What’s next for the TSX

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RYAN   By Guest Blogger Ryan Lewenza
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It’s been a challenging go for Canadian stocks and the S&P/TSX Composite (TSX) over the last decade due to a combination of too few technology companies (big outperformers in the US) and too much resources (underperformers). Over the last 10 years the TSX has returned 8% annually, half the 16% annualized return from the S&P 500.

In this week’s blog I examine the key drivers and outlook for the TSX and whether this trend of underperformance will continue, or whether better days lie ahead. (BTW, I also did a TV piece on the topic – view here.)

First, the TSX remains dominated by two main sectors – financials (32% of the TSX) and resources (25%). While we’ve seen the sector weights of energy and materials decline in recent years, due to their weaker performance, the TSX remains a very commodity-driven equity index. The chart below hits this point home.

In the chart I overlay the relative performance of the TSX to the S&P 500 (blue line) with a broad-based commodity index (green line). Note how from 2000 to 2010 the TSX was in a solid uptrend versus the S&P 500 as it benefited from the big rise in commodity prices. Conversely, since 2010 the TSX has been in a relative downtrend versus the S&P 500 as commodity prices trended lower.

So, where commodities go, so does the TSX. And we’re bullish on commodity prices given: 1) our expectations for solid GDP growth over the next few years; 2) increased demand for commodities as Covid-19 slowly retreats and we return to normal; and 3) commodities tend to do well in an inflationary environment.

Putting it all together, we believe stronger commodity prices in the years ahead could provide a strong tailwind for the TSX, and possibly, improved performance.

TSX Relative Performance and Commodity Prices

Source: Bloomberg, Turner Investments

Second, the TSX has expereinced a huge rebound in corporate profits as the banks and resource companies have seen surging profits. For example, this quarter the Big 6 banks are forecasted to grow earnings roughly 40% y/y on average while Oil & Gas companies are also seeing improving profits.

Below I include a chart that overlays the y/y change in TSX earnings with dividends. There is a lag of roughly 6-12 months for TSX dividends so with the big profits we’re seeing today, this should translate into bigger dividend increases in the future.

In recent months we’ve seen some big O&G companies (i.e., Suncor, Canadian Natural Resources) increase dividends and this week we’re seeing the big banks annoucnce some sizable dividend increases. On average analysts are predicting 20% dividend growth from the banks in the coming months after OSFI removed the mortarioum on dividend increases. The banks have roughly $46 billion in excess capital so I see pretty material dividend increases and stock buybacks over the next year. Key point here is I expect big dividend increases from many of the leading companies in the TSX.

TSX Earnings and Dividend Growth

Source: Bloomberg, Turner Investments

Third, another big positive for the TSX are the reasonable valuations. While not ‘cheap’, the TSX trades at a 16x forward P/E, which is in-line with its long-term average. Compare that to the S&P 500, which is trading a 22x forward P/E and a much higher price-to-book ratio (S&P 500 at 3.5x and TSX at 1.5x). So after years of underperforming the S&P 500, the TSX has become attractively valued compared to the S&P 500, which I believe one day (hopefully soon!) will lead to some nice outperformance.

TSX is Trading In-line with Long-term Average P/E

Source: Bloomberg, Turner Investments

Ok so there’s the fundamental case for the TSX. What about the technicals or current price action?

Below is a closer look at the relative performance of the TSX to the S&P 500 that I mentioned earlier. You don’t need to be a trained market technician to spot the very clear and defined downtrend. Each time the TSX rallied up to this downtrend, it failed to breakout and subsequently traded lower. This is exactly why we’ve maintained our overweight to the US equity markets in client accounts.

After years of underperformance we believe the outlook for Canadian stocks is slowly improving and see the potential for the TSX to start outperforming versus the US markets. However, we’re patient guys and gals at Turner Investments and are waiting for the technicals to give us the confirmation that this long-term trend is reversing before adding to our Canadian exposure. Stay tuned!

Need to See a Relative Breakout before Adding to TSX

Source: Stockcharts.com, Turner Investments
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

65 comments ↓

#1 LewenzaCountry aka Prince Polo on 12.04.21 at 11:13 am

Nice work on BNN this week, Mr. Lewenza!

I hope the admission to watching BNN clips doesn’t revoke my membership in the pathetic steerage section…

#2 TurnerNation on 12.04.21 at 11:23 am

Paging blog dog ‘Mayor of Milton’ . All those people buying the Milton ON SFH pre-cons at $900-1 million a few years ago. Do not seem so crazy when now they are running up to 1.3-1.4mill resale.

A fellow told me that mortgage fraud is rampant in his ethnic community. Liar Loans, etc. I said Brah it’s not just yours it’s everywhere. This is Kanada.

As we know you never make actual money on real estate; no any windfalls are ploughed back into MORE property. A running pyramid. Always goes uppa up right?

—-
—-
People are catching on. The permanent control over Travel/Movement. Prison Planet. Economic Lockdowns.
Just in time to shutter Christmas travel of course…

https://reason.com/2021/12/03/omicron-brings-another-round-of-pointless-travel-restrictions/
“..travel restrictions seem to be the response of choice because they’re politically popular. Never mind that closing borders is ineffective at anything other than further burdening already hobbled families and economies. “

#3 HUNGRY BEAR on 12.04.21 at 11:24 am

OK GOOD.

So your not adding.

S&P it is then.

#4 Andrewski on 12.04.21 at 11:29 am

Appreciate the thorough analysis Ryan. I have an inkling that there’s a percentage of investors who will not take the time to learn the basics that you expound upon & find it easier to just invest in real estate, “because it will just keep going up in value”. What could possibly go wrong?

#5 Ponzius Pilatus on 12.04.21 at 11:47 am

#1 LewenzaCountry aka Prince Polo on 12.04.21 at 11:13 am
Nice work on BNN this week, Mr. Lewenza!

I hope the admission to watching BNN clips doesn’t revoke my membership in the pathetic steerage section…
————————
Nothing wrong with watching BNN, as long as it is part of a “diverse and balanced News Portfolio”.

#6 TurnerNation on 12.04.21 at 11:51 am

I hear T2 is in the running for the Fizer Employee of the Year Award.


War on Small Business continues…and No fun allowed.
How healthy we will be with yet more rules.

https://www.blogto.com/eat_drink/2021/12/new-rules-guidelines-bars-restaurants-toronto/
“So far, it appears that license classes will be changed to differentiate “lower impact” and “higher impact” spaces that have varied offerings, which will effect licensing conditions based on things like hours of operation, venue capacity and uses, and more.”
“Health and safety concerns, as well as the economic impacts the last two years has had, will also be taken into account in the new framework, which will be coming sometime in 2022”


– Permanent rolling lockdowns – check. Only in the Former First World Countries and all of EU.

.Slovakia in lockdown records new daily record in infections (abcnews.go.com)


— Science in Kanada. We pay high taxes for a World Class medical system!
Gee how many skilled staff did they just FIRE?
“But the hospital capacity guys!”

https://www.cbc.ca/news/health/covid-19-surgical-backlog-staffing-shortages-cma-1.6272940
Doctors call for help as hospitals battle surgical backlogs, staffing shortages
Pain ‘stops me in my tracks,’ says patient whose surgery has been delayed for almost two years

#7 Habitt on 12.04.21 at 11:54 am

Great read Ryan. Thanks so much eh.

#8 Ponzius Pilatus on 12.04.21 at 12:05 pm

#2 TN

—-
People are catching on. The permanent control over Travel/Movement. Prison Planet. Economic Lockdowns.
Just in time to shutter Christmas travel of course…

https://reason.com/2021/12/03/omicron-brings-another-round-of-pointless-travel-restrictions/
“..travel restrictions seem to be the response of choice because they’re politically popular. Never mind that closing borders is ineffective at anything other than further burdening already hobbled families and economies. “
—————————
You blame the government.
I blame the anti vaxers.

#9 Nonplused on 12.04.21 at 12:06 pm

Question of the day:

Why is Trudeau desperately pleading with Michigan governor Whitmer to keep Enbridge line 5 open? Shouldn’t he welcome shutting it down in the name of fighting climate change?

It all seems very confusing to me. If the goal is to shut down the Alberta energy sector, particularly the oil sands, wouldn’t a good way to do it be to shut down all the pipelines carrying the products? Alberta would still produce some oil for their own consumption, but the amount would be drastically reduced.

On the other hand, if for some inexplicable reason shutting down line 5 and all the other pipelines is not a good idea, I guess Canada is learning the same lesson that Russia learned some years ago: It is not wise to depend on hostile foreign states for your critical infrastructure (in this case energy transportation). Energy East could be in service by now, making line 5 redundant.

It is sad, but incredibly humorous at the same time, watching these buffoons flail around.

#10 Dogman01 on 12.04.21 at 12:09 pm

Regarding your post today Ryan, what do you think about the Political\Governance climate in Canada?
https://nationalpost.com/opinion/john-ivison-we-are-bleeding-capital-and-that-spells-big-trouble-report-warns

It seems to me to be a huge head-wind, the Dividend Tax credit, Bank oligopoly has really been the only things keeping me invested in Canada, that and perhaps the huge amount of money our O&G sector can make after being pummeled the last few years.

#11 Drill Baby Drill on 12.04.21 at 12:11 pm

Ryan what time frame do you expect the technicals to give you an indication?

#12 Dolce Vita on 12.04.21 at 12:13 pm

Hewers and Drawers.

The Cdn economy.

Has given all of us a high standard of living.

I believe the same Ryan and good to read the SWAG future.

Agreed.

#13 Dolce Vita on 12.04.21 at 12:21 pm

Weekend “Fun” Virus Porn

And the 2021 No-Vax Award goes to…

Italia

Dentist tries to get vaxd (to get the Green Pass) with a SILICONE arm.

https://www.rainews.it/dl/rainews/articoli/braccio-in-silicone-per-vaccino-denunciato-Biella-Green-pass-con-inganno-5e46954b-7184-4eed-b156-d4cd58cefd22.html?refresh_ce

Carabinieri have since escorted him to the Public Prosecutor’s Office to explain himself.

[actually an Odontologist – Google mistranslated “odontoiatra” to Dentist]

—————–

Knock yourselves out.

#14 Dolce Vita on 12.04.21 at 12:29 pm

Weekend “Fun” Virus Porn Part II *

https://twitter.com/222Minutes/status/1466967342785519621

——————–

* No Rubberband Man jokes to my Italian Odontologist Comment.

https://www.youtube.com/watch?v=dXcFFNx0_g8

‘Cause that would be, well…fun.

#15 jimmy zhao on 12.04.21 at 12:36 pm

I watched the BNN clip. (shhh. Don’t tell Garth)

#16 BCWally on 12.04.21 at 12:37 pm

Great article Ryan. The fundamentals are great for the Canadian market.
Now, all we need to is print these same arguments in all the influential papers like the WSJ, and some social media advertising in Reddit. Then let’s get a hold of Barstool Dave and see if he will put this on his YouTube feed. I’m not sure how to do this in TikTok, so I’ll ask some younger people for the right social media backer.
Of course we load up on ETF’s supporting TSX majors before all this and make out like bandits! :)
I’ve always thought if we did things the American way with the TSX we would be much more in the investing world limelight.

#17 Sail Away on 12.04.21 at 12:47 pm

Thanks Ryan, good analysis.

However… the actual Maple/US 10 year discrepancy is far starker, since CAD has also declined 30% relative to USD in this time.

Consider the reality of investing $100k CAD in both TSX and S&P 500 in 2011:

1. Today’s CAD value of the TSX investment is $215,890
2. Today’s CAD value of the S&P 500 investment is $573,490

Stark. Take heed.

#18 Dolce Vita on 12.04.21 at 12:50 pm

Weekend “Fun” Virus Porn Part III

World Journalist MSM FIELDS MEDAL goes to:

All of them.

‘Been trying to gene sequence Twitter for the Root Clade, to no avail.

Omicron Variant Spreading Twice as Quickly as Delta in South Africa

https://www.nytimes.com/2021/12/03/health/coronavirus-omicron-vaccines-contagiousness.html

DW News the same and countless other Journalist Fields Medal recipients – same conclusion.

Those of you that understand Math and Logic, here you go:

https://i.imgur.com/qpRDPuf.png

My MSM Errant Clade Hypothesis is they looked at Nov. 29, 30 and Dec. 1 and et voilà (2-4-8):

2X as transmissible.

No sequencing done for Dec. All that nicd.ac.za know so far is that 73% of Nov cases are Omicron – no Nov date provided.

———————–

PS:

Yesterday Sweden had a bird. Today we have a TIE.

Czechia (the only oversight on their part was “We’ll all be killed”):

“Omikron will cripple the world in three to six months.” Expert skeptical vax in time.

https://www.blesk.cz/clanek/zpravy-koronavirus/697478/omikron-ochromi-svet-za-tri-az-sest-mesicu-expert-je-skepticky-i-k-rychle-vyrobe-vakcin.html

Switzerland (same oversight as Czechia):

“We are heading more and more towards a catastrophe”

https://www.20min.ch/story/wir-steuern-immer-mehr-auf-eine-katastrophe-zu-403149686580

And Spain, my heart be still, ACTUALLY starting to ban virus infested Tourists:

https://twitter.com/EmbSpainUK/status/1465712317736251407

———–

Welcome to Planet Earth. Hope you had a nice day.

#19 Pilot1 on 12.04.21 at 12:56 pm

Interesting BNN Clip. With the likely increase in the interest rates to combat inflation, our Cdn dollar will likely get stronger against the US Dollar for the balance of 2021 / and early 2022. Do you anticipate the increase in the Canadian Dollar as a short term delay against US buying more Canadian Commodities (Housing, Infastructure and EV Revolution) and a minor delay in the TSX Breaking out until the end of Q1 2022. Interesting post with technicals.

#20 Sail Away on 12.04.21 at 1:03 pm

Further to TSX outperformance, I see no evidence this would be the case, speaking from the standpoint of my engineering firm.

On a number of Canada/US ventures, the parent company is US or the design contract is held by US-based companies. These companies are quite happy to hire Canuckle engineers at a big discount to their engineers, so keep transferring more and more work our way, now to the point where we’ve taken on US certification in several states, so are actually doing their home-based work for them.

Not much different than outsourcing tech support to India or manufacturing to China.

I feel so third-world. But rich-ish, in a third-worldy sort of way.

#21 Warren-the- on 12.04.21 at 1:34 pm

Nice work. Looks like the sp/tsx PE ratio likes to shoot past the long term avg on the downside though when coming from excess. Patience seems to be prudent.

#22 Quintilian on 12.04.21 at 1:39 pm

It could be that when the downward trend breaks and heads upward, experts, such as yourself may be lured into bull trap.

For sure oil, gas, rocks and trees, have and hold value, for some time yet, but I doubt it will be as significant as it was during the past.

Technology, alternative energy and the efficiency gains and added supply sources will likely be a barrier to price escalation.

#23 Dolce Vita on 12.04.21 at 1:47 pm

Lighten the weekend up for us EVIL Boomers.

Was watching Rubberband Man and came across this:

https://www.youtube.com/watch?v=hDWPNgRNdHI

There is also another for the 70’s.

Sept ’64, Oct ’67, Oct ’68 for me. There are so many.

#24 Patty on 12.04.21 at 2:09 pm

This is a good analysis Ryan, but I’m sensing markets are about to get shoved down the toilet of another, longer global shutdown.

Look at the very scary new COVID numbers today – 1000 in Ontario and 1500 in Quebec.

https://montreal.ctvnews.ca/quebec-covid-19-cases-spike-again-with-1-512-new-infections-1.5693719

More variants and more people fully vaxxed are catching this now.

This is looking like a five or ten year thing, and adding in the other economic and political issues does not give much optimism.

March 2020, here we go again, but probably for much longer………

#25 Ryan Lewenza on 12.04.21 at 2:49 pm

Dogman01 “ Regarding your post today Ryan, what do you think about the Political\Governance climate in Canada?”

I’ve written about the lack of investment in the past, which is a concern and hinders economic growth. But the price of oil, forest products and copper are more meaningful to TSX stock prices so if commodities remain hot the TSX should outperform. – Ryan L

#26 oh Canaduh! on 12.04.21 at 3:03 pm

Thank dog I don’t buy (Canadian) ETFs. Otherwise I would have had that horrible performance that you have mentioned in your analysis.

By purposefully avoiding those stocks which have been perennial losers and that are significant and obvious laggards (i.e. resource, commodity), I am easily able to match the S&P performance while taking on only minimally more risk without the need to currency hedge.

#27 PBrasseur on 12.04.21 at 3:18 pm

China is by far the biggest buyer of commodities and it’s in such trouble it might actually crash sooner rather than later, gigantic real estate bubble started popping and foreign companies are slowly but surely fleeing that authoritarian/lying/unpredictable regime.

Add to that that the rest of the Canadian economy/TSX is financials principally maintained by another massive RE mirage!

Wakeup and smell the coffee already!

#28 Ryan Lewenza on 12.04.21 at 3:47 pm

Pilot1 “ Interesting BNN Clip. With the likely increase in the interest rates to combat inflation, our Cdn dollar will likely get stronger against the US Dollar for the balance of 2021 / and early 2022. Do you anticipate the increase in the Canadian Dollar as a short term delay against US buying more Canadian Commodities (Housing, Infastructure and EV Revolution) and a minor delay in the TSX Breaking out until the end of Q1 2022. Interesting post with technicals.”

No since a weaker USD is good for commodities which in turn is good for Canada and the TSX. Basically a stronger CAD would confirm the strength in the commodities and our thesis. Key point: commodities are priced in US dollars so a weaker USD is good for commodities. – Ryan L

#29 Albertaguy (waking up) in AB on 12.04.21 at 3:54 pm

Coffee sounds good…have a good weekend.

#30 Damifino on 12.04.21 at 5:10 pm

#9 Nonplused

Why is Trudeau desperately pleading with Michigan governor Whitmer to keep Enbridge line 5 open? Shouldn’t he welcome shutting it down in the name of fighting climate change?
————————————–

Certainly he should welcome it.

But there is Quebec to consider. A winter there without propane will quickly spell the end of Trudeau, and probably the Liberal government for years to come.

That’s why I almost wish Governor Whitmer would (or could) shut it down. But that would be cruel and unusual punishment. I could never condone that.

#31 Wrk.dover on 12.04.21 at 5:13 pm

#20 Sail Away on 12.04.21 at 1:03 pm
I feel so third-world. But rich-ish, in a third-worldy sort of way.
______________________________

As you well know, that’s me to a tee.

I had flipped stations to see the dismal numbers
on the right side of the screen (catching Ryan live) and those numbers make my money hurt.

#32 Wrk.dover on 12.04.21 at 5:21 pm

#23 Dolce Vita on 12.04.21 at 1:47 pm
Lighten the weekend up for us EVIL Boomers.

Was watching Rubberband Man and came across this:

https://www.youtube.com/watch?v=hDWPNgRNdHI
_____________________________________

Grim times indeed, those first few years.

#33 Sail Away on 12.04.21 at 5:26 pm

#26 oh Canaduh! on 12.04.21 at 3:03 pm

By purposefully avoiding those stocks which have been perennial losers and that are significant and obvious laggards (i.e. resource, commodity), I am easily able to match the S&P performance while taking on only minimally more risk without the need to currency hedge.

———

Really? Maple that’s beaten 16% CAGR over ten years? There are many in the US, but very few in Canada.

Let’s see: the railways, waste management, Trans Alta… and that’s about it. Not even that bastion of Canadian investor smugness the banks make the grade.

#34 Sail Away on 12.04.21 at 5:38 pm

#31 Wrk.dover on 12.04.21 at 5:13 pm
#20 Sail Away on 12.04.21 at 1:03 pm

I feel so third-world. But rich-ish, in a third-worldy sort of way.

———

As you well know, that’s me to a tee.

I had flipped stations to see the dismal numbers
on the right side of the screen (catching Ryan live) and those numbers make my money hurt.

———

Yes, I do know that, and the truth of the matter is that everybody who’s reached comfortable self-sufficiency is rich.

I will never understand the philosophy of hamstringing one’s financial future as I see so many do with home country bias. A second truth is that Canada is a significant business and economic laggard.

#35 oh Canaduh! on 12.04.21 at 6:54 pm

#33 Sail Away on 12.04.21 at 5:26 pm
#26 oh Canaduh! on 12.04.21 at 3:03 pm

By purposefully avoiding those stocks which have been perennial losers and that are significant and obvious laggards (i.e. resource, commodity), I am easily able to match the S&P performance while taking on only minimally more risk without the need to currency hedge.

———

Really? Maple that’s beaten 16% CAGR over ten years? There are many in the US, but very few in Canada.

Let’s see: the railways, waste management, Trans Alta… and that’s about it. Not even that bastion of Canadian investor smugness the banks make the grade.

—————————————————-
It’s amazing how a few small changes (by eliminating the garbage) to a portfolio can make a big difference.
All stocks are not created equal.
That being said … my “non-market” holdings have faired even better.

#36 Nonplused on 12.04.21 at 7:49 pm

#30 Damifino on 12.04.21 at 5:10 pm
#9 Nonplused

Why is Trudeau desperately pleading with Michigan governor Whitmer to keep Enbridge line 5 open? Shouldn’t he welcome shutting it down in the name of fighting climate change?
————————————–

Certainly he should welcome it.

But there is Quebec to consider. A winter there without propane will quickly spell the end of Trudeau, and probably the Liberal government for years to come.

That’s why I almost wish Governor Whitmer would (or could) shut it down. But that would be cruel and unusual punishment. I could never condone that.

—————————————-

Don’t forget Ontario. The pipe goes to the Sarnia refinery. “Energy for me, but not for thee.”

If shutting down line 5 would be cruel and unusual punishment, why was cancelling Keystone not? Different customers granted, but it seems like the US consumer could have used that energy right about now.

If I were me, I would be doing my intermediate to long term financial planning based on an upcoming, or possibly here, long term energy crisis. David Suzuki isn’t going to stop collecting speaking fees until it is all shut down, and they can’t build pinwheels and solar panels fast enough to make a damn bit of difference. Look to Germany for a window into the future.

——————————————–

I wonder if there are some subtle “suggestions” going on behind the scenes. “Boy it sure would be a shame if line 5 got shut down. Hey how is that evaluation for a new fighter jet going? I hear you are still looking at Saab for some reason.”

#37 dave on 12.04.21 at 8:03 pm

By the time trudeau is done with canada the TSX will have negative returns over next 10 years. When crystia taxland releases the budget next year I expect a permanent overnight GAP DOWN.

#38 Doug t on 12.04.21 at 9:59 pm

I have been thinking for some time that this country is getting ripe for something major – becoming part of the U.S. perhaps in the next 25 years – if China keeps on its trajectory it’s a very real possibility

#39 R on 12.04.21 at 10:27 pm

The Omicron virus does appear to be significantly more contagious. It also appear to infect people who have been double vaxxed. The infection however seems to be mild. This varient may actually turn out to be a good thing overall. Everyone gets it. Everyone gets through it, and then the whole Covid thing is done with. I doubt there will be another March 2020 market dip. Dr Campbell from the UK is a reliable source IMHO
https://youtu.be/dSfPK-amgKw

#40 SW on 12.04.21 at 10:39 pm

#38 Doug t on 12.04.21 at 9:59 pm
“I have been thinking for some time that this country is getting ripe for something major – becoming part of the U.S. perhaps in the next 25 years…”

Oh, and I was just thinking that I couldn’t ever foresee the Queen (her heirs and successors) being removed as Head of State.

Mind you, the country could declare something/someone else as a successor, I suppose. Like Barbados.

But the USA? Surely, they already have enough troubles? There is not going to be any cavalry to fix our little problems.

#41 millmech on 12.05.21 at 2:25 am

YANG Gang on Monday!

#42 Nine to Eleven Flag on 12.05.21 at 7:37 am

Well it looks inevitable, Evergrande is on the verge of collapse. How its fallout will affect Vancouver RE will be interesting…

#43 Sharon Osborne on 12.05.21 at 8:06 am

Ryan, Trudeau will kill all commodity extraction within five years. His Luddite Liberals have no love for building infrastructure. Taxes will skyrocket and the dollar will burn. The country as a place to live is dead, Canada is dead. Don’t buy anything related to Trudeaus game of turning Canada into the UN dumping ground he’s fighting to beggar. Canada’s biggest companies are transitioning out of Canada. Big Six banks are now more than 50% USD. Canada Pension fund managers won’t invest in Canada, nor will American or Eu. Get out of Canada before you lose everything. If the smartest guys in Canada are getting out, why aren’t you?

#44 Ryan Lewenza on 12.05.21 at 8:16 am

Dave “ By the time trudeau is done with canada the TSX will have negative returns over next 10 years. When crystia taxland releases the budget next year I expect a permanent overnight GAP DOWN”

While I’m also no fan of Trudeau and Freeland, they have a small impact on the TSX and returns. The TSX is driven by more macro factors like US GDP growth, S&P 500 returns and commodity prices. Don’t let your dislike for them drive your investment decisions. – Ryan L

#45 Do we have all the facts on 12.05.21 at 8:28 am

Love your optimism Ryan but the harsh reality is that Canada is not as attractive to foreign investors as it once was. The mixed messages emanating from Ottawa have created confusion about where the energy sector in Canada is headed. Adding to this confusion is the complete lack of incentives for investment in sources of alternative energy.

Canada remains focussed on an asset class that has become dependant on low mortgage rates at a time when increases in the overnight rate are inevitable. If you deduct investment in residential real estate from the equation net investment in the Canadian economy has been declining at an increasing rate since 2015.

Adding to this sketchy scenario is that fact that many successful Canadian companies appear to be hoarding their cash or increasing the distribution of their profits to dividends or buying back their shares. Investment in growth of the Canadian economy seems to be the last thing on many Canadian corporations or Canadian investors minds.

How can we change this self destructive environment before it is too late?

#46 crowdedelevatorfartz on 12.05.21 at 8:33 am

@#36 Nonstop
“If shutting down line 5 would be cruel and unusual punishment…”

+++

Doesn’t line 5 run under the Great Lakes into the US?
Isn’t the line over 60 years old?
Isn’t it exposed in several areas?

https://www.oilandwaterdontmix.org/problem

Time for our environmental spendthrift PM to stop TALKING about saving the environment and actually do something about it…… like improve infrastructure that is 65 years old and passes beneath the greatest fresh water lake system on the planet?

And if the only way to get Canada’s blithering idiots to woke up and pay attention is … to shut it down for a week…. so be it.
Seems to work for the Russians when they want something from Europe.

#47 crowdedelevatorfartz on 12.05.21 at 8:49 am

@#38 Doug t
“I have been thinking for some time that this country is getting ripe for something major – becoming part of the U.S. perhaps in the next 25 years – if China keeps on its trajectory it’s a very real possibility”
+++++
I think your wires are crossed.
It will be China that owns us… not the US….and no one will notice.

#48 crowdedelevatorfartz on 12.05.21 at 8:59 am

From the British archives

“I was just cleaning it and I slipped….”

https://www.thesun.co.uk/news/16923295/bomb-squad-hospital-bottom-shell/

Apparently.
The National Health Service spends almost $1,000,000 per year doing “retrievals” like this……

#49 Oakville Rocks! on 12.05.21 at 9:07 am

@#20 More nonsensical gold from the Puddy of the steerage section.

Who knew that a middling engineering firm on sleepy Vancouver Island could be a bell weather for future TSX Performance?

What is even dopier about your comment is that you go on to say that your firm is benefitting from the 80 cent dollar to grow. But I guess only your firm would benefit from this?

I deal with 20 to 30 US based suppliers throughout the year and compete with or partner with a great number of firms that have operations in Canada & the US.
None have pushed administrative or service based functions to Canada through contractors or otherwise.

What I have noticed in the past 15 years is that US firms have pushed manufacturing to Mexican border towns either through contractors or their own facilities.
The ones that did not do that set up new manufacturing assembly in southern states like Alabama, Mississippi, Tennessee and such. In some cases they have moved administrative functions (billing, customer support) to the American Mid-west (Kansas etc.)
Are these places “third world” too?

By the way, smart people do not refer to India & China as “third world”. Although India & China would love it if clueless, know-it-all, over confident American dolts continue to underestimate them with pejorative thinking like that.

I can picture it now, SailAway pulls up for a morning client meeting. “I may not be from a top-notch engineering firm and my firm may have needed a government hand out to survive a 3-4 week Corvid shutdown, but I did sleep in my Tesla last night.”

#50 Diamond Dog on 12.05.21 at 9:36 am

Hi Ryan. Enjoyed your write up today but since true compliments take time that we both know the answers to, I’ll just head straight to the criticisms. (don’t mind me, I’m a critic, it’s what I do)

Both stock markets are apples and pineapples as one would expect but are still worth comparing. That said, they aren’t the same and so, we shouldn’t expect or even hope for similar outcomes.

Nor should we rely on forward P/E’s in the slightest. To me, forward P/E’s are junk science betting on future growth that may not come. You may disagree with this, but history paints a different picture. For example, dot.com companies back in the day predicted huge earnings that turned out to be a pipe dream. The same thing just happened in large cap techs promising the moon with forward P/E’s (cause they can’t sex up current P/E’s obviously), sound familiar?

Price to book is good for comparing equities “at the same time frame” but book values can drop significantly in recessions, especially in commodities which the TSX is as we all know, heavily weighted. It’s price to sales that I look for and having said all that, the DOW and Nasdaq charts display a bubble and their charts show it everywhere.

Let’s talk commodities. The price of oil is tied to global growth as much as it is supply/demand and the bond markets are saying growth won’t be there and is signalling no growth or recession. So, lets say the bond market is right and a recession comes to pass. What does this mean with commodities and what is the driver that causes a global recession?

Perhaps it’s the Chinese real estate market:

https://www.cnbc.com/2021/10/21/china-economy-property-sector-must-shrink-to-be-stable-says-prof.html

Currently, the Chinese economy relies on 30% of it’s GDP coming from real estate, likely the highest ratio in the world. “Gan estimated that about 20% of China’s housing stock is left vacant, yet developers continue to build millions of new units each year.” These numbers are troubling. Perhaps that’s why China is going back to 3 kids per family policy this year (note the date), climate change/pandemics be damned:

https://www.nytimes.com/2021/05/31/world/asia/china-three-child-policy.html

Numbers indicate that Chinese developers may have built themselves out of a job. The outcome may be disorderly and disruptive and a harsh negative on you guessed it, commodities.

Meanwhile, as inflation romps, monopolies have been price fixing in commodities. I’m seeing it in fertilizer, nat gas (thanks Berkshire Hathoway, they bought out 20% of U.S. nat gas production when gas was at $2 bucks, consolidation i.e.monopolies isn’t all it’s cracked up to be for the consumer anyway) and oil but to be fair, during the pandemic exploration ground to a halt so these effects coupled together with an inflation minded bubble where CEO’s are compelled to cash in “cause everyone else is doing it” (where price to sales is to the moon):

https://www.multpl.com/s-p-500-price-to-sales

… leads to wide scale price fixing from monopolies where possible where everyone is cashing in on jacking prices… inflation and incomes be damned. And that’s the problem. People have to pay for it and when the corporate herd raises their prices without incomes to offset, it triggers recession. I hear it now, incomes have risen? They have to, to get workers back to work? Not if workers can’t come back from Covid19 scarred lungs, obesity, diabetes, NAFLD etc., not if they’re unable.

It’s not just valuations themselves that have created this pickle, it’s “what we value”. PFOA forever chemicals (thanks Dupont)… added sugar in everything (thanks big sugar)… Opioid epidemic (thanks Sackler family) to name a few, perhaps allowing corporations to just “self regulate” was a bad idea after all. Does anyone with a straight face still think greed is good?

So we’ve got real estate bubbles bloated by low interest rates and a lust for glass and concrete the world over and especially problematic in the world’s #2 economy, we’ve got public and consumer debt bubbles the world over, stock market bubbles in the world’s #1 economy, a bond bubble created by CB near zero rates in the western world, a commodity bubble created by a hiatus in exploration a’ la pandemic induced followed by monopoly price fixing wherever possible, a sicker and more aged work force and incomes, typical salaries, can’t keep up.

We also have disruptions coming in transportation with EV’s and autonomous EV’s. We’ve got climate change disruption coming whether oil burners want to face that one or not. In the same breath, imagine a world not using nat gas and what that world would look like in changes to industry and housing. How does that get paid for and where is the political will before the next election cycle?

Filter out the noise of greedy investors and short sighted CEO’s pushing for more consumption of a “finite” resource and short shelf life politicians angling for a few more years with sunset corporate funded pensions and ask what the long term plan needs to be by governments the world over, the kind of tech we need and how we get there. Are we anywhere close to a true start?

Agricultural commodities grown in temperate climate in the Northern hemisphere got scorched this year around the globe, that’s a known fact. Temperate crop commodities are at an all time high by a lot and it’s looking like more to come. This is not a new normal anyone wants. If the market doesn’t fix this one, there may not be a market in 20 years, but I digress.

Point is, everything we see now is already rear view mirror. It’s not just incomes that shake the economy, it’s net worth and when most everything has nowhere to go but down, or systems become disrupted or de-stablized in that effort to see valuations continue to creep up, the old saying rings true. “If it can’t go up forever… it won’t”.

It’s a difficult message but… the focus needs to be not so much on wealth creation but on wealth preservation. We’ll need that dry powder for the disruptions and innovation opportunities that follow. And could the powers that be rub it in the faces of the hoodies just a little? It’s deserved. Bitcoin… we told you so.

#51 Sail Away on 12.05.21 at 9:47 am

#49 Oakville Rocks! on 12.05.21 at 9:07 am
@#20 More nonsensical gold from the Puddy of the steerage section.

Who knew that a middling engineering firm on sleepy Vancouver Island could be a bell weather for future TSX Performance?

——–

I know. Crazy eh?

Oh, it’s ‘bellwether’, as follows:

‘A bellwether is a leader or an indicator of trends. The term derives from the Middle English bellewether and refers to the practice of placing a bell around the neck of a castrated ram (a wether) leading a flock of sheep. A shepherd could then note the movements of the animals by hearing the bell, even when the flock was not in sight.’

#52 Dharma Bum on 12.05.21 at 10:52 am

#9 Nonplused

Why is Trudeau desperately pleading with Michigan governor Whitmer to keep Enbridge line 5 open?
————————————————————————————————-
…and speaking of the great state of Michigan, how ’bout those Crumbleys?

America’s finest.

https://www.ctvnews.ca/world/michigan-parents-found-in-building-bond-set-at-us-500k-apiece-1.5693652

#53 Wrk.dover on 12.05.21 at 11:28 am

#50 Diamond Dog on 12.05.21 at 9:36 am
______________________________________________

Thank you for articulating so well why the top can soon no longer live off of the bottom, though the focus on this site is why the bottom can’t live off of the top either.

Ryan is excellent at what he does, but like carriage making, his is a dying trade.

Financial numbers are becoming no sense nonsense.

The future may well be all people glued to their only tangible asset, an I phone, and doing nothing.

#54 Steven Rowlandson on 12.05.21 at 11:47 am

What is needed is a reality check for the government bonds and anything connected to the real estate and vehicle market. I think there are some seriously big debts and prices being supported by some seriously limited incomes that are hidden by statistics
implying that most people earn seriously big incomes when on a person by person basis that is not generally the case. Champaign dreams supported by beer and bottled water incomes plus low interest rates.
There is only so much you can do on a beer or bottled water income.

#55 Quintilian on 12.05.21 at 12:40 pm

“Key point: commodities are priced in US dollars so a weaker USD is good for commodities. – Ryan L”

Ryan, a weaker USD makes the CAD relatively stronger, which will give the BOC another excuse to keep rates low.

#50 Diamond Dog is right.

I call it an “excuse” because the real reason they won’t raise rates is because they can’t.

#56 Felix on 12.05.21 at 12:41 pm

Two days in a row with no pictures of dogawful mutts.

This is acceptable. For now.

#57 Nonplused on 12.05.21 at 1:09 pm

#46 crowdedelevatorfartz on 12.05.21 at 8:33 am
@#36 Nonstop
“If shutting down line 5 would be cruel and unusual punishment…”

+++

Doesn’t line 5 run under the Great Lakes into the US?
Isn’t the line over 60 years old?
Isn’t it exposed in several areas?

——————————

Ya it runs through the US for part of the way and drops off some oil there before heading for Sarnia.

It is old but it receives a lot of inspection and maintenance. The main concern for a steel pipe is corrosion but this pipe has been kept in good shape. There is no reason to suspect it is any more in danger of leaking than a new one would be. The main concern is more along the lines that a ship or ship’s anchor hits it like what happened in California recently.

I understand there is a proposal to relocate the pipe into a tunnel but I am not sure how far along that is, and I am not sure Whitmer supports it.

#58 Quintilian on 12.05.21 at 1:51 pm

The monetary system is based on nothing more than faith. And in absence of a better method, there is nothing wrong with that. It has worked for a long time.

However, the politicians, and their appointed high priests of finance, have abused and perverted the system to the extent that it has become obvious that the beneficiaries, and those who run the system are the one and same illusionists.

The boomers have been happily subsisting off the crumbs falling from the illusionist gorging feast, but the pile of crumbs is diminishing. When the boomers wake up from their lazy slumber, they may out of anger, and their unlimited stupidity, clone a few dozen Trumps.

#59 espressobob on 12.05.21 at 1:59 pm

A good correction would be most welcome. It’s the stuff contrarians dream about.

One can only hope…

#60 IHCTD9 on 12.05.21 at 2:08 pm

#36 Nonplused on 12.04.21 at 7:49 pm.

I wonder if there are some subtle “suggestions” going on behind the scenes. “Boy it sure would be a shame if line 5 got shut down. Hey how is that evaluation for a new fighter jet going? I hear you are still looking at Saab for some reason
——-

The Gripen and the F-35 will both be obsolete by the time Ottawa makes a decision. The RCAF will have to be content fulfilling their NATO obligations with 40 year old CF-18 Hornets.

If a new fighter was too expensive 15 years ago, it’s definitely too expensive now post Trilludeau.

#61 HUNGRY BEAR on 12.05.21 at 2:27 pm

What housing bubble?

https://www.ctvnews.ca/mobile/canada/canada-not-in-midst-of-housing-bubble-former-housing-and-mortgage-head-1.5693417

#62 crowdedelevatorfartz on 12.05.21 at 2:35 pm

@#60 IHCTD9
“If a new fighter was too expensive 15 years ago, it’s definitely too expensive now post Trilludeau.”

+++

Yep.
No decision will be made.
One of umpteen fiscal turds the Liberals will dump on the next govt to deal with as it tries to dig its way out of a obscene national debt doubled in the last 5 years.
Criminal.
Absolutely criminal.

#63 Phylis on 12.05.21 at 2:53 pm

#42 Nine to Eleven Flag on 12.05.21 at 7:37 am
Well it looks inevitable, Evergrande is on the verge of collapse. How its fallout will affect Vancouver RE will be interesting…
Xxxxx
Is there such a thing as a measurement of sentiment towards real estate in China? That could be a key.

#64 Barb on 12.05.21 at 4:56 pm

I see the bearish irony of the photo (the Bay Street sign, with the Stop sign pointing to it).

#65 Jenn on 12.06.21 at 9:41 am

Nice to see your piece on BNN Ryan. As a contrarian investor (14% annual rate of return on my RRSP since 2005) I do like to buy when everyone else is selling or getting excited about a particular asset class or ETF so I appreciate this update on the TSX’s fundamentals. I’m always learning here for sure.