A Comment -- General Comments From an Expert (A Commentary)

Yes, he likes this strategy if you are very bullish. If you like a stock and enjoy upside, great, but if it goes down, then you buy more shares and increase your position.

AI: DeepSeek's sudden emergence has cracked the bullish thesis, but demand will endure or grow. The reason is Jevons paradox (the theory that states that making a resource more efficient can lead to increased demand) and benefit the megatech companies. But DeepSeek proves that you can use older, cheaper semis than Nvidia's to get the same job done using clever software. Also, DS is open source, whereas North American AI is closed source. So, free versions readily available may be a challenge for tech companies.

The message coming from the Fed is that it's on hold for rate cuts. He'll get a lot of questions as to whether he's worried about inflation, which will elevate the discussion around inflation to the 6 o'clock news. Last week the Michigan Consumer Sentiment numbers came out, and inflation expectations took a massive jump up. That sentiment is a big part of keeping long-term inflation anchored.

If inflation expectations don't change, a lot of people are worried about President Trump's policies around tariffs. That's going to start to really enter the narrative.

Right now, the market sees the threat of tariffs as a Trump negotiating tool. Every time there's a new headline about inflation, markets go down, but then quickly get bought up. The market's in a buy-the-dip mindset at the moment. But for the last couple of months, we haven't really seen any higher highs.

We're on the cusp of that again this week. Can the market expand to the upside here? Or are we going to trade back down to the bottom end of the multi-month trading range we've been in since the US election?

Not great, but OK and a bit better than expected. Over the next week or two, we're going to see more consumer-oriented names like MCD report. Really important what they'll have to say about whether consumers are in good enough shape to further expand the market multiple. He argues that it's going to be a tougher task at this point than a lot of the bulls think.

The bottom end of the income spectrum is really hurting in a big way in many sectors. Now, MCD is a go-out-to-eat trade down; it's less expensive than a Denny's or an Olive Garden, for example. So if MCD, which is already at the lower end of a meal out, is telling us that the lower income folks are struggling, then you really have to sit up and take notice. But the market's pretty much ignoring it for now.

The rule of thumb is that if you're really bullish on the equity outlook, you don't want a covered call strategy. You're not going to do as well as a long-holding dividend strategy. If you don't like the market and you're concerned about it, a covered call strategy will give you a little bit more income.

The second aspect of this rule of thumb is that, internationally, covered call income is going to give you better tax treatment. So in a taxable account, some of those strategies might give you a better after-tax yield.

You typically won't see that. On a short-term bond, there's not enough volatility for the premiums to add significant value. Long-term bonds have a lot more volatility, and preferreds might have some. There might be such ETFs out there, but he doesn't know any off the top of his head.

There's much more volatility in equities, so the option overlays add more value. The longer your interest-rate profile, the more volatility, so you could get some extra tax-efficient income off that.

He'd argue against prices skyrocketing. President Trump's "drill, baby, drill" policies will keep supplies in NA pretty ample in the next couple of years, offset by periods of economic weakness. Buy dips. Unless a name has an idiosyncratic tailwind going for it, don't chase strength looking for longer-term breakout.

US Interest Rates and Debt Pressures

There's a link in the Berman's Call blog, so viewers/readers can follow along with graphics.
 
The new US Treasury Secretary, Scott Bessent, did an interview last week, where he talked about focusing policy on long-term inflation expectations. Bessent really has his eye on the ball. He was looking at the 10-year interest rates, but not at short-term rates. Trump has been audibly outspoken against the Federal Reserve for lowering rates, and that policy has been inflationary.

Last month, the Michigan Consumer Sentiment survey numbers really shot up from 3% to over 4%. If inflation expectations really start to elevate, people change their behaviour. For example, if they think prices are going to rise in the future, they buy more now, which further fuels inflation. You really have to be mindful of that, as the cost of the debt is the biggest line item on the balance sheet. They have to think how they can get the cost of the debt to the taxpayer as low as possible?

Elon Musk, the czar of the DOGE, "tweeted" out fiscal outlays on an inflation-adjusted basis, providing real and adjusted numbers. Medicaid, Medicare, and Social Security are very big items. DOGE might be able to save $50B, but it doesn't really move the needle for a $29T economy. The tax cuts that Trump wants are going to cost too, so you need balance.

Net cost of all the US debt together has been rising as interest rate costs have gone up in recent years with central banks raising rates. That's the single biggest thing they have to control. The right framing is to focus President Trump's attention on keeping the long-term cost of debt as low as possible. We have to keep inflation expectations anchored.

Trump's America First policies are inflationary, make no mistake. We don't want policy moves to ignite inflation, or they'd get out of control and really problematic. Hopefully when Powell speaks this week to Congress, we're not going to see Trump complain on social media that this isn't being "fair" to him or whatever he might say.

Investing Theme to Watch: Urbanization and Digital Infrastructure

People continue to leave their rural lives behind and flock to cities in nearly every country on the planet. This means better jobs, more excitement and more service for them. Thus, this trend is likely going to continue for decades.

Investment opportunities abound from this shift. Companies can establish the necessary infrastructure to cater to both people’s move to cities and their rapidly growing and changing digital needs. As the citizens of developing countries become wealthier, they are going to want to buy cars, smartphones, digital TVs and everything else that can make their lives better and easier.

New technologies are bound to emerge and the companies that can capture market share of this new trend could do very well.

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Central banks cutting interest rates could lead to deflation - perhaps rates are falling too fast. Would suggest Canada mirrors USA who hasn't cut rates yet. Inflation is not going away. Recent tariff threats from USA are reality check to Canadians. Trump administration has done more for Canada in the past two weeks than years of Canadian Federal leadership. Canadian energy will hopefully start to renewed development as Canadians recognize value of energy resources. 

Tech Themes That Created Investing Opportunities:

Smartphones

You probably have realized by now how hard life would be if you didn’t have a smartphone. Boarding a plane? Reading a menu? Ordering a taxi or Uber? Looking for directions? Reading the newspaper? Signing forms? Good luck with that. Essentially, smartphones combined the power of processors and the internet and turned your phone into your own personal assistant, mobile encyclopedia and best friend. The smart phone set off entire industries of companies serving the sector, from app developers to all those kiosks in the mall selling phone covers. You know the company we are going to mention here, of course: Apple Inc. After the recession in 2002, Apple shares went on a 12-year tear, only declining once (46 per cent in 2008) and the company saw its stock rise from 25 cents (split adjusted) to $28 in 2014. It has, of course, increased nearly 10-fold from that level as well to today’s price.

Google

Yes, we are going to single out a specific company here as a tech development. Tied of course to the internet, Google (now a division of holding company Alphabet Inc.) simply made the internet more usable for the world. I remember being frustrated by internet searches back in the day, and a co-worker urged me to use Google. I had never heard of it before, but suddenly the internet was there in all its glory, ready to be discovered. Google searches became so useful and pervasive that the company itself became a verb: “Just Google it,” your friends would say. Since its early days, of course, Google (I don’t think I will ever call it Alphabet) has transformed into a corporate behemoth. It has used its massive cash flow (US$105 billion annually now) to develop new products and services and/or buy all sorts of companies and products and services. It is now about a US$2.4 trillion company. It’s hard to believe that Alphabet has only been public for less than 21 years. Shares have gone from US$4.80 to about US$195 since their debut in 2004.

Artificial Intelligence

AI went mainstream in 2022 with the launch of ChatGPT. Suddenly, AI assistants could churn out entire reports on topics, write essays for students, set up vacation plans, write software code and create videos and graphics. AI usage has started to creep into everyday life, from call centres to drive-through restaurants, internet searches and data analysis. We are not quite at the home-robot stage, but we are certainly getting closer. The dawn of AI is probably a bigger technological advancement than the internet. Of course, it can’t happen without the internet, where AI gets all of its data. Again, you know the poster child of this development. Nvidia Corp., which produces the GPU chips that run AI programs, has seen its shares go from less than US10 cents in 1999, to hitting about US$129 this week. Will DeepSeek change its direction? Only time will tell, but it certainly took a big hit when the DeepSeek news came out.
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When you look at the S&P 500, it has estimated earnings growth of 11% for this year, and ~12% for next year. Looking at mid-caps, it's 11% this year but 16% next year. He likes mid-caps, given their (rare) discount to large caps and their higher growth prospects.

He does think about it, and we can certainly expect more chaos coming out of different US policies. Yet, historically, we know that these types of events are short-lived. 

Tariffs on China are a bigger deal, because it's 19% of global GDP, compared to Canada and Mexico which are less than 4%. In 2018 when Trump first placed tariffs on China, the market dropped about 19.7%. But within less than 3 months, it rebounded. So these risks are opportunities, not obstacles.