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

Everybody gets enthusiastic about something, whether it's a particular stock or a type of trade, and then it unwinds. There's an ebb and a flow. We haven't seen that yet, but there's definitely a divergence. If you follow technical analysis, you may know about Dow Theory and the differences between Industrials and Transportation.

If we look at divergences between different markets, such as US versus international, US is up almost 30% and the others are up 5-10%. The S&P 500 is doing really well. There's even an index with the top 10 from the S&P, and it's up 10% over the base index. That divergence is focused on a few stocks, with NVDA being a key one that everyone's talking about all the time.

He can explain this using technical analysis, which looks for trends and reversals. Right now, we're in a positive trend, and it's a positive trend with a reversal in October 2023. If you're not making 20-30% from then till now, you may want to reevaluate.

It's been a great market, there's no indication of a reversal yet. Technical analysts wait for a reversal before they jump; they don't say to sell just because the markets are the highest they've ever been. If you look at when markets have been high in the past, they usually go higher.

Depends on how it looks. Looking at the reversal of 24 March 2020, there are some times when there are sharp reversals or recoveries and a ton of volatility. Right now what he's looking for is a flaming out, lower momentum. We've already seen lower momentum in that buying isn't as steep, the prices don't go up as fast (still going up, but without the same acceleration).

This is the beginning of an indicator, but doesn't necessarily mean there's going to be a turnaround. Many times in the past, we've seen the setup but the market continues higher.

Banks in general are entering a normal level. Concerns about high interest rates and defaults are mostly in the past. Banks are good to hold here if you want some dividend-paying stocks. 

A good strategy would be to hold an ETF with equal-weight banks, such as the ZEB.

Notable Companies:

The criteria below reflect Canadian companies that have had share prices under pressure since the beginning of this year, depreciating at least by 15%, while the momentum of the underlying businesses continues to be strong, growing by at least by 8% on average in the last three years.

Premium Brands Holdings Corporation (PBH): PBH has been held in our Balanced Model Portfolio for some time. Over the last few years, the company has been in an investment cycle to drive growth going forward. However, PBH has recently seen weakness in sales growth, which dropped to a low single-digits growth primarily due to a weak consumer spending environment. Consequently, PBH’s valuation multiples contracted, which was the major reason for the underperformance. We continue to believe PBH is a high-quality consumer staples name that is experiencing short-term challenges. If PBH can manage to accelerate its topline growth, the stock can see a multiple re-rate from here.

Algonquin Power & Utilities Corp. (AQN): AQN has been one of the favourite dividend names in Canada until recent years when the company mismanaged its leverage levels. AQN has experienced negative free cash flow over the last few years while continuing to invest heavily in capital expenditures. Consequently, its debt level reached an unsustainable level of 7.8x net debt/EBITDA, which is much higher than peers and its historical averages. We don’t think investors should try to catch the bottom in AQN at any price until the company manages to reduce its debt levels to conservative levels. 

BRP Inc (DOO): DOO used to be one of the names we own in our Growth Model Portfolio. However, we recently downgraded the company and sold the entire position in our Model Portfolio due to concerns that the duration of the industry downturn cycle, as well as the timing of the recovery, is highly uncertain and may take a long time to recover. Although DOO went through similar cycles and came out strong in the past, we think the current market environment offers the chance to acquire a stake in businesses with strong momentum, which in general, has a much higher chance of doing well relative to turnaround situations.
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Investors are disappointed at $70 oil, and they should be. He had more bullish expectations coming into this year, with biggest disappointment being Chinese demand. Very few people would have forecast Chinese demand to be negative YOY for a couple of months. Thankfully, there are signs that it's now inflecting. One big energy trader believes that Chinese demand will be up 700k barrels per day next year.

It's kind of a moral victory. His call is that global oil inventories (his measurement of the balance between supply & demand) would hit all-time lows. And we're there today, which is great. Global inventories are at their lowest since at least 2017, US inventories are at the lowest since 2016.

In the olden days, used to be a very strong relationship between inventories and the oil price. As inventories fell, the price would go up. Today, looking at where oil "should" be, it should be about $81 WTI. But it's trading just under $70. There's a disconnect.

Why the disconnect? Market's concerned about 2025 and peak demand being right around the corner, demand weakness continuing, US shale surging, other countries like Brazil coming online, and OPEC ramping up to maintain market share. He feels that the market's a little too bearish on demand, US shale production is flat (Trump will see peak production over the next couple of years, a huge event). Plus, Trump will be ultra-hawkish on Iran exports, giving OPEC the chance to add barrels eventually, which will be the beginning of normalization of OPEC's spare capacity (not as high as people think). 

Demand is fine. Just look at the US economy, which is going like gangbusters. Supply expectations are too high. Market is tighter. Between $70-80 is reasonable over the next 12-18 months. You need Saudi to bring some of those barrels back to market.

He remains very bullish on the outlook. There can't be an energy transition when the demand for oil, nat gas, and coal continues to make all-time highs. Governments and organizations basing their constant negativity on ignorance warps sentiment about investing in energy, which translates into the valuations we see today.

Almost no interconnection. Main uses for oil are not for power generation. Natural gas and, long-term, nuclear tie into AI. The buildout of AI and data centres is real.

In the US, power demand was flat for 14 years; this is the first year with an incline. If demand in the US is expected to grow by 25% by 2040, where will the power come from? What about nuclear? Well, it makes a lot of sense, but you'd have to build 126 reactors, and that will be over decades. Wind and solar sources are not practical. That leaves natural gas.

Many people see nat gas as a bridge. But we're not bridging to anything; natural gas is going to carry the baseload for many years to come. That's why people are getting more bullish on it.

What the investor is really asking is whether anyone will ever care again about small-cap energy stocks? It sounds defeatist, but he's going to say no. Too many barriers to the small caps being relevant to the large institutions. They'll be feedstock for mid- or large-caps.

He owns a company that's getting 300-400% returns on its wells, yet no one cares. Stock's down 15-20%. His funds' relative performance this year has been less than he wanted because he had too much in even mid-cap exposure. When sentiment is challenged, all the focus remains on the large caps. Ongoing apathy.

We've spent 46 weeks getting to where we are for the year, and you don't want to let it all whittle away going into the last 6 weeks. He's being a little conservative here.

Tech stock valuations are rich. Right now, he wouldn't say it's overbought, but it isn't cheap either.

In the technology arena, lots of people focus on the semiconductor stocks and so on. For him, it's all about the data, and you need rich, reliable data. His analysts have always said that it's about the integrity of the data.

Take a look at a chart that's set up like a dartboard. The bullseye is all about the data infrastructure, which provides the foundation. The second ring represents data processing and analytics, which unlocks the value from the data. Outer ring focuses on protecting the data from unauthorized access and ensuring compliance with regulatory standards.

This all has to work together to allow people to have faith in the data -- stored properly, best analytics, and protection of sensitive information.

His fund is an investment vehicle, but a lot of investors also own a stock from the fund in a trading account. In that case, they can sell calls against a position, or they sell some puts if they don't have a position. In other words, if you're going to own it outside a fund, treat it as a trade rather than an investment.

Corners of the Market:

2024 has been a very solid year for the equity markets due to a favourable macro backdrop of declining interest rates, a slowdown in inflation, and especially after the election results, where the markets expect Trump’s policies of putting America first can help corporate earnings over the next few years. As a result, not only broad market indices but risky asset classes, such as small-cap, high-growth stocks, cryptocurrencies, etc., have performed strongly and hit new record highs.

That being said, despite a record year where both the S&P 500 and TSX achieved double-digit returns, not all sectors performed well, and there are some corners of the market that have been under pressure. These are where investors can take advantage of their temporary “losers” by claiming capital losses for tax-loss selling, which could offset capital gains.

This strategy can be accomplished by simply selling a temporary losing name in a non-registered account, which could then be used to offset the net capital gains tax investors have on their investments. The unused amount of capital losses can be used from up to three years in the past or carried forward indefinitely. After 30 days of the sale, these holdings can be bought back if investors believe in the long-term fundamentals of these companies.

Although writing off good companies based on one year of bad performance could become a regret for many investors, some of these names that have been under pressure may continue to see underperformance over the long-term. During a bull market cycle, we think investors should respect the wisdom of the crowd. Therefore, investors need to evaluate these names for future reinvestment on a case-by-case basis.
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A lot of people were surprised with the outcome, especially that they took both sides of the house. According to history, a republican sweep has been better than average for the markets. It is a pro-growth, pro-individual agenda with lower individual and corporate taxes. This is leading the market to recalculate estimates on earnings and expectations. 

We saw a weaker week following a very strong week, so the honeymoon period did not last too long. It will probably persist into the new year, for some technical reasons as well as people won't be too quick to sell with hopes of favourable changes to capital gains legislation. It's seasonally a good time of the year. There is a certain degree of stealing from the future. Valuations are on the higher ranges of normalized ranges. This is demanding on the market, needs stronger corporate earnings, favourable inflation and other economic trends.