Opinions Kim BoltonA Comment -- General Comments From an ExpertA CommentaryCOMMENTJul 24, 2024
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Stock buyer at present. Natural resources has been falling but it has a great future. The primary driver for the drop is higher interest rates. Precious metals in particular reflects the level of real interest rates. In the US questions about credit quality affected the availability capital to the natural resources industry making growth concern appear. Operating results in the sector has been impacted by higher energy costs. Gold is very attractive at this level. The purchasing power of the USD and CAD is deteriorating at a higher pace than CPI suggest and that is going to be accentuated in the next 5 years. He likes uranium and think that the uranium companies don't reflect the underlying strength in the uranium price. Market is mispricing uranium equities in a big way.
Tremendous run. Valuations are not great, so he wouldn't be adding new $$. Don't worry about the quality at all. But he remembers in 2000, when the dot-com bubble burst and markets collapsed, a lot of the (great) Canadian banks fell 50%.
He thinks a broader market correction is inevitable (sometime in the next year or two). At that time, you can buy the dip. Great long-term investments.
Right now, the obvious outcome seems to be that Washington will be facing gridlock. Gridlock in Year 3 of a presidential cycle, historically (50 years), is very bullish for stocks. He's not sure we'll get that this time around, but not sure you want to be against that at this point.
If we get a fiscal cliff, there will be a lot less government spending to boost economic growth. A lot of the earnings momentum would come out of the market. A lot of the names that have been beaten up and forgotten would benefit. If the global economy slows, market multiples would come down and $$ would rotate into the defensive sector. He'd favour value over growth.
US Spending
When you look at the projections from the US Congressional Budget Office, the picture keeps getting worse and worse. So it almost doesn't matter who wins in Congress. They all do a really bad job at balancing the books.
Which part of the deficit is really causing the biggest stress right now? With interest rates rising, it's the cost of financing the debt.
As of now, the US debt sits at $40T. The US Treasury just put out a report detailing how it will pay for that debt, by issuing a certain number of T-bills and bonds. The cost for each new issuance of debt just keeps increasing. It needs to be controlled and it's not up to Treasury, it's up to Congress.
His last graph shows charts for ZTL.F (hedged) and TLT. They have the same volatility as the S&P 500, so it's not risk-free. But if the US economy and equities are going to falter, long bonds are still the best pick out there.
The message, loud and clear, in recent weeks of earnings is the market is becoming more selective. Companies that delivered that earnings that would have been exceptional a year ago, are now facing pressure--strong earnings are no longer enough, but also need to justify high valuations, sustainable profitable, and a tangible return on AI. That enthusiasm about AI has shifted to seeing returns on investment and cash flows. This is healthy for the broader market, happening during surprising resilient economic growth. However, there's rising inflation above the US's 2% target. She's looking at companies' underlying cash flow and watching the bond market. Overall, the market looks constructive and you don't need to be defensive.
Based on polls, it looks like Trump will lose the House which will turn him into a lame duck president, then he will default to more executive orders. Meanwhile, central banks will keep raising interest rates. Yesterday, Google got hit, so the market is asking who will pay for AI. Overall, he's trimming and pull back, including Google after more than doubling, energy and precious metal.
For new money, telcos (as well as REITs and other sectors) have been hit as interest rates keep rising. The telcos, though, have aleady cut dividends, so they are relatively defensive. Getting more income into your portfolio now makes sense. So these sectors act like a bond proxy, which are buys.
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The market expected today's Bank of Canada interest rate hike to 2.5%, given rising inflation fueled by rising energy prices from the U.S.-Iran war. It probably won't impact the TSX much because the index is heavily weighted in commodities and financials, which may actually benefit from higher rates. The hike follows the U.S. one. AI stocks are driving the market and there's a lack of market breadth. About half the S&P is tied to AI and data centres. But two-thirds of the S&P are trading below their 50-day moving average, mostly those not linked to AI, but that's where opportunities lie. He also likes energy.
The market is volatile. Everyday there is a sector or theme that works: one day AI works, the next AI isn't working, then it's energy or the hyperscalers, then not. We're all slaves to the algo trading and causes people to lose focus on long-term investing. He doesn't trade every two seconds; he focuses on the fundamentals, on quality businesses, over 3-5 years, companies that can grow EPS 10% annually and cash flow. He won't overpay for the enthusiasm for potential AI growth. He's attracted to niche US software and IT now, and the hyperscalers.
As we go into this season of August-October, it's not very hospitable to the market. This upcoming period is going to be difficult. In his fund he has about 10% cash, so he'll add a little bit. In some of his separately managed accounts, he has 20-30% cash because he's been trimming as it went up.
It's a nasty market today, but it's worked out well for his strategies.