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

Still underweight, but looking to get back in. We had the AI scare, capex worries, and then the SaaS apocalypse. Those might be legitimate long-term worries, but investors tend to take a narrative and expand it to the end, which creates a lot of selling. 

Bigger problem for the sector right now is that it was a very crowded trade. Lots of new $$ kept flowing in, without paying that much attention to the fundamentals. Valuations exceed on the upside, and now that trade is unwinding.

The good long-term story hasn't gone away. These companies contribute to economic growth and corporate profits. He's looking to add.

Now, history teaches you things. One of the biggest mistakes he made in 2021 was buying into the pullback too early. When things were down 30-35%, his team started buying back into the names they'd sold. Then they continued to go down by 70-80%. Doesn't think that'll happen this time, as fundamentals and cashflow are better.

Pulled out of financials generally. Lots of optimism around them, but he's concerned about incursions into growth from fintech and valuations are at the high end. Earnings growth not as robust going forward, plus economic sensitivity.

Don't have to rush out and sell, but he's not buying any of the Canadian banks -- problem is valuation. Capital markets and underwriting have been strong, loan losses haven't blown up, economy's not tanked.

Other areas of the market are more beaten up. He just can't pay these sorts of valuations. Not even great income stories anymore compared to, say, telcos and pipelines.

Given the Iran war, the market was looking for a reason to sell off. He was holding 20% cash, because sooner or later something would happen. Sentiment was too bullish. Also, during a US midterm year, the returns are soft in the summer. A pullback is healthy--we needed corrective action to put things back in line.

Most people are discounting that energy prices a year out will be significantly lower than spot prices today. No major interest rate changes today, no major shifts in currency. Gold has reacted to some extent, and bitcoin as well.

Most people are looking at the results and saying that the US has tremendous superiority in the air, and they don't want to go on the ground. Whether they can effect regime change or not is unknown. 

Constructive to note that, even with energy prices up 6% today, that's lower than they were last June with the first attack. Markets tend to adjust to geopolitical situations pretty quickly.

Most people think that this is likely a pretty short occurrence, and things should return to normal.

Most people think that the war in Iran will be relatively short, and let's hope it is.

Bank stocks were down 6% last week, and private credit stocks are down 30-50%. They've been trying to sell these specialty funds to the individual investor network, thinking that buyers don't care about liquidity. There was a lot of lending going on, especially when interest rates were significantly lower than they are today. 

The question is:  Have people lent money to solvent businesses? Will they be able to pay those loans back? When investors do need liquidity, there are no easy buyers for these assets.

Seeing an AI temper tantrum. People are worried about mass job losses. They're worried that job losses will cause the economy to tank. Hysteria that software is going to go away, when there's going to be even more software with more software engineers needed to write code, manage it, and integrate it into people's lives. 

But we're seeing the exact opposite. Increased number of software engineers. Very robust economy, corporate profits, and employment statistics right across America. Lower interest rates, despite the spike from energy prices (which aren't expected to last a long time).

A great deal of value has been created in markets because of panic.

There's lots of talk on the loss of American exceptionalism, and he thinks a lot of that is by people who are angry at America. Those comments are less about businesses and the entrepreneurial spirit. Still seeing pretty dynamic operations in the US.

Revenues for the S&P 500 are about 6% international. He's been in this business for over 40 years, and people are always saying to go international. That might be the investment community just wanting you to do something, since they make a living when you do transactions.

He's somewhat skeptical. Europe is heavily regulated, and America is deregulating. Banks in the States are very well capitalized. You don't necessarily need to go international because someone's telling you to. There have been a lot of false starts.

He said today that it might be a good opportunity to take profits in both gold and oil, because this is probably the peak of uncertainty in supply.

You need oil prices at $75-80 over the long term for energy companies to make significant profits. A very difficult business, expensive, not getting any easier. Global oil market is somewhat over-supplied and, despite today's surge, prices won't be high for an extended period.

Sadly, he predicted regime change in Iran. It's surprising how markets snapped back today and market response will be temporary.

Like Covid or the tariff tantrum, you won't get any protection this way. You will rewrite options and get called away and not recovering the upside if the recovery is quick. Don't use these ETFs if you're bearish the market.

It's more likely to fall to $4,000 than rally to $6,000, but he is bullish good long term. Gold bullion is more defensive, gold stocks aggressive. Underweight both now.

Buy the rumour. Sell the news. The attack on Iran was not a surprise. Covid, though, was. Generally, wars have a short impact on markets. Markets tend to price wars well in advance. Since 2013's fracking boom, the XEG has averaged 5% returns a year and most of that has come in the past year and most recently. Don't chase this rally, but take some profits like he did.

That's the $64k (or $64T ;) question that investors seem to have been grappling with for much of the past 3 months. 

The answer is that we don't exactly know. We do see markets starting to price some 2-way risk around the AI theme. Previously, between its inception (which you can roughly date from when ChatGPT went live) to November of last year (when Michael Burry sounded the alarm about circular financing and an overbuild), it had been all one way on anything that looked, smelled, or felt like AI.

But now starting to see markets parse winners and losers. Since November, we've seen an acceleration in selling everything that could be disrupted by AI -- notably software stocks, but also white collar in all its forms (certainly engineering, construction, and IT consulting).

His team were never really all-in AI cheerleaders, nor were they skeptics. They feel you need to take a case-by-case, company-by-company approach as you price in AI risks and opportunities. They're starting to sniff out opportunities in the "baby thrown out with the bathwater" category.

At the front end of the trade, it was all about the semiconductor, designer, and foundry sectors and names like AVGO, NVDA, and TSM. He's taken partial profits in a couple of those names. It's now time to turn to the picks and shovels.

An example of the baby and the bathwater is SHOP; owned for years, sold off, picked up more a couple of weeks ago for his firm's momentum mandate. 

Some business models are on shaky ground. Other business models will endure, and they're being unduly sold off. The businesses of those companies may actually be enhanced by AI, rather than disrupted by it.