Opinions
Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Nov 04, 2024
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She doesn't find the numbers as strong as posted once you start reading through them. There are conflicting job reports. Yesterday's ADP number showed job losses. Today's report beat expectations, but expectations have come down. Looking on a YTD basis, the number of new jobs created is about half what it was for the same time period in 2023.
Details of today's report are not very optimistic. Outside of healthcare, not many industries are hiring. A lot of the jobs are government, whether municipal or state. Government jobs are the least productive in terms of economic productivity.
Her firm is being a bit more careful, positioning conservatively. This past quarter has seen exceptional market growth. But when it comes to the underlying economic data, that's been mixed or weak. When it comes to the disconnect between the market and the economy, it seems to have widened. Then you add in more uncertainty with geopolitical tensions and tariffs.
There are a lot of things to look out for, yet the market keeps making record highs. They see that, and they're a little bit concerned.
There are a lot of reasons why, and she doesn't have the one answer. Perhaps bad economic news makes investors think there's going to be a rate cut. After today's US job numbers, a rate cut likely won't happen this summer. We haven't really had a real recession since 2008-2009. Investors have gotten used to the idea that whenever there's any economic weakness, either central banks or governments will swoop in to save the day.
But with debt levels continuing to rise, there's a limit to how much governments can spend to support the economy. There are signs that the economy is slowing, so it's better to be cautious. Given risks in the market and current valuations, unlikely that markets will continue to post record highs in the second half of this year.
TFSA -- better to DRIP, or to take the cash and buy other dividend stocks?(A Commentary)
Jul 03, 2025What she does for clients is to take the dividend in cash. The DRIP is not a bad thing for accumulating stocks, but her firm likes to have a bit more control. Dividends come in, and they get to choose where to deploy them. This way gives you more flexibility.
For example, she owns AEM which has done very, very well. Instead of "dripping" in more shares at the elevated level, she'd rather put the dividends to work in something that's underperformed, is at a lower valuation, or has a higher yield.
Since she's a little nervous about the markets, she's taking dividends and putting them into money market funds as she waits for a market pullback.
It's remarkable. If you asked someone 3 months ago whether trade wars and unexpected conflict in the Middle East would trigger all-time highs, they wouldn't have expected so. Trying to figure out where markets are going to go is tough.
It's almost as though people were expecting chaos but didn't get the worst-case scenario, and that's being interpreted as reason for optimism. So a sigh of relief is responsible.
He and his team are contrarian investors. Tries to look at areas that are at least a little bit out of favour. Things that are hitting all-time highs are not usually what excites them. Small caps have had a good rally in the last quarter, but not at the 52-week highs the way large caps are.
Canadian REITs are still really out of favour, so that's an interesting area. People have been obsesses with interest rates and how that affects real estate; but rates don't impact every sub-sector the same way. REITs tend to trade right near their NAV, except in occasional dislocations such as the GFC or Covid. But we're going on 2 years that Canadian REITs have traded at a big discount to NAV, which hasn't happened in the last 25 years. The property market is a lot more buoyant than the REIT market, so that's a great opportunity for investors to take advantage of 2 different ways to own the same asset.
When GICs were yielding 5%, you didn't need the volatility of REITs. As rates have come down, the attractiveness of REITs has gone up. Good place to get yield. Often trading at discount to NAV, so you can probably get some capital gains too. Relatively safe way to be invested in stocks.
No, not as much as a lot of people think they are. Canada's in a tough spot economically. Seems that rate cuts are more likely than rate increases, which would probably help the REIT sector. The sector can definitely do well without rate cuts.
REITs are bond-like, but people forget that at least some REITs have the ability to raise rents over time. They can grow cashflow, which offsets the pressure from interest rates. An office REIT with 20% vacancy would find it tough, but an apartment REIT in Calgary with 1-3% vacancy would be fine.
Not all small caps are startup biotech or drone companies. Lots of businesses dominate a niche that you never even knew was a business. Usually in the range of $500M to $5B market cap.
For example he owns Latham Group, North America's largest manufacturer of fibreglass swimming pools. Its market cap is just under $1B. Fibreglass pools are cheaper up front, last longer, cheaper to maintain; keeps taking market share from concrete, now up to 25% of total pools. This company is 5x bigger than the next largest competitor, with 50% of the fibreglass market.
The sector probably trades at a 20% discount to NAV on average. Fundamentals for real estate in Canada are great. Most of our population lives in cities with some kind of land constraint -- border, mountain, water. Land constraints tend to push up rents over time. We also have better population growth than almost any developed country, creating good demand. And Canada's a safe country.
Buying into a REIT at 20% off is a lot cheaper than hiring a firm to buy you a building at full price.
Lots of uncertainty: geopolitical, debt, US election, and on it goes. So, what do you do about it? The answer is to make sure your portfolio is robust. So no matter the outcome or how much uncertainty, your portfolio and retirement savings are geared to long-term goals. Far too many people focus on the noise in the market, taking their eyes off proper portfolio construction.
The debt picture is catastrophic. The fiscal path of US politics has to change, but there's no political will to do it. It won't get better anytime soon, no matter what the party makeup of the White House or Congress. Best outcome for the market is a split, or gridlock, in terms of cost of capital and what that might mean for the deficit. The deficit's really important.
The message for today is to not worry about the noise and uncertainty. Impossible to forecast.
The CPP really does a great job for Canadians. The CPP portfolio was all government bonds in the late 1990s. As interest rates fell, and they knew they couldn't meet the needs of Canadians, they took action by investing in all other kinds of assets like private equity. All the growth is coming from small companies that aren't listed on any exchange.
The average investor needs to think about structuring portfolios for the long term by looking into private markets and other alternatives, to help smooth the ride. This way, you don't have to be nervous about the outcome of an election or some other uncertainty.
Some have criticized CPP for not investing more in Canada, currently only ~12% of its portfolio is here. But Canada is only about 3% of the world's economy. He'd argue 12% is probably too high given what Canada has to offer for investing. If you're investing for the best possible return, you must think globally and be diversified. Use asset classes geared for the long run, not for the uncertainty of tomorrow.