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

There really is so much uncertainty. How much are interest rates going to go down next year? What will Trump tariffs do to the economy? What will US immigration policy do to the economy?

So, yes, uncertainty. But also an incredible amount of innovation. The Biden administration put in 3 very powerful pieces of legislation that are bringing jobs back to NA, and Trump will probably approve that. We have AI. A close parallel would be the post-war years after WW2, which was an incredible period for innovation, buildout, and infrastructure. We also have all these ESG initiatives. Lots of positive factors.

The upshot is that we'll still be in a bull market, but yesterday was a needed adjustment.

About 8%. A lot of that would be names in the utilities space and names like ALA. Pure oils would be 3-4%.

He just wrote some on BCE. Writing puts is a bullish strategy where you oblige yourself to own something at a lower strike price. It's skimming along the bottom and getting paid a really nice premium to wait.

Predicting currency in the short run is complicated. In Canada, people think it's about the price of oil but it's not. The biggest predictor is the 2-year rate in the US versus Canada. Right now, the differential here in Canada is about 120 bps from the US; extreme, huge.

If our central bank continues to ease, and the Fed continues to be a bit more restrictive, he's not sure the differential will change much in the short run. If the Trump tariffs resolve themselves OK, we could get a pop. But he's not playing for that.

What he's not doing is buying US dollars. Even though there could potentially be another 3-4 cents more downside on the CAD. There's way more upside over the next 3-10 years. So don't convert now. Keep your CAD. At some point there's going to be a buying opportunity for USD, but it's not now.

In the investment markets, there's never a shortage of uncertainty. But a lot of it's coming to a tipping point right now, prefaced by where we are on the valuation side. Not to say that things couldn't keep going, but it's more of an orange flag to be a bit more cautious.

Yes, and that reflects the interest-rate sensitive nature of the economy in NA. As central banks increased interest rates to cool things off, there's a lag as to when all that has an impact. All that filtering through is what we're seeing now. That's why the cuts have been so aggressive.

The view now is that it's going to be sharper and shallower, but we'll hear a bit more later this afternoon with the Fed.

Yes. A continuation of the theme for quite a while, as growth has been bid up and has become expensive. In a market like today, companies that don't grow as quickly but pay a really good dividend tend to be more defensive. There's still some good value there.

When he looks across his coverage universe, a high percentage of names in the income bucket are buys for him compared to names in the growth bucket.

For growth stocks like SHOP, he looks at free cashflow yield instead of PE. You get to that point where you're burning so much cash, even though earnings look good. In lots of tech, the multiples will always look high. But if you look at price relative to cashflow from operations, or price to free cashflow, you get a better sense of how they're doing.

Biggest thing right now is the tariffs. Canada exports about 4M barrels a day to the US. The decoupling from the price of oil has to do with the risk of tariffs, not tax-loss selling, as that will affect the demand for Canadian crude oil. Another overhang is ESG; some people don't want any part of energy. Oil price has been weak recently.

A lot of people have to use them as they build up their savings, but he's not a big user of ETFs. They do have a massive advantage, and have attracted massive fund flows, when you compare their value proposition versus a mutual fund. Mutual funds charge significantly more as a management fee than an ETF.

With an ETF, you get a whole lot of everything. Some very expensive, some very cheap; some with good balance sheets, some with bad. His preference has always been to use ETFs, or the market in general, to frame your opportunity set. Then you narrow down the opportunities from 500 to the 10-20 you want on your dream team.

You want great business economics, good balance sheets, strong free cashflow. Those are the companies that can control their own destiny. When you buy individual stocks, you're a lot more conscious of what you're buying at what price and what return you're expecting. As you build up your savings, you may want to transition from ETFs to individual stocks that meet your risk parameters.

It's not only about individual stock-picking as a way to outperform the index. For clients who are retired, let's say, the goal may not be outperformance of the market. It's more risk management and certainty of cashflow.

In an investment portfolio, very hard to be perfect. Especially when it's not your full-time job. Everyone tends to have 10% of the portfolio that just didn't do what you thought. In a portfolio of 20-30 names, 2 or 3 will always be basket cases. You need to have a mechanism to deal with them. When a stock falls significantly, review it; if your thesis is broken, you have to exit. 

And when you own an index fund, you don't even see what's happening under the hood. When you own individual stocks, there's a higher level of monitoring that needs to happen.

Markets plunged today after the Fed's Jay Powell announced a rate cut. Wait, shouldn't that be good news? Those hoping for more cuts ahead were disappointed because Powell announced fewer cuts next year, while those who want to stamp out inflation were discouraged by cuts. Nobody is happy. Powell sounded stern, even though he announced rate cuts. Powell has a tricky job; we have two economies--one on fire and the other stalled.

The Impact of Results Versus Estimates

Stocks move on expectations primarily, especially in the short term. So many investors these days are focused on quarterly results, which means that stock moves can be quite dramatic. We prefer a longer-term approach, but it is what it is — expectations, and whether a company beats or misses those expectations — drive stock prices nowadays. A company reporting 80 cents per share in earnings when Street estimates were 40 cents can see its stock move a lot, though there are other factors at play as well, as we will see below.
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US valuations are too high. Remove the Magnificent 7 from the S&P 500 and you discover those 493 stocks are trading 3-4 multiple turns lower than the S&P headline number. Financials and select healthcare and energy are good sectors to go. He is slightly underweight the Mag 7; he holds 20 stocks at an average weighting of 5%. 2025 will be a stockpicker's market, not for passive investors.

The US has become the swing producer and less reliant on OPEC. Oil prices are tepid, given China being weak among other factors. Oil companies have reduced operational costs, so they are now more profitable and producing more cash. Yields are higher. He sees the opportunity for higher profits if oil prices rise. He owns no oil stocks now.