Monday, October 25, 2010

Robert Gorman, Toronto Money Show 2010

The next speaker was Robert Gorman. He is the chief portfolio strategist of TD Waterhouse, Canada. He talked about where he thought the markets were going. He feels that the US stock market will be up 8 to 9% in 2010 and 2011. Does he think that there will be a double dip recession? He basically feels that there will not be but there was a 25% probably chance of it happening. The savings rate in the US has moved from 0% to 6% and this will not cause a recession.

Governments fear deflation because of what happen in the 1930’s recession, but he does not feel we will go there. Instead, he thinks we will have modest inflation. The price of commodities is rising. What the financial market is telling us currently is that inflation will be in the 1 ½% to 2% range and that there will be no deflation.

In the US, lots of labor is available and the price of labor has been going down. Housing prices are down, but both labor and housing will start to climb again. The US housing inventor used to be 4 months worth of houses, but it is now at 9 months worth. Usually, they build 1.2M houses in the US, but there will only be 6M to 8M built this year. The positive thing is that US 30 year mortgages are at 4% so houses are affordable. The other thing is that the cost of owning or renting a house is the same. At the top of the housing market, to own a house cost about 80% more than renting a house.

Commercial real estate in the US has fallen about 41%. A positive thing is that commercial real estate prices are down (and our Brookfield is buying). A negative thing is that mortgages are higher than the property prices and this will cause problems.

He feels that the next century will not be a lost one for the US. They have cut their interest rates and these have stayed low, which is also, what Japan did. However, took Japan a full decade to reorganize their banks, and the US probably will not. The US has injected lots of money into their banks. The third comparison with Japan is with P/E ratio of the stock market. Japan’s P/E was about 100 at its peak and it is still high. The P/E ratios in the US never got there and now they are ok. The last thing he mentioned is that the population in Japan is declining while the population in the US is growing.

He thinks that the US will have a period of moderate growth and low inflation. He also said that it is better to have moderate growth for equities. If growth is too rapid, it causes inflation and this is not as good a climate for equities. Also, when you compare the P/E ratio in the US to a 10 year treasury bond, the P/E ratio looks good. The 10 year treasury has a return of 2% and the current earnings yield which is at 6%. For stocks, the earnings yield is E/P, the opposite of P/E ratio.

Another thing he points out is that corporations in the US have strong balance sheets. The monetary climate is positive with very low interest rates. In the Presidential 4 year cycle, the first 2 years have average returns around 8%, but years 3 and 4 have average returns around 22%. We will shortly be in the 3rd year of a presidential cycle. He expects the Republicans to be winners in the current mid-term elections. 90% of the time in the mid-term elections, the party in the White House loses.

He expects that 2011 will see US stock market gains in the low double digits. There has recently been strong dividend growth and this point to strong earnings and free cash flow. He expects US Tech stocks to recover well. His expectation for the Canadian stock market is gains in the high single digits. What is unusual now is that bond interest is lower than dividend yields and this is unusual. Dividends are currently rising, and this will provide a floor for stock prices.

The Canadian stocks he currently likes are Shaw Communications (TSX-SJR.B), TransCanada Corp (TSX-TRP), Bank of Nova Scotia (TSX-BNS), Power Corp (TSX-POW), and Royal Bank (TSX-RY). For 2011, he also thinks that energy stocks like Suncor Energy (TSX-SU) will do well. He also thinks that even though natural gas is not liked, it will also do well. In Canadian fixed income bonds, yields will be lower in 2011, so corporation bonds will be better to buy.

Outside Canada, he thinks that Europe, especially Northern Europe will do well and also will Japan. Of European stocks, he thinks that British Petroleum will go up. For emerging markets, he still likes China. There are concerns about a real estate bubble, but currently prices are holding and he thinks this market will be fine. However, he expects strikes, higher wages, and a higher P/E ratios for China. He thinks the Chinese stock market gains in 2011 will be in the low double digits.

He thinks we are in a 4 year recovery period. This started in 2009 and the recovery continues in 2010 to 2012. He sees nothing currently to change is mind on this.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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