February 2, 2015 What to Do: If we are in a deflationary environment

February 2, 2015
What Happened?
appened? It’s all about the Loonie once more as the floodgates continue
to leave the Loonie & flock into the US$. The U.S. dollar is on track for its best run since
it was floated in 1971, notching up a seventh straight month of gains. Adding to the
decline is Canada's economy unexpectedly shrank by 0.2% in November on weaker
manufacturing, mining and oil & gas extraction. (Reuters 30Jan15)
This has placed huge pressure on commodity prices pulling our resource-heavy
Canadian markets lower. Commodity prices are near the lows of the Great Recession
back in 2008 with confirmation from the Baltic Dry Index for commodities
registering a three decade low this morning. (BNN 2Feb15)
Banks here in Canada started reducing their Prime Interest rates last week, look for
others to follow. We’re hearing the Canadian market is now pricing in another 25 bps
cut by our BoC by Q2 of this year around the Mar 18 or Apr 29 meeting. (CG Bond Desk
29Jan15)
•
Oil inventory numbers came out once more on the high end for crude oil.
Evidence is mounting that the slowdown in the oil sands is accelerating with the
number of new rigs for drilling already back to 2009 levels. (Reuters 28Jan15)
Violence in Iraq helped bring a lot of attention back to oil Friday.
MARKET NUMBERS - WEEK ENDING January 30, 2015
Week Ending 30Jan2015
Open
Close
14,779.35
14,673.48
678.18
676.81
2,043.90
DOW
Gold (USD)
TSX
January Year-To-Date
Open
Close
-0.72%
14,632.44
14,673.48
0.28%
-0.20%
695.53
676.81
-2.69%
1,998.37
-2.23%
2,058.90
1,998.37
-2.94%
17,672.60
17,169.12
-2.85%
17,823.07
17,169.12
-3.67%
$1,292.60
$1,283.80
-0.68%
$1,184.10
$1,283.80
8.42%
$45.59
$47.51
4.21%
$53.27
$47.51
-10.81%
TSX Venture
S&P 500
Oil (USD)
Copper (USD)
CDN$ (USD)
Change
Change
$2.50
$2.50
0.00%
$2.83
$2.50
-11.52%
$0.8051
$0.7869
-2.26%
$0.8604
$0.7869
-8.54%
What to Do:
If we are in a deflationary environment, where does one
invest?
Some of my contacts feel we’re actually in a deflationary environment which would
bring a shock to an already fragile global economy. Carney said the UK is heading
there & Germany is there now. The US central bank seems to be showing confidence that
low inflation and rising risks from abroad have not derailed the U.S. economic recovery.
(CG Bond Desk 29Jan15)
See below for what helps in a deflationary environment & don’t forget to get your
RSP done before March 2nd!
&
As January goes, so goes the year? Last year, January ended with a loss (some 64 points on the S&P
500). This year, January ends with a loss (about 66 points). The "as goes January, so goes the year" mantra is
everywhere. Last year it didn't work (as the S&P closed higher by 11% year-over-year despite the weak start).
The Stock Trader’s Almanac notes however that as a barometer, January has been a pretty good one. Since
1950 it missed eight times – of which three of those times have been in the past six years. We'll see what
happen this year. Our TSX closed January 2014 modestly higher (+0.54%) and has done the same this year
(+0.25%) which is surprising given the clubbing that 55% of the index received in the month. Financials (33.5%
weight) and energy (21.4%) dropped 2.2% and almost 6%, respectively in January. The best performing sector?
Healthcare +18%. (BNN 2Feb2015) Gold has also started out well but be wary as it could just be a seasonal play
that ends here in February.
US market;the Bull Market argument: S&P 500 bull
market;70 months & counting. Still room to expand? It
would appear so but it will likely come with volatility. Let's
push back from the day to day volatility to the big investment picture.
According to Zack’s Research, here are the only drivers you need to
focus on...
• Earnings forecasts plummet driven by the Oil Bear and the strong
US dollar.
• US Federal Reserve seems determined to raise interest rates by
June.
Bottom line: Large investors will still pay a 16X P/E multiple for growth in this bull market, but if the profit picture
drops too much the S&P 500 would drop below 2000. The way the market is acting, it seems like a trip to 1900
is more likely this month than new highs. In short, great buying opportunities are right around the corner in
preparation for new highs by April. (Zacks 2Feb2015)
If that plays out, then one should be buying on dips again as we did in 2014. Why do I feel like a mouse nibbling at
that big piece of cheese on the mousetrap;or as Keith Schaefer said to me, “Picking up pennies in front of a
steamroller”. Only twice since 1932 has a bull market run longer than the current US bull market;
;. the US market is not too expensive if you look at the forward P/E ratio but can you rely on that?
(Source : J.P. Morgan Asset Management Jan2015)
(Jan2015)
The American Feds released their thoughts on their economy & even though markets interpreted the US Fed
comments eluded to raising interest rates in the near term, perhaps as soon as June one commentary indicated,
not sure how that’s going to happen with how low inflation is & how weak wages are. The economy in the U.S.
expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in
government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending
in almost nine years. Gross domestic product (GDP) grew at a 2.6% annualized rate after a 5% gain in the third
quarter which had been the fastest since 2003. (Bloomberg 30Jan15)
The Bear Market argument: Deflation, a nasty word
economists do not want to hear as it can place a very
destructive downward spiral on an economy.
In terms of economic threats, deflation has historically been low on the list for
most investors. After the scourge of inflation produced economic havoc in
the 1970s and 1980s, most of the country breathed a sigh of relief when
monetary policies under Fed leaders Paul Volcker and Alan Greenspan,
respectively, brought the destructive upward spiral of prices under control.
While it is now all but impossible to detect inflation, some analysts are getting shortness of breath over
a new fear: deflation. Although it is rare, deflation is potentially just as virulent as inflation.
Deflation defined: Deflation is, in simplest terms, a decline in prices. Isolated deflation occurs all the time.
Sometimes it's beneficial -- such as when oil gluts produce lower gasoline prices. And sometimes it hurts, like
when housing bubbles pop. But the kind of deflation that concerns economists involves a prolonged and steep
decline in prices across the board. It may sound like a consumer's paradise, at least at first, however, the longterm impacts of deflation are indeed worrisome. Corporations see their profits shrink, workers might be
pressured into wage cuts or layoffs, and economic activity crumbles as consumers delay spending for the
inevitably lower prices of tomorrow. It can become a vicious circle.
Keep in mind that most deflation scares have thankfully turned out to be false alarms. There were deflation
fears after the 1987 stock market crash, just as there were after the tech bubble popped. Currently, there is
every reason to believe that the U.S. economy can stave off deflation should the recovery gain steam.
And of course, deflation is a matter of degree. By comparison, the U.S. had problems with inflation before, but
not the hyperinflation that crippled Latin America back in the 1980s. Similarly, current U.S. deflation, if it's there,
is relatively mild, unlike the debilitating deflation behind the 20-year economic quagmire in Japan.
What's clear is that deflation, like any economic phenomenon, produces winners and losers. Here are some
strategies worth considering. (BankRate.com)
Best Investments During Deflation: Article from 2010 but seems just as applicable now:
Deflationary signals have certainly reared their ugly head as of late. If you look at the returns of some of the
investments mentioned, you will see there are those out there that have already started investing for a
deflationary scenario. Not to mention, many prominent investment managers have voiced their concern about
the dreaded scenario as inflation versus deflation has been a great debate over the years. David
Gerstenhaber's global macro hedge fund Argonaut Capital thinks deflation is the greater risk. While investing
during the dreaded 'D' word is not impossible, the options to preserve and grow capital are certainly limited. So,
what is the best investment for deflation? Very broadly and in no particular order, here are some potential
answers:
•
Cash/US Dollar: The phrase "cash is king" is often cliché. It's not cliché during deflation, its rule number
one. Not to mention, the US dollar has been a strong performer during deflationary times. Holding
the physical currency is easy enough, but those wishing to further their wager can play the
PowerShares US Dollar Bullish Index (UUP).
•
Pay Off Debt: Again while 'paying down debt' doesn't sound like an investment, it most definitely is during
deflation. In a period where literally every single dollar matters, each dollar of debt can become crippling.
•
Buy Long-Term Bonds: Alternative to cash, fixed income is also seen as an option for those who seek
protection. While fixed income yields decline due to Federal Reserve easing in an effort to combat
deflation, the underlying bond should appreciate or at the very least, depreciate much less than equities.
US Treasuries are highly coveted here as they are the safest and most in-demand. If one were to go the
corporate bond route, seeking high quality bonds is preferred. The most logical wager here would be the
iShares Barclays 20+ year Treasury (TLT).
•
Short Equities: Traditional investments will start to suffer as underlying companies will see lower margins
and higher losses. Not to mention, highly leveraged companies make ideal short selling targets and certain
companies can face the risk of becoming insolvent. If your conviction is strong enough, you could simply
short the S&P 500 index (SPY).
•
Buy High Quality Dividend Paying Stocks: High quality stocks could be a potentially dim light in an
otherwise dark scenario. While the majority of companies will lose pricing power and succumb to weak
margins, large cap high quality companies that dominate their industries may be able to maintain pricing
power. Not to mention, many of these stocks pay dividends which generate valuable cash during deflation.
Seek companies with pristine balance sheets. Sectors to look to include healthcare, technology and
telecom as those have outperformed in Japan during their deflationary lost decade. Microsoft
(MSFT) is one name that has been repeatedly mentioned by strategists and managers. Keep in mind
though that despite being high quality blue-chip companies, these are still equities. As such, there is
obviously inherent risk in owning them during deflation.
•
Short Housing/Avoid Real Estate: In deflation, prices fall. As such, rent rather than own. Stand back and
let the landlords watch the values of their properties plummet. You can short the iShares Dow Jones US
Real Estate (IYR) for some exposure.
•
Short Leverage/currency plays materialize: Deleveraging should be a big theme playing out in the
future, environment notwithstanding. As mentioned earlier, short the equity of companies that have poor
balance sheets and are highly levered. In deflation, leverage begins to unwind and currency plays can be
found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be
unwound in deflation, thus benefiting the Yen.
•
Long Technology: Regardless of environment, technology will advance and will be in demand. The
technology sector was highlighted as one of the few areas to possible allocate capital in high quality
equities. Companies that have strangleholds on their industry should have an advantage. A basket of
technology stocks could be purchased via the technology exchange traded fund (XLK). However,
that gives you exposure to a lot of companies and it's probably more preferable to single out high quality
technology names with pristine balance sheets such as Microsoft (MSFT), Intel (INTC) and Cisco Systems
(CSCO).
•
Gold: Conventional wisdom says to avoid precious metals during deflation. During the Great Depression
from 1929-1932, commodities in general crashed. However, in very extreme circumstances (emphasis on
extreme), some have argued that gold can make sense when acting as currency. The majority of
proponents for owning gold during deflation would cite its store of value or hedge against uncertainty. While
gold can be played via the SPDR Gold Fund (GLD). That said, those doing so are mainly seeking
inflationary protection.
•
Buy TIPS: Treasury Inflation Protected Securities, or TIPS, serve as long-term protection from inflation.
Buying TIPS during deflation? What's the point? This is an option if investors believe that deflation will
eventually lead to inflation two or three years later. As policy makers attempt to combat deflation, the
natural antidote is inflationary medicine. As such, investors looking further down the road can fend off these
inflationary pressures with TIPS. And even if deflation persists for an extended period of time, TIPS still
produce income via yield and investors can regain their bond's face value at maturity. This can be played
via iShares Barclays TIPS Bond Fund (TIP) for those looking for an easy solution.
That sums up some options to position a portfolio when confronted with deflation. Recent concern is duly
warranted considering that deflation typically rears its ugly head after periods of prolonged globalization and global
growth. Such growth leads to increased investment, a massive increase in production and thus excess capacity all
around the world. This excess capacity then brings forth lower prices. In deflation, companies suffer while the
consumer is the real winner. Make no mistake though; investing during deflation can be quite difficult and
painful. Back in August 2008 when the crisis was heating up, it wasn't quite clear which situation would play out
so it made sense to lay a framework for each context. Arguably, it's still not entirely clear. Many have hypothesized
that we'll see a compromise of views: deflation in the near-term and inflation in the long-term. A few months ago,
inflation was all the rage, now, deflation is a concern. Investors have been flip-flopping more frequently than
politicians as of late. Regardless of outcome, it makes sense to be prepared for either environment. (MarketFolly.com)
This newsletter is merely a means to get basic information to you as quickly & efficiently as possible. Investing in these
companies may not be suitable for all investors as there are always unique characteristics & risks for each company that can
include illiquidity, entry price, insider buying/selling & commodity prices.
Deb’s Ditty:
Ditty:
I find it ironic that the colors red, white and blue
are the colors of freedom…
Until they’re flashing behind you
Cancer sucks! Join us in the fight, support
the “World’s Longest Hockey Game”
Next month, February 6
to 16, 40 amazing hockey
players (men & women) will
challenge the Guinness World Record to
achieve the rights as the titleholders of “The
World’s Longest Hockey Game”.
Russ is
pleased to be sponsoring and supporting the
event this year.
During this 10 day game, players, referees and
volunteers will raise money for the Alberta
Cancer Foundation to support the purchase of a
new PET-MR for the Cross Cancer Institute in
Edmonton.
Founder & organizer, Brent Saik, started this after losing both his father & wife to cancer.
Since 2003, the World’s Longest Hockey Game has raised more than $2.1 million dollars to pioneer
revolutionary projects in support of patients at Alberta's own Cross Cancer Institute and beyond.
Thanks in large part to funds raised by this event, researchers at the Cross Cancer Institute have
expanded the boundaries of knowledge in cancer research, treatment, prevention and patient care in
Alberta and across the globe.
Brent indicates all are welcome to come out and join the fun with so many things to take in beyond
just the game. SO many fun things to do such as another rink for those that want to pull out the
skates; there will be a wilderness trail made that guests can skate on; food & beverages will be
available on-site; warm facilities for as many as 500 folks so you can enjoy the event without
enduring the elements like the skaters if weather does get a little chilly. They’ve played in as bad as 51 degree weather but if anything this year, it might be a tad warm, -7 will be ideal. All they need
at this time is as many donations as possible to accomplish their goal of acquiring another
major “wish-list” item for the Cross Cancer Institute; guests to cheer on the skaters for
their, get this, 5 ½ hour shifts and also, they are in need of volunteers to referee and onsite chiropractors to help with aches & pains. Edmonton on-air personalities such as TSN’s
Dustin Nielson, Kevin Karius of Global News & even ex-Oiler Janne Niinimaa will be playing in the 10day event.
For more information please go to:
http://albertacancer.ca/worldslongesthockeygame2015