If You’re Worried About American Stocks, Look at This…

If you’re worried about American stocks, there could be a great buying opportunity north of the border.If you’re worried about American stocks, there could be a great buying opportunity north of the border.

In 2011, Canadian stocks trailed U.S. equities by the most in three years. The European debt crisis coupled with the slowdown in China sent investors fleeing out of commodity stocks in late 2011.

Since energy- and commodity-related companies make up 47% of Canadian stocks, it is no wonder the TSX (the Canadian equivalent of the NYSE) fell 12% last year, while the Dow Jones Industrial Average was up for 2011.

As a matter of fact, commodity stocks fell more than the prices of commodities themselves in 2011, reflecting a belief that slow growth worldwide will damper demand for commodities. Should commodity prices stabilize or rise even slightly, commodity stocks could take off, hence the buying opportunity.

In my view, the escalating tensions with Iran, which are pitting Russia and China against the U.S. and Europe, will continue to support higher energy prices. Should there be a war (let’s hope not, but realistically, we know the possibility is significant), then energy prices will jump even higher. And, of course, gold bullion prices will boom.

This presents a nice buying opportunity for energy and precious metal stocks on the main Canadian stock exchange.

Many major gold stocks (a buying opportunity in themselves right now) call the TSX home and, as the price of gold bullion continues to rise, then those precious metals mining companies should reflect the upward move in gold bullion with higher share prices.

There is also the strong possibility that Europe and/or the U.S. will embark on more money printing in 2012. Should that occur, you can bet that commodity prices will rise significantly, just as they have in the recent past, whenever the printing presses have been cranked up, giving more credence to my belief that TSX resource stocks, especially the senior gold mining companies, are a buying opportunity.

It is important to note as well the shift in China’s policy as of December. China, for most of 2011, went from fighting inflation by raising interest rates to lowering interest rates as of December in response to a slowing economy.

Should inflation remain subdued, and should the Chinese economy continue to slow in 2012, China has made it clear that it will follow the central banks of the world and cut interest rates to stimulate growth. Since China is one of the most important buyers of commodities worldwide, this would have a positive effect on commodity prices and commodity stocks, hence the buying opportunity I see on the TSX.

Let’s put aside the fact that the shares in Canada might be cheaper for no other reason than they don’t trade in the U.S., which on its own is worth looking at as a buying opportunity.

The most important reason to buy Canada is the Canadian dollar itself, another buying opportunity.

Canada has the lowest debt-to-GDP ratio among the G7 members (in the mid-30% range, far lower than most other countries). And guess what? Canada has not started up the printing presses since the crisis began in 2008. Wait, I think that point needs repeating: Canada has not printed any money since the 2008 crisis began.

This puts the country in better fiscal shape than the U.S. and Europe. If there are shocks to the global economic system (think the European debt crisis), then Canada has the flexibility to print money to help its people and its economy.

Diversification is a great thing. Not only, dear reader, should you look at the TSX as a buying opportunity because commodity stocks are trading low, but it is also great to own a currency that should weather the storm should an adverse event hit the world, like it did in 2008. (Also see: Payback Time: Europe to Export a Recession to America.)

Michael’s Personal Notes:

My forecast that the eurozone is in a recession right now are showing up in the numbers.

Germany, the stronghold of the eurozone, says that its economy probably shrank by about 0.25% in the fourth quarter of 2011 when compared to the third quarter of 2011.

The technical definition of a recession is two consecutive quarters of negative GDP. This means that, should German growth decline in the first quarter of 2012, technically, Germany will be in a recession.

Can the rest of eurozone be far behind? I believe they are already there…in a recession.

Germany managed to grow three percent in 2011, down from 3.7% in 2010. Obviously, growth was affected by the eurozone debt crisis. What is critical to note is that this drop in growth was the largest since German’s reunification, over 20 years ago.

What is surprising is that Germany’s own central bank—the Deutsche Bundesbank—is predicting that growth will be an anemic 0.6% in 2012, with a bounce to 1.8% in 2013.

Germany is almost admitting that it is on the edge of a recession.

Any slight deviation from this forecast will tip the main economic engine of the eurozone. Clearly, if fourth-quarter growth was slightly down, the pressures are building for a challenging first quarter of 2012.

Germany is hoping that the eurozone debt crisis will stabilize, since much of Germany’s exports stay in the eurozone. Considering the turmoil in the eurozone, that stabilization is looking like a bad bet.

A perfect example is Spain’s Industrial Production; it fell seven percent year-over-year in November, the worst decline in 24 months. A large portion of England’s exports is destined for the eurozone, but England’s exports dropped 1.5% in the month of November!

There is momentum in these statistics, but unfortunately that momentum is to the downside, as the eurozone debt crisis continues to worsen.

The austerity measures implemented in the eurozone due to the eurozone debt crisis are squeezing the average person, which is naturally reducing consumer consumption.  As consumption falls, countries need to import less, which is being reflected in the above statistics.

This is further evidenced by the European Central Bank’s own cut in its growth forecast for 2012, to just above the zero line: 0.3%.

As I’ve been saying all along, the eurozone is probably already in a recession. The just-released data are pointing to the fact that growth will be an elusive shadow in 2012. The big question becomes: how much of the eurozone’s recession will be imported into the United States?

Any statement to the effect that the eurozone recession will be limited to the eurozone is like saying the U.S. housing bust of 2006 would be restricted to the real estate sector.

Where the Market Stands; Where it’s Headed:

We are in bear market rally in stocks that started in March 2009. This rally is getting old and tired, but still has life left in it. When this bear market rally ends, Phase II of the secular bear market that started in October 2007 will be over. Phase III of the bear market, the phase I’m predicting is headed to us next, will be devastating for the market and investors. (Also see: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. [Since 2005, I have been writing about how the real estate bust would be bigger than the boom.] In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. A dire prediction that came true.