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

Markets and inflation. The Fed, BOC, and every other central bank have been very clear that inflation is a big issue for them and they have to deal with it. For him, that means they'll continue to raise rates well into 2023 until they can bring inflation down to an acceptable level. People have to realize it's a lagging indicator. Inflation has come down, but core inflation is still relatively high. Also, while the S&P PE has fallen to around 17x (historically it's 16x), earnings for 2023 have not come down that much. The big issue for that is if we're going into a slowing economy, corporate earnings will be lower and analysts have to bring down their numbers. Once that happens in a much more aggressive form, that will be the low in the stock market and it will give you the chance to buy.

The VIX. The VIX is a measure of people's stress in the market, and there's been a lot of complacency. The VIX closed last week at 22.6, which indicates people are very comfortable with the market. You need to see the VIX much higher before you can talk about a low in the stock market. When it does get high, people are stressed and don't want to be in stocks, so you can find a low in the market. You can't talk about a low when people are happy-go-lucky. In 2008 and 2020, the VIX went up to much higher levels. So if we're in a bear market, the VIX should be at a much higher level. Earnings expectations have to come down from the current 234, and when they do, there will be a good opportunity to buy the stock market. He doesn't think everything's priced in yet. Reality is that this is a great time to do your research on the companies you like. Amidst the volatility, there's opportunity.

Precious metals. He doesn't own any, as he's never liked them. Very hard to forecast where gold is going to go. Everyone talked about gold being a hedge against inflation, but it really hasn't done that well relative to where the inflation numbers are. These companies are difficult to own because they're based on the underlying commodity, you have to understand the company dynamics, not ESG-friendly, and there's often geopolitical risk. If you have to be in the space, best to own a gold index or ETF.

Canadian banks. Banking industry is in very good shape in this country. This is not 2008 or 2020. Great dividend yield, trading at reasonable book value. Trouble is that increases in net interest income are being offset by investment banking and such that are doing poorly. All these segments will come back. Longer term, will do well. Tend to over-reserve going into a difficult period, which is what they're doing now with the slowing economy and housing fears. When things turn out not as bad as they thought, the reserves come back into earnings. Lots of capital to increase dividends or buy back shares. Banks are about 33% of the TSX, so when people sell the index, they have to sell the banks. This creates volatility, especially in this bear market, and the share price can drop. Don't forget, bank shares had a great run already.

Healthcare stocks. The way the market is, owning healthcare is safer than owning other things. Very defensive. He owns JNJ and NVO, but any of these companies will be fine. Big issue is blockbuster drugs can make them look like growth companies. Look at pipeline, drugs coming off patent, and what is area of specialty?

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The Importance of Cash in an Investment Portfolio. A diversified portfolio typically includes a cash component to it, and this cash holding provides an investor with liquidity and convenience. Traditional portfolio theory suggests that investors should carry some static percentage of their portfolio in cash to act as a diversifier against volatility in one’s portfolio, for liquidity purposes to add to one’s existing bond or equity positions, or fund new purchases. While cash in a savings account, bonds, GICs, and others, have usually offered lower yields than the returns that can be found in the stock market, the benefit that the liquidity and stability cash offers can sometimes outweigh the benefit from the higher returns that stocks offer.

It's perfectly fine to be in cash. After the bell, Nike will release earnings and maybe that will signal the future of earnings. We'll probably see the cascade in earnings.

Will Canadian banks raise dividends in 2023? 2023 will be challenging. Don't expect big increases in dividends next year. However, on average you get a 4.7x dividend, the PEs are cheap and the banks are always a good investment, perhaps at lower levels.

A top pick 1-year GIC. You can get 5%, perhaps more. Nobody is certain about the economy. If there's a recession in 2023, it'll likely be mild. Don't buy a GIC for all your portfolio, but good to buy for a TFSA or RRSP.

Defensively positioned in this macro environment. For a tech portfolio, it means he's fully invested on the stock portfolio. On the hedge, he's running about 70%, which is overweight. Best part of the hedge is that you can throttle it up or down pretty quickly. This morning, he took it down from 70% to 63%. Market seems to be getting its legs back, but it's a bit of a game of poker out there right now between market players on one hand and the Fed and central banks on the other.

His hedge positioned, explained. It's a short position on equity indices via the futures. But once he gets above 50%, he starts using put options on those equity indices.

Segments of tech to be in. Underweight semis and software. Overweight communications and hardware. Overweight fintech. Semis have had a difficult year, but it takes a long time for that to rotate around. In the portfolio, he has 29 stocks, and his team knows the intrinsic value of them.

How to reconcile the disconnect between what the market's predicting economically, rates from the central banks, what the Fed is messaging, the Fed's amplifying modest rake hikes, and Powell's hawkish rhetoric? Fed can control the short end, but they try to extend it out to the longer end and it worked. But the fixed income players didn't believe it. He's expecting to raise rates, inflation's going to stay higher through 2023, they're gong to maintain their tight approach. Fixed income players are calling his bluff, expecting to see easing in the second half of 2023.

Layoffs at a number of tech players. They have to look to the bottom line and try to understand what earnings are going to look like in 2023. It's all about profitability. Certainly on the software side, they're very leveraged, and so they have to be prudent. We saw hiring freezes going into the middle of this year, and then layoffs with Q3 and Q4

Short-term bonds. The tail that wags the dog. Fixed income guys are acknowledged to be the smartest ones in the barn. They're really trying to call the bluff on the central banks. Trying to extend their short-term impact on interest rates out through the curve. Though it worked for a few days, he doesn't think it will last very long. 10-year treasury was up at 4.2% only 2.5 months ago, and now it's back to 3.6%. Listen to the bond market as to what the economy's going to look like next year, and then extrapolate it and remember that the stock market's supposed to be a barometer of what the economy will look like in 6-9 months. That's why he's chomping at the bit to take that hedge off. When he takes that hedge off, this market is going to absolutely rip.