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

Look at the Global X (formerly Horizons) series of total return ETFs. Gives you exposure to international benchmark markets very tax-efficiently. Helps you avoid foreign withholding tax. Excellent strategy for taxable accounts.

They trade in Canadian dollar value units, so there's a currency translation involved. This isn't his area of expertise. He doesn't use Canadian-listed US securities, but just goes right to the US listing for liquidity in trading purposes.

When he invests, he separates the currency and the security. Now, as an institutional investor he can hedge individual stocks like a MSFT, but individuals cannot. That's why CDRs and the like have come into being.

You're not hedging currency when you buy CDRs on the Canadian exchange. You get the currency equivalent, but you don't have to change your money into foreign currency and back again.

Franklin ETFs in the US are great, low-cost, country-based ETFs. He uses those, ticker starts with "FL". He really likes them and uses them for tactical opportunities. When you buy Germany, you're buying a lot of tech and consumer cyclical; so it's very concentrated, not unlike the US market.

Japan is a unique animal these days in terms of recovery from massive depression and changing interest rate policies. A buy on dips, more dips coming with the carry trade unwinding and currency volatility. Whether you buy Japan hedged or not will matter a lot to your ultimate return. Typically when Japan's doing really well and they have a period of massive currency depreciation, at some point we'll get the other side of that; so you want to be hedged on your currency exposure. 

You have to think about your CAD/US rate, plus USD versus those international currencies. Lot of moving parts.

Market pricing in a US recession?
Last Monday's meltdown was frustrating, because you couldn't trade anything in Toronto on the Civic Holiday. He expected markets, after a shock like that, to bounce. And they did. He's not convinced that it's the beginning of another leg up. Lots more volatility to come. Calls for an emergency Fed cut were just crazy; a gap down of 20-25% may have made the case. No real credit stress to support such a move.

What is the market volatility telling us now?  If you believe that it means recession, not just leverage being unwound, slowing economy, and Fed cutting cut rates, then equity markets are still grossly overvalued.

Look at a chart that tracks the S&P 500 along with times of recession. If you look at EPS on a trailing basis, when we go into a recession, EPS turn down. Always. The only questions for discussion are how much and for how long? Not "if". It's going to happen.

Another chart shows forward-based earnings expectations for the S&P for the current year, 1 year out, and 2 years out. Expectations going out show expectations of 10%, 13%, and 8% over the next 3 years. There's a recession coming. Those numbers aren't going to happen. Such a chart only makes sense if the Fed gets the calls perfect. At best, we go sideways.

There's no way with the most aggressive tightening cycle we've ever seen, and the whole rebalancing of the world, that this is a perfect outcome. Caution is still the message. Don't chase. Don't run out and buy the dip. If you're a day trader, that's all well and good. But if you're thinking long-term, strategic, you want to be defensive. Markets are very fully priced, rich, priced for perfection.

Months ago, he shifted his entire portfolio from public markets to private. Over the next year or two, the ride in the private markets will be much more friendly for returns than in the public space.

See his blog today for more details. If you look at history, the average bear market correction in a recession is 29% for the S&P 500. In 2022, we got a 20+% correction, but there was no recession. Many people think we're going higher, but he's not in that camp. Be defensive.

Technology, but not like the .com bubble. These companies are making real money and lots of it. It's just that they're trading at 35x earnings instead of 25x, which would be a more fair value. A correction is coming. Avoid the cyclical names.

Lots of deep value out there, really good companies that have been beaten up because they have bad balance sheets. With interest rates coming down, that's where you want to look. Value outperforms growth for the next couple of years.

Company Highlight: The Descartes Systems Group Inc. (DSG)

DSG is a global leader in on-demand software solutions that focuses on improving productivity, reducing costs and enhancing the security of logistics-intensive businesses. The main focus is on serving transportation providers (air, ocean, truck) logistic service providers (third-party logistics, freight forwarders, and customs brokers), distribution-intensive companies including retailers, and distributors for which logistics is a key part of their own product/service offering. DSG is one of the few high quality Canadian tech stocks and it has done an excellent job using acquisitions to drive growth being a long-term compounder.

In terms of its financials, its most recent results caused the stock to drop initially. Revenue grew 11% to $151.3 million, in line with estimates, and EPS of $0.43 slightly missed the estimates of $0.47. The balance sheet is strong with a net cash position of $231 million and DSG’s acquisition pipeline remains strong. DSG has historically traded at a premium valuation, currently above 50x forward earnings due to its attractive fundamentals. At these levels, reaction to quarterly results tends to be sensitive, although, the stock has recovered from the initial sell-off when these results were released. The company also does not pay any dividends.
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We are now at the tail end of quarterly reports. Sometimes investor sentiment pivots quickly not based on fundamentals as it did last week. The job numbers were a bit disappointing but in isolation were not enough to explain the volatility last week. The low income consumer, especially in the U.S., has been under pressure for some time but he is bullish on the major economies in Canada and the U.S. over the long term. You need a time horizon of 3 to 5 years. He is not super active in AI investing and their general principle is to buy quality companies with good balance sheets at decent valuations. This does not mean deep value companies.

It didn't cause him to change his mind on anything. When you see the world panicking around you, even portfolio managers take stock. So that's what he did earlier in the week, confirming theses and themes on companies he owns or is looking to buy.

What it means to him is whether there are opportunities out there. There were short-term opportunities, maybe not as much anymore. These markets will create lots of opportunities in the coming months.

Markets were priced for perfection coming into the last few weeks. Anything less was going to cause choppiness. On top of that, there's the consideration of whether the US is going to go into recession. What's going to happen with the wars overseas, or with the US election? All creating a perfect storm of opportunity for volatility.

These opportunities are welcome, as it wasn't clear how the market was going to take next steps higher. Selling  pressure has a ways to go. Investors need to be prepared that this volatility could last a long time.

A few weeks ago, we would have celebrated a bad jobs report because it meant that the Fed would cut rates. Now we fear that a bad jobs report is going to take the US into a recession. Things can change quickly in the markets.

Absolutely. In Canada, we're looking at future rate cuts and those will be warranted. We were too aggressive at increasing rates on the other side, and now we're being too slow to catch it on the bottom. Par for the course for central banks historically.

The bigger concern is how quickly will the US look to cut rates, and will they be caught chasing it as well.

Stuck between a rock and a hard place at the Federal Reserve, between lower job numbers and higher inflation. Really hard to get this call exactly on. Because they are so scared of inflation, suspects that they'll make this call late, preferring to deal with a recession than with inflation. That's been the case this entire time, and likely the case this time as well.

First and foremost is inflation. Jobs reports are interesting and they'll keep an eye on them. Calls for an emergency rate cut are premature at this point.

He loves unique opportunities. Companies that are unique in their space that provide different opportunities. Especially in the world where we are today, things that are outside the Magnificent 7 suit his style perfectly.

Growth at a reasonable price. Not a straight value-investment type shop, loves growth companies. For example, his upcoming Top Picks are not the traditional types of value offering.

Market Update:

The US’s weekly jobless claims fell more than forecast, showing 233,000 initial jobless claims in the week ending August 3, down from 250,000 in the previous week, assuring the health of the US labour market. On the other hand, the Canada Manufacturing Purchasing Managers’ Index (PMI) fell to 47.8 in July from 49.3 in June, marking the weakest level in 2024, as production and new orders fell at a sharp rate. The Canadian dollar was 72.76 cents USD. The U.S. S&P500 ended the week down 1.4%, while the TSX was down 4.0%.

Most sectors ended the week in red. Materials gave up 8.4%, while energy slid 5.1%. Financials and industrials edged lower by 4.8% and 4.4%, respectively, while technology slipped 4.0%, and consumer staples gave up 3.7%. Consumer discretionary and real estate ended the week down 3.7% and 1.3%, respectively. The most heavily traded shares by volume were Bitfarms, Baytex Energy and Enbridge.
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People talk about the volatility and the carry trade. From a bigger perspective, the US economy is slowing down. Pretty clear that the consumer's having a difficult time, though corporate earnings were actually pretty good. It's about people's expectations on all these things. When you look at the numbers, if companies beat on expectations and gave reasonable guidance going forward, you're seeing these stocks do quite well.

The US unemployment numbers going up set people off. The US economy is the last economy to go into slower growth, maybe a recession. You've seen it globally, but not in the US. Biden did a huge fiscal plan coming out of Covid that really propelled the US growth numbers.

The Fed will probably ease in September, maybe November and December as well.

No, not at all. We're probably still going to have a recession. Even when the Fed cuts, sometimes markets go down because you get a lagged effect of what's happening. Rate cuts won't stop a recession, but may make it milder.