WOW – Interesting Times

Sometimes when we observe and attempt to summarize what is happening in the world, it feels like déjà vu. In the world that we live in, trends or patterns are occurring that suggest the past may not repeat itself, but could certainly rhyme. There are a myriad of reasons, points and counterpoints that confirm or refute these trends. Some of these reasons are more complex than could be effectively covered in this newsletter. In the world we live in, we try to keep things simple.

So what is happening out there? The economy is a tale of two stories. First there is Canada. Like it or not, Canada is a resource based economy. This is just a fact. If your investment portfolio does not hold some sort of resources from time to time, forget about attempting to benchmark your results to the TSX. Think about it, do our best in class banks engage in lending money to both Canadian individuals and businesses?  Do these businesses include resource companies? Yup. A random walk through Calgary these days tells a sad story of a compressed market environment, resulting from a sell off from energy prices. Add in the shock of what is happening in Fort McMurray and the provincial economy in Alberta sees a bad situation get worse. BUT WAIT! STOP THE PRESSES! Things are good in the real estate space in almost every other place in Canada. For those of you trying to buy a home, simply add $200k to any bid you are posturing in Toronto and use some multiple of that in Vancouver, in order to get to the next round of bids. This weird disconnect somewhat confuses the issue across our nation. Are foreign buyers buying up our houses, apartments and commercial buildings with reckless abandon just to keep their money safe? Maybe?

In the US – arguably the strongest currency in the world, the economy is getting to the point that policy makers had targeted several years ago. Interest rates have recently gone up. WHY? Well, the economy must be doing a bit better in order to raise interest rates.

So - WE THE NORTH find ourselves fighting the global supply/demand concerns in the resource space. In the US, they are faced with a reality of slow growth.

We are constantly “peeling back the onion” to discover price and value concerns. The biggest head scratcher has been gold. At the end of October, gold prices were at about $1150 an ounce (USD). Today the price is around $1261, a $110 dollar appreciation, or about a 9.5% move.  The chart below covers the past year’s price action:

Source: Bloomberg and VIP Wealth Solutions

Most would look at the chart above and say gold has really done nothing in the past year. This would be a fair comment. While the peak to trough movement has been somewhat more pronounced, it is not a boom/bust type of experience. HOWEVER, the stocks in this sector have experienced greater surprises.   We will look at one name just as an example of what is happening in the shiny yellow metal space. As we mentioned earlier, just look at Barrick Gold which was down almost 19% for the full year last year.  They were down more than 70% for the previous 3 year period, yet YTD is digesting triple digit gains.

Next let’s look at First Quantum Minerals, which is basically a copper gold/producer. Over the past year, the stock price of this producer is still down about 41%. However, its peak to trough experience does look like a boom/bust type of experience. The stock fell from a high of about $18 in May 2015 to a low of $2.15 in January 2016. Since that time, the stock has moved to a recent high of $11.58 or about 363% return!!!! Remember, no one person can consistently buy at bottom and sell at the top.  Some stocks are experiencing a very marginal move in the underlying commodities, yet their stock price has move by a larger margin. This is NOT NORMAL.

Source: Bloomberg and VIP Wealth Solutions

So, we need some context as we grind through these data points. In 2014 and 2015, the talking heads on our specialty financial channels on TV coined the acronym FANG. This acronym represents 4 stocks:  Facebook, Amazon, Netflix, and Google (now Alphabet). These stocks were the market darlings over multiple time periods. To start the year, we are hearing the new acronym BARF. Fittingly in Canada, it holds Barrick Gold, Agnico Eagle Mines, Rona, and First Quantum Minerals (our own choices – Thank you Jeff Leung).

Let’s look at the FANG and the BARF numbers this year to the end of April:

The challenge for most is that First Quantum does not roll off the tongue, and is generally not the first stock global investors are thinking or talking about. These acronyms help to illustrate a market that remains somewhat challenged from an adoption of risk perspective.

Interestingly, gold is down about $40 since the start of the month.

Hopefully you are now seeing the trend here. A tale of two markets from a more macro perspective Canada, and the impact of resources.   While the US has the better economy, and a larger, and more liquid stock market, that does not necessarily mean larger opportunities.   We observe bigger return opportunities in Canada, some in the form of BARF type investments.

So should an investor only seek to invest in well know market darlings stocks? Should they adopt a more contrarian viewpoint, and just buy the BARF type names? Should they straddle both markets?

This gives you a sense of what is happening in and around North America.

Generally the world was a bit better behaved in April and we would just be forecasters if we put a number on May – so we won’t until it’s over but perhaps there are more surprises in our future.

Thanks for reading this month and for your continued support.

 

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