Random charts and musings

No topic today. Just a bunch of interesting charts I’ve been privy to recently.

Proceed with Caution

SPX price vs. SPX profit margins – chart below: How profitable have the companies comprising the S&P 500  been vs the relative performance of their stocks? History shows us that the decline in profit margins tends to drag the stock market down, followed by dragging the market back up as margins improve. Seems to be a disconnect right now.

 

 

Another example – chart below: After-tax profits tend to lead the stock market. Note the spread in 2000 between after-tax profits on SPX companies and SPX level. This was corrected, but only after profits had been relatively  flat between 1998 to 2000 while markets soared.  Obama’s era saw falling after-tax corporate profits in his final year (spend n tax liberal policy). This lead into a market correction. After Trump was elected in 2016 (for 2017), his promised and delivered corporate tax relief begat a stock market rally. The problem was, the rally became parabolic. Meanwhile, the Fed kept cutting (why?!?!?. ). Is this another 2000 stock crash setup?

 

If the Democrats take the Senate

The chart below by Predict it (courtesy Beartraps.com) is supposed to be a better predictor than standard polls. The Democrats were trading near 30% on predict.org at the beginning of March with Republicans at 70%. The chart shows, it’s 50/50 – actually, the very latest work by Predict it shows an edge by the Democrats. If they take the Senate, higher taxes (namely on the 1% and potentially big-tech companies) are likely paying for some of this MMT-like spending for the COVID crises. If Dems win the Senate, Larry McDonald feels there will be some form of a wealth tax / windfall tax / un-do of the Trump tax cut. The chart above suggests continued after tax \profitability shrinking would be another negative in this very, very overheated market….

 

Loonie vs USD

I’ve been asked a few times to give my two cents worth on the loonie (ha-ha!). Type loonie in the search part of this blog and you’ll see a fair amount of my research on the subject. An over leveraged consumer, a tax & spend government with no clue of what austerity* means, and a reliance on already pressured energy prices within an unfriendly government policy continues to pressure the loonie. I have been blogging accurately about the demise of the loonie for a decade.

So I’ll just do a quick wrap today. Chart below.

Note the Big Red Line that has been marking the loonies downtrend since 2011. It broke out in 2019, but failed at $0.77. Looks like its trying to break Big red again. Will it last? Perhaps…I’ll give it a shot at hitting 0.77 or so in the near term. But the trend is going to be hard to break. As I noted to one reader:

The current loonie strength is based on 2 things: oil’s rally (which has resistance in the low $40’s, currently just under $40) and on the USD vs. world currencies weakness. The “risk on” trade is back – which makes the USD less of a fear/safety asset play that it was during the COVID crash. However, if the market pulls back or if the COVID re-emerges–watch the USD rise and the CDW fall…risk-off will re-appear. That’s actually bad for the loonie.

I continue to view the upward moves on the loonie as trading opportunities only.

 

15 Comments

  • XIU.TO relative strength vis a vis SPY which reversed in 2009-2010, has been followed by relentless strength of SPY against XIU.TO. For an index investor or stock investors in Canada , is US the better choice for outperformance – also given your view on the loonie?

    Reply
    • Ray- the SPX has been outperforming the TSX for a decade – with only occasional momentary spurts of out performance. We rely too much on energy and resources – and that hasn’t been a good place to be especially with the idiot(s) at the helm right now who want to cut their noses off (oil) to spite their face (the country) – as is said.

      I’ve covered the loonie extensively through this blog over the past decade- I’ve been correct in my calls– that is, it will have its momentary spurts of out performance just as the TSX will–but the BIG trend is to under perform the USD. Right now is likely one of those times, so enjoy it while we can. Over leveraged consumers, a financially incompetent government, a population who are inclined towards non-gdp enhancing socialistic policies vs. free market policies, reliance on resources, etc – these factors won’t change right away if at all.
      The neartermed view is possibly bullish for Canada–we may be in one of those spurts where we get a bid on the resources and the loonie rises a few more pennies. This may last a few months or even a year– who knows? But I’m as confident as I could be that the US market will outperform over the next 5 years – whatever might happen in the coming months.

      Reply
  • Hi Keith,
    After this stellar, and unexpected rally to these levels on the S&P, during the sell off that perhaps now underway, how far back do you anticipate the S&P will fall to this time? At what level will you consider putting some of your cash back into equities?

    Reply
    • The 200 day SMA and the last level of resistance (which now becomes support) lie just above 3000 on the SPX. So I will be looking anywhere between 3000-3100 as a good place to invest cash.

      Reply
      • Thanks Keith. Put some of my cash to work today. What’s the next level of resistance? 2850?

        Reply
        • I think you mean support…if so, yes, 2850 is minor support then low 2700’s is more significant support. Those would be hit if the current level (3000) is breached by more than a few days –given the coinciding level of the 200 day SMA. For now, lets see if the 3000 can hold. My best guess is a sideways summer trapped near 3000 and the old highs of 3400. But, that’s a guess. And that assumes 3000 holds….which is to be seen
          For what its worth, we bought a little bit yesterday–but we are sticking to low beta names.

          Reply
  • Hi Keith – I was planning to see +500 points from 2900 or the all clear signal from Paid Analysts (of course your team is not part of what I call Analysts here!) – so we didn’t get the 500 points but not a bad run, however we just got the all clear from the FED today saying the worst is over. So the worst is here and going to happen now. I am thinking gold might have a run – what do you think about the top side $1800 as a trade ?

    Reply
    • Yes we bought some gold a week ago. We like it, and $1800 could be a reasonable target.

      Reply
    • Correct! Elected in 2016 – began in 2017–made the change. Thanks David.

      Reply
  • Question for “ask me anything blog”.
    Can you comment on the LTHC sector.
    – is Ontario the driving force for most companies in this sector, such that if Ont took them over or placed significant constraints on them it would cripple/stiffle their earnings potential?
    – there is still strong demand going forward for spaces so revenue should not be an issue but if they retain ownership will their increased costs be offset by revenue increases?
    – Given all the uncertainty with possible class action law suits, gov’t intervention would you see this sector as one to avoid or to invest in? This summer or wait until risks are better known.
    – prices are low now so does this not mean that the price reflects uncertainty and any rulings may not have a negative impact.
    -what would be the catalyst to get prices back up
    – are some names to avoid (Sienna?) while others may be better positioned (ie Chartwell).

    Thanks

    Reply
  • Question for “ask me anything blog”.
    I don’t wish to get into a discussion of US politics, but rather the market implication of republicans over democrats.
    Is it a generalized perspective that a democratic elected gov’t would likely have a negative effect on the US markets, compared to a reelected republican party? If so why is that the case?
    Thanks

    Reply
    • I believe I answered that in the blog.

      “If they (Dems) take the Senate, higher taxes (namely on the 1% and potentially big-tech companies) are likely paying for some of this MMT-like spending for the COVID crises. If Dems win the Senate, Larry McDonald feels there will be some form of a wealth tax / windfall tax / un-do of the Trump tax cut.”

      The chart on the blog displaying after tax \profitability shrinking will likely shrink the markets too.

      Reply
  • Question for ask me anything blog”
    If one needed to spend some US currency over the next period of 2022 -2025 ( i have coverage for 2020 & 2021), i) should one be buying today or in the next few months and ii) will the spread/savings be significant enough to offset lost interest if simply sitting idle collecting little interest?

    Reply
    • Daddyo–I will be converting quite a bit of money to USD if we get anywhere near 0.77. I too have to spend USD in the coming few years, having bought a Florida home (which COVID has kept me from actually seeing since it was built!!!). If we got 0.76-0.77 (not saying we will for sure!) then I would say the interest earned cannot make up for that 5% difference between today’s price –assuming the loonie drops back down to today’s price. IMO it will go lower over time. Especially if the current government stays in power. That too, remains to be seen. I did not bother posting this question to the ASK blog given its fairly straight forward nature.

      Reply

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