Larry Berman CFA, CMT, CTAA Comment -- General Comments From an ExpertA CommentaryN/AMay 05, 2014

Yes. A lot of people focus on the Iran war right now, which is clearly having a big impact on the price of oil up and down 5% based on Trump's tweets.

But if you look at the longer-term picture, there are a couple of things. First, global underinvestment for the last 10-15 years in the sector, particularly E&D. So the reserve life of most of the global players is much lower than long-term averages. Increased E&D bodes well for spot demand balance going forward.

Secondly, the oil patch in Western Canada has really found religion in fiscal discipline. Companies are spending within their capex budgets. Also new-found enthusiasm for returning capital to shareholders -- paying down debt, share buybacks, or healthy dividends.

Because Canada can boast longer reserve life assets, our companies are very attractive. Most of the Canadian industry trades at a significant discount to global peers. Canada has not only better assets, but they're cheaper. Eventually people will realize that, and we should see more $$ flowing into Canada.

It'll be at least 12-18 months before we see things coming back to normal. We lost close to 1B barrels of production. A lot of places like the Philippines, which had to ration, are thinking about instituting a strategic reserve. Even Doug Ford was talking about it for Ontario. Damage to facilities will take some time to come back online as well.

He thinks the market's gotten ahead of itself with WTI down to $75 again today. He's looking at $80 for the second half of this year and the rest of 2027.

About 2 years ago (and updated recently), his firm analyzed who was/was't investing in Canadian oil and gas. It was very clear that pension funds were not investing. His own view is that the Canadian pension fund model chooses "exciting" investments to visit around the world than solid investments "just down the street". Politics also comes into it.

The oil & gas sector is the most productive one in our country. When we talk about the productivity issues that Canada has, putting $$ into our most productive sector is how to stimulate our economy.

His team also looked at the 10 most actively managed funds in Canada. Two years ago, those funds had 6% energy exposure, now up to 10%. Getting better, but still massively underweight compared to the index weighting of 18%.

Because of the size of the pension funds compared to the rest of the market, they can really only invest in the top 5 or 6 names. There's a big gap in investing in companies whose market cap is less than $10B.

The banks aren't big players in the oil patch either. Average size of a Big 6 bank energy fund is $139M, average exposure to Canadian energy is only 27%. The bulk of them are invested in gold super majors and the big 6 Canadian energy names. 

No one's looking at the tier below the $10B mark, and that's what his new ETF (COIL) is trying to take advantage of.

Usually you see a blip in August, post-earnings until the traders come back from holidays to break the quiet, or the euphoria over the next earnings. Something somewhere pops out to make the markets dive 3-5%. He expects this bull run to continue. Earnings on strong and the economy is strong. Canada is exiting a technical recession and the CUSMA deal is unsigned. Unemployment is steady and job growth is okay and the consumer is spending, especially the rich. Unfortunately, war is good for the part of the economy producing the equipment.

Yes, the PEs are very high and the dividends are very low historically. Any blip in the economy or credit could mean earnings will take a beating. There's little margin of safety on the earnings. Take profits on the banks if you're collecting a huge profit. He doesn't own the Canadian banks now. How much can earnings growth in this Canadian economy?

There was a lot of geopolitical risk that everyone was watching closely. Investors were digesting higher valuations and potentially shifting interest rate expectations. This week, markets have regained their footing.

Markets are looking past recent volatility and turning attention back to corporate earnings, where we've had some strong results over the last few days. The latest results are reinforcing the fact that businesses are continuing to invest heavily in AI. Investors are becoming more selective on which companies they want to own, the AI investment cycle remains intact. It's still creating opportunities across multiple sectors.

The economy has given investors plenty to think about. Growth is slowing a bit more than expected in Q2, especially in the US. Inflation has eased slightly since a month ago and the labour market remains resilient. Instead of a recession, her team believes the data points to settling into a slower, but more sustainable, pace. This is encouraging for allocating capital. Interest rates are likely to remain elevated and hikes are back on the Fed's table until inflation is under control.

Everyone was in wait-and-see mode for Keven Warsh's approach and language. Fed minutes indicate the possibility of short-term hikes. Chance of a rate hike in September is now over 60%. Since there's no rate decision in August, it'll allow almost 2 months of economic data to come out to really allow the Fed to analyze and assess whether to hold rates or whether a hike is necessary.

Canada's a bit of a different story. GDP growth for Q2 has picked up, which is positive. Nice to see, especially coming off of a minor, technical recession. TSX remains resilient, even with all the trade uncertainty out of the US. Energy has continued to lead the market this month, followed by tech. Strong corporate results have also supported many Canadian businesses. Canada's exposure to commodities, combined with a resilient financial sector, continues to provide a solid foundation for long-term investors.

They've done well. She owns RY, and has exposure to other Canadian financials and US companies. Likes the group as a whole. She wouldn't be overweight at this level, as they're ultimately a leveraged bet on the health of the economy. Good news is that earnings have held up much better than many expected. She's still watching credit losses.

The interest rate story is more balanced than people think. BOC is holding rates at 2.25% and expects economic growth to improve (which we're starting to see). Lower rates can relieve pressure on borrowers and, eventually, revive housing and loan demand. Rates falling too quickly can squeeze lending margins.

Be selective in the space. RY has the broadest mix of Canadian banking, leader in wealth management and capital markets. TD and BMO bring more US exposure into that play. Likes the sector for earnings and dividends, but not as an oversized bet. Keep holding a balanced position.

There are always surprises, as you can see by the price action :)  Yes, MSFT did well, while the last 2, 3, 4 earnings have been terrible. They got their act together. They know how to phrase things for the audience to show how they're monetizing the AI infrastructure buildout. 

Whereas META, he doesn't know. Perhaps it's hard to get out of being a true advertiser. They're trying to monetize. But the market wants to know what the plan is.

The hyperscalers are doing great, as are the connectors. The whole infrastructure buildout is doing well. That's sort of the bullseye, and then around them you have tools like the large language models. And then the applications surround all that. 

Most of the large language models are private. Anthropic, Grok, and OpenAI. It's difficult to get all the information. Hopefully they'll go public and they'll have to be a lot more transparent, as that's the "glue" between the infrastructure and the applications for the end users.

They stick to their knitting on stock portfolios. They know where they want to enter and where they want to exit. There's a farm league of other companies that they'd like to put into the portfolio when they exit something.

Some of the magic they add is on the hedging. Sometimes it works, sometimes it doesn't. With the recent volatility in the market, they're finding that the hedge can actually contribute profits (rather than just acting as an insurance policy). They had dialled up the hedge to 80-90% of the notional value of stock portfolios (last time they did that, was in Spring 2020 going into Covid). This past Tuesday, they took almost all of it back.

In today's environment, you see a lot of the market whipsawing back and forth and different sectors come into favour based on speculation (and Trump's statements). A lot of companies, that aren't involved on a headline basis, grind along and get overlooked.

We do know that Trump won't be president in 2.5 years, and businesses will move on. Perhaps in the midterms Donald will be neutered a bit more and won't be as, let's say, aggressive.