Obama Stimulus Boom for Canadian Stock Market?
Stock-Markets / Investing 2009 Jan 16, 2009 - 02:23 PM
Investors are already positioning themselves in U.S. stocks to make the most of the boom fueled by Obama's stimulus plan. While many of these picks could rally nicely as our government throws hundreds of billions at our economic problems, they're not outside the box. Or maybe I should say “outside the borders.”
Because if President-Elect Obama actually succeeds in jumpstarting America's economy, I think one of the best places to put your money to work is in Canada.
Canadian Stocks Could Skyrocket!
About 70% of Canada's exports go to the U.S. So if the U.S. catches a cold, Canada gets pneumonia. Likewise, the reverse is true. If the U.S. starts to recover, Canadian stocks should be on the launch pad.
Obama is pressing Congress to act quickly on a two-year, $850 billion economic stimulus plan. This plan includes:
- New government spending,
- $300 billion worth of tax cuts,
- And the second half of the bailout fund Congress approved last fall — worth $350 billion.
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| 70% of Canada's exports go to the U.S. So if the U.S. starts to recover, Canadian stocks should be on the launch pad. |
It's hard to see how this will be enough to re-inflate the biggest credit bubble in history. Still, economists tell us that each dollar of government spending increases the GDP by 1.4 dollars. So this is a sizeable plan that could shorten the recession. And that, in turn, could turn up the economic heat in our neighbor to the north.
Canadian stocks have a lot going for them right now, too. And they're going to look even better in an economic recovery.
Let me give you three reasons why …
Reason #1 — Canada Stimulus Package to Come
Prime Minister Stephen Harper has said his government is working on a stimulus package that could be worth as much as $50 billion.
Considering that Canada's gross domestic product is roughly one-tenth that of the U.S., $50 billion spent in Canada could be the equivalent of a $500 billion stimulus package here in the U.S. And it will surely add juice to select Canadian stocks.
Reason #2 — New Tax-Free Investment Plans
Just last week, Canadians became eligible for new, tax-free savings accounts (TFSAs).
Now, Canadians can deposit up to $5,000 annually into a TFSA. Investment earnings in the account are tax-free. And anecdotal reports show that Canadians are using the new funds to buy bargain-bin stocks. After all, when stock prices are comparatively low, these accounts might be best used for “Tax Free Trading.”
This should ramp up any market rally in Canada as investors use the TFSAs to pile aboard small-cap stocks in hopes they're going to blast off.
Reason #3 — Canadian Stocks Are Cheap
Do you think the S&P 500 Index is cheap at around 16 times trailing earnings? I sure don't. Though you'd be hard pressed to find it cheaper on a price-to-earnings basis in the last 10 years.
Now, let's take a look at the historical price-to-earnings ratio of the Toronto Stock Exchange Index …
The leading Canadian stock index recently traded at a trailing P/E ratio of just 10.8 … and trades at just 9.7 times forward earnings. This is historically cheap. The last time it traded at its current price, its P/E was 18.
To be sure, these stocks could get cheaper. But remember, stock buyers discount the future.
By the way, in both the short term and the medium term, Canadian stocks outperform U.S. stocks. The TSX is up about 37% in the past six years, compared to just 1.7% for the S&P 500.
If you put together a historically cheap valuation with the fact that the U.S. is going to have a massive stimulus plan … Canada will have its own stimulus plan … AND Canadian investors have a new, tax-efficient way to trade stocks, you can see how we could be in for a heck of a rally!
So when the broad market finally returns to health, who do you think will be among the leaders? My money is on the stocks in the TSX.
Plus, the Canadian Dollar Can Outsize the Payoff for U.S. Investors
The Canadian dollar, also known as “the Loonie” because of the bird on their one-dollar coins, depreciated 18% in 2008 as the global slump reduced export demand. And a recent Bloomberg survey of economists forecasted that the Loonie would weaken to C$1.28 in the first quarter of 2009.
But a funny thing happened: On Friday, Canada's dollar touched a two-month high against the greenback. And it looks like it could be poised to break out to the upside.
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The Loonie's recent rebound was fueled by a rally in hard assets — especially copper and gold. We should see volatility in both going forward. But longer-term, I expect hard assets like gold to go higher. And that should boost the Canadian dollar.
Because your Canadian investments would be made in loonies, your returns in U.S. dollars would actually get an extra boost from any strengthening of the Canadian currency.
So to get your portfolio on track for the boom I see coming north of our border, I have …
Three Canadian Picks You Might Want to Consider …
Pick #1 — Central Fund of Canada (CEF on the AMEX, CEF.A on the TSX)
CEF invests in gold and silver bullion — one ounce of gold for every 50 ounces of silver. If you think precious metals are trending higher over the longer term — and the greenback will trend lower — the CEF is a closed-end fund that looks good at current prices.
Pick #2 — The iShares Canada Fund (EWC on the NYSE)
This ETF is filled with leading Canadian companies including Royal Bank of Canada (finance), Encana (natural gas) and Barrick Gold (gold). It has put in a nice double-bottom on the charts and looks poised to run higher.
Pick #3 — Agnico-Eagle Mines (AEM on the NYSE or TSX)
One of the best gold producers around, this stock has already racked up open gains of 42.7% since I recommended it in the “Golden Parachute for 2009″ report I sent to my Red-Hot Global Small-Caps subscribers a couple months ago. But it could go a whole lot higher!
Since this is a volatile market, you should consider buying any of these three investments on pullbacks. After all, this is a wild and wooly market, and timing is crucial.
Yours for trading profits,
Sean
P.S. Later this month, I'm heading up to Vancouver, Canada, to attend the Vancouver Resource Investment Conference. I've also arranged to meet with some of the most promising small-cap natural resource companies in Canada … and the world.
I'm looking for smaller gold and silver miners that are off the radar screen and that are in, or near, production. I'm talking about companies with pounds in the ground — or even with production — that are way undervalued compared to bigger companies.
And on January 29, I will fire off a special report, Three Red-Hot Picks from Vancouver , with my recommendations for my best picks in Canadian small-caps.
These stocks are too small for a recommendation in Money and Markets. So this report will only be available to a select group … subscribers to my Red-Hot Global Small-Caps .
If you want to get in on the ground floor of three of tomorrow's potential superstars … with the kind of service that can hit the mother lode in small stocks … call 1-800-898-0819 or click here. My team will set you up and make sure you're all squared away so you can act on these recommendations IMMEDIATELY as soon as my report comes out.
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