Yearend 2015 Scorecard for Smart Money

score

There are only a few days left in 2015 before we ring in a new year. It is a good time to look back and evaluate this financial blog. I am not sure that increasing the number of followers, views, likes or comments is an accurate measurement of success?

The financial media is constantly pitching you investment ideas and so have I, with a disclaimer to do your own research or consult with a certified financial advisor. I feel that it’s an important exercise to look back at both the good and bad ideas.

hit

Here are some good hits:

Back in January, I suggested going long the U.S. dollar and to get out of Canada. I made money in both my retirement and personal investment accounts by simply transferring Canadian dollars into U.S. cash. I was confident that the downward trend would continue but I had no idea that the Canadian dollar would fall 19% during 2015.

Now, the TSX has underperformed the U.S. markets over the last few years so moving out of Canada was a good bet especially with the weakness in commodities. The TSX was down over 11% in mid-December but the Santa Claus rally has come to Canada a little early and reduced the losses to only 8% with three trading days left!

One of my very best suggestions was to avoid investing in the oil & gas sector. All the Wall Street analysts, media experts, hedge fund managers and even the Bank of Canada were wrong on predicting a bounce back in the price of oil. Both oil & gas ETFs in Canada (XEG) and the U.S (XLE) were down 25% this year. There were a number of sucker rallies that just fizzled out.

I also suggested some U.S. sectors that I liked for 2015. They were consumer discretionary (XLY), health care (XLV) and technology (XLK). It looks like all three sectors will end up being positive for the year. I also stated that I was avoiding the gold sector (GLD) which is down 10% because I didn’t understand the factors that cause the price to move.

big3

 

miss

Here are some bad pitches:

The worse suggest was investing in the transportation sector (XTN). Planes, trains and transport trucks should have benefited from the drop in oil prices. The overall sector is down 20% and I lost some money on my shares of  CN Rail and Fed Ex this year. I did manage to make some profitable trades in the airline stocks.

After a number of derailments, plus delays in new pipeline construction,  I suggested that rail car manufacturers could be a good investment. The three stocks mention in the blog post are all down year to date. (GBX,TRN,ARII) I apologize for not writing a follow-up post stating that I didn’t put any money into these stocks.

big4

I have highlighted some of the best and some of the worse suggestions over the last year to illustrate the importance of keeping score. Your investment account statements will be on line soon or in the mail if you are old school. Take some time to evaluate the performance of your financial batting average. If you have a financial advisor, book an appointment to evaluate their recommendations to ensure that you are still on track to meet your short and long term goals.

Getting a hit 35% of the time in baseball would get you a big signing bonus and a huge salary. Over time, that same average in picking investments for your portfolio could put you into the poor house.

In case you didn’t know, we do play baseball in Canada.

Advertisements

Can Star Wars, “The Force Awakens” overcome the Dark Side of ESPN?

star_wars_large

This blog post is safe to read if you haven’t seen the movie. It doesn’t contain anything that will spoil your future viewing of the actual movie. This post is a follow-up to a post that I wrote back in August. Has Disney Lost Its Magic Touch? | Smart Money

The company first warned of subscriber losses at ESPN back in August and since then other media companies have spoken of concerns that viewers are increasingly opting for online streaming over pay TV. I was surprise by an analyst that came on CNBC last Friday will a bold call on Disney shares.

Walt Disney shares slumped after BTIG analyst Richard Greenfield cuts his rating to “sell” from “neutral”, saying the likely success of the latest Star Wars movie would not be enough to offset the impact of subscriber losses at ESPN.

Disney’ shares fell as much as 3.6 percent to $108.01 on Friday as BTIG became the only brokerage among 33 to rate the stock “sell”. BTIG has a price target of $90 on the stock.

Greenfield said Disney’s cable network’s profitability would meaningfully underperform investor expectations which would eat into operating income in 2017. Cable networks represents about 46 percent of Disney’s total operating income. Greenfield said if the new Star Wars movie did not rake in more than $2 billion in worldwide box office revenue, Disney would miss Wall Street’s profit estimates in 2016 as well!

BTIG thinks “Star Wars Episode VII: The Force Awakens” would help Disney “modestly” top earnings estimates in 2016, but said consensus estimates were “too high” for 2017 and “far too high” for 2018.

Disney’s chief executive, Robert Igar, has said that he could imagine ESPN selling the sports network over streaming video via a so-called over-the-top, or O.T.T., subscription, calling such a move inevitable. However, Greenfield believes that subscribers wouldn’t pay annual fees for ESPN. For example, football fans would only subscribe during football season and then cancel.

As a shareholder in Disney, this bold sell call got me a little worried so I did some more research. I rechecked first call earnings valuation report at T.D. Waterhouse which had 4 strong buys, 13 buys, 12 hold recommendations and no sells.

I watched a Business News Network (BNN) video featuring a special report on companies that will benefit from the success of Star Wars. The CEO of Cineplex which owns 80% of all movie screens in Canada was interviewed. I was surprised to learn that 50% of ticket revenue goes back to Disney.

A toy distributor was also interviewed and he indicated that licensing agreements with Disney required royalty payments of over 10% on all Star Wars merchandise that is sold. Even “Cover Girl” is trying to profit from the Star Wars movie craze. “Star Wars Limited Edition Super Sizer Mascara – The Dark Side”

The CEO of Toys R Us was also on CNBC and stated that all Star Wars merchandise was consolidated into one section of their store to ensure customers would have easy access to all available products.

I also googled upcoming Star Wars movies and list of titles. Besides Episodes VIII & IX, Rogue One: A Star War Story and a Young Had Solo movie are also in the works. Disney’s line up of upcoming films and its merchandising strength appears to be strong enough to reduce any of my fears regarding my faith in the Magic of Disney!

Only time will tell if Richard Greenfield (aka Darth Vader) is right: “If you only knew the power of the Dark Side”

The Domino Effect of the Collapsing Price of Oil

domino

The collapse of the U.S. housing bubble sent the world spiraling into recession. Could the collapse of energy and the bursting of the commodity bubble be just as damaging? Very few Wall Street experts are willing to even use the term “bubble” with regards to the boom and bust in the price of oil, copper, iron ore and other materials.

As with housing, there was a fundamental reason for these prices to soar. China has been on a historic commodities binge as it doubled the size of its economy in recent years to become the second largest economy surpassed only by United States.

A feeding frenzy of financing, mining, fracking and deal making intensified the boom and now, the bust as China’s growth and appetite for such raw materials has slowed dramatically.  You can add Canada, Australia, Brazil, Japan and Russia to the domino picture below:

dom

 

The U.S. economy is among the least directly damaged by this unwind but that does not mean the country will escape unscathed. For starters, the slowdown in world trade has already damaged profits of big corporate multinationals and transportation providers. The transportation EFT (XTN) is down 20% compared to the S&P 500 which is almost flat for the year.

Cracks have been forming in the high yield bond market from the realization that the price of oil will not be recovering anytime soon. (junk bonds) The possibility of oil fracking companies defaulting on their loans has caused a stampede to the exits.  U.S. investors have been pulling money out of high yield mutual funds at the fastest pace in over a year.

Third Avenue Management said on Thursday it was shutting the doors of its $800m high-yield bond fund because it had run out of money to pay redeeming investors without having to dump bonds at fire-sale prices.

The chart below of two popular high yield ETFs illustrates the rapid decline in their price that started back in June 2015.

bonds

Many Wall Street traders and hedge fund managers have been betting on a recovery in the price of oil. The collapse in oil below $40.00 a barrel last week has caused them to panic and caused the market to selloff.

In my humble opinion, I expect more tax loss selling this week. Plus hedge fund managers will probably try to recover some of their losses by going short oil and adding more downward pressure to the price of oil stocks.

The next domino to fall could be investor’s confidence leading to equity mutual fund redemptions. This could force fund managers to sell some of their more liquid big cap names like Facebook, Amazon, Netflix and Google which have been big market winners’ during 2015. Some fund managers will also be selling some other winners to avoid sending out tax forms in 2016 to their shareholders with capital losses.

There are two important events that I will looking at closely this week. The first is the wording of the Fed statement regarding the pace of interest rate hikes expected for 2016. The second is the stock market reaction to the triple witching of options that expire on Friday. It can be a down day for U.S. stock markets!

Triple Witching Definition from Investopedia

An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. 

I would strongly recommend avoiding putting any new money into the stock market. I would wait to see how this plays out this week.

Random thoughts on Canada, our dollar, oil and taxes

canada

 

The Canadian dollar is viewed by the rest of the world as a petrodollar. The falling price of oil has been followed by a fall in the value of the Canadian dollar. However, that is only part of the story. There are other factors to consider. The Bank of Canada (BOC) has cut interest rates twice in 2015 which has had a negative effect on the dollar. The BOC cut rates based on oil recovering to the $60 level by the fourth quarter of 2015 which hasn’t happen. Will the BOC cut rates again? 

Now, the U.S. Fed has signaled that they are going to raise interest rates for the first time in nine years on Dec 16th. Another rate cut by the BOC or more rate hikes by the Federal Reserve during 2016 will put even more downward pressure on the Canadian dollar. Some economists think that the U.S. Fed will raise interest rates three more times in 2016!

Yesterday, the price of oil was flat but our dollar lost some value. Bank of Canada announced that negative interest rates is an option for Canada. Can you imagine having to pay interest to your financial institution on money sitting in your savings accounts?

My thoughts: the Canadian dollar could continue to fall to the 66 to 68 cent level by the end of 2016 if the price of oil doesn’t rebound or if the Fed raises interest rates. I only hope that I am wrong!

Over the past year I have written eight posts dedicated to the oil market. My bearish view hasn’t change from a year ago when I wrote Don’t Catch a Falling Knife & Dead Cat Bounce Here is a sample of that I wrote:

  • There is still a lot of fear in the oil market.
  • The so-called experts are often wrong when predicting where the price of oil will stabilize.
  •  It takes time for oil companies to stop pumping out oil from existing wells. It is more complicated than just closing the tap.
  • Oil companies have made some commitments to spend money on new drill sites that can’t be postponed.
  • Oil prices are falling due to oversupply and OPEC says that it isn’t going to cut production.
  • Hedge funds are short selling oil stocks driving the price even lower.
  • Tax loss selling season isn’t over yet.

Add the fact that the OPEC meeting held on Dec 4, 2015 didn’t agree to production cuts and confirmed that members are cheating on their quotas. They are currently over producing 1.5 million barrels of oil per day and nothing will be done before their next meeting scheduled for June 2016!

My thoughts: I believe that the price of oil will not rebound until late in 2016 at the earliest. I am still avoiding investing in the oil & gas sector.

Some good news on lower-income taxes for millions of Canadians. Many couples will see an average tax savings of $540 and $330 for single individuals. The bad news is the tax rate for individuals making over $200,000 will face a tax increase to 33% from 29%. Couples with children under 18 will no longer be able to income split and the yearly contribution limit for TFSA has been reduced back to $5,500 per year.

 My thoughts: it’s too little too late to help the Canadian economy. Most of my investments are still outside of Canada. I expect negative returns in the Toronto stock market will continue for most of 2016.

Investment Ideas: Look for companies that get revenue from outside of Canada and could benefit from our weak dollar.  I found eight companies that get more than 70% of their revenue outside of Canada. Some of these companies have already moved up in price during 2015.

For my U.S. readers: five of these companies are listed on the U.S. stock exchanges

CCL INDUSTRIES CL B  (CCL.B: Toronto)

CONSTELLATION SOFTWR  (CSU: Toronto)

ELEMENT FIN CORP. J  (EFN: Toronto)

CGI GROUP CL A SV  (GIB.A: Toronto) (GIB: New York)

MAGNA INT’L INC.  (MG: Toronto) (MGA: New York)

BROOKFLD ASSET MANAGEMENT  (BAM.A: Toronto) (BAM: New York)

GILDAN ACTIVEWEAR INC  (GIL: Toronto) (GIL: New York)

DESCARTES SYS GRP INC  (DSG: Toronto) (DSGX: NASDAQ)

These are only suggestions, do your own research before investing.

Travel bargains for Americans, thanks to a stronger U.S. dollar

can3  canada

Most of the travel world is on sale for Americans right now since the U.S. dollar is enjoying one of its strongest periods in forty years. Central banks have been printing money to devalue their currencies. The U.S. Fed keeps talking about raising interest rates which could further strength the U.S. dollar. There is a 74% chance that the Fed will raise rates at their Dec 16 meeting.

First of all, don’t rule out Canada as a vacation spot. It is home to many U.S. hotel chains, retailers and fast food outlets. You can drive, fly or even take a train ride across the border. The current exchange rate gives U.S. travelers a 33% discount and could be as high as 40% by this summer. Being Canadian, I have gone whale watching and salmon fishing off Vancouver island. I have also gone horseback riding in Banff, canoeing on Lake Louise, white water rafting on Kicking Horse river and walked on a glazier in August!

 

ice can1

Canada offers Americans a wide range of vacation activities at a big discount and we even speak the same language.  (excluding same cities in Quebec where French dominates) I dare you to come to Toronto and walk on the edge!

cn cn3

 

Two other countries that offer deep discounts and speak the same language are Australia and New Zealand. Their currencies offer a 35% to 45% discount for American travelers. Plus their time zone is opposite to North America, our winter is their summer. I am a” Lord of the Rings” fan so visiting New Zealand is on my bucket list. Plus it is one of the few places that gives our Canadian dollar a 11% travel discount.

A few other destinations to consider but safety could be an issue:

Calling all Russian Vodka fans. Moscow is a can’t miss for cold-weather travelers right now. Russia’s ruble has been tanking as its economy gets hurt by western sanctions and plunging oil prices. One dollar would get you 68 roubles, a 32% savings. I wouldn’t recommend walking around with any items containing American symbols.

South America is a bargain, especial Brazil. Pack your bikini or speedo, it’s the right time to go to Rio De Janiero or anywhere else in Brazil. Brazil’s currency, the Real, has lost almost 33% of its value against the dollar from a year ago. That means places like Rio and Sao Paulo are much cheaper to visit now. By the way, you want to go now before prices possibly soar again for the Summer Olympics in 2016.

Have you been dreaming of going to Europe? The Euro is now nearly equal with the U.S. dollar. One euro costs $1.08, compare that to two years ago when one euro was about $1.37 which works out to a 21% savings!

There are plenty of destinations to choose from, so grab the kids and go abroad.