Confronted with a U.S. president equal parts confident, active, and ill-informed on the relevant economic or diplomatic knowledge, I almost panicked and sold a bunch of equities on Tuesday. There is a big difference between risk – where investors can calculate loose probabilities on the potential for gains and losses – and the uncertainty of ‘anything could happen here, whether it makes sense or not.’
Panic is almost never a good investing strategy so I talked myself out of it. What helped was that North American economies are humming along nicely despite market volatility. The Bank of Canada raised interest rates because of strong domestic wage growth and capital investment. In the U.S. , an unambiguously positive jobs report last week shows an economy that is not only strong but accelerating.
To avoid excess anxiety in the future, I developed a short list of indicators that would justify some selling and general portfolio de-risking.
Domestic retail sales. Canadian households have notoriously high debt levels and when and if they become a hurdle to economic growth, this should first become apparent in consumption growth. Mortgage payments aren’t optional – trips to the mall are.
U.S. junk bond spreads. Credit Suisse’s highly respected strategist Andrew Garthwaite noted that a widening of high yield bond spreads (readers can follow them here) has preceded the end of equity market rallies eight times out of the last nine.
JP Morgan Global Manufacturing PMI Index. This is a collection of survey results from executives in manufacturing companies across the world, who indicate changes in activity, hiring, new orders and inventories. Emerging market economies have been pushing this benchmark lower, dragging commodity prices with it.
These are not the only three indicators I follow, just the ones that would scare me most if they went sharply the wrong way. There has been a bit of weakness in the PMI index but by and large the three measures are all in healthy territory. Until they break, it’ll be easier for me not to panic no matter what the man in the White House does.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
BSR Real Estate Investment Trust (HOM-U-T). This is a defensive security with an attractive yield that may appear on the positive breakouts list (stocks with positive momentum) in the future. Analysts are forecasting an 18-per-cent price return with a total return (including the 5 per cent yield) of 23 per cent. Headquartered in Toronto, BSR Real Estate Investment Trust holds a portfolio of 48 multi-family apartments located in the U.S., with a focus on the Sun Belt region. Jennifer Dowty reports (for subscribers).
Bombardier Inc. (BBD.B-T). Bombardier Inc. is flying high – and analysts from Goldman Sachs Group Inc. to AltaCorp Capital Inc. say the rally has plenty of room to continue. The Montreal-based plane maker is heading for its biggest annual stock gain in almost three decades, only two years after its shares dipped below $1. The private-jet market is rebounding just in time for the debut of the company’s swanky Global 7000. And a partnership with Airbus SE is paying dividends in the form of stepped-up sales of a small jetliner Bombardier developed – as evidenced by JetBlue Airways Corp.’s US$5.4-billion order Tuesday. (for everyone)
Hydro One Ltd. (H-T). Analysts are downgrading their outlook for Hydro One Ltd., as shares were hammered a day after Ontario Premier Doug Ford announced that the utility’s entire board of directors are resigning and its chief executive officer, Mayo Schmidt, is retiring. For Mr. Ford, the move fulfills one of his key campaign promises, under a belief that new leadership would drive down electricity prices for Ontario consumers and businesses. But did investors – many of whom bought the shares for the strong dividend and dependable operations – expect that the Premier would actually follow through on a plan that, by most accounts, may have little impact on energy prices? David Berman explains (for subscribers).
Waste Connections Inc. (WCN-T). This stock appears on the positive breakouts list. This company has a successful track record of reporting better-than-expected quarterly earnings results that sends the share price spiking higher. The company is set to report its second-quarter financial results on July 24, and given the strong industry fundamentals, the company may once again beat the Street’s expectations. Another positive is the company’s strong balance sheet. I would not be surprised if management announced a dividend increase along with its quarterly results. The stock has been a consistent outperformer and the share price remaining in an uptrend. Waste Connections’ core business offers solid waste collection, solid waste disposal and transfer, and solid waste recycling services with operations across North America. Jennifer Dowty reports (for subscribers).
The Rundown
Why Canadian bank investors should shudder with each rate increase
The Bank of Canada’s interest-rate decisions, often a rather humdrum affair, are becoming downright fascinating. The announcement on Wednesday of a hike, and the growing probability of more before year-end, suggest that the future will be very different than the past for Canadian banking stocks. While the latest increase was widely expected, the tone of the announcement “was more hawkish than markets expected,” according to Derek Holt of Bank of Nova Scotia. He is counting on at least one more rate hike this year and would not be shocked to see two. Every upward tick in interest rates magnifies the burden of carrying all that borrowing. Ian McGugan explains (for subscribers).
Bank of Canada burns hedge funds
Global hedge funds bet heavily against the Canadian dollar ahead of Wednesday’s Bank of Canada decision on interest rates and they were immediately punished after Governor Stephen Poloz increased policy rates as expected. Scott Barlow explains (for subscribers).
Top stock picks from seasoned investors for these dangerous market times
A number of observers are warning that the nine-year-old bull market will soon sputter amid higher interest rates, stretched valuations and escalating global trade tensions. But if hiding in cash seems like an extreme response to an uncertain threat, what are the best Canadian stocks for awaiting a downturn that, well, might take a while? David Berman takes a look (for subscribers).
Are U.S. banks an opportunity, or forever out of favour?
Chris Kotowski, who has covered United States bank stocks on and off for more than three decades, acknowledges that some investors don’t like the sector, for some good reasons. “These are highly levered, heavily regulated, cyclical commodity companies with a history of blowing up every decade or so.” This does not stop Mr. Kotowski, an analyst for Oppenheimer & Co., from recommending the sector, which kicks off its second-quarter earnings season Friday. But after a serious slide in bank share prices in June, which has reinforced the sector’s discount to the broader U.S. market, a question arises: Is this a buying opportunity, or are these shares permanently out of favour? David Milstead reports (for subscribers).
Top Links (for subscribers)
‘Trade war is just a warm-up act for financial crisis’: Mobius
Sell-off in energy, mining sectors offers buying opportunity
Others (for subscribers)
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: Companies insiders are buying and selling
Thursday’s small-cap stocks to watch
Wednesday’s analyst upgrades and downgrades
Wednesday’s small-cap stocks to watch
Wednesday’s Insider Report: Companies insiders are buying and selling
Others (for everyone)
Hedge funds lead way as big money starts to dabble in marijuana industry
This oil sands company has become Canada’s top stock on crude’s bull run
Goldman Sachs says market melancholy sets the stage for a big earnings season
The shadowy Chinese fund at the heart of the copper rout
China can hit U.S. tech firms where it hurts in tariff response
Stocks quant reeling from their worst run in 8 years
Number Crunchers (for subscribers)
Defensive strategy focuses on dividend-payers with lots of cash flow
Ask Globe Investor
Question: Should we be concerned about the flattening yield curve re U.S. Treasuries and, if so, what action would you recommend, especially with the apparent trade conflicts?
Answer: A flattening yield curve (the difference in yields between short and longer-term bonds) is something to keep an eye on but not a cause for immediate concern. If the curve becomes inverted (short-term bond yields are higher than long-term ones) that’s usually a signal that a recession is looming.
--Gordon Pape
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What’s up in the days ahead
David Rosenberg will share his thoughts on the Fed, interest rates, and how investors should be positioning in this late stages of the bull market.
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Compiled by Gillian Livingston
Scott Barlow