Not Over Yet!

Over the long term all stock markets are based solely on earnings.  At the end of 2012, the Dow Jones Industrial Average was trading at 13,190 while the combined earnings of the companies listed on the index were $89.98. On January 2, 2020, with the DJIA at 28,868 points, the average earnings were $145.44, a 61.6% gain. Meanwhile, the index was up 118%.  

At the time Wall Street was predicting the stock markets would continue to soar. On February 12th, the DJIA average set a new all-time high.  At the same time the earnings had slid to $140.82.  This was when the world’s attention began to shift to the Covid-19 virus causing unemployment to inch up.  As I post this, earnings are $135.37, off $22 from a year ago and down from $145.44 on January 2^nd.

Obviously, the virus has had a direct effect on the world economy. The consumer began to cut back on spending in January. Today, it is in a free fall and could be for months to come. Corporate profits will join in the downward trend and government subsidies will not be enough to maintain consumer spending. Corporate profits will stay down for a few quarters after the economy reopens, at best.

Over the past 100 years the average price earnings ratio on the DJIA was 14.2 times.  Since the beginning of this century the average price earnings ratio has risen to just under 16.  Historically, stock markets always return to their long-term average.  

We expect second quarter combined earnings on the DJIA will be down to around $100 and stay there for the rest of 2020 (2021 could see a slight increase). Based on prior corrections the DJIA could fall to the 15,000 area. However, in every major down trend the index has gone under the historical average. This means the DJIA could be heading to between 13,000 and 14,000.  

 Remember that banks and brokers will always be bullish. If you do not buy securities, the brokerage industry will go broke.  I rarely ever listen to them.  It is rare for them to issue sell orders because they fear being sued by the company being talked about. When I used to listen to them, 90% of the time it cost me money.

Come the warm summer months you can see with your own eyes just how bad the economy is.   Watch for cars for sale on corner empty lots and on driveways.  There is a huge glut throughout North America already, and many who cannot afford them.   By August there will probably a flood of RVs up for sale as well. Even going by your local hotels and motels, are they full or half empty?  Watch Craigslist for the number of jewelry and electronics to spike. Keep an eye on the number of For Sale signs on real estate and the number of empty store fronts.  If it is a flood of new listings you will know the economic slowdown will last well into 2021. This is a sign of people desperate for cash.          

In summary one must use common sense and protect what assets one has. Listening to Wall Street experts will cost you money.  We do not have a clue when the bottom will be reached, nor does anyone else. It could be well into 2021 or a few months from now.  Our recommendation is to stay on the sidelines, hold your current dividend paying shares and build up cash.  Eliminate debt and favour cash as future investments for the time being.  We anticipate a period of deflation ahead of us.

Justin & Finance Minister Morneau have so far offered $82b to save families from the Covid-19 virus in order to keep the economy going.  $27b of that will be used wisely through various government benefit programs.  The remaining $55b is 100% fancy bookkeeping solely to make Ottawa look good.  This is a tax deferral that will be reversed once 2019 taxes are collected.    The amount could be $1b or $55b, no one knows, but all that matters is that Ottawa looks good and is supposedly saving the country.

Realistically, Ottawa cannot afford to offer much relief without penalty, either be a lower credit rating or higher borrowing rate, because contrary to what they say, it too is broke.  Yes, they can still borrow, and the Bank of Canada can print fiat money, but it is today’s outstanding debt and the interest charges that is squeezing the government’s finances.  Borrowing more money today only increases future problems which Ottawa will have no clue how to resolve. 

Once today’s economic slowdown reverses, everyone’s taxes will go up substantially. There is no doubt about it.  This is because Justin does not understand what budgeting is. One cannot blame the guy!  After all, he has a huge trust fund that allowed him to never worry about money, and now a gold-plated pension that will lift him into the top 5% of income earners in the world.  

We get a daily update from Justin, which I turn off because he is part of the problem.  He loves to say he has “our back”.  To date, he has done nothing other than create more problems. Thankfully we have Dr. Henry, Dr. Tam and all the other medical professionals giving us daily updates.  They make sense. Justin just babbles.  We are in good hands with our medical system and all those who are aiding in delivering the care.  We thank them all for taking on such risk to carry out the excellent work they are doing.

If unemployment is going to increase to record numbers, it is likely the Canadian Emergency Response Benefit (CERB) and income supplements will not be enough of a cushion to prevent a deeper recession for the simple reason it will only cover living costs.  There will be no money leftover to spend in the community.  Furthermore, these programs do not offer any relief for many people such as part-time workers or seniors.     

A policy that would cost the government less and still cushion a downturn immediately would be to instate temporary tax changes such as increase the personal exemption, eliminate the GST, PST, and various other consumer taxes, eliminate taxes on dividends, capital gains and interest altogether. This will be a bonus for seniors.  Sadly, the chances of these simple acts, even for a year or two, will not happen because the bunch in Ottawa only want to be seen giving out benefits upfront, whereas nobody will notice the three tax changes until 2020 tax time.  

Cash in the hands of the consumer is the only way for the economy to recover.    Ottawa has shown that when pushed they can get things done.  The payments to flow now were done within a month.  There is no excuse why they cannot begin to plan to boost the economy today for when the virus is yesterday’s news.

Another easy path to recovery is to get rid of the destructive Bill C-69 immediately.  There are plenty of infrastructure projects (energy, mining, highways, dams, and bridges) needing to be (re) built that would generate so many high paying jobs across the country.  It is crazy to need up to 10 years, which Bill C-69 pretty much requires, to get these projects all the permits needed before they can break ground.   Justin will never go for this because it would make him look bad even though it would cushion the economic effects from the Covid-19 virus.        

More importantly, we need fresh blood in Ottawa.  Our political leaders today, except for a couple of them, are clueless.  Have you noticed that wages are being cut across the country (including directors and CEO’s), meanwhile Ottawa has not mentioned that their wages should be cut?  The politicians just gave themselves their annual salary increase that became “law” years ago.  Only a handful of MPs’ declared they would donate their salary increase to help with the fight against todays problems.

For the next year CASH will be the number one asset.   We are fortunate the virus is striking during spring and summer when our costs are lower and one’s immune system tends to be healthier.  This is a chance to build up your savings, which we strongly recommend you do. Continue to hold your blue-chip shares that pay a steady dividend. Other than that, sit on the sidelines and accumulate cash. If the virus does not change course by winter, the world will come to a complete shut down.  I do not think this will occur, but we do expect the global economy to slow down dramatically either way by summer.  In other words, the world has a few months to find a remedy.

I have been fortunate to travel three to five months each year.  Every time I return home I appreciate more of what a great country Canada is and what it has to offer. However, I recently returned from Europe and the Seychelles Islands.  This time Canada has changed for the worst.  The reason lies with one person: Justin Trudeau. 

The sole purpose of democracy is honouring the rule of the law.  Today our politicians have thrown this out the window. Court orders are meaningless. Protesters do whatever they want with no consequences. They enter private land to block trains by lighting pallets on fire.  Meanwhile, trains pass within a few feet of these fires.  Many are pulling tanker cars which could easily explode. On the other side of the track were police watching and doing nothing because that was their orders.

Change can only come from Parliament.  We had an election five months ago.  Not one protester or First Nation Hereditary Chief ran in the election.  Yet, spineless Justin rushes to talk only to these 2000 unelected people.  He should be talking only to the elected chiefs and let the protesters deal with the courts.  That would be leadership, of which Justin does not offer. Any agreement made with the Hereditary Chiefs will be worthless.  They make their own laws, while Ottawa disregards enforcing the law of the land.  Soon the troublemakers will be back again demanding changes. 

Without investment in the North, the young living there have no future.  The Hereditary Chiefs, along with Justin, have told investors to go elsewhere   They do not want their people to have good paying jobs.  They want to keep them poor so the unelected chiefs can keep power.  These leaders do not believe in law and order, let alone democracy. Honoring elected chiefs is no longer an option.

Justin has made it abundantly clear he hates Western Canada and the energy sector.  For the past four years he has told all foreign investors to go elsewhere.  It is estimated that $80b of investment left Canada, with even more leaving everyday. Even Warren Buffett took Justin’s advice and pulled $4b from a Quebec LNG project.

Justin prefers us to buy oil every month from countries with horrible human rights records such as Saudi Arabia.  It costs Canada over three billion dollars every year; money that should be used buying Canadian oil.  Saskatchewan and Alberta can easily meet Eastern Canada’s demand.  His policies have destroyed well over 100,000 high paying jobs, plus many families.  He does not care since he is making Saudi Arabia rich. 

Justin has no concept of his job.  He is supposedly Canada’s chief officer and has the final say with approval of Parliament.  He alone can order the police to obey court orders.  Yet he passes-off the choice to others.

The bottom line is Justin must go today.  He has no knowledge of basic economics.  He believes to borrow as much as possible and spend it even faster - then repeat.  For the year ending this month he will add another $72.9m to the national debt.  Canada is slowly heading into bankruptcy.  Unemployment is set to rise substantially.  His sole concern is power for himself. He does not care one bit about the First Nations.  He just wants the protesters to love him. If it was not for a healthy U.S. economy, ours would have tanked under his leadership years ago. 

The good new is that once Justin disappears billions of investment dollars will flow into Canada and we could easily become one of the best places in the world to invest.  Canada needs a leader who puts Canada’s well being first, believes in the law of the land, and acts accordingly.

Brian Abroad

I was recently in Britain.  While I was there it was announced that during November their GDP slid .3 of 1%.  In the months ahead it will shrink even more, maybe down another one percentage point. The main reason being the uncertainty of Brexit, plus the world economy is quickly slowing down.  Lower interest rates today are of little to no benefit and will be for months to come.  

It is the world economy that is the real worry.  Britain has one serious problem, as does Canada, 1 in 10 retail stores are going broke or in the process of closing. So many businesses cannot compete with online commerce.  I noticed the British tavern is disappearing.  It is easy to see why.   McDonald’s and Pret (a world restaurant chain) sell lunches and dinner meals substantially less and the food is eatable. 

London’s number one shopping district,  Oxford Street,  was busy but not as much as in my past visits.  Some stores had few customers.  To attract shoppers into their store, Microsoft has a McLaren in it for everyone to dream about owning. There is plenty of construction on going especially on government buildings. 

I took the train to Orlay Airport.  I noticed only four apartment buildings had solar power, no where else.  There was a small wind farm along the coast. That was the only one I saw.  Tiny Cook Islands has more solar power than England.  In France almost every small town there has wind farms working, but no solar power.   For Britain there is plenty of work to do to switch to solar and wind power, which will take years to accomplish.

What a golden opportunity for Canada this could be.  We could be selling billions of dollars worth of gas & oil to them.  We have free trade with Europe (and TPP) and Britain will want trade deals.  As usual, Ottawa is doing nothing to encourage business to go after these markets.  These countries would buy all we can ship.  I guess Ottawa is afraid of offending the U.S., Russia, Saudi Arabia and China.  Trudeau makes it clear he believes Saudi Arabian oil and Russian gas is better for Europe than ours.  And the heck to with potential jobs in Western Canada and Ontario (steel).

In two years  Britain will be outperforming Canada because they will have to work extra hard to overcome Brexit.  Ottawa will continue to talk the talk and do zero just as it has done for the past 4 years.  At least Britain will attempt to move forward and will probably be successful.

I also went to the Seychelle Islands, which is worth a visit.  At breakfast a special guest arrived - a crayfish walked up from the beach, about 50 feet crossed a busy road and walked another 25 feet and into the restaurant.  The owner directed the crayfish back outside.

A British newscast mentioned that Trudeau announced that he is going to be tough on Iran. ----It must have been the nightly joke.

Price-to-Earnings

The Price-to-Earnings ratio (P/E) is used to help value a company or index relative to its per-share earnings. For example, if an index has a P/E ratio of 14-times, investors are paying $14 for every $1 in earnings,  A high P/E ratio could mean that a company's stock is over-valued or else that investors are expecting high growth rates in the future. 

The Dow Jones Industrial Average (DJIA) in its present form is beginning its 101^st year.  It is actually124 years old (May 1896), however, accurate records only began in 1920. According to Value Line Publishing, between 1950 and 2000 the average P/E was 12.4.  Whenever this number went up to near 20 it was due to falling earnings.  Shortly after that the economy slid into recession.

This century the average P/E has soared.  Between late 1999 and 2005, the average P/E ratio jumped to 14.4.  Since then the trend has been rising.  We estimate the historical average today is running at just under 16-times, or roughly 25% below today’s numbers. Todays P/E is warning us that the stock markets are overvalued.

Assuming a P/E of 12.4, 14.4, 16 and 19.6 means investors believe corporate profits will double every 5.8, 5, 4.5 and 3.7 years, respectively.  The 3.7 years is impossible to meet.  It would require massive wage increases that are then leveraged, followed by a major spending spree like none other before. Inflation would most likely takeoff, pushing interest rates up in the process.  This would cause the U.S. economy to contract.  Plus, every politician would be busy raising taxes to cover the higher interest expense on their debt.  It would drag down most of the world economy. 

It is easy to see why the Toronto stock market (TSX) has done little for the past four years.  It was, and still is, because of politics. While America has stressed business, jobs and lower taxes, Ottawa has been telling the world do not invest in Canada. One example is Bill C-69, which guarantees no infrastructure can be built for at least the next 10 years.  Ottawa has been successful in destroying one of Canada’s biggest industries and taxpayer, the energy sector. 

Ottawa has wasted the past four years listening only to the environmentalists and turning a deaf ear to all businesses.   It is business that creates the money that finances most environmental organizations, no matter which side of the debate.  It should be noted that it is also business that finances the research and innovation needed to make the world a better place. Ottawa has been 100% lucky because America has its lowest unemployment rate on record.  Canada’s numbers are not bad, but we must wonder what they would be if America was in a recession since they are our biggest trading partner. 

We are into the longest bull market in history.  How much longer can it last? One week, a month, a year – nobody knows.  But, outstanding debt for all levels of government and the average consumer is a ticking time bomb.  Canada’s consumer debt is $1.77 per $1 of income, one cent off its record high.  The U.S. Debt Clock states that their total debt is equal to just under $70,000 per person - a record that grows every second. 

As the debt grows cash becomes king.  For the stock markets we can see a potential 30% downside based on its current P/E.  Earnings in the next recession will be falling so the market could fall further than the 30%.  Until we see a noticeable change of attitude out of Ottawa, our recession will be worse than in the U.S. 

Fortunately, most of the companies we invest in are cash rich and will weather the coming storm.  For the next two years we predict it will be dividends and money market investments that will be the main source of returns; the same as the past three out of four years.   

Based on the dividend yields on our purchase prices it will mean we should easily be near the top for all investment returns.

Note of Interest: During July the Bloomberg Baltic Exchange Dy Index, an index that measures the price of shipping raw materials across 23 global marine shipping routes, traded around 2,440.  On Friday January third, the index fell 16.6%, which is one of the biggest one day drops on record.  On the eight there was another 6.9% decline, followed by a further drop to 773.  This is a warning that world trading has fallen off a cliff.  If this trend continues a recession is almost imminent. Let’s hope it had more to do with the Christmas season rather than Trumps destructive tariffs, and it reverses upon signing of a new trade agreement between the US and China.