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

Would tend to hold in cash account. Growthier opportunities provide more opportunity for capital appreciation, so you get the benefits of friendlier taxation, as capital gains are taxed at an inclusion rate of only 50%. Hold fixed income and low-growth components in your RRSP.

Yes, we've already started to see it. Healthcare has really been a laggard in 2023. When you compare sector performance with its fundamental growth of around 2.5-3x GDP, there's tremendous value there. That, despite headwinds of impending legislation that might hamper some growth prospects in the sector.

Likes the sector. Will do well with a normalized yield curve, as it enhances net interest margins. Fed signalling interest rates coming down should depress the short end of the curve, with the long end maintaining itself somewhat.

Trading at about a 30% discount to normalized valuations of around 13.5x earnings. That carries through to book value, trading at discounts to historical norms. He owns JPM, BAC, and MS, and that's where he'd put money.

Seems to be. Today's Fed rate announcement is a bit different from the others. Expectation is they'll hold rates, but they'll also be releasing the dot plot, a survey of roughly 20 people who have a say on rates. We'll get a sense of their expectations of interest rates over the next 3 years. 

They release the dot plot 4 times a year. The September one clearly showed a declining interest rate environment. There's less interest in the rate announcement itself than there is in the dot plot, which will be quite telling.

It's the hardest thing for investors. You hear negative things such as a potential recession, but then look at what happened to the markets in November. Putting money in and then taking money out doesn't work. Absolute biggest mistake investors make. 

You have to get in at good prices, and then you have to stay. Who'd have thought November would be so positive, but that's why you have to stay invested. Things can change quickly.

He'd rather buy a great business at a reasonable price, than a marginal business at a great price.

Sentiment is very negative, so valuations are depressed, and that makes him constructive on the sector. With all the technology, scale is so important in being profitable. Being only 8-10% market share in some markets is not profitable enough for a bank, something would need to change.

Companies That Earn More With Less:

One of the greatest investors of our generation, Warren Buffet once said “The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates”. Investors always need healthy, growing businesses not only to maintain their purchasing power but also to compound capital. However, growth at all costs without considering the incremental capital required can be detrimental to long-term shareholders’ wealth.
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It's official: we're no longer fighting the Fed. Jay Powell today said that the economy has slowed considerably and will cut rates next year. The bulls have been waiting for this. The most-shunned stocks--homebuilding and banks--roared back today. Mortgage rates will decline and so will defaults, which lifts banks. The easy money's been made in big tech (though not smaller tech). Banks and cyclicals now have room to run.

He likes the energy space because it's a large business and generates a lot of cash, but all natural resources offer value. Short-term he sees why some people expect weakness out of fears of a recession, which he feels may or may not occur. Countries like China are securing their own sources of resources, which is normal and natural and happened in the past in the West and Japan. Consider that Panama forced the closure of a mine despite that operation means over 5% of GDP and could face penalties.

Believes upcoming inflation data won't alter US Fed policy going forward. Huge dislocation between market pricing and US Fed communications (markets don't believe Fed). Thinks US Fed needs to take a hawkish position. If US Fed continues to lose credibility, it will have destabilizing effect on markets. Doesn't think US consumers are as resilient as media narrative is telling (sales volumes are down). Bottom end consumers are struggling (delinquencies are up). Due to consumer struggles, is a matter of time when interest rates are cut. Does not expect any more rate hikes. 

Expecting US Fed to nudge rates lower. US Fed facing difficult problem of trying to navigate a "soft landing" of the economy. Believes most aggressive tightening cycle in history will make it very hard for markets to land softly. Easier financial conditions do not make it easier for Fed to navigate economy. Would rather a hawkish position to stabilize economy. Historically, US Fed not able to handle inflation very well. 

Basic Investing Metrics: Price-to-Book (P/B):

P/B measures price-to-book value of equity. The calculation for P/B is the current market cap divided by the book value of equity. To derive book value of equity, investors must look to the balance sheet to determine the difference between assets minus liabilities. P/B has a slightly different interpretation, as it focuses more internally, on how the company is being priced by the market relative to its assets. A P/B ratio of less than 1.0 indicates that the company is being valued less than its equity and can be an indicator of undervaluation. A P/B ratio of 1.0, indicates that the stock is being priced at a fair value compared to the book value of the company.

P/B can be useful in identifying high growth stocks that are severely undervalued due to the company’s early stages. P/B can also be useful in analyzing capital intensive industries such as real estate and energy where earnings are not the primary indicator of current or future success.
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The Nasdaq was down 30% last year with no capitulation. It is now back to its 2021 levels on the strength of the Magnificent 7 and the rush of big techs to get into AI. It is up 4 times in eight years. Retail investors have done well buying what is popular and the Magnificent 7 are now at lofty valuations and more volatile. If you look at the full slate of stocks (not including the Magnificent 7) that represent 30 % of the index now, you will find better opportunities going forward.

Year end performance chase occurring as investors fear mediocrity, and pile into top performing stocks. Appearance of owning high flying tech stocks important to portfolio managers. Upcoming inflation announcement on Tuesday will be interesting to watch. If inflation rates continue to fall, and economy is strong - will be good for general investors. Currently there are lots of small cap names in Canada that present lots of opportunity.