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

Definitely seeing more volatility as of late, roller coaster for investors. Since most recent pullback off correction lows 2 weeks ago, Dow is now up close to 6%, S&P 500 up 8.5%, NASDAQ up 12%. What a difference a couple of weeks can really make. Just last weeks, S&P gained almost 4% off the back of that encouraging inflation report and strong macro data.

Continued to see great earnings, boosting bets for a September rate cut from the Fed. It's also eased some of the recession concerns.

Recall that the weaker-than-expected employment report a few weeks ago sent stocks plunging on talks of recession. But that was quickly rejected, stocks began a massive rebound. She took advantage of the volatility and did some buying.

Remember that this is common, the second correction we've seen this year after April's 6% pullback. It's normal volatility and great for investors to pick up some stocks that did sell off and get back into the market.

Definitely. Expecting heightened volatility for the second half of the year. Lots of macroeconomic data still moving markets. Interest rate expectations starting to become more clear, though continue to be a key driver of market volatility and direction.

Market's now baking in a 75% probability that Fed will cut by 25 bps next month, up from 49% a week ago. Inflation is getting close to 2% for the US, already seeing cuts out of Canada. Uncertainty around US election in November.

Despite everything, still room to run in this bull market over the next 12-18 months.

Financial sector, as a whole, has been under pressure. With the banks, you're still collecting great dividends. Struggled with loan-loss provisions, resulting in carrying a lot more capital than needed. Being more defensive, they needed to do that in face of concerns of delinquencies.

You'll be fine as a long-term holder. Prices will fluctuate, depending on where we are in the business cycle. She trimmed a lot last year. Could benefit from interest rates coming down.

Rebound in some. Especially RY, which she really likes.

She owns gold throughout the portfolio anywhere from 2-5% by way of an ETF, as the liquidity is better. Still bullish on gold and silver, still upside. With inflation cooling, gold still has momentum to run. Not as an inflation hedge, but because of upside in the materials sector.

Earnings largely over (except NVIDIA), but generally speaking - consumers are in a relatively good position. Earnings growth appears to be broadening out in the markets (not just big tech). Expecting an economic hard landing as bond yields pointing to dark times ahead. Equity markets and bond markets appear to be diverging. Time will tell, but bond markets usually smarter than stock markets. Expecting volatility from now until the US election. 

Market Update:

The TSE Index was up 5.65% in the month of July, up 10.27% YTD and 12.04 % over the past year. Canadian GDP was up 0.4% in the third quarter of 2024 and 0.50% for the full year; in the USA the GDP was up 2.80% in the third quarter and 3.10% for the full year. The Canadian inflation rate was up 2.70% annually and the US inflation rate was 2.90% annually in July 2024. With this background, the following Table presents the highest and lowest performers for the month of July 2024.
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What Are Depository Receipts (DRs) ?

To understand how CDRs work, investors must first understand depository receipts (DR). A DR is a negotiable instrument issued by a bank which represents shares in a foreign public company. A DR used to be a physical certificate, but this has shifted electronically over time. DRs trade on a local stock exchange and allow investors to hold interests in international/foreign stocks without needing to trade directly on outside exchanges. DRs are designed to be less expensive and more convenient than directly investing in international markets. They concept is quite common with American Depository Receipts (ADRs) being the largest class, and Global Depository Receipts (GDRs) being a general term for DRs used across the world.

Looking at Canadian Depository Receipts (CDRs) specifically, these allow Canadian investors to access foreign listed publicly traded stocks. A Canadian issuer (typically a bank) will purchase a large quantity of foreign shares. The issuer will then redistribute the shares in smaller units on a Canadian exchange with a built-in hedge to the foreign currency for which the issuer may charge a small fee (less than 0.50%). Essentially all Canadian brokerages offer trading of CDR’s, however, CIBC appears to be the sole issuer. Interested investors can invest in over 50 CDRs on the NEO Exchange with popular tickers ending in ‘.NE.’ 
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He feels good about it. But energy investors feel glum, which is really perplexing. Energy stocks are up YTD about 24%, they're doubling the broader TSX, beating NASDAQ which is up roughly 15%. No reason for the pessimism.

Pervasive concern for about 2 years that the US consumer is faltering, China is weak and so demand must be weak, and oil's going to sell off. The thesis that's bearish on oil is invalid. The best measurements of demand and supply are global inventories. Seasonally, we're at the lowest levels in history of global oil inventories.

Demand is not as strong as some thought coming into the year. Yes, China's weak, but the US oil demand was just revised up. So net-net, demand is fine. US supply is actually negative YTD. Still sees some growth this year and ahead, but a fraction of what it was last year. 

So now we come to OPEC. Beginning in October, scheduled to return barrels to market and people fear that's going to loosen the market. What people are missing is that the return of those barrels is subject to market conditions, plus certain respected OPEC members are at pains to be proactive and precautionary.

Given the selloff, the volatility, uncertainties around health of the global consumer and interest rates, he doesn't see those barrels being removed. He sees a further drop in inventories, and a further tightening market as we head to year's end.

There's a notion that we could see a spike up later this year. He sees the merits of that argument, but doesn't subscribe to it. 

He thinks the fundamentals support WTI at $80, roughly where we are today, and at that level the health of this industry is unbelievable. As is the free cashflow being generated and the share buybacks.

He's fully invested now, after being 32% cash 3-4 months ago. There was a huge geopolitical risk premium at that time, but we're not there today. Sentiment of the financial players is at its weakest in history. Hedge fund interest in energy stocks is at the lowest in 20 years, as they all want to be in tech.

So he can buy into a sector that's deeply out of favour, with lowest global inventory levels in history, demand is exceeding bearish expectations, and he thinks the market is going to further tighten. $80 oil is fundamentally supportive, sector's trading at 15% free cashflow yields, most companies have met final debt targets so they're buying back shares. So there's this underlying bid.

For his main fund, he's pretty much 100% in Canada with 1 US service name. In his income fund, he's about 60% Canada, 40% US, with a little spin of Colombia to spice things up.

Very reasonable question, but it's complete noise. Constraints to US production growth include the ongoing religion to remain disciplined and maximize free cashflow. In the US, energy sector is only about 4% of the S&P, so it's pretty irrelevant. Any whiff of these companies pursuing meaningful growth and the stocks will get destroyed.

As well, can clearly see that US shale inventory is eroding on depth and quality. The basins are maturing.

When a company does M&A, it's usually to solve 1 of 2 problems. Either a balance sheet issue or an inventory problem (not enough or poor quality).

Most of the senior producers have 30+ years of stay-flat inventory. Balance sheets are strongest in history. We're not on the cusp of a massive M&A wave. Plus, many in the US have been mergers of equals or measly 5% premiums. If he's correct on $80 oil and $3.50 gas, he can see 80-100% upside potential on many of these names. That's what he's after.

He's biased, but if you're looking for an energy ETF he'd recommend NNRG, his own fund. Lots of natural gas exposure.

Thinks nat gas as a commodity is bottoming out seasonally. Lots of varied opinions for the price next year. All comes down to winter weather and how cold is it going to be. Depends on cadence of buildout of LNG capacity in Canada and US. Delays in US.

In general, risk/reward favours oil, so that's why he's in oil names.

He's been doing this for 21 years, and his ability to forecast M&A has not been phenomenal. The common theme is that of getting something for nothing, such as decades of free cashflow. 

You can get that in the Montney, the Duvernay, the Canadian oil sands. Companies that are trading at 10-14% free cashflow yields and buying back stock every year are natural takeout candidates. Those attributes fit almost every company.

As a fund manager, M&A potential is never, ever one of the attributes he looks at.