Thursday, October 16, 2014

Enjoy the October roller coaster


This is a though October with markets seemingly in free fall. The gurus are at it again: Quantitative easing number 4 required according to said gurus and oh, by the way, said gurus also expect a revival of the European debt crisis and the end of the world. Oil is to go to hell in a hand basket as well and we’ll see war in the Ukraine and in Iraq and if everything works out we’ll also see the collapse of the Chinese economy in the wake of the latest democracy protests in Hongkong. Boohoo Boohoo! Plus… Ebola!
In the meantime most economies are not even in recession yet, the U.S. economy is growing at a decent clip… who wants really 4% real GDP growth, unless you’re yearning for inflation and high interest rates, something said gurus also fear! Yes they can have their doomsday cake and eat it too. Earnings season has started in the U.S. and even if earnings growth only turned out to equal the consensus guru forecast of 6.7% while most stock markets have barely gained over the last year, it should result in higher stock prices, especially after banner earnings in the 2nd quarter.  It is not that stocks were terribly overvalued, to the contrary, stocks were fairly valued and now valuations are in attractive buy territory.
If you have built up your cash, as I have been advocating over the last 12 months or so, here may be a buying opportunity. Don’t shoot your powder all at once; market timing doesn’t work very well – only buying at the right price works and maybe you can buy Apple, Microsoft, Qualcomm, Johnson and Johnson, Canadian Banks, Peyto, Canadian Natural Resources or plain market ETFs at even  cheaper prices!  My favorite approach is to sell put options on stocks you like to own at current prices; with option premiums in your pockets, you end up buying these stock even cheaper.
As said, don’t shoot all your powder, just dip your toe in the water or add small amounts of shares of good companies you already own in your portfolio. Only when it is clear that this correction has bottomed start using up significant amounts of cash.  Enjoy the rollercoaster ride.

Saturday, October 11, 2014

October correction or bear market


Recessions often follow excesses in the economy; bear markets follow periods of euphoria in the investment markets such as the stock market or the bond market.  We may not know exactly when recessions and bear markets occur but we know they will occur. Right now we are not in an overheated economy; we do know some of the bad practices that ultimately led to the Great Recession are once again practiced but ultimately the trigger of the Great Financial Crisis was the collapse of the subprime mortgage market at the peak of a housing boom.  Anyone seeing a boom right now?

So yes we had a very long lasting bull market but nowhere I look, I see overly optimistic investors or a hot economy. Stock markets are still reasonably priced, mind you not like in 2009 which was the bottom of a historic bear market, but I see no significant over evaluation of stocks.  The bond market does seem very high priced but interest rates remain stubbornly low. Energy and other commodity prices are in a bear market and at even a whiff of trouble the doom and gloom prophets shout for another end-of-the-world scenarios.
Overall 2014 was not a great stock market year, the Dow is near the levels it started the year with and although we had this little revival in the TSX, now with the oil industry once again on sale, most of the TSX profits have molten away. Yet, Canada just announced some good job numbers. Most Canadian oil companies get a lower oil price but it is in U.S. dollars while the Canadian dollar has fallen nearly 10% this year.  So Oil down 10-15% and we have a cheaper Canadian dollar oil which has fallen against the U.S. dollar around 10%. So basically, for Canadian companies oil prices haven’t changed a lot.  To top it off the ‘differential’ between heavy Canadian crude and West Texas is barely $5.00 thanks to oil-by-rail.

Why are those oil companies so cheap again?  Yes plain emotion – even the natural gas price has hung in around $4.00 and the heating season is not far off anymore. Oh, by the way, many oil companies hedge their oil contracts using oil future contracts and they likely get higher prices for their current oil production than those of the current spot market.

So, my guess is we’re in a correction and probably we’re having a buying opportunity, or at least we should hold-on to our stock portfolio and accumulate cash. Enjoy the roller coaster ride.