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

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.

What about the independent central banks that are supposed to prevent inflation? Yes, but this time around they didn't inject it just into the banking system. Stimulus was injected into the economy at large. In hindsight, it appears that they overdid it. During the 2008 financial crisis, the governments injected several hundred billion dollars as a bailout. Then during the pandemic in 2020, governments and central banks wanted to get ahead of the situation and injected 5 trillion dollars into the US economy. This is more than was spent during WW2, adjusted for inflation.

Gold. Always considered the ultimate hedge. A real disappointment that it hasn't done much even with highest inflation in 40 years. Not sure that the decline in crypto would benefit gold. Younger demographic is invested in crypto, and if they weren't, they might find something more speculative than gold to put their money into.

Free cashflow yield. Cash that a company has left over after it's paid expenses and capital expenditures. Can be used to either pay dividends or buy back stock. So, if a company's worth 1B, and it generates 100M in free cashflow, that's a 10% free cashflow yield. With oil & gas companies generating so much money, but their stocks not moving up that much, you're seeing 10-20% FCG yields, and they could theoretically buy back all their stock in 5 years.

Downside to IPO favourites. When a company comes out of the IPO gates a favourite, its valuation is at a premium, and it can take a long time for the earnings to catch up. Add in a sector that's facing a difficult market, and you can end up with a stock going nowhere for several years.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Key Metrics and Ratios When Analyzing REITs. Net Operating Income (NOI). NOI is frequently used when analyzing REITs as it is a good proxy for a REITs operating income and cash flows. It is used to measure a REITs profitability before adding in costs from financing or taxes. It is a good metric to understand whether rent collected from the properties are sufficient enough to cover the costs of owning and maintaining them. Thus, an NOI of greater than zero is preferred. NOI is useful in calculating the Debt Service Coverage Ratio (DSCR).

Maybe by Feb. 1, 2023, the Fed is done with rate hikes. If so (a big if) earnings may stink in the first half of 203, but the second half will look pretty good. The Atlanta Fed pegs this quarter's GDP at 4%--this is a strong economy. A recession next year is possible, but not guaranteed. Stocks have been hammered on the prospect of a recession, which does not have to happen.

Despite the rally this week, his forecast for the markets hasn't changed. Earnings will still fall significantly. Powell in mid-December will put the kibosh on the market; he will raise rates by 50 basis points. He remains bearish.

This week's rally We're not in a bear (or bull) market now, but in a long, hard consolidating process where there are peaks and valleys. We're not down over 20% anymore. Will the S&P return to 4,800? No. Peaks and valleys. You can make money, though.

Believes economic impact of rising interest rates yet to be felt by global economy. Large amounts of international leverage combined with interest rate increases are hard to predict. Less money will flow through the economy from the top to the bottom. A softer/more dovish US Fed policy does not mean a return to past historically low interest rates. Signs that tech, long bonds and Crypto starting to become priced fairly again. Positive on oil & gas as view is shifting back towards importance of the product (particularity gas). Also likes utility companies as power demand rising across Canada.