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

Optimistic on precious metals. Have any governments done anything about their hideous balance sheets? No. Globally, the debt to GDP ratio has reached what he'd call a second-order insolvency, close to being a bankruptcy. Balance sheets either have to be fixed, which he doesn't see happening, or if we enter another expansion phase and the Fed eases up on QT, precious metals will soar.

Canadian banks. His advice for years has been to buy the Canadian banks, put them away, don't look at them. Perhaps review them in your portfolio every 3 years or so. They've just had a beautiful growth pattern.

Share buybacks. Doesn't like share buybacks, as it takes away from reinvestment. We never should have allowed them in the first place. And now the federal government is going to tax them. Begs the question whether the CEO is running a company or running a stock? The result is companies with enormous price to book ratios, but the balance sheet is in the cellar. Eventually the gap closes, but it doesn't close up, it closes down.

Impact of rising rates can take 1.5 years to take effect. Not to downplay the impact of inflation on people's lives, but it's just getting started. Economy is just starting to feel the impact of the first rate hikes enacted about a year ago. There's a 12-18 month lag for monetary policy. Rate hikes hit the rate sensitive parts of the economy first, and then propagate elsewhere. Haven't started to see the real economic impact of the last round of hikes. The rate-hiking campaign is alive and ongoing in Canada, the US, and globally in developed areas of the world. All this will play out in 2023.

Impact of rate hikes on the stock market. The silver lining is that markets are hair-triggered to react early, swiftly, and decisively to changing forces in the economy. A lot of the pain in 2023 may manifest in job losses, lower corporate profits, bigger bank credit provisions. The market sniffed that out starting in the tech sector in November last year, and in January for most of the market, and then in March/April in Canada. Market's already discounted what's going to happen in 2023, but we're not out of the woods just yet.

Canadian and US banks. Not exposed to US bank sector. Does have some core holdings in Canadian banks. Not timely to be overweighting banks when we're going into a declining phase in the economy. Capital markets have been busy since Covid, households and businesses have been flush with cash, excess savings high. Recessions are when they wear the consequences of bad lending decisions. US banks are 2-3x more credit sensitive than Canadian banks.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Permanent Losses Versus Temporary Losses. A loss is the difference between what you paid for an investment and what it is worth today if it dropped (usually evidenced by a market price). Permanent losses are those that have been fully realized through sale, liquidation or termination (bankruptcy). Such losses are not coming back. Market prices can go above intrinsic value when investors are bullish and greedy, and can plummet when investors are scared and fearful. But the intrinsic value of a company doesn’t change nearly as much as the market price. The job of the intelligent investor is to avoid permanent losses and to accept temporary paper losses. Most investments are subject to the prospect of permanent loss, but the key is to get paid for that risk by the prospects of much higher returns.

Historically, equities do OK in second half of presidency? Absolutely. Third year of a presidential cycle is typically the best, and the fourth year is the second best. Reason is the mid-term election mirrors the winning presidential ticket. Democrats got in in 2020, and they hold Congress via the House of Representatives, so it's very likely it will switch over to the Republicans. That creates gridlock. Markets love a stalemated Congress. Nothing good happens, but nothing bad happens either, and that's a win as far as markets are concerned, and so they often do quite well in that environment.

Republicans generally seen as more business friendly? Yes, but the Biden presidency has a veto pen, and that's usually where legislation stops. Bills can start in either the House or the Senate, the only difference being that the House can create revenue bills, which the Senate doesn't do.

Portfolio positioning. He hasn't changed a whole lot. Barbell approach. On top of it being a mid-term election and markets doing well, the market has corrected severely. Over the last 75 years, the market's corrected 25% or more 9 times. Research out of New York shows how the market does subsequent to a 25% correction. Details can be found at goodreid.com / Insights / Gauge.

Leisure travel outlook. We're moving toward a tightening of the screws on the individual. Savings rates are dropping dramatically. Only a matter of time where people are being pinched to the point where they don't take that expensive vacation.

How to use Top Pick ideas. A manager always likes to come on Market Call with good Top Picks to reward people. Highly dependent on markets, systemic issues, luck of the draw. Viewers have noticed that energy and healthcare stocks have done well, whereas tech or communications stocks have not. Top Picks are just a part of well diversified portfolios containing about 40 stocks. At his firm, they diversify geographically with half in Canada, and half in the US. Foreign exchange hedging. Diversifying by industry and sector. Proper weighting of dollars within portfolios. A balance of growth and value. Think of your portfolio as a conglomerate with good ideas for subsidiaries feeding up into that conglomerate. His Canadian portfolio is up this year, while his balanced portfolio is down about 5.5%. He's not unhappy with that, given the environment.

Sell and take a loss or hang on? Remember that it doesn't matter where the stock price has come from, look at where it's going.

Damage from housing downturn would be limited? Coming off of 2008, Canada and US had completely different experiences. Loan to debt ratios are quite low. We'd have to see housing prices drop precipitously before credit values of mortgages would be affected. He doesn't anticipate that at all. Canada has a bigger issue with a bubble being built in the real estate market, without question, since housing prices in Canada have grown many times more than they have in the US.

Consumer discretionary. A tough sector, as we're coming off elevated savings rates. Consumers are eating through their savings. Objective of the Fed is to scare people into not buying, and that's not good for discretionary businesses.