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

At the end of Q1, we're nearing 5 straight months of gains with earnings expectations in the US will exceed 10% and 13% for 2025. Good news is market breadth: 80% of the S&P is above its 200-day moving average and 75% of the world MSCI too. Not just tech is rallying. But the RSI is high, so we're overbought. A near-term pause is possible before the next leg up, and healthy. This US presidential cycle could see some volatility this year, but since 1950 every presidential year with a first-time president has never seen a negative return, but 12.2%. The futures market expects three interest rate cuts this year.

Market Update:

Canada’s inflation rate in February unexpectedly dropped to an annual rate of 2.8%, the result was better than expected at 2.9%, indicating the Bank of Canada will have ample room to begin interest rates cut in the coming months. On the other hand, despite some hotter-than-expected inflation prints, the US Federal Reserve held interest rates steady in the range of 5.25% to 5.5% and maintained its outlook for three rate cuts this year. The Canadian dollar was 73.96 cents USD. The U.S. S&P500 ended the week up 2.3%, while the TSX was up 1.6%.

All but one sector rose this week. Real estate and industrials added 2.3%, each. While technology, financials, and consumer discretionary added 2.0%, each. Materials edged up 1.7%, and energy rose 1.4%. Consumer staples ended the week flat down 1.4%. The most heavily traded shares by volume were Lundin Mining Corporation, Power Corporation and WELL Health Technologies.
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The American economy is on a path to a soft landing which basically means no major recession and no spectacular growth. There have been little recessions over the last two years in different sectors, eg, the tech sector. He thinks Powell doesn't want a recession and that the market thinks there is now room to push rates lower, anticipating maybe three cuts. Market leadership is broadening out which is a good sign. He could see a 4% to 5% correction which would be healthy for the market and a buying opportunity.

The question was on his opinion of Telcos. They have been under pressure and performing poorly. They are still spending on Capex but their pricing powers are being lost. There is a real price war on cell phone packages now. Rate cuts in Canada will help dividend payers like BCE to rally. He is definitely not overweight in Telcos.

Markets at all time highs with strong commodity prices combined with tech strength. Not seeing rising interest rates taking any momentum of out markets. Seeing small amounts of rotation out of strong tech stocks into under valued sectors like energy. Rebound in China providing support to global economy. Demand for copper will continue to rise with increase in economic strength in China. 

Call Option vs. Put Option:

1. Call Option: Current Stock Price > Strike Price. This allows call option holders to benefit by purchasing securities below market value.
2. Put Option: Strike Price > Current Stock Price. Put option holders will benefit from stock prices declining below the strike price, indicating that they have the right to sell at a price higher than what the stock is currently worth.

Since options will only be exercised when the holder receives a positive payoff, the option seller charges a premium. Sellers get to keep the option premium no matter what, and the most profitable scenario for them is when options are not exercised.
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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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