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

Types of Pensions: Defined Benefit Versus Defined Contribution

To start, if you are the owner of a pension asset, particularly a defined income stream, consider yourself lucky! A pension is one of your greatest financial assets.

There are two types of company pension plans: Defined Benefit (DB) and Defined Contribution (DC). While not the focus of this article, we will provide a quick note on the key differences in order to better understand the context of the remaining article.

A DB pension means you receive a specific, known and periodic payout that is guaranteed by your employer regardless of how the pension investment performs. Your defined benefit amount depends on how much is paid into the plan and your years of service with that employer. The employer bears the investment risk and any ‘underfunded’ status.

A DC pension is entirely dependent on investment performance. The employee typically directs the asset allocation via investment fund choices. There are no guarantees about what your payout will be when you either retire or leave that employer.
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He likes Canadian energy where such companies make good energy, valuations are attractive and are coming back after being overlooked for US energy. Many are returning capital to shareholders as they control spending. Overall, are strong financially. Also, he likes the car-makers who also make a lot of money, have good PEs and are buying back shares. He likes Ford, but is neutral the Canadian auto-parts-makers.

Covered calls make tons of sense when the market is sideways or moving up a bit, but underperform in a raging bull market like last year. Owning blue chip names and selling some calls. If you're not that overall bullish, set premiums for a short time and a lower price. You give up some upside, but capture more of the premium. Also, if you do this several times a year, then your gains add up.

Options add or remove risk, depending on whether you forecast the current direction of a stock. Also, they can create a lot of leverage. You buy a call when you are bullish a stock; you have the right, no obligation, to buy a stock at a certain price by a certain date. A put is the opposite. A cash-covered put means you will sell a put--give somebody the right to sell you a stock at a certain price below the current price by a certain date; the cash part means you actually have the money, and aren't using leverage.

If the options on a stock are expensive, he will use a call spread because it reduces the outlay. Uses this occasionally. If you buy an expensive option, try to sell an expensive option. A drawback is that if a stock moves quickly and your option is out a couple months, you will realize the full upside. Get the direction and timing right.

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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