Chinese Economic Growth

The data will not really help the consensus get more optimistic about the outlook; on the one hand it is not strong enough to generate any improvement in the sentiment towards the economy but, unlike Europe, it is also not weak enough to trigger talk about stimulus measures from the Chinese government or central bank.  Investors may just have to accept that this is the ‘new normal’ for their economic growth.

Companies in the S&P500 Index really love their shareholders; maybe even a bit too much!  They’re poised to spend US$914 billion on share buybacks and dividends this year, or about 95% of earnings!  This proportion of cash flow used for repurchases has almost doubled over the past decade and these buybacks have fueled one of the strongest stock rallies in fifty years as stocks with the most repurchases gained more than 300% since the market low in March, 2009 (Source; Bloomberg).  At some point companies will have to start moving these cash flows into capital spending and other initiatives that lead to real growth.   Record low interest rates have engendered a period of ‘financial engineering’ to move stock prices higher, but you can only go so far before you have to actually have a business with real growth.

Finally, as the old adage goes, ‘if you are going to forecast, then plan to forecast often.’  In a recent appearance on CNBC’s Fast Money, Dennis Gartman, publisher of the widely-followed Gartman Newsletter, said that crude oil prices will fall demonstrably from current levels.  It had been reported that Gartman saw crude oil going as low $10 a barrel (versus $80 today).  In discussing the “end of oil,” Gartman referenced news from Lockheed Martin earlier this month that the aerospace giant has made a technological breakthrough in developing a power source based on nuclear fusion.  While many in the scientific community are skeptical, Gartman sees the potential in this breakthrough as being something of a death knell for oil.  What was more interesting than Dennis’ controversial call was the firestorm it started on Twitter immediately after.  The Tweets below were quickly recalled as evidence that a lot of his recent calls, including his call for a bear market right near the October lows, were all wrong.  This is a tough business to make accurate short-term calls in, even for 40-year veterans!

Oct14-7

Our strategy continues to be one of caution in terms of the stock market.  We don’t think that the snapback in stocks in the back half of October signaled the end of the correction.  Volatility will remain high and we expect stock prices to test those mid-October lows once again over the next few months and perhaps break down further.  ‘Giddy’ investor sentiment has not diminished and short-term earnings and economic risks are still in place until we see some recovery in Europe.  Stocks are still being held up by factors that are not sustainable; excessive buybacks supported by low interest rates and record high profit margins.  Commodity stocks remain at risk as long as the U.S. remains the only central bank talking about tighter money conditions; we are still significantly underweight energy, base metals, industrial commodity and gold stocks.  We are also becoming less positive towards the Canadian financial sector as a falling currency, less investment banking and a slowdown in loan growth will all put pressure on bank earnings growth, at a time when valuations remain near record high levels.  Technology/telecom stocks continue to look like one of the better places to protect capital in any downturn.  They continue to benefit from an improvement in global capital spending, generate positive free cash flow and are still the best way for most companies to improve productivity.  The group valuations are below historical levels and just in line with market averages.  Bottom line though, it’s too early for the ‘Santa Claus Rally’ and we are continuing to keep our seat belts fastened until overall stock prices check back.

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