Sand used during hydraulic fracturing. Source Energy is Canada’s largest distributor of fracking sand.Jeff McIntosh/The Globe and Mail
The last few weeks have seen a sharp increase in both expert forecasts of impending market disaster and investor appetite for these stories. I'm not sure what this means for future portfolio returns.
Janus Capital's Bill Gross, hedge fund titan Paul Singer of Elliott Management Corp, former Office of Management and Budget head David Stockman and prominent hedge fund manager Jim Rogers are only a small sample of the market experts predicting a major slide in equity values. Phrases like "horrendous storm" and "the worst crash of our lifetime" feature prominently in interviews with these doomsayers.
Domestically, investor sensitivity to bad news was borne out by the near-insatiable appetite for "Is Home Capital the start of a 2008-style financial crisis?" stories in the Report on Business and elsewhere. In general, we wouldn't be getting all these depictions of a market apocalypse if there wasn't a sizeable audience for them – media organizations don't continue to publish on a theme no one's reading.
Investors can take some solace in market history – major corrections seldom occur when people are looking for them and everyone's anxiously hovering a finger over the sell button on their keyboard. Concerns about expensive valuations are somewhat mitigated by stronger (and perhaps more importantly) stable profit forecasts. The S&P/TSX price-to-earnings ratio based on trailing earnings is worrisome at 21.1 times, but the forward price earnings ratio of 16.6 is more reasonable, and signals strong earnings growth ahead.
The late 1990s was a case where a steadily rising number of pundits, analysts and strategists predicted a disastrous end to the tech bubble and turned out to be correct. But outside of Amazon.com Inc., the current market doesn't display the egregiously expensive valuations in the way that Cisco Systems Inc., trading at 140 times trailing earnings, and Oracle Corp. at 106 times, did at the beginning of 2000.
For investors it's disquieting when familiar faces continually warn of impending portfolio doom. To me, it doesn't feel like a market top but "a feel" is all that is. Results from the current second quarter of activity, which will be announced during third quarter of the year, will be vital on both sides of the border, and will give investors more direction.
-- Scott Barlow
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Stocks to ponder
CCL Industries Inc. This stock appears on the positive breakouts list, breaking out to the upside on very high volume – a very bullish move from a technical perspective. This is a stock that is in a multi-year uptrend and any pause in the positive price momentum has proven to be a buying opportunity. The company is an industry leader with a solid growth profile, writes Jennifer Dowty. Recently, the company completed a five-for-one stock split making the share price more affordable for investors.
GreenSpace Brands Inc. This stock was last featured in the TSX Breakouts report at the start of the year. At the time, Jennifer Dowty speculated that this micro-cap stock may steadily gain attention from investors as it continues to grow. Since then, three additional firms have initiated coverage on the company and the share price has increased over 22 per cent. This stock is now covered by seven analysts – quite impressive for a micro-cap stock. The stock has an unanimous buy recommendation with analysts forecasting nearly 34-per-cent upside potential.
Source Energy Services Ltd. This stock may have thought it got its timing right as it scheduled an early-2017 initial public offering, planning to catch an upswing in sentiment in the sector. Alas, not so much: By the time it went public in April, it had to sharply cut its offering price to $10.50; the shares traded below $7 for the first time this week, making investors losers as well. This sorry state for Source Energy's shares, however, may be an opportunity for those with the longer term in mind. Calgary-based Source Energy is Canada's entry in the surprisingly large category of publicly traded sellers of "proppants," or the sand and materials used in fracking. And there are three factors that could drive Source Energy's earnings up sharply in the next couple of years. David Milstead explains.
The Rundown
How borrowers, savers and investors can prepare for higher interest rates
The Bank of Canada has begun the process of slapping Canadians back to reality on interest rates, writes Rob Carrick. Economic growth is picking up and the central bank made it clear earlier this week that it's looking at whether to raise rates. CIBC Economics sees the bank raising rates by a total 0.5 of a percentage point in the first six months of 2018, or a bit sooner. We've had speculation, off and on, about higher borrowing costs in the past decade or so and rates stayed low. Today, risks to the economic outlook include a correction in the housing market, high household debt levels and weak wage growth. But the U.S. economy has been strong enough lately for rates to start rising, and it looks like Canada could follow the same pattern if our overall economic picture continues to improve.
Too high, too fast? Why big tech is slumping
Some of the top U.S. technology stocks have been heading straight down over the past two trading days, raising concerns about lofty heights, writes David Berman. But if investors are now growing sensitive to valuation, there are going to be plenty more casualties ahead given that the broader market hardly looks cheap following nine years of gains. Most of the bludgeoning since Friday has been reserved for the highest profile names in the U.S. technology sector – mostly members of the acclaimed FANG group of stocks, largely known for heady growth, massive market capitalizations and stellar share-price gains in recent years.
The turning of the Trump trade: Now it's 'Short America'
Investor expectations that the U.S. economy was set to re-take global leadership were strengthening well before the American electorate's collective brain cramp in November. Now, however, the optimism has not only faded, but turned to outright pessimism. "Short America" has become one of the most popular hedge fund trades, writes Scott Barlow.
Mutual fund industry stands up for small investors? Good one
The mutual fund industry has just offered a rare show of support for the little guy. It's just for show, though. By acting like it's on the side of what it describes as "modest investors," the Investment Funds Institute of Canada is hoping to head off unwanted rule changes being considered by regulators. The proposal is to stop burying the cost of an adviser's services in the fees charged to own mutual funds and have investors instead pay their advisers directly. Rob Carrick explains.
Larry Berman: What a flattening yield curve says about the U.S. economy
The shape of the yield curve tells us a lot about investor expectations about the future. As of Sunday night, the odds the U.S. Federal Reserve raises the overnight rate was 97 per cent, according to the derivatives tied to the federal funds rate. In fact, that is the last rate hike the market has priced in at this point despite the Fed suggesting rates will be closer to 3.00 per cent by the end of 2018. Since the Fed started raising interest rates in December, 2015, the yield curve has been flattening. The one exception was in the weeks after U.S. President Donald Trump's election when the markets were excited about Mr. Trump's growth and stimulus plan, which is still quite the mystery. A flattening curve in a combination of short-term interest rates moving up and longer-term interest rates falling suggests the rate hikes are likely to hurt growth and cool the economy. Larry Berman reveals.
Federal Reserve poised to hike rates amid uncertain economic outlook
The U.S. Federal Reserve is set to raise its key interest rate this week for the third time in seven months, but the outlook for the rest of the year has become clouded by economic uncertainty. Markets are currently pricing in a quarter-percentage-point increase when the Fed announces its decision on Wednesday, which will lift the rate to a range between 1 per cent and 1.25 per cent. Fed chair Janet Yellen will add to the importance of the event by holding a news conference after the release of the policy statement and updated economic projections. David Berman explains more.
An investing world where only a handful of stocks move the indexes
If you have a broadly diversified portfolio, you're probably holding far fewer good stocks than you think. Chances are your equity earnings, like the stock market itself, are dependent on the runaway returns of a precious few stars counteracting the mediocrity that characterizes the vast majority of public listings. Much has been made lately of the dominance of a few tech champions in upholding U.S. stock indexes. A similar trend is afoot in Canada, with just seven names responsible for all of the index returns so far this year. Tim Shufelt explains.
In defence of actively managed portfolios: Value investing works, in multiple ways
A new study from Arizona State University, titled Do Stocks Outperform Treasury Bills?, is turning heads and gives ammunition to those who oppose active management to further bash stock pickers. The study, by ASU professor Hendrik Bessembinder, found that over the long run individual stocks have done poorly even though the stock market as a whole has prospered. George Athanassakos looks into the study and what it means.
Alberta boosts investment industry regulator's investigative powers
One of Canada's investment industry regulators has been granted greater investigative power in the province of Alberta, sparking hope that other provinces will follow suit to help strengthen investor protection. Last Friday, the Alberta legislation amended its securities act, with the passage of Bill 13 – which now provides the Investment Industry Regulatory Organization of Canada (IIROC) with legal authority to more effectively investigate and prosecute those who harm investors. Clare O'Hara explains further.
Canada's largest mutual-fund firms turn to ETFs
After years of being on the sidelines, Canada's largest mutual-fund players are now racing to offer exchange-traded funds in an effort to capitalize on the explosion in popularity of the lower-cost products. But they are facing a dual and formidable challenge: how to attract new investors in an already-saturated market while also ensuring they are not sabotaging the success of their existing fund offerings. Over the past year and a half, seven of Canada's largest asset managers – including Mackenzie Financial Ltd., AGF Management Ltd. and Manulife Financial Corp. – have decided to step out of their comfort zone to add ETF products to their fund lineups. In addition, three smaller mutual-fund providers have also entered the ETF space. Clare O'Hara looks into the reasons behind these moves.
A private investor's story
George Stockus worked in the investment industry from 1984 to 2002. Bond trading and institutional sales were his specialties. Then he left to spend more time with family and to invest his own account, a move made possible by the gains earned from short selling software and telecom stocks near the end of the technology bubble of the late 1990s. Larry MacDonald looks at what he's investing in now.
Others
Monday's Insider Report: Companies insiders are buying and selling
Tuesday's Insider Report: Companies insiders are buying and selling
CEO, CFO buying as Atlantic Power dips
The four pillars of financial adviser trustworthiness
Number Crunchers
Fifteen powerhouse Canadian dividend stocks
Ask Globe Investor
Question: Cash has been building up in my tax-free savings account. Rather than having it sit there as dead money, can you make any recommendations as to how I can still get a return, no matter how small, on this cash? Would a money-market fund make sense?
Answer: The problem with money-market funds is that the management expense ratio eats up a big chunk of the already puny yield. A better option are the high-interest savings accounts offered by discount brokers. These products, which currently pay about 0.75 per cent to 0.8 per cent, are bought and sold like mutual funds and can be held in non-registered accounts as well as TFSAs, registered retirement savings plans and other registered accounts. Like regular savings accounts, they're also covered by Canada Deposit Insurance Corp. (with the exception of U.S. dollar savings vehicles). The interest rates aren't huge, obviously, but convenience is a big plus because the money is at your fingertips should you decide to cash out a portion of your savings to invest in stocks, mutual funds or exchange-traded funds. Typically, these products have initial minimum investments of $500 or $1,000. There should be no fees or early-redemption penalties, but be sure to verify this with your discount broker.
--John Heinzl
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What's up in the days ahead
David Berman examines why preferred shares have seen a jump and Tim Shufelt looks that latest top analyst as chosen by StarMine.
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Compiled by Gillian Livingston