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

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. 
Unlock Premium - Try 5i Free

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.

The question was about the energy sector. He doesn't think tariffs will be brought in at 25% and quoted the saying that we should take Trump seriously but not necessarily literally. There is way more energy up here and the U.S. will still need Canadian energy. With plans to increase energy production in the U.S. they will become more self reliant.

The question was on the outlook for Bitcoin over the next four years. Crypto currencies are likely to stay and he has invested in crypto exchanges. There is excitement in this area because of the Trump administration. If you want to get into this field you should by buying just a little bit and then easing into it.

The question was on the telcos. Bell has some challenges but has the best commercials. The protectionism for telcos may make the big three vulnerable. All big three Canadian telcos are down by at least 18%. He owns no Canadian telecommunications companies.

Yes. The bond market always dictates what happens in the stock market. If you're thinking about how to value a stock, the higher interest rates go, the higher the discount rate. This, in turn, means lower cashflows. You're seeing it today where the S&P is down 1%, but the Mag 7 stocks are down anywhere from 2-4%.

So it's important for investors to understand that rates are rising -- 30-year mortgage rates in the US are now 7%, 30-year bonds are at 4.8% and going higher. Professional bond investors are only investing in 2-3 year bonds, and not longer, simply because they're afraid of higher inflation if this economy overheats. Instead of cutting rates, the Fed may end up having to raise rates.

In 2022, rates went up 4.75%. The S&P was down 20%, NASDAQ fell 35%, and the Mag 7 were down anywhere from 25-70%. This is important information for people who are in tech stocks right now, where it's all about AI. His son-in-law owns a ton of NVDA shares; David advised him that when he'd doubled his money, to sell half and use the proceeds to pay down his mortgage. You have to be smart about how you interact in this market.

Last week, a prospective client came in and wanted a 35% guaranteed return with no risk. Risk-free T-bills are at 3%. The client needs to understand what kind of risk he's taking to get that return. If rates go up, stocks will come down, and this client's portfolio will get hammered. That's not how his firm works.

He can't really predict anything until we see what happens on January 20 when the circus comes to Washington. Trump wants to cut corporate taxes, which would be good for profitability. But how is he going to rein in runaway deficits and potential higher inflation?

2/3 of all of your performance comes from dividend growth and reinvestment of those dividends.

Financial flexibility lets a company increase dividend, pay down debt, invest in R&D, and make tuck-in acquisitions (which grow your revenues and profits over time). Rinse and repeat, and you get double-digit returns in the long run.

If you double your money, do the smart thing and sell half. Certain tech stocks are 3x riskier than the market if interest rates go up. It's about managing risk in your portfolio. It's not watching it go up 100%, and thinking maybe it'll go up another 500%. Then you could buy a house without taking out a mortgage. Take your emotions out of the game and be realistic. At the end of the day, it's revenue growth and profit growth that determine where the stock price will go.

Big moves in the 2-year bond rate means that's where the Federal Reserve will have an impact. Professional investors are not investing in longer-dated bonds of 10 years or beyond. That gives the signal of a rising yield curve, which will be good for the economy. It's inflation that's the biggest concern.

So it you're parking your money for 1-3 months, US T-bills are paying 4.25%. That's the place to put it. Don't go beyond 2 years, as everything's been backing up. Yields of 2 years and greater have gone up, not down, despite the fact that the Fed's cutting rates.

Stocks are selling off today, led by the Mag 7 (-2.6%). She didn't expect this weakness until January, but it signals a rough January to come. After all, gains in Mag 7 were to large this year, so now there's rebalancing.

Bitcoin vs. Gold

A common assumption is that investors are no longer interested in gold because they are too busy buying bitcoin and other cryptocurrencies. Looking at current prices, it is easy to see how this assumption is so prevalent today. Bitcoin has soared to records, while gold has been a dog for the past little while.

But just because one is up and one is down does not mean there is an automatic correlation. Gold might be weak for entirely different reasons (inflation disbelief, for example — see above). The fact that gold is down does not mean bitcoin is the cause of the decline.

Bitcoin, while getting more popular, has not been tested in multiple different economic environments. Gold has thousands of years of history behind its use as a store of value. In a different world, bitcoin investors might sell bitcoin for gold. Who knows? But we would certainly not assume it cannot happen.
Unlock Premium - Try 5i Free

He's cautious heading into 2025 and expects a correction at some point. Indicators tell him this, including excessive euphoria, as seen in the put-call ratio (investors were buying a lot of calls recently). Typically, markets are bullish for 3-6 months, then corrects for 1-3 months. He thinks we're building towards that correction. The S&P last pulled back in August. He expects the S&P to pull back to 5,850 to correct the excesses, perhaps in January. 

First, what is your time frame? Weekly? Monthly? He looks at moving average divergence (MD), relative strength (be long the winners, short the losers), and what institutions are buying or selling, because they influence markets so much. Also, what market are we in, bear or bull? In a bull, a rally usually lasts 3-6 months with the up legs bigger and the pullbacks shorter; in a bear, the down legs are bigger, the bounces shorter.

He's been wrong on this. Commercial hedgers have been quite long the CAD and remain so. Starting to see this on the Euro as well. He follows the commercial hedgers, who aren't always right, though. The next target for the CAD is 65 cents. The CAD is trying to find a floor. The 72-cent level is key; if we rise above that, it's positive. Watch 72 cents. Don't short the CAD. Probably, most of the bad new is priced in, so we could see a sharp snapback in the CAD. All this is driven by interest rates, particularly the US which look extended.