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

Great businesses to own for the long term. Some are better to not trade, but just own. Great tailwinds over the long term. But it will be a bit of a bumpy ride. Just because META rallied 65% doesn't mean it's a good buy here. He's been using them as hedges. When you get a nice market lift as it has over the last few weeks, probably a good time to add put protection. So he's been using the tech sector to fund some of that protection, as it's seen some really good runs.

Businesses in the semiconductor space aren't doing well right now. Companies like TSM, Samsung. And that will flow through to the FANGs, as they're the ones that are laying off tons of staff. 

Challenges ahead. If you own them, don't trade. If you don't own them yet, don't add.

Inflation cooled (today's CPI number) but the core number remains high. He guess the Fed will raise another 25 basis points. More important is what's the Fed's damage to the economy to this point? How will the market react? Expand valuations which is undeserved now.

The Fed should pause. We all know inflation was out of hand last summer, but since June 2022, the CPI headline has been 3.7% annualized. The real Fed funds rate is now a very positive 4.875% and will be more positive as inflation declines. If the Fed raises by 25 points, it will put a lot of pressure on the banking system and trigger flows out of the system. The Fed is wrong to focus on core inflation.

The damage to the economy by Fed rate hikes has already been done and we will see a flurry of data to show this. Rather, the big story is the economic contraction that's unfolding. This is why the market is rallying. The megatechs are leading because they're seen as safe.

Deposit inflows are the story in the coming earnings season. Commercial RE charge-offs will be low for the big banks. Inflows will offset weakness from net interest income. Also, fixed interest trading will be weak for the banks.

Surprisingly, not as much as you think. A year ago, if you said GIC rates would be 5.5% in an environment as opaque as this, you'd think that many people would be happy to lock that in for a year, and some have. A lot of folks are pretty scared, but a lot of folks think that this is over. 

Markets have been a slow tease up, with bond yields dropping since January. So many strategists have been negative, predicting a recession, and therefore saying be careful.

He's been saying for some time that it's too close to call. Strong labour market on the one hand, inflation that's coming down, so we're not completely out of the woods yet. A year ago, he was very light on equities. On a 60/40 portfolio, he was 40-45% equities. For the last 3-4 months, he's been heading towards about 63-64% stocks. 

The longer we can take the negativity with the economy holding in, and the closer we get to a pause (and we're within 25 bps of that), then it can be a happier story than a lot of people are figuring.

Has hurt so many people over the last 10-15 years. You want to be long gold and silver at the right time, once every 15-20 years, and it's hard to find those times. Gold has really broken out, as has silver. It's always about free cashflow, and that's harder to come by when costs have been rising. Stocks still trade at a discount to bullion, as they have for a long time. 

Not for the faint of heart. And you have to be right about your bond yields, which have to keep coming down for gold to work. That's probably the way they're going to go. He likes ABX and AEM and owns them, but is not piling in.

Ask if the transaction is accretive in earnings going forward? That takes into account execution, cost of capital, existing debt, and earnings. The transformative ones are the riskier ones. 

The Importance of Pricing Power:  We believe that companies with strong pricing power have the ability to do well in an inflationary environment for these particular reasons: 1) The ability to raise prices to offset inflation without losing volumes helps companies maintain their profit margins 2) Pricing power allows companies to price their with flexibility, sometimes even faster than average inflation rates of 3-4%, leading to operating profit margin expansion 3) A high gross margin can be a powerful lever for organic growth over the long term, especially for companies with mature volume growth. 
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We might get interest cuts, but not without pain in the economy and market. Leaving rates so low in 2020-1 was a mistake, made worse by central banks announcing they would leave rates low, which encouraged consumers, businesses and banks to plan interest rate risk on that basis. Central banks won't pivot sharply, because that would lead to questioning of their credibility, already damaged when the central banks wrongly called inflation transitory. Rate cuts will happen in a dire situation or emergency only.

Today's CPI report was positive. CPI rose 0.1% month-over-month, which is on pace for 2% annually. Good. YOY it was 5% in March vs. 6% YOY February. A serious decline. Also, super-core inflation (services ex-shelter) declined YOU and MOM.

Doesn't like bank stocks now. But it's positive that the outflows from the small regionals has stopped and now there are some inflows. It comes down to competition for deposits and the online savings rates are much higher than what the banks are paying. So, the banks will have to raise their rates which will reduce their margins. Bank preferred shares are interesting, though.

Banking sector fears should alleviate since the Fed will guarantee deposits. The near term risks for the Regional Banks group are earnings expectations since deposits have been withdrawn from these banks. Also there is uncertainty on what the new regulations will be for the banks. eg. will there be a cap on dividends to be paid out by the Regional Banks. It is safer to be with the large banks.
The recent announcement re the coal spinoff from Teck is something to watch. This spinoff is best placed within private equity and will be good for ancillary businesses.

Editor's Note - The question was on switching bank holdings from Canada to the U.S. He recommends a blend of both American and Canadian. In Canada he likes Royal and National, in the U.S. Goldman Sachs and Morgan Stanley. Canadian banks have higher dividends.