Friday, July 3, 2015

In the middle of a Doldrums Correction this bull market has probably much longer to run

These are not easy days for Canadian investors.  The resource heavy TSX is affected by a commodity bear market with no clear end in sight. At $65 oil it appears that the rig count in North America nudged up. Also possibly due the end of ‘break up’ in Canada and the onset of good summer weather in the U.S. What will really end this commodity bear market?  Saudi Arabia cutting back its record production?  I don’t think so. 

The real culprit is lack of commodity demand because world economic growth is still too tepid. As pointed out in earlier posts, emerging markets, including China, are still dependent on foreign investment money and increased demand for their export products. That in turn depends on money from the developed world. Who else would buy from these emerging economies?  The good news is that the U.S. has clearly picked up in economic activity and the EU thanks to its own ‘quantitative easing program, and in spite of the Greek tragicomedy, is finally showing signs of life. Then, also Japan’s stock market recently reached an 18 year high – still not an all-time high - in response to Abenomics, yet another form of quantitative easing.

So, for now, Canada remains on the edge of recession and with its banks targeted by U.S. short sellers, the stock market performance is lackluster at best. Real Estate across Canada ranges from lackluster to near bubble territory so there is limited potential for investment as well. The federal government is trying to balance its budget as promised to the electorate and thus not stimulating the economy.  NDP dominance is not exactly inspiring an enthusiastic business climate in Alberta – Canada’s most recent economic growth engine. Investing in fixed income is like playing with fire at minimal yields or better, after inflation and taxes at negative yield! 
No wonder our investments seem to be going nowhere, especially now that U.S. earnings and exports are affected by the strong U.S. dollar which also depresses commodity pricing in particular for the debt-heavy U.S. petroleum industry. Now, the Dow and the S&P are also in the doldrums.  So even if you are heavily invested in the U.S. your investment returns are not great.

Don’t be depressed – instead collect your dividends and build cash! Because after the summer doldrums, there is opportunity for a renewed pick-up of the pace. By that time, the Greek noise level will have fallen; people are back fresh and re-energized from the summer holidays and Janet Yellen probably has retraced from the intent to raise interest rates. So yes, there is room for a year-end rally in the U.S. and a recovery in Canada’s financial sector (banks in particular). Many experts say that we haven’t experienced a significant correction since 2012.  I am not sure, but my guess is that we are in one right now – a rolling correction because this market certainly shows not much spirit on either the downside or the upside.
I think that the current market malaise is as much of a correction as we will see this year. So this is probably a buying opportunity. With a lot of investors being so pessimistic, I expect a major rally and certainly not an 2008 style market crash. Once you have your 20% cash position, use this summer to buy cheaply priced stock market opportunities especially when they pay decent dividends.  Canada’s banks, Brookfield, Proctor and Gamble; Microsoft, Apple, Cisco, Qualcom. There is lots of value out there. And with us being in the middle of this doldrums correction I start to suspect that this bull market has much longer to run.

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