Newsletter #22 - Why Are "They" Getting It So Wrong?

Why Are "They" Getting It So Wrong?


First BREXIT then Donald Trump. I can understand getting it wrong when its expected to be a close decision but both of these outcomes were suppose to be long shots. So much for the main stream media and pollsters.

Not only were "they" wrong on Trumps victory but the financial experts were just as wrong on how the markets would react to the outcome. In the unlikely event of a Trump victory stocks were suppose to crater and gold take off to the moon.

The uncertainty of what Trump would do as president combined with all the crazy stuff he said was suppose to make investors flee stocks and buy gold as protection. These predictions couldn't have been more wrong as the exact opposite happened. Who knew or predicted that Gold would sell off close to a $100 and equity markets would rally to all time highs? It's safe to say almost no one.

For an interesting and unique perspective about why the experts have been getting it wrong, black swan events and uncertainty check out this essay called: This Could Be Our 1999...


Crude Oil WTI vs The Stocks - Mind The Gap


Crude oil WTI has rebounded nicely off the lows from last February and looks to have put in a bottom. The recent agreement by OPEC to cut production by 1.2M barrels a day only adds more confidence for investors in the sector. Some of the large cap oil stocks didn't need to wait for a production cut to rally as they've been in a solid up-trend for months.

The chart above shows a massive gap or disconnect in price correlation between crude oil and three well known Canadian large cap oil producing stocks. Canadian Natural Resources (CNQ.TO), Suncor (SU.TO) and Imperial Oil (IMO.TO) have broken away from range bound oil and have went on to new highs not seen in almost two years.

So what? A disconnect in a price relationship like the one shown above usually correct themselves but how will it occur? Will crude oil rally significantly to catch up to the stocks? Or will the stocks run out of steam and eventually come back down to meet crude oil at or near current levels? 

Nobody knows for sure how things will play out but I know it's something worth paying attention to, as we analyze investment opportunities in the sector in the weeks and months ahead.


Don't Be a Victim of Confirmation Bias


Confirmation bias is the tendency to search for, interpret, favor and recall new or existing information in a way that confirms one's preexisting beliefs or theories, while at the same time discounting or giving little consideration to alternate possibilities.

It happens more than most people want to believe or admit to but as investors we need to pay close attention to our internal bias.

To learn how NOT to become a victim (not lose money) as well as ways to avoid it. Check out my latest blog post on the topic here...



Investing Trends


Pot Stock Frenzy - As Canada readies itself for marijuana legalization the related stocks continue to run. Many have seen gains of over 100% in the last few weeks alone. The price swings have been wild causing trading halts on the TSX due to excessive price increases - followed by excessive price declines. Some say the rally is over and some think it still has legs.

Banking Stocks Love Trump - There have been some very impressive moves in the big banking stocks since Donald Trump won the election: Goldman Sachs (GS) 30%, JP Morgan Chase (JPM) 20%, Morgan Stanley (MS) 27% and Bank of America Corp. (BAC) 30%. The recent rise in interest rates combined with Trumps plans to loosen regulatory restrictions have added fuel to this fire.


Tech Bad. Industrials Good - Technology stocks were leading the way before the election and industrial stocks lagged. That has since reversed in a big way. The NASDAQ has been flat while industrial stocks are up over 10% in the same period of time. Money flows have since shifted to reflect expectations of the effects of a Donald Trump presidency. It looks like old school is being favored over the new.


Back to a Fearless Stock Market - The VIX (CBOE Volatility Index) is back to lows it has only seen three other times in the last six years. This extreme complacency among investors increases the odds that a sell-off or at least a pull-back in stocks is on the horizon. It's definitely something for investors to take note of if planning on initiating new positions.



What's Happening?


  • Out of Recession: Recovery to Take Place in Alberta but at a Moderate Pace - BoeReport
  • Trump Bull Market Tops $1 Trillion as Bear Case Mutes - Bloomberg
  • Amazon Go, The World's Most Advanced Shopping Technology - YouTube
  • Developer Secures Approvals for two New Downtown Calgary Hotels - CalgaryHerald
  • Foreign Investors Continue to Gobble up Canadian Commercial Real Estate - FinancialPost
  • Bill Gross says Canada's Housing Market is Growing "More Tenuous" - BNN
  • Donald Trump Says He Will Personally Negotiate Air Force One - WSJ
  • Canadian's Average Debt Load now Up to $22,081 - YahooFinance