Bull Market Is Old At 7 Years

Miners meet at Toronto's PDAC convention 
The chase by Frances Horodelski:

“This is the first time you lied to me since you stopped lying to me.” – Tom Yates to Claire Underwood. Season 4 House of Cards done.

I’ll try not to lie to you this morning.

First, get ready for the celebration. This Wednesday marks the seventh year of this bull market if you count from the March 9, 2009 low. Some might count from August 2011 (when the S&P 500 dropped just slightly less than 20%). But on the seven-year basis (and the market closingFriday at 1,999.98722585876 according to the keeper of the data Howard Silverblatt at S&P/Dow Jones Indices), the market is up 195.62% (just under 17% per annum and 19.3% with dividends). Consumer discretionary is the best performing sector and maybe not surprisingly, energy is the worst. The average bull market lasts under 59 months – this one at 84 seems old but is only the third longest.

So what happens with this one? A couple of cautious items from traders. Russell Rhoads from the CBOE noted this week a VIX death cross (he’s looking at one year versus five year trend lines) – something similar happened in November 2007. The percentage of stocks trading above their respective 50 day moving averages has recently soared to just under 74% (the last time we saw it this high was November 2015). CNN’s fear/greed index is at 71. And there are lots of questions about the sustainability of the commodities rally, although this is my favourite quote from weekend reading on markets: “I've never in my career heard someone call an early rally off the bottom sustainable.” Trend & Cycle’s technical analyst at RBC notes that markets are “still early in an upturn” and that they “expect pullbacks will be relatively short-lived and shallow.” The S&P 500 is now just 6% off its all-time high – but 190 names (from Best Buy to Southwestern Energy) are down 20%+ from 52-week highs.

Meanwhile, the price of hops has more than doubled over the past seven years (doing better than stocks) – putting pressure on craft brewers according to the Financial Times. Now that’s a story.

This week’s action will focus on central banks (Bank of Japan, European Central Bank and the Bank of Canada). For Canada, the odds of another rate cut are low (less than 10%) but with the Canadian dollar’s big recent bounce, the workload shifts back to the bank (and of course, fiscal policy). With a budget coming down March 22^nd, unlikely the bank would move in front of that. For the ECB, traders suggest another cut deeper into negative territory (10 basis points to -40 bp) plus an increase in asset purchases by 10-20 billion euros (versus 60 billion currently) and an extension to March 2017. There is a 100% probability according to the tea leave reading of Eurozone OIS (overnight index swaps) of a cut. We’ll also hear from Mark Carneytomorrow on the consequences of Britain’s exit from the EU (he’s speaking to Parliament). Today, Fed governor Lael Brainard and Vice Chair Stanley Fischer give speeches – the last as the Fed’s quiet period starts before next week’s meeting (92% probability the Fed stays pat at current rate levels).

In things closer to home, the mining world will focus on Toronto and the Prospectors and Developers Association of Canada (PDAC) meeting. Andrew Bell will be bringing reports all day today and tomorrow. Later in the week, FirstEnergy’s East Coast Energy conference will shift our attention to oil and gas companies will a series of CEO interviews.

Earnings wise watch names like Square (Wednesday) and laggard retailers (Urban Outfitters today and Dick’s Sporting goods tomorrow but also a number of investor days including NCR, Chevron, American Express, United Technologies, General Electric Healthcare. Today, Canadian earnings calendar focuses on CargoJet and Pizza Pizza. There is little economic data today (Germany factory orders came in better than expectations although negative) but we’ll build to Friday’s jobs numbers in Canada (10,000 jobs expected). Tomorrow, Magna has an investor day. Iron ore jumps 19%, the biggest one day bounce on record. Torque.

Markets this morning are light of news and weak of price with the exception of Chinese equities which have bounced post-the People’s National Congress where 6.5-7% GDP growth forecasts were entrenched in the next five-year plan, the first time in 20 years that a range of growth has been targeted.

I’m sure there will be lot more to say as the week unfolds. From Research, RBC adds Agrium and Enbridge to their technical best ideas list. CIBC highlights the benefits of buybacks and notes that names such as Metro, Canadian Tire, Thomson Reuters, Agrium and CN Rail fit its positive stance (and these names are on the recommended list). Barclays has upgraded Power Financial (PWF) to overweight while downgrading Power Corp. (POW) to neutral—a popular institutional trade. SunLife has come off the restricted list and is again a buy.

And the day begins.

Every morning Business Day Host Frances Horodelski writes a "chase note" to BNN's editorial staff listing the stories and events that will be in the spotlight that day

Why the stock market is tanking right now, and what comes next

 It’s been one of the worst starts to the year ever for the world’s stock markets. All the more reason to keep your nerve

Look around the global market place and you’d be hard pressed to find anywhere in the green. Out of hundreds of major global indices fewer than 20 are positive; you have to look to Slovakia (up 5% year to date) to find one of the few bright spots.

Everywhere else, it’s red—blood red, if you ask anyone owning equities. Today alone, the S&P/TSX Composite at one point was down 4%, although it’s since eased back and finished the day down 1.33%. And it’s not just Canada that’s feeling the pain. The benchmark U.S. indices, likewise, aren’t far behind, with the Dow Jones Industrial Average down 1.56% and the broader S&P 500 down 1.17%.

Such single day losses are always tough to swallow, but these drops come after an almost continuous stream of losses since the start of the year, with barely a whiff of a positive market response to act as a buffer. It’s been like this since the opening bell on January 2, the first day of trading for the year. It’s as if the market turned the page on 2015 and entered an entirely new reality.

It’s not, of course. Here is what need to know about the selloff and what it’s going to take to stop it:

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TSX long-term value investor ideas for 2016

For the long-term value investor, here are some compelling stories to think about in 2016. Metro Inc.

Canada’s third-largest grocery retailer is also its most profitable. The Montreal-based Metro operates in Quebec and Ontario, gaining clout in the latter with its 2005 purchase of the Dominion and A&P banners (since rebranded Metro). With cost efficiencies and a comparatively lean workforce, Metro boasts a net profit margin of 4.3 per cent, while that of rivals Loblaw Cos. Ltd. and Sobey’s owner Empire Co. Ltd. are each less than 2 per cent. Even long-term, it’s difficult to identify significant risk potential at Metro given the recession-resistant character of grocery and drug retailing, and the sheer heft of Metro’s market coverage with its 800 or so supermarkets, drugstores and specialty food chains. The latter include corner store operator Marché Richelieu and Marché Adonis, a top Quebec ethnic food purveyor. What makes the value investor’s eyes pop is the Metro’s low stock-market valuation relative to its competitors. Metro stock trades at a price-earnings multiple of just 15.4 times its estimated 2016 profit per share, far below the industry average p/e of 27.2. Linamar Corp. Few companies in today’s market offer Linamar’s growth potential, with a stock affordably priced at less than 10 times’ forecast 2015 earnings. The Guelph-based auto-parts maker has the markings of a longterm outperformer, having emerged unscathed from the Great Recession’s collapse in vehicle sales, and posting a near quadrupling in profits since 2011. Linamar has mastered geographic expansion (48 plants on four continents), new product development (more than 150 product launches in 2014 alone), and fiscal discipline (revenues were up 45 per cent between 2011 and 2014, while costs increased just 35 per cent). Skilled balance-sheet management enables Linamar to finance continued expansion, including its recent $1.2-billion friendly bid for France’s Montupet S.A., a specialist in aluminum castings that will reinforce Linamar’s own prowess in aluminum components and further expand its global reach. Much larger peer Magna International Inc. is more diversified in products and capabilities, but the yawning revenue gap between the two firms (Linamar’s $4.2 billion to Magna’s $48.9 billion) suggests a great deal of room for Guelph-based growth. That goes for Linamar’s dividend yield, as well, which is currently just 0.59 per cent. Procter & Gamble Co.

P&G is in one of its periodic swoons, its stock having slipped by 26 per cent from its all-time peak just 12 months ago. P&G has been here before. Its stock plummeted 48 per cent in the late 1990s, and fell 38 per cent in the late 2000s, only to recover each time to set new all-time highs. Now as then, there are panicky calls on the Street to break up the company. Fair enough: P&G is a $102 billion (in sales) behemoth whose products are used about 4.6 billion times a day worldwide. But P&G is already shedding two-thirds of its brands. In the past year, oncecherished P&G brands like Cover Girl, Max Factor, Wella and Duracell have been shed at handsome prices in P&G’s largely completed campaign to downsize a product portfolio that had become bloated. That still leaves P&G with market-leading brands collectively worth about $120 a share in earnings power. And that’s before a leaner P&G boosts profits now that it’s able to focus on its highest-margin products, including Tide, Gillette, Olay, Pantene and Pampers. The stock also boasts an industry-leading dividend yield of close to 4 per cent. Honeywell International Inc.

Honeywell is not a contrarian play, its stock having outperformed the S&P 500 by a factor of three in the past decade. The company is best known for its thermostats and other control systems, though its monitoring systems actually control everything from household furnaces to liquefied natural gas (LNG) plants.

The New Jersey firm’s mastery of controls gives Honeywell a head start in its bid to become a dominant player in the emerging “Internet of Things” market. Honeywell is hedging its bets by establishing itself in dozens of IOT sectors, many still nascent. The $54 billion (2014 sales) Honeywell has the R&D heft to devise machine-tomachine IOT systems for building contractors, commercial property managers, factory and mining operators, and municipal supervisors aiming to create “smart” cities. Growth in IOT revenues will be measured in the tens of billions of dollars per decade, giving Honeywell stock unusually big upside potential for such a large and stable company.

The stock also yields a generous 2 per cent yield, above average for this sector.

Oil - Canada- TSX And 2016 Predictions

That’s the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to ensure their costs remain below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. It traded Monday at a little under $37, two-thirds lower. The current price per barrel is enough to buy 24 bottles of Sleeman’s Original Draft at the Beer Store — but not the cans, which cost a few dollars more. If you think about that in terms of your household, how would you fare if your family income was cut by 67 per cent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that this month the U.S. lifted a 40-year ban on the export of domestically produced oil.

That is because fracking is making the U.S. virtually energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis, seeing a long-term threat to their oil power, have ensured that OPEC continues to produce at the same pace to maintain market share. The Saudi goal is to drive the higher-cost fracking industry under. Our even more expensive oilsands are caught in the crossfire.

OPEC shows no signs of standing down. It reaffirmed its strategy at a December meeting, and last week its World Oil Outlook forecast that a barrel of oil would only cost (in real terms) around $70 by 2020.

So here’s what it means for us: The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for an American dollar. On Monday, it was at 72 cents, a drop of 22 per cent. It was $1.40 to $1 at the consumer level.

If oil rebounds, so will the dollar; if not, it may fall further which is something readers care a lot about. How to get a better U. S. exchange rate deal was the most popular column of the year. Canadian stocks

Toronto share prices are down 9.8 per cent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 per cent.

If oil prices improve, these shares will too. Ditto for our banks, which are big lenders to the oilpatch and are another big part of the main TSX composite index. They’ve had a lousy year too, down 5 per cent. Inflation

We climbed out of our 61-centdollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again. Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, ands and maybes here and, as always, beware of forecasts. In June, when I wrote about the dollar, the consensus was that it would be between 77 and 80 cents now. Between now and this time next year, anything can happen. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays.