Weekly Market Watch
05/18/12Big Picture
Rising possibility of Grexit, Fed on hold, Japanese GDP strength
The European debt crisis moved back to centre stage this week following the elections in Greece and France last weekend. The situation in Greeceis most tenuous but it’s the possibility of Spain defaulting that has investors on edge as its economy is far larger. Greece’s inability to forge a coalition government and the next step – a second national election in mid-June – raised the likelihood of the country exiting the euro zone, thereby sending ripples across global markets for the second week in a row. If Greece breaks company with the 17-member euro bloc, one major concern is the precedence this sets for other highly indebted countries. With regards to Spain, it is worth noting that the 10-year bond yields peaked again Thursday to over 6% while Moody’s downgraded credit ratings for a swath of banks that they consider to be undercapitalized.
The euro-zone situation overshadowed other economic and corporate news out of the US which was mixed. Tepid jobless claims data and reasonable industrial numbers were offset by contracting manufacturing conditions in the mid-Atlantic region which surprised on the downside. Minutes released from the Fed’s late-April FMOC meeting also did little to excite the markets as it appears bankers are comfortable staying the course for the time being. The next Fed meeting is scheduled two days after the June 17 Greek election.
In contrast, Asian markets received a bit of a boost Thursday as Japan reported Q1 GDP growth of 4.1%. This marked the third straight quarter of growth following last year’s natural disasters. That said, however, the figure is expected to decelerate in coming quarters as reconstruction efforts spurred much of the growth.
Markets
Flight from risk assets continues, North American stocks slide
It was another down week for the S&P/TSX as it fell from 11,694 to 11,331 over the four-day period. The TSX is now at its worst level since early October last year, pulled lower by the flight from risk assets. Gold bounced higher Thursday but is down about US$100 an ounce over the past two weeks and stands at US$1,574. Crude has also slumped to its 2012 low for the year and ended at US$92.30 a barrel at close Thursday. US markets also lost ground this week with the Dow falling from 12,820 to 12,442 over the four-day period. The S&P 500 and Nasdaq indexes also fell on the week with the S&P moving from 1,383 to 1,304 and the tech-heavy Nasdaq moving from 2,933 to 2,813.
Our Recommendation
Market sell-off setting up a longer term buying opportunity
Definition of “Price to Earnings Ratio (P/E Ratio)
05/18/12With the recent frenzy over the Facebook IPO, its important to keep in mind P/E Ratios when contemplating investing … PE is not the only factor to consider but an important piece to the overall study.
A valuation ratio of a company’s current share price compared to its per-share earnings.
Calculated as:
Market Value per Share
Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as “price multiple” or “earnings multiple”.
Investopedia explains ‘Price-Earnings Ratio – P/E Ratio’
The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings
The Power of Dividends
05/14/12The Power of Dividends
Are you interested in improving your return and increasing your income through dividends?
Dividend vs. Interest Income
Interest Income Scenario Dividend Income Scenario
Principal $300,000 $300,000
Investment Interest – 5% Dividend – 5%
Investment
Earnings $15,000 $15,000
Tax Payable $5,850 @ 39% $2,700 @ 18%
Potential Tax Savings = $3150 per year
Assume you reinvest at 5% for 10 years, this would equal $44,751.37 in tax savings over a 10 year period
Smart fixed income investing
Dividends are even more important to your portfolio now than years ago. When the economy was strong, the Dow and TSX indices were able to hit above 8% consistently year after year. However, in today’s economy, inflation, interest rates, government debts, and government deficits are all
increasing. The market is more volatile and it is not as easy to achieve an above average return without increasing your investment risks. Therefore, we need to look at other ways to ensure you achieve your desired rate of return. We need to select companies with attractive dividend records and strong
underlying fundamentals, including a proven history of dividend growth, solid earnings, and favourable industry conditions.
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2012 Guide to Preferred Shares
02/29/12Preferred Shares Provide Stable Tax-Efficient Dividend Income
