Taking Stock
Canada may be leading but the U.S. could be the dark horse
Why not? Inflation is no threat. Statistics Canada said yesterday that core consumer prices, which the Bank of Canada watches closely, increased just 1.6 per cent in May. The figure excludes things such as food and gasoline, which only seems right, since not very many families eat or drive cars.
With inflation on the lam, bank Governor David Dodge can rest easy, enjoy the sunshine on his deck and smoke his pipe. With Mr. Dodge smoking his pipe, interest rates will remain low. Bond prices are likely to stay strong. And as long as bonds are expensive (i.e.,yields are low), stocks look more attractive — hence the desire of investors to pay ever-higher prices for them. See what a virtuous circle we have going here?
The best thing about the current state of affairs, for those who make a pastime of America-bashing, is that U.S. investors aren't enjoying a similar sense of tranquillity. Depending on whom you ask, any day now the American economy will face a reckoning because of expensive oil, a housing bubble, a bond bubble, a huge budget deficit, a bigger trade deficit, the insurgency in Iraq, overindebted consumers, takeovers by the Chinese or (this just in) mad-cow disease.
The divergence in national moods is reflected in the stock market. While Canadian pundits were waxing poetic about the Toronto exchange's return to 10K, U.S. stockholders were getting the tar beat out of them this week, at least for those who've put their faith (and cash) in blue chips. The Dow Jones industrial average ran up a five-day losing streak and had its second-worst week of the year.
The Dow, lately called the Down for efficiency's sake, has lost 4.5 per cent in 2005, compared with an 8.1-per-cent gain for the TSX. Even when you adjust for currency, the Canadian benchmark has out-paced every major U.S. index by a substantial margin this year. For the record, the gap between the Down and the TSX has narrowed to about 300 points (not that this statistic should matter, but we're sure there's a technical analyst living in his parents' basement who finds it significant). The big reason for the disparity in returns is oil. We've got it, the Americans need it and it now costs $60 (U.S.) a barrel. End of explanation.
But just because Canada has outperformed doesn't mean it will continue to do so forever, so we thought it would he good to check in with someone who prefers to run against the herd. Irwin Michael, who runs an investment shop bearing his name and manages the ABC Funds, is known best as a practitioner of the black art of deep-value investing.
Lately, though, he has taken to watching politics and the tortuous path of the Martin Minority in Ottawa as they try to pass the federal budget. The budget bill would end the foreign content rule, which forces pension funds and other retirement accounts to keep 70 per cent of their assets in Canada. When it becomes law, he says, he'll be moving the domestic portion of his portfolios down to 50 per cent.
"For every Canadian stock we're finding right now, we're coming across three or four U.S. stocks that are cheap," he says. With so much cash still flowing into cyclical plays, there are simply not enough bargains to go around at home, he says. As for America, he notes that its economy is still in decent shape despite all the knocks against it, though it is weakening.
If U.S. growth slows dramatically, of course, that will be bad for American equities — but possibly worse for oil prices and thus for the TSX, with its heavy weighting in crude stocks. 'Ibis scenario doesn't exactly fit the prevailing enthusiasm for domestic stocks, we'll admit. It's just too bad for Canada that Mr. Michael's contrarian views have proved correct so often, in the long run.
ddecloet@globeandmail.ca
SOURCE: WWW.GLOBEFUND.COM