Facebook - Is it Friday yet? Your Money October 8th 2021

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“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” I could go on, but Dicken’s words may seem prophetic in today’s turbulent markets. Then again, we may all be victims of the law of large numbers. Ten years ago, when the Dow dropped 400 points, traders would reach for their antacids and gulp them down like breath mints. Today with the Dow at 34,000 is barely a 1% move and when you factor in the relative weights of the Apple, Amazon, Microsoft, and Face Book, any one of those stocks can trigger what at first glance seems like calamitous dip in markets. Upon closer inspection, those 400 point moves now look more like noise rather than signals for bull and bear investors.

However, earnings season is all but upon us and let’s face it, stocks are priced to perfection right now and for the first time in a long time, I am hearing reports that third quarter earnings could be lower than Q2, and as things stand right now, the Dow is still 200 odd points above its June 30th close. Meanwhile you would have to be living in a cave not to have noticed the falling inventories at retailers from the Bay to Thrifty Foods. Supply disruptions thanks to Covid must be eating into the profit margins of Corporate America and Corporate Canada.  Once you factor in crude oil trading above $75, and you can bet the inflation stats are on the rise. Bond investors are already taking money off the table in anticipation of monetary tightening by central banks on both sides of the border. Ten-year government bonds now yield 1.60%. The last time rates starting spiking was the end of April and by May 11th they reached 1.64% at which point the stock market started to sell off. It was short lived as investors chanted “buy the dip” and markets rallied.

Looking at the markets this week, I am actually surprised the US held up as well as it did following the lacklustre jobs data coupled with the 0.6% increase in average hourly earnings. Mind you beneath the topline number, private sector employment jumped nicely but so did wages and that might be the market’s achilles heel. I believe 87 US corporations report next week including their big banks (which may be utilizing technology to reduce head counts) plus Walgreen Boots, Domino’s Pizza and JB Hunt transport Services. And then the avalanche really starts the week of the 18th when something like 363 companies report. My worry is between the bonuses to get employees back to work and the rising cost of fuel, businesses may indeed see a drop in earnings quarter over quarter which could cause stocks to pull back.

Meanwhile in Canada, energy companies are making so much money they don’t know what to do with it…well actually they do. First right size the balance sheet by paying down debt (most have already done so), followed by modest increases to their exploration budgets, stock buy backs and dividend increases.  YES I said dividend increases. So far it is just a trickle, but I believe it will gain momentum as long as oil prices stay above $75. That could lead to a property boom in Western Canada. If you have not noticed, Canadian Western Bank started the year at $29 and it is now at nearly $39.

Last but not least, I must mention the great jobs number Stats Can released today. Despite rising covid cases, it seems more Canadians are working again and that is a great thing for our economy. We hope it will continue well into 2022. In the meantime, we wish everyone a safe and Happy Thanksgiving.

Cheers Steve and Michele.

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Steve Bokor

Steve Bokor

Portfolio Manager