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

Markets are toppy. Washington settled the debt ceiling, stabilized the U.S. banks for now. Are still dealing with inflation and don't know the direction of the US Fed. However, the market has priced that we will get rate cuts in 2024, and that's a delusion. He expects stocks to pull back, though not a crunch. Take profits, get defensive and wait for a pullback. The Fed meets June 14. Australia surprisingly raised rates yesterday after a pause. Inflation here has ticked up again. The BOC announces their next move tomorrow and he expect a raise.

Is encouraged by US debt ceiling agreement, & thinks it will positively affect markets.
Lots of moving pieces with regards to macro environment (debt ceiling, inflation, interest rates etc.)
Is expecting second half of year to be positive for investors.
Expecting volatility through June in markets (short term). 

Past Investment Bubbles: 3D Printing. This was a massive bubble several years ago. Everyone was going to have a 3D printer at home, maybe even one in every room. Trucking and delivery companies were going to go out of business as consumers just printed what they needed at home. The stocks of 3D companies soared and soared, and then crashed. What happened? Well, simply, demand just never materialized as expected. The technology was emerging, but stocks got ahead of themselves.

Now, after the bubble has popped, the sector looks a lot better. The technology has improved, and there is a real benefit in using 3D for many companies. The bubble popped, but, unlike some others, there is still a real industry here left in the ashes.
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The rest of the year will look exactly like what we've seen so far. Up and down, a lot more volatility. A tale of 2 economies. On one hand, inflation rates are up, with interest rates rising accordingly. On the other hand, a very strong consumer with employment rates at record highs, and wages going up with inflation. 

Though inflation rates have trended down a bit, the consumer is still healthy and spending will remain strong overall. Short term, we'll have to see which one weighs out over the other.

No, if we do get one, it will be short-lived. Consumer spending, more jobs, and more wage increases will offset any decline. Data in the short term will be up and down: interest rates, inflation, jobs, and spending. The numbers will weigh in favour of the consumer.

He's never seen such a divergence between the narrative of oil and reality (the fundamentals). Ignore price for a moment, and just look at the setup. Global inventories have built so far this year by about 7M barrels per day, whereas typically they'd build by 80M. Inventories are telling you that the health of the oil market remains strong. 

When you look at real-time demand, such as that from China and India, it's making new records. Refiners are all pointing to very strong demand, both in the US and globally. We're weeks away from seeing the impact of the voluntary cut from OPEC. 

The fear of a recession is clouding people's ability to see what's coming on very soon. This summer, we should experience the sharpest drawdown of inventories in history. We have a seasonal uptick in demand, China demand normalization, the OPEC cut, and Russian production finally rolling over.

You can believe in a recession, but he still expects to see this year a 5-10 year low in inventory levels. We need a jolt to make people see that the physical market is tight and about to get meaningfully tighter. That catalyst should be inventory draws and should start in the next several weeks.

If you're income-oriented, other than a couple of small caps in Canada, US names are better geared for that. So he owns companies with higher dividends and writes call on them. US names are trading at a material premium to Canada. 

His positioning now is 92% focused on Canada in his main fund. The only names he wants are Canadian heavy oil, as we're getting a decades-worth of free cashflow and deeply discounted, but the differential could really narrow, Trans Mountain expansion adding capacity. Much longer inventory depth than US peers, and much lower decline rates. This means that US names need to spend more money than Canadian names to sustain production. For capital appreciation, focus on this theme.

Up until a year ago, one of the strongest predictors of price of oil had been inventories. As inventories went up, price went down, and vice versa.

This broke down around June 2022, when the fear of an ultra-hawkish Fed took hold and recessionary talk took off. People started to use oil as a financial instrument to express a negative view on the economy. Sentiment is very poor, yet fundamentals appear to be strong.

Global inventories have built only modestly this year, as opposed to usual. Heavy drawdowns will send a price signal to the market. If oil continues to sell off for the next couple of days, he could see OPEC cutting again, but it's tough to call. His base case is there will be no cut, as previous cut is only just now taking effect, and they'll let recessionary fears play out.

Recent Investment Bubbles: Artificial Intelligence (AI) - This theme gets our vote for the next most likely bubble. Investors are scrambling for new ideas, so the mere mention of AI in a press release moves stock prices, and large tech companies are mentioning AI hundreds of times in their conference calls. Investors see AI as the next greatest thing, one that will lower costs, boost productivity, boost margins and accelerate growth for hundreds of companies. Frankly, it probably will. But that, of course, doesn’t mean all AI companies are going to be winners.

AI development is expensive, and that’s why we would concentrate on the largest, cash-rich companies in the field. Just because a company mentions AI, or even has AI in its name, doesn’t make it a winner. There is going to be a lot of hype in this sector. Also remember that AI has the ability to destroy sectors and other companies, or at least lower their valuations. Investors need to be careful about what they buy in the AI field, but also about what they own elsewhere in case it is negatively impacted by AI.
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Will it kill the Fed to wait a little longer before raising interest rates? The word on the street is that they will the next time they meet later this month. But he gets it--housing prices are jumping and he expects unemployment to remain at historic lows--he gets the need for hikes. But the prices for all else aren't as hot. Oil, copper and natural gas, for example, are getting crushed. Also, retail reports and forecasts are down. Advance Auto Parts warned of a serious slowdown in auto sales. Tech firms like Meta are cutting jobs, but more so now. The Fed should pause.

The market reminds him of 2000 with Cisco, Lucent, Microsoft dominating. The S&P is up 9% YTD, but the equal-weighted is actually down slightly. This is slightly worrying, because a healthy bull market enjoys broad gains with depth. He's been taking profits in tech to reduce the bet. Either everything rolls over and tech brings down the wider average (they can't extend their valuations forever) or the rally broadens and sees more participation from other sectors like cyclicals.

Copper prices have come well off since the year started. Copper is important because it's a global economic bellwether--copper is used heavily in construction. Garner feels the same themes that led to copper's boom this year will let it keep running now. A weaker dollar and interest rate price volatility are good for copper. Garner notes that copper has seen an overall uptrend since 2020. There's a floor of support at $3.60. But if copper can't hold its 200-day moving average, copper could fall to $3.30. But that's a buying opportunity. The tumbling RSI indicates that most of the copper selling may be behind us. If copper vaults past $3.80, the upward momentum could overwhelm the bears. Large speculators are net short by a lot, which limits the potential downside and multiplies the upside if the price moves in the right direction. Seasonally, coppers hits lows in late June and rallies in the fall. China's reopening has disappointed (China buys half the world's copper), so copper prices have flagged. Traders got too bullish on China, but their selling of copper is ending. Copper could rally from here.

Gold used to be a hedge against inflation, so people are abandoning gold. He still feels that gold should comprise 10% of a portfolio.

Believes US debt ceiling agreement is good for markets - however - is worried about long term government spending.
Expecting bond market interest rates to increase.
Congressional budget projection (10 years) of debt/spending not very good.
Believes idea of debt ceiling not good (creates artificial stress).
Root of debt ceiling problem is a bi-partisan issue. 
Strength in labor market is not helping US fed fight inflation.
Expecting a hard landing.

 

A.I.(ChatGPT) recommendation on Active vs. Passive investing: it depends on what individual investing goals are.
ChatGPT recommends quarterly re-investment to average out cost basis.
Consult with your investment advisor before relying on any A.I. investment advice. 
No right or wrong answer.