Paul VanEeden A Comment -- General Comments From an Expert A Commentary COMMENT May 29, 2009

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.

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 there's been a sigh of relief.

He and his team are contrarian investors. They try 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 obsessed 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.

Investing 101: Companies That Don’t Need Money are The Best Investments

This goes a bit in tandem with the first point. If a company doesn’t need money, and its growth is fully funded internally, you are not likely to get a phone call about it. The best companies simply go about their business, year after year, and compound capital. Without needing new equity, shareholders are not diluted. All growth accrues to the existing owners.

These companies can be harder to find. They may not trade much. They may not pay dividends. They may not make the news for 10 years, after which their strong investment performance might finally get noticed. But they are out there. Before buying any stock, an investor should look at how the share count has grown (or not) over the past 10 years. We certainly try to avoid companies that consider their stock like an ATM and issue shares too often.
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Last week, we saw the ADP (US payroll) come out. ADP cuts paycheques, so is accurate, and ADP claims net job losses in June. Trump can yell at Powell all he likes, but it will do nothing. Interest rates won't move until there is economic clarity. Not today, but markets are growing desensitized to trade news. Today, President TACO is pounding his fist on the bigger numbers. The Big Beautiful Bill was signed into law, and Big Beautiful Deficits are coming, and he's got to pay for them. Deficits are a headwind to long-term growth. Trump needs revenues, so he's pushing tariffs hard. Uncertainty is very high, while markets are priced to perfection at all-time highs. He was supposed to sign 90 trade deals by now, but there are two frameworks for trade deals, instead (UK and Vietnam). Headwinds are building. The BB Bill offers very little net-new stimulus in tax cuts. The bill just continues what he started in his first term. Rather, there's a lot of spending.

It's about timing. About 18 months ago, he didn't like the valuation in the public markets and so was investing his assets into private equity. Then, he switched back to public markets right before Trump flipped the tariff switch in April. He caught the market bounce of April 8. He likes the lower volatility of private equity, but you give up liquidity. 

The U.S. dollar volatility: There's been lots of talk about it. Year to date, the USD is -11%, but in the big picture, this is noise. The USD is basically where it was in the early 1970s. Historically, the USD spiked in the mid-1980s which led to the Plaza Accord to strengthen other currencies which lowered the too-high USD, and in 1999 when the Euro was created. That said, the USD now does matter. The USD's depreciation, plus the inflationary impact of tariffs that's coming will negatively impact inflation. The Fed pausing rates makes complete sense. The positive side: a weakening USD is positive for earnings, particularly for these sectors (many revenues from abroad): tech, materials, communication services and consumer staples. Look for what companies say about inflation and tariffs during earnings season.