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

Editor's Note: This is the first appearance for Rebecca Teltscher who is a long term investor. She feels that markets are not reflecting the causes for concern regarding the economy. Canadian and U.S. banks are seeing labour disputes which could lead to pressure on wages and therefore higher inflation. She is being defensive and more cautious on the market at least in 2024 and is looking for the first shoe to drop this year.The threat of a recession or soft landing has not gone away and the market is pricing in too much perfection. Commercial real estate is a weight on the market as well as other real estate divisions. Also she is underweight in banks.

Utilities did well March of 2023 and then slowly fell. She is looking for a rebound along with economic weakness since there is lots of room to grow along with possible rate cuts. Utilities will benefit from increased (unprecedented) power demands including the need of AI for lots of power. She likes regulation in the industry. Utilities are inversely related to the 10 year bond. The yield on the TSX Utilities Index (STUTIL-IDX) is 4.9%.

Believes S&P 500 at risk of under performing in the next few quarters. Equities as a % of household financial assets is at a very high level. This metric indicates lower periods ahead for financial markets. Valuations overall - are very high right now. Canada presenting investment opportunities because assets are under valued (energy & lumber). Believes commodities will do very well going forward. Negative correlation between common stocks and commodities is negative - presenting opportunity to buy commodities. 

Company Highlight: Terravest Industries Inc. (TVK)

TVK is a Canadian company that operates as a serial acquirer of niche equipment and services for a variety of markets including transportation, mining, transportation, etc.

Over the past 10 years, its price has compounded at a 31.6% annualized rate, supported by healthy growth in fundamentals, and TVK’s sales growth during that period was 26.6% CAGR. Solid sales growth was driven through a combination of organic growth and acquisitions It currently has a market cap of $900 million, a reasonable forward P/E of 21.4X, and a decent financial position with a net debt/EBITDA of around 2.0x.

TVK has a disciplined and opportunistic approach to capital allocation. It has a dividend yield of 1.2% as TVK reinvested heavily back into the business. In 2021, TVK opportunistically reduced its outstanding shares by 6% while the valuation was cheap.
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Absolutely. The economy's been pretty resilient in the face of these higher interest rates. For the first time ever, he listened to J. Powell's conference call yesterday. Despite the headlines that they're not going to cut rates anytime in the next few months, Powell acknowledged that the first rate cut decision will be huge for the markets.

If data stays where it is, we can expect to see rate cuts in the back half of this year almost certainly. So the market's pricing some of that in. If we do get some rate cuts, it's going to give some relief to consumers who are sitting in a lot of debt. Wages are still rising. He thinks the economy will probably escape a recession.

Lots of bargains in lots of places. 2024 has started off like 2023, where the tech stocks are driving markets. Outside of that, everything else is treading water. Some of the world's great businesses, both in the US and abroad, are trading at really attractive valuations and offer lots of value because they haven't moved very much in a couple of years.

He's completely wrong. US retains its high credit rating because its tax rate is one of the lowest in the world. If the US ever runs into serious issues, it can raise taxes somewhat. Reality is that the US economy continues to grow, and debt as a percentage of GDP is declining. So he doesn't see any issue there, but it makes for great headlines.

Inflation has already had an impact on debt. The US would have to pass larger spending bills, and that's just about impossible with the Congress they have. There are so many things going on in the background that are out of government control. They spent a ton of money just like everyone else during Covid. Debt to GDP in most countries is on the decline.

Strongly advises investors to avoid rate-reset preferreds. Reason: traded horribly when rates went down, and horribly when rates went up. Relatively illiquid. Not fixed income, not equities. Either buy fixed income, where you know what your return will be and the maturity date. Or buy equities and get the growth.

Whole rate reset world has not been great for investors for a number of years. He thinks the whole sector will have less issuance over time.

GOOG had some difficult numbers but, generally, the numbers seem to be good. We're waiting for Thursday, when META and a bunch of other names will come out. MSFT's numbers show that they were executing quite well over the quarter. 

The big thing is how do companies show how the talk about AI will drive revenue? That's difficult. It is slowly happening, as can be seen by MSFT's numbers. It will take time to implement AI into products and then benefit from that.

The other issue is that expectations have gotten very high for a lot of companies. Even though they're beating them, stocks are pulling back.

There's a target of 2% that we're supposed to get to. If you drop rates too quickly, you may get stuck in a situation where inflation stays higher and you may have to hike again, and central banks don't want to do that. People criticized them for not jumping to hike rates sooner, but the reason they didn't was they felt that US and Canadian economies were fragile.

Central banks can push down inflation faster later on if they need to, rather than starting to lower rates now. Market's pushing for 6 rates cuts, but waiting is better for the stock and bond markets and for the economy. If central banks around the world wait, we'll have a better economy down the road.

Canadian banks have underperformed for 2 years in a row, which is very strange. Last quarter, all the banks "kitchen sinked" everything, giving expectations that things were not going to be pleasant. But they're actually setting up to beat expectations over the next year.

Cost structure's a bit out of whack, and they all need to cut back. Very hard for a bank in Canada to lay off people, so it takes a long time to take down their labour force.

He doesn't own gold stocks. Gold exploration is expensive, so it's easier to take over a company. Environmentally unfriendly, often in bad parts of the world.

With the price of gold where it is, why aren't the stocks higher? Companies may have aspects to them that don't benefit them even when the price of gold goes up. You might be better off owning a mid-cap stock that's not as leveraged to gold. There's an argument to be made that, if you really believe in gold, you should just own a gold ETF.

He doesn't own any EM stocks or ETFs. You can still get a lot of diversification owning NA stocks. For example, 50% of MSFT revenue comes from international. You can be over-diversified, and you already get a lot of diversification from these big global companies.

If you are in EMs, do it through an ETF. You have to have a very long timeline for this. The companies tend to be smaller and much more volatile.

He does own international stocks, but they're a very small percentage of his portfolio.