 2014's energy price collapse are providing an increasingly positive backdrop for crude oil stocks. Scott Barlow takes a look at a chart that shows the year over year percentage change in U.S. gasoline inventories (annual change data help remove seasonal effects from the trend lines) compared with the West Texas intermediate crude price.
Fairfax vs. Berkshire Hathaway: Here's the one most likely to produce the better returns
Here's an intriguing question for value investors: If you had to choose between the two, which stock would you pick – Fairfax Financial Holdings Ltd. or Berkshire Hathaway Inc.? Both companies are in the insurance industry, led by legendary value investors Prem Watsa and Warren Buffett, respectively. They are both capable insurance underwriters who have wisely invested their float (that is, the difference between premiums collected and claims paid) over the years of operation, thus profiting from both sides of their balance sheet and earning unparalleled returns for their shareholders. But this is the past; the question is, going forward, which one makes a better long-term investment? George Athanassakos examines this question.
Amid marijuana boom, cost data leave analysts dazed and confused
If there's one thing that's still hazy in Canada's nascent marijuana market, it's how wide the margins are on that dime bag. With less than nine months left before recreational cannabis becomes legal in the country, analysts and investors are still unclear who the big winners and losers will be. Some publicly traded pot companies don't report how much a gram of dried bud costs them to make and if they do, the numbers aren't uniformly calculated. Moreover, producer margins could start to shrink as provinces start to purchase pot wholesale. Jen Skerritt from Bloomberg News reports.
Rosenberg: 'There are numerous signs of decay beneath the surface' of this market
David Rosenberg is not saying that we are going to see a repeat this November of the events we saw in November a decade ago, which was the start of the financial crisis, but he says he's getting a real tapped-out feel to this market and the economy. People are fooled into believing that that there is anything durable to recent data so heavily skewed by post-hurricane rebuild activity.
The big short: How a National Bank analyst found himself in the crosshairs of a group of short-sellers
Three guys walk into a bar and start talking about investing. It sounds like the beginning of a joke. But when three men met at Earl's in Toronto's financial district one night this summer, one of the men was secretly recording what was being said. That conversation has now become a flashpoint in an intriguing battle between a Manitoba company and a band of critics who are trying to drive down its share price. The party of three included Trevor Johnson, an analyst at National Bank Financial who has been a long-time booster of Exchange Income Corp., a Winnipeg-based industrial company with a market capitalization of $1-billion. The other two men were short-sellers who had bet against the stock in the belief that Mr. Johnson's investment case is wrong. David Milstead reports.
The exemplary returns of a fund manager inspired by valour
In the wake of Remembrance Day, Norman Rothery examines a hedge fund recently started by money manager Keith Smith, which he named in honour of Dietrich Bonhoeffer, a Germany theologian who tried to stop the tide of madness by the Nazi regime and was executed by them.
Rob Carrick's first-ever buyer's guide to balanced-fund ETFs
The ETF industry won't seriously challenge the supremacy of the mutual fund until it develops an alternative to the humble, but hugely popular balanced fund. Balanced funds are a blend of stocks, bonds and sometimes other investments such as preferred shares and real estate. They're a convenient way for investors and advisers to diversify portfolios and they sell like nobody's business. In the first nine months of the year, members of the Investment Funds Institute of Canada reported $21.6-billion in net sales of balanced funds. Net sales of individual equity and bond funds together came to just $15.3-billion. The exchange-traded fund business seems to have a balanced-fund blind spot. Rob Carrick reports.
Two of the scariest words in personal finance today are 'investment property'
Through 10 of the most confusing years ever for managing your money, housing has delivered. So it's no surprise that I'm hearing more and more from people thinking about buying an investment property. Never mind whether this increased interest in investing in houses and condos is a sign of a bubble or, at least, a surfeit of enthusiasm about real estate. Let's look at the question on a pure financial planning basis. Rob Carrick examines the issue.
Scott Barlow's Top Links
Six tricks 'financial predators' use to separate investors from their savings
Upcoming surge in shale oil production will be 'biggest oil and gas boom in history'
Others
Monday's Insider Report: Companies insiders are buying and selling
Chairman and other directors buying at Cenovus Energy
What analysts are saying as 'priced-to-perfection' European stocks show signs of exhaustion
The Globe's stars and dogs of last week
Number Crunchers
Momentum and yield: 25 stocks with the best of both worlds
Ask Globe Investor
Question: I am retired, 68, and looking for your thoughts on where I might put approximately $50,000 at this time. I am reluctant to put it into Canadian equities as the market seems to be in a state of flux and going nowhere. I have TFSAs for my wife and I and they are fully topped up. I have a non-registered account with about $200,000 in Canadian and U.S. equities. My thinking is to invest the $50,000 in a bond ETF or fund until I feel comfortable with the equity markets. I see in your portfolios that you have a few bond positions, such as XBB, PIMCO Monthly Income, etc. I was wondering if you could advise me on a selection. I don't understand the bond market.
Answer: Let me start by saying that securities laws do not permit me to give specific personal advice. You need to assess any comments that you read and discuss them with your financial adviser.
That said let me look at the two funds you mention. XBB is the trading symbol for iShares Core Canadian Universe Bond Index ETF. It covers the entire Canadian bond market, including government and corporate issues, with maturities from less than a year out to 20 years and beyond. The current weighted average maturity is 10.21 years. The weighting average yield to maturity is 2.38 per cent. The management fee is a very low 0.09 per cent.
Recent performance has been disappointing. The one-year return to Oct. 31 was negative 0.69 per cent. Over the past five years, the average annual compound rate of return was only 2.72 per cent. On the plus side, the fund provides downside protection in the event of a stock market crash.
The PIMCO Monthly Income Fund is a different matter. It invests globally, with very few of the assets held in Canadian dollar securities. This is an actively managed fund (the iShares is a passively run index fund) so the management expense ratio is considerably higher at 1.38 per cent. The fund has an explicit mandate to avoid concentrated risk. As a result, no more than 50 per cent of the assets can be held in below investment-grade securities.
Interest distributions are paid monthly, with a year-end capital gains distribution if applicable. The October payment was $0.0409 per unit and year to date the fund has paid out $0.4115 per unit.
Performance has been good. The year-to-date return to Nov. 3 was 6.51 per cent. The five-year average annual compound rate of return was 6.37 per cent. Of special interest is the fact this fund has never lost money over a 12-month period since it was launched in January, 2011. Its worst performance was a gain of 0.19 per cent in the year ending Feb. 29, 2016.
There you have it. The choice is a purely Canadian ETF with a very low management fee or an international bond fund with a high fee but a very good performance record. It's your call.
-- Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters
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What's up in the days ahead
In this week's Yield Hog, John Heinzl looks at the investment case for CT REIT and Telus. Meanwhile, John Reese looks at three stocks, one from each of the S&P 500's three hottest sectors, that could provide some value for stock pickers.
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Compiled by Gillian Livingston