Wednesday, 28 September 2011

Are Stocks Cheap?

According to Robert Shiller's cyclically adjusted p/e model, stocks are still not cheap.

Friday, 23 September 2011

Significant Downside Risks: Plan for Lower Portfolio Returns

Significant downside risks (the three most important words in the last US Federal Reserve Statement) are three words that the financial markets do not like to hear, especially in the aftermath of the most recent recession. Economic uncertainty and slow economic growth are the new reality and this reality is not good for investment portfolios. As my charts on the momentum tab of my blog show, except for Canadian real estate investment trusts and ten year bonds, every other major asset class is underwater.

Investors need to think about Japan. The Nikkei 225 hit a record high of close to 39,000 back in 1989 before the Japanese equity market collapsed. A few years latter it was trading around 15,000. Today the Nikkei trades around 8,000. In the past 22 years, the Nikkei has never even got close to that record high.

With bond yields at record lows, and equity markets tanking (the TSX lost 6.5% this week), it is hard to achieve decent portfolio returns.The 8.25% annual portfolio return that was used in calculating retirement portfolios ten years ago is now a distant memory. Historically, the yield on a 10 year government of Canada bond has outperformed the dividend yield on the TSX, but with bond yields now so low dividend paying stocks are looking attractive. Currently, the yield on a 10 year government of Canada bond is 2.59%, the same value as the TSX dividend yield in July.

Wednesday, 21 September 2011

NRG: The Future of a Utility

On a recent edition of Mad Money, Jim Cramer talked with David Crane who is the CEO of NRG. NRG is a utility company with a market cap of $5.4 billion, a beta value of 0.76 and a  forward  p/e ratio of 23.8. This company has an interesting renewable energy portfolio.

Friday, 16 September 2011

Seasonality and Trend Following on the TSX

Here is a chart showing how three simple investment strategies on the TSX compare. The returns are calculated from price returns (no dividends) over the period 1957 to 2010.The MA(10) switch portfolio uses a moving average trend following strategy by comparing monthly closing prices with a moving average of length ten. Buy or hold the TSX when the monthly close of the TSX is above the 10 month moving average and sell the TSX if it falls below the 10 month moving average. The seasonal switch portfolio invests in the TSX during the 6 month period November to April and then at the end of April the portfolio is sold and the money held in 3 month Treasury bills. The buy and hold strategy produces the lowest returns and highest standard deviation.The seasonal switch produces the highest returns and lowest standard deviation.

Using these average annual returns it is useful to do some future value calculations. Suppose that at the beginning of each year, an individual invested $13,500. This is done each year for 25 years. At the end of a 25 year period, the buy and hold strategy generates $769,941 while the seasonal switch portfolio generates $1,419,170.

Friday, 9 September 2011

Septembear on the TSX

Here is a chart showing how average monthly returns on the TSX break down. The returns are calculated from price returns  (no dividends) over the period 1957 to 2010. The TSX does seem to have a seasonal pattern. September and October are the worst months while December and January are the best months.

Thursday, 8 September 2011

Cuts to US Government Spending

Here is a chart showing how US government spending has been cut in the last few years. Cuts to government spending reduce jobs. In an economy with 14 million people unemployed, job creation should be the priority.

Ontario's Debt

Ontario's debt and slow economic growth are two issues that voters might be thinking about in this election year.

From Livio Di Matteo's site, here is a link to a good article on Ontario's 244.7 billion dollars of debt.One can make the argument that debt is not that big of a concern when it is held by domestic residents.



According to the Ontario government,

"Ontario accounts for approximately
38 per cent of Canada's GDP. In 2010, Ontario's GDP was approximately
C$614 billion. With 13.2 million or approximately 39 per cent of the Canadian population, Ontario is Canada’s most populous province. Ontario is centrally located for both the Canadian and United States markets."

Here is a link to a fact sheet on Ontario's economy.  Financial services and professional services  make up 44% of Ontario's GDP. Manufacturing makes up a smaller percentage of Ontario's GDP.


Reducing debt is however, going to be a problem since Ontario's GDP is forecast to grow at around 2.5% per year over the next three years and the unemployment rate is forecast to average 7.7% over the next three years. Reducing debt requires cutting government spending and increasing taxes: neither of which is popular during an election year or when the economy is growing slowly.

On the expenditure side, health and education are expected to account for 57% of government spending in 2011-2012. There is not much room for cutting expenditures.

In 2009-2010, tax revenue made up 67.8% of Ontario's government revenue. Here is the forecast for 2011-2012.


On the tax side, personal income taxes and sales tax account for 62% of  tax collection. Here is a link showing where the tax revenue comes  from.

Personal income taxes accounted for 36% of Ontario's tax collection while corporate taxes accounted for 9% of tax collection.

My preference would be to focus on increasing economic growth and worry about the debt later.

Tuesday, 6 September 2011

Two Slow Growing Economies

Second quarter GDP data was recently released for Canada and the United States. Second quarter growth in both countries was slow. The modest surprise, especially given all of the talk about the weak U.S. economy was the slightly negative second quarter GDP growth rate for Canada. For Canada, second quarter GDP fell by 0.1% (or 0.4% on an annual basis) compared to the first quarter. This is not a very big number, but it is a negative number. This means that the Canadian economy is half way towards a recession. On the other hand, these numbers do get revised in the coming months and there is a chance that the revised second quarter GDP number will be positive. Consumption, business investment and government spending continued growing slowly between Q1 and Q2. The negative Q2 growth rate comes from imports out pacing exports. One thing is for certain. The recovery (if there ever was one) from the most recent recession has stalled.

In the charts below, Canadian growth rates are quarter over quarter, while US growth rates are annualized quarter over quarter.

Monday, 5 September 2011

A New Leading Economic Indicator from Suez Cargo?

After the Baltic Dry Index lost some of its usefulness as a leading economic indicator, there has been much interest in finding a suitable cargo based alternative. As The Economist reports, perhaps the Suez indicator will provide useful.

"Making a simple forecast based on the past few months' data suggests that world GDP will fall from 3.8% in the first quarter to 3.3% in the second quarter."

Saturday, 3 September 2011

Siegel on Cheap Stocks

Here is an interesting video of Jeremy Siegel explaining why he thinks stocks are cheap and why he doesn't like Robert Shiller's CAPE.

Thursday, 1 September 2011

Comparing Emerging Economies with Developed Economies

Here is a short video from The Economist comparing emerging markets with developed economies.

Sector Rotation for August 31, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios
iShares S&P/TSX 60 Index (XIU.TO)
iShares S&P/TSX Completion Index (XMD.TO)
iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors
iShares S&P/TSX Capped REIT Index (XRE.TO)
iShares S&P/TSX Capped Energy Index (XEG.TO)
iShares S&P/TSX Global Gold Index (XGD.TO)
iShares S&P/TSX Capped Financials Index (XFN.TO)
iShares S&P/TSX Capped Info Tech Index (XIT.TO)
iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios
iShares S&P 500 Index C$-Hedged (XSP.TO)
iShares MSCI EAFE Index C$-Hedged (XIN.TO)
iShares MSCI Emerging Markets Idx (XEM.TO)
Claymore BRIC (CBQ.TO)


Rank 7 12 1 13 9 2 11
Above ma(10)? No No Yes No No Yes No

Rank 4 3 8 5 6 14 10
Above ma(10)? Yes Yes No No No No No