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

Absolutely. And this has been the characteristic and hallmark of every single technology adoption cycle. The dark fibre era of the early 2000s became the lit fibre era, because all that technology in the ground ultimately got used.

But investors are focused on the quarterly sequential beats for NVDA, and how that flows downstream. One stat that many might not know is that GOOG spends more as a percentage of its sales today on hard, capital expenditures than GE did in its heyday of the industrial boom. These companies are way more analog in their investments than most people realize.

If you're a long-short fund, which is very popular in the US, you are long NVDA and short IBM. So if you're selling your NVDA to flatten out your exposure as a hedge fund, you're buying back the IBM that you were short. So that's a lot of the technical momentum that we've been seeing. NVDA's at the top of the list for hedge funds.

Best way to think about it is that the geography in which a stock is listed is not important. It's about where it's positioned in its overall value chain. Whether it's a can of Coke, semiconductors, or a pair of yoga pants, you have to start from the very beginning and the product's inception. Go from which companies serve that category all the way down to the end retailers.

For example for yoga pants, start with the cotton and end with the retail store. Learn where the ROIC is the highest, where the defensibility of that ROIC is the highest, and where the growth and reinvestment runway is the greatest. 

For heavy machinery, TIH is in a great position, but so is CAT. Find out where the consistent returns are, and wherever it's located in the world, that's where you go. The answer here is to go with CAT.

Absolutely. When you look at some of the performance numbers that have come out over the past few months, despite the rally, the Russell 2000 is still basically flat since the end of 2021. Still lots of room for companies within that index, and certainly Canadian small caps as well, to catch up on valuation appreciation and fundamental appreciation alone.

He's still optimistic about this sector. Q2 earnings for this group are going to be quite dramatic. He's expecting north of 15% EPS growth at the index level, which should provide an extra tailwind there.

Certainly that's part of it. That's part of a secular trend that's going to continue for technology. 

But what really happens is that there's only so much money to go around. So when large-cap stocks, and tech stocks in general, are taking a lot of capital in, that takes money from other areas of the market. We're seeing that with valuation depression in a lot of the small-cap names.

So if that rotation happens a bit (think big pension funds and institutional managers), capital is going to start shifting away from the larger-cap stocks into some of these more depressed areas of the market. When you get these dramatic moves in the market, it usually marks a shift change. Compared to the S&P 500 and the NASDAQ, the Russell 2000 is seeing the greatest outperformance since the 1980s.

Even more encouragingly, we're clearly in an environment of loosening financial conditions. We saw this with the Bank of Canada yesterday, and we're seeing it with central banks around the world. If you look at when small caps started to underperform, it was when interest rates started to go up. So interest rate certainty is very important to this subset of the market, because they have more variable debt and more debt on their balance sheets.

Finally starting to see interest rate cuts. He feels that these cuts should have been a bit sooner, based on the data he was seeing. Nevertheless, it's encouraging. If you look at the next few meetings, north of 70% probability of more cuts is what the bond market's pricing in. Likely to see more cuts as the year progresses. Hopefully, the economic data doesn't fall too much off a cliff between now and those meetings. 

Should be a tailwind for a whole bunch of sectors that have been struggling over the last year -- REITs, utilities and telcos. It's a broadening of breadth, not just in small caps, but in areas of the market that haven't been feeling much love since tech stocks started to take off about a year and a half ago.

Based on the data he's seeing, he expects the BOC to cut again on September 4. And that's built into the markets as well.

Not surprising. Lots of high-quality, public assets trading at significantly depressed valuations. It's encouraging. Likely to see more, and the premiums have been pretty nice.

It really comes down to the credit markets in this environment being quite robust. Credit spreads are quite tight. And now you have the benefit of more interest rate certainty. A survey would likely show a belief that interest rates are going to be lower a year from now, not higher. This creates a catalyst for companies to make a move.

A second big theme is that we know that private equity is a massive asset class, with more and more money going there. So a lot of capital is sitting on the sidelines, ready to be deployed. That's why we're seeing private equity come in and buy these assets, probably still at pretty good prices given the underperformance we've seen in the space. Doesn't see this aspect changing anytime soon.

A third thing, not much talked about, is that public market costs have actually gone up quite a bit. In this regulatory environment, it's expensive to be a public company, which takes substantial capital away from the business itself. Stripping that out becomes a meaningful synergy to the buyer.

Buy high-quality, small- and mid-cap stocks, especially in Canada. Lots of great assets trading at depressed prices. Take a barbell approach in your portfolio -- have some large-cap or ETF coverage, but start to sprinkle in some of these higher-quality smaller-cap names, and you might get a nice premium over the next year or so if they're acquired.

He has a lineup of stocks where he thinks there's a high probability of this happening. But if not, you want to make sure you own high-quality names where the fundamentals will help the multiple expansion.

Not a lot of Canadian REIT takeovers yet. Maybe that's coming. As we get more interest rate certainty, we should see a lift in the valuation. A lot of them are quite undervalued. These names will appreciate in value as interest rates come down and people get more comfortable owning that sector.

Over 500 points, amazing. And that's a good thing. On his fund, and a lot of separately managed accounts, he had a hedge overlay on top, which means he was short the indices. So he has an underlying stock portfolio, and then a short overlay of equity indices. The short overlay was a little bit of luck, to be honest. 

July, historically, is the best month of the year for the stock market and certainly for the NASDAQ. But he wanted to put on a bit of a short overlay, so he's up to about 70% short the notional value of the stock portfolio. A lot of that is put options. So when he went home last night, it was sitting in the mid-high 40s. But because the market's rolled over and volatility has gone up, those options are a lot more valuable. So in a market that's down 3%, his fund is down only around 0.2-0.3%.

The hedge overlay lets you weather down days like today.

As we go into this season of August-October, it's not very hospitable to the market. This upcoming period is going to be difficult. In his fund he has about 10% cash, so he'll add a little bit. In some of his separately managed accounts, he has 20-30% cash because he's been trimming as it went up.

It's a nasty market today, but it's worked out well for his strategies.

So many times he's been on the show and it's been difficult to find some runway in some of these stocks. But on a day like today, he loves coming on because the runway is a lot longer. There are some great opportunities, and the fundamentals haven't gone away.

He's lightened up a lot on software. The place to make $$ these days within the AI revolution is the hardware (picks and shovels). Software will come, but it's too early, maybe in a year. The whole idea of AI is that the embedded AI in the hardware is going to do a lot of the analytics itself. It will be eating the lunch of a lot of the SaaS providers.

Silicon carbide has been around for a while, and is much more efficient. Problem was it was more expensive. AI revolution just took off like a rocket, and they're still trying to bring down the price.

That's right, don't buy a full position today. For the kind of events like today, it takes people time to digest information. The people bailing out today are the "weak longs". There are other people out there who, instead of looking to sell, are trying to put hedges around their portfolios. 

Problem right now is that volatility is up, with the VIX around 16.5-17. A week ago it was 13.5-14. It's expensive to do the hedges.