Still bearish on Canada

Back in December,  I noted that Canada was not my favorite investment choice as a longer termed outperforming market. Not to say that the benchmark index for Canada (the TSX 300) wouldn’t have potential for a bounce based on oversold commodities at the time.  My bigger picture look at both TSX trends, the reliance on commodities, and Canadian government fiscal policies keep me cautious beyond near termed trades on our home and native land.

The oil chart below demonstrates my prior noted resistance point as WTI approached its 200 day MA. Remember folks, oil has very much lead the TSX recently – so its important to be aware of its trends. As I noted in past blogs– a failure to break $42 by WTI means a failure for the TSX to move significantly higher.

oil

On the positive side, the TSX has broken an intermediate termed downtrend, and has a target of 14,000 if oil can continue moving up . The chart below illustrates this fact perfectly. However – beyond oil’s potential stalling point at current levels, Canada has another important factor going against it.

tsx

Unfortunately, on the fiscal prudence front, Canada has gone from bad to worse since my blog in December. The Liberal election pledge made just 5 months ago to borrow a ‘modest’ $10 billion per year has been cast aside. The new government has instead raised the spending bar to $30 billion –and that’s for this year alone. Imagine that–Canada’s PM who enjoyed privileges of being born into wealth that few of us will ever realize –and who  stated prior to election that the economy will “take care of itself” -(really??) – had no idea of how much his lofty promises were actually going to cost.

Canada is now projecting the rather unfathamoble deficit of over $100B over the next 4 years. The chart below, courtesy of Nesbitt Burns, gives us an idea of how Canada had managed to control the deficit even after the 2008/9 world financial crises, earning us accolades worldwide.  The chart provides a forward view of how it will look in the coming 3 years. Will the current government be able to act as prudently as the prior government by bringing Canada’s finances back to a surplus after their spending spree? I for one am skeptical. Meanwhile, the purses are open – not just for infrastructure spending, but a reduction in the retirement benefit age (a negative benefit cost), a reinstatement of civil servants sick benefits (a negative benefit cost), a reinstatement of redundant postal walkers positions (a negative benefit cost), and free student grants (I got a job when I needed to raise my school tuition). As Rona Ambrose (PC opposition to the current Liberal Government) noted “Canadians gave them an inch, and they’re taking miles.”

budgets

Unfortunately, my observations – made in my year-end blog – on Canada’s investment status haven’t changed much. Thanks to the new budget, some potentially unrealistic hopes surrounding oil’s comeback, and a focus by the current government to buy votes through appeasing the over leveraged middle class. The CBC on March 22nd noted: “Most of the gain in this budget, most of the new dosh, isn’t going to the neediest. It’s going to people that this government deems are most deserving. A quick rule of thumb: Anyone who puts super grade fuel into his or her car and has trouble making ends meet needs a cheaper car, not someone else’s redistributed wealth.”

 

As always, these views are my own and don’t necessarily reflect those of my employees nor of WorldSource Securities.

13 Comments

  • Keith: If you are not really investing in Canada, then where are you (or will you be) investing? If you invest in the USA then don’t you run the risk of loosing any gains to the cdn$ appreciation? So I guess the hand in hand question is also where do you see the Cdn$ going relative to the US$?
    Thanks

    Reply
    • Daddyo–there are always some securities we can buy in Canada–gold may be a short to mid termed play –I have about 6% exposure in CDN gold and gold stocks. Some companies will benefit from the infrastructure spending. Think engineering and construction firms perhaps? There are also some great stocks in Canada-we’ve owned GIB.A for a while and its certainly been an outlier-Although there are slimmer pickings here than in the USA. As far as the C$ appreciation–the problem for the C$ will be oil. So far, it has failed at that resistance zone I have mentioned in several prior blogs ($42 or less). I’d suggest that we keep an eye on oil before predicting a big spike in the loonie. Yes, the Fed is hinting at a dovish stance (again!)- so that will put pressure on their greenback, but we are comparing the loonie to their dollar on a relative basis only to our potential strength, not to their dollar vs. the world currency basket. So my view is that, despite the inevitable spikes, we wont see much movement on the loonie vs. USD — unless oil moves through $42. That could happen–but it remains to be seen.

      Reply
  • so much for the chance for a sell off with Yellen’s comments today. The market looks like it’s excited about her dovish tone.

    Reply
  • I get so mad when I hear the liberal budget plans I just try to ignore it. Hopefully they will be limited to one term in office but in this country with so many people drawing a government cheque they could get another term after this one. Dark days for Canada.

    Reply
    • Socialism appears to be spreading in Canada, however there are some provinces who are second guessing their choices after a few years of damage by fiscally irresponsible governments (Ontario, Alberta). There is long termed hope. Neartermed not so much.

      Reply
  • The new government is lumping all its “investments” and spinning all of this as “infrastructure” with a new definition which includes “social” infrastructure spending in the areas you highlighted. Look a little deeper and the emperor has no clothes. Investing $4 Billion this year they claim will boost .5% of GDP with another $7 billion next year boosting GDP by 1.0% – these of course are just one time lifts with borrowed $$ and unreliable projections by government. The majority is just the usual social dogma spending which creates structural deficits. No wonder they have no plan to balance the budget because voters have apathy and no memory (remember the HST in Ontario was suppose to create 500,000 jobs??) — all the more reason to reduce my exposure to Canada…..its a sad day for all….

    Reply
    • Its funny- I am in Florida right now. The interesting thing is I hear people constantly yammering how they are sick of Obama and his left wing policies. I tell them “you ain’t seen nothin’!” I am not exaggerating when I say that they cannot believe that we not only pay over 50% of our income out if we are in the highest tax bracket vs. their 38% top bracket, but also pay 13% sales tax combined vs their 7%, and cant deduct our mortgage, etc.

      Reply
  • Hi Keith,
    I echo the sentiments regarding the liberal budget. There will be some infrastructure spending but it seems the bulk of the deficit will be overspending on social programs. I believe their real “plan” for balancing the budget, is to rely on external factors to boost GDP (betting on higher oil prices from their low ball base case, and on improved exports to the US). I don’t see their “investments” having any significant impact on GDP, but they will take credit for any global factors that improve the Canadian economy and claim the investments are paying off. Meanwhile the debt will have ballooned.

    Re. Alberta, I continue to see signs of hope as a result of buyers remorse regarding the NDP. The previous gov’t mistakes on the spending side of the ledger, which caused the right to be severely split between the established PC and grass roots conservative parties. This opened the doors for the NDP. However there are a lot of disgruntled voters out there and serious efforts underway to unite the right. My sense is that most people here are very pragmatic. The NDP know it and are starting to soften positions. We’ll see how it plays out, but either it won’t be as fiscally bad as perceived as they back peddle, or they will not get a second chance. I think the levels of deficits in Alberta are transitory as oil prices stabilize and new revenue streams come on (not to mention reduced government spending haha). Even if there were no economic improvements (unlikely) they could balance the budget if they wanted to by simply introducing a small consumption tax (doubt that would fly unless offset with a reduction in business and personal taxes). In any case, the debt level in Alberta is quite low relatively speaking, and the economy is way more diversified then people would think based on the media. Good companies here are rapidly consolidating and/or getting more efficient (some recent examples include Suncor, CP Rail, Stantec, Westjet, many more). I am pretty sure no one will hear about the innovation and diversification that is going on here, at least not in the national media lol.

    Anyway, I am not sure it is socialism or anti-establishment sentiment that is spreading around the world but it’s not good. Very strange times and especially turbulent for investors.

    Enjoy Florida!

    Reply
    • Thanks Ron
      BTW–I hear from a lot of Americans and they are supporting Trump–who is a pretty extreme type of politician – the general consensus with the business people I speak with is that they are sick of socialist policies and are wanting to send a message by voting for an extreme guy like Trump. I always laugh and tell them “you don’t know socialism like we do!!”. They are amazed when I explain our top tax rates and sales tax rates. Top income rate in Florida is 38%, and sales tax is 7%. Compare that to Ontario–52% top income bracket (thanks Justin!) and 13% sales tax.

      Reply
      • Americans who have lost their home due to a health care bill or had their hours reduced to part-time because of Obamacare might be happy to pay a little more tax. As a traditional conservative voter I share your economic views. I can not overlook the previous government’s sinister adoption of bank bail in legislation. It created TFSA but in violation of it own rules tried to tax successful investors. I have a little more time than most to research things, but our government participated in war crimes against the people of Libya and is in part responsible for some of the problems like it in the world. My personal interest is the role of religion global conflict. As a freemason, Harper’s loyalty was not to Canada.

        Reply
    • What is spreading is the income gap between the top 10% and the rest of us rabble and we are fighting back peacefully (so far) but extreme divides as is the case today have always ended in bloody revolution so it will be interesting to see if this time it is different.

      Reply

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