But the upward move in the US$ has been nearly ‘parabolic’ and it has now become a very ‘crowded’ trade since everyone assumes that the US rates are headed higher while other global rates all move in the other direction. While it is hard to argue for a stronger Euro or Yen when those interest rates are still being cut and the Quantitative Easing programs are in their early stage, we wonder if the US$ trade has come too far too fast and is ready for at least a retracement of some of those gains. That would probably mark a bottom in commodity prices as well, particularly oil, unless the weaker Chinese growth crimps demand even further. We have been adding to the larger Canadian oil stocks recently, under the view that oil prices have stabilized, the lower Canadian dollar offsets some of the oil losses and the major companies with strong balance sheets can take advantage of merger activity in the sector, picking up the assets of some of the more ‘financially strained’ junior companies. The recent takeover (or, more appropriately, ‘take-under’) of Legacy Oil and Gas by Crescent Point Energy is one such example of this.

While the sharp fall in oil prices over the past year is having a mixed impact on the global economy, there seems to be no doubt as to the impact on the Canadian economy, as demonstrated by the 0.6% fall in Canada’s annualized gross national product (GDP) in the first quarter of 20015, versus the expected increase of 0.3%. That put year-over-year growth at just 1.5%, down from the 1.9% rate of the final quarter of 2014 and well below the expectation of 2.1%.

Fall in Oil Prices and its Effect on the Canadian Economy

This weak growth, particularly compared to the recent strength in the U.S. economy, is the primary reason why we have seen such a sharp fall in the Canadian dollar. The ‘surprise’ interest rate cut by the Bank of Canada earlier this year accelerated that downturn. While we don’t expect rates to be cut again in Canada, the currency will most likely stay under pressure until investors see some recovery in economic growth. Exports from Ontario and Quebec should start to improve due to better trade terms, but the negative impact on the higher growth western economy has been the bigger overall influence so far. Record consumer debt levels also suggest that the Canadian consumer will not be coming to the rescue of the economy anytime soon.

Like we’ve been saying for months now, the $6.5 trillion China rally that’s making stock-market history is a huge bubble that is being inflated by the actions of the government. But as China’s boom surpasses the headiest days of the U.S. Internet bubble, signs of excess are cropping up everywhere. Mainland speculators have borrowed a record $348 billion to bet on further gains, novice investors are piling into shares at an unprecedented pace and price-to-earnings ratios have climbed to the highest levels in five years. Sure-fire signs of a stock market bubble. The economy, meanwhile, is mired in its weakest expansion since 1990. The bad economic news is one of the biggest sources of fuel for the stock gains though, as investors pile into stocks on the belief that the central bank (PBOC) will continue to cut interest rates and reduce lending restrictions in order to bring the Chinese economy out of this tailspin. It worked in the U.S., Japan and, more recently, Europe! All of those stock markets surged when their central bankers ‘loosened the money spigot’ aggressively, even if the ultimate impact on those economies has been far less successful. But the stock market party may already be ending. The 23% decline over the past 3 weeks in the Shanghai Index and the 5% daily moves in the index during the last 3 trading days of June are indicative of the churning seen at major market tops. The volatility in the Chinese stock market is only getting started.

While we continue to point to what we see as exceptional risk levels in the overall stock market, there are still many companies that we see as perennial winners which are still trading at reasonable valuations. Walt Disney Company tops that list for us. Disney remains the premier player in entertainment content with additions of Star Wars and Marvel Comics franchises, adding to their Disney/Touchstone movie libraries, ESPN sports, ABC and music. Earnings growth has been boosted by strength in cross-selling these platforms through theme parks, merchandise, television, internet games and online content. While valuations in the media sector continue to rise as merger activity increases, Disney still trades at only a slight premium to overall stock market P-E multiple despite it’s proven record of decades of growth.

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