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

The market is oversold. What does it need to breakout? 1) New bond buyers and no more foreign selling. 2) The Fed stops selling its bond hoard. 3) Data showing growth without inflation. 4) Ending giant forecast cuts. 5) Stop dumping the stock of well-run companies in a temporary rut, like Danaher 6) Accepting a potential forecast cut by Apple. 7) No more price target cuts. 8) End of rate-cut predictions. 9) Wage cuts or no increases, which are impacting the car industry for example. 10) Wars contained, namely Israel/Hamas.

Global oil inventories at lowest levels since 2017. Oil demand remains strong as recession fears have not come to fruition. Believes OPEC will remain disciplined to bring on new production. Expecting Saudi Arabia ~1M bbl cut to remain through end of Q1 2024. Energy stocks do not require anything higher than $80 WTI. Discount on energy stocks remains very high. Final debt targets are being met across the industry. Large stock buybacks and dividend increases on the horizon for energy investors. Balance sheets and free cash flows are the best in the history of the industry. 

Canadian Bond Prices Haunted by Soaring Yields

Bond prices are inversely correlated with interest rates, and thus, as interest rates rise, bond prices fall. Investors have traditionally liked bonds for their low correlation with the equities market, but over the past three years, this low correlation has led to a 35% decline for the iShares Core Canadian Long-Term Bond ETF (XLB). This decline comes amid a meteoric rise in the Canadian 10-year bond yield from 0.6% to 4.1%. 
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Chilling Drop: Canadian Utility Stocks' Plummet

It has been a bloody and brutal few months for Canadian utility stocks, as investors worry of the ramifications from a ‘higher-for-longer’ theme. Utility stocks were particularly bruised as these names are well-known to carry significantly high debt loads. It was not only the high debt burdens that utility names hold, but also the weakening prospects of the yield provided by utility companies versus a relatively risk-free GIC or high-interest savings ETF which are yielding more than 5%. The iShares S&P/TSX Capped Utilities ETF (XUT) posted a 16% rolling-three month decline, matching some of its worst drawdowns from the past. 
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Earnings season (so far) has been better than expected, but YOY earnings growth bottomed a quarter ago, and such growth is modest now. Market reaction is very subdued; economic gravity is setting in as companies offer modest guidance in Q4. Investors are trading down Canadian banks to fresh lows and they face difficult comparisons and pressures to net interest margins. Also, the banks have been cutting staff.

The operate very different; US banks face a lot more competition and Canadians enjoy a tight oligopoly. Canadian ones pay higher returns consistently and grow dividends faster. Canadians don't stretch balance sheets and are more conservative. Regulators are closer to our banks. Canadian banks gain a foothold in the US by buying US regionals. A big plus. So, he chooses Canadian banks, hands-down.

The size of the U.S. deficit is scary. But he expects yield-curve control to be imposed on Western countries. So if rates rise above 50 basis points in, say Japan, that government will buy all the bonds to get the yield down by 50 points. The market is waiting for the switch from QT to QE. The US Fed will have to be the last resort-buyer of debt.

OPEC+ is down 4 million barrels/day in supply which is putting a floor on the price. But he sees a recession coming. Add to that China's output falling. So, oil prices should be lower for these reasons. He already made his money in oil, but will wait and see before returning. Macro events mean everywhere, not individual stock plays. Doesn't know where oil is going, whether higher or lower.

Likes physical gold, not the stocks, gold that's already mined and smelted.

He still urges getting out of Canadian dollars and into the US dollar. Go through your broker. He expects the USD to rise. He sees deflation which he worries about. The US treasury trade has been painful. Buy USD to protect your capital during this difficult time.

We're in the middle of earnings season, but there's volatility in the market. The Nasdaq peaked at July 19, but is testing the bottom of its range since then. He's pretty hedged. The USD is stronger because of fear of inflation and rates. He expects the next AI development to be in software to house and interpret all that more data being produced. 

The Backdrop of the Decline in Utility Stocks

Bond yields, interest rates, and yields on cash products like GICs have been rising to levels greater than 5%, and this has been leading investors to reconsider the risk/rewards of their high-yielding stocks. Right now, investors are worrying over the ‘higher for longer’ theme on interest rates and not only has this led to some investors selling their high dividend-paying stocks, but it’s also led to concerns over companies with high debt loads. Of all the companies in the stock market, none are more leveraged than utilities, and these high debt profiles have sparked a recent sell-off in utilities stocks.
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The rising bond yields are a return to normal levels before the financial crisis of 2007/2008. The questions are: do rates keep going up and does the peak hold for longer. Equity markets seem to be adjusting to higher rates. Inflation is trending down but is still above the 2% target. U.S. corporate profits are down but are expected to be up a bit in the third quarter and maybe as much as 9% in the 4th quarter so this type of yield is not reflecting a recession. Canadian banks have a good yield at 6 to 7% so you could start taking a position in them.

Believes interest rates have most likely peaked. Retail sales data pointing towards consumer spending slowdown. Higher interest rates adding pressure on consumers. Expecting inflation to moderate with higher interest rates. Long term bond yields also impacting spending behavior. ~5.5% Canadian bank yields very attractive for investors. Lots of opportunity for investors in Canada at this moment. 

30 Year Treasuries: Risky government bond. Would prefer 1-5 year bonds.