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

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.

We've seen these events in the past where, out of nowhere, the ceiling falls in. The worst one was the crash of 1987. For this one, everyone's made a lot of money, hedge funds are loaded with debt, Japan raising interest rates scared the carry trade. All that set off a quick, short-term panic. Market traders always love a little bit of fear and they can scare people into selling them stocks at a good price.

Underlying economy is slowing, but he doesn't think we'll have a recession. Especially in the US. Canadian situation could be different because of our 5-year mortgages, coming up for renewal at higher rates.

Interest rate cuts should stimulate the economy. Starting to see demand slowing for industrials. As inflation comes down goods will be priced lower, so marginal cost per unit will be lower for producers.

We need them. We could have a repeat of the Roaring Twenties, a century later, just as everything comes together. Especially with the productivity that AI's going to introduce across the entire system. By the end of the decade, you could be getting an Uber without a driver, that's deflationary.

He remains bullish. Parts of the market reflect bullishness, parts don't. His Top Picks today reflect plays on interest rates coming down, which should help PE's rise.

Gold's use in the digital world has declined. Over time, it's underperformed a lot of assets. Doesn't use it for defense in his portfolio. It's cyclical, 7 up years for every down year, and you usually forecast the down year 3 years too early and suffer.

Today's data corroborated the trends already in place, that inflation across NA is cooling. It gets people wondering when rate cuts will start? Not only is inflation cooling, but there are so many economic indicators (especially on the consumer side) showing how drastically things are slowing.

Inflation and rate cuts are two big things that are capturing investors' attention right now.

He doesn't think it would be 50 bps. Tough period macroeconomically because many signs of consumer weakness and a weakening economy, but on the flipside employment, wages, and stock market valuations are all still quite strong. So it would be difficult to justify a 50 basis point cut.

In a softening cycle versus a hardening cycle, rate cuts can be a lot more gradual. It doesn't preclude that down the road, the Fed could revert and raise again. Historically, that has happened a few times. A shorter, more shallow rate-cutting cycle to get the economy back on track, and then they have to raise again.

It's a potential move that you don't hear much about.

He's both being defensive and buying the dips in tech. You look for opportunities when good companies sell off. Biggest value right now is in interest-sensitive, slower growth companies. Wouldn't chase valuations on higher growth companies, but when some do sell off and hit your buy price, it's a good opportunity to take advantage of.

He doesn't really break it down that way. But if you look at the US equity markets and the PE multiple on the S&P 500 relative to historical averages, it's richer than almost any other equity market in the world. You have to be cautious there.

Lower rates have not, historically, been very favourable to life insurance companies. That's why they were in the dumps. Thinks this rate cycle will be a lot shallower and shorter. Balance sheets of these companies have trued up to the current environment, so less susceptible on the downside. If downside isn't that deep, they'll be OK.

Attraction of Stable Dividends:

Canadians love dividends, it is not only the culture but also an implied encouragement in the tax system which treats dividend income favourably with the dividend tax credit. As a result, dividends are the most common form of capital returns to shareholders in Canadian public equities compared to the US which tends to prefer share buybacks. Because, unlike share buybacks (which ultimately should lead to capital gains) which could be subject to market volatility, the dividend received is “real money” at the end of the day, which could be either spent or reinvested. Numerous companies use their track record of consistent and growing dividend payments for decades as a badge of honour, and companies such as Royal Bank of Canada (RY) or Enbridge (ENB) are rewarded handsomely by the market with higher valuation multiples relative to US peers.

Very few businesses are stable and strong enough to withstand the pressure of competition because capitalism tends to attract fierce competition, especially in industries with above-average, attractive returns. Companies with consistent and growing dividends year after year even during economic downturns could possess some underlying competitive advantages that are difficult for competitors to copy, and therefore, are attractive candidates for long-term investment. This consistency demonstrates not only the resiliency in the business model or staying power but also the fact that the company possesses pricing power that helps it raise prices without losing market share over the years.

Buying and holding “dividend-growth” machines could be one of the safest ways to build generational wealth, it is the investors’ dream that the annual dividend received will eventually equal the cost basis. Here we have filtered out a small subset of high-quality companies that grew their dividend per share over the last ten years supported by a healthy growth in fundamentals.
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The current volatility doesn't totally surprise him; the market was in a risky position. We haven't hit bottom, because too many people remain too heavily invested in the market. The next move in interest rates will be lower and the economy is weakening. Today, Home Depot reported the latter, though investors are pricing this in. Starbucks, UPS, McDonald's, Airbnb, many companies are signalling a weaker economy, but has the marketed discounted this in valuations? He predicts a short, shallow recession, and a 0.5% rate cut in September to catch up to other central banks in Canada and Europe. This will ultimately benefit investors, because lower rates will support higher valuations. Buy on weakness.