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

It's never "completely different this time", history rhymes. We will mean-revert at some point, some crisis. The last one was Covid, which was a shock; we mean-reverted, and it lasted a few weeks until they threw money at it. To think that that's always going to happen is probably a truth to count on, except that every time fiscal/debt/deficit all get a little bit worse.

So it's not different this time, but fixing things by throwing $$ at the problem has always seemed to work. When does a mean-reversion happen, and how long does it stay? Will we go through a period of really undervalued markets? For that to happen, we'd need inflation to be sticky. That puts the cost of money higher and takes all the leverage out of the system. Not unlike what we started to see in 2022, when the Fed was raising rates. We found out that the Fed had to pivot and cut rates, and inflation didn't come back under control.

If we were to see persistent inflation, that's when valuations would have to get cut and cut on a more permanent basis. That's more the debate, rather than all these financial ratios. For example, you could argue that, because technology is so much a bigger part of the market, it deserves a higher multiple than we've seen historically.

Difference between today and the dot.com bubble is that the vast majority of companies back then didn't have the revenues or growth that the leaders today have to drive markets with real earnings. There are things that are very different today from past cycles. Doesn't mean we shouldn't look at any of those metrics, but they're almost impossible to time as a way to think about your portfolio.

Last week, Stan Druckenmiller said that markets have started to price in a Trump victory. Let's unpack that.

A bunch of smart people created an (untradeable) index that lists the companies that would benefit the most or least from a Trump win. Since July 21, when Biden dropped out of the election and Harris got a big bump in the polls, the companies based on a Trump win initially came down.

Since July 21, the total US market has gone up. But the stocks that would benefit most from a Trump victory are still down. Originally, Trump was going to win against Biden; whereas now it's a lot closer against Harris. But recently, a Trump victory is heading up.

On a long/short chart, you're long the companies if Trump wins, and short the companies if he loses. Since July, the chart was initially down, but recently stronger. So the charts have turned. 

Look to polling and predictive markets, where people can make a bet on who's going to win the election. If Trump wins you get paid, and if he loses you get $0. A chart on the predictive market initially showed higher probability of a Harris win, but recently things have gone the other way. Markets are thinking now that Trump is going to win. If you look at polling from a company like Five ThirtyEight, for example, they're now saying that Trump's ahead. 

So lots of indications that Trump's going to win. But it's a Trump sweep of both the House and Senate, and the Presidency, that would be the worst outcome for the market. Right now, Senate's looking like 51 seats for Republicans. The House race is going to be very close, but best guess right now is that both House and Senate go GOP.

Best outcome for the market would be Harris in the White House, split Congress with gridlock and not a lot of spending. The bond market, such as TLT, is trading as though it'll be a Trump sweep. He's all about cutting taxes, which means more debt financing, and that's inflationary.

Larry's all for putting $$ back in people's pockets, but that will limit the Fed's ability to cut rates, and the market's not priced for this right now. If we get a sweep, initially markets will rally. He'd recommend selling, not buying, into that rally. The cost of money would go up, the Fed would be less accommodative, and that will eventually hit equity multiples. Now, he can't tell you exactly when.

Bond yields are backing up. Someone came out today with a 5% US 10-year bond. If Trump loses, he's probably going to jail. If he loses, the Trump Media stock, DJT, will be worth nothing. If he wins, the stock will keep going. If it breaks below $25, bearish on Trump until election. If it keeps going higher, Trump's going to win.

Company Highlight: Intuitive Surgical (ISRG)

Intuitive Surgical (ISRG) is an industry leader in the robotic-assisted surgery industry, well-regarded for its da Vinci surgical system. Its technology allows surgeons to perform complex procedures with enhanced precision, control, and visualization, which greatly helps with the recovery time for patients. Its da Vinci system is the most widely used robotic-assisted surgical platform in the world. Its sales are from a mix of da Vinci systems, ongoing sales of instruments and parts, and maintenance fees of the systems. 

ISRG has a strong track record of performance, with a 10-year total return CAGR of 25.0%. In terms of its financials, it is a large-cap healthcare name ($170.0 billion market cap), and it has grown its sales and earnings at a five-year CAGR of 13.4% and 11.6%, respectively. Forward analyst estimates call for a 13.7% next year sales growth rate and 16.6% earnings growth rate. Analyst estimates have been rising over the past few months, as optimism around its industry-leading healthcare robotics position continues, and it makes progress on the AI front. 

While its share price has risen dramatically since the peak of 20221, its valuation has stayed roughly the same or declined slightly. This suggests its fundamentals are improving and that we could see its valuation compress more in the future if earnings continue to grow and its share price grows at a slightly lower rate. It is not cheap at a 68X forward earnings multiple, but we feel this is the price for a high-growth, industry-leading name in the robotics-assisted surgery industry.
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Unsure on how high gold prices can go. Record high gold prices due to the highest debt levels in USA ever. ~$35 Trillion balance sheet liabilities very worrisome. Canada in not much better position. Concerned that increased printing of money to cover debt costs will erode purchasing power. Long story short, high Federal debt levels, and record spending are the reason gold prices are rising. Gold remains a safe place for concerned investors as people look for a place to store value. In addition, the US Dollar might not be the leading fiat currency globally (another reason gold prices rising). 

 Company Highlight: Intuitive Surgical (ISRG)

Intuitive Surgical (ISRG) is an industry leader in the robotic-assisted surgery industry, well-regarded for its da Vinci surgical system. Its technology allows surgeons to perform complex procedures with enhanced precision, control, and visualization, which greatly helps with the recovery time for patients. Its da Vinci system is the most widely used robotic-assisted surgical platform in the world. Its sales are from a mix of da Vinci systems, ongoing sales of instruments and parts, and maintenance fees of the systems. 

ISRG has a strong track record of performance, with a 10-year total return CAGR of 25.0%. In terms of its financials, it is a large-cap healthcare name ($170.0 billion market cap), and it has grown its sales and earnings at a five-year CAGR of 13.4% and 11.6%, respectively. Forward analyst estimates call for a 13.7% next year sales growth rate and 16.6% earnings growth rate. Analyst estimates have been rising over the past few months, as optimism around its industry-leading healthcare robotics position continues, and it makes progress on the AI front. 

While its share price has risen dramatically since the peak of 20221, its valuation has stayed roughly the same or declined slightly. This suggests its fundamentals are improving and that we could see its valuation compress more in the future if earnings continue to grow and its share price grows at a slightly lower rate. It is not cheap at a 68X forward earnings multiple, but we feel this is the price for a high-growth, industry-leading name in the robotics-assisted surgery industry.
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Bottom line is that back in October 2022, there was a major market low. After that, you typically see a new 4-year cycle in a 3-5 year cyclical bull market. By time, that should take us at least into the first half of next year. So the answer to the question is yes, and we can talk about some targets later. For now, the path of least resistance for equity markets remains up.

In Phase 2, the leaders typically are industrials, info tech, and basic materials. That's played out for the most part this year, especially info tech. But what we're seeing here, and on the semiconductor index, are early signs that we're failing to make new highs on the NASDAQ. The point is that we're starting to see signs of rotation away from information technology. 

At the start of the year, he was telling clients that the target was 5400, or roughly 15% upside. But it's a moving target now so 6000 is his next target, which is above the previous target of 5800 that was broken a couple of weeks ago.

On the TSX, he's looking at around 26,000. Back in the summer, his big call was that the TSX would outperform the S&P 500. The reason is that we're getting late cycle, and that should favour resources and the resource-heavy TSX. So far, that story has played out.

In technical analysis, the similar theory is "Dogs of the Dow". Instead, he tries to put the best patterns and charts in front of clients. People like to vote for the underdog, but TD, for example, is not a dog he'd be voting for.

Really likes energy here. Next 2 months are a bit choppy, especially with WTI crude swinging quite a bit. However, January-April is a really strong seasonal period for energy. So he doesn't mind adding across the board, and make sure to stay through the choppy period. See his Top Picks.

If he's correct as to where we are in the cycle with rotation out of Phase 2 (industrials, basic materials, and info tech), Phase 3 typically sees resources lead. More importantly, we start to see energy come into the picture. When energy comes into the picture, inflation starts to rear its ugly head again.

Gold remains in an uptrend, past his target of $2600. He's a big fan of the Commitment of Traders data from the Chicago Board of Trade, which comes out weekly on Fridays at 3:30 pm. Commercial traders continue to reduce exposure on the way up. Though gold can push higher, we're getting to the end of this move in the intermediate term.

We've had a good move, but he's cautious at current levels. Vulnerable to at least a near-term correction. Some charts look great, such as OR, AGI, and WPM, and he'd gravitate toward those.

Pipelines have been great this year and he recently took the trade off, yet they've continued to run. Continue to look strong. If he's correct about rates going higher again, and bond proxies coming under pressure, people will still want yield. If inflation comes back, he thinks pipelines are going to be the new hot thing.

Quite positive sentiment. Really on the back of inflation numbers that came in for the last month, which were lower than expected. 

Lots of value in the rate-sensitives particularly in utilities and telecoms, and even in Canadian banks. If you look at higher-growth names where valuations are quite rich, compared to the interest-rate sensitives where the valuations are quite reasonable, it's justified that they've run a little bit.

Profits are profits. But on the multiple, you're definitely not willing to pay the same for wholesale earnings as you are for retail and business. What you've seen across the board is that every single money-centre bank has beaten. They've all been showing lots of strength. Citi might have been the outlier given that it was close, but it still beat.