Happy new year, everyone. 1999 was already 20 years ago. That was the year when The Matrix and Star Wars Episode 1 movies came out. Darn, I feel old. 😐
I think the financial markets are in for a very eventful year in 2019 as issues in the economy may expand and bleed into the real estate and bond markets. Here are a few things to consider as we kick off January.
- According to hedge fund manager Stanley Druckenmiller, since 2010 actual corporate earnings have only climbed 27%. Yet somehow the S&P 500 index has doubled in price. If stock prices are meant to reflect corporate profits then something doesn’t add up. Druckenmiller attributes the gap to buybacks and mergers financed by corporate non-financial debt, which climbed 60% to $9.6 trillion from 2010 to the end of 2018.
- High yield and leveraged loans are growing. In late 2018 Sen. Elizabeth Warren warned the Federal Reserve’s vice chair that leveraged loans pose an economic threat on scale with subprime loans from a decade ago. “The Fed dropped the ball before the 2008 crisis by ignoring the risks in the subprime mortgage market,” Warren said. Simon Macadam, global economist at Capital Economics, also said leveraged loans, which generally are issued to lower-quality borrowers that already have a substantial debt load on their balance sheets, pose a danger. This has not become a crisis just yet, but I would keep an eye on it.
- Historically, if the S&P 500 goes up in January, the trend will follow for the rest of the year. Conversely if stocks fall in January, then it will fall for the rest of the year. From 1950 till 1984 both positive and negative prediction had a certainty of about 70% and 90% respectively. But after 1985, the negative predictive power had been reduced to 50%. Whether or not you believe in the January barometer, it’s not a bad idea to spend the first month of the year planning your finances, and observing the markets, instead of jumping in to buy stocks right away.
January is a great time to review the previous year, and make plans for the near term. As interest rates have now come up to a reasonable level I think there are more investment opportunities in the fixed income market.
So last month I bought about $5,000 worth of Parkland Fuel bonds maturing in 2024. It’s a BB rated senior note that has a 5.75% coupon. The yield to maturity is 6.1% if I hold it all the way to 2024, but it’s possible for the bond to be redeemed before then, similar to my previously held Boeing bonds.
I now have 3 individual bonds in my RRSP, with annual interest payments of $339. 🙂
I purchased Parkland Fuel stocks a year ago, so I am already familiar with this fuel retailing company. It outperformed the S&P/TSX Composite index by over 40% last year. 🙂
As 2019 progresses I will likely purchase more bonds and fixed income assets. I do have a watchlist for stocks as well so we’ll see how things go. I’ll post my latest net worth update next week.
Random Useless Fact
How much did your Parkland bonds cost? From the YTM of 6.1%, I derived the cost @ $98.31. (The book value should be about $4916.) TD’s bond bulletin has been showing $97.35 (6.31% yield) since 21 Dec 2018.
Why didn’t you buy more Baytex bonds? On 28 Dec 2018, TD quoted them @ $95.90 for a yield of 7.97%!
TD records show I bought Parkland bonds for $98.23. Baytex bonds look tempting to buy this month. I’m happy with my exposure for now though. 🙂
Interesting three points. The deja-vu inducing subprime lending has been climbing for a few years, with no fallout yet. Should be interesting when it hits the fan though.
Some economists are calling for a recession in 2020 so we shall see. 🙂