Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Nov 04, 2024

We've had a fantastic run since the tariff tantrum back in March/April. Conditions still support further upside.

One of those is that we're expecting further rate cuts in the US, and likely one in Canada this month. As well, AI is still leading the group, but you have to be selective because things are getting a bit pricey. 

And then we have very strong seasonality tailwinds behind us at this point. Q4 for the last 10 years has averaged about a 5.3% return, and it's been positive 9 of those 10 years. Finally, look at all the cash on the sidelines in the US -- about $7.3T. With interest rates coming down, some of that cash might move into equities and other risk assets including bonds.

Right now, markets are forecasting at least 2 rate cuts in the US being highly likely. Then we'll have to see what comes through in the data.

A record amount. Not all of that will shift into equities and corporate bonds, but he's suggesting that at least some of it will as interest rates start to fall. Of course, some of that cash is meant to be there as proper allocation in a portfolio.

As a technician he expected this, but you never know what's going to trigger it. It was sort of pre-ordained with the setup through August and September, and then we usually get a low in early October and one late October. Today, the driver is an announcement from a politician.

Thinks this correction will be well bid. So on any weakness, whatever the source (an announcement, bad economic news, geopolitical event), investors are probably going to step back in. Just as in April, the market will probably absorb this and move on, knowing that we're in a period of expected weakness anyway.

We'll need to wait a few more weeks, but we'll probably go through this quickly.

Technicals are very binary and clinical. So the setup is always there, but you don't know what the story is behind them. Trump is a bit of a wild card. But the underlying strength in the market (such as shown by the jobs numbers) means that investors are ready to buy on any weakness.

We've seen this a lot more with the Fed, where they're between a rock and a hard place. It was the last central bank to cut rates. The reason they dragged their feet, unlike Canada (which was one of the first of the G7 to lower rates), was concern that underlying strength of the US economy could come back to bite them.

In Canada, we may be less apt to lower if we see jobs continue to do well and GDP pick back up. If GDP starts to have some upward momentum, it'll put both central banks in a bit of a fix and we may not get those lower rates.

Looks good as a longer-term play, but it can be quite volatile. His team is now looking at positions and, for those that have done really well, deciding which ones to clip a bit to bring the position size back in line. Yesterday's pattern suggests further weakness to come, but it's not guaranteed.

Seeing a shorter-term reversal, where all the action of one day is encompassed by the next day's action. Yesterday it moved higher, but closed lower. Gold's up today because of the down market. No connection between safety and gold; biggest connection to gold is the USD.

While he may lighten up on the US dollar, he's not going to the ruble or the yuan. Chart on the USD starting to move up, and that's going to put some pressure on gold. Might see some people selling their gold and going back to the USD.

If you're gold's done well, maybe you clip some profits. But thematically, looks good long term. It's a balance of short term vs. long term.

Investing 101: Canadian Depositary Receipts (CDRs):

Canadian Depositary Receipts (CDRs) are a relatively new concept that has been introduced in recent years to help Canadians gain access to U.S. blue-chip stocks in a simplified, low-cost manner. 

Canadian Depositary Receipts (CDRs) are securities that trade on the NEO Exchange in Canada, and the concepts are essentially similar to American Depository Receipts (ADRs) that are listed on American exchanges. CDRs give Canadians access to some of the largest US companies listed on NYSE and NASDAQ through a Canadian exchange in Canadian dollars. CDRs are issued and managed by the Canadian Imperial Bank of Commerce (CIBC). There are no management fees, so the main cost that investors will incur is the buy/sell commission on trades.

PROS:

Accessibility in registered accounts: CDRs can be held within registered accounts, similar to other Canadian-listed securities. We think CDRs can fit in any account, but generally, growth investments are usually better in a TFSA.

Currency-hedge feature: There is a currency-hedge built into the shares. That said, the built-in currency hedge has a certain cost and may not perfectly track changes in track exchange rate. There are no management fees associated with CDRs, but CIBC does make money on the currency hedge. While investors do not see this as a charge, it does impact net asset value. This cost is estimated to be about 0.50% annually. 

The benefit of currency hedging could be explained through this example. For instance, if the Canadian dollar strengthens relative to the US dollar, then that investment will lag behind the equivalent US stock, and vice versa, if the US dollar appreciates, the CDR will appreciate more than the US equivalent. As investors might expect, this is simply a currency call. 

Fractional ownership: One of the key advantages of CDRs is a lower share price. CDRs are structured so that the price per share always starts at $20, giving a wider array of investors access to these global companies. In simple terms, CDRs represent fractional interest in the underlying US shares.

CONS:

Illiquidity: The primary disadvantage of owning CDRs is their lower liquidity than the US shares. Consequently, a wider bid-ask spread could result in a higher cost when buying/selling for investors.

Withholding taxes still apply: Despite trading on Canadian exchanges, the underlying assets are still U.S. shares, which are subject to withholding taxes for dividends received (except in an RRSP account).

Limited selection: Since the product is still new, only a handful of well-known U.S. mega-cap stocks are currently available. Most small- and mid-cap U.S. companies are not yet offered as CDRs. 

Conclusion

Overall, we are comfortable with CDRs for investors who want lower-priced exposure to U.S. securities with a built-in Canadian hedge. They are not fundamentally different from owning the underlying shares, aside from their price, the currency hedge, and where they trade. The underlying U.S. shares are held by CIBC, which issues the CDRs.

We generally prefer non-hedged products and would favour owning the U.S. shares directly if investors have the capital available and are comfortable with currency exposure. That said, we view CDRs as a good complementary option within a portfolio, and we would be comfortable buying them for U.S. company exposure.
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