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CDN-18.5% annual returns over the past 15 years

Post by Webscout » Wed Sep 13, 2017 4:06 pm

A simple TSX stock-picking technique that would have produced 18.5% annual returns over the past 15 years

NORMAN ROTHERY
SPECIAL TO Utopia
SEPTEMBER 13, 2017 FOR SUBSCRIBERS
Applying simple value-investing strategies to the S&P/TSX 60 index produced wonders in recent years. It's high time to put them under the microscope.

The S&P/TSX 60 follows 60 of the largest enterprises in Canada. It includes big banks, insurance companies, utilities, resource firms and others. Over all, the index produced solid returns over the past 15 calendar years with average annual gains of 7.52 per cent, including reinvested dividends.

The S&P/TSX 60 holds each stock in proportion to its market capitalization (shares outstanding times share price) with an adjustment to reflect the number of shares available to investors. That is, shares tied up by strategic owners such as founders are excluded. But generally speaking, the index puts more money into larger stocks.

The approach makes it easy for index funds to track the index in a cost-effective manner because the funds don't have to trade much. The rare trades that do occur are often prompted by corporate actions, such as mergers, takeovers and the like.

But, when it comes to returns, investors might be better served by opting for an equally weighted portfolio. In this case, that would mean buying an equal dollar amount of the 60 stocks in the index and rebalancing the portfolio from time to time.

An equally weighted portfolio of the index's 60 stocks, rebalanced annually, gained an average of 9.35 per cent annually over the same 15-calendar-year period, according to Bloomberg's backtesting facility. It outperformed the index by 1.8 percentage points a year. But frictional costs, such as those from trading fees and taxes, would have dampened its relative attractiveness in practice.

Equal weighting generally favours smaller stocks in the index when compared with market-capitalization weighting. It also tilts more to value stocks that trade at low prices compared with their fundamentals.

But narrowing in on value stocks by using four simple strategies yielded even better results. Each strategy uses a different value ratio to select 10 stocks in the index that are held for a year and then the process is repeated.

If you had purchased an equal amount of the 10 stocks with the lowest price-to-book ratios from the 60 stocks in the index and held them for a year before refreshing the list, you'd have gained an average of 10.24 per cent annually over the 15 years through to the end of 2016. The strategy beat the index by an average of 2.7 percentage points annually. (Again, the results do not include frictions such as taxes, trading costs or fund fees.)

Picking 10 stocks with the lowest price-to-sales ratios each year fared even better. They climbed by an average of 14.42 per cent annually over the period and outperformed the index by an average of 6.9 percentage points annually.

The 10 stocks with the lowest price-to-cash-flow ratios did very well with average annual gains of 17.46 per cent. The portfolio outperformed the index by an average of 9.9 percentage points a year.

But the best returns were generated by moving into the 10 stocks with the lowest price-to-earnings ratios each year. The low-P/E method sported an average annual gain of 18.59 per cent and outperformed the index by a stunning 11.1 percentage points on average annually.

You can examine the current crop of low-P/E stocks in the accompanying table. (I personally own shares of many of them.)

But, before you dive in, it is important to be aware of a few caveats. The most recent 15-year period was an unusually good one for the low-P/E approach. It would have also required a great deal of fortitude to stick with the method through the crash of 2008.

In addition, 10-stock portfolios tend to be more volatile than diversified portfolios such as those offered by broad index funds. As a result, they are prone to both unusually good, and unusually bad, periods.

Over all, it seems likely that the relative merits of the low-P/E approach will moderate somewhat in the future. But it should lead investors some good bargains over the long term.

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

LOW-P/E VALUE STOCKS IN THE S&P/TSX 60

COMPANY TICKER RECENT PRICE P/E P/B
Cenovus CVE-T $10.13 3.40 0.63

Teck TECK.B-T $28.32 8.02 0.89
Barrick Gold ABX-T $21.10 8.58 2.09
Magna MG-T $59.20 8.78 1.69
Husky Energy HSE-T $14.45 9.57 0.88
CIBC CM-T $106.04 9.64 1.65
Power POW-T $29.94 10.18 1.05
Thomson Reuters TRI-T $55.31 11.17 2.57
Bank of Montreal BMO-T $90.89 11.18 1.52
Sun Life Financial SLF-T $47.01 11.19 1.39
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Gap Inc. Announces the Closure of 200 Gap and Banana Republic Stores as Focus Shifts

Post by Webscout » Thu Sep 14, 2017 7:46 am

Gap Inc. Announces the Closure of 200 Gap and Banana Republic Stores as Focus Shifts to Old Navy

By Ambia Staley
September 6, 2017
Gap Inc. announced earlier today that it plans to turn its focus away from Gap and Banana Republic stores and instead focus on its growing Old Navy and Athleta brands.

This shift in focus means that the company will close approximately 200 under-performing Gap and Banana Republic stores over the next 3 years and open approximately 270 Old Navy locations within the same time frame.

The news may not be surprising to many, as the brand's namesake store brand, Gap, has been reporting struggling sales for the past few years, even going so far as announcing the shuttering of 175 North American stores in 2015.

The company has been trying to re-invent its image under the leadership of CEO Art Peck since 2015, but still finds itself facing the same sales woes as many other retailers with stagnant store sales, as shoppers shift towards shopping at off-price chains and online.

"Over the past two years, we’ve made significant progress evolving how we operate – starting with getting great product into the hands of our customers, more consistently and faster than ever before," Peck said in a statement earlier today. "With much of this foundation in place, we’re now shifting our focus to growth. We will leverage our iconic brands and significant scale to deliver growth by shifting to where our customers are shopping – online, value and active."

While Gap and Banana Republic are seeing a decline in sales, Gap Inc. reports that Old Navy is on track to exceed US$10 billion in sales, and US-only brand, Athleta, is poised to surpass the US$1 billion mark over the next few years.

At this time, it's unknown how many -- if any -- of these closures or openings will impact :confused: Canada.
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Investing hot shots didn’t get that way through timing

Post by Webscout » Thu Sep 14, 2017 1:47 pm

Investing hot shots didn’t get that way through timing
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Gold...interesting site

Post by Webscout » Mon Sep 18, 2017 11:19 am

Gold...interesting site
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http://www.usagold.com/cpmforum/
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Today-Friday Sept 22/17

Post by Webscout » Fri Sep 22, 2017 11:14 am

SCOTT BARLOW..Canada-Globe and Mail
5 HOURS AGO
SEPTEMBER 22, 2017 Special to Utopia
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web.

The projections for electric vehicle sales in this Bloomberg report look like wishful thinking to me, but I'm not negative enough that "skeptical" is the right word,

"The shift to electric cars could displace about 8 million barrels a day of oil demand by 2040, more than the 7 million barrels a day Saudi Arabia exports today, the London-based researcher says. That could have a significant impact on oil prices—a drop of 1.7 million barrels a day in global consumption during the 2008-2009 financial crisis caused prices to slump from $146 a barrel to $36."

"How Electric Cars Can Create the Biggest Disruption Since iPhone" – Bloomberg
"@chigrl Interesting charts from that article #EVs " – (charts) Twitter
"Most of the world's countries could run on 100% renewable energy by 2050, says study" – Bloomberg
"Nuclear Experts Head to China to Test Experimental Reactors" – Bloomberg

=====

Morgan Stanley argues that the steady improvement in crude prices is being driven by demand for middle distillates like jet fuel,

"Strength in oil demand has been a key highlight this year… This is particularly thecase for middle distillates (diesel, jet fuel, heating oil), where … observable inventories have been falling counter-seasonally and expressed in days-of-demand are close to five-year averages, crack spreads are strong and forward curves are getting deeper into backwardation… The real winners, however, are refiners, and we see value in deferred product cracks"

"@SBarlow_ROB MS: Distillates demand driving crude price higher" – (research excerpt) Twitter
"OPEC and Russia Stay Focused on Cuts as Oil Market Improves" – Bloomberg

=====

Cities across North America are bending over backwards to impress Amazon.com CEO Jeff Bezos as the company looks to build another headquarters. Google, however, has taken a different approach by planning to build a city of their own from scratch,

"Google's parent company was working on a sweeping plan to build a city from the ground up, the executive in charge of its urban innovation business said on Tuesday, in an attempt to prove that a technologically-enabled urban environment can improve quality of life and reduce cities' impact on the environment. …"We actually want to build a new city, it is a district of the city, but one that is of sufficient size and scale that it can be a laboratory for innovation on an integrated basis," said Dan Doctoroff, head of Sidewalk Labs, at a talk to the San Francisco Bay Area Planning and Urban Research Association."

"Google City!" – Marginal Revolution

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I need to take a closer look at stocks representing network securities companies, like Check Point Software Technologies Inc. and Palo Alto Networks Inc., in light of all the data hacking scandals, I'm surprised they're not doubling revenue and stock prices every year,

"Equifax Board Needs a Security Dream Team" – Gadfly
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My top 5 investing lessons after 30 years as an economist

Post by Webscout » Mon Sep 25, 2017 11:07 am

DAVID ROSENBERG
My top 5 investing lessons after 30 years as an economist


DAVID ROSENBERG
SPECIAL TO UTOPIA
SEPTEMBER 24, 2017
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

Next month marks my 30th anniversary as a Street economist – from Bay Street to Wall Street and then back to Bay Street. In fact, the exact date of my first day as the financial markets economist at the Bank of Nova Scotia was Oct. 19, 1987, otherwise known as Black Monday. That actually turned out to be a great day to start a career despite all the nail biting. It taught me the difference between a correction and a bear market – what separates them is not magnitude as much as duration. The time you spend in the contraction and the time it takes to recoup the lost capital. What happened in the Fall of 1987 was a steep correction, not a bear market, though that was a tough sell back then during the eye of the storm.

Indeed, the next fundamental bear market did not take place for another three years. And what caused that bear market was a recession – something that was averted in 1987, which in retrospect was a liquidity event. When we confronted the 1990-91 bear market condition, a recession was at hand and that leads to another critical point – that bear markets only occur when there is outright contraction in economic activity.

It is a comment on human nature that in the Fall of 1987, many pundits believed the equity-market devastation would lead to recession. When it became apparent by the Winter of 1988 that the expansion was intact, the mood swung massively bullish and the consensus swung to a view that the Reagan upward trend would never end. Well, it did, just after celebrating its 92nd month.

This current cycle also deserves a toast because it turns 100 months old in October. What a milestone. If it lasts to May, it will be the second-longest since the U.S. Civil War (only that superlong cycle of the tech-led nineties will have been longer). I have more to say on this below, but I want to point out that while expansions and bull markets don't ever just die of old age, they usually come to an end at the hands of the Fed. It will not be any different this time around.

After 30 years of experience as a Street economist, you pick up a lot of learning lessons – especially from the mistakes made along the way. Here are my top five below:

Don’t put all your eggs in one basket (concentrated portfolios but diversified geographically and across the asset classes);
There is no such thing as a sure thing (the forecast is just a base case across a continuum of possibilities across a distribution curve);
Marry your partner, not your forecast – it may not love you back (what gets economists into trouble is lack of humility; admitting you’re wrong is never easy);
If you don’t have a Plan B, you don’t have a plan. If you are wrong, it is imperative to know in what direction – and delineate the new course of action;
Anything that can’t last forever, won’t last forever.
And it is with that fifth lesson in mind that I emphasize again this economic cycle turns 100 months old in October. I'm not saying it is the bottom of the 9th yet, but it's not the national anthem either and very likely past the 7th inning stretch.

Our in-house research, based on capacity, economic and market variables, shows that we are 90 per cent done in terms of the economic cycle in the United States and Canada, which means 2018 will be the last year of expansion, in all likelihood. This does not mean head for the hills or raise cash as much as mold the portfolio into something that works more often than not late in the cycle, which is the opposite to how you would treat it in the early innings. The level of risk is just completely different and has to be priced as such. And so it means an extra focus on quality, balance sheet strength, liquidity, reducing the cyclicality of the portfolio, and having more exposure to companies that have no correlation to GDP and have low earnings volatility and high earnings visibility.

Or, there is a companion strategy of moving funds to parts of the world that are more mid-cycle, with a longer runway for growth, friendlier central banks and superior valuation metrics – on both sides of the ocean. The euro zone expansion is 53 months old, so call it the 4th inning if North America is 8th; Japan's is 36 months old and the country is now undergoing a tremendous positive shift toward unleashing an equity culture, one reminiscent of the United States back in 1982 when price-to-earnings multiples were single digits. When we run the same numbers for Japan, the euro zone and emerging markets, we see that they are anywhere from the 4th to 6th innings in their cyclical phase.

Remember that Canada is 3 per cent of the world market cap, the United States is another 33 per cent, so there is nearly 65 per cent of the world's equity-market cap, or around $50-trillion, well worth a look at right now across both oceans. And we've been doing more than just looking – we have more than $800-million of exposure to this part of the world and are continuing to focus on boosting that exposure. Go east, young man, or go west, but avoid the classic syndrome of "home bias" if you live in North America.
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U.S. investors see a correction coming

Post by Webscout » Thu Sep 28, 2017 11:06 am

U.S. investors see a correction coming — and are ready to buy the dip
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Today Friday Sept 29/17

Post by Webscout » Fri Sep 29, 2017 8:31 am

Short sellers and The Emperor’s New Clothes


SCOTT BARLOW
2 HOURS AGO
SEPTEMBER 29, 2017 -Special to Utopia
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web

Unlike a lot of Canadian investors, I have a soft spot for short sellers. Short sellers, at their best, play the cathartic role of the little kid in the fairy tale who yelled out that the emperor had no clothes. Jim Chanos is almost certainly the best-known short seller and he had some harsh words for Tesla Inc. in an interview Thursday,

"'Three years ago, this company was supposed to be making money now,' Chanos, who's betting against Tesla shares, said in an interview Thursday on Bloomberg Television. 'Now it's supposed to be making money by 2020. And I'm guessing by 2019, we'll hear about 2025.' ... 'This stock, probably more than almost any other, is a poster child for the hopes and dreams of this bull market,' Chanos said."

"Tesla Is 'Structurally Unprofitable,' Chanos Says" – Bloomberg

=====

I'm not that interested in whether the ongoing NAFTA discussions can be described as a trade "war" – semantic arguments are boring. That doesn't mean, however, that there's not a lot at stake,

"'What is the best thing to do in the face of market distortions to arrive at free and fair competition?' [U.S. Trade representative Robert] Lighthizer asked at an event hosted by the Center for Strategic and International Studies. 'I believe — and I think the president believes — that we must be proactive, the years of talking about these problems has not worked, and that we must use all instruments we have to make it expensive to engage in non-economic behaviour, and to convince our trading partners to treat our workers, farmers, and ranchers fairly.' … There is little reason to think any of this change will be for the better."

"Trump was looking for a trade war. Now he has one." – Maclean's

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Global oil markets are caught between rising demand and the hard place of U.S. shale investment, says Bloomberg,

"The oil market is battling with a paradox: what happens when the unstoppable force of OPEC production cuts and soaring global demand meets the immovable object that's U.S. shale? ... For many at the annual Asia-Pacific Petroleum Conference in Singapore, one of the global oil industry's biggest events, the clash means prices will remain in a narrow band of $50-$60 a barrel the rest of the year and into 2018. Yet a growing minority -- notably oil trading giant Trafigura Group -- believe the paradox will be resolved next year as U.S. shale proves it isn't an immovable object that can continue capping prices."

"Unstoppable Force Meeting Immovable Object Stumps Oil Market" – Bloomberg

"@SBarlow_ROB CS: oil consensus prob too bearish" – (research excerpt) – Twitter

"Oil's September Surge Propels Bull Market Run on Demand Optimism" – Bloomberg

=====

Mohamed el Erian is concerned that passive investing will destabilize markets,

"Risk in the global financial system had migrated from the banks and was now embedded in instruments such as ETFs. He said instruments such as these were 'over-promoting liquidity in asset classes.' 'Risk has a way of morphing and migrating,' he said, adding that he expected the next crisis to come from non-banking activity rather than the banking sector."

"El-Erian warns of ETF contagion risks" – Financial News

"@mark_dow No doubt-in my mind at least-that the migration to passive has 1) lowered vol, ceteris paribus, and 2) raised cycle peak equity multiples" – Twitter

=====

Tweet of the day: "@tbiesheuvel The bloomberg world mining index just had its best quarter since 2010. Chinese stocks the big driver. " – (chart) Twitter

Diversion: "Is AI Riding a One-Trick Pony?" – M.I.T. Technology Review
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Picking stocks is hard. It’s even harder with growth

Post by Webscout » Fri Sep 29, 2017 11:40 am

Picking stocks is hard. It’s even harder with growth
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Biz Wax/Investing/Economy (BIE)

Post by Webscout » Mon Oct 02, 2017 7:41 am

These stocks set to benefit from expected surge in electric vehicles

British Columbia’s Liberals are promising a $50-million jolt to charge up more electric vehicles across the province.


SCOTT BARLOW
45 MINUTES AGO
OCTOBER 2, 2017-Utopia
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web.

Non-market news was so uniformly nightmarish over the weekend – Edmonton, Spain, Puerto Rico, Las Vegas, the incoherent rage surrounding NFL protests – that I'm tempted to research defense stocks as a hedge against what Friedrich Nietzsche was referring to when he wrote, "Madness is something rare in individuals – but in groups, parties, peoples, and ages, it is the rule." Lockheed Martin is where I'd look first with Canada and the U.K. annoyed with Boeing, but hopefully the mood passes before I feel forced to do anything.

====

Crude is trading more than 2 per cent lower Monday. There is no doubt of some profit taking after a strong third quarter for the commodity price, and Reuters is blaming weakness on signs of higher production. In addition, Goldman Sachs notes that producers are locking in current prices in the futures market, which may put a ceiling on short term gains for West Texas Intermediate crude:

"[Brent] Oil falls to below $56 on signs of higher output" – Reuters

"@chigrl $GS: Record pace hedging, positioning and non-OPEC ramp still limit upside #oott #oil ' – (research excerpt) Twitter

"OECD oil stocks set for 'substantial' 2017 draw, but may rise in 2018: IEA" – Reuters

====

Ritholtz Wealth Management's Ben Carlson wrote a column for Bloomberg listing five common investor myths. I don't entirely believe his discussion of bonds versus bond funds, but the other four myths – low volume rallies spell trouble for stocks, cash on the sidelines (a broker favourite in my experience), margin debt is always bad, and 'something's gotta give between stocks and bonds' – provide a useful discussion.

"Some Market Myths Hurt Investors" – Carlson, Bloomberg

====

Business Week provides options for investors looking to benefit from the expected boom in electric vehicle production:

"Take S&T Motiv Co. or Hanon Systems. The two South Korean auto parts suppliers make motors and thermal management systems, respectively. They're generating an increasing percentage of revenue from electric cars made by Hyundai Motor Co., General Motors Co. and Tesla."

"How to Play the Electric Car Hysteria" – Business Week

"Automakers Plan Electric Car Blitz as Tesla Burns Billions" – Bloomberg

===

I've been threatening this for a while, but news of a major data breach at accounting firm Deloitte provides further impetus for me to research the reasons why network security stocks are not the leading performers in the market, or at least the technology sector:

"Hackers infiltrated the sensitive internal email service of the prominent accounting firm Deloitte, potentially exposing a large range of data about the company and its high-profile clients. First reported by The Guardian, the breach likely occurred in October or November 2016, but wasn't discovered by Deloitte until March … Meanwhile, new research indicates that millions of Macs don't have the latest firmware updates because of distribution flaws and installation errors, leaving them potentially exposed to critical compromise by hackers."

"Security news this week: the deloitte breach was worse than we thought" – Wired

===

Tweet of the Day: Monty Hall died at the age of 91, but his name will live forever in finance and probability math circles, "@JeffMacke The Monty Hall problem explained (from "21" written by my friend @Banditzeel ) " – (video) Twitter

Diversion: "Blade Runner 2049 review – a gigantic spectacle of pure hallucinatory craziness" – Guardian U.K.
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Why traditional retail hasn’t hit rock bottom — yet

Post by Webscout » Tue Oct 03, 2017 7:18 am

Why traditional retail hasn’t hit rock bottom — yet

Toronto Globe and Mail
ERIC REGULY
1 HOUR AGO
OCTOBER 3, 2017
A friend of mine who runs a private equity shop in Toronto has a problem. His fund owns a medium-sized retail footwear chain that is making profits. He and his partners want to unload it but can't find any buyers willing to offer a non-giveaway price (he did not want the store's name publicized for fear of looking like a desperate seller). That's because traditional retailing is dying, he says, and the sell-off might just be getting started.

While it's fashionable—and not wrong—to blame Amazon for most of the retailers' woes, other factors, from stale retail formats to the new anti-stuff movement, are at play too. Put together, the financial and cultural forces battering the retailers seem relentless.

The outlook is so grim that Bespoke Investment Group of Harrison, New York, invented a "Death by Amazon" list of 54 retail stocks that it thought would get whacked by Amazon and other forces conspiring against the sector. By late August, the index had slumped more than 20% in just over a year, erasing some $70 billion (U.S.) in value. In the same period, Amazon was up more than 25%, taking its stock market worth to about $450 billion (U.S.).

Traditional retailing, of course, is not entirely doomed because only the brave or bone-headed would buy some expensive items—diamond earrings, high-end suits, musical instruments, mattresses, Persian carpets, prescription sunglasses—without hands-on examination. And some shoppers, me among them, like the pleasure of propping up independent stores that sell high-quality goods.

But I don't shop much for general merchandise any more, because I am sick of clutter and, with university fees for my kids, don't have the spending power for non-essential items.

Apparently, I am not alone. Writing on his blog early in July, Vitaliy Katsenelson, chief investment officer of Denver's Investment Management Associates, blamed shifting consumption patterns for much of the old-style retailers' distress. Take the rise of the smartphone. In 2006, smartphone sales were close to zero. By his calculations, consumers will spend some $340 billion (U.S.) this year on smartphones and wireless services. This is money, he says, that won't be spent on T-shirts and shoes. Meanwhile, middle-class incomes have stagnated, healthcare costs have climbed, and highly leveraged consumers are more interested in paying off debt than buying new TVs. Something had to give, and it was the department stores, whose shares are down by 40% or more in the last year or so (Macy's, J.C. Penney). Or their businesses are outright collapsing (Sears, Payless ShoeSource). Warren Buffett last year sold the bulk of his stake in Wal-Mart, whose shares have lost ground since 2014.

Consider Amazon the store with endless virtual aisles, where almost any product can be bought at a competitive price and delivered to your door. In Italy, you can buy a Fiat car on Amazon. In the United States, Amazon is now an official seller for Nike shoes and Sears' Kenmore appliances. Amazon recently bought Whole Foods and dropped its prices, which put the mainstream supermarkets into a panic.

Amazon's enormous stock market value belies its actual retail market share, which, at about 1.5% of total retail sales (online and in stores), is negligible. But the market valuation implies the sky is the limit and Amazon's sales continue to set records. In the second quarter of 2017, sales rose 25% to $38 billion (U.S.), putting it well on course this year to exceed its 2016 sales of $136 billion (U.S.). In Canada, Amazon's business is growing at about 50% a year.

According to Internet marketing service BloomReach, 55% of product searches start on Amazon, far more than the 28% that start on search engines. The popularity of Amazon Prime (which provides free, two-day delivery as well as TV and movie video streaming) and the construction of massive warehouses have accelerated its growth. Amazon captures an estimated 40% of every shopping dollar spent online and is already the second-biggest apparel seller in the U.S., behind Wal-Mart. No wonder the traditional retail sector is in free fall.

To be sure, some retailers occasionally post quarters of better-than-expected sales and profits, triggering a share-price bounce that has some value investors convinced the traditional retailing sector is bottoming out—time to buy, they say. But that's an exceedingly brave call. Amazon's phenomenal growth and the seismic shifts in spending habits suggest the value destruction among the traditional retailers has a long way to go even if some stores will survive and thrive. And here's another question: As traditional retailers weaken or go out of business, and anchor stores disappear from North America's crazily over-malled shopping geography, can the real estate investment trusts be far behind? Betting against Amazon seems a fool's game.
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Shopify shares plunge after Citron Research questions business model

Post by Webscout » Wed Oct 04, 2017 11:47 am

Shopify shares plunge after Citron Research questions business model
https://beta.theglobeandmail.com/globe- ... e36481080/
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Why the bull case for global financials doesn't apply to Canada bank stocks

Post by Webscout » Thu Oct 05, 2017 6:30 am

Why the bull case for global financials doesn't apply to Canada bank stocks


SCOTT BARLOW
50 MINUTES AGO
OCTOBER 4, 2017 For Utopia
Wall Street bullishness on global financials has reached fever pitch after attractive valuations and rising interest rates drove the sector to strong performance in September. I applied this thesis to domestic bank stocks and found that, while there's no reason to be bearish, the bullish rationale does not apply.

Merrill Lynch derivatives strategist Nitin Saksena believes that U.S. financials represent a "striking opportunity" as sectors positively correlated to interest rates begin to outperform the broader market. In an Oct. 3 report, Citigroup Inc. strategist Chris Montagu notes that global bank stocks were among the best performing sectors in developed-world indexes. Mr. Montagu attributes these strong returns to a market that is now rewarding the banks' low valuation levels relative to history.

The banks' basic business of lending involves borrowing funds at short-term interest rates and lending the proceeds to clients at higher longer-term rates. The difference between the costs of borrowing and the monies received from customer payments makes up the bank profit where loans are concerned. As a result, it's not the nominal interest rates that drive bank earnings (and by extension stock prices), it's the difference between short- and long-term rates. This is measured by the steepness of the yield curve.

I compared the steepness of the Canadian yield curve (in a number of different variations) with forward bank-stocks performance and, in short, I found that if the yield curve was ever a good indicator for bank-stock returns, it isn't any more.

The closest relationship between the yield curve and bank-stock performance is depicted in the first chart below – the difference between two-year and 10-year bond yields, and the subsequent 24 month performance of the S&P/TSX bank index.

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The available data go back to 2003. It looks very much like the yield curve was an effective indicator for bank-stock returns from 2003 to 2009, but afterward provided little or no useful guidance at all. In practical terms, the recent rise in domestic bond yields is not a good reason on its own to buy bank stocks, even if it should, in theory, be a positive driver.

Exhaustive analysis by Merrill Lynch chief quantitative strategist Savita Subramanian concluded that the best valuation metric for bank stocks – the one that best predicts future performance – is the price-to-earnings ratio relative to the historical average. Unfortunately, however, this technique doesn't work much better for Canadian bank stocks than the yield curve.

The second chart below shows the relative price-to-earnings ratio (trailing P/E divided by the 10-year average of 12.4 – the final reading of 0.4 per cent, for instance, means the current P/E ratio is 0.4 per cent higher than the 10-year average) and the subsequent 24-month return for the S&P/TSX bank index. Note that P/E ratios are plotted inversely to better show the trend.

The correlation is negative – future returns fall as bank stocks become more expensive – but the relationship is not strong at all. This implies that relative P/E ratios are an unreliable indicator of future returns for domestic banks.

The charts imply that the two biggest reasons for global bank-stock bullishness, rising bond yields and valuations, don't really apply to Canadian banks, and I know this is an unsatisfying conclusion. My guess is that our banking industry is so operationally diversified, with businesses far beyond basic lending, that they are less sensitive to interest-rate changes than their global counterparts. In terms of valuations, the domestic banks are so dominant that stock prices can be driven more by the economic environment than the attractiveness of valuation levels.

The fact that Canadian banks don't fit in to the broader bullish thesis doesn't mean the future isn't bright. It remains a fact that there has rarely been a bad time for longer-term investors to buy bank stocks, and just because they don't fit a broader pattern doesn't mean that anything has changed.

Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online.

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Thursday Oct 5/17

Post by Webscout » Thu Oct 05, 2017 7:54 am

‘Fresh money’ stock ideas with big dividends




GLOBE AND MAIL UPDATE
SCOTT BARLOW
2 HOURS AGO
OCTOBER 5, 2017-For Utopia
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web.

At the Report on Business, website traffic statistics tell us that the fastest way to make sure nobody reads a story is to put 'Europe' in the headline. But, just this once, I'm asking readers to bear with me because the words 'big dividends' are involved.

Deutsche Bank strategists published a list of 'fresh money' stock ideas in European markets. Investors will have to be very careful about tax considerations, but European economies are recovering nicely and some of these companies look ideal for income investors at first glance. Drug maker AstraZeneca, for instance, has an indicated yield of 4.3 per cent, Rio Tinto yields 5.0 per cent and Telefonica generates 4.5 per cent.

"'Fresh Money' stock ideas from Deutsche Bank" – Twitter

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U.S. oil inventory data have taken on added complexity as American companies set records for exported crude. U.S. inventories are falling, but rising exports that are expected to benefit from higher Brent crude prices are a big part of that. The risk is that U.S. inventories are falling, but at the expense of global inventory levels, so the global oversupply situation is not changing as quickly: "'OPEC and Russia are talking about extending production limits, but there's still plenty of supply with U.S. crude exports up sharply,' said Carsten Fritsch, commodities analyst at Commerzbank in Frankfurt."

"Oil steady as talk of new OPEC deal balances U.S. exports" – Reuters

"Oil Trades Near $50 as U.S. Exports Soar, Putin Comments on Cuts" – Bloomberg

"US crude exports spike to a record" – Financial Times

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There's been a lot of research on the potential positive market effects of a U.S. corporate tax cut but it remains my belief that, despite highly competent exceptions such as secretaries James Mattis and Rex Tillerson, the current administration would have trouble passing a kidney stone in the current political environment, never mind wide-reaching legislation. Merrill Lynch agrees: "We do not expect comprehensive [tax ] reform this year or the next … After reading and rereading the 'Unified Framework', the most striking thing is how specific it is about the good news on cutting rates and how vague it is about how the cuts will be offset by closing loopholes."

"ML : 'We do not expect comprehensive tax reform this year or next'" – (research excerpt) Twitter

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Bloomberg provided more details on the rapid growth in renewable energy production:

"On Wednesday, the International Energy Agency released its latest outlook for renewable energy and made this observation, 'We see renewables growing by about 1,000 gigawatts by 2022, which equals about half of the current global capacity in coal power, which took 80 years to build.' Let's adjust those numbers for utilization and say, very roughly, that coal plants produce at just 60 percent of their capacity and renewable sources at just 30 percent. Even then, we are talking about renewable energy with the equivalent of a quarter of the effective capacity of the world's coal power, which took eight decades to build, switching on within half a decade."

"Renewable Energy Comes at You Fast" – Gadfly

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Tweet of the day: "@BloombergCA Rising borrowing costs are taking their toll on Canadian consumer confidence bloom.bg/2xhojTt" – Twitter

Diversion: "Anthony Bourdain catches cod, hunts for moose, dines at Raymonds while filming Parts Unknown in N.L." – CBC
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Tuesday Oct 10/17

Post by Webscout » Tue Oct 10, 2017 7:59 am

Dangers are hidden in a ‘market with no risk’


SCOTT BARLOW
2 HOURS AGO
OCTOBER 10, 2017 Special to Utopia
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web

The CBOE Volatility Index (VIX) Index is low, global manufacturing activity continues to climb, and profit growth throughout the developed world appears to be accelerating.

Macquarie analyst Viktor Shvets, however, notes that while it might seem like a "market without risk," it isn't,

"Unfortunately, we do not see evidence that velocity of money is improving and neither are there signs that sectoral balances are moving towards sustainably higher private spending while core inflationary pulse remains weak. We continue to view China's leveraging and CBs' injections of liquidity and suppression of volatilities as the key drivers of global reflation… Investors understand that there is nothing normal in the current environment … The deadweight of US$400 trillion 'cloud' of financial instruments … must be supported by ongoing financialization."

"@SBarlow_ROB Macquarie: sure it * looks * like a World Without Risk, but ..." – (research excerpt) Twitter

Related: "Bill Gross of Janus blames Fed for 'fake markets'" – Reuters

"@tracyalloway So much for global economic divergence? Standard deviation of global growth is at the lowest in decades even as growth accelerates. BofAML " – (chart) Twitter

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University of Alberta professor Andrew Leach explains that Donald Trump and simple economics killed the Energy East pipeline,

"National Energy Board regulation controls the number of pipelines built in order to ensure that the pipeline network as a whole operates at near or full capacity to keep shipping costs as low as possible. This means that a pipeline is unlikely to be approved if it will not be filled with new oil production… The already-approved Keystone XL as well as Trans Mountain and Enbridge Inc. expansions offer more-than-sufficient capacity to adequately service expected pipeline demand."

"How Donald Trump killed the Energy East pipeline" – Leach, Report on Business

"Oil demand growth may hold the key to market rebalancing" – Forbes

"Fund managers turn cautious on oil as prices fall: Kemp" – Reuters

"[Brent] Oil rises above $56 on Saudi export cut ' – Reuters

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Australian investment firm Arion Investment Management writes that lithium, cobalt and graphite investments are the best way to for investors to benefit from electric vehicle dispersion,

"Markets in Lithium, Cobalt, Graphite and Rare Earths are small and less established. Any material increase in production of EV's will likely continue to send these markets skywards."

"Electric vehicles – the metals & the means to invest in them" – Arion Investment Management

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The Financial Times argues that people have short memories, and ETF investors are forgetting the carnage caused by the popularity of momentum-based investment strategies in the late 1990s,

"The S&P 500, the most widely followed stock index in the world, aims to provide exposure to the 500 largest publicly traded US companies. However, given the index is cap-weighted, critics say it is too trusting of the market's judgment on a handful of very large stocks. The top ten stocks presently account for 19.17 per cent of the index, according to data from Standard & Poor's.

"Very often the term 'passive' is confused with the term 'neutral', says Yves Choueifaty, founder of Tobam, a Paris-based fund manager. "But when you are passive you are far from neutral. The benchmark is hugely biased. It is undiversified."

"'Momentum' investing bubble worries fanned by focus on market cap" – Financial Times

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Tweet of the day: "@morganhousel Top three most common ages in America: 2010: 45,46, 53 , 2017: 26, 25, 27 " – Twitter

Diversion: Good overview of the work of new Nobel Prize winner Richard Thaler,

"Nobel Prize awarded to Richard Thaler" – Marginal Revolution
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