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

Earnings valuations vs. the S&P. The issue with earnings multiples falling is that the S&P has fallen, but the earnings underlying it haven't. It was trading at 23-24x at the beginning of the year, and now it's trading at 15x. Earnings growth has fallen only 5-6%. You have to see earnings come down. The opportunity today is to do the work on good companies that you really want to own. Earnings will come down if we go into a mild recession, so it gives you a chance to buy really great companies at much lower multiples. You get those opportunities every so often, and this is one of them.

Where to hide in a moderate recession? A moderate recession lasts for a couple of quarters and then you drive on. Historically, you want to be in defensive stocks like pharma. He'd argue that you should buy good companies with good businesses. Take a look at them, because now you have the time with all the volatility in the prices, and you may be able to buy them at cheaper multiples. Build a portfolio of good businesses over a long period of time. Hard to hide in any specific sector, because everything's doing poorly except for cash. Interest rates are impacting everything from bonds to equities to housing, so it is hard. But it's still a good opportunity for those with a long-term view.

Oil stock ideas. Don't need to go internationally to own oil companies. He owns CNQ, a great business that's executed and acquired well. The whole complex has come down a fair bit over the last little while, reflecting slower growth. Oil will be tighter than people think. Oil may be higher, but not substantially. SU is another one to own. After 2020, they all cut capex, paid down debt, bought back stock, increased dividends. They continue to do all this. Will continue to throw off lots of free cash.

Ideas in the automotive sector. Doesn't like anything in that industry. Cheap, but for a reason. Larger OEMs have lots of issues to deal with, especially being both combustion engine and EV engine companies. Trying to juggle 2 balls at the same time. Dealerships cause legacy issues. An EV engine has 20 parts, basically a battery and a computer, whereas a traditional has 200. TSLA is much more difficult to compete with, has such a commanding lead. You can buy a Tesla online, but you can't do that with a Ford. A tough industry.

Impact of higher rates on mortgage losses? Mortgage industry is very different from that in Canada. In the US, banks secure most of their mortgages off their books. The banks are much more cautious, given what happened in 2008-2009. If they think they'll have problems, they'll probably over-reserve. They can do this by stopping buybacks and dividend increases. In good shape that way, and they're not seeing as many esoteric mortgages as they did years ago.

Lower US inflation number last week caused markets to swing violently. We thought coming out of the US mid-term elections, things would calm down. But then the CPI came out, treasury yields had the 17th most downside move since 1980, and the 9th largest daily decline in the USD since 1980. The S&P runup was the 15th largest 1-day rally in that same time frame. Almost feels as though we spent the better part of the year selling on rallies, and last week everyone was buying on dips, and it still seems to be that way. Great opportunities to make some money in the market.

The Fed. It's still going to be raising interest rates in its bid for a weaker economy. Consensus seems to be 50 bps on December 14. Lots of water to go under the bridge until then: another CPI number, non-farm payroll at beginning of December. There's a lot of volatility that's not going away.

Lower USD good for tech? Yes, as it raises foreign revenues. You can see that correlation on the USD index and on the CAD. As the CAD starts to strengthen, that really gives a boost to the stock market.

Portfolio strategy in the face of declines. Many of the tech stocks are anywhere from 40-80% down from highs of November 2021. SHOP, down 75% in the last year, is a poster child for this volatility. He understands the business model and the intrinsic value of the companies he holds. The way he sticks with a stock is through a hedge overlay, and so his fund is down only 4.3% compared to deeper declines on the indexes. What he's lost on the underlying stocks that he really likes and believes in their intrinsic value, he makes up for on the other side with the short equity index overlay. Right now, his overlay is sitting around 30%. When participating in the tech arena, it's important to protect what you have. A lot of the tech names are more trades than investments. A year ago, runway for a lot of names was only 10-15%. Now, the runways can be 40-60%, so now's the time to invest.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. REIT Leverage Ratios. REITs use debt to finance their income-generating properties, and as such evaluating their D/E ratio is important is determining if they are overleveraged or not. Their high debt loads means that they are sensitive to changes in interest rates, and thus looking at whether a company’s debt burden is greater than their equity position is important. Typically, a D/E ratio of less than 1.0X is preferred (debts are lower than total equity), but the average real estate D/E ratio is roughly 3.5X. This gives a lot of leeway, but we prefer REITs that have as low D/E ratios as possible.

Traditionally, bonds move in the opposite direction to stocks during inflation, but this year they are moving together. Bonds would act as a hedge to stock risk. This is prior to 2022. This year, things are different as we move towards global competition driven by scarcity and not abundance. This creates big moves in interest rates, foreign exchange, commodities, stocks and bonds. There is opportunity as inflation's volatility creates pronounced winners and losses. Simple diversification may not be enough. Investors, rather, should add active strategies like managed futures.

Unsure whether the economy has turned a page, and is starting to recover. Believes many headwinds to overcome in the global economy. Claims of a recent bull market are wrong and inaccurate. Economy heading into a recession and will require less commodities such as oil. Uncertain whether market has priced recession into market. Walmart push back on price increases example of tension arriving in the market. Crypto collapse exposing fraud & speculative nature of cryptocurrencies (fundamentally worth what next person is willing to pay for it).

Educational Segment. Lagging impact of rising interest rates (US Fed policy) is hard to predict. Believes US Fed is worried about slowing rate increases and inflation rising again. Charts indicate long term inflation is low (thankfully). Expecting US Fed to keep interest rates high (in order to keep inflation down).

Letting inflation run will reduce government debt value? It's a possibility. In the last 3 years, we've been grappling with a pandemic, war in Europe, surging interest rates, worst inflation in 40 years, climate disasters, dictatorships. Today, the US has the highest debt-to-GDP ratio of all western countries. In the 10 years after WW2, US inflation averaged 4.2%, and debt to GDP fell by 40%. In France, inflation was 50% after the war, which melted away the debt but also people's cash values. Inflation is interesting, because investors can actually do something about how they allocate their capital. The key is that investors need to own companies that have pricing power.

4 tools when a country's debt is elevated. Implement austerity. Raise taxes. Declare bankruptcy. Inflate their debts away, and this one is the least painful for politicians and governments. Governments can never come out and admit to this, because there would be a revolt from all their lenders.