Hank CunninghamA Comment -- General Comments From an ExpertA CommentarySELLJul 17, 2013

The oil price has returned to pre-war prices. So, the market will shift attention to the U.S. 10-year bond yield. That yield has risen to 4.5% in recent weeks; typically at this level, forward market returns are muted. AI stocks are insulated, but all other areas, namely growth stocks, have seen downward pressure. He expects the U.S. 10-year to come down and broaden out the rally. Falling oil and gas will lead to lower inflation expectations. Meanwhile, rent prices are starting to roll over, which will lead to tailwinds for core CPI.

The thing is that the US is the biggest economy in the world, so it has leverage over Canada and Mexico. They're going to make additional progress from what the deal was before, but the structure mandated that it was up for review. It either gets extended through to 2042, or it gets extended 10 years, it it's up for annual review. 

He suspects it will take a number of months, but the US will come out ahead. PM Carney will probably be very good at dealing with President Trump as far as public perception goes. But recently at the G7 meeting, there was an off-mic comment that caught the PM in a vulnerable position. 

From Canada's perspective, we're on our heels. But when it comes to terms of trade, what matters most is energy distribution for Canada.

It would be nice to have it between Canada, Mexico and US, but it could go bilateral. The differences between Canada and the US where, ex-oil, they actually run a surplus with Canada, but a clear deficit with Mexico. That should demand a different focus. For example, Mexico couldn't care less about milk; but it'll be a big issue for the Canada-US talks.

When we look at forward pricing on crude oil, pricing for oil in the back months is $50 out past 2031-32. The question is timing of a resolution. For political reasons, Trump would like oil prices to stay low through the midterm elections, and his decision-making will be largely leveraged off of that. Make no mistake, he started something and he'll probably need to finish it. 

Right now, Iran has the upper hand on the president.

Makes no sense that a $1T company should swing 5% in valuation in a day. Massive amount of speculation going on in this wonderfully exciting area. Given the nature of retail investors,and the second-order effects of what buying call options does to create leverage in markets, it's creating some dramatic imbalances. This is adding to volatility and, typically, doesn't end well.

Hedging
Trump's been talking about the US being self-sufficient on energy. It's not actually true. When you look at how many barrels of oil the US produces, it's about 14M a day. They consume about 20M barrels. They need to import a lot of heavy crude. They need Canadian oil, despite what he says.

How this will impact Canadians in on the value of the CAD. We're 3% of the world. When most people look at their investment portfolios, the vast majority of exposure is in the US (over 60% of the world's capital markets). So it matters what the CAD-US rate is, especially in registered accounts.

Today the CAD is trading around $1.42. Short-term interest rates relatively drive a lot of capital flows. If you back out crude oil, Canada actually has a deficit to the US. If we can hammer that point home to the US during CUSMA negotiations, we can gain a lot of ground.

Correlation between the interest-rate differential and the current value of the CAD is much more of a factor recently than what's happening with oil prices. We have a more hawkish Fed, a BOC that probably still needs to cut rates, and a structurally weaker economy here in Canada. It's debatable whether PM Carney's policies will drive foreign investment into Canada.

Very rare for the CAD to hold above current levels. So, for a lot of investors in registered accounts, look to switch your exposure in ETFs to hedge that foreign currency. He encourages people to check out the related links on his blog.

Very bullish on Canada. Lots of opportunities to invest, with big structural themes that are working. These are multi-year themes, not just 1-2 years. Lots of capital going into the Build Canada theme.

As well, he's very bullish on Canadian defense. We're in very early innings of what's to come. They're trying to build a whole supply chain from scratch, and increasing our domestic percentage of defense spending. So money doesn't get sent abroad, it stays in Canada.

Over time, a list of "national champions" will be developed. These are Canadian companies, which will be designated by the government as structurally important to both our national and domestic defense capabilities.

There will be a massive change from how things were done in the past to how they'll be done in the future. The best comparison he has is what's happened to the Canadian banking sector over the last few years. They've seen outsized ROE because they're structurally important, protected by the government, and an oligopoly in many respects. This protection will now turn to critical infrastructure and defense.

As much as possible, he tries to avoid making macro calls. Predicting exchange rates, interest rates, or commodity prices is not how he likes to allocate capital. Odds of successfully making predictions outside of the market are very low. Instead, he'd rather predict things that are structural and highly predictable.

Despite the interest rate paths to be taken by the BOC and the Fed, he's very bullish on some structural themes that should compound capital at very high rates of return for an extended period of time. Adverse interest rates would, of course, have a dampening effect on market multiples.

If you don't overpay for a business, you like it fundamentally, and it's exposed to a growing area, you should be in a really good position irrespective of interest rates.

Over a 3-year horizon Canadian equities are a good place to put capital, but outside of the resource space. This avoids being exposed to commodity price volatility. As well, a lot of the Canadian market is exposed to financials, and the banks are doing quite well.

They're putting on a really brave face here. So many challenges:  another tough inflation print today, a hawkish Federal Reserve, market was poised for lower rates, political unrest, trade uncertainty. Yet markets are near their highs.

Then we have MU last night that tore the cover off the ball. But the NASDAQ's down this morning, and who would have guessed that? It's a tug of war between the haves and the have-nots. The memory guys are saying that their cycles are going to be longer, so they can make more money for longer.

At the end of the day, it's an earnings-driven story. Many different pockets to put money to work, even including the crowded trade of tech stocks. Take NVDA, whose PEG is cheaper than all the rest.

You always want to see breadth widening. Mag 7 leadership has done much of the heavy lifting for markets for quite some time. Now 62% of stocks in the S&P 500 and the Russell 2000 are above their 200-day MAs, and that's what you want to see for a healthier, balanced market. 

Breadth isn't fully healthy, but it is improving. Hasn't gone in a straight line. 

At the end of the day, you have to take the markets that are in front of you. And we're still in a bull market.

Lots of opportunity in tech and in Canada with the nation-building theme. Banks have done really well and deserve the multiple they're at, with earnings improving and probably more to go.

Some software names have really come down a lot. Some really good opportunities to buy stuff that's cheaper than it ought to be.

Gift to all banks with OSFI lowering capital buffer, which really increases ROE picture. Since GFC, they all traded at 11-12x PE forever. Surged up to 15x, and their growth profiles are really growing into valuations. All passed the bank stress test beautifully.

With valuations where they are, he'd be careful.

Yes, unless it isn't ;)  Depends what the post from Truth Social is at 3 am. The most likely scenario is that we're through this particular bizarre phase. Whatever "exogenous shock" is going to hit the market probably won't be Iran, but could be something totally different. There will be a bit of a hangover in the markets, just because after these traumatic events everyone's on a sort of mental high-alert.

Energy prices will probably continue to come down. Neither the US nor the president has any appetite to renew hostilities with Iran, as Trump really is looking down the barrel of the midterm elections. A lot of what happens in US foreign and domestic policy, as well as monetary policy, will be governed by the looming elections in early November. Those could determine whether Trump can continue to run things the way he has been, and he's going to do everything possible to achieve that.

The pullback in the gold sector, for one. He's not asking anyone to catch a falling knife, but thinks the sector will continue to rally. The lack of faith in fiat currencies and government-issued currencies will be here for a while. Other stores of value will continue to be important.