Market Buzz – Canadian Economy Shows Slight Sign of Growth in July But Investors Remain Uncertain
The TSX Composite index closed on Friday, September 30th, at 11,624 points, down 62 points, or 0.5% for the day, but up 1.4% for the week.
Canadian GDP numbers were released on Friday indicating that the economy grew 0.3% in the month of July. The numbers were roughly in line with economists’ forecasts supporting expectations that GDP growth for the third quarter will be in the region of 2.0%, after a dismal Q2 which recorded an economic contraction of 0.4%. Recession, which is technically defined as two consecutive quarters of negative economic growth, may or may not be thwarted in the short term, but recent economic indicators may be pointing to the direction of another and potentially more troublesome culprit – growth recession. A growth recession occurs when the economy does not expand or contract but simply remains stagnant.
Some may be familiar with the term with respect to commentary coming out of Japan. The island nation has spent much of the last 15 years battling this unyielding foe. In a typical recession, the economy experiences contraction which has the eventual impact of restoring balance to the economy, thus repositioning it for future growth. While the conventional recession can be quite painful for those that lose their jobs, homes, and lifestyles, the pain has traditionally been temporary, lasting on average anywhere from six to 18 months (at least over the recent past). In the growth recession, the rebalancing of the economy may not occur as quickly, resulting in a less severe but for more prolonged state of economic stagnation, such as has been the case for Japan. This does not mean that low growth inevitably results in decade long recessions, as the developed world has seen these occurrences come and go without the lasting impact. Nonetheless, these are far from conventional times and we are not of the opinion that anyone can state inequitably where the economy will be in the next two to five years.
The best strategy for an uncertain market is to keep a long-term focus and remember that opportunities exist even in low growth environments. Warren Buffet once said that he would never buy a stock that he would not be comfortable holding if the market shut down for the next five years. What he means is that when he invests, he bases his decision on the fundamental value of the underlying company relative to his purchase price. If the investment is made in a quality, profitable business, at a reasonable for discounted price, then the investor will likely still generate a long-term return, notwithstanding the short-term oscillations of the market. It also helps if the business is spinning off some of this cash flow to investors in the form of a dividend.
Looniversity – CANSLIM – 7 Steps to Identify Potentially Great Stocks
Developed by William O’Neil, the co-founder of Investor’s Business Daily, CANSLIM is a philosophy of screening, purchasing, and selling common stock. While the name may sound like a new “Canadian Weight Loss Supplement,” this seven-letter acronym is actually one of the more successful investment strategies.
Below (in a nutshell) are the seven components which the CANSLIM strategy focuses on:
C = Current quarterly earnings per share. Earnings must be up at least 18-20 per cent.
A = Annual earnings per share. They should show meaningful growth (15 per cent or greater) for the past five years.
N = New things. Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to make new highs in price. Forget cheap stocks; they are that way for a reason.
S = Shares outstanding. This should be a small and reasonable number. You are not looking for an older company with a large capitalization.
L = Leaders. Buy market leaders, avoid laggards.
I = Institutional sponsorship. Buy stocks with at least a few institutional sponsors who have better than average recent performance records.
M = Market direction. The market will determine whether you win or lose, so learn to interpret the daily general market indexes (price and volume changes) and action of the individual market leaders. It is important you know how to determine the market’s overall current direction.
Put it to Us?
Q. A friend recently bought some “zero coupon” bonds. Can you explain what they are?
– Johanna Johnson; Calgary, Alberta
A. Zero coupon bonds were introduced to the fixed-income market in mid 1982. At the time, they were quite a unique concept in the marketplace.
While most municipal bonds provide semi-annual interest payments (coupons), zero coupon bonds, as their name suggests, have no “coupon” or periodic interest payments. Instead, the investor receives one payment (at maturity) that is equal to the principal invested plus the interest earned, compounded semi-annually, at a stated yield.
Zero coupon bonds are sold at a substantial discount from the face amount. When a zero coupon bond matures, the investor receives the full face amount of the bond. For example, a bond with a face amount of $20,000 maturing in 20 years may be purchased for roughly $6,757. At the end of the 20 years, the investor will receive $20,000. The difference between $20,000 and $6,757 represents the interest. This example is based on an interest rate of 5.5 per cent which compounds automatically until the bond matures.
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