2019

We will begin to see the first signs of an economic slowdown in North America in late 2019.  The main cause will be real estate, politics, and excessive personal debt.  Other notable reasons for a slowing economy is a lack of world leadership, the attack on world trade by the United States, and surpluses in just about everything we grow and produce.  Plus, Ottawa and B.C. continue to tell the world to not invest in Canada.  Business people are listening and directing their investment dollars elsewhere, mostly to the U.S.

National home prices are falling only slightly now, but we expect sizeable drops in the new year as house sales will confirm they are falling off a cliff. No matter how one twists the numbers, house prices share no relationship to family income.  History says house prices must fall or wage gains must soar.  Since after-tax wage gains do not equal inflation, coupled with numerous tax increases coming to Canada in 2019, Canadian house prices must fall.  The same can be said for most major cities across the globe. 

The TSX is trading at the same level as it was in June 2014.  This is four and a half years of no growth. Investors either broke even or lost about 6% due to commission.  Fortunately, if you followed our portfolio you have had one of the best rates of return in all of Canada.  Almost every company has raised the dividend at least once a year.  In the 195th issue we predicted that “for the rest of this decade dividend income will be the main source of earnings from investments.”  On August 1st, 2016 the portfolio dividend yield was 7.5% while the GIC rate of return was .75 of 1%.  The yield had grown to 10.4% in 2018 based on the recommended purchase price.  It should be higher again in 2019.    The TSX is not going to experience new highs until Trudeau stops scaring away foreign direct investment. 

Other warnings are that copper prices are down 8.5% from a year ago.   This is the most important industrial metal and is a leading indicator. Its price decline is warning that construction and manufacturing spending is falling. The Baltic Dry Index, which measures the cost of shipping, is down 15.1%.  Is this a sign of shrinking world trade?  Figures show that car sales are falling.  Platinum warned of this as the price of it is now down 12.3% from a year ago.  The CRB Index is off slightly which shows people are still carrying on their day-to-day spending.

The sell-off in the stock markets in December was due to two things; no leadership anywhere in the world and, more importantly, stock markets were seriously overvalued.  Markets over the long term are based solely on corporate earnings.  The Dow Jones a year ago was trading 28.45 times earnings.  This was double the 99-year average and indicated that investors expected corporate profits to double every 2.5 years, which is literally impossible.  Today, the stock market is trading in this millennium’s average price earnings ratio of 18, but still high compared to its historical average of 14.6 times.  At 19.6 times, the S&P 500 Index is also trading in expensive territory based on their 119-year average.

The North American economy is currently running well enough to justify rate hikes.  This should mean interest rates will go up in the U.S. and Canada at least twice in 2019. Not even a slowing consumer will stop the coming increases.  The stock markets are probably at or near the bottom. But there will not be a big rebound due to the dysfunction of Washington and Trudeau.  It is time for investors to buy the blue-chip shares that offer a good yield and chances for increases in the years ahead.  Our selection in the Sacola Financial Newsletter have yields of between 6 and 8% at current prices.  They remain a buy.

One thing is certain, 2019 is going to be very different from 2018.  Based on their latest economic report in November, the Liberals are going to continue their relentless efforts to close the Canadian energy sector.  For some unknown reason they hate this sector and the province of Alberta.  Yet, it loves Alberta’s transfer payments to Quebec, which today they do not need. As the Globe and Mail reports, “Quebec will receive $13.1-billion in equalization payments next year – a $1.4-billion increase – while Alberta, Saskatchewan and Newfoundland and Labrador continue to be left out even though Canada’s oil-producing provinces are facing deficits and hard times.” 

Canada has enjoyed a booming economy, of which Trudeau’s party has only limited its growth.  They have no intention to curb their wasteful spending.  It will take a decade to rein in Ottawa’s finances.  Young people today can look forward to rising taxes in the years ahead.  These added taxes will be needed just to pay the huge increase in interest charges Ottawa is creating.

Washington is also a mess and it is set to get worse. The only changes made under their new free trade agreements are an increase in tariffs that have so far hurt the American consumer the most.  Trump is pushing for all countries to work together based on U.S. rules only.  He is under the false impression countries want to trade only with his country.  He is from another planet for thinking so.  The U.S. market is 360m people, whereas Asian countries have a population ten-times them and becoming wealthier.  The average American (and Canadian for that matter) has experienced very little income growth.  The States is losing respect in many parts of the world.  As a result, global trade pacts are being developed without them. Most nations want little to do with America. Who can blame them?

American stock markets will eventually slide to their 119-year average price-earnings ratio of 14.2, versus today’s 21.1. The TSX has done nothing under Trudeau and is at the same level it was in August 2014.  This is a sure sign that foreign investors have no faith in our government.  Can you blame them when Ottawa’s only intention is to close Canada’s biggest industry?  Trudeau’s solution to all of Canada’s troubles is to impose a carbon tax.  This will do nothing for the environment and make all Canadians poorer.  If the Toronto stock market (TSX) perceives Trudeau will lose the next election, the TSX will become one of the world’s hottest stock markets and foreign investment will pour back into Canada.

If Trudeau gets re-elected, the Canadian economy will slide into recession.  If you believe he will win, we strongly suggest you build up a huge cash reserve.  You will need it as interest rates will have climb.  Fewer investors lending to Ottawa means they must bribe these people with higher coupon rates to buy our government debt.

A 1% Guaranteed Investment Certificate over the past 4.5 years has outperformed the TSX and just about every mutual fund.  Dividends probably earned investors at least a 5% gain in each of those 4 years. As we stated in the 206^th issue (August 1, 2016), “rising dividends will be the main source of investment gains for 2017 and 2018.”  We now extend the prediction for 2019.  If Trudeau gets elected until 2023, we will have a leader who makes it clear he hates Western Canada and constantly tells foreign investors go elsewhere.

Canada has so much economic potential, yet so little interest by our current politicians.  So sad.

Ottawa’s carbon tax will have zero impact on our environment.  This is a 100% tax grab.  Prime Minister Trudeau states all carbon taxes collected will be returned to the taxpayer.  Not a chance!  This tax is just an excuse to build another set of bureaucracy which will be very expensive and continue to scare much needed investment away from Canada.  In a speech Trudeau stated he wanted “little carbon”.  Not once has he defined what he means by “little carbon”.  All he sees is tax revenue.

It is competition amongst industry that cuts greenhouse gases (GHG).  Competition makes fuel efficient autos and jet engines, builders are making homes more solid thereby cutting down on heat fuel.  From land extraction to offshore mining, oil and mineral companies spend millions of dollars every year researching and creating new environmental technologies.  Contrary to what anti-oilsands activists preach, the grounds leftover from tar sand extraction is cleaner and lusher.

Just a few things to ponder regarding climate change:

• What is a safe level of CO2?  You will never get the same answer twice, except from a handful of protesters who flunked primary school science - they want zero.  Without CO2 we would die.   

• I have been in 4 provinces in 2018.  I have noticed with all the new home construction probably 99.9% of the homes do not have any solar power.  Why are the Greens not protesting this?

• Is today’s “global warming” a result of a long-term weather pattern that is repeating itself?  The Russian Academy of Science’s, Pulkovo Observatory, in St. Petersburg, found using science, that the world has begun the next mini ice age based on the disappearing sun spots from the face of the sun.  This occurred in the 1700's.  The National Astronomical Observatory of Japan, the University of California, and Northumbria University (to name a few) have also confirmed this. Why have the Greens not disproved these findings?

• Hurricane Michael was the third worst in Florida history.  The snow storm last month in Calgary was a repeat of a storm a hundred years ago.  Today, every storm like these two are proof Green House Gases(GHG) are creating them, so say environmentalists.  However, after each major storm the weather reporters will tell us the last time we had that same type of storm.  In other words, this is nothing new, but rather Mother Nature repeating herself.

• Why are they not protesting about methane, hydrofluorocarbons, nitrogen trifluoride, or the use of lithium in batteries which are a worse poison than CO2?

• Why is there no protest about the global increase in the use of coal?

• The University of California’s, Berkley National Laboratory states since 2002 CO2 levels have hardly budged, even though we are pumping out more CO2 than ever. 

• Why do the Greens not demand the more planting of trees?  Trees are the cheapest and the most efficient means to soak up CO2.

• An article in Nature Geoscience stated “we (scientists) haven’t seen that rapid acceleration in warming after 2000 that we see in the models that were on the hot side  leading to forecasts of warming and inundations of Pacific islands."    Reality has been the Pacific Ocean is cooling, the Arctic ice is expanding, the polar bears are thriving, and temperatures did indeed stop climbing over the last 15 years.  Where are the Greens telling us it is wrong?

• Average drought conditions across the US have varied since records began in 1895. The 1930s and 1950s saw the most widespread droughts, while the last 50 years have generally been wetter than average. US Environmental Protection Agency

All the Greens have succeeded in is trying to destroy Canada’s energy industry, which our Prime Minister clearly is content with.  Businesses do not invest billions of dollars into projects that will last decades if they know will get shut down for whatever reason.  Contrary to environmentalists, companies are the heart of innovation and without them we would not see advancements in environmental technology. Afterall, when was the last time the David Suzuki Foundation or Greenpeace invested a hundred million into innovation like the Suncor’s and Enbridge’s do nearly every year?  The energy sector is one of the few groups that is trying to do their share to protect the environment and should not be taxed for doing so.  All the carbon tax will accomplish  is to make every Canadian poorer.  The actions of the Toronto stock market confirm this.  It is a disaster.

Stick to Dividends

You rarely hear investment advisors recommend portfolios based on dividends.  The main reason is because buyers of these types of shares rarely trade, generating very few commissions in the process.  A broker’s sole job is to turn over an account at least once a year, or put investor’s savings into mutual funds and ETF’s, especially if the firm owns and manages them.  These funds are designed to slowly, over several years, to transfer investor’s savings to the brokerage house via commissions and hidden management fees.  If the customer makes money, then it is a bonus.

I have a list of 14 Canadian companies and two American that have raised their dividends for at least the past 9 years.  There are around 80 American companies that have the same record.  It is rare for any brokerage house to recommend these shares.  When they do recommend it is usually because the brokerage house will be underwriting new shares for the company. As a result, the brokerage house will come out with a bullish stance to help unload these new shares.  The brokerage house will earn huge commissions in the process. The brokerage house represents the company not its clients.

In our financial publication we have two shares which we have held since 2004.  Both have raised their dividend once a year this century.  These two have increased in value by 125% since we first recommended them. Two others of our recommendations have also raised dividends yearly.  They have realized a capital gain of around 300%.  Another benefit of holding Canadian dividend paying shares you can benefit from the Canadian Dividend Tax Credit which can lower taxes you owe (this is only available outside of the TFSA and RRSP).  

This is a slow but steady way to increase wealth.  No matter what stock markets are doing, dividends continue to be paid and many companies will increase their payouts.  In severe down markets, like the one in 2008/09, the dividends continued to flow.  There might not be a dividend increase but one still gets an income.  We recommend people enjoy spending some of this money.  When have you heard your broker make this statement? 

If you believe in the future of Canada, you can buy Canadian dividend paying shares and hold through up and down markets.  In many cases you will be rewarded with an increase in payouts.  When a new bull market begins these types of shares move up faster than most companies because of the steady income.

Today, the governments of Ottawa, B.C. and Quebec have closed Canada to foreign investment.  When these negative governments are gone the Toronto stock market will be one of the world’s best performing exchanges.  All good dividend paying shares will join the party.  Hopefully, the new Quebec government will want development in the energy industry.  The previous government was only interested in supporting Saudi Arabia, Libya and other than ruthless countries by buying their oil, rather than supporting Canada by buying Western Canada’s oil and natural gas.

Invest in Canada, or Don't

On August 30^th the happiest person in Canada was the Prime Minister because the courts shot down the Trans Mountain Pipeline (TMP).  We wrote in the 225^th issue that he and four of the provinces have been trying everything possible to close the whole energy sector.  They have continually told investors to take their money elsewhere.  And, they have.  Data shows that in 2017, Foreign Direct Investment (FDI) into Canada was lower than in any other year since 2005, other than 2009.  In fact, FDI jumped off a cliff as soon as Justin grabbed the reigns in 2015 and is expected to fall almost 15% in 2018.

Have you noticed before the Liberals took power there were no problems in expanding the energy sector?  Then Trudeau arrives and changes the rules.  TMP would in operation today if he had not interfered. Things will only get worse under T2.  Specifically, he has laws before the House of Commons giving the right for any person, group or local government to object to any major project via Bill C-69.  Before Ottawa had the right to issue every needed permit, but under this new bill it will give the power to the protesters.   

If TMP is to go ahead it will basically have to restart the process which will easily take 5 to 10 years, thanks to Bill C-69.  The TMP decision, while relative to this case, can now be used as evidence for all major developments like the building of dams, more pipelines, new mines and major infrastructure.  No business is going to waste years and millions of dollars to get approved maybe within a decade. 
In the meantime, Ottawa will go through the motions wasting taxpayer’s money trying to get the project restarted.  TMP did everything the courts required to avoid a Gateway Pipeline type rejection.  This time this same judge added a bunch of new regulations in rejecting TMP. 

The Greens are happy because now more oil will be shipped by safer means, like trucks and rail tanker (even though they are not). Not surprising, there has not been one protest about all the rail tanker cars that travel a few feet from many fast-moving rivers throughout Canada.  If one of these trains would ever have an accident and slip into the one of these rivers it would destroy the river for years to come plus cause chaos downstream.  But the Greens do not care. Soon one-mile long tanker rail cars will be the norm.  Most will be going to the West coast of the U.S. to be shipped elsewhere.  Americans will get thousands of jobs and Canada might get a few hundred.  

Protesters have told us that all oil tankers in the waters of B.C. are a threat to whales and are too noisy for marine life.  The TMP was going to add just over 1 extra tanker per week on average when the new pipeline was completed.  Why is it that container ships and cruise ships are not a threat to the whales, only oil tankers are? Plus, all the international boat traffic going up and down our coast are not viewed as threat to marine life.    During the summer months it is possible to see up to four cruise ships a day enter the Vancouver harbour, and not one of these is a threat to whales. 

We noticed that immediately after the announcement that pipeline shares, which should have jumped in value due to being full for years to come, resulting in higher profits and future dividends, but they were flat to down slightly.  This is a perfect sign that the markets believe Ottawa and Trudeau will continue to do everything in their power to close all pipelines and the energy sector.  Of course, it will never happen due to the energy sector being the biggest tax generator in Canada.  Afterall, politicians love to spend.

Prediction:  Trudeau until election day will show us he “is going to get TMP built.”  If he wins the election he will cancel the TMP.  It will be a victory for Trudeau and a major loss for all of Canada.