Ross Healy, chairman of Strategic Analysis Corporation and portfolio manager at MacNicol & Associates Asset Management
Focus: North American large caps

MARKET OUTLOOK

We’re now in a period of rising market stress as valuations reach into the stratosphere in some areas, including the FANGs and many of the stocks with major buyback programs, but the press of financial easing and ultra-low interest rates makes the scramble for yield intense. The paradox of today is that bonds are being bought for capital gains and stocks for income. Our own mathematics tells us that the S&P 500 has a cap at roughly 3,140 basis points (its fair market value level as we measure it), which has never been breached in the past 35 years. The problem right now is central bank actions have never distorted markets so much in all of history. We’re relying on signals and valuations whose expected value in current forecasting is based in historical readings from previous eras without those distortions. We can’t – and don’t – know if they are still reliable.

The Fed is caught right in the middle of it all. Up until a very few days ago, the consensus numbers suggested that a 50 basis point rate cut was in the cards. Suddenly, it’s back to the 25 basis points originally forecast. The last two times that the Fed met and cut rates, the market sold off after the policy meeting. I wonder if the market will be disappointed today by “only” 25 basis points.

Market stress is also coming from all of those Trump tweets which have a virtually uniform tendency to push stocks prices down. Right now, Trump is “locked and loaded” for Iran (and all that we need is another Middle East war). The black swan event this week was the drone attack on Saudi oil production. Then on Monday evening, the U.S. repo rate shot to 10 per cent without warning, a sort of “dark gray swan” event which makes one wonder how the capital markets are actually bearing up under the pressures of financing a massive and almost unwieldy deficit.

With the markets this high and values so questionable, I think that some cash in portfolios is called for. To quote that old master market timer, William Shakespeare: “better three hours too soon than a minute too late.” (It is true that he may have said that in another context, but a true investor knows exactly what he meant).   

TOP PICKS

IMPERIAL OIL (IMO:CT)

This stock is cheap, selling at book value. It’s at its lowest valuation since the Gulf War.

CENTERRA GOLD (CG:CT)

It’s going through a nice setback with the recent weakness in bullion. This is a buy at book value.

CASH

Investors should have a defensive posture this late in the market.

PAST PICKS: AUG. 20, 2018

LAURENTIAN BANK (LB:CT)

• Then: $47.62
• Now: $45.09
• Return: -5%
• Total return: 1%

BLACKSTONE MORTGAGE TRUST (BXMT:UN)

• Then: $33.81
• Now: $36.24
• Return: 7%
• Total return: 15%

GOLDCORP (G:CT)
Merged with Newmont on April 22, 2019.

• Then: $14.07
• Merged at: $14.20
• Return: 1%
• Total return: 2%

Total return average: 6%

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