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

Markets. You have to think about discount rates and where interest rates were in 2020 relative to where they are today. Back in 2020, the risk-free rate was 0%. So if you tack on a 2.5-4% discounting rate to the present value of future cashflows, you end up with very high cashflows, which is why at 0% interest rates, growth stocks did very well. Today, the risk-free rate is around 4.25-4.5% on 3-month T-bills. So if you tack on 2.5-4% there, you end up with a 7-9% discounting mechanism, which brings cashflows down and, therefore, earnings down. That's why growth stocks capitulated the most in 2022. As Fed and others continue to raise rates, they're still going to suffer. We've already seen a move from growth stocks to value stocks, which are trading at much lower multiples with higher dividend yields.

Impact of strong USD in 2023? Emerging markets, because they trade at the lowest multiple and because their currencies are down the most against the USD this year, could be the news of 2023. But only if and when the Fed stops raising interest rates, as that could cause a drop in the USD. Then you'd see EM currencies start to rise, they'd have more spending power, and it would get the economies moving in the right direction. If the S&P is trading at 22x earnings, and the EM indices only at 10x, that's where he could foresee investors moving, since that's where the value is right now. The USD rose along with interest rates, because foreign bond investors would buy US treasuries because they have the highest rates out there, and would have to convert local currencies to US dollars.

Portfolio construction. He still owns 30 stocks at a 3% weighting each. That's been his strategy for 40 years. Each stock you own thereafter does not reduce your risk at all. If one of them becomes a 6% weighting, he automatically sells half. A stock that does get to 6% has probably gone too far, too fast, and will come back down to earth or at least go sideways. If a stock makes an all-time high, chances are the next year's going to be pretty ugly, as we saw with RY, SHOP and TSLA. His #1 rule for picking companies is that if you choose one that can generate free cashflow and grow it, you have a long-term winner.

European airlines. Problem is that airline companies tend not to do well over time. They tend to be heavily loaded with debt and cyclical in their cashflows. Bad investments because they tend to have high capex, which wipes out most of their cashflow. Do well when economy does, but do poorly when economy weakens. Inflation's running at 10% in Europe. Europe probably won't see an increase in travel because it would be very expensive. 2023 won't be a good year. He avoids the sector.

Criteria for selling stocks. The only stock he's sold in the last year was FCFS, pawn shops through Latin and South America. It made an acquisition of Cash America. He sold on an ethical issue. Cash America was charging US military personnel almost 60% on money borrowed against articles being pawned, which broke the rules, but they refused to comply. He doesn't regret selling. Another reason to sell would be if a CEO is retiring and there's no succession plan in place. Third reason is if Board of Directors is not as independent as expected. Another is if executive compensation is beyond expectations, for example, if it's greater than 1% of stock options to the float. For example, PG has 10% of stock options going to executives every year. It's like having an open chequing account for people whether they've done a good job or not. Another reason would be if a business is getting old, tired, and mature and they're not able to keep their revenue or dividend growth going. Also alarming would be if free cashflow disappears as might be caused by higher interest rates impacting debt repayment. All these situations create red flags, and his firm has to make a decision to continue holding a stock or to get rid of it. He assumes that whatever governments or central banks do, good companies will roll with the punches and deal with it. As long as there's a good business model in place, it will just be business as usual. Companies that are elastic, where they make all their money in the good years and lose it in the bad, tend to have that cyclicality that can be more affected by changes in interest rates. His companies have very little or no debt, and now they're even earning interest on cash invested.

Markets. Lots of calls for recession, and maybe there will be one. Doesn't necessarily mean the stock market has to do badly. Stock market tends to anticipate the actual economy by some 18 months. We can see a recession in 2023, but he can see the stock market doing well, for no other reason than everyone's so negative about it. He thinks much of the negativity has been factored in: higher interest rates, war in Ukraine, China, Covid. Unless there's something new and unseen, the market's taking all this very much in stride. Tech stocks with higher multiple earnings have been under much more pressure for multiple contraction. Some of the more dividend-strong and dividend-increasing stocks will continue to outperform in 2023.

Growing consensus for a short-lived recession? Some of that optimism comes from his observing that optimists tend to be richer than pessimists. If there's a really bad recession that goes into a depression, stocks aren't going to do that great. It would be a recession like we've never seen before. It's still very hard to hire people. Even in the tech sector, which has been pretty aggressive about laying off, the tech companies that actually make stuff are finding it easier to hire people. It's not a case of too many workers for too few jobs, but rather the other way around.

Canadian technology. The most frustrating two words to ever be put together. Whether it's Nortel, Mitel or BlackBerry, we've had leadership in so many areas over his career, and it's frustrating that we can't take our technology to the next level and become a true world-beater. Not sure if it's market size, government and industry not working together, or lack of depth of management. Lack of world-class leaders is a national frustration. Perhaps government should get out of the way of business. Though BlackBerry's struggles are its own fault, they are still indicative of a more systemic problem.

TFSA stocks for a beginner investor? Two stocks would be DIS and ATZ. Nobody likes DIS, it's sold off 50%. But everyone still gets excited about Disney. DIS will be a good turnaround. He owns ATZ, stock's done well.

REITs and rising rates. The property business, in general, is going to be a tough slog simply because, while interest rates may have been taken into account by the general markets, real estate is very interest rate sensitive. There's no telling how occupancy rates are going to go over the next while. For example, downtown Toronto office towers in general are not full.

Tax-loss selling dates, Canada vs. US. In Canada, today (Wednesday, Dec 28) is the last day you can sell for tax-loss selling, as the settlement day will be Friday, Dec 30 and that's what the Canadian tax department looks at. In the US, the last day to sell is Friday, Dec 30, as the US tax department looks at the trade date.

Buying US stocks on margin. He's not a fan of this strategy, as it makes time your enemy. Time should be your friend. All the concerns we've talked about today will eventually be gone. If you have the time to stay invested, you'll participate in that growth. For example, BAC is one of the great American US institutions. If BAC has a bad day, the brokerage firm says put up more money or we're selling your BAC shares, and then you don't have the time to participate. Normally, higher interest rates have helped banks. But now capital markets are a much larger part of the business, so fluctuations are more than they were historically. You need time. He'd whittle that margin down before the brokerage firm does it for you.

Today, people are selling off everything. He expected a Santa Claus rally this year. Instead, people are locking in their losses before the next year. No one is chomping on the bit to get into stocks. Q1 2023 will likely be tough as this sell-off likely gains steam. What's the rush in buying?

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The Bottom Line for High-Interest Savings ETFs. High-interest savings ETFs are a safe and effective method of attaining high yield in an investor’s portfolio. While they do not have as attractive rates as GICs do, their benefit of price stability, no minimum investment or lock-up period requirements, and reasonable management fees make them a great option for an investor seeking yield. Overall, we think the entrance of high-interest savings ETFs into the Canadian space is a net positive for an investor's portfolio and can help to minimize volatility and maximize yield.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Pros and Cons of Each Yield-Generating Product: 1) High-interest savings accounts through financial institutions can offer competitive sources of yield and offer an individual with price stability, although they often carry requirements for holding a minimum balance in the account or a minimum investment amount and may have monthly account fees. 2) REITs provide investors with modest yield, but they are highly sensitive to changes in interest rates and the price instability can at times offset any benefits from their yields. 3) Bonds have been a historically safe approach to earning yield while offering some level of price stability, although, their prices are negatively impacted by sudden changes in the interest rate, and this year is particularly evident of this dynamic. 4) High-interest savings ETFs, we feel, offer a good combination of all factors, providing an attractive yield with high price stability, and no minimum investment or lock-up periods.