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

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.

Doesn't really surprise him too much. Trudeau government is past its best before date for the most part. Pretty clear that we'll get a change in leadership with the election next year. Anyone with future leadership ambitions in the party is trying to distance themselves from Trudeau.

Clearly, from her statement, they weren't aligned on how tax dollars should be spent. "Gimmicks" was the right way to categorize the GST holiday and $250 giveaway; complete nonsense from anybody who has any fiscal responsibility whatsoever.

To be fair, governments had to spend a lot of money to pull the world out of the Covid downturn. No matter who was leading. Excess spending in the US probably accelerated inflation, as it did here in Canada. Similar events happened in Europe.

He's not so sure the opposition in every country wouldn't have done exactly the same thing. Nevertheless, people are voting for change. Trudeau government has been in power a long time, and it's time for a change. When a finance minister resigns, typically you'd expect negative impact on the CAD. A change in the Canadian government might actually be a positive for the CAD.

The ETF companies don't earn anything from the amount that trades. But the volume does speak to investor interest in an ETF. An ETF that doesn't trade a lot is probably not long for this world, as it won't be economically viable. Typically, any ETF should have at least $25M of capital after being live for a year or two.

Volume is one thing to look at, but not the only thing. Look at the assets it contains.

You have to understand what they're doing with the covered calls. Some of them write right at the money, some of them write out of the money, and some only 50% of the name. And on it goes.

Here's a rule of thumb:  if they completely overwrite the entire portfolio, you're going to get a higher yield, but lower upside traction. If you're bearish, that would be a better one to play. If bullish, you don't want it -- you want writing out of the money, less yield, but you get more upside capture.

You really have to look at the strategy and understand it. It's not whether one is better than another, it's about the market environment you're in. He has no problems switching ETFs within a registered account, as these aren't taxable events. But in a taxable account, if you're constantly switching, you're probably generating a lot of tax for no reason.

Outlook for 2025

The "fearless" forecast. It's fun, and everybody does them, but nobody really knows. 

The Fed is meeting this week. A couple of months ago in their Summary of Economic Projections, they thought US GDP would be 2% this year. It's 2.7%. They thought the unemployment rate would be 4.4%. It's 4.2%. Inflation was supposed to be 2.6%, and it's 2.9%. There's no reason they should cut rates this week, yet they are going to. His point is that forecasting's very hard.

A year ago, when we looked at the Wall Street consensus for earnings, $233 was the number. When we get to January and earnings for Q4, looks to be around $241-242. So they underestimated earnings  growth. But the median number for the S&P was expected to be 4850, with the most bullish strategists pegging it at 5200. Yet here we are today with it pushing on 6100. Even the most bullish bulls were not even close last year.

He was overly cautious last year. He figured the chances of a recession were really high. Usually when there's big consensus in one direction, something else is going to happen. He was right, but in the wrong direction. 

Let's turn to next year. Wall Street consensus for earnings at end of 2025 is $267. So a 12% increase from where we are today. Average S&P forecast for 2025 is around 6500. Bulls see the S&P ending at 6700-7100 next year. This year there's a lot more optimism, and the markets are significantly more expensive. Last year was expensive at 20x; this year is 25x and expectations are for it to maintain that premium.

Again, he thinks something different will happen in 2025. If you look at history over the past 100 years, no one really knows what's going to happen after back-to-back years of stellar performance. He suspects markets will be flat to down a little bit. Given Trump's policies, odds of a recession will be pushed way into the future.

For the bond market, bonds are broken. US treasuries are the benchmark of the world, and YTD they've returned 2%, pretty much a failure. Bonds have done a bit better in Canada with our structurally weak economy; but most of the gain has come in the last month. Don't expect that from Canada going forward. Cash will beat bonds in the next year or two.

On crude oil, he sees us being range-bound for a number of years. Everything has been positive for oil and gas, yet still can't hold above $100. If we go into a downturn/recession, can expect a dip below $60.

Gold had a breakout. He's expecting sideways consolidation for the next year or two, not acceleration above the top of the trend channel.

CAD -- above $1.40-1.42, long-term owners of USD should hedge that. You want to buy Canadian dollars on international markets, especially if we get a change in government next year. Canada is a buy.

Today's resignation by the Finance Minister on the same day as the fiscal update is not timely. Today the Nasdaq is hitting new highs. We've had two straight years of strong returns, which is unusually. The TSX is up 20% this year, playing catch-up vs. the S&P's 25%. The market is discounting good news. The market expects Trump's presidency will see more M&A and investment. Consensus says that S&P companies will grow earnings in 2025 by 14% from 10% this year. Canada's weaker economy has seen interest rates fall much faster here (75 basis points), though cuts may be more measured in 2025. Now, the mortgage market is better. The banks just reported the positive effect of lower rates should be felt in latter-2015, which is good. The street expects the US Fed's Powell to cut, but watch for his comments and tone.

You need to own Canadian banks for their increasing dividends. They've been building provisions in the event of credit losses--a headwind--but these are starting to peak. The banks recently said that that the positive impact of falling interest rates will be felt in latter 2025 (mortgage renewals). RY is her top pick.

The Importance of Valuation:

At times, companies have great earnings, a great forecast and great management comments. And still the stock goes down. This can confuse investors more than the other four points discussed above: “If everything is great, why is my stock down?” Usually, this is related to valuation. Yes, expensive stocks can get more expensive. But sometimes, stocks are priced to near-perfection. Even a “perfect” earnings report is not enough if investors were expecting “better than perfect.” High valuation stocks can see profit taking on even the best news. Sellers can come in on a perfect report on the belief that “things can’t possibly get better than this.” Some investors will sell when brokers’ target prices are hit, which tends to happen when numbers are good.
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There have been de facto, as opposed to legislative, holdups on the development of American oil and gas transmission assets. In particular, as it relates to the pace of construction of natural gas liquification plants on the East Coast under Biden. That's probably over.

Of interest to Canadians would be the de-bottlenecking of oil transmission pipelines, Keystone in particular. This could move a lot of Alberta's heavy sour crude down to the US Gulf Coast refineries. They need that product to replace heavy oil imports from Mexico and Venezuela, which are no longer as prolific as they used to be.

Despite the fact that the Canadian Prime Minister doesn't see a business case for exporting Canadian natural gas to Europe, the customers do. Canada won't facilitate the Atlantic Basin gas trade, but there could be room through US facilities for Canadian nat gas to be exported from the US East Coast. Could potentially be very beneficial.

Trump administration will likely be completely ineffective with its Department of Government Efficiency. It won't do anything in particular to reduce the size of government. Trump is a transactional president, like every president before him.

Over time, the relative strength in the USD, which we've seen since the election, will continue relative to other currencies. But he sees continuing debasement of the US currency through ongoing debt and deficits.