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

Yes. That's a technical question, so we look at all the indicators. If you look at what we've seen from about December 2023 to now, we're seeing a rolling top. Typical this time of year. Every January, we always get a bit of a soft spot, especially after the Santa Claus rally. Gets soft into the end of January, so it's not something to worry about too much. 

This year, because it's an election year, it's going to be a little bit bigger.

When we have an election year, the downside softness in January expands to mid-March. He's expecting markets to be lumpy and up/down, a "washing machine" effect. When you look at the fundamentals, you get a lot of election noise. Once all the news is digested, the chart resumes its upward excitement about the coming election.

When you add that to the economics such as Canada's PPI coming out hotter than expected yesterday, upcoming US PPI, and global central bank actions, there are a lot of moving parts until about mid-March. He thinks we're going to have a lot of US election surprises, hopefully to the good with less political hostility.

He compares all the sectors on a short-term and long-term basis. On a relative basis, financials had crept up to #4 out of 18 areas he looks at in the Canadian market. Last couple of weeks they've come down to #8 short term, but they remain #3 for the long term. Interest rate rise will probably cause a few hiccups, along with concerns on real estate, so banks won't do much in the short term.

He uses all 3 disciplines: technical, fundamental, and seasonal. It's about trying to get the odds in your favour. Getting as much data to make the best decision you can, not about being precise. If you wait for the perfect price, you may never buy. He tries to be agnostic when buying and selling, keeping emotion out of it.

Always compare a stock's technicals relative to the S&P 500.

After years in the business, he tries to keep stock selection simpler than ever. For good companies, just go buy them. Whether you want to add to your position on pullbacks is just a nuance.

If investors have some time, read what Stanley Druckenmiller has to say. Patience is what makes you money in this business.

If you want to know what a commodity's going to do, you follow the producers. Don't follow the commodity itself. Producers lead on the upside and the downside. They're like a canary telling you what's going to happen with the commodity.

Appropriate to do so. To abandon ship now would undo a lot of the work that they've done. Those expecting rate relief in the near term are going to be disappointed.

Expectations seem to be grounding at 3% now. Inflation is the enemy of bonds, so it's the key driver for the bond markets. For $100 today compounded at 3%, in 10 years it's worth $65.

Inflation isn't going away. The Fed and BOC aren't going to slash rates in March.

He doesn't know, but bond yields, especially the longer-term ones, are too low. If you buy a 10-year bond, you want to be paid, and you're not. Right now, a 10-year Canada bond is around 3.40-3.45%, and inflation's just over 3%. Normally, you get a term premium when you buy a long-term bond, and right now you're not getting one.

In his opinion, long-term bond yields are going to rise in the next few months, and the bonds will fall.

No. Their fiscal situation is far worse than ours. Their debt servicing costs are now bigger than their military budget. They're selling bonds out of the Fed's balance sheet at about $60B a month, and the Chinese and Japanese have been selling  bonds. 

Who's going to buy all these bonds? One of these days there's going to be a bad auction, and bond yields will flip higher. Right now, the market seems to be absorbing the supply fairly well.

We have no evidence yet of any credit issues. Corporate bond spreads are very tight to government bonds, both investment grade and high yield. If there's a recession coming, they haven't told the corporate bond market about it yet. There could be some pain, credit contraction, but so far no evidence of that.

Don't worry, you'll get your money back. There are no secured bonds in the banking sector, so these are really close to the top of the credit pile, though deposit notes rank ahead of them. CIBC is AA-rated, safe, you'll be fine.

Some people have to buy them. Insurance companies, for example, match their liabilities with government long-term assets. The actuaries insist those companies buy them. But the individual investor stays fairly short, unless they're speculating. Bonds are not the place to speculate, save that for stocks.

The bond portfolio is your "sleep at night" money, so you want to keep it safe and short.

The yield curve's inverted, so the best yield you can find is at the 3-year term. In his forecast, he has the yield curve tilting downwards under 5-6 years. You'll get a reasonable return on a short-term investment, without risking a lot. Likes the risk/reward.

Thinks the rates in the 3-6 year timeframe will come down. A lot depends on the BOC. The 5-year yield is very important in Canada. That's where the mortgage rates come from. Banks usually fund themselves with 5-year money to fill up the mortgage market. Though the 5-year yield has risen lately, the longer chart shows that it's actually gone down quite sharply. 

Individual bonds are better than ETFs and mutual funds. The simple reason is that you get your money back, whereas a bond fund never matures. You know what you're going to get paid, and when you'll get your money back. With a fund, you're at the mercy of the market if you need some money. Your income varies. Individual bonds are also cost-effective on fees, you pay the commission just once rather than ongoing management fees. ETFs might be good if you have just a small amount of money, but he buys bonds with as little as $5K.

Favours the ladder approach. Take, say, $100K. Divide it into $20K packets, and buy a bond or GIC for 1, 2, 3, 4 and 5 years. A year from now, the first piece of the ladder matures, while the other rungs are now 1 year shorter. So you buy a 5-year, to keep the ladder intact. You don't risk buying short and having yields fall, or buying long and having yields rise. A way to get relatively attractive yields and returns without risking much principal. Job #1: protecting your principal.
 
Buying a bond at a discount say, $80, and it matures at $100 -- the difference is a capital gain. Depends what province you're in and what your marginal rate is, but the tax appeal is better than owning a full-coupon bond. Strip bonds are all income, but usually held in tax-sheltered accounts, so it's a moot point.

Generally, you want your bonds in a tax-sheltered account. But some people need the income, so that's where the capital gains tax appeal comes in.

Lots of punishment in the bond market. 2022 was the worst year ever, at -12% for the bond index. We've almost had 3 years in a row of negative returns, now we're getting back onto the plus side.

Retail bond market is maybe 5% of the total. Bond market is 100x the size of the stock market. Enormous market for the professionals.