5 Reasons Not to Buy the Canada ETF 15 comments
Hao Jin
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iShares MSCI Canada Index (EWC) consists of blue-chip Canadian companies. Industrial Materials and Energy sectors account for almost half of its weightings, which include Barrick Gold (ABX), Canadian Natural Resources (CNQ), EnCana (ECA),Goldcorp (GG), Potash (POT) and Suncor Energy (SU). Financial Services accounts for 30%. The rest are other brand names such as Research in Motion (RIMM).
Following are 5 reasons why EWC might cool down from its strong rally over the last few months:
1. Over-Priced Compared to Dow
With yestesrday’s close, the Dow Jones Industrial Average stands on 8,675 while S&P/TSX Composite index is 10,290. In other words, TSX (Toronto Stock Exchange ) is 1,615 points higher than Dow. The chart below shows the difference between the TSX and Dow over the last 18 months. It seems to me that the TSX recently ran too fast compared to Dow. In addition, the Canadian dollar, or CurrencyShares Canadian Dollar Trust (FXC), appreciated too rapidly over the last few weeks too.
2. Growing Banking Problem
Royal Bank of Canada (RY), the country's biggest bank, just reported its first quarterly loss since 1993. It also wrote down the value of its U.S. assets and set aside nearly $1 billion to cover bad loans. The provisions for bad loans signaled deteriorating credit.
3. Downgraded By S&P
The Canadian government contributed a total of $10.6 billion to the bailout of General Motors (GM) and received 12 per cent of the common shares. But Prime Minister Stephen Harper admitted on June 1 that almost no hope that the bulk of the money will be repaid. Both the federal and local governments have said they are facing higher deficits for this year, largely because of the high price for retaining a shrunken GM in Canada. The federal government hiked the projection for its deficit to $50 billion from $34 billion.
On June 2, Standard & Poor's and DBRS both revised their outlook on Ontario, the biggest province in Canada. The province’s ballooning deficit has prompted two debt-rating agencies to change their outlook on the province to “negative” from “stable”. Restructuring of the auto sector is likely to further cut into manufacturing jobs in Canada, particularly in Ontario where GM and Chrysler closing plants.
4. Uncertain Energy Price
China kicked off its $586 billion fiscal stimulus package last November and boosted the worldwide oil price. When it runs out of steam in a few months, how high could the price of oil go? On the other hand, if energy price stays high, it would hurt Canada’s economy as well. Mining is one of the most energy-intensive industries, and it happens to be one of the largest industries in Canada. According to estimates, worldwide mining operations use as much as 10% of the world’s fossil fuel consumption.
5. Unable to Profit from Rising Gold Price
Barrick Gold (ABX) is famous for its gold hedge strategic. There might not be significant upside potential for ABX, even with rising gold price. It might also be a recipe for disaster if the price of gold is far out of range.
As you can see from the chart below, EWC has an almost identical pattern with iShares MSCI Emerging Markets Index (EEM) over the last 2 years. However, I already have a max allocation of EEM in my portfolio, so I have to move money from EWC to cash for now.
Disclosure: I have a long position on EEM
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This article has 15 comments:
What does this mean? That the gold miners won't make more money with a higher priced gold? That people will stop buying gold? That's a very mistaken assumption. When conditions worsen and more money pours into gold, even more money will pour into gold--which is actually a relatively small market.
If we stop buying thier product they go belly up in 3 years, something goes for stocks. They cased this economit crisess, GM and other big companies that moved thier manufacturing to China and India because of cheep labour. You get what you payed for, substandard products manufactured in somebody's basement, using child labour, outdated contaminated material that are banned in North America and Europe. Using industrial strength preservative for human consumption and list is going on and on. Do I need to say more?
should be Quote Canada will always kow-tow to usa and
even with triple earnings they decrease in this market. without bias
and disclosures.
Canadienn HopeslashEspere can not make them
drink their own water over USA kool-aid UNQUOTE
Anyone who doesn't buy Can and Aus and Brazillions is not looking at the right picture and will lose.
Please lose the bear in the STATES for the bull over the fence; thin and worn and full of leaks but way WAY better than this Quicksand on this side.
Play the sectors for a little reality and forget the economy,except Obama glitz, GS glitz and hopefully Hollywood glitz cause it is all we have left May June July etc Invest in Glitz Resources
Born and bred without Canada's wealth, the usa will fall faster.
EWC may have some ups and downs ahead, but for anyone taking the longer view, it is resource based, it is denominated in Canadian dollars instead of the overprinted US dollar.
Canada is going to be a good bet. While its socialist bent has been a problem over the years, Canada may surprise us and in fact not drift into some of the possibly dangerous policy positions that Dear Leader Barack may take us to.
Your "comparisons" have little merit.
Harper stated "we enter into this assuming a 100% loss of return on our investment" and Industry Minister Tony Clement said he's hopeful GM will be back up and running as a privately held company in the next few years and he further states "We do have an exit strategy with the Obama administration, selling our equity stake over the next several years in chunks in an orderly transition into a company that will be privately held again," he said in an interview with Canada AM on Tuesday.
5. Unable to Profit from Rising Gold Price
"There might not be significant upside potential for ABX, even with rising gold price. It might also be a recipe for disaster if the price of gold is far out of range"
I HAVE READ SIMILAR THINGS ONE SOME OTHER WEBSITES ABOUT BARRICKS HEDGES AND IF THE PRICE OF GOLD IS TO RISE.
So, it is good to get the Canadian oil & gas co.
Plus, the monthly dividends are great.
Check out PDS, the biggest and most high tech driller in this world.
Good dividends too. A Canadian co.
However: China is increasing its supply agreements as well as its investments w/ Canada. Also US energy consumption will continue to require imports for decades to come. likely
cause shifts in
Canadian banks are NOT in trouble, and in fact are ranked as the best capitalized in the world.
ABX still has some hedging in its business model, but check out the ounces in the ground and you will see what will drive its value when gold becomes the "buzz".
Canadian companies are the leaders in mining worldwide. 80% of worldwide mining investment comes via the Toronto exchange. So, if demand continues, Canadian mining (at home and worldwide) will prosper.
1) How do we know that it is "overpriced to the Dow"? What makes the Dow the baseline for reasonableness for global equities? The Canadian government deficit is nowhere close to as bad as the USA's and the Canadian citizen's debt load as a percent of their income is nowhere as bad as ours. Perhaps the prior ratios between the two isn't reasonable anymore.
2) The Canadian banks will increase their loan loss reserves as loan defaults rise. That will cause earnings to drop. But, none of their banks are at risk of collapsing like our Citibank and Bank of America.
3) Ontario is a better credit risk that the USA. Their budget deficit isn't going to run 13% of GDP like ours will. Plus, that is just one province. Yes, participating in the insane bailout of GM and Chrysler was stupid but not fatal to Canada.
4) Your biggest error is here. Canada produces oil from the tar sands. They need oil prices above $70 per barrel to make that an economic endeavor. They use huge quantities of natural gas and water in the extraction and refinement of the oil. Therefore, this is perfect for them - high oil prices and cheap natural gas!
5) Why does your asset allocation decisions in your portfolio have any bearing on whether EWC may or may not be appropriate for ME?
Finally, fix your grammar errors before you post.
Disclosure: I have 300 shares of EWC but I don't have a clue what it is trading at today because it is a long-term strategic decision and I haven't checked the price in 2 or 3 months. I wish I owned more though and less of my USA ETFs and mutual funds.
be wise to buy Canadian just for the pop on the dollar. The
Canadian dollar will rise long term vs the American dollar. It
tracks the price of oil pretty closely, and the long term trend is
higher oil. The banking system is a world leader.
As per the overpriced theory, the US is falling deeper in debt
by the day, and that only means higher future taxes to fund
health care, and pensions.
If you beleave that resourses, oil, wheat, hydro power, and
potash will not be in demand going forward to fuel the world
population growth, then Mr. Jin may be right.
However, go to msn money and read anything written
by Mr. Jubak about future trends, and the facts will
speak for themselves