Dennis GartmanA Comment -- General Comments From an ExpertA CommentaryBUYApr 16, 2009

Rabidly enthusiastic demand for stocks, which is shown by S&P 500 and the TSX hitting sequentially fresh all-time highs. Next week will be an interesting test of investor mettle, that's when the enthusiastic demand collides head-on with unprecedented supply. He's referring to the SpaceX IPO, by leaps and bounds the largest IPO ever. 

Add to that the OpenAI IPO later this year, and Google recently raising $85B.

We don't know how it's all going to play out. What we do know is that history teaches us that some of these blockbuster IPOs garner a tremendous amount of attention, but don't always fare that well in their rookie season.

It can go one of 2 ways. The IPOs coming down the pipe could create a halo effect and add fuel to the fire of enthusiasm for thematically similar businesses. Or, they could compete with some of the leading index heavyweights and siphon investor $$ away.

His team is going to be watching with interest in the coming months.

Not trading yet, but IPO coming fairly soon. Not much of a publicly traded healthcare market in Canada, so this should attract a fair bit of attention. 

Well-positioned, generic drug manufacturer. An exciting catalyst are GLP-1 drugs, and it has the first license to sell. His firm doesn't generally buy IPOs, but they're taking a close look at this one.

Lumber companies are not good businesses. Full stop. They're commodities, and this period in time with tariffs and trade is particularly fraught. After the pandemic deck-building peak, demand and prices crashed. Tariffs have been plaguing the lumber industry almost 30 years now, his entire career; they're not going away. Canadian industry is being decimated.

As well, primary use for lumber is housing, and housing demand is still subdued because mortgage rates are still high.

A trade at best. Instead, go downstream for a company that adds value such as DBM or SJ.

Run up, so take some profits. You don't want to sell them, though. Good line of sight to double-digit total return over a cycle. Yes, we're in a "technical recession", but it's narrow and concentrated in certain parts of the economy. As well, the banks own global and US assets, and the US is not in a recession.

That's the $1M question. When the Iran conflict broke out, that trade got expressed in terms of higher energy prices. Peak pessimism saw a spike in oil to $140 a barrel, which is just not sustainable. Now it's traded down on the prospect of peace.

Commodities are also rising on the back of inflation that comes through from energy. The TSX is up, but the question is how much retracement are we going to see when peace takes hold? We'll definitely see some, and for some areas it could be significant.

He wouldn't recommend pivoting out of your winning AI and energy trades, but it's definitely time to think about taking some profits. Moving forward, you want to be pushing capital into areas that the market has really ignored.

Midterm elections in November will also be very significant for the markets as well. CUSMA negotiations are coming up. 

Really surprised by their strength. Poor economy, in a technical recession now, probably a full recession next quarter based on what we're seeing. Yet the banks are moving higher.

Higher interest rates are good for banks until we see credit losses. Banks have not built up provisions. Lower rates would be beneficial for the Canadian economy, but bad for banks. But with oil at higher prices, it's very difficult to see rates being cut.

When he sees how much banks have run, he's taking profits for good risk management. Doesn't see the trajectory as sustainable. Remember how much these banks declined in 2008.

Healthcare looks fairly cheap. An example is AZN, which will increase revenues by 1/3 between now and 2030. Stock's up, but not meaningfully.

Consumer staples is another sector. Luxury good have been decimated.

Money has flowed into energy and defense. If those stocks sell off, that capital will need a pathway to be redeployed into the economy. It'll be interesting to see where funds flow.

He doesn't generally buy day-of IPOs. Problematic. Price will be hyped up, and will probably disappoint. Is SpaceX like the AOL-Time Warner trade (a serial disaster)? Don't buy. Wait and see how it plays out.

Interesting category, with a number of ways to play -- traditional satellites, weapons, communications. The ultimate question is does the business create money? Are revenues sustainable and growing? You have to wait and see.

Everybody has their eyes on the major transformation of AI and its enormous potential. Valuations are quite high, and the market is concentrated in these stocks. His firm is there.

There are also other leadership themes. Most of them are sectors that either benefit from or provide a hedge against inflation.

Things that are more disinflationary or reflect economic weakness really are nowhere to be seen. It's a market of haves and have-nots. It's a market you can be both targeted and diversified in while being involved in the AI trade.

AI hardware stocks caught in a supply chain bottleneck are going parabolic now, given so much demand and limited supply. And yet Sandisk is trading at only 9-10x and their income margin has shot up from 5% last October to now 70%. They command extreme prices. Ultimately, hardware will see competition enter this space. You can't have 5 years of backlog and 1,500 data centres by 2028 at the same time. Software: do these companies have a subscription or usage-based model? Ultimately, AI will disrupt the subs model, but if you provide a service and infrastructure to AI agents, this is positive (usage-based), like Datadog and Snowflake. He likes software and the Q1 sell-off of 50-70% piqued his interest, but these businesses are still growing 10-30% topline and very profitable. He dove in. These stocks are a lot less attractive now than in Q1. That sell-off was partly due to short covering. The ones that have since gone parabolic will catch their breath, so any pullback would be a buy.

The Canadian banks are very exposed to the housing market. However, if the front end of interest rates come down while the long end stays high, that's a net tailwind for banks. Lifecos are slightly better bet, based on valuations.

It's more about narrative and momentum that's driving share prices now, because there's much more algorithmic trading and more retail investors. So, market are growing more detached from fundamentals for longer. It's riskier, so pick your spots. Retails investors look at headlines, rather than ROI. Problem is, that creates bubbles.

When markets are at all-time highs, sometimes it's justified and sometimes it's speculation. He'd argue that right now there's an element of speculative excitement, as well as real fundamental earnings growth.

But we have this massive, diverging economy between the haves and the have-nots. And it's evident in a lot of places.

His belief (not the majority view) is that there's no way we come out of this with the IRGC governing Iran. He can't imagine any scenario where they're OK giving up their nuclear ambitions and walking away. It'll get a lot worse before it gets better.

But, contrary to his views, the market thinks there's a deal coming any day now.