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

Believes US President Joe Biden stepping down is good for the overall prospects of US politics. It appears Republicans have the advantage at this time, but regardless, high quality, bottom up approach to investing is best for investor portfolios. Generally speaking, politics are hard to predict. S&P 500 at all times highs, and TSX index also performing well. Sees an investment case for TSX catch up(lower PE ratio) to the S&P 500. Overall, it is an excellent environment for active stock picking investors - lots of under valued equities in the markets. However, sectors like Canadian Telecom sector will be difficult (very price competitive and hard to make a profit). 

Trump would benefit small business, a sector crushed by de-industrialization, a world he wants to bring back along with better wages for workers. Kamala Harris would be way better than Biden--and even Trump--for big business, because she believes in globalization like American world leaders before 2016. In contrast, Biden was adversarial to big business, because he admittedly didn't know much about business. Harris is an elected rep in California, and knows the people who run Silicon Valley. Her secret weapon is her brother-in-law who's general counsel at Uber. She will be friendlier to business than Biden was.

Company Highlight: CAE Inc (CAE):

CAE is a technology company which digitalizes the physical world by deploying simulation training and critical operations support solutions. It is managed through three segments: Civil Aviation, which provides comprehensive training solutions for flight and other personnel; Defense and Security, which provides global training to ensure mission readiness; Healthcare, which provides virtual education and training solutions.

For the third quarter of fiscal 2024 Revenue of $1094.5 million was up 12.8%; Operating income at $121.6 million was down 14% and net income at $56.5 million ($0.18 per share)was down 28% ($0.24). Adjusted order intake at $1273.9 million was up 7% leading to adjusted backlog of $11,746.3 million, up 9%. Civil service segment margins were a bit light with product mix being a factor;  defense revenue margins were low in part due to legacy contracts. Management remains confident in the future.
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Mainly the heavy oil side, the pure oil players. The whole industry will benefit from tighter spreads.

Believes crude oil prices will remain high throughout 2024. Under investment in energy development will ensure relatively high oil prices. Energy stocks are the cheapest they have been in recorded history. Is bullish on Canadian oil and gas sector. Gold prices have recently pulled back, and is a good time to buy. Any time investors have ability, it is a good time to buy gold. Physical gold is a very good hedge against inflation. Gold equities should close the cap between physical assets prices, and stock market valuations. Believes owning physical gold trusts is a good option for investors - don't have to physically own it "in person".

Market Update:

Canada’s inflation cooled down faster than expected in June to 2.7 percent compared to the consensus estimate of 2.8 percent, increasing the odds of another rate cut. On the other hand, the European Central Bank left interest rates unchanged at 3.75 percent after June’s cut, indicating that borrowing costs will remain restrictive for some time to ensure inflation returns to 2 percent. The Canadian dollar was 73.01 cents USD. The U.S. S&P500 ended the week down 0.5%, while the TSX was up 1.0%.

All but one sector rose this week. Real estate and financials added 3.2% and 1.8%, respectively, while consumer discretionary and industrials added 1.2%, each. Consumer staples rose 1.1%. Energy and technology ended the week slightly up 0.2% while materials gave up 0.2%. The most heavily traded shares by volume were Royal Bank of Canada, Bitfarms, and Air Canada.
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Panel guests:

Rob Butler
Butler Mortgage

Lauren Haw
Zoocasa

Bob Dugan
CMHC

Bob Dugan: Shortage of supply of housing in Canada, not building it quickly enough. Puts pressure on affordability. Tremendous growth in demand through population growth. Last year, Canada saw strongest population growth since 1957.

Because of high interest rates, home prices have come down. But because of mortgage payments at those higher interest rates, we still have an increased cost of home ownership. A lot of that population growth is moving towards the rental market, and we're seeing some frightening numbers in terms of rent growth, especially in units where there's turnover. Rent control protects a lot of people while they live in the unit, but as soon as they move out and someone else moves in, the rents correct to market prices.

Lauren Haw:  That's right. A lot of mortgages are still up for renewal. A lot of homeowners brought forward their refinancing to 2021 and early 2022, when you could essentially get free money. And then we had a 500 basis point jump. There are a lot of sellers in the market, but we haven't seen forced selling to a big degree.

Ron Butler:  Risk didn't turn out at all well for people with variable mortgages. The next 2 years in variable mortgages will probably be the most impactful renewal cycle. We have 4 banks that didn't raise payments, but interest payments just built up and built up, so that's going to be a sizable impact. So in many cases, mortgages actually grew over the last year and a half.

Bob Dugan:  A lot of people are facing payment increases. When you get behind on your amortization schedule because your payments aren't covering the interest, upon renewal you have to get back on your original schedule. Those people will be facing payment shocks down the road. 

Then you have folks with fixed rate mortgages renewing at higher rates, and that'll be a big payment shock as well. The BOC did some work and estimated that over the next couple of years, 50% of mortgages will be renewing at higher rates.

On one hand, you see interest rates coming down at the margin, but the effective interest rate for a lot of people renewing is going to be higher.

Lauren Haw:  They aren't. You can get 5-year fixed at under 5% right now, pretty reasonable. As Bob said, supply continues to be the true issue. Rates went down so low, and prices shot so high, because money was free. 

Now you have a number of sellers who don't want to sell for less than the peak. There's a pretty big spread between what sellers are willing to sell for and what buyers can afford to pay.

Ron Butler:  Some homeowners are hanging on, and some are starting to slide off because it's becoming too unmanageable for them. Uniquely in the last 6 months, we've started to see increases in unemployment. If that rises, then the impact of the renewal combined with the possible loss of income to the family could be the real problem we're going to see in the next year.

Bob Dugan:  Absolutely. Last year they came in much higher than expected, and a lot of that was multiple starts in Toronto and Vancouver that exceeded CMHC forecasts. A lot of the reason for that was that a lot of big projects had pre-arranged financing at rates that pre-dated interest rate increases. They were operating in a bit of an artificially positive environment.

But now what we see is that a lot of these multiple projects are not going to be happening to the same degree, particularly in Toronto and Vancouver. So overall, starts will decrease this year. Unfortunate, because the size of the supply gap means that the pace of housing starts has to double each and every year over the next 10 years to close that gap. Instead, starts are coming down, but we need them to go in the other direction.

Lauren Haw:  It's not. She believes that stats for Ontario are that 31% of the costs of a new development are taxes and government fees. If your average production cost is about 16% tax and housing's 31%, we're not going to tax our way into more housing supply.

Bob Dugan:  Very good question, and becomes more relevant as the BOC has more and more success combating inflation. In June 2022, inflation rate was 8.1% YOY, and it was fairly broad-based. More and more, the different components of inflation have been settling down. 

One of the strongest components right now is the cost of shelter, accounting for about 25% of the CPI. And a big part of that shelter cost has to do with mortgage interest costs. It's one of the fastest-growing parts of the CPI right now.

Speaks to the difficulty of running monetary policy. Tricky balancing act, because the BOC has to make sure that inflation is defeated before they start to cut too far. If inflation were to rear its ugly head again, the BOC would have to reverse course, detrimental to their credibility. On the other hand, if you keep rates high for too long, you can exacerbate inflation through higher mortgage interest costs and perhaps create too much of a slowdown in the economy.

BOC's doing a pretty good job so far, and inflation's coming down fairly gradually. The latest June number of 2.7% for year-over-year CPI is in the target range of 1-3%. Core measures have come down, but still outstanding issue of high shelter cost. That should start to come down as interest rate decreases continue over the coming years, as the BOC gets back to a more neutral policy.