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

Those who think interest rates are now peaking are too bullish. Let them get slaughtered in their bonds, then the market can have a ripping rally. We need to see softer economic data or the bond bulls need to get wiped out now.

The last time he was here was early March 2020, right before Covid. Everything then went into a bubble--stocks and cryptos--then corrected, then the Russian war happened. So, what we see now is resilience--make your stocks all-weather. The strong consumer can last, because we have the lowest unemployment in 50 years. However, we have an inverted yield curve, which signals a recession. Meanwhile, the high interest rates of last year while generate pain later this year.

Inflation has been a hot topic in the investment community in the last two years. Every investor wants to protect their portfolio from losing purchasing power by diversifying into different asset classes such as real estate, foreign currencies, gold, real estate, crypto, etc. We think one of the best hedges against inflation is through the ownership of great businesses with significant pricing power that could raise prices to offset costs pressure without losing volumes. The following business criteria help protect against inflation:

• Gross margin of 50% or higher
• Market cap larger than $100 million
• Net debt to EBITDA ratio below 3.0x

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Covid created market distortions that we are untangling now. For instance, we were in lockdown, so we bought a lot of home computers and office furniture, which drove up those prices (inflation) and manufacturers pumped out more, expecting sales to last. But we got those Covid vaccines out of nowhere, and demand suddenly dropped. Meanwhile, after Covid people couldn't wait to go on vacation or retire, because they realized that life is short. Add to that Pres. Biden's well-intention waiving of college tuition, which is contributing to inflation. It would have better if he had introduce this measure in 2009 as Obama's vice-president, not now. History cannot help, offering us guidance, because we are in unprecedented times.

We have been in dis-inflationary times for 40 years but are now in a re-inflationary period with higher than historical inflation and interest rates. Rates can continue to rise over a long period of time but it may be that the economy and employment can handle it. Therefore we need to readjust our views as to what might happen in a rising rate environment. Investors worry about something breaking but we are not necessarily seeing signs of this. There is some improvement in supply chain issues but there are still some sticky areas. Re-inflation develops in steps so we now need to look at what works in this type of environment. Technical and growth stocks don't do as well as stocks with good yields.

Believes price of natural gas could fall to $0 in the coming months (warm weather, surging production). 
Advising investors to sell natural gas holdings.
Certain companies such as Tourmaline able to mitigate falling natural gas prices.
In contrast, oil demand at a record high. Expecting further growth with re-opening of China.
Expecting oil weighted equities to perform well in 2023/24.
Investors need to tune out noise and listen to fundamentals on oil demand growth.
OPEC out of spare capacity, shale growth over.

Shouldn’t actively managed mutual funds justify the fees and get me higher returns than ETFs? In theory they should. However, the reality is that active management is often not worth the extra fees. In fact, studies show that 80% of actively managed funds underperformed passively managed funds based on five-year average annual returns in Canada and 75% underperformed in the US. In addition, mutual fund investing can be quite limiting to the DIY investor who wants to formulate and customize their own strategy since actively managed mutual funds tend to have very specific exposures based on the mandate of the fund. However, this can be a positive point for investors who want a ‘hands off’ approach to investing.

Reality is starting to set in. We had this great January rally, but interest rates are going higher and staying there longer than perhaps the market was expecting. Morgan Stanley published a report on equity ratios stating that, adjusted for interest rates, stocks are probably at their most expensive since before the financial crisis. Multiples are at the high end, but interest rates are no longer at 0% to offset things. Earnings expectations are still a little too high. The bullish case for long-term investors is you want to stay the course, you don't want to panic out of it. He's probably more bearish now than he's felt in a while, but he still has 40-65% stock exposure, which is at the low end of his traditional norm. You don't want to run for the hills and get out of stocks altogether, but it doesn't hurt to have a little extra cash or to take some profits in some areas that have had a great move. In January, he made back everything he lost in 2022. Sometimes, the market hands you a little gift. Take it and step back a little bit. Energy, telecom, and the bond market still look OK. 

In the shorter term, they won't stop raising rates until they get a crack in the inflation numbers. And you can't get a full crack in the inflation numbers until you get a crack in the economic data. It hasn't happened yet. The bullish case is that the economy will be OK through all of this, but no it won't because if it stays OK, inflation won't come down and rates will stay higher for longer. The economy and individuals are too financially levered to be able to absorb the sharpest increase in rates we've seen in monetary history. A year and a half ago, inflation was "transitory" and they weren't even thinking about raising rates. 

Cash is not trash. You can get an adjustable rate GIC for 4.5-5%. While you're thinking about whether the stock market and the economy are going to be OK or not, you can earn something there and take no risk.

Almost anything in semiconductors or tech got whacked pretty hard. Highly valued stocks got hit the hardest. He looks to see if a stock's had an earnings downgrade. Tech took quite a hit, and he's taken money out recently, but a lot of the problems have been front-ended. Last year was the adjustment to higher interest rates, and valuations collapsed across the board. That part's done, so now you have to pick the winners and do a bit more work on the earnings stories.

He doesn't worry too much about what he thinks are low probability factors. GM, MG, STLC all have capabilities in factories and raw products to switch to products other than those used in peacetime. He doesn't necessarily want to invest on that basis. But if that's your view, the major industrials wouldn't suffer as much, because they would have a production outlet. During the pandemic, modern manufacturing processes allowed many businesses to switch to Covid-related products. He can't invest on the basis of what he doesn't know, so he goes with what he does know.

The market doesn't like banks right now. If the economy slows down, what will that do to loan losses? Earnings start tomorrow, might be all right as the economy hasn't rolled over yet. He'd be a bit concerned going forward. He's underweight banks right now. Lower end of valuation range, decent dividends, but earnings growth will be challenged in the short term. His order would be TD, CM, and then BMO.

He prefers Canadian to US telcos for better growth, valuations, and yield.