Michael YoshikamiA Comment -- General Comments From an ExpertA CommentaryCOMMENTAug 14, 2009

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.

There's always something more in tech, and he talked about quantum on last week's show. Technology is wildly disinflationary in terms of the productivity it adds.

For him, it always comes back to what do you pay today for that future growth? We're paying a bit too much for it. A case in point is SpaceX. The current generation won't be living on Mars. Perhaps there will be a reason for it someday for their great-grandchildren. The hype is completely misguided.

Loves it. At his firm, he's seeing vibe coding and productivity enhancements that are fantastic. It's very real and it's tangible. It'll have dislocations and disruptions in terms of employment -- the debate now is how much.

Some are saying we need a universal basic income, as a lot of white-collar jobs will be taken away. Robotics may replace a lot of blue-collar jobs, but that's been happening for decades. Still more blue-collar jobs today than there have ever been.

Time will tell. Question is what do you pay for these things today?

It's a great question to ask, especially as equities and valuations are at all-time highs.

Traditional fixed income is broken as an asset class. Because inflation is, potentially, a problem in the decades ahead (which it hasn't been for 40 years), we need to think about the traditional 60/40 split differently. We need to bring other asset classes into our portfolio.

An investor at this stage of experience in life, who has certain income needs, requires a very specific financial plan. They should work with someone. He can't give adequate advice during an on-air call-in show.

What he can say, however, is that traditional fixed income may not meet an investor's needs on real return. If you need growth because you spend more than you have, it's going to be harder to go to a fixed-income portfolio. It's not about trading decisions, it's about having the asset classes you need. It's about income needs and risk tolerances.

For example, there are all kinds of headlines about private credit today. But the right kind of private credit could further enhance the returns in your portfolio. 

Consumer Sector

Well-known economist Peter Boockvar is a good friend of Larry's, and puts out a daily note. Larry highly encourages investors to follow Peter on Substack if they can (Larry provided a link in his blog). 

Today Peter posted a chart that resonates. It tracks delinquencies for credit cards, student loans, car loans, and mortgages. Where we were in the GFC is similar to where we are today on all metrics except for housing. GFC was housing-related, so mortgages aren't there yet (but starting to turn up). Paid-up mortgages are saving consumers. 

But the trend is starting to be a big concern. People who own homes and are doing well are now starting to see stress.

Here's the challenge.... Normally when markets are expensive, you get defensive in your portfolio. XLT represents consumer staples in the US, trades ~30x PE. A consumer cyclicals ETF trades at 35x PE, but it has TSLA in it at 225x PE and is 20% of the index.

We have a bifurcated consumer, and a bifurcated stock market. For example, COST is 46x PE, yet CAG is at 8x PE. At some point, we're going to get a rotation.

While he loves ETFs (and their low cost), we're now at a point in the economy where they're going to be challenged. You always have to understand where you are in the cycle. Right now, it makes more sense to pick your CPB and CAG and good dividend names than it does to rotate from consumer cyclicals to staples within ETFs.