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

We're at an interesting point. Inflation is in the rear view mirror as it continues to hit lows. But the central banks continue to have to put up a hawkish stance, because they're not quite at target. Maybe when rates stop being raised there will be a rally in the markets, but there's a lot to happen between now and then. Starting to see economic growth slow down as a result of rapid tightening. We really don't know what the impact is on companies and the economy yet. 

Most people think there will be a slowdown, but the question is how severe will it be? Too early to put up the green flag and push all your chips in. Manage your money with prudence, hold some cash, and wait to see what the result of the tightening campaign's been.

Absolutely. It's not unexpected that we'll see earnings decline over the next few quarters. Will we beat or miss expectations? What guidance are companies giving? We're fresh off the heels of the March banking crisis. There's still a lot of uncertainty in the markets, and markets hate uncertainty. 

Definitely in the last few days, the market seems to be taking a lot of this in stride. He'd still be a bit cautious. Never too late to buy some put options as protection or to raise a bit of cash for what he sees as a volatile few quarters.

Always. Sharpen your pencil. There are lots of companies that are extremely undervalued and are pricing in the worst case and most pessimistic of the scenarios. But others are trading as if there's no economic slowdown coming. Be careful of where you place your bets and allocate capital.

He wouldn't be afraid to add to any of the Canadian banks at these levels, even though there's still some hair there. We saw net interest margin expansion from rising interest rates, and now we're going to see if the credit side is more of an issue that what the street currently thinks. He thinks you'll be surprised how well the banks can perform in this environment. It's an oligopolistic structure for them, and they always find ways to make money.

Gold's a great place to be at the moment, as interest rates are checking back. It provides some portfolio protection. When inflation and growth are slowing, gold tends to perform well. Smaller names are riskier. 

He owns FNV and ABX, and is looking at WPM. The larger caps have less operational or geographic risk. Gold, in general, is an underowned sector and so should do well if the economy goes the way he anticipates.

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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