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

Inflation is slowly declining as central banks are in the late inning of interest rate hikes. Investors hope banks reverse course later this year, but job numbers remain high and inflation in sticky. Sentiment is neutral. There's fear of missing out in “zero days to expiry” options trading on single stocks and U.S. indices. He remains cautious, patient.

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Has been keeping a close eye on corporate profits/earnings the past few weeks. 
As expected, earnings down "year over year" for Q4.
Believes companies are bullish on ability to grow earnings in 2024.
CPI number reported on Feb 14 came in as expected (still above 2% target number).
Recent market rally backed by lower inflation numbers & lower energy prices. 
Expecting mild recession in 2023. 

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He's been quite pleased and surprised that equities have held up as well as they have. We've had a few fairly hot inflation numbers, with CPI and retail sales and PPI. Equity markets are telling us that the economy is just fine with a little higher interest rates. This is the digestion process that the market has to go through. Low interest rates were the anomaly, not the norm, and all of us have to get used to more normalized rates that will approach 5% on an ongoing basis. It will favour good quality companies with an ability to manage the debt load, and maintain high profitability metrics such as ROIC and ROE, in higher interest rate environments. That plays right into what his firm does, so he's not unhappy.

He does think rates will stay elevated. There's a huge swath of investors and professionals who've never experienced rates in the mid-single digits. But some of them, like him, have. Markets, economies, and corporations can handle these levels. We last saw higher rates in the late 1990s, which were halcyon days for equity markets. Don't be fearful of them, but build them into your screens to look for companies with enough firepower to do well with interest rates that are a bit higher.

Very few exceptions to not liking a dividend being initiated or raised. Company feels confident in its cashflow to pay a dividend, invest in R&D, or buy back shares. 

We're in a tight labour market, and this leads to higher wages because there are fewer workers than there are job positions. Even though the Fed is trying to slow the economy down, labour employment has been very sticky. That's probably the last nail in the coffin of inflation that the Fed will get to, but it's not proving easy. Since Covid, the whole employment picture has changed. You can have a tight labour market that's not inflationary, but only if productivity increases. So prices don't have to go up, because companies are producing more with less. It's doable, because technology will enable us to do more with less, and it has for the last number of decades. Productivity is the key, watch this carefully. If we can create a magic situation where workers get paid more, profit margins are maintained, and inflation is kept in the bottle, wouldn't that be a wonderful world? In some ways it's doable, but it's a big ask.

In this environment, if you just put your portfolio in a drawer, you're going to be disappointed when you open that drawer. You have to be an active manager to add alpha. He's not interested in regaling guests at cocktail parties with stories of how he did well on high-beta names. He's in the business of taking wealth and growing it responsibly over time. For reasons to be optimistic about the 2023 markets, look at the Gauge under Insights on goodreid.com.

Alpha is the added value that you provide. If you add value to a particular benchmark, that's alpha. In a more technical way, it can be defined as the reward you gain off a risk-free asset, such as a government treasury bond. Think of it in the generic way, as just the additive amount. For example at his firm, they're trying to add alpha, which means they're adding to a benchmark. As a peer group, he uses a broad group of several thousand similar managers under the Morningstar umbrella. He wants to be in the high percentiles of that group. His firm's record is found at Performance on goodreid.com.

We're all faced with that as investors. What's the difference between being patient and being stubborn? There's a small difference, but it's of a magnitude that makes a big difference. He likes to get up each morning and look at the market with fresh eyes. Is a company working at solving problems that would provide a catalyst for the stock price to go up? You wait for it to work. If you feel that it's not working, at some point you move on. In the investing world, they say that an incredibly successful investor will be right about 70% of the time, and wrong 30% of the time. You want the companies that comprise the 70% to be up a lot more than the companies that comprise the 30%. Your losers may fall, but it doesn't hurt you too much.

Agrees that it will come down steadily in the next while. In the second half of this year, the comps YOY get tougher. So if the price level remains relatively flat, you'll see inflation come down from about 6% to about 3%, just where prices are maintained at a reasonable level. We're not seeing the price level continue to go up. He's not in the camp of rate cuts this year. The Fed is so data dependent, if you don't see inflation come down below 2%, which it doesn't look like it's going to, it's going to stay north of 3%. Great steady progress since it peaked last June, but it's not going to hit their target range. Interest rate cuts will be pushed out into 2024.

There's the parent, and 4 subsidiaries. It depends on what you're looking for. For income, BIP.UN. For growth, BN. Those are the 2 he uses. Longer term, a lot to like in terms of what it's doing to maximize value of assets. By investing in BN at the top of the pyramid, it has some unique arbitrage opportunities among the different assets. BN also has strategic capital allocation benefits. The subsidiaries pay out most of their income as dividends to shareholders and to the parent company. Because BN has more of a growth orientation, it retains that capital, with a yield of only 0.8%. 

Absolutely. Search has been an ambition of MSFT for quite some time, it just hasn't been very good at it. If MSFT hadn't gone through its anti-trust problems all those years ago, there might not have been a GOOG. It could spark an arms race in AI between the 2 companies. MSFT didn't develop these capabilities internally. It partnered with another company that was emerging on that front. GOOG has become dominant in Search because of all the money they've spent on it. Difficult to unseat them from that spot. Important to watch market share and see how things change over time.