We continue to maintain a defensive position across our portfolios. We are holding a larger than usual amount of cash, government bonds, and commodity producers, with a reduced exposure to equities.
The five charts below illustrate my thoughts about the market, and how we are positioned to take advantage.
The first chart measures stock market valuation -- how much investors are willing to pay for $1 of corporate earnings. Valuations match levels seen only before the Great Crash of 1929 (stock market then fell 90%), and the DotCom Crash of 2001 (stock market fell 46%). The average stock is too expensive, hence risky. That makes the best performing stocks of the last year even riskier. Hence, I view the market and consensus growth expectations with a fair amount of skepticism and caution.
The second chart measures investor euphoria – how excited investors are about owning stocks. We can measure this by observing the amount of cash in US brokerage accounts relative to the size of the stock market. When the blue line is low, there is less cash because investors have spent it on stocks. Today’s current level of excitement has coincided with investors going “all-in” at past stock market peaks. As a countermeasure against this euphoria, 30% of our Canadian Growth Portfolio is in cash, 12% of our American Growth Portfolio is in cash, and 22% of our Small Cap Value Portfolio is in cash.
The markets are expensive, and investors can’t seem to own enough stock – a perfect recipe for a tidal wave of risk in my opinion.
When it comes to stocks, not all of them are expensive, just most of them. We always want to be defensive with our stocks by owning what’s cheap. The third chart below shows the relative value between stocks and commodities. When the blue line is low, commodities are relatively cheap, and when the blue line is high, stocks are relatively cheap. The chart shows that commodities are at their cheapest value since 2000, and match the early 1970s before that. I expect commodities to significantly increase in price as they did after both prior occasions. Our Canadian stock portfolios own large interests in gold, silver, oil, and natural gas producers to take the advantage.
The fourth chart below highlights our particular interest in precious metals, with an emphasis on silver. The high price of gold bullion relative to silver bullion has reliably marked the start of strong periods of outperformance by precious metals. Our largest individual position in the Canadian Growth Portfolio is a silver miner.
Our fifth chart shows another place to find shelter. This chart measures investor sentiment for 10-year government treasury bonds, which tend to act as a safe haven in times of market turmoil. When the blue line is high, treasury bonds are unpopular and cheap, and when the blue line is low, treasury bonds are popular and expensive. The chart shows bonds haven’t been this unpopular and cheap since the mid 2000s. Most of our Income Portfolio holds long term government bonds, which I expect to increase in price. Of note, we hold zero so-called “blue chip” dividend stocks – they are too risky at this time due to excessive valuation, as per the first chart.
The final bonus chart is the most important of all. Investing obeys two of life’s core principles: there is no growth without pain, and everything moves in cycles. With commodity stocks and bonds so cheap and out of favour, our portfolios are at the point of maximum financial opportunity for intelligent investors.
Higher interest rates are slowing the economy: http://business.financialpost.com/personal-finance/debt/these-charts-show-higher-canadian-rates-are-starting-to-bite
Canada has too much debt to escape a major recession: https://www.bloomberg.com/news/articles/2018-03-13/consumer-debt-binge-draws-moody-s-warning-for-canadian-banks
Detachment from the outcome is a key attribute of successful investors: https://intelligentfanatics.com/forums/topic/the-power-of-detachment/
A list of powerful ideas: http://www.collaborativefund.com/blog/ideas-that-changed-my-life/
Ben W. Kizemchuk
55 Yonge Street, Suite 1100
All opinions and estimates contained in this report constitute the judgement of Ben W Kizemchuk of Wellington-Altus Private Wealth as of the date of this report and are subject to change without notice. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.