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

There are other indicators to look at besides the usual charts, such as moving averages and MACD and relative strength. It's these indicators that are showing weakness. That's what he means by divergence. The market's making new highs, but these indicators are trending downwards. You start to get more of the lifting done by smaller and smaller stocks.

In the last month, we've had a resurgence of the growth profile such as in the NVDA's of the world. So we're seeing divergence, but it doesn't mean that we're expecting a large correction. There's definitely a pause in place, which means there's probably a better time to make a large commitment to the market, sometime in the next month.

Interest rates falling did give all the players a bump up. But then rates have risen in the last few weeks, hitting what was previously a stalwart sector. Whole sector's under pressure. Better places for you money until you see some sort of basing.

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Real estate has performed poorly the last 10 years. 2016-18 saw Trump adopt a growth-on mentality that allowed tech to take off, but at the expense of real estate stocks. Then, RE rebounded only for Covid to crush it in 2020--will people go to the office or mall again? But then, markets invested in data centres and cell towers for a year or two. Then, high interest rates crushed that rally in 2022. Now, the good news is an easing cycle in rates which will feed the appetite for RE stocks.

Private markets used to be for institutional investors, but are increasingly reaching retail investors. Blackstone is the largest player, and they launched a fund for retail investors. More players will enter this space as costs will decline. Public RE stocks will have to catch up to private market values (as they grow more popular) or the REITs will go private.

Financials will be important, and other earnings as well, especially given the sensitivity to the consumer and interest rates. But the very strong and surprising US employment report on Friday has really changed the dynamics and thinking around Fed policy, plus around what the economy's going to look like for the next 6 months or so.

Over the weekend, several upgrades to the economic outlook and downgrades to the recession risk. That's a pretty significant change from last week.

Economy's stronger than they thought. So we're not going to get the aggressive rate cuts that were priced into the market. 

People are asking him about buying fixed income ETFs, and he's saying no. Where you want to buy them is between 4.5-5%, in order to benefit from falling rates. Don't buy after rates have significantly fallen and are much closer to a trough. In around the 3.75% range there's no trading value in bonds. If we start to see the 10-year back up to higher levels again, there's some value there.

There's going to be an escalation in Middle East conflict. It won't be over until Iran leadership recognizes Israel's right to exist. Until that happens, there's going to be escalation.

Big dock strike last week, back at the table last couple of days. Interesting that the dock workers don't want the use of technology to replace jobs, so they don't want efficiency. When a company has to pay their workers more money, the way they offset that so it doesn't hurt margins is to invest in tech. 

It speaks to the idea that inflation's going to be stickier, as will wage demands. More than we've seen in any cycle going back decades. Where rates can come down to, and where inflation ultimately settles, will be higher than what we've been used to for the last couple of decades.

Transportation and infrastructure, and getting products to market, are key. Supply chains shut down during Covid, and that's where inflation came from. If workers insist on striking, and there are shortages on goods, prices will go up. It makes the job of central banks of the world way more difficult to keep inflation contained.

Today's segment focuses on the surprising strength of the US jobs report last Friday. Over the weekend, he noticed a fairly significant number of earnings upgrades, as well as a changing perception of markets for the next quarter or two. Goldman Sachs' chief economist also downgraded risk of recession to 15%.

Labour market is stronger than expected. People are working and spending more money, so corporate earnings keep the party going. As we enter earnings season, we'll be looking at what companies say for going forward. Goldman Sachs upped its price target for the S&P 500, forecasting earnings at $268 for 2025 and a target in the 6300 range; for 2024, earnings at $241 and a 6000 target.

Goldman's chief strategist says the market's trading at 22x and that's fair value. Larry doesn't agree, as a historically fair multiple is around 16.5-17x. With tech being a bigger part these days, you could argue that a fair multiple is 19-19.5x, but not 22x. Still expensive. 

Looking at a chart of standard deviations, the market's cheap and a buy when it's somewhere below 1 standard deviation. Right now, we're on the expensive side of the range, relative to forward-based earnings. You want to buy dips.

Looking at the 30-year bond yield, it's at 4.27%. But the earnings yield of the S&P 500 (take forward earnings of $268, and the current number of $236, and divide it by the S&P at 5700) is 3.81%. This shows you that when the earnings yield of the market is high, and bond yields are low, that's when you want to buy stocks and sell bonds. Today, stocks are expensive relative to where bonds are trading today from an earnings perspective.

You're much better off buying bonds than stocks at this point. He's not saying there are positive returns, just that treasuries are a better deal.

His friend-guru in the States says that all asset classes are overvalued, relative to inflation and risk premiums. Not a lot of places to hide, except for shorting some positions. He's cautious on markets.

 Invest Like a Fund Manager - Berkshire Hathaway 

One great tool for idea generation when investing is looking at what others are doing in their portfolios. The stocks and the size at which they hold them can be an interesting signal into what an investor might be seeing at a company. Of course, this information is not always easy to find and this is where we come in. 

Of course, just because a manager holds a stock does not mean it will work out or is appropriate for everyone. It does, however, offer a stamp of approval from someone that already owns the shares and at worst provides some ideas for an investor.

It is impossible to not begin with Berkshire Hathaway (BRK), led by Warren Buffett and Charlie Munger. BRK is associated with many blue-chip stocks. BRK holds 48 positions at the time of analysis. The portfolio went through a few significant changes given recent events. One thing to keep in mind, when looking at any portfolio, is that there are other investments and hedges we do not see. In the case of BRK, they own companies privately such as railroads and insurers. This diversification is not seen in the holdings of public companies and can allow the public equity portfolio to 'appear' more concentrated in single positions or sectors. In other words, the below portfolio does not provide a full picture of the total portfolio or exposures.
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Europe is largely in a recession and Canada is in a recession. He is seeing unemployment spiking in different markets and real interest rates are significant in causing pain. The U.S. is running as an island unto itself but we are starting to see some issues there too. He would not be surprised to see the U.S. hold pat in the next rate decision. It is highly political now. We need to consider macro economic issues, unemployment, credit loss spikes, etc., so expect the pros to be trimming with weakness into an election cycle. This gives an opportunity to deploy capital into that weakness. China provided stimulus but it wasn't really enough.

Recent market highs pointing towards general strength in the economy. However, geo-political tension and upcoming elections in USA and Canada could impact markets. Underlying fundamentals of business remain the most important attribute when evaluating equities. Investors should be aware of chance that markets will fall. It could be a good time for investors to take some profits with recent highs in the market. Would advise investors to keep cash on the sidelines in case of a market correction. Chinese economy will also be important factor in evaluating global markets strength vs. weakness. 

Investing Theme to Watch: Demographics

An aging population is becoming an issue in many countries. Investing in this theme can cover a wide area: age care, hospitals, drug companies, housing, estate planning and so on. Companies that can successfully target aging consumers are likely to see faster growth.

There is also a big debate on whether rich baby boomers are going to transfer their wealth or spend it. There is another debate on how governments can possibly fund pensions if there are fewer young workers on the contribution side. When investing, we suggest asking yourself how your prospective company’s business is going to be impacted by an aging population.
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