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

Two dynamics. Existing home sales were down when supply disappeared because the next person to buy had to spend 7-9% for their mortgage. Very different from where we are today. 

Homebuilders went even further by offering a 3-2-1 buydown mortgage if you bought a new home. So new home supply has taken a lot more market share from existing home supply.

Jury' still out, but he expects inventory to unlock as rates come down. On an absolute basis, rates are still 200-300 bps higher than in pre-Covid era. Needs to be a big step down in the yield curve, especially on the 30-year end, to make this conversation more live than it is today.

The secret with banks (and especially RY) is to buy at 9-10x earnings, assuming there isn't a systemic crisis or looming credit cycle. But at 13-15x, banks start being viewed as more than banks, and that's a great time to sell to someone who has a dream that you shouldn't be dreaming.

One of the biggest risks for telcos as a whole is that leverage for the Canadian ones tends to be on the higher end. Still, debt is in context of a stable structure, respectable margins, and debt servicing that's higher but not stretched.

Leverage profile, combined with any change in the competitive dynamic, creates a spiral situation. It's getting better and a problem for tomorrow, but it is a problem.

The US Fed's Jay Powell said today that he isn't rushing to cut rates, but will be more aggressive if the data warrants it (if the labour market weakens dramatically)...  re: Israel killed the Hezbollah leader which could escalate Middle East tensions: Tension will continue until Iran's government changes.

Investing Theme To Consider: Longevity

This theme is not exactly new, but we think it will get much more traction. Consumers want to live longer and better. Already, there are drug companies extending the life of dogs, and we wonder how long it will take to get to human trials. We know of more than 20 companies already working on life-extending products in such areas as cellular reprogramming, body part replacement, young blood injection, cloning and genetic editing.

There are hundreds of snake-oil companies looking to make a quick buck from boomers seeking to extend life. But there are also real companies, backed by billionaires, doing real research and starting to see breakthroughs. This will become a much bigger industry — and investment theme — over the next 50 years.
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All technical aspects of the markets look good - markets at all time high. Technical signals all pointing to favorable outlook. Does not have much cash - has invested heavily into the markets. Strength of markets appears favorable. Rally appears to be diversified - strength in broader section of the markets - not just "Mag 7". China and commodities appear to be presenting value. Chinese economy appears to be recovering from recent weakness, and is breaking out. 

Investing Theme to Watch:

Artificial intelligence

We know you are saying, “That’s a current trend,” and, yes, it is, but we think it is absolutely here to stay. It has probably barely started.

Like the internet in 1997, we do not really know where AI is going to take the world. It may be very helpful or it could be very disruptive. Entire industries could be replaced. Companies that properly utilize it might see profit margins soar and stock prices surge, too. Companies that miss the boat might go out of business.

At some point, companies will need to decide if the money spent on AI was worth it. We think, in most cases, it will be. Better productivity and higher profit margins will be powerful drivers for companies.

For stock pickers, there will be losers and winners in the AI game. The hardware sector has run already. Software and data analytic stocks might be next. After that, who really knows? Certainly, cybersecurity stocks could be winners. AI likely makes it far easier for scammers, so security is going to be a very big concern down the road.
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Good times for equity investors. And for bond market investors as well, after 1-3 difficult years in the bond market. We can chalk it up to a Goldilocks scenario in the minds of investors. 

The BOC was ahead of the Fed with rate cuts, and continued with another one this month. And then with the Fed, the long-awaited, pined-for, initial rate cut came last week, and it was a doozy. A double, so to speak, at 50 bps. Investors have developed some conviction that we're going to get some relief in the rate-sensitive segments of the market.

Despite the fact that we're seeing tentative signs of weakness in the labour market, there's a jelling consensus that the Fed might be able to stick a soft landing and avoid a recession. He's in that camp. There have been a lot of naysayers anticipating a recession, going back to 2022, and there were some compelling arguments for that.

But fiscal largesse allowed us to stick-handle our way through what many thought would be a recession in 2022-23. He's cautiously optimistic that we'll avoid one in 2024-25 as well.

A lot of factors at play to explain these moves.

Yes, they are defensive sectors, but not solely. Real estate is a value play, and perhaps an emerging view that offices are going to start filling up again. And with the loosening conditions in the labour market, the balance of power might start shifting away from employees (who have enjoyed working in their pyjamas and Lulus the last 4 years) and back toward employers.

Utilities are defensive, regulated, and defensive, and there's going to be a secular increase in power demand as we move to a greener economy. But it's also a second derivative trade on the AI mania that's swept the market for the last 2 years. Data centres and the AI chips use a tremendous amount of power.

It certainly helps out on the software side, because they're more leveraged. 

Imagine a chart set up like the rings on a dartboard. It will depict the infrastructure that's been built out over the last couple of years.

In the middle, the bull's eye, is the power grid. It provides the power for everything else that's going to happen. Names like NRG, PPL Corp, DUK, SO. A lot of US names. Interestingly, the utilities side is up 25-27% YTD.

Moving to the second ring, there lie the data centres. All the way from the hyperscalers like AWS and Azure to EQIX and DLR. That's the backbone of the AI stack.

The third ring is communication infrastructure. Boring, but essential. 5G. Names like VZ, CSCO, and JNPR.

On the outer ring, you find the semiconductors. From NVDA to ARMH. Designers, foundries, equipment suppliers, to manufacturers.

Right now, you definitely want to be invested in the semiconductors, because we're still only second or third inning. Data centres are also attractive. As well, good dividends come out of the communications area. Really, anything except utilities (though they're up a lot this year). 

If infrastructure is what's been built out, the stack is where we're going.

Imagine another bull's eye chart setup. In the middle, you have all the cloud storage. 

Around that, you have the data analytics. Here you'll find DDOG, MDB, and the like.

Third ring is what's happening right now, which is machine-learning models. Gemini from GOOG, Watson from IBM, Claude from Anthropic. All the algorithms are here, processing everything to get to the outer circle. 

Outer circle involves the applications. He thinks this is where the puck is going over the next year. It can be very broad, or industry- and company-specific. NFLX, SNAP, ADBE, CRM. Happening in education with DUOL. A good point to note is that model training could actually eat the lunch of some of these applications.

He likes to spread his investment across the whole chip sector. There are 4 areas: foundries, manufacturers, equipment suppliers (see his Past Top Picks), designers.

Foundries are agnostic; he'd probably pick TSM. In the manufacturers, he'd pick MU, as it both designs and manufacturers. For the designers, he'd definitely pick NVDA.