Larry Berman CFA, CMT, CTAA Comment -- General Comments From an ExpertA CommentaryN/AOct 01, 2012

They're cautious because they're fearful that the ROI on the huge investment (approaching $1B) isn't going to be fulfilled. Thinks that's unlikely, but the markets are rightfully cautious. Not a terrible thing for investors, forcing them to take it a little slower. 

For a long time we heard about the Mag 7, with extreme concentration in these hyperscalers. The other 493 stocks in the S&P 500 were an afterthought. As money flowed to the Mag 7, many of the other 493 companies continued to do quite well but weren't getting any love. That meant that the valuations were becoming more and more compelling.

Areas include consumer stocks, healthcare, and some industrials. One area that was particularly shunned, which his team made a decisive move on a couple of years ago, was healthcare. He's been on BNN during that time saying that he didn't know when it would move, but that he was quite confident that it would. And it has. Seeing not only green shoots, but very good moves.

His firm has allocated money to AI all along, but in a smaller percentage. It's such a broad area, that to be market weight was too big a bet for his clients. The area has great promise, but his team doesn't want to take on the risk side of the equation to the full extent.

They've been underweight in consumer service companies right from the beginning. They made up the difference in performance by very good stock-picking in the other 493 companies. On a risk-adjusted basis, his firm is way ahead.

Out of stress or negative issues comes opportunity. It forces change. Pre-Trump, Canada hasn't made investments in Canada that need to be made to fulfill what we do well, which is our industrial base (critical minerals, energy, power). 

If you look at the stats, the investment that we're making per worker has fallen dramatically (~15%) over the last 10-12 years. In the US it's grown by 25%. Our hand has been forced, and we might look back and say it was a great thing. Take a look at an article written by Don Moss on goodreid.com under Insights, "Canada's Industrial Restart?"

Don't be too quick to make changes. The macro situation is changing so quickly, and Trump has his TACO nickname. Be prudent, and watch what you have. Don't jump based on the news flow.

Hopefully, you came into this well-diversified by both geography and sector. If you did, just continue to hold down the fort. Individual companies, if hurt badly, may create more of an opportunity than a problem. Be patient with your problems, as they may change.

Look for opportunities, because these times aren't permanent.

Middle Eastern production is down 7.5 million barrels per day, we have forfeited nearly 4.5 million barrels cumulative of Mideast production, and exports out of the Strait of Hormuz are 12-20 million barrels daily (if you trust the White House) though 7-8 M are more likely. So, now we can't drawn much more production, and Iran is aware of this. Also, Ukraine is blasting Russia, which lowers oil refining, and the Houthis are attacking Saudi refineries. Diesel prices are up 60% the past year and gas is up 40%. China saved the oil market by dropping their imports by 5.5 million barrels per day, which is massive. We may see weakness in the refined product, but the strength will transfer to the oil price. Everything is on the table: oil prices could soar past $100, 120, 130, 140, 150. This war was supposed to last 2 weeks, and now it's month 7. We are in a critically dangerous area for oil. A key risk is bad US policy from now till the US Midterms. The US 10-year is at 4.8%. 5% is the red-light level. Energy is the biggest inflationary factor. The oil price is high, Trump has only a 33% approval rating heading into Midterms, and the is very unpopular with both sides of the House. Bad policy would be a crude or diesel export ban, or a TACO that will result in a massive loss.

The US jobs report came out this morning and blew everyone away, very strong. That will add fodder to the arguments of the Fed hawks, though there might be some dissenters.

For the BOC, the job number today was very weak and broad-based by sector and region. Very much poured cold water on any thought of a near-term rate hike by the BOC, and there wasn't much inclination of that.

Yes, it's likely that inflation will stick around for a while and is being pushed up by energy prices. This war in the Middle East was supposed to be over in 3 days or some grandiose timeframe. The off-ramp for both sides is looking very congested. That will likely keep the oil market fairly tight, though we are hearing some reports of escorted tankers making it through the Strait. 

Nevertheless, $90 oil is a problem for inflation because oil prices are implicit in the cost of transportation for all goods. And oil prices are explicitly part of consumer goods. It's a bigger problem in the US where the economy is running hotter in the first place and the labour market is tighter.

The big thing is what happens to wage inflation. In the States, it was not getting either worse or better. It cooled off remarkably in Canada, from 3% and a bit last month down to 2%.

The big thing is this cliche that the market climbs a wall of worry, and it's been doing that since he was last on the show in August. Both the S&P and the TSX marched up to fresh all-time highs before pulling back in the last couple of weeks, but still not too far off their highs. 

That's on the back of very strong corporate earnings growth -- close to 20% in Canada, and an unbelievable north of 50% in the US. All driven by an investment super-cycle that's centred on AI and data centres.

His firm is seeing opportunity in the suppliers of critical minerals, who are selling into the massive global infrastructure, AI, and data centre buildout. Also seeing opportunities in stalwart secular growth champions in non-cyclical industries. Here and there are AI babies thrown out with the bathwater, and on which his firm is taking a contrarian view.

Good question. Succinct answer:  not a chance. AI is driving 2/3-3/4 of overall US economic growth. Canadian banks are a levered play on economic growth, always have been and always will be. If the AI bubble bursts, it'll be a macro headwind.

To one degree or another, Canadian banks are all operating in the States. Provisions for credit losses would likely pick up, which would impact earnings. Capital markets businesses are all making money hand over fist. If that were to fizzle and dry up, would be a headwind. Wealth management fees are predicated on value of assets managed; if markets tanked, fees would go down. Overall market multiple would compress, and banks now are trading at elevated PE ratios.

Real question:  would they weather the storm better than other parts of the market? Probably better than some, but wouldn't be immune.

Last couple of years they were positive, which was a big surprise. More often than not, we usually get negative returns in September. Now we have the midterms. If you look back all the way to 1945, the average decline during a midterm session is ~1.3%. 

Moral of the story is:  Buckle up!

His team has entry points for stocks, and they have price targets. They find that if you stick to the knitting, it'll prove out. Over the last 4-5 months the market has been in a band, albeit a wide one. It can drive you nuts, but it also provides some opportunities.

They stick to the knitting on single stocks, and then they have a hedge overlay to add some value/alpha to portfolios. If you look at the NASDAQ futures, they've traded in a range between 31,000 and 27,500. When they approach 31,000, you sell some futures. His team is always fully invested in the single stocks, and they try to add value by hedging. It works, until it doesn't :)

It was only 4 years ago when MSFT put $10B into OpenAI. Over those 4 years, it was all about agents and chatbots for software companies. But then everyone thought that the large language models were going to eat the lunch of the SaaS companies.

Over the last 12 months, this agentic AI (like an army of agents, rather than individual) has come to the forefront. If you can control that army to solve the puzzle or build the house or whatever, it's pretty powerful.

The Canadian AI equity story is real, but different. In the States it's all about the AI ecosystem, and sitting at the top of the hill are the hyperscalers.

In Canada, it's more of a multi-theme portfolio rather than a single AI stock or ETF. It's more about the infrastructure enablers. We don't really have hyperscalers here, but we have some fantastic enablers. Think of CLS. The poster child for industrial AI software is SHOP. We also have power and data centre beneficiaries, such as ENB, FTS, EMA, and H.

You can drill down further into space and defense AI. The first one that comes to mind is MDA.