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

The CAD from the time (8:00 pm EST last night) the Globe and Reported Justin Trudeau would resign the CAD sold off, then rose a little when European markets opened overnight, then jumped higher at 6:00 am after the Washington Post reported that Trump would impose sweeping tariffs, but fewer targeted ones. However, the CAD sank heading into Trudeau's resignation around 10:00 am. Minutes later, Trump tweeted that the Post is wrong and that full tariffs will happen. The CAD sank. So, the CAD will whipsaw in the coming months, based on the forthcoming Canadian election and Trump's tariffs. Over the last 5-0 years, the Canadian dollar has rarely been at levels as in the early-1970s. The last-1900s saw a bottom due to Canada's massive deficits and energy market not working. Today, fair value is around $1.25-1.30 and should return here in a year (or 1.5 years) if US tariffs are moderate and a change in the Canadian government. So, hedge assets with US exposure, including ETFs.

With a change in the political scene we should get a re-embracement and fixing of the economy by returning to good wages and dealing with the cost of living issues. The Liberals have not been good for business and sentiment with entrepreneurs, and have shown a lack of understanding of how jobs are created and where higher wages come from. They come from value out of industries. Money has been put into AI and battery technology but he feels this has not been done on a day-to-day basis. Mark Carney could turn things around for the Liberals but Christia Freeland could get tagged with the previous policies.

Comfort and Returns

‘Comfort is the enemy of returns as you can have comfort, or returns, not both’ – Mark Yusko.

Behaviorally, an investor's willingness to sell stocks increases as the market declines, as it becomes more uncomfortable to hold on to a losing position. In order to feel more comfortable, those investors will sell the declining positions in order to ‘stop the bleeding’. In some instances, selling a losing stock is certainly warranted, where the fundamentals have changed or it is going against the market, but in other instances, it can simply be attributed to systemic selling across the broader markets. The same principle applies to buying at the very lows, it can be uncomfortable buying a stock after it has declined significantly (such as what we are seeing across many stocks today), but historically these periods have represented some of the best long-term buying opportunities.

Of course, the principles of ‘buying low and selling high’ and ‘buying when others are fearful and selling when others are greedy’ are well-known mottos to most investors, yet in practice, these are much harder to execute on than in theory. Almost every investor would prefer to buy at the exact bottom of the market or sell at the exact top so that they do not have to hold through the uncomfortable waiting periods in between, but part of a long-term investment strategy involves holding through both bull and bear markets. Many studies have shown that missing out on the few best stock market days of the year can be detrimental to an investor’s portfolio, and while holding on during bear markets may be uncomfortable at times, it is in the depths of the bear markets where bull markets are born. 

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Stocks will do well, if the yield peaks and goes lower, even at 4.5% or 4.6%. But if it climbs to 5%, the stock exchange could be miserable, at least short term. Remember in the mid-1990s the yield hit 6.6% and that was a great time to own stocks.

Anything below 5% unemployment is considered full employment. He expects the labour market to remain strong. But if Trump orders massive deportations, it could trigger a massive labour shortage. Could the labour market get too tight and could wage inflation?

He hopes we achieve this if the consumer stays strong and there's deregulation in capital markets and China bouncing back from the pandemic. More corporate tax rates could help, too. Then again, consumer spending could decline, tariffs and higher interest rates could curb the EPS. 

Bullish sectors in 2025: aerospace, HVAC and anyone selling into data centres, financials (because of expected deregulation), pipelines, legacy tech (like Dell) as long it keeps generating growth, cybersecurity (hacks will continue), robotaxis. Bearish sectors in 2025: agriculture, defense (too expensive), anything sector needing a lot of finance because long rates remain high, packaged food (headwind of GLP-1 drugs), energy (Trump will encourage too much production and drive down prices), retail REITs, materials and commodities (need to see lower interest rates and Chinese demand must increase), quantum computing (a bubble in unprofitable companies).

Believes it will be important to stay diversified and defensive in 2025. Will be important to keep gains from 2024 and 2023. After a period of strong gains - history of markets is towards average gains (~10%). Expecting China to remain important player in the global markets. Chinese markets could be a risk to recession if tariffs are placed on Asian markets. Even if investors don't own Chinese stocks - mush be observant. A.I. stocks show potential, but as a whole, is difficult to  measure cash flow/valuations etc. Will take time to determine winners in the A.I. race. 

Market Update:

The Canadian Manufacturing Purchasing Managers’ Index (PMI) rose to 52.2 in December from 52.0 in November, marking the fastest pace of manufacturing activity in two years driven by inventory accumulation by U.S. clients in anticipation of tariffs. On the other hand, the US manufacturing PMI also rose to a nine-month high of 49.3 in December, up 1.1 from November due to a rebounding in production and new orders, but the outlook remains uncertain amid the threat of higher tariffs. The Canadian dollar was 69.16 cents USD. The U.S. S&P500 ended the week down 1.3%, while the TSX was up 0.9%.

A lot more greens this week than reds. Energy and materials gained 4.3% and 2.8%, respectively. Real estate added 0.7%, while industrials edged up by 0.7% and 0.1%, respectively. Technology gave up 1.6%, while consumer staples slipped 0.2%. Both consumer discretionary and financials ended the week flat. The most heavily traded shares by volume were Bank of Nova Scotia, Toronto-Dominion Bank and Bitfarms.
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Second straight year we've seen returns of over 20% per year, at least in the US. The last time this happened was 1997-98, and we know what happened subsequently when the dot-com bubble burst. She's not saying this market feels like a bubble, but it definitely feels expensive with valuations stretched, and more so in the US than in Canada.

Her firm is always conservative on a regular day. Preservation of capital is the most important thing for her clients, not risky investments. So today, they're being extra cautious. Still, the market rally of the last 2 years has focused predominantly on the tech sector and, in particular, on 7 stocks.

Though her portfolio has done pretty well in the past year, she's not dealing with unreasonable valuations. So there's still an opportunity for the portfolio to continue to grow. The sectors she's in have seen moderate growth, but valuations for the most part are still OK.

Her holdings include pipelines and utilities. Telcos have done poorly, but that's just a small part of the portfolio. She focuses on infrastructure, and critical infrastructure that's difficult to replace. What do consumers need, not want? With utilities, for example, even if we go into recession and consumers are strapped financially, they're not going to cut off their power or cell phone service.

To be comfortable with this, you need to look at the different sectors to understand how cashflow is generated. For pipelines, look at free cashflow rather than earnings. For any company that does large capex up front, with cashflow coming on later, the earnings will look very low at the beginning.

Looking at today's EPS and today's dividend doesn't give you the whole picture as to what earnings are going to be in the future. It is a bit of a risk, but companies like ENB and TRP have regulated growth, backed by long-term take-or-pay contracts. So they're pretty safe in terms of the dividend.

The Mag 7's multiples are high, but it gives an opportunity to trim some shares. They are the Kings of the market, not just in tech. They deserve these higher multiples going forward, not over-valued. In his AI ecosystem, companies like Nvidia, AMD, MSFT and Amazon lie at the foundational centre, providing the hardware and infrastructure to make necessary machine-learning. The next layer includes IBM Watson and Azure Machine, which provide the training and managing of the ML models. The next layer includes Adobe, Netflix and Palantir, which are the application service providers, which use the ML technology to deliver this across industries and to customers. Overall, this is where people make money in ML while they wait for the large language models to come.

The Value in Avoiding a Loss: Multiples Needed to Breakeven from Drawdowns

One of the most often misunderstood concepts in investing is the difference in percentages from a drawdown against an increase. For example, if a stock declines by 10%, a subsequent increase of 10% will not bring the investor back to breakeven, but rather an 11% increase in the price is required to break even. For example, a $10 stock declines by 10% to $9, a subsequent 10% rise from $9 brings the stock up to only $9.9. Below we have listed various drawdown percentages in increments of 10%, and the subsequent percentage increases needed to break even, along with their respective ‘multiples. For example, a 90% drawdown in the price of a $10 stock requires a 10X to bring the stock back up to $10. 
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The new year could start off slowly after such a strong two year market in the U.S. but there is a mood of optimism in the U.S. Bitcoin is over 100 000 after the Trump election. Interest rates are the determining factor with the Fed having started cutting rates, but now likely to keep rates higher for longer with the possibility of inflation returning. He likes the picks and shovels stocks that make all of technology flow. The learning curve with AI should be faster than the one with the Internet as we figure out how to monetize it.