Items that may only interest or educate me ….
Canadian economic news, Headwinds buffeting the American markets, What is a VIX?
Canadian economic news
Statistics Canada reported the March Consumer Price Index (CPI) fell to 4.3% in March, down from 5.2% in February. This was the smallest increase since August 2021. Month over month, the CPI rose 0.5% in March, after a 0.4% increase in February. A drop in energy prices helped offset higher mortgage costs caused by higher interest rates. The Core CPI (CPI less energy and food prices) gained 4.5% on an annual basis, down slightly from February’s 4.8%. The CPI is a widely used measure of inflation that reflects the price changes that Canadian households experience in their day-to-day expenses.
The Industrial Producer Price Index (IPPI) for March rose 0.1%, on a monthly basis, after falling 0.6% in February. On a yearly basis, the PPI fell 1.8%. Core IPPI (IPPI less energy and petroleum) gained 0.4% on a monthly basis but lost 0.1% on an annual basis. The IPPI measures the price movements of a basket of goods and services that are typically sold by Canadian manufacturers, including raw materials, intermediate goods, and finished products.
On Friday, Statistics Canada showed February retail sales fell 0.2% compared to January’s increase of 1.4%. On a yearly basis, sales grew by 4.3%. Of the nine retail sales subsectors, the biggest drop was in the gas and fuel vendors subsectors which fell 5.0% on a monthly basis. Core retail sales (excludes gas, fuel vendors, vehicles, and vehicle parts) increased 0.1% on a monthly basis and grew by 3.5% on a yearly basis. Monthly gains were led by clothing and clothing accessories which gained 4.4%.
Canada’s Gross Domestic Product is expected to expand 1.4% in 2023. The stronger than expected growth means the Bank of Canada (BoC) does not have to worry too much about the Canadian economy falling into a recession and can focus on getting inflation back to their 2% target. Analysts are predicting inflation should fall to the 3% range by the end of the year but getting that last bit to 2% will not be easy. As a result, interest rates likely will stay at the current rate of 4.5% for an extended period to ensure inflation falls to 2%. As always seems to be the case, the BoC gave itself some wiggle room and warned additional increases may be necessary if inflation does not continue to fall.
The silver lining of all this economic news is the BoC should be able to be able to maintain the pause on their interest rate increases for the remainder of the year. With any luck, the BoC may even possibly start lowering the benchmark rate towards the latter end of the year.
US market headwinds
Inflation in the US continues to cool. Last week’s US CPI report showed inflation was down to 5.0%, one of its smallest increases in two years. However, 5% is still more than twice the Federal Reserve’s (Fed) target of 2% so there is still a way to go before the Fed starts to lower the interest rate. Until inflation gets down to the Fed’s target, inflation and higher interest rates will continue to act as headwinds to the markets. Based on the recent economic data, its likely the Fed will bump up the interest rate by another 0.25% at their May 2 – 3 meeting, giving strength to the interest rate headwind.
Another headwind that is growing is earnings. Depending how the first quarter earnings season plays out, the headwinds could turn into a tailwind and lift the markets higher. On the other hand, if earnings do not meet expectations, the headwind will gain strength and act as a further drag on the markets.
The first quarter 2023 earnings season started last week, getting off to a decent start with a few of the big US banks presenting strong reports, and many of the US regional banks at least met expectations. This week has been a mixed bag, but a few big names came in lower than expected, sending the markets lower. Tesla (NASD: TSLA), American Express (NYSE: AXP) and AT&T (NYSE: T) all came in lower than estimated.
Many of the mega cap technology companies that powered the Nasdaq Composite Index (Nasdaq) and S&P 500 (S&P) higher in the first quarter report next week (April 24 – 28). The earnings reports will provide insight to how revenues and earnings have been affected by the ongoing higher interest rates. If earnings do not meet expectations, expect this headwind to further buffet the markets.
The VIX
The CBOE Volatility index (VIX), is commonly referred to as investors’ fear gauge, fell to its lowest point since November 2021 during the session. Investor fear is dropping. Great! But what is the VIX?
Imagine you are out on the open ocean on a three-hour tour on the trusty yacht, let us call it the Minnow. Like the waves of the ocean, the stock market can be choppy and unpredictable at times. That is where the CBOE Volatility Index, or the VIX, comes in as your handy-dandy wave forecast!
The VIX is like a weathervane that tells you how rough the market waters might get in the next 30 days. It looks at how much investors, are willing to pay for options contracts, which are like safety nets, or life vests if we are sticking with the sailing analogy, for their investments. When the VIX is low, it is like calm waters and smooth sailing ahead. Everyone is feeling calm and relaxed. But when the VIX is high, it is like stormy seas are brewing, and investors are getting a bit sea-sick! If the Minnow had had a VIX like weathervane they would not have gone on that three-hour tour and ended up stranded on a deserted island.
The VIX reflects the expected volatility of the S&P index over the next 30 days. It is calculated by analyzing the prices of options contracts on the S&P index. Options are financial instruments used to speculate on the future movement of the stock market.
The VIX is often used as an indicator of market sentiment and risk appetite. When the VIX is high, it suggests that investors are expecting a greater degree of market volatility and uncertainty, which is often associated with a higher level of fear or pessimism. Conversely, when the VIX is low, it suggests that investors are anticipating less market volatility and are generally more optimistic.
The VIX is measured on a scale from 0 to 100, with higher readings indicating higher expected volatility. A reading below 12 is considered relatively low. Investors are expecting lower levels of market volatility and are generally more optimistic. Typically, a calmer market environment with less perceived risk. An average VIX reading typically falls in the range of 12 – 20, suggesting investors are expecting a moderate level of market volatility, but not necessarily extreme or unusual movements. Generally, it indicates a relatively stable market with a reasonable level of risk. A VIX reading of 20 or above is generally considered to be relatively high, indicating increased market uncertainty, fear, and pessimism. The range 20 – 25 indicates growing concern; 25 – 30 usually indicates turbulence in the markets, while 30+ suggest extreme turbulence. The all time high was March 2020 when it reached 82.69. While
Investors may use the VIX as a tool for risk management and to assess the overall level of market risk. For example, during periods of high VIX readings, investors may consider taking precautionary measures such as adjusting their investment portfolios, hedging their positions, or reducing their exposure to higher-risk assets.
Its important to remember that the VIX is not a crystal ball that predicts the future. It is just a tool that gives investors an idea of the market’s mood. So, if you see the VIX rising like a big wave, do not panic! Just remain calm, stay informed, adjust if necessary and ride out the storm.
Now that you know what the VIX is, let’s see what happened this past week….
Weekly Market Review
Monday: The week got off to a promising start as all four major North American indexes – the Toronto Stock Exchange Composite Index (TSX), the S&P, the Dow Jones Industrial Average (DJIA), and the Nasdaq – ended the day higher. Investors are waiting to hear from various Fed members who will be giving speeches throughout the week. Investors are hoping to gather insight into the Fed’s thinking ahead of their next meeting – will the rate be going up or will they pause.
In Canada, the TSX ran its winning streak to seven days as investor sentiment continues to rise in lockstep with improving Canadian economy. Also contributing to the gains on the TSX is investors bidding up the share price of takeover target Teck Resources. It was a day of widespread gain in trading as the Technology and Healthcare sectors led all Canadian sectors higher. Consumer Staples, Energy and Basic Materials (mining companies and fertilizer manufacturers) were the only sectors to end down.
In the US, the indexes inched higher as investors prepare for many of the first quarter 2023 earnings announcements. Investors will be looking to see how companies did in the first three months as well as their outlook for the remainder of the year. In the markets, Financials and Consumer Cyclicals led the gainers while Energy was the only sector to lose ground.
Tuesday: After a strong start to corporate earnings season boosted the markets yesterday, today the indexes were largely flat on mixed results from the big names that reported earnings today. The TSX and S&P inched higher while the DJIA and Nasdaq were down slightly. Investor optimism is rising thanks to strong economic performance in Canada and the US. The downside to strong economic performance is the Fed will most likely increase the US interest rate at least once more, while the BoC may increase the Canadian rate to cool the economy.
In Canada, the TSX recorded its eight straight positive day as inflation in Canada slowed to 4.3% in March, down significantly from 5.2% in February. Falling inflation provides the BoC a reason not to increase the benchmark interest rate. In trading, it was a big day for the Canadian Healthcare sector, up 3.25%, followed by the Financials sector. Of the sectors that lost ground today, the biggest declines were the Utilities and Consumer Staples sectors.
In the US, the DJIA and Nasdaq were slightly lower while the S&P was barely higher as the markets ease into first quarter earnings season. Separately, two members of the Fed, speaking to separate audiences, said they felt there would be at least one more interest rate hike to drive down sticky inflation. In the American markets, Basic Materials and Financials led the gainers while Utilities, Healthcare, and Telecommunications Services were the only sectors to end in the red.
Wednesday: Everything was down today, well, almost everything. Somehow the technology heavy Nasdaq scratched out a gain at the last minute, despite the US Technology sector ending in the red. Otherwise, the other three indexes and oil were all down and gold broke even.
In Canada, the TSX’s winning streak came to a halt as commodity prices dropped. Lower commodity prices led to lower share prices for many of the resource companies on the resource heavy TSX. However, all was not gloom and doom on the TSX as more than half of the Canadian sectors ended in the green, led by Industrials and Healthcare. Of the four sectors that dropped, Basic Materials and Energy had the biggest fall.
In the US, the American indexes were largely unchanged while investors reviewed earnings and looked for signs if a recession is coming or if the Fed can pull off a ‘soft landing’ (a gradual economic slowdown rather than a sudden, sharp decline). In trading, only four US sectors ended in the green, led by Utilities and Financials. Of the sectors that ended in the red, Basic Materials and Telecommunications Services fell the most.
Thursday: All four indexes retreated on mixed earnings results across various sectors. News that jobless claims in the US came in higher than expected, suggested a recession in the US is possible. Oil prices fell as investors are concerned the US could slip into a recession, leading to lower demand.
In Canada, the TSX started a losing streak with another day in the red thanks to falling oil prices sending oil company shares lower. In trading in the Canadian sectors, the Industrials sector was the only sector to end higher, while the Technology and Energy sectors had the biggest drop.
In the US, disappointing earnings from a few of the biggest American companies dragged all three indexes lower. Investors continue to try and decipher what the Fed will do at their upcoming meeting as well as their outlook for the rest of 2023. In trading in the American sectors, Consumer Staples and Industrials were the only sectors to advance, while Telecommunications Services and Consumer Staples led the decliners.
Friday: All four indexes ended slightly higher. Prior to the blackout period ahead of the Fed’s next Federal Open Market Committee’s (FOMC) meeting, several Feb members have suggested they support further interest rate increases, adding to concerns about a recession hitting the US later this year. There is a strong chance the US interest rate will go up another 0.25%. News of tightening oil supplies in Europe finally stopped the weeklong skid of oil prices.
In Canada, the technology companies pushed the TSX into the green, overcoming the drag of falling gold prices. In the Canadian market it was a day of broad-based gains across the Canadian sectors, led by the Technology and Consumer Staples sectors. Basic Materials was the only sector to end in the red.
In the US of A, all three indexes hovered slightly under the break even point most of the afternoon before creeping into positive territory in the last hour. It was another mixed bag of earnings which has not moved the indexes one way or the other for most of the week. However, there should be some movement next week when many of the biggest American companies report their first quarter earnings. In trading, the American sectors were fairly evenly split between gains and losses today. The biggest gainers were the Healthcare and Consumer Cyclical sectors, while the biggest drops were Basic Materials and Financials.
Weekly Market and Portfolio Review
For the week, the TSX (SPTSX) notched a fifth straight weekly advance, gaining 0.6%, the S&P 500 (SPX) dropped 0.1%, the DJIA (INDU) had it worst week in six weeks, slipping 0.2% and the Nasdaq (CCMP) fell 0.4%.
After last week’s step forward when all four indexes gained ground, the TSX was the only index to maintain a weekly winning streak. The TSX benefitted from rising metal commodity prices, especially gold, and falling inflation in Canada. As shown in the chart above, the three American indexes were basically flat for most of the week on a mixed bag of corporate earnings reports. The indexes faltered at the end of the week on concerns the Fed will raise the US benchmark interest rate that could send the world’s largest economy into a recession. Investors will now be focused on upcoming earnings reports from most of the big technology companies. I am confident there will be a great amount of speculation on whether the Fed will raise the interest rate the following week. 😊
Its not too often all three Portfolios outperform the indexes when all the American indexes decline, but that is what happened this past week. Not only did all three portfolios end in positive territory but they almost all beat the best index performer, the TSX, as seen below. Portfolio 1 was pushed higher by the big technology companies in the portfolio. Portfolio 2 benefitted from a strong week from MongoDB (NASD: MDB). Portfolio 3 was buoyed by a week of 10% gains by Shopify (TSX: SHOP) and Alvopetro Energy (TSXV: ALV). It is a fluke the portfolios did so well when the American indexes all ended lower. That will not happen to often. I would prefer to see all indexes end the week higher since that provides the best chance that the three portfolios will advance. But a win is a win. 😊
Companies on the Radar
Supremex (TSX: SXP) leaves the Radar List after being added to Portfolio 2.
After talking with a few friends, Airbnb (NASD: ABNB) is back on the Radar List. They all were very satisfied with their stays at Airbnb locations, would use the service again, and explained why people would use them rather than hotels. I then did a quick search on the Airbnb site and discovered there were approximately a dozen Airbnb host location in my neighbourhood alone. Happy customers and a growing number of locations got me interested in the company again, so it has been added to the list below.
- Vale (NYSE: VALE): A global mining company that extracts various metals and rare earth elements such as nickel, cobalt, gold, copper, that are used in electric vehicles. *For some reason, this weeks Thomson Reuters report shows Vale as ‘Not Rated’ so I maintained last weeks rating of 10.
- Intact Financial (TSX: IFC): A Canadian mid size insurance company supplying home, car and business insurance in Canada, the US, and the UK.
- Amphenol: Producer of a high-tech interconnect, sensor, and antenna solutions for the automotive, aerospace, industrial and various technology industries.
- Hammond Power Solutions (TSX: HPS.A): A small cap Canadian company manufacturing transformers used throughout the world in a wide variety of industries.
- Smartcentres Real Estate Investment Trust (TSX: SRU.UN): Owns and manages a number of income producing malls and retails spaces throughout Canada.
- Ero Copper Corp. (TSX: ERO): A small cap Canadian copper mining company with mines in Brazil.
The Radar Check was last updated April 21, 2023.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended April 21, 2023: UP 
- The US Treasury Department dealt a blow to Rivian (NASD: RIVN) and other electric vehicle (EV) manufacturers when they announced that EV makers will lose access to the US Inflation Reduction Act (IRA) tax credits. The IRA requires 50% of the value of battery components be produced or assembled in North America to qualify for $3,750 tax credit, and that 40% of the value of critical minerals used in the vehicle be sourced from the US or a free trade partner for a $3,750 credit.
- Apple (NASD: AAPL) opened their first retail store in India. As in North America, hundreds of people lined up, some overnight, to be among the first to enter the store. One of the reasons I invested in Apple was because they have a tremendously loyal customer base, as evidenced by people lining up to enter the store.
- Tesla reported that all those discounts (six this year alone) caused profits to fall 24% compared to the same period last year. Rather than suggesting an end to discounts, founder Elon Musk suggested additional discounts are in the works and the company was sticking to its plan to sell more cars for less. Tesla is putting sales growth ahead of profit for now. Unfortunately, Tesla’s earnings miss and forecast also side swiped other EV manufacturers like GM (NYSE: GM) and Rivian.
Tesla had a big victory in court when a jury found Tesla’s Autopilot did not fail to perform safely when the vehicle was involved in a crash. That was the first trial of what is expected too be more involving the company’s self driving system. - Alphabet (NASD: GOOGL) announced they are combining two of their artificial intelligence (AI) units – Google Brain and DeepMind. This is Googles latest attempt to get back in the AI race, currently led by OpenAI’s ChatGPT.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
BSR Real Estate Investment Trust (TSX: HOM.U)
Andlauer Healthcare Group Inc (TSX: AND)
US $
No US$ dividends this past week.
Quarterly Reports
Tesla, Inc.
All currency listed in millions of US dollars.
Selected highlights from their first quarter 2023 financial results on April 19, 2023
- Revenues of $23,239 for the three months ended March 31, compared to $18,756 for the same period in 2021. An increase of over 23%.
- Net income of $2,539 for the three months ended March 31, compared to net income of $3,280 in the same period in 2021.
- Diluted earnings per ordinary share of $0.73 for the three months ended March 31, compared to earnings of $0.95 per share for the same period in 2021.
Portfolio 2
Portfolio 2 for the week ended April 21, 2023: UP
- Alimentation Couche-Tard Inc. (TSX: ATD) signed a license agreement with Fire & Flower Holdings Corp. (TSX: FAF) to develop Fire & Flower retail cannabis stores in Ontario and other markets outside Canada. I wonder if they will sell cannabis products at their gas station convenience stores. 😊
- TC Energy (TSX: TRP) has partnered with Chemours Co (NYSE: CC), a chemical producer, to develop, build and operate clean hydrogen producing plants in West Virginia. Clean hydrogen is a favourite of many governments even though very few facilities currently exist. I am guessing there are some government incentives involved because the Canadian and US governments are big on clean hydrogen.
Separately, TRP said a crack caused by fatigue led to the oil spill in Kansas last December. An independent third-party investigation found the fatigue crack came from a weld connecting a manufactured elbow fitting to the section of pipe constructed near Mill Creek. The girth weld met applicable standards when it was fabricated. - Mitek (NASD: MITK) announced its flagship Check Fraud Defender identity verification mobile API (Application Programming Interface). Check Fraud Defender can determine if a cheque is authentic and not simply a picture of a check. Banks and other financial institutions can use the software to limit cheque fraud and reduce losses.
- Walt Disney Corp (NYSE: DIS) plans to build 1,400 affordable housing units on Disney property, a few miles from Disney World’s Magic Kingdom. The homes will near be near schools and shopping stores. The first homes should be available sometime in 2026. I imagine many of Disney World’s employees are looking forward to the homes built by the Mouse.
- Guardant Health (NASD: GH) received notice its Guardant360 Response test will be covered by Medicare in the US. Guardant360 Response is a blood only test that allows doctors for early indication of metastatic or advanced cancer. This should make it easier for the product to be used by doctors and medical facilities.
Activity
Bought: Supremex – A small cap company that sells packaging solutions throughout Canada and the USA. The company should continue to grow the box side of the business given the growth of the ecommerce industry. Items must be packaged to be shipped. 😊 The company did not score high on my growth oriented Multibagger test, not surprising since its not a high growth company. However, it did well in the financials section of the test. It has steadily increased revenues, net income, gross and profit margins. Debt has grown because of recent acquisitions but revenues from the acquisitions should help pay down the debt. It currently has a 2.29% dividend yield. Not the most exciting business but it provides diversification, income in the form of dividends, and growth potential with low risk.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended April 21, 2023: UP
- A story in the New York Times suggested Samsung may change the default search engine on its smartphones from Google to Microsoft’s (NASD: MSFT) AI enhanced Bing. Samsung has the largest smartphone market share so this would be a big deal for both Microsoft and Alphabet.
- TD Bank (TSX: TD) announced their deal to acquire US regional bank First Horizon (NYSE: FHN) is unlikely to close as scheduled. I suspect the US banking crisis has led to some speed bumps in negotiations between the two banks. Some TD shareholders are suggesting TD renegotiate the price or cancel the deal outright.
On a related note, many investors have shorted TD, betting the purchase of First Horizon will not happen. The short position has grown by 45% in the last two weeks. - Brookfield Asst Management (TSX: BAM) has joined the fray to acquire Network International, the largest payment processing firm in the Middle East and Africa. BAM’s offer top is now the top offer, but it may have started a bidding war for Network International.
Activity
Bought: BAM – I received a few shares of BAM when it was spun off from Brookfield Corporation (TSX: BN), one of the best Canadian companies. I decided to build up my holdings of BAM and purchased more shares.
BAM is one of the largest alternative asset managers, owning and operating a wide range of long-life assets and businesses across a number of sectors. Before BAM was spun off as separate entity and part of Brookfield Corporation, it developed a successful track record of generating returns. I see no reason this will not continue since BAM benefits from being part of the greater Brookfield family. Financially, BAM revenues and net income are growing, plus it has a strong balance sheet with no debt and lots of cash. Finally, it has a dividend of 3.92%.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
No quarterly reports this past week.