An Unfortunate Divergence

General Comments

There was a lot going on last week from a news standpoint, although most of it adds up to utterly irrelevant but for the media coverage. The Fed meeting on Wednesday brought a nice bounce in the afternoon that carried into a runaway move on Thursday. But there was nothing new or meaningful in the meeting—it was a simply a case that we had gotten to the lower end of our trading range and any news that got things ‘out of the way’ provoked a bounce that does nothing to disturb the grinding sideways consolidation we have been in since November.

Likewise the Greek sideshow is great to fill media ‘analysis’ for months if not years on end, but the irrelevance of it can be seen in this weekend’s so called summit of 19 EU bigwigs trying to negotiate a 2bb Euro payment for this week. Two billion Euros! To put that into perspective, the ECB has been buying 60bb Euros worth of long bonds every month since their QE program began in the winter, and is down roughly 30bb Euros on that intervention alone. If the ECB can blow through that amount of money buying 10 year German bonds at 5 basis points, even the total Greek debt numbers can be contained.[1] I believe the best thing for Greece would be an exit from the Euro and a return to their own currency, but the Euro leaders consider that a validation that letting Greece in originally was an error. When artificial constructs are removed, recovery will be far faster. In any case, all annoying drama aside, a deal will likely be struck, even if it is a temporary one.

Two small charts present the ‘divergence’ referred to in the title:

June 23, 2015 Review Chart 2

Chart courtesy of


June 23, 2015 Review Chart 3

Chart courtesy of

The top one is the energy share ETF since the Alberta election—in a steady fall. The second is crude oil, which is somewhat higher over that period. This is the cost of increased taxation and government, and it is just beginning to be felt in Alberta.

June 23, 2015 Review Chart 4

Source: Dorsey Wright and Associates

June 23, 2015 Review Chart

Source: Thomson Reuters


Our longer term indicators are positive in Toronto and the Nasdaq, but negative on the NYSE. This remained so after the big rally on Thursday, though I expect it could reverse back up soon.

Short term measures are mixed, with Toronto defensive but oversold, and both US measures in positive territory after Thursday. It is interesting to note that the TSX is about the same level it was at 7 years ago.


TSX Chart June 19 2015

Chart courtesy of

Interest Rates

Bonds finished up a bit on the week. The TLTs finished at 118.95, with the ten year yield at 2.35%.

Bonds seem to be finally finding some support, but they have stubbornly followed the dislocation going on in Europe, which continues to adjust from a disastrous QE policy of the ECB.

But the main thing for us has been the action with the utilities shares. Although they have outperformed bonds, they have been a drag on our accounts. Any reasonable bounce in bonds should bring good gains to the utility group. More need to come around to our long standing view that it is a lot better to get a 5% dividend than a 2% interest payment.

REITs were flat on both sides of the border, but also held support, and that is adequate in the very short term.


Our dollar was stronger last week, before falling back to finish nearly unchanged at 81.45. We would be very happy to see this extend to the 84 area to convert much more Cdn cash to US funds.

The Euro was also higher, finishing at 113.65, helped by a dovish Fed meeting on Wednesday.  The Greek situation is not even having that big an impact on the Euro these days. We remain negative on the European economies vs the US, but clearly the amount of the slide in the Euro makes us less negative than we were a year ago, or two years ago.  Euro stock and bond markets have been weaker, but seem to have finally cleared most of their overextension. Most have pulled back to good technical support and appear to be finding buyable support there.


Gold finished up at $1,200, up $20 on the week. Gold shares were flat and remain unexciting to us.

Base metals shares were lower again as the early May rally has fizzled. This is not a surprise, as its origins were strange. Copper was down, at $2.58, nickel at $7.05, and zinc at $0.80. We still have no interest in the shares of either group.

S&P 500

S&P 500 Chart June 19 2015

Chart courtesy of


Crude finished the week at $59.80, down a bit on the week after spending most days comfortably above $60.

The shares had some firmness midweek before giving that back on Friday.

Natural gas was up again to $2.85.

We spoke about Canadian energy shares in the front section and showed how they have fared since the Alberta election. Canadian banks are in a similar situation, though to a lesser degree. As the post-election period continues to develop, the outlook continues to deteriorate.   Energy shares should be underweighted at this time. Sustained rallies in crude and/or natural gas would lend some support, but we’ve already had the first bounce off the bottom. We continue to selectively trim exposure in Canadian energy. The only reason we are not selling more is that a strong move up in crude will drag our shares upward, and at $60, that is a possibility.

 Canadian Stock Focus

Stocks in buy range are:  Rogers, BCE, Potash, CAE, Manulife, Ag Growth, Liquor Stores, Medical Facilities, Keg, Progressive Waste, , and Chemtrade,

US Stock Focus

US Shares in buy range are: US Bancorp, Duke Power, Dominion Resources, Southern Corp, Restoration Hardware, Pacific Gas and Electric, Cisco, Corning, Wells Fargo, Brinkers, Biogen, Williams Sonoma, Lifepoint, and Pepsi.


Overall, the week confirmed that the Fed is in no hurry to raise interest rates. With growth currently negative for the first quarter in the US, that is hardly surprising. Of course, that GDP report is widely ignored and blamed on the weather—even the Fed only cut their target for GDP growth from 2.8% to 2%. It is unusual for government agencies to ignore their own statistics, but I am in agreement in this case as well. All the same, if the Q2 numbers don’t look as though that Q1 activity were bulging out of Q2, there will be a lot less talk of interest rate increases. As it is, it should be clear to all that growth is mediocre at best, and rapid rises are simply not in the cards, whether in September or December, or whatever month the navel gazing on CNBC fixates on next.

We continue to look for an opportunity to convert more Canadian dollars to US funds to invest south of the border. Our thesis on reduced Canadian growth due to the changing situation in Alberta continues to demonstrate its validity in the marketplace, as shown on the first page.

As mentioned for a few weeks, we continue to add names, but cautiously. Trading ranges seem even narrower than usual, and we seem to be grinding around in the mushy middle ground. As we head into summer, it is difficult to tell how long this muddling action will persist.


This newsletter is solely the work of Greg Radovich for the private information of his clients. Although the author is a registered Portfolio Manager with Dundee Goodman Private Wealth, a division of Dundee Securities Ltd. (“Dundee”), this is not an official publication of Dundee, and the author is not a Dundee research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Dundee. Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
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