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

Rate cuts in Canada would help our economy, and it will help the banks. In the US, if the first one doesn't happen until the end of this year, she doesn't know if that will make much of a difference. 

What we want to look for, when the cut does happen, is the impact on sentiment. Corporations are going to be more comfortable with the rate environment, which they'll see as more stabilized. If it's a soft landing scenario, and the economy does continue to grow, over time that's going to be beneficial for corporate profits.

Yes. Even in Canada, earnings are expected to be up. In the US they're much stronger, again, led by tech stocks. If we have that profit growth, that's supportive for the stock market.

If it does, it's short term. Don't let it influence what you do in the stock market, you have to take a long-term view. If there is some profit taking or selling before June 25, then take advantage and buy some good companies. In general, just ignore the short-term noise. Her own clients haven't been stressing about the change.

Banking industry, in general, seeing a slowdown in growth. Good time to increase weighting in the sector. Lots of dividend-type stocks are lagging, such as banks, utilities, energy infrastructure, telecoms. Don't go full force into the banking sector, just nibble.

US Fed Chair Jay Powell walked the tightrope well today, saying the economy is no longer super heated though gradually cooling. He held rates. Today's CPI print seemed to catch the Fed by surprise.

Company Highlight: Loblaws Companies Limited (L):

Loblaws (L) is the largest Canadian food retailer, and some of its notable brands include President’s Choice, No Name, and Joe Fresh. The company operates supermarkets, drug stores, liquor stores, and clothing stores. It has two reportable operating segments, its retail and financial services business lines. Its retail segment includes corporate and franchise-owned retail food and associate-owned drug stores, and includes in-store pharmacies, health care services, other health and beauty products, and apparel. Its financial services segment provides credit card and everyday banking services, insurance brokerage services, and other. Management has been repurchasing shares at a fairly aggressive pace, indicating that management believes shares are undervalued.
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She is concerned about the economic landscape with a risk of a slowdown. Savings rates in Canada are coming down, credit card debt is going up, and the consumer is spending less. Bank earnings that came out a couple of weeks ago were really messy and the rate cut last week is a sign that things are not going well. They will have to cut more due to mortgage shock. In spite of all this. markets continue to rise. Guidance in companies relying on discretionary spending is coming down and consumers are taking home less volume. Her company's portfolios are focused on the preservation of capital and safety of dividends. They are overweight in defensive sectors. 

The question was on portfolio construction. Stay diversified with a balance of high dividend stocks and high growers. For example, in the financial sector you could own TD Bank with a 5 1/2% dividend and a depressed price because of the money laundering situation, and compliment it with Manufacturers Life with higher dividend growth. You could do the same type of strategy with utilities and telcos.

Generally speaking, political shift to the right in Europe not a concern - however is something to note. Right leaning governments tend to simulate inflation as countries pursue protectionist strategies (cheaper goods not available), and less global trade. Upcoming CPI report (May) will give direction on US Fed policy regarding interest rates. If CPI data is higher than expected, will give less room on potential for interest rate cuts in the USA. Recent Canadian interest rate cuts putting pressure on Canadian dollar. Expecting another interest rate cut from the Bank of Canada. 

Believes upcoming announcements from the US Fed will reduce expectations of interest rate cut. CPI readings will be very influential on direction of US Federal Reserve. Question is whether traditionally "dovish" J.Powell will hold his stance. 

What are "net-net" investments?

In his early days, Warren Buffett was famous for compounding money at a high rate of return with low risk by seeking “net-net” situations. In effect, he was looking for a company that had more liquid assets on its balance sheet than its market capitalization indicated after conservatively subtracting all obligations. As a result, theoretically, his downside would be quite well-protected given the liquid assets acting as a floor valuation.

Investors are puzzled about why such a situation happens and persists, especially in the public market, where there are tons of highly educated investors, and professionals trying to seek above-average performance. Are investors too naïve to let such a situation happen?

The phenomenon typically happens with companies where they have one operating business and a portfolio of liquid assets in cash, short-term investments, or even private investments, etc. Those companies tend to trade at a discount compared to a situation where a portfolio of securities and the operating business are two separately traded entities. Investors can get into such situations with the mindset that they can purchase a fine operating business at a discount to peers given the cash cushion.

That being said, the market has become much more efficient nowadays than in Mr. Buffet’s era thanks to the transformation of technology. In addition, the presence of activist investors and private equity who are willing to be actively involved to realize this value much faster by pushing management to improve on capital allocation. Consequently, the popularity of such situations has been few and far between, however, occasionally, investors still can find such opportunities, especially in inefficient places where institutional investors are not too active.
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A recession is possible and a soft landing in the U.S. is not guaranteed. It wouldn't be the first time when the effects of fiscal tightening are felt long after. We're seeing weakening in some sectors; some retail numbers are troubling, some corporate reports are spotty, and poorer demographics are showing weakness. Be on guard in case we don't get a soft landing. The street started this year forecasting 4-6 rate cuts, and now there's even talk of raising rates. Markets have held up well, though, particularly tech, AI stocks and those with wide moats. He's selling consumer discretionary; some companies report poor customer traffic, while some have elevated valuations.

Absolutely. Today we had pretty good jobs numbers out of the US and Canada. People want those rate cuts to happen sooner rather than later, but ultimately good news should be good news. If we're creating jobs, if the economy's doing OK, that should filter into stronger earnings for companies. We've had no rate cuts in the US and the US markets are up double digits. We had our first rate cut, as expected, in Canada. Probably more to come. 

At the end of the day what really determines strong stock prices, if you're a long-term investor, is earnings -- earnings per share, earnings that grow over the long term. Valuations are at high levels, very high levels for many companies, but this is what happens in a bull market. You can't always have your cake and eat it too, and in a lousy market you can get cheap valuations in an economy that's not doing well. You have to reconcile that in your mind.

Are you going to pay up for good quality companies? Do you believe in the next 5 years they'll be bigger and better? Even if you pay too much, if you pick the right companies, there's still an opportunity to do very, very well. 

Canadian market has a different dynamic than the US, missing a lot of those hot sectors -- nothing to do with AI, and commodity prices are starting to come off again. Canada has better valuations but the businesses, quite frankly, are just not as good. We don't have the same type of quality companies that we can buy in the US.

One rate cut doesn't make them that much more attractive, but if the economists are right and we see 3 rate cuts this year, and 4 next year, and GICs will offer only 3-3.5%, that will definitely make the ENBs and TRPs of the world that much more attractive. He imagines that many people sitting on cash or in GICs or high-interest savings will look to add some of those names to their portfolios.

The only problem is that some of those businesses have gotten worse in the past 5 years. Balance sheets are in worse shape, perhaps there's more competition as in the telecom industry. Banking industry has a few great quality winners like RY and NA, but others are struggling and some with serious issues.