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Investment Ideas What to do when markets and media collide, why bank stocks could rally, and an energy play to avoid

An RBC sign is seen in the financial district on Bay St in Toronto.

Mark Blinch/The Globe and Mail

Bespoke Investment Group notes that the U.S. earnings expectations are the strongest they've been since the financial crisis but you wouldn't know it from reading financial media lately. Pessimism reigns at editorial desks everywhere as a steady stream of 'look out below, bad things are coming' stories were published already this week.

A cursory look at my news feeds uncovers headlines like "Signs of euphoria are so high investors are 'having a hard time imagining a decline' ''; "Wall Street's rising euphoria may spell trouble for stock market" from Bloomberg; the Financial Times' "Are we seeing a peak in bullish equity sentiment at last?"; and "U.S. junk bonds are a time bomb with a long fuse" from Reuters Breaking Views.

The negative mood is in clear conflict with markets -- which are off to their best annual start in a number of years. Going against the flow, rejecting strong market sentiment, has frequently been a profitable investment strategy but when markets are positive and news coverage pessimistic, it's hard to be a contrarian. Do you go against the market, or against the media sentiment?

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One of the best investing columns I read last year was called The Three Body Problem by Ben Hunt, the Chief Investment Strategist for U.S. investment firm Salient Partners  (he also has a PhD in government from Harvard). The tldr (too long, didn't read) summary of the post was that the extent of global central bank monetary stimulus after the crisis means that the usual rules of investing no longer apply. The market patterns of the past are no longer relevant in forecasting the future.

The rules of market sentiment and media coverage might not apply any more either. The internet and Google's takeover of online revenue has left a degree of desperation for attention among incumbent and new media that might not provide much market sentiment guidance at all.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Royal Bank of Canada (RY-T). This  stock appeared on the positive breakouts list last week when the share price closed at an all-time high. Jennifer Dowty anticipates that the share price will continue to set new record highs as the year goes on. This stock has a potential catalyst on the horizon. On Jan. 17, the Bank of Canada will be announcing its decision on its overnight rate. Currently, the market is pricing in a 83-per-cent probability of a 25 basis point hike, expecting the overnight rate to rise to 1.25 per cent from 1 per cent. A rate hike could cause bank stocks to rally. Jennifer Dowty reports.

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RioCan Real Estate Investment Trust (REI.UN-T). This security appeared on the negative breakouts at the beginning of the new year. On a valuation basis, the REIT is trading at its lowest level in years. The unit price has been under pressure as investors sentiment is negative for securities with retail exposure. In addition, a rising interest rate environment is putting pressure on interest sensitive securities as you can see from list of securities on the negative breakouts list. Management is currently in the process of transitioning the REIT with its plans to divest over $2-billion of assets in secondary markets and reinvesting the proceeds in primary markets (in major cities). Patient investors may be rewarded as management's strategy unfolds. RioCan owns and operates a portfolio of 294 retail and mixed use properties across the country, including 16 properties that are under development. Jennifer Dowty explains.

PrairieSky Royalty Ltd. (PSK-T). As oil prices have muddled along over the past couple of years, up from their troughs but still well below robust levels, the energy space has been a place to try to find bargain stocks. And then there's PrairieSky Royalty Ltd., which has been expensive, and then more expensive, during the energy doldrums. There's little dispute that PrairieSky's position as a royalty concern – ownership of its resources without the expense and risk of actually doing the drilling – merits some premium. But PrairieSky's price has gotten so far out of line with the Canadian energy sector – and, arguably, other royalty peers – that investors need to be aware of the sky-high price they're paying. David Milstead reports.

The Rundown

If markets are indeed heading towards a 'melt-up' - this is what you should do

Stock markets have begun the year in an exuberant mood, and for good reason. Economic data are coming in strong around the globe and several years of superb returns, especially in the United States, have conditioned Main Street investors to expect more gains ahead. Even notable grouches such as Jeremy Grantham of GMO LLC in Boston acknowledge that today's market seems determined to spike higher. An optimist (and everybody appears to be one these days) could well assert that this is a prime time to bet on stocks. Fair enough. But a warning is also in order: It would take very little to reverse today's ebullience. Investors should consider not just how much money they could make over the next few months if things go right, but how much they're prepared to lose if anything derails the market's upward climb. Ian McGugan reports.

Gordon Pape: The key stocks to watch in 2018

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Gordon Pape takes a look at five key stocks he'll be watching closely in 2018 including Enbridge Inc.,, Suncor Energy, Teck Resources, and Torstar. Read his reason's why.

2018 is shaping up as the year of the cocky investor

Fear stalks the stock markets – fear of missing out. There has been a decisive shift in investor psychology in recent months. The trepidations about investing that lingered long after the global financial crisis and market crash of 2008-09 have finally disappeared. The traffic jams at online brokers TD Direct Investing and RBC Direct Investing last week are less a story about technology issues than they are of investors acting on a fear of missing out on hot sectors and markets. Some words of advice for the bullish hordes: Be careful out there. There's a fine line between confidence and hubris in investing. Rob Carrick reports.

Nine things you need to know to survive the next online brokerage traffic jams

Investors began 2018 with a surge of excitement that quickly turned to frustration when their online brokerage firms struggled to keep up with demand trade stocks. There were outages for the websites of both TD Direct Investing and RBC Direct Investing in the first few days back from the Christmas break, and complaints continued into this week. TD cited "unprecedented trading volumes" in explaining why investors keen to take advantage of hot markets and sectors, like marijuana, could not log into their accounts or complete trades. We may well see a further surge in trading by individual investors. Here are nine things you need to know to survive the traffic jams ahead. Rob Carrick explains.

Why TSX oil stocks are going to continue to disappoint investors

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Strength in both the Canadian stock market and in global crude oil can't fix what's wrong in the oil patch. Canadian oil and gas stocks collectively are proving to be the listless exception as domestic equities trade close to record territory and global oil prices are just off of three-year highs. Despite the favourable environment, the kind of heavy crude extracted from the oil sands has recently become deeply discounted as a result of a shortage of spare pipeline capacity. Tim Shufelt explains.

Investor Clinic quiz review: Explaining the tough questions

John Heinzl explains some of the toughest questions in his year end Investor Clinic money and investing quiz. Haven't taken the quiz yet? Click here.

Four compelling reasons to buy Canadian bank stocks right now

In the past couple of years, Canadian bank stocks have powered through concerns about energy loans, new regulations for the domestic housing market, rising competition from technology companies and short-selling activity by U.S. investors. The sector rose 11 per cent in 2017, not including big dividends, which was nearly double the gain for the S&P/TSX composite index. Bank stocks have continued to rally this month, hitting fresh record highs as recently as Friday. What should investors expect now? David Berman reports.

Top Links

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The Globe's stars and dogs for last week

Top Canadian preferred fund seeks value in turbo-charged market

Canaccord Genuity's top 24 stock picks for 2018

Industrial Alliance reveals its top 16 stock ideas for 2018

Bond traders strap in as selloff leads Bill Gross to call bear market

Number Crunchers

Seven Canadian blue-chip stocks with growing profits

Ask Globe Investor

Question: I am having trouble understanding the long-term effect of return of capital in mutual funds and trusts. I have been told I should use this mechanism to defer tax but I am not sure it is a good idea. I would be interested in your comments on return of capital. It just doesn't seem like I am actually making money with them.

Answer: Return of capital doesn't necessarily mean you are just getting your money back. For tax purposes, return of capital can be generated by previous business losses, depreciation, and other accounting items. If part of a distribution from a mutual fund or REIT (real estate investment trust) is classified as return of capital, you are not subject to any tax in the year it is received. The tax is deferred to the year in which you sell the security. Putting off tax for as long as possible is almost always beneficial.

Any return of capital payments are subtracted from your costs, to produce what is known as an adjusted cost base. For example, suppose you pay $10 for a mutual fund unit. The next year you received distributions that include a 50-cent return of capital. Your adjusted cost base is now $9.50 ($10 - $0.50 = $9.50). If you were then to sell the security for $11, your taxable capital gain would be $1.50 per unit ($11 - $9.50 = $1.50).

You benefit in two ways from this. First, you defer any tax until you sell. Second, when you do sell you are taxed at the capital gains rate on the return of capital distributions, which is normally advantageous.

--Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What's up in the days ahead

Scott Barlow looks at what promises to be one of the hottest stock sectors of 2018, while David Berman has a bit of advice on the best, easiest way for investors to bet on a potential NAFTA collapse.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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