Opinions
Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary N/A Jun 27, 2016
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Quite in line with what was expected. We shouldn't be distracted by that. It will lead to more accommodation and more robust business growth down the road.
When you're in a situation where you've had higher interest rates, it does slow the economy. There's a great deal of growth and opportunity coming from our neighbour to the south. Because we're a resource-rich nation, and if we can get less carbon-embarrassed and more pro-resource, it puts us in a very good spot as we go through the tidal wave of innovation that's going to manifest in some sort of physical infrastructure (data centres, power sources, AI and digital asset booms). Things that were more software-oriented are going to become more hardware-oriented. We'll go "from software to steel".
Crisis necessitates change.
US administration is undertaking a coordinated program to achieve its goals. US used to control the currency. With rising debt and rising China power, that's going to fade. Nations are going to want to price things in other than US dollars. This takes away from the USD. But the US has a plan for that -- if you can't control the currency, control the protocol (that is, control the commerce through digital assets and AI). Data centres and power for AI will need to be created, and US will see deregulation to bring down barriers for resource development.
All this will benefit Canada in a big way, if we can just get out of our own way. We'll be forced to do that. It has to be done and it's economic. Sets up NA as a global head of commerce. It's a pretty bullish scenario.
Market Update
Canada’s tech job market has gone from boom to bust in a matter of years, as August job openings in the sector were down 19 percent from the early 2020 levels. While the CIBC economics published a report showing that unemployment among 15- to 24-year-olds has climbed to the levels typically seen only during recessionary periods. The Canadian dollar was 72.72 cents USD. The U.S. S&P 500 ended the week flat, while the TSX was up 0.6%.
It was a mixed week of greens and reds. Financials and Materials rose 1.4%, each, while energy gained 1.1%. Consumer discretionary dropped by 1.3%, while consumer staples and real estate slid by 1.2%, each. Technology and industrials ended the week lower by 0.9% and 0.8%, respectively. The most heavily traded shares by volume were Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Royal Bank of Canada (RY).
Last month, the market rallied due to corporate earnings, especially from big tech, while interest rates declined. For now, tariffs have not had a big impact. Though, last Friday, Trump's tariffs were ruled illegally by US courts, so that may be creating angst among investors. Ignore the stuff about September being the worst month; buy great stocks at lower prices. The Mag 7 are growing at insanely fast rates, even before we see the benefits of AI. The US market is overlooked.
Her firm is cautious on a good day, let alone where we are today. They're conservative investors, wanting to focus on dividends in general. Their thesis is that the more you rely on dividends coming in, the less you're relying on the overall market to do the work for your total return.
She feels that today the market's doing one thing (going up), but the economy is telling a different story. Looking at the sub-sectors, gold is telling a different story and bonds are too. There's a lot of hesitancy out there, looking to gold as a safe haven. Gold prices have gone up over the last 2 years, and really in the last 3 months. Economic data is hit and miss. Full impact of tariffs hasn't been priced in. Long bond prices are selling off.
A bit of a head-scratcher, but there seems to be this risk-on sentiment. So that makes her firm extra cautious. Hard to put $$ to work right now, as so many valuations are unsustainable. She's actually hoping for a pullback.
Yes, September is a volatile month historically. But she's really looking at the disconnect between the market and the economy, which just keeps getting bigger and bigger.
We're in a policy-driven world right now, so everything will fall on what the Fed's going to do in a few weeks. The US jobs report is coming out this Friday, and she thinks people want to see bad job numbers because that will guarantee a Fed rate cut in September.
But she's thinking that if the economy's showing signs of weakness, a bad jobs report would mean there are problems in the economy. She believes that Canada is already in a recession.
Time to be cautious. Doesn't mean be out of the market, just be careful about which areas you focus on.
Take the S&P 500. You think you're getting a basket of 500 stocks. While that's technically accurate, it's actually very skewed to technology stocks. Just the Mag 7 stocks alone are worth over 30% of the S&P. The TSX had a 5% move last month alone, but that's because 11% of the TSX is just gold stocks. By owning the entire benchmark, it's actually a lot more concentration risk.
Her firm focuses on companies that are more boring, more conservative, and more mature in their life cycle. Their largest weightings are utilities, pipelines, and telcos. Likes banks but, given this economy, now is not the right time to be buying them. Likes critical infrastructure that can't easily be replaced, and won't necessarily change depending on where we are in the market cycle. For example, people aren't going to stop using electricity for their fridges just because we're in a recession; on the other hand, though, general electricity demand is increasing as technology expands.
Doesn't have a favourite right now. So many different sub-sectors. Not a fan of retail REITs because she's nervous about consumer and economy right now.
She does own SIS, which plays on the demographic of aging at home.
Really likes AP.UN and its management, but the fundamentals are not looking so great. Vacancy numbers are worrisome. Not sure if they'll be able to meet lofty expectations for rest of this year. Hasn't cut dividend, while others have. Likes jurisdictions it operates in, nice core asset historical buildings. One to look at once we get to trough occupancies and see what the rental rates are.
Most favourable sector is probably seniors housing like CSH.UN. That sector has risks, such as liability issues during pandemic. Occupancy pretty close to objective of 95%. Demographics are in its favour, people will move there because they need to not because they want to. This would be the one she'd pick to consider.
Permanent Losses Versus Temporary Losses
A loss is the difference between what you paid for an investment and what it is worth today if it dropped (usually evidenced by a market price). Permanent losses are those that have been fully realized through sale, liquidation or termination (bankruptcy). Such losses are not coming back. Market prices can go above intrinsic value when investors are bullish and greedy, and can plummet when investors are scared and fearful. But the intrinsic value of a company doesn’t change nearly as much as the market price. The job of the intelligent investor is to avoid permanent losses and to accept temporary paper losses. Most investments are subject to the prospect of permanent loss, but the key is to get paid for that risk by the prospects of much higher returns.
This year, you no doubt have lots of paper losses, with all major markets down on the year. But is this always going to be the case? (Answer: no). If you sell now, all you have done is crystalize a permanent loss. Every situation is different, of course, but the lesson here is to determine what’s happening with your investment. Is your investment bad, or is the market bad? Knowing the difference will be key in whether you should accept a permanent loss or not.
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Educational Segment. Brexit. At the end of every Bear cycle, if you are still bearish you make no money, markets rally. At the end of every Bull cycle, the Bulls have to feel some pain when things go down. Every correction we have seen in the last couple of years has been 1 month or 2, and then a recovery. Thinks BREXIT is enough of a catalyst, that this time it is going to be more painful, taking out the lows that we have seen earlier this year, and in the middle of last year. He showed the STOXX 600 Banking Index (European bank index chart). It showed the 08-09 lows, and lower lows in 2012. Today we are at about 6% from those lows of 2012. Those lows need to be tested and probably to be taken out at a minimum before we see people confident about coming back in to European banks. He then showed the STOXX 600, which is like the S&P 500 of Europe, a benchmark of all the European countries including the UK. Chart shows a long upward trend line from 2008, and we are sitting on the trend line now. If it breaks where do we go. Retracement levels are where you look for where the market might come back to. The trend line is almost certainly going to break, and that adds to the broader European markets of another 10%-15% downside. On fundamentals, looking at the last 5 years of the earnings, earnings have been going down. Negative interest rates don’t work, they are toxic. He doesn’t know how they stabilize things, and there is more downside to come. Fundamentally we have to go down lower, there has to be some pain. The US and Canadian markets are going to come down in sympathy. They probably retest February lows, and let hope it holds.