Opinions Josef SchachterA Comment -- General Comments From an ExpertA CommentaryN/AOct 20, 2009
Josef SchachterYou might be interested:
Q3 is off to a shaky start. Q1 was good and Q2 great. Everybody is excited by earnings growth with the S&P up 30%+ based on Google's report last week of $98 billion of profit, but that came from Spacex shares. Investors ask what is the AI picture for the next 12-18 months? Uncertainty over the Fed's interest rate policy (will they hike and when?) is concerning investors. What's driving that is the uncertain US-Iran war. So, investors are stepping back from the momentum trade of the last 3 years to wait. AI is half the US GDP growth, but meanwhile, China is building new AI models that will drop the pricing of AI.
He'd be very surprised if they raise rates. If you really look into it, what's driving inflationary issues today is largely linked to the spike in energy prices because of what's happening in the Middle East. Beyond that, he doesn't see a broad-based worry about inflation.
The Middle East conflict will be elongated (we thought it was imminent, now maybe not), and inflation concerns will be with us for a while. For him, that means the Fed can't cut rates. But they're certainly not going to raise rates, because raising rates is not going to fix the issue in the Middle East.
Sure he does, but even he understands (one would think) that the Fed can't do it at the moment. But when he's out in public, he needs someone to yell at because that's his style. So he's gone after FOMC board members.
Chairman Warsh has set up committees, and defers to the groups' opinions whenever he's been asked recently about rates. He's going to let the data drive things. And right now, the data does not support a rate hike.
Not really, but you do have to understand where the distribution comes from. True, some ETFs are tricky that way. It really depends on how it's being presented. Often, when an ETF is growing quickly but hasn't yet earned its stated yield, the return might include a return of capital to reach that yield. What you need to do is look through the ETF and determine if, based on what it holds, it can generate that type of return.
It is yield, as it is paying out that return. But in many cases it's ROC. Some people might call that a tax-efficient way to get income out of a portfolio.
He's advocated these as opposed to traditional fixed income. The investor's talking about public companies that trade as MICs on the stock exchange.
There's a difference between a public MIC and a private one. In the public markets, you get the volatility both up and down. You have some growth potential (which you don't have with your typical MIC), but you have a lot more volatility in terms of interest rates or risk to housing in general. If you can handle the ride, and the MIC is large and well diversified, not a bad time or place to put some $$ to work compared to the private ones.
All the private ones are very transparent. They all ought to have audited financials. If one doesn't, then pass; you don't want to be there.
If you take the total world index, your yield is about 1.7-1.8%. If you want 2% or more, you have to have concentration in areas that pay higher dividends.
For example, many tech stocks don't pay a dividend. But there are a lot of dividend-weighted ETFs that give you exposure to Canada, US, international. As a general rule, Canada (banks, energy, lifecos) and international have higher dividend payouts than in the US. Why? Because the US has a lot more tech than everybody else.
He likes the BMO international covered call strategies. It's a way to get enhance yield and income in a tax-efficient way.
Look at any of the utilities or banks in Canada -- all have very high quality, stable preferreds, without you having to worry too much about credit risk. As a Canadian, you want a pref that comes from a Canadian corporation if you're in a taxable account (as you get the benefit of a tax credit in there). Don't look in foreign jurisdictions, as the income doesn't get preferential tax treatment.
He can't give a specific recommendation, as he hasn't done a deep enough dive on credit research.
AI investing -- Bull Case vs. Bear
He came across a new index put out by a group called Silicon Data, which tracks the cost of LLM tokens. In recent weeks and months, there's a high correlation between the cost of the tokens and cheaper alternatives becoming available. Updated daily. Larry's provided a link to this index in his blog.
In general, buy the dip. We're in the early, early stages of what's going to be a multi-decade bull trend.
Lots of talk about AI bubbles, so he's gone back to look at three of the stock darlings of the late 1990s. At one point, Nortel was over 35% of the Toronto 60 Index. We know what happened there. CSCO and INTC are still around. Pre-crash returns were in the magnitude of 1000% and 2000%. Today's AI stocks have run up 50% and 80%, so we're nowhere near the intensity of the dot-com bubble.
Lots more to come. Be comfortable buying the dips in AI names, but not sure he'd do that today. Thinks there's more correction risk here. But if we get back to where we were a few months ago on some of these names, it'll probably be a good opportunity (especially if you feel you've missed out).
Nobody knows when the Iran conflict is going to end, but the market tends to overlook these geopolitical events if not the price of oil. Generally speaking, markets have been trending higher and doing very well in light of this geopolitical uncertainty.
The less stabilizing part of the market is the discussion around AI and how long that trend will persist. When oil moves $30 a barrel seemingly every week, this sector tends to get overlooked.
It'll take a long time to figure out whether companies are overspending or not, and whether they'll be able to monetize those investments. These companies will continue to plow money in, and they don't really have a choice at this time. Time is a big competitor, and North American companies really have to stay ahead of the curve.
The spending is a sustainable factor in the market, and has been lifting a lot of the market recently. There have been a lot of investment flows in a lot of different sectors, and that's been very helpful to capital markets.
Yes, that's what his team sees. One pushback they get is that the bull market's lasted for 3.7-3.8 years now, when is it going to run out? Bull markets tend to last a lot longer than people think (average is ~5.5 years).
There's a very good backdrop right now. The economy's doing quite well, and so are companies. We're getting through Q2 earnings, and the earnings have been very strong. Despite oil prices being all over the map, and being high right now, companies are still performing very well. In that environment, markets can continue to do well for a while.
It can happen, and GOOG is a good example of that. It had a very good quarter on topline and bottom, but it's increasing the capex spend. Investors see some uncertainty around that. Generally speaking, the volatility will come out of the stock and it'll start to move higher again.
Right now with all the uncertainty around interest rates, his firm is short-duration fixed income. Doesn't look as though Canada will raise rates.
Note that income from fixed income is fully taxable. If you really need to be in fixed income, he advocates corporate bonds at the short end, and probably investment grade. If you're comfortable, some high-quality companies may not be investment grade but give you a slightly higher yield.
Preferred shares are a good way to get income through dividends. Stable, though not as stable as fixed income. Yields of ~5-6% are roughly double what you're getting on fixed income right now, and those yields are tax-advantaged.
Yes, US bonds offer higher interest rates today, as the Fed funds rate is higher than the BOC overnight lending rate. But you're running two risks.
One is that you have currency exposure. The CAD is trading at the low end of the range, and that dynamic might turn. The other thing is that the Fed may be in a better position to raise interest rates, and so the price of your bonds will come down.
