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

It's still early. Interesting last couple of years. Any small caps that required capital or didn't have really strong earnings went straight down. Some in the group have performed well. In July, started to see some small caps outperforming and started to see more breadth. We've seen that continue to follow through in the last couple of weeks, now that markets have settled down.

Will be interesting to see if it's a short-term trend that leads to a longer-term one, but too early right now to know for sure.

These ones have been in a really challenging environment the last couple of years. The capital just hasn't been there. Market was pushing those stock prices down, and probably still continues today. But now we're seeing more and bigger financing. A year ago, average financing deals were sub-$10M; now they're in the $18-20M range.

Banks like to stay in deep water, which doesn't include any small caps. But there's a huge opportunity in small caps, and bank-owned firms can use that as a managed-money solution.

That's a concern, but he doesn't see that. He's seen a broadening out, and anytime the market does this it's really healthy. It was so narrowly focused on the Mag 7, and that wasn't a good situation. With the market, you always have to be on top of things, as there's constant movement and rotation. Good news can be bad, and bad news can be good, so stay sharp.

Market seems primed for a larger cut, but he's in the camp of 25 bps. Risk to the upside is a lot higher. If inflation is higher, it's a lot harder to raise rates than it is to lower them. So his view is that they're going to lower rates more moderately and take their time. If they cut by 50 bps and they're wrong, it's going to be a lot harder to go back up. As well as being more detrimental to businesses and consumers. They're going to wait for the data, as they've mentioned.

For him, the more important thing about today's announcement is the communication. Whatever decision is made, it's based on the past. The market will be focused on what the Fed chair communicates.

Exactly. Communication, so far, has been that it's going to pay attention to the data and make decisions based on that. Yesterday's retail sales print was broadcast by the media as the most important retail sales print "ever". Probably not the case, it's just one data point in a series. Based on communication, the Fed will look at that and at other data going forward. There's also an election coming up.

A 50 bps cut would get them more involved politically, even though they're not supposed to be. Whereas a 25 bps cut could be seen as just reacting, starting the process, and they'll move forward after the election when more is known.

He doesn't own any gold stocks. If you want to enter, focus on large-cap, seniors. They offer more conservative growth, and there's a lot behind them (more than just 1 mine or project). Names like AEM or Kinross. Kinross just had great results. AEM is a great producer with lower costs. Go with names in friendlier jurisdictions.

Beneficial if you're concerned about the company you're invested in. He doesn't use them. His view is that if you're thinking that way, you should probably be thinking about selling some of the position. It tells him that you're unsure about the investment. There's nothing wrong with them, but in a volatile period the stop loss could get hit quickly. Then the stock comes back up, but you miss out.

Another strategy is to sell a portion, say 10%. That way, you've taken some money off the table if things go down.

Manulife (MFC) vs. Sun Life (SLF):

Manulife (MFC)

Manulife Financial (MFC) is a Canadian multinational financial services company that operates under ‘Manulife’ in Canada and Asia, and through its John Hancock division in the US. It offers services include life insurance, wealth management, and investment services to individuals and businesses. 

Sun Life (SLF)

Sun Life Financial (SLF) is a financial services company that offers savings, retireent, and pension products globally. Its operations include five business segments: Asset Management, Canada, US, Asia, and Corporate. Its services include life insurance, health insurance, and investment management. 

Looking at valuation, we can see that both names are trading at similar levels (SLF at 11X forward earnings and MFC at 10X forward earnings). Although, SLF has been trading at a premium valuation relative to MFC over the past few years, and we think that MFC’s recent strong execution has caused it to re-rate. Both names have similar dividend yields (around the low 4% level). We can see how since early 2024, MFCs returns have begun to take off, and this is largely attributable to a combination of a previously cheap valuation and execution in cost management. 

Both names have performed well over the years and have sustainable dividend policies, but recent performance has begun to shift from prior years. We think with declining rates, that both of these names have certain tailwinds, particularly in the asset management space, but MFC has shown strong execution in its recent earnings results. We think that investors looking for a strong momentum play and a larger name might prefer MFC today, however, for a more conservative play, we give SLF the edge due to its longer track record of success in margin expansion, causing it to trade at a premium to MFC, and its generally lower levels of volatility. 
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What's key to a soft landing is that the US economy is holding market up and the job market fairly constructive. In Canada, the inflation number was also good. The risk to the market is that we don't get a soft landing. The market has priced in a soft landing already, possible but unlikely. AI will probably take us to places we can't imagine, just like old mainframe computers did and some lacked the imagination to see their potential.

Wednesday will see the first interest rate cut from the U.S. Fed. There's a lot of economic data already priced into the market. He wants to see what guidance is and he predicts a 25-point cut though some expect 50. We've seen a rotation from the FAANG into value, and the TSX has seen some of that. But if the economy is slowing, the TSX will lag, because Canada is lot more sensitive to interest rate activity than the U.S. 

Doesn't know if it will hit $3,000, but it's going higher. He's bullish, but it's had a tremendous run up and short term, gold is overbought. Buy any pullback and don't chase strength. Also, physical gold has already factored in rate cuts, so disappointment is more likely. He'd sell gold.

Before each US Fed meeting, he looks at what's priced into the market and what are the street's expectations. George Soros said you make money by discounting the obvious (what's priced in) and bet on the unexpected. His data says that a Sept. cut has a 158% chance, no surprise. There's a two-thirds chance they cut 75, not 50 points. In the coming year, he's pricing in ten 25-point rate cuts (250 total). Last June, the FOMC indicated their median forecast for end-2025 was 5.1% vs. the market pricing in 5 cuts this year to 3.9%. So, the Fed must be aggressive in lowering outlook. If the Fed cuts more than they projected this and next year, it means the Fed is worried about the state of the US economy.

The markets have been all over the place and the pullback in September was expected. The Feds meet on Wednesday which is meaningful for markets. In August there was a 20% chance of recession. There has been a weakening of the employment market in The U.S. and Canada so maybe there won't be a soft landing. 
Banks are a little less restrictive on capital and he is becoming more positive on banks from underweight in 2022 to market weight now. Provisions for the default rate are low in Canada and the Bank of Canada is not too concerned about mortgage renewals. Canada really needs lower rates since they are restrictive. The U.S. economy is OK for now but rates are restrictive there too. 

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