Outlook for February 2016

Earning season is in full swing with a majority of the companies reporting mixed results. Generally speaking, the earnings expectations were met by most companies, while revenue numbers mostly fell. Its the new reality – as US companies become more global, result in increasingly dependent on international markets for revenue and earnings. With the march upward for the US$, most companies are seeing pressure on both their top and bottom lines. This trend can be expected to continue for the forseeable future.

On the Fed front, there has been a realization that a policy error was made in December 2015 when the US Fed raised interest rates. Sticking their heads in sand, the Fed gave a all-clear and started raising rates indicating for four more raises in 2016. The January meeting shows that the rates are on hold and now expectations in the market are for the Fed to hold the rates thru 2016 and partly through 2017. Current expectations for a US recession are ~30%, but if the Fed continues to blindly raise rates, the next recession will come sooner.

In Canada, there were expectations of another rate cut in January, and the Loonie took a dive before the announcement. Canada is already in deep trouble, still reeling from the collapse in oil and commodity markets, coupled with runaway food inflation and overheated housing market. The announcement to hold the rates steady brought some stability to the Loonie and the currency has recovered a wee bit.

Outlook for February 2016

As things stand, there are a lot of headwinds facing the economy. Potential recession/depression troubles still exist. The bond market, commodity market, transportation market, manufacturing market indices are all sending very strong signals that all is not well in the world. The overall stock market is being held up with a handful of companies while the rest of the stocks are approaching or already in correction/bear market territory. Also, in the coming months, we can expect bankruptcies and consolidation in the energy market – so, all in all, things are looking bad. Generally speaking, things havent changed much since my Outlook for 2016 post. Be sure to check it out for further investment ideas.


Portfolio Considerations

As I mentioned earlier, lots of headwinds facing the economy and things arent looking good for stocks. So, am I selling all my holdings and moving to cash? No. At the end of last year, I took a long hard look at each and every single security in my portfolio and decided that I am comfortable to sit through the next crisis while seeing their value drop. What I do intend to do is accumulate as much cash as I can and wait for the big fat pitches. We are currently holding approx 8% of our portfolio in cash (see our portfolio diversification below), and looking forward to build that up more. If a great opportunity shows up, we might nibble a bit, but our main focus will be to stay in cash and look for “screaming buys“.

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Dividend Increases

Beginning of the calendar year usually sees a lot of dividend increase announcement. As a result, I am excited at the prospect of getting pay raises. We are expecting dividend increase announcements from the following companies in our portfolio.

  • Archer Daniels Midland (ADM) – last increase was 16.66% in Feb 2015
  • BCE Inc (BCE) – last increase was 5.3% in Feb 2015
  • Brookfield Infrastructure Partners LP (BIP.UN.TO/BIP) – last increase was 10% in Feb 2015
  • Main Street Capital Corp (MAIN) – last increase was 2.85% in Aug 2015
  • Magna International Inc (MG.TO/MGA) – last increase was 15.78% in Feb 2015
  • Toronto-Dominion Bank (TD) – last increase was 8.5% in Feb 2015
  • Thomson Reuters Corp (TRI) – last increase was 1.5% in Feb 2015

What are your thoughts on the stocks mentioned here? Do you own them or are they on your watchlist? What do you think of the current market levels and buying here? Make sure to leave a comment below as I value reading your questions and comments.

Disclosure: Our full list of holdings is available here.

Photo Credit: Alexey Kljatov

21 thoughts on “Outlook for February 2016

  1. I’m not sure that the Fed made a “policy error” as their charter has an inward focus (i.e., domestic) as opposed to outward (global). But their actions do cause a chain reaction in currency and bond markets around the globe. Until the US labor market tightens further I see the Fed pausing. On this note, it appears Windsor is getting new production.

    You and I have some similar holdings. As I think the US dollar will remain strong through the year, my approach will be to ‘top off’ some of my Canadian holdings. AGU yesterday, and TD, RY, BCE through the year.

    • Nice picks, Charlie. I am starting to turn my focus to Canadian holdings as the exchange rate is making me harder to invest – take much longer for my savings to accumulate before I can buy. I still expect the US$ maintaining the upward trajectory – so I will be looking for Canadian companies with lot of revenue from the US.

      The Fed – it looks like they had their eyes set on raising it in 2015 after their initial statement in 2008. I still remember that and wondered how they could possibly know what the economy would look like in 7 years! They’ve tried every trick in the book – including changing the definitions of inflation, labor market slack, unemployment numbers etc. If they continue to stick their head in sand, and just raise rates – they will simply kick start the next recession and the onset of a depression. Stan Fischer yesterday suggested that they are looking at negative interest rates and see that “its working” in international markets – maybe thats the solution for next crisis (instead of QE)? We’ll have to wait and see how things progress.

      Thanks for stopping by and sharing your thoughts. I always enjoy these discussions.

  2. I know somebody who’s sitting on $700k getting to buy a house in Vancouver should the housing market collapse along with the oil. But it’s probably not going to happen. We probably will not see 2008-2011 house price as neither us and Canada have the same credit issues. That’s why there are talks about going to negative interest rate to stimulate spending.

    Anyhow, I’m looking for a raise from TD also. That way I don’t have to spend as much to meet my 500/mo goal by year end. It’s a tough market. 🙂

    “Screaming buy” is a great idea as I see some other bloggers has also developed buying strategy for future sell offs.

    For me, I’ll continue to make my regular buys in 401k, still break down equally in 24 pay checks. Buying strategy remain the same, looking for a specific correction in individual stocks. “Screaming buy” on aristocrats that get sold off for no good reasons. Hopefully, I’ll be owning 75 companies by year end instead of 45.

    • Hi Vivianne,
      Unlike the US, we didnt really see any housing correction up here in Canada. I think its our turn now. For now, the market is propped up with low interest rates and borrowed money to fund the expensive lifestyle. But once the jobs go (which has already started in the western provinces) that will start the tumbling of the market. The on major difference is that the banks are well protected – as homeowners cannot simply walk away from their mortgages as in the US – and most of them are insured by government backed CMHC (although the amount of uninsured homes has been going up over the past few quarters).

      Its prudent to keep lots of cash handy – this market will provide us some good opportunities. Like I said in the articles, the overall market is propped up with just a handful of stocks – for e.g., in 2015, the amount of market cap increase from FANG was more than the the decline of the whole S&P Energy sector. So, as soon as one of these high leveraged/high growth companies stumbles, we are in for a rude awakening.

      Happy investing

  3. There are essentially no “screaming buys” in the market right now. I love the strategy, but as long as retail is going to be buying these dips, we’ve still got a long ways to go…

    Everyone thinks oil is the buy of the century right now — it’s not. When revenues are down 30% to 50% Y/Y, you cannot possibly believe that low prices are baked in. If anything, these majors really should do away with dividends b/c in a commodities crash, the focus should be 100% on shoring up the balance sheet…

    Selling off assets and taking on more debt to appease shareholder is about the stupidest thing you can do.

    The reality is nobody has a clue how bad things can get… But as I’ve learned from investing in the gold space, in many instances, things can and in fact do get much worse than anyone could have possibly imagined… Anyone interested in oil should follow the gold companies since their bear market extends another 3+ years… That’s what devastation really looks like in the commodity sector.

    Going majority cash is the smart thing to do right now. The writing is on the wall and the trend is down, down, down.

    The gap between the 2009 lows and now is MASSIVE. Somewhere in between is the the time to load up big.

    • Agreed, FIFighter. The mayhem in the commodities – esp gold should be seen as a bellweather. Gold provides a much better investment opportunity right now than oil. I think a lot of traders are thinking that once oil hits bottom, its all good. The only way is up. But that doesnt really well for companies who are overleveraged and selling assets.
      I was just looking at the Chevron balance sheet and details of their transactions on the weekend. Its mind boggling what they are doing. They are taking on debt to pay the dividends. In a market that is only seeing profits rolling in from the downstream business, the company is selling downstream assets and bulking up on upstream market. I will be posting the article tomorrow to highlight this. For now, the dividends are safe, but time is running out for the oil majors. We will probably see some bankruptcies and some major consolidation in the market before things can stabilize.


  4. Looking forward to your article R2R! I love dividends as much as the next guy, but I totally agree with you; dividends should be a function of free cash flow, nothing more.

    In dire times, companies need to focus on the long-term picture… For instance, just look at Freeport, BHP Billiton, etc. in the copper space. Those companies are most likely going to be forced to cut dividends, and in the case of Freeport, many are now questioning survival…

    That’s what happens when you take on too much debt, over leverage at the top of the cycle, and pay out absurd dividends that you cannot realistically support. The piper gets paid, at one point or another…

    I’m not implying the same will happen with the oil majors, but that’s why I believe it’s so important for them to focus on shoring up the balance sheet now as opposed to later…. I wouldn’t be surprised to see COP cutting dividends either since they aren’t as diversified like CVX or XOM. They cannot last in this environment for very long…

    Chasing a perceived “safe” 8% yield is one of the biggest traps out there right now for “value investors”. Passive income is an incredible gift, but as investors, let’s be realistic about things. If companies can’t pay, they shouldn’t.

    • Agreed.
      Ive been banging on about the buyback mania for the past couple of years…companies loading up on debt to pay shareholders. Its insane. And what happens when the stock prices fall. The companies suddenly care about the balance sheet and suspend all buybacks. Studies have shown that companies buy more when the stock prices are higher – not when they are undervalued. There are only a very few select companies that actually use buybacks intelligently.


  5. Nice discussion buddy. Of the stocks you mentioned, ADM is of the most interest…. I need to take another look at their debt load, but I’ll start accumulating again in the high $20s. I loaded up back in 2012 when they got in the mid $20s. I sold too early, but that’s ok. We’ve been buying Union Pacific stock at $70. We also have more than half the portfolio in cash…..maybe we’ll be lucky enough that the market downturn becomes a genuine crash 🙂

    • Yes, ADM is starting to look attractive again. Its back down in my buying zone…but the conversion rates arent helping. Wish my CAD$ could buy more shares – but atm its not really helping.


  6. Hey R2R,

    Thanks for putting this together. Those potential dividend raises throughout February are REALLY helpful to see all organized here. Wanted exactly that.

    Was looking at BIP.UN briefly for a potential investment, unfortunately a pretty high PE but on the surface looks good.

    MG has been dropping like a rock, so not sure when I’ll be entering there. Also want to invest in TD but looking at opening a position in NA as well. Way too many bank shares I’d like… but diversification…

    Thanks man,

    • Hey DB,
      The potentials are only of the holdings in my portfolio…there are lot more div increases coming this month from other large cap companies. The first few months of the year are great for dividend growth investors.

      BIP is interesting – its an MLP, so you cant really look at the PE ratio flat out and need to look at cash flow instead for better valuation.
      MG is very attractive too. Great investment at a great price – would buy more if I didnt already have a full position.

      Best wishes and happy investing

  7. I can see the economy taking a beating just by watching my Lending Club portfolio. I’m getting too many loans that are late or charged off.

    But I never worry too much about macro factors. The Fed can raise or lower interest rates and China can be all China-y, but does that impact Colgate-Palmolive’s long term ability to sell toothpaste or Johnson & Johnson’s long term ability to sell Band-Aids? Nope. And that’s why I love individual dividend stocks.

    Loving all the dividend increases. That ADM one is quite nice, as I’m a fellow shareholder there. Nice to get more money without having to do more work.

    ARB–Angry Retail Banker

    • Agreed, ARB. Looking at macro events can give you a clue as to what things might look like, but hardly under control. Even an entity like the Fed cannot control it, let along retail and institutional investors.
      Looking for strong companies that can survive any storm is the way to go. ADM increase was a good one – looking forward to more increases in the coming days.

      Best wishes

  8. Hi R2R,

    I think based on what the actual interest rate was, the growth of the US economy etc it was unhealthy to have the base interest rate so low, it was due to be a lil bit higher. But I think you’re right what you say now, there won’t be many if any rises now for a while.

    I agree with the idea that a company shouldn’t pay a (increasing) dividend if it can’t afford to. This concept will see which DG investors have chosen well with companies with growing earnings, not just growing dividends and as Warren Buffet said “Only when the tide goes out do you discover who’s been swimming naked.”


    • Thats a great saying by Buffett – its important for us to keep in mind what the valuation is and invest in strong companies and not just invest in companies that appear good but arent well run.

      Interestingly enough, the US is now looking at NIRP and asking to stress test that measure. Whether something will come off it, we’ll have to wait and see. Expect more asset bubbles if US goes to NIRP.

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