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

A January report noted that delinquencies had skyrocketed in Canada. Unemployment in Canada has been rising, just below 6% now. The rise is partly due to immigration flow. We do have job creation, but it's not keeping pace with population growth. Headwind for the job situation in Canada.

On the flip side, perhaps BOC will cut interest rates sooner than in the US. Might do this if they see economy in Canada weakening faster than in the US.

In US unemployment has been quite low, 3.9% at last reading, which is 25 consecutive months of sub-par 4% unemployment. Typically, when the economy starts to slow and a recession is perhaps coming, unemployment usually ticks up over 6%. Even the Fed yesterday when it released the dot plot, said it anticipates unemployment at just over 4%. So the Fed sees the US job market holding in relatively well.

Americans have been drawing on savings. Rate of saving peaked during pandemic, and now drawing down to below 4%, around 3.8%. Pre-pandemic, the rate was over 5%, and the historical average is 6%. That tells you that the consumer continues to spend in the US, very important to the economy. So now the job market becomes even more important in terms of getting an income to keep spending patterns in place.

She's been out since oil peaked in 2016. Cyclical, difficult to forecast underlying commodities. Considers the producers as growth stocks, so you have to assess operations and margins on top of the commodity forecast. Makes analysis difficult.

Just made an all-time high, took many years to surpass the prior one. Suffered in the past with thoughts that crypto was taking its place. Gold might be picking up because of deficits across the world. So hard to forecast the commodity, driven by sentiment.

It's been a good run. A good sprint into the end of the year, and the first couple of months of 2024. March has been more of a consolidation. Sometimes it looks like a bit of a selloff, but treat it as a consolidation, and hopefully in Q2 we'll be off to the races.

He has price targets on everything he has in the fund and in separately managed accounts. Normally, when it gets within 5-6% of price target, he takes 1/3 off. Take another 1/3 once it reaches the target. Then evaluate and perhaps even change the price target, though this doesn't happen that often. Always good to bank some profits.

Very much so, except during earnings season. Once earnings season is over, it goes from the micro to the macro. That's what everyone's talking about right now. But we'll be back into earnings season in about 4 weeks' time, and then we're back into the micro.

Everything is pretty well lined up for a pretty good Q2. Consolidation has been good for the market.

In a neutral hedge, he'd normally be short equities between 20-25%. Right now, equities are starting to get close to his price targets. So he's raised the hedge a little bit, now being at a 45% short equity index overlay on top of the stock portfolios.

At the beginning of the year, he had the hedge all the way up to 75-80%. And this was the right thing to do. At that time, everyone thought there'd be a big selloff. Since mid-January, he's had the hedge under 50%.

An Overview on Protective Puts and Covered Calls:

As earnings season wraps up, investors who have been adversely affected may be now questioning, how they can guard against negative results. One of the most obvious risks of holding stocks is downside risk and no matter how bullish an investor may be on a company, feelings of uncertainty can always creep in. Investors should not lose too much sleep in these scenarios however, as there are options to hedge against downside risk. Two of these strategies which will be discussed are protective puts and covered calls.

 To understand how these strategies work, we must first understand the basics of put options and call options. An option grants the holder the right but not obligation to buy or sell at a pre-specified price known as the strike price (X). A put option grants holders the right to sell at the strike price, while a call option grants investors the right to buy at the strike price. If an option expires and it is not exercised, it will have a payoff of zero.
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Compared to the 1999 tech boom, the current rally is more sustainable. 1999 was a series of small speculative companies, some of which didn't survive (AOL). Current leaders like Google and Facebook emerged from that period. We're more like 1997-8 as AI companies are now emerging, but only big companies can play this expensive game. The market will eventually broaden out; tech has sucked money out of other sectors, but this will change. He see value in healthcare, like Pfizer and Eli Lilly. Also, two export pipelines are coming and this will raise the value of Canadian energy and narrow the gap with US oil.

Company Highlight:

ARC Resources Ltd. (ARX): Acquires and develops crude oil, natural gas and natural gas liquids in Canada through its interest in the Montney basin located in Alberta and northeast British Columbia. ARX has cyclicality in revenue and earnings. Over the last few years, ARX experienced a decent tailwind due to record energy prices and favourable operational leverage. The company is returning capital through dividends and buybacks with a combined yield of around 6% on the trailing twelve-month basis.
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He wonders at how much markets have been driven up by speculation. The options market is seeing speculative activity that is more than it was two years ago. Also there has been a record increase of '0 days to expiration' options being traded. This all begins to look like a continuation of 2021. For longer term investors, in particular Market Call's callers who are not traders, look at what you own and decide if it is being given up to speculation or not. NVIDIA is a good example of enthusiasm pushing up the price but at the same time not being over-valued. However what happens when people don't want new GPU's anymore.

The question was on his son's starting portfolio. Should it be in utilities or banks. Go with Canadian banks and start with the one his son deals with.

Focused on safety in the markets right now with all-time high stock valuations. P/E ratios very high - can be a source of concern. Doesn't believe interest rates will fall anytime soon. Inflation rates are sticky, and won't be easy to get rid of. ~4% inflation rate appears to be a realistic inflation target. Doesn't believe 2-3% inflation rate is reasonable. 

Company Highlight:

MEG Energy Corp (MEG): Operates as an energy company that utilizes steam-assisted gravity to extract and produce thermal oil in its Christina Lake Project in the southern Athbasca oil region of Alberta. The company has had a 54% EBIT CAGR in the last five years due to favorable commodity prices and a significant improvement in profitability profile. MEG also allocated capital in a disciplined manner by paying down debt and buying back shares aggressively. MEG is a good balance of high quality assets, excellent management and exposure to favorable tailwinds in energy prices.
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