I am beginning my 54^th year in the investment business.  The stock markets so far this year are the most expensive ever during my career.    The average Price-Earnings Ratio(P/E) of the Dow Jones Industrial Average (DJIA) was 14.2-times over the last century.  Between 1950 and 2000 the average was 12.9-times and the average dividend yield was 4.4%. 

This century the DJIA price-earnings ratio has been just above 18.  This past January saw the price earnings ratio hit an all time high of 28.45.  Since then it has traded around 24-times earnings, or roughly 61% above its long-term norm.  The S&P 500 Index is over valued today by roughly the same percentage as the DJIA. 

At the peak of the market that led to the Great Depression, on the last Friday of August 1929, the P/E ratio was 15.6.  From that day to the bottom, in May 1932, the index lost 90% of its value.  Only once has this been equalled when the NASDAQ Tech-bubble peaked at 183 times-earnings in March 2000.  This implosion saw this index also fall 90%. 

I never hear Wall Street and Bay Street mention corporate earnings.  Today, the only thing that matters is whether sales are increasing.  This makes absolutely no sense unless it results in profits.  Without growing earnings there can be no dividend increases and companies cannot re-invest in their business.  Growing sales means nothing if they are not translated into earnings. 

The brokerage industry is probably scared to mention profits because they know the stock markets are too expensive and they do not want to scare away investors.  Their sole job is to sell securities.  That is why you never hear them suggest selling securities for being too expensive. 

The reason for this change is that with the Dow trading at 23-times earnings today it means the stock markets expects corporate profits will double in 3.1 years. This has never happened in the history of any stock market, plus it is probably impossible to achieve with taxes and government regulation always changing, mostly for the worst. 

This is the second longest bull market on record, so its days are probably numbered.  The best result would be if the P/E drifts calmly down to 18 times earnings (23% decline).  If a quick drop occurs the stock markets will fall further than they should.  The collapse in the stock markets after the Hi-Tech implosion saw the Dow fall to a P/E of nine. 

Not only are the stock markets very expensive, real estate, especially in big centres like Vancouver, San Francisco, London, Toronto, Sydney, and Zurich to name a few, bare no relationship to household income.  This is an accident waiting to happen.  It is a matter of when, not if.  If the stock markets and real estate fall at the same time a world-wide recession will begin.  With personal and government debt in record territories it is not hard to see a possible decade long correction.  President Trump is determined to plunge the world into a deep recession.  He will probably be very successful.We believe the world is about to enter a new era. 

According to Jennifer Winter (U of Calgary), at $50-per-tonne, BC families will pay at least $603 a year (0.68% of household family income) in Carbon Tax.  This may not sound like much, but it is $1.15b that could be put towards local spending and investment across the province every year. 

  By 2022,  a Nova Scotia family will pay around $1,120 (1.25%).  Alberta, which is the biggest financial contributor to the eastern provinces and Quebec, will pay $1,111 (1.14%).  These numbers could be low if a family has more than one vehicle.   The Saskatchewan government estimates the tax will grab $16b from its consumer’s pockets over the next 11 years.  This will weaken the overall economy by lowering disposable income and scaring away investment.

If Canada is to progress, the new Premier of Ontario, Doug Ford, must fulfill his promise to do away with the Carbon Tax.  He has already started eliminating the Cap and Trade part of the tax.   His most recent move was to scrap the incentive program for electric and hydrogen vehicles, which costs Ontario taxpayers up to $14,000 per car. Scrapping the Carbon Tax completely will save Ontario families $707, annually.  Hopefully the rest of the provinces will follow suit.  Alberta, Saskatchewan, and Manitoba are already on board.  Our negative and destructive B.C. government only believes in raising taxes, scaring away investment throughout Canada, and wasteful spending.  These clowns love the Carbon Tax.  

The Carbon Tax is a job destroyer.  Our competitors in the world economy do not have this negative tax.  Furthermore, Canada is the ONLY country trying to reach the Paris Accord on Climate Change.  All other countries talk the talk, but so far have done nothing.  Given his stance on the environment, Trudeau sure lacks the ambition to go after much bigger concerns such as pushing for China, Russia, and India to cut down on their carbon creation.  Every day, 365 days a year, pollution from these countries flows across the Pacific Ocean, down to Oregon and the West Coast, and then flows directly to Ontario, with a bit hitting Quebec and the Maritimes.

If you were to ask 10 experts what is a safe level of carbon, you will get 10 different answers.  Some experts call for zero.  These people do not realize at zero the planet dies.  Greenpeace and all other money hungry organizations who preach doom and gloom will never admit that maybe Mother Nature is giving us perfect weather.

Ottawa’s Carbon Tax is a 100% tax grab.  It has zero to do with cutting down on the amount of carbon in the atmosphere.  All governments can see is how much money they can raise to waste on their useless spending.  Trudeau is one of Canada’s biggest deficit creators and wasteful spenders in history.

While they give out more of our money it is of little benefit.  Ottawa continues to pass on too many made up expenses on business and the so called rich.  These costs have to be passed on to the consumer via higher prices, so there is zero gain from exuberant social spending.  It is time for the politicians to be told we are over taxed.  Getting rid of the carbon tax is a good start to trying to place, rather than grab, money back into the hands of the taxpayer.

Trudeau Mountain Pipeline

It is a good and bad deal for Ottawa to buy Kinder Morgan’s Trans Mountain Pipeline (TMP).  The bad news is that it will cost Canada short term; money it does not have.  If the protesters continue their tactics trying to delay the pipeline it will mean higher costs to the Canadian taxpayer, including the protestors.

The destructive B.C. Premier, literally minutes after the takeover announcement, told the world he will continue to try and stop the TMP.  Indirectly, he was telling investors do not invest in B.C. or Canada for that matter.  By never talking to Kinder Morgan management, it was obvious he refuses to talk to anyone who supports the TMP. He only represents the job destroying protesters.

We have held pipeline shares in our portfolio for over a decade.  Pipelines are regulated by governments and must get permission for rate increases.  Since governments, led by Ottawa, refuse to build new pipelines, energy companies have no major means to ship their liquids to market, except by rail, which obviously the Greens believe to be safer than pipelines even though it is not.  “Specifically, based on petroleum product transport data from 2004 to 2015, pipelines were 2.5 times less likely than rail to result in a release of product when transporting a million barrels of oil (Fraser Institute).” While incidents are more frequent by pipeline, the amount spilled by rail is nearly three times larger. 

Oil is still going to continue to be shipped by Kinder Morgan.  The company not only ships liquids by pipeline, but by rail and trucks.  Most oil companies in Alberta are forced to ship their oil via trucks to the U.S. border, where it is then put into U.S. pipelines. 

The outcome of not building enough pipelines is already visible.  Imperial Oil wanted to expand one of their tar sand operations by 50,000 b/d.  A month ago Imperial cancelled the project because they “had no means to ship the oil”.   This is the loss of thousands of high paying jobs.

Ironic to their stance on the environment, Quebec, mostly from Montreal, dumps raw sewage into the St. Lawrence River every day.  At the same time they help defeat the West to East Pipeline so they can continue to buy oil from their friends in Saudi Arabia, Nigeria, Algeria and other dictator run countries.  Our Fairy Tale Prime Minister also likes these countries and gladly killed the pipeline to their benefit.  It should be noted that everyday Quebec happily accepts money transfers from Alberta but refuses to buy Alberta oil.

Ottawa created the TMP mess.  When they first passed the pipeline they could have legally issued all necessary permits.  Instead, they passed this onto the province and cities, which is the problem today.  At the time the Prime Minister hoped the protesters would stop the TMP.  Make no mistake about it; he did not want the TMP built and still does not today.  He obviously never thought of the consequences he would face.  The Canadian economy badly needs more pipelines to supply the world with oil and Ottawa with much needed tax revenue.  This is the sole reason the Prime Minister okayed the TMP today.

The good news is that the TMP, for six decades, has made money and will continue to do so, just as all other Canadian pipelines do.  The oil will also continue to be shipped from Vancouver waterways without incident.  TMP will be a constant source of growing dividends for Ottawa.  Many mutual and pension funds will be buying into TMP for the dividends to come.  We may also one day.

Unanswered Questions

1.         Why are the experts not calling stock markets expensive? The Dow Jones Industrial average is trading 30% above this century’s average price earnings ratio and 45% above it 98 year record.  The S&P 500 index is trading just off its 118.3 year record high.  With the Toronto stock market trading at the same level as it was in September 2014, what damage is this doing to Canadian pension funds?

2.         Why are the Greens and the paid professional protesters not contradicting the recent finding that shows the world has begun the next ice age?  Why are there no protests over one of Canada’s biggest polluters - the drive-through?  Why is it that no Green or politician ever tells us what is a safe level of carbon dioxide in the atmosphere?  Our Fairy Tale Prime Minister stated he wants “little carbon”.  If little is too low the planet dies.  Why aren’t the Greens demanding the planting of more trees?  Trees are the cheapest and most efficient means of destroying CO2.  In return the trees give us our always needed oxygen.

3.         No one is questioning Statistics Canada about their monthly numbers regarding housing and Canada’s population.  Their numbers bear no relationship to what is taking place.  Where are the people coming from to fill up these new homes?  In many places across Canada old homes are being torn down and replaced with multiple homes on the same lots. 

Reported immigration and shrinking Canadian birth rate means there are too many houses.  Or is Ottawa allowing hundreds of thousands of people into the country and not reporting it?  Is it people buying 2^nd and 3^rd homes?  If so this means Canada has one of the largest numbers of millionaires.  It means household debt of 171% of family income is inaccurate.  If the 171% rate is correct why are Canadians adding to their debt when interest rates are set to go much higher over the next year?

Is the housing market an accident waiting to happen?  We beleive so.  Do not own any real estate bonds.  Make sure you buy only insured Guaranteed Investment Certificates to the allowable insured level of $100,000.

4.         Why is our Fairy Tale Prime Minister happy closing down the West to East Pipe-Line while at the same time transferring billions of dollars to his good friends in Saudi Arabia, Nigeria and Algeria - countries run by dictators with questionable human rights records? 

Business investment is dropping in Canada and this money is moving off shore where it is wanted.  Ottawa, British Columbia, Ontario and Quebec over the past year have told investors they are closed to energy sector investment.  Why are these four governments not asking why drilling rigs are leaving Canada for the U.S. where the work is?

5.         Why is Canada the only country in the world trying to meet the Paris Climate Agreement, when we will never get close to the target?  Most countries, like China, the U.S., and India do not even pretend they are trying.  I notice no one complains that every single day, thanks to the trade winds, we get CO2 pollution from China and India.

Today Canada is a leaderless country.  Most of those politicians in office today are 100% incompetent.  Canada is heading into a multi year deep recession unless we get new leadership with some knowledge of basic economics.

The beginning of March marked the beginning of our 14^th year.  In the past thirteen years we have recommended 44 stocks. Thirteen of those still remain on our recommendations list. Our past 32 trades have averaged a 29% return in just over two years.  There were three losses.  Cash-flow from dividends accounted for 29% of the gains.        

Our current recommendations have returned 176% in nine years on average. We have outperformed the Dow Jones Industrial Average (+136%), the S&P 500(+137%), the Teranet 11 Home Price Index (+143%) and the TSX (+76%) since the first issue.  The only North American benchmark that we have not outperformed (yet) was the NASDAQ.  It closed 260% higher.  The bulk of these gains have come from only a handful of stocks, namely, the FANG (Facebook, Amazon, Netflix and Google).    This index is overvalued today (Amazon and Netflix trading at over 230-times earnings).   We continue to participate in this market with one of our holdings. 

Dividends account for 49% of the above returns.  If you qualify for the Dividend Tax Credit, be prepared to tack on another 1 percentage point. 

Investing is all about patience.  A good portfolio should not have to be monitored on an ongoing basis.  The investor should be able to glance at their statements to watch the dividends roll in and not have to worry about the capital.  Boredom should also accompany a good portfolio because one should be able to buy and hold a stock, hopefully forever, resulting in very little to do once the company is found.  

Our strategy of buying and holding companies with a history of stable dividend increases is boring, but it works.  A stable dividend will place a natural floor below a share price.  As the dividend increases so does the floor. We continue to outperform the market year-over-year.