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

They have a big weighting in AI related stocks - 27% of the portfolio, and had a great first quarter. He doesn't think there will be a recession and the world is still recovering from the pandemic. Used car prices are still high indicating there are not enough new cars.  Canada is in the Global Growth Fund with a 25% weighting. Canadian banks are just chugging along but doing better and better over the years. There is good growth in U.S. banks but they can and do go bankrupt. 

Believes upcoming statement by J.Powell will be indicative of the strength in the economy. Easy financial conditions, and relatively low interest rates have created strong markets. If US Fed wants to slow the economy - there are many tools to do that. Expecting weakness in the markets as consumers are starting to turn the corner (fragile). If Trump becomes President - will be interesting to watch. Full control of US government by Republicans might not be viewed positively by markets. 

Would buy silver at this time. Commodities going to valuable going forward. Electrification will require more silver. Good time to buy.

Business of forecasting markets is impossible - 38 years of experience has proven this point. However, economic indicators ('economic surprise index') are pointing towards recession/hard landing. Rising interest rates will have impact on markets - just not sure when it will occur. Overall, structure of markets is very fragile. Yield curve has been inverted for almost 2 years. Expecting economic pain - just a matter of time. Large amount of US debt also a major concern. 

Company Profile: Cadence Design Systems (CDNS)

CDNS provides software, hardware and intellectual property for semiconductor design and manufacturing. Essentially, CDNS can be thought of as an ‘architect’ of chips, which can benefit from the current high levels of AI spending. It supports the creation of integrated circuits, systems on a chip, and other devices by using GenAI for its customers to improve their own semiconductor designs. Its customers operate in various industries including automotive, aerospace, and healthcare, and its customers include the world’s most innovative companies.

Its growth has been around 13% on average, driven mostly by organic growth. It has a strong balance sheet, a net cash position of $500 million, and a track record of repurchasing shares. Currently, it has a buyback yield of 0.9%. It is not cheap at a 49X forward earnings multiple, but strong sales and earnings growth are expected in the next few years, with a healthy level of margin expansion expected.

Looking at its financials we see an incredible track record of beating earnings estimates, and long-term EBITDA expansion. Its valuation is rich, but it has contracted from 2021 levels, while its price has moved materially higher. We view CDNS as a high-quality name with exposure to the AI spending theme, and long-term secular tailwinds of bridging the gap between the digital and real world. 
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Believes slowing job growth in the USA indicating economic contraction. A slower economy is actually a good thing - gives consumers and markets time to cool off. Unsure on direction of markets, but eventually strength in the markets will broaden out (not just "Mag 7"). Over valued tech stocks present growth, but very risky in terms of downside. If markets collapse like 1999, investors could lose a lot of money. Direction of semi-conductor business is undeniable, but the problem lies in over valued stock prices. Also, there are other competitors in the market to NVIDIA - will eat away at earnings. 

Market Update:

Greater Toronto home sales edged down 16% in June compared to the same period last year, despite the easing cost of borrowing. On the other hand, Canada’s job market stalls in June, as unemployment rate climbs to 6.4%, increasing the likelihood for the Bank of Canada to cut interest rate in July.. The Canadian dollar was 73.46 cents USD. The U.S. S&P500 ended the week up 1.2%, while the TSX was up 2.1%.

Most sectors ended up strongly this week. Technology, energy, and real estate added 3.4%, each, while financials and materials added 2.4%, each. Consumer discretionary and industrials ended the week up 2.3% and 2.2%, respectively. The most heavily traded shares by volume were Power Corporation of Canada, Corus Entertainment, and Toronto-Dominion Bank.
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Seasonality matters. In his recent newsletter, he contrasted two reasons why the market might go up, and two reasons why it might go down.

July is OK seasonally, and momentum is still with the market. However, some of the underlying indicators are kind of weak. Like Kevin O'Leary wearing a suit blazer with pyjama bottoms, the market looks good up top, but not so good when you look below the surface.

He read a statistic that about 3-4% of the S&P 500 is making new highs on the year, versus the percentage of the TSX that's significantly higher. Both have kind of crummy breadth, but especially the S&P 500.

There's always a bit of pumping coming into an election, where they promise the world. That can have an effect on the markets. Typically, election years often see positives in the back half of the year.

But he has a problem with market breadth and overbought status (how much above the 200-day MA the S&P is). He likes the indexes that are a little less technology focused.

He likes the indexes that are a little less technology focused, and he's 98% not tech in his equity platform. And yes, he might underperform for a while, and this will continue as long as it's all about MSFT and NVDA. He doesn't like the market from a momentum point of view, it's overbought, but you can't argue with it too much so you have to be invested.

He's compared the breadth stats between now and 2000-2001, and the two market participation numbers are at about the same level. The usual suspects were moving up, and nothing else was. We're in the same sort of situation. Everyone knows what happened, it imploded.

He's not saying it will implode tomorrow. But the setup is perfect, it's going to happen, unless things slow down for that handful of leading stocks.

It very well could happen. Right now, though, the focus is so much on those stocks. Everybody's aware that they're overbought, yet everyone's still buying them partially because of FOMO. When that changes, the other stocks will catch up, which is why he's in non-tech stocks. The change will happen eventually, so it's safer to be there now, even if he suffers a few months of underperformance.

No. Draw it so that it touches the troughs. It's sort of a median line. If the stock hits that, it's probably a buying opportunity.

Seasonally, not great over the summer. Coming into an election, incumbent will try to keep prices low, so that inflation and gas prices don't look so bad, and electorate will like them. They've done it before. He's lightened up, but still holding, expects these stocks to tread water for a while.

See his (really good;) blog on oils, being published tomorrow.