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

Although the market has been on an upswing since the downturn in August there is still reason for some caution. There are a couple of cycles coming. The months of September and October can be volatile. Also this is an election year in the U.S. and this can create more volatility. He is bullish on commodities  although not necessarily three months from now. Gold does not have a relationship with the stock market but it does with the U.S. dollar which is at the bottom of its trading zone. Gold moves up when the dollar moves down and vice versa. The U.S. dollar could climb which could cause the price of gold to pause. The market is now going beyond mega caps to small and mid caps which is a positive sign.

The question was on the state of the market. It measures a lot of things and he uses a Bear-O-Meter which has been in the neutral area. There has been a lot of good news but pay attention to the chart. It looks OK with the recent breakout. He gives a nod to the TSX over the next few years with a lot of commodities in it.

ETF Highlight: CASH

CASH is the Global X High Interest Savings ETF. CASH invests essentially all its assets in high-interest deposit accounts at Canadian banks. One of the big benefits of CASH, is due to its ETF structure, investors are free to remove their money as they please, whereas actual savings accounts will have minimum investment periods and amounts. CASH is highly liquid at $5.15 billion in net assets, has an MER of 0.11%, pays a 4.95% yield, and is up 5% over the last year. CASH is quite new with an inception in November of 2021, but its annualized return since is 3.79%.
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J.Powell indicating lower interest rates in Jackson Hole. As a result, market has responded favorably. However, if markets feel rates are cut due to weak economy, stocks may fall. Appears markets are heading towards a soft landing. If anything, investors might be in for a stronger than expected economy (higher inflation). Regardless, positioning investments towards growth in tech (Apple,Amazon, Meta, Google). Also diversifying into healthcare and industrial sector etc. 

ETF Highlight: XBB

XBB provides investors with exposure to the Canadian investment grade bond market. It is highly liquid at $7.625 billion in net assets, has an MER of 0.10%, pays a 3% yield, and is up 9.4% over the last year. XBB’s portfolio is primarily comprised of government bonds (federal 39.91% & provincial 33.28%) but financials are the next largest holding at 9.54%. Two important metrics being a bond ETF are the effective duration at 7.26 years and weighted average maturity of 9.98 years. These two metrics tell us that XBB’s holdings have a medium-term tilt. XBB is a longstanding ETF which has an annualized return of 4.48% since inception at the end of December 2000.
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Silver lining in a rather tumultuous day of trading in the US on our August civic holiday. Started to unfold from about July 10-11, with a pretty benign inflation print in the US. Market was speculating about more aggressive US rate cuts, prompting a rotation out of large, secular growth leadership of the Magnificent 7 and into value, cyclical, and interest sensitives.

Mag 7 have reasserted some leadership since the lows, but still being outperformed by the rest of the market. A healthy development. A rally where only the generals are advancing is not sustainable; you need the foot soldiers to advance as well to be able to hold ground.

Shows that sentiment changes quickly. Less liquidity in that market, and people are slow to put a lot of $$ and conviction behind a nascent theme. Tug-of-war between what's a demonstrably established 1.5+ years of entrenched leadership and the broadening rally. Tentative signs after a month and a bit.

It's part and parcel of investing. A summer analogy is that the potential of unexpected storms doesn't deter us from enjoying summer activities or time at the cottage. Likewise, don't let prospect of sharp and dramatic bouts of market volatility, domestically or overseas, undermine a well-constructed and well-diversified investment portfolio. Keep calm and carry on.

Wise to consider "tail risk", highly improbable but impact would be severe. That's what risk management is all about. Risk is the product of probability. No cut would be rather shocking to the bond market, USD and all foreign currency trades (remember the recent Japanese carry trade chaos). Equity markets are begging for rate cuts. So you'd see a broad-based selloff in US equity markets. Not much would be unscathed aside from very low beta defensive sectors like consumer staples. Utilities, real estate, home improvement retailers, durable goods, and growth stocks would be affected.

Risk of not cutting in September is very, very low. As of yesterday, a 130% probability is priced in of a 25 bps rate cut on September 18. Very high confidence of sophisticated investors.

Look for clues tomorrow at the Jackson Hole press conference.

S&P 500 has been unstoppable for the past 2 years, up until the start of August when there was quite a bit of shakiness. Stemming from Japan and some unexpectedly bad US unemployment numbers.

From an ETF lens, interesting to see that there was more buying of S&P 500 ETFs than other global market indices, all while the actual stock markets were selling down. Shows, once again, that when the markets turn tough, people generally sell individual holdings and flock to ETFs that have been beaten down. When people find themselves in panic mode and selling individual positions, they still want some type of exposure and ETFs are ideal for that.

A lot of people are asking how to get exposure. People are sometimes worried about the prevalence and weight of China in those indices, which can be 50% or more of EM exposure. Some investors are trying to apply more judicious focus by, for example, looking at India or Asia-Pacific broadly. Even though the area has been volatile, the interest still remains.

Surprise rate hike in Japan recently caused a downturn in its equity market, but a big jump in its currency. Jump in currency buffered equity decline a bit. If you were in an unhedged product, you wouldn't have felt it as badly; in a hedged product, you would. Japan continues to experiment with with rate hikes, so you don't want to be currency hedged.

Company Highlight:  A&W Revenue Royalties Income Fund (AW.UN)

AW.UN generates revenue through licensing their trademark to A&W restaurants within their royalty pool. AW.UN is entitled to 3% royalties on the gross sales reported by the 1,047 A&W restaurants in the Royalty Pool through a partnership with A&W Food Services of Canada. AW.UN’s stock has recently jumped over 20% on news that AW.UN and A&W Food Services were merging together in a strategic combination to form a single publicly traded entity. 

AW.UN’s stock has recently jumped over 20% on news that AW.UN and A&W Food Services were merging together in a strategic combination to form a single publicly traded entity. There are a number of moving parts in the transaction, and we will explore the terms of the agreement here. 

Overview:

Under the proposed merger, a new company with a more simplified structure will be created that will be operate similarly to other publicly traded quick-service restaurants (QSRs). These new shares referred to as A&W Food Services NewCo will be a more growth focused QSR, while quarterly dividends are expected to be paid at the same annualized rate as the current monthly distribution for AW.UN at $1.92. The transaction provides numerous benefits to the company and shareholder including: exposure to the performance of the entirety of the business, increased potential for share price appreciation, better liquidity, and greater financial flexibility. The transaction is expected to be closed in October 2024.

Terms of the Transaction: 

AW.UN unitholders are being offered two options as a result of the transaction:

1. Become a shareholder in the NewCo and have units of AW.UN exchanged on a 1:1 basis, OR
2. Receive $37.00 in cash for each AW.UN unit currently held (this was a 30% premium on at the time of announcement)

While this seems like a simple offer, there is a caveat related to option two. The option is subject to proration, where if the total cash elected by all unitholders is less than or exceeds $175.6 million, the cash distribution is prorated so that only ~32.5% of the outstanding units are purchased for cash at $37.00 per unit.

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US employment has risen from 3.4% to 4.3%, much higher in Canada. The weak July suggested Jay Powell (who is data-dependent) may be behind the ball. Since then, inflation is trending down to the target, which encourages a September interest rate cut by Powell. The first cut will improve sentiment. Today's 2.5% inflation number likely points to a third cut by the Bank of Canada in September, which we need. Central banks around the world are cutting as inflation declines and unemployment rises. S&P 500 earnings last quarter grew 12.5% YOY, including a topline of 5.5%. Previous headwinds: transportation and input costs, but that has reversed, so companies have better operating margins. The lower-end consumer and China are weakening, but the overall economy is okay. The street expects the S&P to grow 10% YOY this year and 14% in 2025. She doesn't expect a US recession.