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

Recent comments from US Federal Reserve an attempt to emphasize higher for longer interest rates. Markets don't seem to believe narrative of higher for longer interest rates. Expecting a hard landing in the global economy. Does not think markets will be able to maintain momentum. Gold futures (higher) pointing towards some investors fear on markets. Rising Bitcoin prices a speculative narrative around issuance Bitcoin ETF's in USA. Fall in oil prices due to skepticism on OPEC ability/willingness to cut production. Believes floor around ~$70 for oil prices. 

American Association of Individual Investors recent survey pointing towards bullish outlook for investors. Expecting economic pain in global markets as believes investors too confident. Believes investors should be more cautious going forward (keep cash on sidelines for bearish economic opportunities at the bottom). Could be opportunities for investors if markets fall. 

Company Highlight: Enghouse Systems (ENGH).

Enghouse Systems (ENGH) stock was up 8.61% in the month, down 9.48% YTD and up 7.49% over the past year. The stock price has bounced around over the last year: it reached a yearly high of $43.40 in late February 2023, fell to a low in August of $28.02 (it was the 2nd worst performer in June 2023) and rose to close at $32.56.

ENGH is a leading global telecommunications technology and IPTV SaaS platform solutions provider. It provides vertical enterprise software solutions focused on contact centers, video communications, healthcare, telecommunications networks, public safety and the transit market.

Results for the  third quarter ended July31, 2023 pleased management: Revenue ($111 million, up 8.7%); operating profit ($30.9 million, up 3.8%) and cash flow ($39.2 million, up 33.8%) all looked good. Also, recurring revenue at $72.3 million was up 13.8%. Additionally, Adjusted EBITDA at $33.4 million , was up 2.9% over the comparable last year period and cash on hand at period end rose to $249.7 million. However, net income at $17.6 million ($.32 per share) was down 2.8% due to increases in amortization of acquired software and other expenses. The acquisition of Lifesize Inc was completed subsequently for US$20.7 million and management sees further acquisitions in future. 
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Watch the U.S. 10 year bond yield since it is the biggest instrument in the investment world. The bond market is much bigger than the equity markets. Many things are tied to it: mortgages, annuities, etc. Bond yields and the growth parts of the equity markets go in opposite directions. If rates start rising again this would probably affect the stock markets again. He feels rates could go higher since inflation is still higher than it was two years ago. Only the rate of the increase in inflation has slowed down. We haven't seen the impact of higher interest rates yet since everything has been smoothed out through credit.
The 50 year chart for the 10 year bond market shows that we are in new territory. If the 10 year bond yield goes to 3.9 or below, it could be bullish for markets but could also affect the view on recession and lead to a hard landing.
Expect a flood of borrowing by the U.S. government in the years to come - and Canada too.

The question was on what technical indicators to use. Two basics are the 125 and 50 day moving averages used by lots of trading desks. His favourite is a Japanese system called Ichimoku where you get lots of data in one picture. It easily identifies a bull or bear market.

The pendulum has swung. Now, the street feels that the Fed won't raise, but cut rates, so there's a rally.  But he expects the pendulum to swing the other way in the middle of the month, and we're seeing signs of this today. This means that there will  be pressure on stocks. It's healthy for both the stock and bond markets to give back some, and to avoid violent swings. We won't know until after Q1 2024 what the Fed will do with rates. Also, the Fed doesn't want to make any major policy changes heading into a U.S. election year.

You need exposure to this defensive sector if the economy weakens, which seems to be happening. But pick your stocks wisely. He prefers AI over obesity stocks, and own a diversity, not one.

The 60/40 portfolio never died, and those with conservative risk tolerance should embrace bonds. Pick the sectors in line with your tolerance.

He expects a rally in to year-end, barring a bad inflation numbers, which he doubts. Powell has not gotten more hawkish and we're in bullish seasonality. Christmas spending will be higher. We're now in a trading rally. He doesn't know if the market can sustain it beyond this month.

Stock rebound has been rewarding for investors who demonstrated resilience. Canada & USA both participating in stock market rally. 3 consecutive weeks of gains has erased prior losses for investors. Believes further strength in markets for investors. Economy more resilient than expected. 

Company Highlight: STELLA JONES INC (SJ):

The top performer for the month was Stella Jones Inc (SJ) whose stock was up 11.21% for the month, 49.71%YTD and 77.04% over the past year. The stock price has moved up more often than down this year from a low in early October of $63.38 it rose to close at $77.04.

SJ is North America’s leading producer of pressure-treated wood products. It supplies the continent’s major electrical utilities and telecommunication companies with wood utility poles and North America’s Class 1, short line and commercial railroad operators with railway ties and timbers. It also provides industrial products,  manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications. It operates 43 wood treating plants and a coal tar distillery in facilities located across Canada and the U.S. complemented by an extensive distribution network. As at June 30, 2023, the Company’s workforce numbered approximately 2,835 employees.

Results for the 2nd quarter ended June 30, 2023 (published August 3,2023) continued on their strong trajectory: Sales at $972 million were up 7% over the corresponding prior year period; EBITDA at $175 million was up 14% and EBITDA margin was 18% compared to 17% last year; Net income at $100 million or $1.72 per share was up 14%.

For the first six months of 2023, sales amounted to $1,682 million, up 8% over the corresponding period last year, driven by the 13% organic sales growth of the Company’s infrastructure-related businesses. Long Term Debt was up $198 million in order to finance growth in accounts receivable of $116 million (in line with seasonal trends) and inventories of $97 million (to prepare for higher pole sales). At June 30, 2023 SJ had $292 million available. Net debt to EBITDA was 2.6%

Stella-Jones’ strategy is to solidify its leadership position in its core product categories and in key markets, through organic growth, network efficiencies, innovation and accretive acquisitions. Its outlook calls for a 6% CAGR in sales going forward and 9% CAGR in EBITDA. It also calls for the return of $500 million to shareholders through dividends and share buybacks.
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Lower interest costs will be a tailwind for everybody in real estate, but it comes down to fundamentals. Where is demand exceeding supply? Look to apartments in Alberta with no rent controls, industrial warehouse globally, manufactured housing in the US. 

Probably the best setup is grocery-anchored shopping centres in Canada. Defensive, cashflow is going higher, population growing, interest costs going down.

Pandemic proved the resilience of necessity-based shopping centres. Population growth + dominant grocery shopping centres = sales improve and rents improve. Enclosed retail malls are more challenged: lots of bankruptcies, discretionary retail moves in rather than necessity-based. If consumer spending is soft, the more discretionary retailers suffer.

Yes, up around 10-11%. The Magnificent 7 are dragging everyone along with them. Looking back, October and September were each down 5%. So it just got back close to those July 2023 heights. A lot of the software stocks are well shy of their 2021 peaks.