Jordan Wealth Management Group - ScotiaMcLeod Truro

Since the last time…

I was taught that if you have nothing good to say… say nothing at all. So that’s it for this month’s newsletter.

Seriously though, there is always something good to say if you look hard enough. Since my comments last month, the large majority of companies in the S&P 500 have reported their second quarter earnings – and of these, 76% have recorded positive earnings surprises. It bears reminding that a good portion of the US companies in the S&P 500 are multinationals, and they benefit from sales outside of the US. Corporations by and large have stronger balance sheets and many can afford to raise dividends or buy back their stocks. As for Canada, we continue to be attractive to foreign buyers – with our markets taking up a larger percentage of their global allocations. This obviously is supportive of prices. TED spreads (indicating the cost and availability of capital for companies to borrow) have improved a bit over the past month; as has the Baltic Dry Index up 20% in August.

Now that earnings are out of the way, the markets focus will shift towards economic news again. The Federal Reserve made decisions and comments that they would take their time about removing the stimulus they have put in to the system, admitting that they were uncertain as to the future, and markets chose this as a reason to sell off last week – why anyone was surprised that the future still faces some strong headwinds is beyond me, however!

As one result; forecasters who a year ago were calling for rates in the US to start to rise by now are now pushing this expectation out a year … or five.

The market can’t really make up its mind. Markets will continually be moved by confidence – and confidence right now is low – we need some catalyst to change this – Some positive news on jobs growth or housing price bottoming in the US would be nice, in the short term, some are looking for decent back-to-school sales as an indicator of what Christmas sales will be like.

In the news today – China is expected to surpass Japan as the word’s 2nd largest economy. Look out a bit further however, and it looks like India will surpass them – as India has not had the restrictive one child to a family policy that will slow their growth as their population ages. In the meantime, that’s not necessarily a bad thing – look at the following picture!

My bottom line for now – same as it was last month – invest for the longer term; and ask yourself – who makes more money; those who own the bank, or those who lend their money to the bank?

Since the last time…

We are currently at the early days of “earnings season” where companies report their quarterly earnings. These periods often move markets because this is where earnings get compared to what had been estimated; with sometimes big moves to reward or punish those that surprise on the upside or downside. Equally, if not more important of late is what these companies provide for an outlook for future quarterly earnings.

The period we are in currently is inordinately important; as many prognosticators of market direction argue that expected earnings growth for this quarter and the year ahead are too optimistic – if they are right – there is the possibility – not the guarantee that markets could trade lower. As I write this, the pessimists are being given a fight, for at least today – Intel, often considered a proxy for the overall economy announced better than expected earnings. This is based on the simplistic notion that markets simply trade on a P/E (price to earnings) multiple only. So, if you forecast the companies comprising a market can collectively make one dollar this year in earnings, and that people are willing to pay, say 15 times these earnings for these companies, then the market is worth $15. You see what happens if companies only make ninety cents instead of one dollar. Fifeteen times ninety cents is $13.50 instead of $15. This value is not cast in stone, however. A stock/ the markets are worth whatever someone else is willing to pay for it on any given day. There may be buyers willing to pay 16.67 times earnings instead of 15 times – in which case the market value is unchanged.

The multiple of earnings is often a reflection of confidence - our markets over time have traded as low as 5.9 times earnings in 1949, and as high as 75 times earnings in 2009 and

Since the last time…

We’ve had a number of open orders to buy kick in over the past month as markets around the world finally decided to have a decline and make companies more affordable for those willing to wait. As expected, the emotional swings from greed to fear have been strong and swift – and some days leave me shaking my head in wonder. There seem to be fewer and fewer Warren Buffets out there lately that want to invest in good companies, and more kids sitting at trading desks where they are paid to day trade all day long for hopeful profits of a penny a share or less.

At time of writing, our Canadian stock market is down about five percent from its most recent high in April, and did come close to being down ten percent a few days ago. You could sense panic coming back in to people’s voices – even though this last move down just took us back to where we were 3 months ago in February.

It is times like this that you need to remind yourself that markets never go in a straight line – neither down nor up. And don’t get fooled into looking at just the last few years market moves and assume that pattern will repeat itself – it never does. Instead, bring up a 20 year chart of our market – THAT chart shows something you should expect to continue – it moves up from the lower left to the upper right – inexorably higher – with many swings, big and small along the way.

The fears of the last month have focused around the continuing saga of Europe’s hard few years ahead, and massive 

What I am hearing and observing since last time:

I had the good fortune to speak personally to Scotiabank’s VP and Chief Economist, Warren Jestin late in March when he was guest speaker at our local Chamber of Commerce’s Annual Dinner. I was left with the belief that the benefits (and risks) to Canada from the developing markets growth (China, India, Brazil) are real and will be enduring. In the meantime, however – real caution is warranted, and taking some profits on commodity stocks that have had such a great run would not be a bad decision.

In terms of our exchange rate relative to the US dollar, there is without a doubt a “good feel” for the Canadian dollar globally – there is a lot of money around the globe looking for a place to call home, and Canada doesn’t look so bad relative to Europe or the States. If our interest rates increase as we expect then to do in the second half of this year –