Keith Schoonmaker, Industrials Equity Research, Morningstar talks about the revenue warning from CP Rail.The Canadian Press
This is dangerous territory but the recent 'on again, off again' pattern where forecasts of higher interest rates are concerned is starting to remind me of Japan in the 1990s.
It is vital to note that there are substantial differences between the Lost Decade in Japan and the post-crisis Western economies. Japan's monetary and fiscal responses to their recession were found wanting, to be charitable, and the Bank of Canada and U.S. Federal Reserve learned policy lessons that came in handy when the disasters of 2007 and 2008 occurred.
There are, however, similarities between Japan then and North America now in terms of real estate-centered asset bubbles, demographics and debt overhangs.
During the 1990s and early 2000s there were literally hundreds of economist and strategist reports proclaiming that deflationary pressures were ending and Japanese interest rates and bond yields were set to move higher. The report I remember best was "Sayonara Deflation" by then-Merrill Lynch analyst Jesper Koll in 2003. At the time, I thought it was among the three or four most important reports of the year.
Japanese deflation pressure never truly went away. There were frequent bouts of hedge fund managers shorting Japanese bonds in preparation for higher rates – this became known as the Widowmaker trade. This continues today – hedge fund manager Kyle Bass of Hayman Capital was publicly short Japanese bonds as recently as last year (although to be fair his reasoning was more complicated than just higher rates).
When I read news stories like Bloomberg's "Central Bankers Tell the World Borrowing Costs Are Going Up" from Wednesday, I can't help but think of Japan, and how many times higher rates and yields were wrongly predicted.
I know a lot of market-focused economics, but not enough to completely parse the differences between Japan then and Canada now. I do know that high levels of domestic household debt will limit the Bank of Canada's ability to raise rates. A large enough increase in borrowing costs would cause defaults that require the bank to cut rates again to maintain consumption levels. I will believe in sustained higher interest rates when I see them, and not before.
--Scott Barlow is Globe Investor's in-house market strategist.
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Stocks to ponder
RioCan Real Estate Investment Trust. This stock appears on the negative breakouts list and is technically oversold with a relative strength index reading of 21, writes Jennifer Dowty. Investors sentiment is negative on the REIT given its retail exposure. The security is trading at a significant discount relative to its historical valuation. It offers investors a steady distribution, yielding 5.8 per cent. Nine analysts have buy recommendations with expectations that the unit price will rally over 20 per cent during the next 12 months.
TSO3 Inc. This stock may appear on the positive breakouts list in the future if analysts are correct, writes Jennifer Dowty. The share price can be extremely volatile and for that reason the stock is best suited for consideration by investors with a high risk tolerance within a diversified portfolio. To illustrate the price volatility, the stock was last featured in the TSX Breakouts report nearly one year ago, in early July of 2016. At the time, the share price was $2.95. Several weeks later, on July 27, the share price had soared 26 per cent to $3.73. However, a few months later, in December, the stock price had slid down to $2.29. This stock can have extreme price moves, and analysts are betting the share price will experience an explosive move higher with the consensus target price implying a 63 per cent price return over the next year. There is an unanimous buy recommendation on the stock from six analysts.
Canadian Pacific Railway Ltd. has a strong track record of rising profits and top-notch operating measures with the cheapest stock in the rail business, by some measures. So why is the company's stock performance lagging its rivals? To find out, Fadi Chamoun, a transportation stock analyst at Bank of Montreal, polled big investors. Eric Atkins writes about what he found out.
Maple Leaf Foods Inc. This is a security whose share price has retreated 5 per cent month-to-date and is nearing an oversold condition. The stock was last highlighted in the TSX Breakouts report at the end of January, and a little over four months later, the share price had rallied 25 per cent, closing at a record high at the beginning of June, writes Jennifer Dowty.
The Rundown
The ROB Top 1000: Two of the highest-ranking stocks to consider for your portfolio
Think about how you'd go about ranking all of Canada's largest stocks for their investment appeal. It's a daunting task. Norman Rothery has been doing it, in various publications, for more than a decade. While there have been a few bumps along the way, the overall results have been more than satisfactory. But the pressure was really on when he was asked to develop a ranking system for the Report on Business magazine's Top 1000 this year. The feature provides a plethora of useful facts and figures on the largest stocks in Canada. It now also includes a star rating to highlight those with the best prospects, which earn a full five out of five possible stars. Norman Rothery explains. You can also read the story from ROB Magazine: Twenty stocks to buy now from the Top 1000.
The unspoken reason central bankers are suddenly keen to hike interest rates
Suddenly, after years of ultralow interest rates, central bankers are signalling they're ready to start hiking borrowing costs. Bank of Canada Governor Stephen Poloz surprised markets this week by hinting at higher rates ahead. Nearly simultaneously, European Central Bank chief Mario Draghi, Bank of England boss Mark Carney and Federal Reserve chair Janet Yellen spouted similar, hawkish sentiments in what could be interpreted as a co-ordinated global effort to reshape expectations. The tough new tone among central bankers is an important shift and markets reacted violently. But bankers' fresh willingness to contemplate higher rates is also, by conventional reckoning, a mystery. Ian McGugan explains.
Three ways to benefit if rates move higher
The positive spin on the interest rate increase that could come as soon as July 12 is deliverance from the hell of trying to earn a decent return on safe money. Given the massive borrowing by Canadians in recent years, it's natural for rate increases to be framed as a reckoning of sorts. But for savers, a rate increase would start the process of boosting returns on savings accounts, GICs and bond yields. Rob Carrick explains.
The top stock picks from two Wall Street giants with wildly different views
Two heavyweight Wall Street strategists have unwittingly squared off with wildly different market forecasts. Investors should choose options from each of their lists of preferred stocks, writes Scott Barlow. David Kostin is the chief U.S. equity strategist at Goldman Sachs. On Wednesday, a report from Mr. Kostin raised his 2017 target for U.S. equity markets but also reiterated his forecast that the S&P 500 will finish the year lower than current levels. Savita Subramanian, chief equity and quantitative strategist at Merrill Lynch, presented a decidedly different set of recommendations in a research report also released Wednesday. Scott Barlow explains.
My index-based Passive Plus Portfolio is leaving the TSX in the dust
The Perfectly Diversified Portfolio, first presented in April of 2017 , has been rebranded the Passive Plus Portfolio. More importantly, the performance profile, clearly a far more important issue than what we're going to call it, remains as strong and stable as intended. The new moniker underscores the index-based investment strategy for the majority of portfolio, and the "plus" highlights the attempt to boost returns with the secular growth stories of health care and dividend growth stocks, and also the higher growth possibilities in global smaller company stocks. Scott Barlow explains.
National Bank says it's time to cut cash positions and load up on Canadian stocks
Canada's stock market is the weakest in the developed world in 2017, with a year-to-date gain of just 0.4 per cent. But rather than give up, consider buying. That's the view of Stéfane Marion, chief economist and strategist at National Bank Financial. He changed his asset allocation on Wednesday, reducing cash in favour of Canadian stocks. David Berman explains.
Another reason to stay invested in Canadian bank stocks
Canadian bank stocks have barely budged since Warren Buffett announced last week his investment in Home Capital Group Inc., removing a concern that has lingered over Canada's housing market and financial system for the past two months. If Mr. Buffett can't spark a rally in bank stocks, what will? Here's one idea: The factors that have eroded the banks' return on equity, a key measure of profitability, over the past decade should stabilize this year and start edging higher. David Berman explains.
Three lower-risk REITs with rising payouts
Real estate investment trusts deserve a spot in every well-balanced investment portfolio. They own assets that typically rise in value, offer above-average yields and – if you choose your REITs carefully – their distributions will grow over time. John Heinzl identifies three REITs with a track record of raising their distributions. All three have conservative payout ratios that put their distributions on the safer end of the spectrum and also increase the likelihood of future increases.
Time to get over our squeamishness about reverse mortgages
There's still one notable example of the old Canadian conservatism with money. It's the reluctance of retired people to crack open the equity they have in their homes and spend the money. Strong growth in demand for reverse mortgages suggests this won't last. Rob Carrick explains.
Others
The week's most oversold and overbought stocks on the TSX
Wednesday's Insider Report: Companies insiders are buying and selling
Thursday's Insider Report: Companies insiders are buying and selling
Friday's Insider Report: Companies insiders are buying and selling
The Macron effect: Why the rich are putting their cash to work in France
Six personal finance reasons to be thankful on Canada 150
Number Crunchers
The 10 most profitable stocks among Canada's lesser-known names
Fifteen U.S. stocks that stand out in their sectors
These five dividend-paying grocers are poised to prosper – despite Amazon
Ask Globe Investor
Question: What technology stocks do you feel have the most favourable outlook right now?
Answer: Technology stocks took a hit this week, and it's anyone's guess if the dip represents a buying opportunity or signals further weakness ahead. These stocks tend to trade at high price-to-earnings multiples, reflecting expectations of strong future growth. But the high P/Es also make tech stocks vulnerable to selloffs when there's a whiff of bad news.
Picking winners in this environment is no easy feat. For every multi-bagger such as Facebook or Amazon, there are losers such as Snap and Twitter.
Rather than pick one horse to bet on, it would be more prudent to get broad exposure to the technology sector through a diversified exchange-traded fund. One example is the Vanguard Information Technology ETF (VGT-N), which holds a basket of 365 stocks including the big names such as Apple, Alphabet, Microsoft, Facebook and Visa. The expense ratio is a very reasonable 0.1 per cent. There are dozens of other technology ETFs -- including some with more concentrated holdings and others that follow an equal-weighting methodology -- that you can find with a Google search (it's hard to avoid technology these days).
By diversifying your tech exposure, you'll minimize the risk of picking a stock that blows up in your face while still participating in the growth this booming sector has to offer.
--John Heinzl
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What's up in the days ahead
On Saturday, watch for Tim Shufelt's Canada Day look back on the first half of the year on the TSX, with lots of charts to help illustrate what's happened so far; John Heinzl will examine five ways to cope with a rising loonie; and on Monday, Brenda Bouw has an interview with Hap Sneddon, president and chief portfolio manager at CastleMoore Inc., who feels stock markets are likely to go up again over the next six months or so as investors feast on growth stocks in areas such as financials, technology, and even energy.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston