Sell-offs always set the stage for recovery,

although it’s hard to think good times won’t return

Human nature tends to work against us when the stock markets turn.

Now is one of those times, particularly for readers who have turned to stocks reluctantly as the only way to stay ahead of inflation. As share prices have moved wildly and largely lower this year, concern has mounted. Some think they should sell now, which may be the worst time to do it.

Wednesday, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade, and the news offered another example of a day of lurches. North American stocks sank before the announcement, then soared once the hike was official. Both Toronto and New York ended the day with triple-digit gains.

The last two trading days aside, it’s been a lousy year for investors. The main index on the Toronto Stock Exchange is down 10.7 per cent on the year as of Wednesday’s close, largely because of the commodity and energy rout, which hurts many areas of our economy. The Dow Jones has fared better, but is still down a little less than half of 1 per cent.

Toronto reader P.N. has had a small portfolio of stocks for 30 years. She wanted a higher return without too much more risk, so her adviser put her into a portfolio of dividend stocks.

She doesn’t need the quarterly dividends for day-to-day living, so instead of cash she opted for a dividend reinvestment plan (DRIP), which adds the equivalent of the dividends as shares. But as the face value of her holdings has fallen, she wonders whether it’s smarter to take the money.

“With the erosion of the stock market, I admit to feeling some anxiety,” she wrote. “I feel I should stop the DRIP method and receive the dividends in cash.”

After some to and fro, P.N. has decided to stand pat, reasoning that her DRIPs buy more shares as the stock price falls. And given the high quality of her holdings, the companies she owns will fall least and rebound first. They will also pay dividends along the way, so there’s no reason to sell.

Her thinking is similar to Brampton reader S.W., who has watched his portfolio shrink almost 10 per cent in the last few months, losing $107,000 on paper, he says.

His holdings are also top-quality. They include large real estate investment trusts and preferred shares of Canada’s banks. All pay monthly or quarterly dividends. S.W. wanted to know whether he should hang on. He uses the dividend income to live on, but does not need to touch his seven-figure capital. He has also decided there’s nothing to be gained by selling and believes his holdings will rebound.

Diversification and investment quality are the keys to long-run investment success and if you have both you’ll come out ahead. But we live in the short run, where emotions are always at play.

Bernard Baruch, a Wall St. financier and adviser to five U.S. presidents, once noted that emotions constantly set traps for our reasoning powers. We tend to react to the urgency of today’s news and lose sight of our goals. Here are a few things to keep in mind: Stocks can seem risk-free for long periods, but they aren’t. When they fall, it can be a rude shock for those who are in the markets as a last resort. If you need to preserve capital, you shouldn’t be there. If you can accept some risk, high-quality funds and shares offer a higher return.

Market sell-offs always set the stage for recovery, although as Baruch observed, it’s human nature during bad times to think the good times will never return.

On Black Monday in October 1987, U.S. shares fell 22 per cent in one day. They recovered all of that in a few months. Crashes in 2000 and 2008 were all followed by big rebounds.

Lower share prices mean a higher dividend yield. For example, shares of TransCanada Corp. tumbled following the U.S. rejection of its Keystone pipeline. A year ago, the shares were worth $52.83 with a dividend yield of 3.6 per cent. The shares closed at $48.30 Wednesday with the dividend yielding 4.3 per cent. On top of that, TransCanada raised its dividend this year, a sign of confidence in its outlook.

This is not to say that sell-offs don’t hurt. It’s just that if can look beyond them you often find that better things lie ahead. Adam Mayers writes about investing and personal finance

USA Interest Rate Bump Up - Helps Canada

Confident American consumers, low-flying loonie could bring prosperity north of the border when Fed raises benchmark rate

Never has so much attention been paid by so many to something so small.

With apologies to Winston Churchill and his Battle of Britain speech, the greatest American economic experiment in the post-Second World War period will probably end Wednesday.

It’s been a battle of another sort, as the U.S. Federal Reserve ends its zero-interest policy, letting a key rate rise by as much as a quarter of a point. It would be the first increase there in almost a decade.

The increase isn’t much; more important is that it signals a swing toward normal conditions. And it is actually good news for Canadians.

The Fed pushed rates down sharply in 2008 to stave off a financial collapse, creating trillions of dollars out of thin air. That did the trick, encouraging consumers to borrow and spend. It brought U.S. housing back from the brink and has pumped up stock prices.

It’s no accident that a decision to raise rates is being made nine days before Christmas, when the financial world is winding down for the two-week holiday period. Nobody is quite sure how this will play out; stock markets have been behaving erratically at the thought. A rate hike may mean more lurches, or the bump may already be factored into prices. Nobody knows. So all the better to make a move when attention is focused elsewhere.

With the U.S. still our biggest trading partner, here is how their decision could bring energy here: Energizer No. 1: Confident Americans The move signals that the U.S. economy is humming after seven lean years. Consumers account for the bulk of American economic activity, and they are back in a big way. Their economy is creating jobs and the unemployment rate has fallen to 5 per cent, which is considered full employment. Wages are rising and wallets are open.

These forces usually create inflation, and policy-makers want to act sooner rather than later to stop it from building.

Our economy tags along. Demand rises for everything we sell to the U.S., from energy and resources to manufactured products. One sign of the good times this year is car sales. They’ll set a record in the U.S., exceeding a high set 15 years ago in 2000, according to Automotive News. Many of the cars Americans drive are made in Ontario: Oshawa, Brampton, Cambridge, Woodstock or Alliston.

Autos are just one sign of the times. Scotiabank economist Aron Gampel said in a recent briefing that Canadian exports have increased at a 9-per-cent annualized rate since February. Expect more momentum in 2016. Energizer No. 2: A 70-cent dollar Our dollar ranks among the worstperforming major currencies against the greenback in the past year. Canada and Australia have seen their currencies fall by about 25 per cent and 30 per cent respectively against the U.S. currency. Both of those countries are huge exporters of energy and minerals.

This week’s 72.5-cent (U.S.) level for the loonie is an 11 1⁄ 2- year low. That may seem awful, but more may be in store, CIBC economist Avery Shenfeld says. In an interview with the Star last week, he said, “I think a 70-cent Canadian dollar is now in sight.”

That’s bad news for those heading to Florida or the Caribbean, where things are priced in U.S. funds. Mexico may be a better deal this year.

But a weaker dollar is more fuel for our economy. This is especially true in industries that are exchange-rate sensitive. Beyond cars, this includes industrial machinery, electronics, aircraft and consumer goods. Energizer No. 3: Low inflation If these changes can come without inflation, as during the days of the 66-cent dollar in 2000, that’s a third boost. Meanwhile, the slide we’re seeing in energy prices helps us — it’s effectively a tax cut, making it cheaper to heat, drive and manufacture. Inflation held steady at 1 per cent in October and our central bank has made it clear things aren’t going up any time soon in Canada.

The one inflationary worry is that rock-bottom interest rates are fuelling an unhealthy housing market in the GTA and Vancouver. Mindful of that, federal Finance Minister Bill Morneau on Friday tightened the minimum downpayment for high-end homes from 5 per cent to 10 per cent.

If the Fed raises its rate, it will be a small move with a big implication. For us, long-term gains may well outweigh short-term pain.  

http://torontostar.newspaperdirect.com/epaper/pageview.aspx?issue=10382015121500000000001001 

Will the Fed stick to its rate-hike strategy?

The chase by Frances Horodelski:

What were you doing June 29, 2006, the last time the Fed hiked rates (to 5.2%)? That was the last hike after a series of 17 hikes over two years that moved the rate from 1% to 5.25%. That stair step of increases was followed by a water fall of cuts beginning in September 2007 and ending with ZIRP on December 16, 2008. With great symmetry, seven years to the day, Janet Yellen and the Fed is widely expected to put ZIRP to bed this Wednesday , Dec. 16, 2015.
Last week ended badly, so is it time for some good market news? We’re starting the week with bad news if you’re an oil trader. The price of oil dropped below $35 as the U.S. dollar is strong, the momentum from last week continues and all the concerns with supply continue (Iraq, Libyan peace agreement, etc). According to CFTC data, the commercial shorts are at the lowest level since the Spring while speculative longs are at the lowest levels since January 2013. But the catalyst for a reversal is hard to see (there is no risk premium and remains driven by supply). Natural gas is trading at the lowest level since 2001 (when the low was $1.83, right now the commodity is $1.88) – a reversal here is also hard to see.
Weather remains unusually warm and even when it does get cold later in the week in the North East and in Canada, it couldn’t be called frigid. These are tough times. And another sign of these times is Encana which has “reset” its annual dividend from seven cents/share to six cents/year. Reset is euphemism for slash I guess.
Meanwhile, the world continues to reel from high yield collapse including last week’s closure of Third Avenue’s fund (which was very high yield) and another this morning (Lucidus) which was triggered by a significant investor wanting out in October forcing the fund to wind down. One measure of credit risk (junk yields versus the 10-year) is stressed having risen 437 basis points since June (from 2.21% to 6.585 spread) but still well below five year highs at 8.33% and crisis high of 20.55%.
Last week’s CNN fear/greed index has moved to the highest fear level in a month at 24 – but the index can go to zero. But fear is [palpable. According to one pundit, when the market falls by more than 1.5% on a Friday, 86 out of 90 times, the market is down on the following Monday. Right now, markets are showing green but weakening as I type.
Meanwhile, news continues – especially in the record setting M&A space. Another big deal on the table as Newell Rubbermaid and Jarden merger in a cash and stock deal. Each JAH shareholder will receive $21 cash plus 0.862 NWL. The combination will be a bit of a branded powerhouse with Jarden bringing things like Sunbeam, Coleman, Rawlings, Yankee Candle, Bicycle playing cards and the list goes on. M&A activity so far this year is running at a record $5.5 trillion globally (announced deals). Interesting item on the DowDuPont merger from last week. According to Barron’s, DuPont paid US$500 million to investment bankers on its spin-out of Chemours. Some more suspicious than me suggested that the big chemical merger was more to line the coffers of the bankers than for strategic or shareholders reasons!
Speaking of Barron’s, the 2016 outlook from strategists look for an average year from stocks in 2016 (2200 on the S&P 500). Stocks that were profiled positively include Macy’s, XL Group, Disney. Also a note that the correlation between stocks has risen to 71%-- the highest since 2012. What does that mean? The macro backdrop is more important than the micro and stocks are moving together. So your stock-picking prowess is less important. There is an old adage on Wall Street that suggests just when you need it most, that is when markets fall, diversification helps you the least. We’re in one of the moments. They do end – but I have found that this “tough” time happens when a transition of some magnitude is unfolding just beneath the surface.
We’ll talk transitions with Scotia’s chief strategists this morning and what his 10 themes are for 2016. MKM Partners chief derivatives strategist also uses the term transition in his daily missive. Pivot and transition – watch for these words in the strategy pieces for 2016.
From street research this morning – RBC getting more conservative on Valeant (by reducing the target to $194 from $206 U.S.); Scotia says now is the time to buy Paramount Resources (with a $15 target), BMO upgrades Mattel to outperform from hold ($33 target); Barclays introduced its global stock picks last week that included four names that are Canadian – Suncor, CNQ, Vermillion and Goldcorp (these have been the same Canadian names for some time) and Scotia introduces its 2016 featured stocks list that run from Aecon through to WPT Industrials with 41 names between. Barclays also initiates on two recent IPOs Square and Match Group with outperform.
Stick with BNN as we stick-handle these markets with guests. The futures are now in negative territory and European markets are also lower across the way. From Art Cashin at UBS: “Crude is bothering markets but it's the high yield thing that has the most market risk. Friday's Option Expiration is rumored to be enormous, which could make this a very volatile week. Stay wary, alert and very, very nimble.”
So there you have it.

Survival of the fittest

The chase by Frances Horodelski:

From the reading pile:

-Goldman Sachs is making a head and shoulders pattern and is vulnerable to $120 (!) (Bottarelli Research)

-FANG stocks are ridiculously overpriced (Facebook, Amazon, Netflix, Google) and require increases in net income of 473%, 5017%, 1752% and 81%, respectively to get p/e levels to market multiple (720 Global)

-Global exposure to USD appreciation is highest ever (at 18% of world GDP, ex-U.S.) and $9.8 trillion (National Bank Financial)

-Beware of Sovereign Wealth Funds (from China to Saudi Arabia) where selling could exacerbate global debt market valuations. Oil country SWF’s total $4.2 trillion. China’s reserves have dropped from $4 trillion to $3.43 trillion (an old number, but still falling) (Financial Times)

-Resistance on the S&P 500 is around 2072 and then about 2100 – will we take another run today (traders)

-Suncor made the front page of options newsletters yesterday as the shares have seen two days of heaving call buying (50:1 over puts) – 9 of 10 most active contracts are all calls especially the January 2016 $25 (U.S.) calls

-Not surprisingly, Caterpillar and Exxon are these most oversold Dow stocks (deeply oversold), the most overbought Dupont and Procter & Gamble (Bespoke)

-CNN’s fear/greed index is in the fearful territory (35)

-But maybe fear is justified – from Walter Murphy, CMT looking at chart patterns notes “the long-standing internal deterioration suggests that in early 2016 the market could be in its most fragile condition since 2007”

In the news cycle we have Cenovus lowering its 2016 capex budget by 19% to $1.6 billion (there will be a call at 11 am); we have a report from CIBC that 80% of millennials have no idea how to invest; there are earnings to asses including Hudson’s Bay Company after the close (watch in particular the impact of the U.S. dollar’s strength on the flagship 5^th Avenue store of Saks and commentary about the Christmas selling season), DavidsTea (third earnings release post IPO, first earnings saw the stock collapse and has never recovered trading 41.6% below $19 offering price), and Transat (reported already and outlook shows 15% improvement in first half 2016 bookings).

Sandvine and Lumenpulse have also reported results. Economically, housing starts for Canada (which traders say is unlikely to move the dial on the Canadian dollar which is oil focused) as well as initial claims (the last jobs related number before next week’s Fed meeting). BNN will have more 2016 outlooks, some small cap high tech ideas in the “disruptor” space, we’ll talk about the dollar and the results of an IIROC study into High Frequency Trading. CVE’s CEO will also join BNN.

From the analysts on the street – interesting discussion on Dollarama which had a good quarter and opened higher yesterday got pummeled on what CIBC calls “detailed” guidance that was below their forecasts and admittedly “conservative” according to the company. DOL has a history of beating its own outlook but street worried about stocks trading at about 30x earnings. RBC has a detailed report out on the short interest in specialty pharma companies. The companies with the largest % of float short positions include Insys (82%) and Lannett (36%). Biggest changes higher include Teva (+49%), Perrigo (+24.5%) while Valeant has seen its short position drop modestly.

On the U.S. active list, Men’s Wearhouse missed its Q3 numbers and looks like it will miss the next quarter as well (stock down 21%), Canadian Solar also down 14% while Adobe, Box and GoPro are modestly higher on discussions that they could be targets for Apple.

U.S. futures are higher, European markets are lower, the smart money index is high but rolling over, bonds are getting a little bit of love, gold is up, oil is flat, the Canadian dollar is a little higher.

There isn’t much to read into the action so far. Glencore is a topic of conversation as it looks potentially to IPO is agriculture assets as it pledges to cut debt further (stock up 11% in London), Uni-Select and Cott remain at the top of the performance list in Canada (+109% and 82%, respectively YTD) while the biggest bounces today may come in the mining space.

Remember that there have been three bull market bounces (+20% or more) in oil since the collapse from last June. These quick bounces are very tough to play – we’re probably due for another bounce for the very nimble only. When the turn comes, there will be plenty of time to get one board.

Enjoy the day.