John Stephenson is Senior Vice President and Portfolio Manager for First Asset Investments Management Inc. and editor of Strategic Investor. His talk was entitled "Breakaway".
Breakaway is talking about US's strong performance versus Canada. The EU is the biggest risk followed by Japan and then US. The US had a lot of problems earlier this month. However, we are encouraged to buy stocks and take risks. The markets have lately been on fire. The DOW is up 18% compared to the TSX up by 7.3% year to date.
We are half way through S&P500 earnings season and there were 5% surprises to the upside. Earnings growth was 4.5%. There were material sector surprises. Why is this? The 4-6 month valuation is reasonable at 14 times earnings.
He took a trip to Asia and ended up in Japan. The cab from the airport of Tokyo center was $400 US. The bus was $60 US. Japan's government has built a fire under its market. There are strong stimulus and Central Banks have unlimited power. Japan is using 3 times the stimulus that the US used. However, there was a 180 degree turn around in the US.
After the bust of 2008, there were abandon buildings and no one in the shopping malls. A lot of US citizens looked to Canada for jobs. But the US has picked up. Spending is up. The job market is still weak. Not everyone will get a job. The hardest hit real estate market is up big. This is very positive news, the real estate market being up.
Car sales are flooring analysts. There are strong sales because the average age of cars in the US is 11 years. People are therefore buying. This is good for Linamar Corp (TSX-LNR), Magna International (TSX-MG), Chrysler, General Motors (NYSE-GM) and Ford Motor (NYSE-F).
The US shale oil and gas will not change the US from an importer to an exporter. They may have sufficiency in gas, but not in oil. Energy is a net job creator. We in Canada have struggled with house prices and they have just gone up higher and a hard landing has not happened. Debt to disposal income is up in Canada. Canada is relatively less attractive than the US. We are going to have tougher times. The US has had tough times for 5 years and is just heading out of tough times. The biggest predictor of global economy is US Manufacturers Index. When is its 50 the economy is growing and when below 50, not so much.
Look at the industrials. They are moving higher. Europe and China may be going up. The current cycle in the stock market may be longer lived. The early cycle movers are the place to be. US stocks are good, but the multiples are getting higher and therefore stocks are getting expensive. What will carry us forward will be capital expansion. Companies are sitting on cash. They will start to spend and this will push up growth.
The replacement of hardware is starting. The Fed is still driving the economy. The Fed will be on hold in the first part of 2014. The talk of tapering caused interest rates to rise up by 3%. Ben Bernanke wanted them lower (i.e. at 2%). Utilities and pipelines are in cyclical times. The hissy fit of the Republicans and Democrats causes a pause in economic stimulus. The Fed is waiting for better employment numbers.
The best growth is in emerging markets. All talk of tapering has stopped. $550B was raised my global mutual funds. Most of this money went into bond funds and not much into equity. There is no current shifting from bonds to equities. However, we need to put a greater amount into equities. Brazil is struggling. Russian and India were down until tapering talk stopped.
We should be going into cyclical stocks such as info tech, financials and industrials. Commodities are big in Canada, but we should be cautious about commodities. China is doing a bit better at 8% rather than 7.5%. However, it used to grow at 10 to 11%.
We should avoid things with little growth now. We should be out of the defensive stuff. Interest rates will go back up in the middle of next year. The dividend yields are not looking as good and balance sheets have debt. Utilities and telecoms (i.e. Rogers - as government wants to lower roaming rates) have negative headwinds.
Some pipelines are ok, like Enbridge (TSX-ENB). The dividend is ok and will have growth. Pipelines are different than utilities as pipelines are infrastructure. Railroads are fine. Do not have any gold as there is not much performance going forward. The Costs for gold are going up as cost for oil is going up. The view that gold is a safe haven is false.
Where we should be putting our money is in financials such as banks and insurance companies. In the long term insurance companies will be fine but they are just not strong at the moment. They are tied to the stock market but they have rounded the corner.
In the US and China, stocks will be good. Bonds will be challenging. The US banks have spent 5 years in the dog house and are doing better now. We are in a cyclical up cycle. It is time to buy such things as Blackstone Group LP (NYSE-BX), Lazard Ltd. (NYSE-LAZ) and Morgan Stanley (NYSE-MS).
Tech stocks are trading at a discount now, but fundamentals are good. These are such stocks are SalesForce.com (NYSE-CRM), Qualcomm (NASDAQ-QCAOM), Oracle Corp. (NYSE-ORCL), Linamar Corp (TSX-LNR), Magna (TSX-MG), Air Canada (TSX-AC.B) and Boeing Co. (NYSE-BA).
SalesForce.com (NYSE-CRM) and Qualcomm (NASDAQ-QCAOM) are good investments, but there is a problem with tax withholding on US dividends. The US does not recognize the TFSA as a registered account so there will be tax withholding on dividends for this account.
Qualcomm makes chips for cell phones and we are heading into a wireless world. For Oracle, we are going into a cloud world. Linamar is better at present than Magna. For Magna, it has had a great run and you might want to wait before buying. For Boeing, its problems are being solved.
Later in the year will be times for the later cyclicals, such as the materials sector. He is negative on precious metals, but not a bear. Good stocks are Teck Resources (TSX-TCK.B) and Freeport McMoran (NYSE-FCX).
Energy peaked in the latest cycle. The worldwide economies are picking up. US is on a tear re gas. The world is getting better. Canada is having a hard time getting oil to market. Keystone will not be built. However we have the Northern Gateway pipeline project, the Kinder Morgan pipeline and we are reversing the flow of eastern pipelines to flow east.
Our oil is trading at a discount, but there is international interest. Companies to consider is Suncor Energy (TSX-SU), EnCana Corp (TSX-ECA) and finally Canadian Natural Resources (TSX-CNQ) which he owns. Also other companies are Whitecap Resources (TSX-WCP), Crescent Point Energy (TSX-CPG) and ARC Resources Ltd. (TSX-ARX). He thinks that Canadian Natural Resources will have better growth than Suncor, ARC or Crescent Point.
Stephenson says he is excited about the future. The US has turned the corner. Canada is looking better. Our real estate is ok. The valuations are cheap and he is looking forward to being fully investing.
He thinks that the Canadian currency will go down to $.90 to the dollar. The GDP will be 3.5% in US (and it will do no new taxes) and 2% in Canada. The Canadian dollar is an oil proxy.
The REIT rise is over, but maybe good yields later this year. Nowhere looks like Toronto, not even New York with the number of condos being build and the exuberation. Canadian Banks are not financing them. Finance is from non-Canadian banks. There is a bubble and there are no good stats on owners and speculators. He went on a tour with US investors. There will not be a crash, but there will be a draw down on condo's in Canada. We are out whack with US real estate market.
It is in 2014 when most condos in Toronto will be completed. They were sold 3 yes ago and in the future there will be too much supply and lower demand. There are too many speculators involved. There is more risk in condos than in houses. Yes, Toronto is desirable, but there is weakness in condos, but not in houses.
When do interest rates become a speed bump? This will be at 6 to 7%. Stock markets do well when rates start to rise. Rising interest rates only become bad later. The central banks want some inflation, but not too much inflation. The US economy is not that good, so the Fed will keep rates low. Main Street is improving, but there is government gridlock. Real estate is recovering in the US. The US market is up, so the US investor has recovered.
Chevron Corp. (NYSE-CVX) is a good investment. There are lots of big US companies getting gassy but he is not as positive on gas as he is on oil. Currently the price of gas is $3.50 to $100 for oil, which is a 25 to 1 ratio. (It used to be a 4 - 1 ratio.)
The last 7 years have been very volatile and he does not believe in buy and hold. The Utilities and REITs have gotten hammered with all the talk of tapering. The fundamentals are getting better. People on fixed income investments will be going to equities.
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