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

Private equity is selling off. Where's that $$ going? Might be going into the REITs. He likes the ones with a more stable profile, such as CRR.UN and the retirement homes.

Might be some fair value in the retail ones. Office ones have been really tough, with one thing after another.

Everybody knows the story on gold -- hedge to the US dollar and to geopolitical uncertainty, with central banks buying. It goes up big after shocks like Covid and war. 

But were precious metals priced for inflation in the system to the extent that we've seen since Wednesday? It might take a while to open the Strait sufficiently. So we don't know when oil will come down, and it might even go higher. Investors in these commodities weren't ready for inflation to be at this level.

First gold fell off, and then silver did the same thing. It's a tough call. For silver and gold, you're relying on the fickleness of investor appetite. A much tougher theme to play than just owning tech stocks that are changing the world.

He owns silver and gold, but bought at way lower levels. He'd rather put new $$ into nuts and bolts that he can be more sure of for the long term.

Great question! It always breaks a little bit. Usually a stock breaks a bit, and then rights itself. If it leads to a deeper correction, then that's a different story.

If he's correct and we have another 3 weeks of peak non-visibility for this hot war, traffic through the Strait starts to move better, and oil prices stabilize, then many stocks are great buys right now.

One of the huge issues that the US should be facing is what happens to Iran? Does the society there collapse? In which case, they're going to have to have more boots on the ground. They've already promised a bunch of Marines, but now they're talking about much more than that.

We've seen this before, in Iraq. Costs just spiral away. That's a really big concern.

It has the potential to get a lot worse, as it did the two other times the US intervened in the Middle East.

No. There isn't really much benefit to individual taxpayers. Most benefits are to big corporations. 

The US balance sheet is weak. The problem is now that it will result in a huge increase in the deficit. That tends to push down the USD and increase inflation.

Let's go back 26 years to 2000, when we had the last big-tech explosion. It's not that the companies weren't all needed. The problem is that in the short-term, if you way overbuild AI server farms, utilizing all that capacity is in jeopardy and so is the profitability.

You can even go back to railways in the 1800s. It's happening all over again. Vast overbuilding, and then you get a big correction in stocks. And he means a BIG correction, like 85%. This isn't trivial. 

In 2000, even great companies like CSCO had huge setbacks, though that company came through OK. We're facing very much the same kind of issues. There's the initial euphoria, and then a big setback.

Everybody's talking about AI. But who's really using it, and who's using it to make money in a substantive way? We may well get there, but it's going to take a while.

But in those big setbacks, you get some marvelous trading opportunities. That's what you need to watch for.

He looks at gold in the context of the US balance sheet, which is brutal (and potentially getting a lot worse). In that environment, tend to get currency weakness and renewed inflation. 

How do you protect yourself? Historically it's been precious metals, high-quality industrial stocks, and unlevered real estate. Perhaps gold got a bit ahead of itself. But does he see any improvement in the US balance sheet? No, certainly not with Donald Trump in charge.

We always have to be on the lookout for change. After 18 months of great performance from anything that was economically sensitive or an inflation hedge, the nature of the market has been going through a shift in the last few weeks. 

So far this year, defensive assets have done better. That's a bit of a tell. Energy was doing well leading up to the conflict in Iran, and has been doing well since. Consumer staples and energy doing well coupled with weakness in technology and financials is not a great combination.

The percent of stocks that are in long-term uptrends has deteriorated over the last 6-7 weeks, in Canada and the US and internationally. 

Markets are assessing a higher degree of risk. The longer the disruption in Iran and the Strait of Hormuz goes on, the longer you have to take that into account in your calculations.

His firm is sitting on a bit over 20% cash. His biggest weight would be energy. In general, they're being a bit more cautious.

As we're going through this correction, he'd encourage you to be building your "farm team" -- a list of companies you'd like to own. As things start to show some improvement, then you have names you can start entering.

Economic data showed that earnings were great in Q4. Revisions were generally better looking out through the course of the year. Near-term PMI economic data has been improving. That's great.

However, when you have events in the Strait and oil prices moving up so sharply, that has a knock-on effect in a whole bunch of different industries. Has the potential to add to inflation, which is already sticky. Recent inflation data came in higher than expected.

Concern that all this could slow economic growth at a time when inflation is higher. Not a great combination. So investors have been thinking about their positioning.

We came into this during a time when people were exceptionally bullish and over their skis. Investors have been hedging and reducing exposure. Technically, the markets are looking a little weaker.

In financials, his positioning is down to 13% from 28%. Fintech has been weak, as have companies like MA, V, and PYPL. The P&C insurance group has been weak. 

Canadian banks have been pretty resilient, and he has some good exposure there. He's watching the real estate market closely. Thankfully, mortgages make up a lot less of earnings than they used to because the banks have diversified.

Coming into February, the whole rail sector across NA was in the process of breaking out from a very large base. Transports also woke up.

Now we're going through some stuff with oil plus some weakness in the market. And these concerns are washing through transportation. They've pulled back to their breakout point. 

Rails are particularly attractive if you think the price of fuel is going to be elevated. Biggest impact so far from rising oil price has been rising diesel prices. Diesel likely to work its way higher the longer the Strait is constricted. Rails are way more competitive in an elevated fuel-cost world.

He likes the rails. See his Top Picks.

Part of the job of money managers is to generate returns. When that's not a high probability, the most important job becomes to play defense. In a sloppy market, it's OK to hold some cash, play defense, and be a disciplined seller. 

One reason people invested in the Mag 7 is that they were capital light -- great cashflow, and not a lot to spend it on. That's completely changed. 

These companies are now major investors in data centres. Remains to be seen what kind of economic value they get out of it. He has no doubt that AI will be a major productivity opportunity, with lots of $$ made. 

From a technical perspective, the MAGS ETF topped in October, making lower highs since then. Now trading below the 200-day MA, with relative RSI weakening. This group is less attractive, and still over-owned.