US Thanksgiving Gives a Short Quiet Week
The US Thanksgiving is technically only Thursday, but in practice market close down Wednesday around lunch, in the busiest travel day of the year, and effectively stays that way until Monday in spite of being open for four hours on Friday.
It is a timely point for reflection, as the US market hovers near its highs for the year—which leaves the broad market with no real return for the year, but up nicely from the August and September lows. This letter has been a positive voice overall for equity markets since mid- March, 2009, aside from periodic overbought trading recommendations, but there are a number of clouds growing that are making us concerned about the structural potential of equity markets over the next several months at least.
First off is market breadth. The NASDAQ is the only index with modest gains this year, and without Amazon and Google, this index would also be at zero. Many shares have been in a bear market all year.
Secondly, we’ve mentioned the poorer showing of the last two earnings seasons. While valuations are still mid-level by historical standings, (27x in 2000 when all were bullish) and rates remain at zero, even a 15x multiple starts to look pricey when growth is in single digits.
Third, the high yield market may not be in our portfolios, but it affects everything when it starts to falter. And it is underperforming both bonds and stocks presently.
This is not a universal call on the US market—As long as we can find quality companies that meet our technical, earnings growth, valuation and financial strength screens, we will buy them. Compared with 2000, we remain in far better shape by any measure. When risk is really elevated, I can’t even find stocks that meet our criteria, and this isn’t the case at present. But the current situation does argue for being highly selective and much focused on individual stock risk management. If the past year has been difficult for indexers, the next year will likely be even more so. We will be expecting the indexes to remain in trading ranges, and we will be quicker to take gains and losses. The grinding action of the utility shares this year has been part of this change, as the trading ranges have been compressed.
Next week we will talk more about Canada. But it will come as no surprise that if we are more concerned about the US, we are much more worried about the prospects for the Canadian markets. This year has seen the TSX fall again, and we are now almost 2,000 points lower than the index was at in June, 2008. Thankfully we have had the US market to offset the returns in our home market, but Canadian investors as a whole have not done so to any great degree.
Our longer term indicators are all positive.
The shorter term signals are now negative, though close to a turn.
While the market continues to hang in better than anticipated over the past few weeks, the volume and breadth have not been encouraging. Clearly making short term market calls are difficult—and we continue to navigate on a stock by stock basis in the portfolios.
Bonds were very slightly stronger on the week, with the TLT’s finishing at 120.90, with the ten year yield at 2.24%.
Utility stocks found support at recent lows and started back to the upside. We continue positive on them here, but our expectations on the upside are more modest than they were in the summer. Getting back to the top of recent range still represents an upside of nearly 15%.
While there is no change to my expectation that that more will come around to our long standing view that it is a lot better to get a 5% dividend than a 2% interest payment, it is clear that these shares are much more volatile than I expected to see.
Our dollar was lower last week, finishing at 74.90. Our view on the dollar remains bearish. Anyone without the benefit of US currency investments at this point is encouraged to do so. The enormous new carbon taxes announced in the past week to delusional cheers will only grind our growth to lower levels. Our hope is that an energy rally back to the high 50s might drag our dollar back toward 80c. We would be aggressive sellers there.
The Euro was lower at 106.35, as the US dollar continues to gain ground on the expectation of an interest rate increase, however small. Still, I am more open to Euro share purchases now that one third of the air has been removed from the Euro. Compared to the outlook for Canada in the next year, Euro shares are looking much more appealing.
Gold finished unchanged at $1,056, and has now made some new lows. The shares have followed bullion fairly closely recently. Gold could mount a bounce in the coming week or two but that is for traders only.
Base metals shares also fell. Copper was flat at $2.05, nickel at $6.00, and zinc at $0.76. We still have no interest in the metals shares.
Crude finished the week at $41.75, which was flat with last week. Natural gas was lower at $2.27.
Energy shares were softer, although continue to hold above levels they were at when crude was this level last time.
We are more negative on energy than we were a month ago. Our outlook for crude prices is not as bright as expected due to stubborn oversupply from OPEC. Also, the election result is substantially bad news for the energy sector in Canada, despite the best efforts of all to pretend this is not the case. We have just seen the first stages of the ‘carbon taxes’ announced last week.
Canadian Stock Focus
Stocks in buy range are: Gildan, Magna, Martinrea, Keyara, and Richie Brothers.
US Stock Focus
US Shares in buy range are: Ciena, Wells Fargo Bristol Myers, Korn Ferry, UnderArmor, Lowes, Acadia Health, Mylan Labs, Jabil Circuit, Duke Energy, Advance Auto Parts, Priceline, and Gilead.
Overall, little happened in the past week, and typically large moves do not occur the week of the US Thanksgiving. The comments of the first page do not change the short term expectation for a modest pullback followed by a seasonal rally into the end of the year, but it is clear that the market will go its own way without the obligation to follow any historical script.
We will continue to add non extended names where appropriate, and will take any opportunity to increase US currency exposure in the weeks ahead.