Author: Bob Gay, GEARS
Covestor model: Bluenose
Disclosure: none
The Bluenose model is a portfolio of Canadian companies traded on U.S. exchanges. The model is designed to exploit the more extreme growth cycles and commodity price exposure of Canadian companies.
Experience shows that the periodicity of business cycles is similar between Canada and the Unites States but that cyclical amplitude is greater for Canadian Companies. Canadian cyclical shares perform better during a cyclical advance.
Historically, shares of Canadian companies produce their best performance during the leveraged acceleration phase of the U.S. business cycle. Over the two years year we have been in the early acceleration phase when companies are enjoying the cash flow benefit of a sales growth improvement but new wealth is retained as cash, conservatively invested or paid out to shareholders. The recent stock market correction has hit the Bluenose particularly hard because the commodity stocks that for the bulk of the Canadian exposure have declined sharply.
This is not a long term market top, but rather a leadership transition. The history of business cycles shows that the early stage of the recovery is driven by demand for consumer durables. After about two years the consumers stop advancing and capital expenditures begin, propelling corporate profits higher for the next and last two years of the business cycle. Wea are at that transition now. We are beginning the leveraged acceleration phase of the business cycle and the recent drop in Bluenose shares is providing a buying opportunity for the model.
Bluenose is not a trading model but rather invests in Canadian inter-listed companies to benefit from a U.S. acceleration. I will hold these positions until the U.S. acceleration peaks.
