# Canary in the Coal Mine? Will Markets Drop Next Year



## bmoney (Jun 22, 2013)

2 weeks ago I sold almost all my winners listed on the TSX. I've been getting a feeling that something has been uncoupling, disjointed and contrasting. I could be feeling cynical because my oil stocks are in the red. Resource stocks are trading at some of their lowest levels in a decade, yet markets are at all time highs. If things are really rosie, certainly there must be prospects for growth and demand, but prices are falling, something is off.

1) There have been several downward adjustments to oil demand by various interest groups. This is not limited to oil, coal demand has also dropped precipitously indicative of a decrease in demand for smelting steel. If demand is decreasing, where is growth coming from? The sharp drop in oil and other resources may be the canary in the coal mine demonstrative of a real global slow down. 

2) Despite the resilience of the US economy blue-chips have headwinds from a stronger US dollar that is likely to dampen earnings. A larger share of US large cap sales/profit is from overseas, a global slow down matters to US financial markets more so now than 10 years ago.

3) U3 the official US unemployment measure of 5.8% in November is misleading. There have been revisions to the U3 measure between 1983-1996 which excludes categories of unemployed persons. The U3 excludes in large part discouraged works, those unemployment for a period greater than 12 months but still interested in employment. U3 also excludes marginal workers, those who work part-time for economic reasons. With the deep recession there must be a significant share of discouraged and marginal workers, the U6 which includes marginal and discouraged works, currently stands at 11% and likely is the reason many in the US still feel like they are in a recession.

4) Central banks continue to add stimulus, the markets are addicted. BoJ and ECB announcements caused markets to rally. BoJ is openly purchasing ETFs and ECB is looking to buy bad bank debt. The Fed is looking to unwind open market operations, will the DOW and S&P still float? Central bank intervention is becoming more extreme in Japan and the EU.

5) The US shale industry has added 2-3 million high paying jobs in the US. Likewise, oil and resource sector has been creating jobs in Canada and revenues have been floating Provincial budgets. A protracted period of low energy/resource prices is threatening to de-rail one of the fastest grown sectors in the US and Canada. Will Provinces or states be forced to cut back?

6) The markets have largely shrugged off political risks as the US reaches closer to energy independence but OPEC policy appears to threaten this. Likewise some OPEC nations are becoming unstable. The pot of water is looking like it might start to boil over and tensions could escalate if countries react to low prices by slashing budgets or defaulting on debt.

Is anyone seeing this, or maybe have some bull arguments to put forward? I just can't help feel something is off.


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## dogcom (May 23, 2009)

There could also be problems coming for banks derivative books from low oil prices if they continue. Oil companies that hedged out there production at higher prices from 90 to over a 100 dollars could be a problem for those banks holding the other side with oil prices as much as half of that. I am not sure how true this is but it could be a problem. Also what about bad debts from fracking companies who borrowed expecting much higher prices. Lower oil prices are also a byproduct of weak economies which higher prices will only make worse raising prices when consumers can't afford it.

Still however central banks are on the inflate or die program and could be letting market weakness continue so they have fuel in killing short positions to get the most bang when they come in to manipulate the market.


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## Just a Guy (Mar 27, 2012)

Personally, I don't understand the sell the winners keep the losers idea.

I look for things that effect the companies that I'm invested in...for example the price of oil affects oil companies,,but it lowers the cost of gas...so transport companies (which were hurting due to high oil) may benefit from lower prices...food stores which rely on transport may also benefit.

That was, of course, an oversimplification but even in bear markets, some stocks do well. Q

Being a buy and hold investor, I don't ever tend to sell...but I would if I saw something that would have a long term effect on one of my holdings, and I do mean long term...this oil blip is a buying opportunity to me, not a selling one as oils companies are not going away any time soon.


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## Pluto (Sep 12, 2013)

Canary in coal mine? 
I think one can not say in advance. In the 1990's various industries took turns having their own bear market - rolling recessions - while the overall market carried on upward. Same thing could happen here, although I'm not predicting that. In general markets are over valued, propped up by very low rates and the thesis that stocks are the only game in town and one must own stocks. There will be an adjustment in valuations, but when is an unknown at this point. I don't really believe in diversification myself, so I didn't own any oil stocks and missed this plunge. Got rid of my bank stocks and locked in profits there, now I'm nibbling in oil. But over half of my $ is in short term bonds as I don't really believe in risking capital due to the thesis that stocks are the only game in town. For me they are the only game in town when they present good value.


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## 1980z28 (Mar 4, 2010)

nortel
rim
oil

different times same results

I learned from nortel 

Diversify,more important as we get near the last of our working years


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## Cal (Jun 17, 2009)

I see it more like this:

1) There have been several downward adjustments to oil demand by various interest groups. This is not limited to oil, coal demand has also dropped precipitously indicative of a decrease in demand for smelting steel. If demand is decreasing, where is growth coming from? The sharp drop in oil and other resources may be the canary in the coal mine demonstrative of a real global slow down.

-Demand isn't decreasing, oil production has exceeded demand.

2) Despite the resilience of the US economy blue-chips have headwinds from a stronger US dollar that is likely to dampen earnings. A larger share of US large cap sales/profit is from overseas, a global slow down matters to US financial markets more so now than 10 years ago.

-If anything, low oil prices will help the economy grow (unless you live in Alberta) as people will have extra $ to buy stuff, which stimulates growth.

3) U3 the official US unemployment measure of 5.8% in November is misleading. There have been revisions to the U3 measure between 1983-1996 which excludes categories of unemployed persons. The U3 excludes in large part discouraged works, those unemployment for a period greater than 12 months but still interested in employment. U3 also excludes marginal workers, those who work part-time for economic reasons. With the deep recession there must be a significant share of discouraged and marginal workers, the U6 which includes marginal and discouraged works, currently stands at 11% and likely is the reason many in the US still feel like they are in a recession.

-To a certain extent the numbers are always misleading, however they are at least consistent in the calculations.

4) Central banks continue to add stimulus, the markets are addicted. BoJ and ECB announcements caused markets to rally. BoJ is openly purchasing ETFs and ECB is looking to buy bad bank debt. The Fed is looking to unwind open market operations, will the DOW and S&P still float? Central bank intervention is becoming more extreme in Japan and the EU.

-The US, one of the biggest markets in the world, is reducing their stimulus, Russia the #2 in OPEC just increased their rates, low oil prices will help the EU. The markets know that stimulus is being reduced, it will not come as a surprise to the markets. 

5) The US shale industry has added 2-3 million high paying jobs in the US. Likewise, oil and resource sector has been creating jobs in Canada and revenues have been floating Provincial budgets. A protracted period of low energy/resource prices is threatening to de-rail one of the fastest grown sectors in the US and Canada. Will Provinces or states be forced to cut back?

-Yes, certain provinces and states will be effected.

6) The markets have largely shrugged off political risks as the US reaches closer to energy independence but OPEC policy appears to threaten this. Likewise some OPEC nations are becoming unstable. The pot of water is looking like it might start to boil over and tensions could escalate if countries react to low prices by slashing budgets or defaulting on debt.

-Saudi Arabia has enough $ to float their country for 3 years without pumping another barrel....even when OPEC says they will cut production, some of the smaller producers don't....some OPEC nations are always unstable.....OPEC is trying to reduce the fringe North American producers, some probably will be eliminated. None of the countries that you should worry about will default on debt over this. Yes some provinces and states will have smaller budgets as a result of less tax dollars from the oil industry.


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## bmoney (Jun 22, 2013)

I'm bumping my own thread because it's prescient.

I was right on the macro picture, sell the TSX, and companies TCK, BBD, G, CU to name a few. Thank goodness I locked in my profits on some of my Canadian stocks.

I'm chalking up the bad advice on TPH/LRE (shouldn't have listened to some forum members, that's my fault). The biggest losers in my portfolio.

I'm taking responsibility for pumping COS; oil is looking like a 24 month recovery, and we're at the bottom of the 4th inning still, it will come back eventually. Hopefully some of you took my advice on selling covered calls, my ACB is $10.47 on COS.

For my next prediction, I'm bearish Canadian Bank stocks, get out while you can.


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## uptoolate (Oct 9, 2011)

lol - sorry I meant to say 'great work'. Keep us posted on what to do.


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## fatcat (Nov 11, 2009)

usa housing is going nuts, renting is now being replaced by ownership as the most affordable option
home prices are climbing and housing starts are going up

http://www.usnews.com/news/articles/2015/07/22/housing-maintains-blistering-pace-as-prices-climb



> "Limited inventory amidst strong demand continues to push home prices higher, leading to declining affordability for prospective buyers," Yun said. "Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes."
> 
> That said, new housing options are on the way across the country, as housing starts and building permits have taken off in recent months. Permits in particular jumped to their highest reading in June since July 2007. Upon completion, these new residential buildings could help moderate surging prices by giving would-be renters and homebuyers more options.


this will help resource and timber stocks, trucking companies, home builders, railroads, banks, insurance companies

it will lead to increased employment which will put more into the hands of people to spend and buy things

cheap oil has all kinds of benefits for the rest of the economy

commodities are cratering which means its time to look for opportunities

this is just part of the business cycle

canadian banks are some of the most adaptable financial service companies in the world, i wouldn't count them out ... i'd rather short apple

nothing is happening now that hasn't happened hundreds of times before

so far the fed has been right on the money


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## Oldroe (Sep 18, 2009)

The markets are finally interesting.

I've sold a couple things and now sit about 30% cash.

I do hope everybody sells there bank stocks and run. I'm hoping for a 25%+ correction. At this rate I can avg. down my bank stocks.

Would like that pesky Suncor to tank about $10 but $ would due. Again I don't want to sell I want to buy.

Remember if you run with the herd you look like the herd.


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## bmoney (Jun 22, 2013)

Commodity markets are sending a mixed signal on the direction of the global economy. A decrease in expected demand due to a slowdown or over supply/investment caused a collapse - probably a little of both. 

The chance of a rate hike this year is lower each day. The Fed could be disappointed as the data will not support a hike. A rate increase will put more upward pressure on the USD, hurt earnings, commodity prices and increase the risk of further price deflation. The bond market is already discounting this with 10 yr yield dropping 25 basis points since June. 99% chance the most is a 25 basis hike by Dec, the likelihood I put @ 40% chance.

As for oil, the second leg down is all due to OPEC (Saudi) increasing supply by 1.5MM bpd in Q2. Demand is at record highs, but we are still over-supplied. If you do the math, they are no further ahead, and that doesn't make sense. OPEC is flexing muscle and reasserting themselves as the global swing producer. This gives back OPEC control as price setter, and first mover, thereby benefiting from increases in demand first and with the least risk. As many OPEC member nations run large fiscal deficits, this behavoir is unsustainable for the medium-long term, and prices will rebound. Although it is creating significant short term pain, and sending a loud message as to who is in control.

Canadian banks are poised for more declines and the smart money has started shorting - some of the banks have the highest short interest on the TSX, with a major shift in June and July. Decreases in mining and exploration will impact many different areas of banking from loans, underwriting & consulting. At the same time Canada is entering a recession, impacting the housing sector, mortgage originations, consumer confidence and household spending. They benefited from a long bull run in commodities, housing and energy, time to pay some of those gains back.


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## BoringInvestor (Sep 12, 2013)

As an FYI if you bought into XIC.TO (a Capped Canadian index ETF) on the day of your initial post (Dec 12, 2014), and held to today, you'd be up 3.4%.


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## avrex (Nov 14, 2010)

bmoney said:


> Canadian banks are poised for more declines and the smart money has started shorting - some of the banks have the highest short interest on the TSX.


Well, not really. 

Let's look at large cap companies on the TSX. There are 235 companies with a market cap larger than one billion dollars.
The highest short interest of the big 5 banks places *only as high as 45th place* on this list. That would be the Bank of Nova Scotia, with a Short Interest of 2.66%. 
That doesn't seem excessively high. (For example, Gildan Activewear has a short interest of 9.4%)

I will agree that the short interest, for the the Big Five Banks, has increased in recent months.
But, to be honest, I'm not sure how worried one should be about this.


TickerCompanyShort Interest 2015-07-16Short Interest 2015-03-16BNSBank of Nova Scotia (The)2.661.28TDToronto-Dominion Bank (The)2.651.95BMOBank of Montreal2.011.84CMCanadian Imperial Bank Of Commerce1.911.49RYRoyal Bank of Canada1.451.16


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## bmoney (Jun 22, 2013)

avrex, you're right I should have qualified my statement better. They have some of the highest overall _increases_ in short interest between June-July.

RY is already down 12.5% from it's 52 high, TD is off 12%, BNS is off 18% - these stocks are already in official correction territory and the fall out hasn't fully materialized or reflected in earnings.


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## Belguy (May 24, 2010)

I believe that the markets might very well fall next year or they might rise or even stay flat and I know as much as the next person. You're welcome.

Just stick with your target asset allocation.


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## Oldroe (Sep 18, 2009)

Basically you are all quoting stats that everybody knows. And they won't be the trigger for a 25% correction.

It will blindside everybody except guys like James who say everything so they are always right.

Just be prepared to make the move, know your avg. cost and how much your new money will effect avg cost.

When everybody is running for exit I run for the door.


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## RBull (Jan 20, 2013)

^isn't the exit and the door the same thing?


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## Oldroe (Sep 18, 2009)

LOL

OK...... If you run with the herd you will look like the herd.


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## bmoney (Jun 22, 2013)

Boy, was I right on the money or what?


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## fatcat (Nov 11, 2009)

bmoney said:


> Boy, was I right on the money or what?


not really ... now you have to time the markets right when you get back in ... the odds against getting both time-points right are pretty high

of course, if you stay out for good then yes, you were right on the money

from david rosenbergs piece in the fp: http://business.financialpost.com/i...ere-entering-a-period-of-irrational-pessimism


> Many have pointed out that the five per cent plunge in the S&P 500 so far in 2016 is the worst start to any year, the very worst, since 1928.
> 
> *Guess what? The S&P 500 closed that year with a 32 per cent advance.*


it's all well and good to get out and go to cash but what are you gonna do next ? ... where are you going to earn ?
let me know ... please


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## lonewolf (Jun 12, 2012)

cash is in a bull market it is becoming more valuable


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## Pluto (Sep 12, 2013)

fatcat said:


> not really ... now you have to time the markets right when you get back in ... the odds against getting both time-points right are pretty high
> 
> of course, if you stay out for good then yes, you were right on the money
> 
> ...


Fatcat,

All he has to do is buy back lower than what he sold so that he gets more shares and a higher yield than he had previously. You make it sound as if he must get back in at the precise bottom, other wise it is a total failure. Get a grip.


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## fatcat (Nov 11, 2009)

Pluto said:


> Fatcat,
> *
> All he has to do is buy back lower than what he sold so that he gets more shares and a higher yield than he had previously.* You make it sound as if he must get back in at the precise bottom, other wise it is a total failure. Get a grip.


it doesn't even have to be the bottom of the market, it is pure market timing 

effectively it is day trading which is fine but it's a whole other thing than _investing_

the internet is littered (and i choose my words carefully here) with people telling me that market is going to up or that it is going to go down and you merely need to buy at the right time

you start taking any of this stuff seriously and you will lose your shirt

if merely "getting back in at a lower price" were really that easy, we wouldn't have a market

look back at our predictions, all of us, and mostly we are wrong and only occasionally right ... (pick any thread on oil for the last 2 years to start)

that we put so much credence in people who get lucky and make right calls is a mystery because most of em never do it again (rogers, whitney, faber, taleb, shiller, roubini, etc etc etc)


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## LBCfan (Jan 13, 2011)

To get back to the original question, a resounding YES.

Markets will drop this year although there's a good chance they will drop by a negative amount. You heard it here first.


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## bmoney (Jun 22, 2013)

For better or worse, I have put money to work this week and I bought TransCanada, Hudson's Bay, Telus, and gambling on Teck Resources. I am considering adding RY, MFC and POT. The market is panic selling and has completely decoupled from reality because it's primarily driven by algos not humans. Algos operate in the mico-second time, thousands of times faster than humans and millions of times faster than companies or entire industries can react. This is exemplified by the fact that relentless selling pressure in oil since the start of the month has not directly impacted supply, it simply doesn't respond that fast and the market continues the punishment. US, European economy is doing relatively well, China is growing at a slower pace but at a larger size, things are not has horrific as the bots have made it out to be so I'm putting some money to work and we'll see how right I am about it this time.


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