Money Show 2013 - Gordon Pape

Gordon Pape is Editor and Publisher of The Canada Report. His talk was entitled "Canada in 1914: Rebound or Retreat".

Gordon Pape first gave a review of 2013. In 2013, as interest rates rose, the bond bull market ended. The US indexes surge as the TSX stumbles. The BRIC countries also falter. There was a new crisis in Washington. Europe muddles through the year. Canada and EU do a free trade deal. The target and commercial rates are holding.

In Canada, interest sensitive financial and utility stocks go down. This last item happened in May 2013. What happened in May will occur again when the economy picks up, which might be in 2015. Utilities are down by 7% this year, and the REITs are down 9%.

The US indexes surge this year. The TSX was up by 6.6%, but the DOW is up by 18% and the S&P500 is up by 23%. Canada has been trailing the US which had astounding results driven by economic growth. Canada had one the weakest markets in the Developed world. Resources are down and mining is down. The TSX will not recover until resources do. The BRIC countries faltering caused the reduced commodities demand. We will not see a bounce back of resources section until the BRICs recover.

The debt ceiling crisis was caused by Republicans trying to detail Obamacare. You got to wonder about their politics. Europe has muddled through and there nothing much is happening. German leader was re-elected and has held the EU together through this crisis. Calm is good. With the Canadian-EU trade deal, there should be no effects for about 2 years. Some items may be fast tracked. Most details have not been announced. Dairy and wine producers are unhappy, but beef and pork producers are happy.

2013 was a good year for equity investors, especially those invested in the US. The winners were Wall Street, Japan, EU stocks and some TSX sectors. Japan was a surprise. With the new Prime Minister, the Japanese index was up 40%. Abe is credited for the turnaround. Japan seems to be on the road to economic recovery. Europe was good news and the index will probably have double digit returns of around 14 to 17%.

The TSX sections were mostly mediocre. However Consumer Discretionary was up 35% with Canadian Tire (CTC.A) and Tim Hortons (TSX-THI) on his buy list. Health is up 35%. This sector has 4 companies but only one is driving this. Info Tech is up 26% and this is all outside BlackBerry Ltd. (TSX-BB) with Constellation Software (TSX-CSU) and Davis and Henderson (TSX-DH) doing well. Consumer Staples are up with Alimentation Couche Tard (TSX-ATD.B), Loblaw Companies (TSX-L) and Shoppers Drug Mart (TSX-SC) doing well. Industrials also had some good performance.

The 2013 losers were bonds, dividend stocks, REITS, mining stocks (which had an awful year), Gold (cannot predict what it will do) and the BRICs took a beating. The bond ripple effect has been big. Bond ETFs have been hammered.

In 2014 GDP growth will be 2.2% for Canada after 1.6 for 2013. The GDP growth for the US will be 2.6% after 1.6% for 2013. (Boom time number is GDP growth of 3%.) Growth will gain momentum. Interest rates will go up and bonds will be under pressure. Toronto and New York indexes will converge. Unemployment will go down and there will be more government revenue and debt will be cut. EU will recover, but China remains a question mark. Gold will do better.

The US is also beating deficit estimates as is Canada. The Fed is committed to low interest rates. Bank of Canada will move from its biases to tightening, but this will depend on the economy. The pushes from interest rates will be commercial rates. The REITs and dividend stocks will be hit.

In 2014 he expects the Toronto and New York Indexes to converge as New York indexes will not be as strong as they were in 2013. The US had strong growth but will consolidate. Canada cannot get much worse. Mining will be steady rather than beaten down. There will no big disparity but New York may still outperform Toronto. Gains will be in the low double digits of perhaps 10% to 11%.

The Washington crisis has eased, but will come back in mid-January. The polls say that voters blamed the Republicans for the last problem. More moderate Republicans might come back and there will be no more budget crisis.

The EU is recovering. Spain is recovering. Italy is the only country still in recession. This is an improvement. China is hard to read and no one knows what is going on. Maybe slower growth at 7 to 8% will be the new norm. Growth at 7.5% is low for China. Gold will do better in 2014 and will pick up but gains will be modest. Gold is a hedge against inflation.

Equities will be the place to be. Bonds and interest rate sensitive securities will continue to struggle. You should not abandon bonds. Do not do long term bonds or real return bonds. Go to short term bonds.

The best bets for 2014 will be the US market, selected Canadian stock and international stock. If you are interested in income and you are not worried about portfolio values, dividends stocks will be ok. His active US recommendations are Boeing (NYSE-BA), Wells Fargo (NYSE-WFC), Starbucks (NASDAQ-SBUX), Beam (NYSE-BEAM), and Norfolk Southern (NYSE-NSC).

Boeing (NYSE-BA) is the largest plane manufacturer with a market cap of $97B. The trailing P/E is 23.5 and the forward P/E is 17.6. The yield is 1.6%. He recommended this at $88.89 in January 2013 and it was recently at $128.34. It will still go up. The Dream Liner will end up being a great profit producer.

Wells Fargo (NYSE-WFC) is one of the strongest US Banks. The market cap is $226B. The trailing P/E is 11.3 and the future P/E is 10.7 which are reasonable. The yield is 2.8% and the recent price is $42.80. He recommended this first in January 2013 at $35.14 and still owns shares.

Starbucks (NASDAQ-SBUX) has a market cap of $60B. The trailing P/E is 38.4 and the future P/E is 30.1. It is a bit expensive. The yield is 1.1% and he recommended it in September 2011 at $39.20 and it was recently at $80.31. It is still a buy, but it is not cheap.

Beam Inc. (NYSE-BEAM) is a major liquor manufacturer. They manufactures Canadian Club. The market cap is $11B. The trailing P/E is 28.7 and the forward P/E is 24. The yield is 1.3%. He first recommended this in September 2012 at $58.97 and it is now $69.57. Liquor companies thrive no matter what the economy.

Norfolk Southern (NYSE-NSC) is the size of CN. It has 20,000 miles of track. The market cap is $27B and the trailing P/E is 15.8 and the forward P/E is 13.7. The yield is 2.6%. He first recommended this in December 2009 at $52.52 and it is now $85.98.

None of these companies have a high yield. A new market cycle has started and this will affect their growth and yield. He also has some Canadian picks of CN Railway (TSX-CNR), Alimentation Couche-Tard (TSX-ATD.B), Linamar Corp (TSX-LNR), Stella-Jones Inc. (TSX-SJ), Constellation Software (TSX-CSU), Stantec (TYSX-STN) and Shaw Communications (TSX-SJR.B).

CN Railway (TSX-CNR) is in Canada and US. The market cap is $48B. The trailing P/E is 19.3 and the forward P/E is 16.5. The yield is 1.6%. He first recommended it in May 2002 at $25.95. It is now $114.92 and it is still doing well and he still recommends it. It is the most cost effective railway in North America. It will continue to grow unless we get new pipelines.

Alimentation Couche-Tard (TSX-ATD.B) is a convenience store and a great story. The market cap is $13B and the trailing P/E is 17.6 and the forward P/E is 14.4. The yield is 0.5%. He first recommended it in March 2013 at $19.72.

Linamar Corp (TSX-LNR) is into Auto parts and it is smaller than Magna. Its market cap is $2B. The trailing P/E is 13.3 and the forward P/E is 11.1. He first recommended this in July 2012 at $19.76 and it is now at $35.63. The company will benefit from EU trade deal.

Stella-Jones Inc. (TSX-SJ) is a supplier to railroads. The market cap is $2B. The trailing P/E is 21.9 and the forward P/E is 17.1. The yield is just 0.7%. He first recommended this stock in April 2012 at $42.20 and it is now $108.13. It is expensive, but still a buy.

For international stocks he recommends Chicago Bridge & Iron (NYSE-CBI), Baidu (NASDAQ-BIDU) and Diageo PLC (NYSE-DEO).

Chicago Bridge & Iron (NYSE-CBI) is an international stock that trades in New York. It is based in The Hague. The market cap is $8B. The trailing P/E is 24.3 and the forward P/E is 14.4. The yield is 0.3%. He first recommended this stock in April 2013 at $53.28 and it now trades at $73.73.

Baidu (NASDAQ-BIDU) is China's Google. The market cap is $54B. The trailing P/E is 32.5 and the forward P/E is 4.0. The yield is 0%. He first recommended this stock in February 2011 at $128.80 and it is now $155.18. He can see it getting to $200.

Diageo PLC (NYSE-DEO) is into liquor. The market cap is $82B. The trailer P/E is 20.7 and the forward P/E is 17.2. The yield is 2.9%. He first recommended this stock in September 2007 at $85.92 and it is now $131.03. The dividend is tied to profits of the company so it varies each year.

So, wrapping things up, the place to be is in growth stocks. Some fixed income is also good but be defensive. He thinks that we should emphasis the US over Canada. His web site is www.buildingwealth.ca, with newsletters of Income Investor and Internet Wealth Builder.

As far as the CDN to US currency goes, economics tells us that the CDN dollar should be at $0.92. There will be no dollar parity anytime soon. The CDN dollar may go down rather than up.

The Canadian Banks should do well but nothing dramatic. Best would be Toronto-Dominion Bank (TSX-TD) and Scotia Bank (TSX-BNS). The insurance companies have been badly beaten and are recovering. This is where you should put money for growth. Canadian oil and gas depends on the price of oil being at $100 a barrel. The pipelines will be built. There is still a price differential and this will change but he does not know when.

The trailing P/E for the TSX is 17.1 and for the US is 14. He does not look at P/E ratios, but at trends and momentum. The index P/E does not speak to the individual stocks. The P/E ratio is only one factor to consider when looking at individual stocks.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.