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

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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The question is whether it's 1996, 1997, 1998 or 1999? That's what people are concerned about. This has been the sharpest rally that the S&P has probably had in 50 years. 

Inflation data keeps coming in that's not perfect. CPI on Tuesday was a bit higher for the second month in a row. PPI this morning wasn't great. Futures were very strong this morning, but have sold off a little bit. This market's been on such a tear and investors have just been fending off some of the bad news.

The one thing needed for equities to continue to work here is interest rates. Are we going to get a drop in rates? Market thinks 60% chance of a cut by June. He doesn't know. But if rates aren't cut and the economy's still holding in, that's a good sign. Valuations are a question mark, too.

He's not sure markets will continue to go up till the end of the year. But they probably will, as there's some really good momentum here. 

There are plenty of places to put capital to work right now on both the Canadian and US sides and still do well. In equities, yes, but having a balanced portfolio is always a good thing to do. When you have all these headwinds  like an uncertain election outcome, wars, higher valuations, there's nothing wrong with having a certain percentage of your portfolio paying you 5% or better in fixed income.

If you want to put your money to work in the equities market, you want to be in high-interest savings. Absolute liquidity, while you get your 5%.

Only want to be in the bond market if you have a 1-3 year time horizon. For non-registered accounts, you want to look at coupon bonds. For example, buy them at a discount of $91-94, and they go to $100. You get paid only 1-2% on the coupon, but most of the return is capital appreciation so it's taxed more effectively without necessarily any more risk.

In a registered account, GICs are great.

To buy the Canadian banks right now, after this recent rally, you have to think that interest rates are going to start dropping soon. He doesn't know if that's going to happen.

If you're going to buy in the space, BMO and RY are the two to consider. Accretion from acquisitions. BMO is 2 points cheaper. Still, he'd rather go with insurance -- MFC first, IFC second.

Yes. Economy is much stronger than most economists predicted and investors expected. Inflation is coming down, but 3% is going to be the new 2%. Target was 2%, but in the end will be satisfied with 3%. 

That last mile of inflation is always stubborn. Central banks have to decide how damaging that incremental 1% is vs. let's let the horse (economy) run. Higher for longer is going to be accepted because the offset, strong economic growth, is just as good if not better.

Yes. It's multi-cycle and multi-year. As you go through the cycle, it's hard to know where you are and if you're even in it. The revolution will challenge the Industrial Revolution in terms of its effect on society and economies. We think of AI as it is today, but it's going to be increasingly impactful day by day.

Estimates give a 1-2% bump in GDP, and these will look low in retrospect. Tremendous opportunity.

Markets ebb and flow, spending very little time in fair value territory. They're either somewhat overbought or oversold. Trying to predict that, and especially trying to trade that, is extremely difficult. Most investors who try to do that end up net losers in the end. They sell too early, and then it's difficult psychologically to get back in once something keeps rallying.

For that portion that you have dedicated to equities, his advice is simple. Stay invested, don't worry about the ebbs and flows, keep your eye on the horizon, and you'll do well over the long term.

See blog under Insights at goodreid.com. You have to balance all the attributes in making your investment decisions. Profitability, growth. Also dividend yield. Worst case is to get into a growth company that's paying a high dividend just to keep you around. They're not fulfilling their primary mandate of being a growth company.

Big difference between liking a product and buying its stock. You have to investigate what the value of that stock is. There might be way too much already built into the price for what you're getting.

For each stock, he creates bands of normal trading for the high and low ends of a cycle. When it pokes its head through the top end of the upper band, he asks some serious questions. If not comfortable with the answers, he sells.