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

It causes a lot of froth. Lots of cross-currents with promises made, possible shift in balance of power, polarizing situations. We're probably going to pause here for a little bit, and then ramp up.

Traditionally markets go sideways in summer, as it's more sell in May go away. In an election year, there's a bit of sell in May but it happens later in the summer, around July. And then markets pop up. 

It's a bit of an odd market. There's this tension between inflation-focused investments or commodity-type things versus the growth story. Your portfolio could look kind of weird if you try to create it from the world that you see, and it might not be best for you at this kind of time. Barbell might be a way to describe it, where things are seemingly opposite with tech and growth along with base metals and commodities and such.

Yes. They've been doing that consistently for Q1, Q2 and Q3, and then the outlook for the full year was raised. Not just the earnings, but the revenues too. Pretty positive.

It's just not going away. We saw the bottom of something like 0.4% back during Covid in 2020. And it's around 4.60% today. A bit of a correction late last year, but it wants to keep going higher.

When it pops above 5%, it starts breaking parts of the market. We're moving back up to that level right now. Bank of Canada may cut next week, but the Fed's ambassadors have been messaging that it might actually raise once more. The market's taking it up in advance of that.

Lot of volatile spots. Volatility is pretty high, with some pretty big moves. If you look through it all, we have an uptrend. You just have to bear with the periods of weakness and correction. And then the uptrend resumes amidst some rotation. It's your normal corrective market, but with more at stake this year we're seeing a bit more volatility than normal.

We've seen a pretty good dose of rotation change over the last year. We've come back to growth with the NVDA's of the world and technology. The AI focus has contributed. See his Top Picks later for an AI pick that's more downstream, but really connected to AI.

Whole sector's been a pretty good place to be. If you're looking for real strength as far as opportunity goes, move downstream from the big names to mid-tier names like IMG. Those are the ones that are behaving quite robustly.

Often it works to buy a basket, and then drill down and add one name for some extra alpha.

Hedging Options:

Value stocks as a hedge. We agree with this thought process, and it ties into the importance of diversification in a portfolio. Tech stocks are generally classified as ‘growth’ stocks, which are characterized by trading at high multiples, not paying dividends, and the goal is capital appreciation. Due to these characteristics and the consumer focus of technology companies, they typically perform poorly in a recessionary environment.

So, in order to hedge tech stocks an investor would want to have an efficient allocation towards stocks with the opposite traits. Value stocks would fit the bill here, typically being stable, mature companies that trade at low multiples, and which pay dividends at regular intervals. In a recessionary environment, there is typically a shift towards value investments due to the stability they provide. Therefore, by incorporating an offsetting allocation towards value stocks into a portfolio that may be too heavy in technology, there will be some degree of ‘hedging’ in the event of a sector downturn in tech.

Stocks in defensive sectors specifically would also be good to target as a hedge. Defensive sectors are those that are seen as ‘recession-proof’ and will perform similarly no matter the market conditions. Defensive sectors typically have companies with ‘value stock’ characteristics. Sectors such as: energy, consumer staples, and utilities are commonly thought of as being defensive. Utilizing an ETF in one/multiple of these sectors would be an efficient way to manage one’s portfolio.
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Markets will be choppy in the second half of 2024. Yes, the economy has been outperforming, but there are definite signs of stalling. Interest rates of the last 2 years needed time to impact the economy, but this drag effect is starting to happen. It's been offset by crazy spending by world governments, which has kept things going. It's an okay environment for companies, though. Inflation remains higher than expected, so he expects no interest rate cuts this year. Some company valuations are getting stratospheric, but there is opportunity in neglected areas. Everyone is chasing megatech.

She notices a bearish engulfing pattern in the S&P chart, meaning the possible end of the uptrend. Last week saw this pattern devour gains made in the previous five sessions; support was at $5,250. Note that support last March when the S&P peaked was $5,265. If the S&P holds above this support, then the rally continues. If it falls below that, then it will fall to its next level of support which is the 13-week moving average. Also, the SPEXW (the S&P 500 Equal Weight) indicates that the rally is broadening out, which is positive. Sectors: Inskip isn't bullish in real estate unless it breaks its 200-day moving average (based on the XLRE chart). Now, is a crucial time in the S&P. 

That's right. The simple reason is that he thinks and behaves long term. The average time for holding securities has dropped from 5 years in the 1970s to 10 months today. So when your time horizon is 5-10 years, you've already separated yourself from many investors out there.

With a long time horizon of 5-20 years, you're going to have periods of high inflation and periods of low inflation. High interest rates, low interest rates. Tense geopolitical situations, more relaxed ones. So when you think of it through that lens, and accept that you can't control any of these factors, an investor's stock analysis should focus on the things they can control.

Good companies tend to stay good and get better. Weak companies tend to stay weak and get weaker. During periods of economic weakness, he finds that the under-levered, founder-run, founder-owned businesses, rather than being reactive, can gain market share and perhaps make attractively valued acquisitions.

An area he's not involved with, mainly because it involves too much predicting. For example, if you held uranium in 2010 you probably started to feel pretty good about things. Then the Fukushima crisis knocked it down. Now in 2024, it's just starting to come back.

He gets why people get excited about it. But he's been at this for 25-30 years now, and there have always been pockets of enthusiasm for the clean, cheap, safe, wonderful energy of uranium. Earnings can be challenged, ROIC isn't strong. A lot of expectation built into recent action.

This question may be the best one he's ever had in 5 years on Market Call, as it speaks to the process of identifying securities to invest in. #1 metric is ROIC, and there are variations on that theme.

Average ROE of the market is 8%. Standard economic theory states that if a business has an ROE of 20-30%, competitors will come in and eat the lunch such that the returns for all businesses in that space will come down to the cost of capital, around 6-8%. However in practice, looking at the likes of CSU or ATD or NKE or META, we see businesses that have been able to produce a 20% ROIC for years. That tells him there's a moat around that business preventing others from coming in and reducing ROIC.

Businesses set to outperform will have a history of strong ROIC.

He generally won't touch a business unless the people running the business also own a sizable portion of that business through insider ownership. He wants them to be acting like the rest of the shareholders.

Not really a huge difference. Return on Equity can be juiced by levering up your balance sheet. Return on Assets is probably the single most important return metric you can look at, because it can't be increased by debt.

If you have a stock that "goes down every day", and this is a high-quality, predictable stock, you should be getting excited, smiling, rubbing your hands together. Because the lower the stock, the higher the forward return, as long as you can predict that earnings will be higher in the future.

Often when he comes on BNN, there's disappointment that he offers stocks that are down. Well yes, they're on sale! Who doesn't like a sale? Focus on the fundamentals of the business, and the stock price second.

Believes interest rates will remain "higher for longer" in USA. Expecting interest rate cut in 4th quarter (USA) - at the earliest. Since employment is strong, and inflation is sticky - there will not be an interest rate cut (USA). Canada on the other hand, may get an interest rate cut earlier. Mortgage's are renewing faster in Canada which (among other reasons), will be more reason to cut rates (as early as June). Generally speaking, not too positive on Canadian banks. Falling interest rates mean weakness in consumers (not good for banks). Will wait for more weakness in Canadian banks before buying.