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

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. What is a Real Estate Investment Trust (REIT)? A REIT is defined as a company that owns, operates, or finances income-generating real estate. REITs trade like stocks on major exchanges and offer investors a way to gain exposure to the real estate sector with much lower capital requirements than traditional forms of real estate investing and a steady income stream. A REIT company purchases income-producing properties, leases them, collects rents on the properties, and then redistributes that income to shareholders. REITs usually purchase properties with debt, earn cash flows to service that debt, and over time use the equity in those properties to increase their financial leverage and acquire more properties.

Inflation. He thinks about it in terms of the impact on interest rates more than anything else. Looking forward, the question is that with commodity prices having come off, are we heading for a more disinflationary environment. What's going to be the effect on the overall economy and the stock market?

Markets. Problem is when we look at the market, despite the fall we've had so far, the US market isn't cheap. NASDAQ in particular has only fallen from 60% above its FMV last November to 25% above FMV. Still not cheap, some ways to go. Canadian market is cheap, FMV of the TSX is 70% higher than the current level of the market. So that explains why the TSX outperformed the US market on the way down. Looking ahead, don't be surprised if we get another cycle in which the Canadian market outperforms the US. Canada has the fundamentals in place for a good time in the next market cycle, but that isn't tomorrow.

Dangers of a consensus market. When everybody agrees, the odds are that everybody is wrong. Today is a perfect example. Everybody was expecting US inflation to come in lower, and it was, so the markets have taken off. Going forward, we need to be careful. Inflation is not wiped out by any stretch of the imagination.

Weekly rundown on big tech. Every Friday, he posts a webinar on YouTube called FANG Friday.

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.