Canadian & International Economies
Both Trump and Trudeau were in Japan for the G20 meeting.
Although Canada wants our two civilians freed from jail in China, as well as Canola, Pork and Beef exports to resume with China, I don’t see Canada having much leverage to be successful in our negotiations. Meanwhile, the U.S. wants to either make a new trade deal with China, or additional tariffs will be imposed on another $300 Billion of Chinese imports to the U.S. There is not much press about what China wants, except for the CFO and daughter of the founder of Huawei to be released while the U.S. attempts to extradite her from Canada.
It seems to me that Canadians and our economy are suffering a lot as we abide by the rule of International law and are caught in the middle of the U.S./China battle. In Germany, their 10-year bond yields are minus 0.3%. Imagine investing 100 Euros today and getting back 97 Euros in 2029!
In North America, inflation is benign, corporate profits are strong, GDP growth is slowing, and unemployment numbers are good. The 10-year bond yield is approximately 2% while shorter term yields are higher. This inversion of the yield curve where long term rates are higher than short term rates is often an indicator of a recession. Add all this data up and we may see an interest rate decrease in the U.S. later this summer in an effort to keep the economy growing and avoid a recession.
Although the S&P 500 touched an all-time high value on July 1st, in my opinion it is not trading at excessive valuation levels. The current P/E ratio of the S&P 500 is 19, while the forward P/E ratio (going out one year) is 17 and the historical P/E ratio is between 15 and 25. Additionally, Canada has a federal election this fall, and the U.S. election is in November of 2020. So, we are likely to be deluged with political advertising and commentary from both sides of the border in the coming months. Also, the health of stock markets is very important to President Trump, and I think he will do everything in his power to keep the economy and stock markets strong as we get closer to November 2020.
Interestingly, the state of Illinois just legalized recreational cannabis which brings the total number of States that have legalized cannabis in some form to 44, plus D.C. So, I expect the SAFE Act which will make it legal in the U.S. for Cannabis companies to work with banks to pass by the end of 2019. I think this should be a catalyst for higher share prices for many U.S. cannabis multi state operators.
In Canada, cannabis edibles are to be legalized as of October 17th of this year, although not available for sale until December. It will be interesting to see if actual sales of edibles are close to meeting lofty expectations.
Toronto Real Estate
If you have spent any time in the Yorkville area, you will no doubt be impressed at the amount of construction going on. There is a new condominium project to be built on the north east corner of Yorkville and Avenue Rd. We have invested money in this project through Greybrook Yorkville 111 Limited Partnership. This is a Private Equity Investment that will be illiquid for approximately 5 years. If you have any interest in an investment of this nature, please give me call to discuss other opportunities that may be suitable for you.
One of my friends is a successful real estate agent in the Toronto area. Recently, I asked him about any opportunities to invest in a rental property, and what kind of return I could expect from such an investment. He explained that if I was prepared to invest 25% of the purchase price of a property and mortgage the balance, I could expect to lose money every year for at least the next five years. If I would be able to increase rents annually by 3% to 5%, then in approximately 5 years, I should break even, excluding the impact of unexpected capital expenditures. He explained that as the down payment increased the cash flow numbers improved. Another complicating factor in this investment for me is that I have been unable to get my wife interested in property management.
As an alternative investment that can also provide income, I suggest we consider the TD Dividend Growth Fund. It owns large blue-chip companies such as Canadian banks, railways, insurance and energy companies. We are able to purchase this investment with a variety of options for annual income. If you would like to talk about how this investment may be suitable for you, please give me a call.
Recently, one of our clients paid me a very nice compliment. He said that he could always count on me being considerate of his best interests, treating his money like my own, and giving him and his wife great advice. We only add new clients if they are introduced or referred to us. I have included a one-page marketing piece that describes what we stand for and are proud of. If you know someone who needs what we offer, they may be interested to read this.
Please call us if you need our assistance with any aspect of your financial affairs. Thank you for the privilege of working with you and your family.
Wishing you a safe and happy summer.