Opinions Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 20, 2025
Stockchase InsightsYou might be interested:
Be cautious. We've seen this before and it ended badly. Many good things are happening: the US economy is doing well, Canadian jobs numbers were solid, the housing market is firming up a little, the AI boom. Though he's skeptical, the Middle East war is de-escalating. We're near the end of the bull market: are record-high multiples and the market should mean-revert in a correction. U.S. 10-year treasury notes are not being issued because 85% of the issuance is now at the short end. Even defensive stocks aren't cheap. Only energy and tech have gained in the last 12 months; all else has done poorly. In Canada, telcos are cheap because of competition and regulatory threats. Canadian banks have shot up to all-time high PEs. He's not in a hurry to deploy new capital.
Inflation should decline when gas prices normalize, assuming the peace holds (between the US, Israel and Iran). Meanwhile, there'll enough excess supply in other regions in coming years, such as Venezuela. However, it's projected that after 2032, oil prices fall to the $50 range. The premium is in the next 18 months before it reverts to pre-US/Iran war. Historically, in Q2 and Q3 before a US Midterm election there's more market uncertainty--will there be a turnover in Congress? Congress typically spend less money in those years. Overall, upcoming earnings will be pretty good again. So far so good, but much is due to massive spending in AI. Debt: he's more worried about spending by world governments than corporate debt.
The changing role of the U.S. Federal Reserve. Last week's new Fed Chief was surprisingly hawkish, since Trump appointed him to lower interest rates. Warsh is restructuring how the Fed will communicate with investors. This adds uncertainty and less transparency. And more volatility which is not necessarily negative. When 2008 hit, the balance sheet of the central bank became a policy tool. Critics of Alan Greenspan point to the late 1980s when he slashed interest rates to zero that maybe led to the real estate bubble. Since 2008, there's been a massive ramp-up of the Fed's balance sheet as a percentage of US GDP is what Warsh will manage, to lessen than past Fed chiefs. Warsh's intent is to lower the bond coupon of 3.36% and the T-bill yield of 3.84%; his hawkish stance will help the long end of the curve, but hurt the short end. It will add volatility.
Expects it to retrace. If you assume that peace holds with Iran, his suspicion is that the higher oil prices that we've endured for a while will kill some demand in lower-income countries (such as Pakistan and Sri Lanka), but not make much of a difference in Canada and the US. When supply comes back, he expects price volatility to the downside (as long as peace holds).
He doesn't know, and he's not sure anybody does. His own view is that the oil price runup that we saw was more a function of an anticipated supply shortage, while countries were able to work off inventories. He's told that there are ~200 loaded cargoes north of the Strait, and ready to proceed through. He suspects that producing countries (with the possible exception of Iran) have pretty good stored inventories that they couldn't move.
This is all speculation on his part, based on whatever he's been able to read. To say that the data is conflicting is an understatement.
To the extent that the oil price falls off, his suspicion is that the market will begin to discount the fact that we're going to have shortages in the future that aren't war-related. Rather, they'll be related to the industry under-investing by ~$1B a day in terms of sustaining capital investments.
Over the next 5-10 years, he feels good about precious metals and mining. In the very near term (this summer), he wouldn't be surprised to see mining stocks in all shapes and forms go down. Two reasons for this: rising US interest rates plus higher oil might cause a synchronized global slowdown.
If mining and oil/gas stocks are sharply lower, this summer would be a lovely time to establish positions. Both industries should do very well over the next 5 years.
Gold price should do well over the next decade. Not so sure it'll do well over next 2-3 months given relatively high US interest rates. Hawkish stance of the Fed will be bad for gold in the near term. Gold will do well because of high US debt, high US deficits, and unfunded entitlement liabilities.
He's a short-term bear, but a long-term bull.
And that's why he likes it. Natural gas has been in systemic oversupply in NA for 5-6 years. Oversupply in the US is beginning to take care of itself with massive investments in infrastructure. Canadian investments have been constrained politically.
He wouldn't be surprised to see nat gas prices trend lower over the summer. Next 3-5 years should see them higher. Canadian nat gas is a more leveraged play than US nat gas, as Canadian companies are selling at higher discounts. The current Canadian PM is anti-energy, but also pragmatic on the need to fund deficits. If the political headwinds disappear in Canada, companies like PEY and BIR will do extremely well.
Rick RuleHe is bullish in the short term. Rapid decline in price has everything to do with vastly increased production, especially laterite nickel in Indonesia. That's changing, as Indonesians are angered by the environmental destruction; government is being forced to crack down. Laterite mining is energy-intensive, and a lot less pleasant at $90 oil. So it's no longer a significantly better cost proposition than the sulphide nickel that Canada produces.
It's done too well of late. Suspects an economic slowdown in the very near term due to the impact of higher oil. So he's a near-term bear. In the long term, he's an incredible copper bull.
Underinvestment for 20 years. Use continues higher for AI plus for the electrification of the world. Five years from now, we'll be rationing copper by price.
Difficulty is between now and, say, October. But that's not enough to put him off.
Operation excellence. Definable development upside. Project pipelines with visible continued revenue growth. Making sustainable capital investments necessary to maintaining production (rather than distributing disproportionate amounts of cash back to shareholders). Dividends and share buybacks are good up to a point, but it's now reaching dangerous levels (particularly in the US). He's not in favour of cannibalizing a company's balance sheet.
Names he owns include CNQ, TOU, and (until recently) ARX.
Advantages of ETF's for Investors:
They are a great tool for investors transitioning from passive to DIY
In investing, there is no need to choose between being an exclusively passive ETF investor or a DIY stock investor. There’s certainly room for investors to do both and create their own hybrid strategy. Investors who want to make the gradual switch to DIY stock investing can also take a hybrid approach by starting with broader market exposure through ETFs as core holdings, then selecting individual stocks as “satellite” holdings. As one gets more comfortable with the risks and concentration of owning individual names and develops a more refined strategy, an investor can slowly sell off units of core ETF holdings (or take new cash that come into the portfolio) and move more towards individual names.
There are many ETFs with niche exposures that allow you to differentiate from the market
There are enough ETFs and variety out there for an investor to create a portfolio of ETFs that he or she views as more optimal than the broad market. An example we often use is owning a TSX ETF which would be overweight in financials, materials and energy. A more optimal allocation may include increased exposure to technology, industrials and other cyclicals for investors looking for growth or utilities and REITs if one is looking for a higher yield than TSX. These adjustments can be achieved via specific sector ETFs. One can also tilt their portfolio towards smaller market cap ETFs that may have higher growth potential and are not well represented in market-cap weighted indices.
Why buy one or two stocks when you can buy the sector?
While this sounds like a rhetorical question, there is an actual reason for this: superior returns by being concentrated in a winning stock of course! But the trick is getting to a level of conviction where one can believe the particular stock is a winner in a specific indsutry. Of course, this can require a lot of time and energy researching a company and its competitors. Meanwhile, one may want exposure to this sector until deciding which name(s) to be more concentrated in. The solution: ETFs. For example, you want exposure to the cybersecurity space and are bullish on the sector in general. To not rush the decision of which cybersecurity stock(s) to pick while getting exposure one can purchase an ETF like the First Trust NASDAQ Cybersecurity ETF (ticker: CIBR) or ETFMG Prime Cyber Security ETF (ticker: HACK) to benefit from industry tailwinds and ultimately let the market decide which individual companies get a higher weighting in the ETF (assuming a market-cap weighting).
Low knowledge areas
Related to the point above, another benefit to ETFs is that they give investors access to instant diversification in areas that are far out of an investor’s realm of knowledge. For example, an investor may want emerging market exposure in their portfolio for geographic diversification. If one knows barely anything about emerging markets, it can be a daunting task to learn the ins and outs of companies in foreign countries that have very different economic cycles, regulatory and competitive. Many investors may not even want to own individual securities outside of North America and this is understandable. Again, ETFs offer a solution to gain this exposure of broader regions or specific countries. Of course, low knowledge areas for an investor can also be specific sectors in local or North American markets.
Final Thoughts
ETFs have many other uses that we can on and on about such as hedging a portfolio’s broad market exposure through inverse ETFs, getting exposure to commodities, currencies and precious metals or even using as a proxy for exposure for the 30-day period one needs to wait before buying back a stock sold as part of a tax-loss selling strategy. The point is, given how easy ETF make it for an investor to customize a portfolio and quickly gain diversified exposure, ETFs can find a place even the most active investor’s portfolio.
Unlock Premium - Try 5i Free