One rule of thumb that works is ‘follow the smart money.’ Based on the most recent data I’ve seen:
In the three months to November, $20.4 bln flowed into equities, the fifth largest 3-month total on record, lifting year-to-date total net foreign buying to a solid $16.6 bln. While we look for commodity prices to remain relatively contained, there appears to be renewed interest in Canadian equities of late, perhaps taking advantage the weaker loonie and overly negative sentiment present through much of 2013. (BMO ‘econoFACTS’ Feb 16th, 2014 issue.)
Why in the world would money be moving into Canadian equities? The $C has been falling and big Canadian financial institutions have aggressively been introducing new “US” equity funds based on the purported better returns had and to be had in American stocks?
In my post that called for a correction (which we’ve had) I suggested that: “Because it’s likely that ‘some’ monetary easiness (now that it is considered good ‘political’ medicine) will continue to prevail – commodity prices will bounce and present some inflationary threat.” A number of opportunities present themselves in this sort of environment.
As always, the better returns almost always come from places nobody is looking. I’ve suggested in the past that China’s extremely responsible economic policies of late would not destroy its economy. Yes growth has slowed, but it is ‘growth’ nevertheless. While observers remain overly concerned about China, they’re missing the big picture. Consider this quote that I found in an article about Australia’s strong shipments of raw materials to China:
While growth may be slowing, China’s economy is many times larger than it was a few years back and it still needs massive quantities of raw materials to construct houses and fuel urbanization.
Rio Tinto, the world’s second-largest iron-ore producer, will report its 2013 annual results Thursday, and is expected to post a rise in earnings after last month unveiling record iron-ore shipments for 2013. A poll of seven analysts estimated an average net profit of $7.59 billion. That compares to a loss of $2.99 billion in 2012 due to write-downs on investment. (WSJ Feb 13, 2014)
Two things that benefit countries like Australia and Canada when they do occur. Weaker currencies relative to the $US are good – costs of production are in the domestic currency but commodity prices and revenues are based in the stronger $US. And improving demand following a period of constrained supply. The crazy weather patterns not only affect agriculture:
Coffee jumped the most in a decade, soybeans reached the highest since December and sugar rallied as drought scorches fields in Brazil, the world’s biggest exporter of the crops. (Bloomberg News February 18, 2014)
Unusually cold weather also hits other industries – particularly steel and mining.
As mining companies of all varieties watched their bottom line deteriorate over the past few years, cost-cutting and the postponement (or cancellation altogether) of major projects was bound to stall the longer term supply of raw materials. And all this was happening just as the U.S. and European economies were picking up some momentum.
Despite bumps along the way my expectation expressed back in August of 2013 wasn’t too far of the mark:
As I’ve published previously (see China will be the next big surprise!) stronger demand in China (as well as North America and Europe) will drive growth, and the FED & ECB won’t have to fuel it….the heavy lifting has already been done.
The Canadian stock market, despite its heavy weight in resource sectors has managed to climbed considerably since then. Most of what I see suggests that this trend has only just begun. Our hockey team beat the U.S. and Europe, and don’t be surprised if our stock market beats them in 2014 as well.
GO CANADA!
One thing that worries me a bit is when experts kind of agree. Goldman Sachs’ David Kostin believes capital spending (a good cause of stronger raw materials demand) will be robust this year:
“S&P 500 companies that provided guidance plan to boost capex by 7% in 2014, [are] slightly below our forecast,” added Kostin. “171 S&P 500 companies provided capex guidance during recent quarterly earnings conference calls. These firms account for 50% of aggregate capex spending by the S&P 500. All sectors plan to increase capex in 2014 with the exception of Telecom Services, which guided flat.”
I can only hope that they’ll be wrong (they always are) because they’re too low (not too high) in their forecast for cap spending growth. After all, there’s plenty of cash in corporate coffers and in lending institutions that should soon be put to work in the real economy.
On the other hand, news that the G20 believes they need to encourage growth is a welcome indication – since as usual governments decide to do something that really no longer needs to be done. Growth will happen anyway, and they’ll be jumping up and down taking credit for this growth – having really actually done nothing at all.
The world’s largest economies, including Canada, have agreed to a soft target of boosting global economic growth by 2 per cent over the next five years at the Group of 20 summit in Australia amid concerns about a sluggish world economy and high unemployment. (Globe & Mail, Feb. 24 2014)
What makes me worry less is expressed well in this quote from the Globe & Mail (Feb. 24) concerning Agnico-Eagle Mines’ (I’m a big fan of the company) Meadowbank project way up in Nunavut.
This open-pit mine west of Canada’s Hudson Bay has had such steep construction and operating costs—flying workers in and out, stocking a year’s worth of food, employee turnover and battling snow drifts that can reach eight feet—that the project is unlikely to break even over the long haul, executives now concede. (WSJ Feb 23, 2014)
I financed a fair share of Meadowbanks’ exploration via mining flow-through funds I managed – when the project was owned by Cumberland Resources. I visited once and even spotted some of the visible gold in a drill core sample I found in their core shack. When management is at the point that they’re willing to say “the project will never make money” even if they don’t believe it (I don’t think the CEO Sean Boyd believes it) then not only will the mine make money, the price of gold and the company’s stock have bottomed out and should probably be bought – in my humble opinion. And if gold is on the rise again, then so is the Canadian stock market.
Maverick Investors Rally Site 
You certainly called the 1000pt correction in January.