September 2013 – Time for a Fall Check-Up

Many of our friends (and clients) are 60 + years old (including one of us) and it seems to us that without exception, we are headed this Fall for the annual check-up with the medical doctor, dentist, optometrists, etc. Fall, in our way of thinking is a time where we make sure everything is working the best it can. Your investments need to have at least an annual check-up too.

The signs of the approaching Fall are upon us. Labour Day is just a week away, days are getting shorter, endless back-to-school ads, the CNE has started, Jay’s have been eliminated and Monday Night football is about to start. For us who advise on your investments, it has been the irrational or in our words, wobbly stock markets as we head towards traditionally the toughest month of the year for equities and clearly, we need a Fall check-up.

Over the last several months, we have been advising (and writing accordingly) that we needed to consider the following:

1. Bonds are currently the riskier buy, as yields will likely flare higher even in a slow growth Global economy and sub 2% inflation rate.

2. The US economy will likely lead the G7, helping the US Dollar outperform the Canadian Dollar.

3. Commodity prices seem poised to come off their highs with the Fed tapering looming, China’s economy slowing and Europe continuing in a recession.

4. Canada’s Housing market seems a step away from a soft correction posing a risk to Canada’s economy and its currency.

Let us first start the check-up process by checking in on our assumptions:

1. Just a smell of Fed tapering has sent bond yields skyward, with ten year US Government bonds testing the 2.90% this Summer, up over 100 basis points in yield since early May. This despite the Chairman of the US Federal Reserve Board, saying that tapering is not tightening. (Please see “You Say Taper, I say Tapir” – July 2013).Canadian Ten year Government Bonds yields hit two year highs above 2.75% in spite of slower GDP growth.

2. The US Dollar continues to perform well against the Canadian Dollar. The forces have been two fold, namely: 1. Commodity priced in the US, have found some support in the stronger US Dollar, at least against Canadian Dollar and 2. Foreign Investors interest in Canadian Dollar securities plummeted by over $15 billion this summer, a far cry from the massive amounts of foreign investments that has been ploughed into the domestic market, over the past several years. (FYI: Foreigners sold $18 billion in Canadian Bonds and bought roughly 3 billion in Canadian equities, demonstrating that there is some asset class shifting going on besides the obvious shift out-of Canadian Dollar, according to the last survey of Statistics Canada ( Also following the money trail, Global balanced funds and US equities received the lion’s share of investor cash this summer as has been the case for some time as Canadians have generally displayed a measured approach to investing.

3. The most difficult one to explain is commodity prices. In spite of a slower US GDP growth and with the Bond yields rising, commodities have quietly come back this Summer with bounces in both gold and oil prices. Even copper prices have climbed around 10% in recent weeks, suggesting economic forces are also at play. This is happening in spite of a deeper than expected cooling in China, which has fanned across many emerging markets. Europe appears to have turned the corner. We chalk this up to over active “traders” who at time over-buy a commodity and then reverse course and over sell. Oil seems to be near a short term top and could move lower in the coming weeks.

4. In regards to market expectation of a soft correction in the Canadian Housing Market, well, three out of four is not bad! A big part of Canada’s strength is in the housing market. Home sales are again back above levels prevailing before mortgage insurance rules were tightened in July 2012 (up 9.4% yr / yr) and average transaction prices are at records highs (up 8.4% year over year).

Now that we have had our Fall check-up, what is next? This is probably a good time to put it all on the table as to what we are looking for going forward. Here we go:

1. As bond yields rise, those interest rate sensitive stocks should come under pressure. Utilities and REIT’s usually fall in this category and lead the pack downward. We do not believe the entire sector should be avoided. We are looking for more stable low debt corporations with strong protective boundaries.

2. While US Federal Reserve Board’s “tapering” still appears likely to commence this Fall, markets have been underwhelmed by US growth in 2013. The “Market” (we agree) looks for better growth for the remainder of year as deflationary pressures ease and job growth continues with a steady decline in recent jobless claims.

2. Currency wise we continue to plan for a slightly weaker Canadian Dollar. The Canadian market should continue to see a foreign exodus of buyers (sellers) from both domestic equities, and bonds will continue to experience net outflows of cash.

4. Finally, the Canadian economy has managed to keep pace with the US over the last quarter. The TSX has gotten into the act, somehow outperforming the S & P 500 over the past three months after trailing in the first few months of the year. We continue to like the Canadian market as a big part of Canada’s respectable showing has been the continued strength in commodity prices (Canadian originated) and continued strength in the Housing Market.

And finally, finally, the Toronto Maple Leafs should not be eliminated from the play-offs by this Christmas, however we do regretfully look back on such a hopeful Blue Jays season that materialized significant disappointment.

Written by Rod Stein and John Tabet