A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Paying a high price to acquire. Big companies don't have much organic growth, so they're all trying to acquire the same assets, thereby bidding up prices. He doesn't like to criticize management for paying a high price to acquire a company, as they probably have a strategy of, for example, wider distribution to recoup the purchase price.
COMMENT
Canadian banks. Canadian banks represent the greatest weighting in his Canadian equity strategy, for the simple reason that they've done a spectacular job creating shareholder value over the last 50 years. All in excellent shape. The top 5 have never cut their dividends, though they were forced to suspend hikes during Covid. Very well capitalized. Canadian regulators force them to be more conservatively managed than in lots of other places. We'll get some loan losses with the recession, we always do, but the loan books are in outstanding shape. Wealth management is in good shape. Will continue to grow earnings. Benefit from the fact that foreign banks are not allowed to operate branches here. A great place to invest.
DON'T BUY
Long-term US treasuries. Best to buy them if you already have USD, and not converting your CAD. Buying long-term bonds now is a very risky strategy if bond yields rise. Fed has already signalled it's embarking on swift unwinding. He'd be very careful of putting a lot of money into long-term bonds. Bond ETFs have not always tracked well versus individual bonds. You can probably employ a simple buy-and-hold strategy for individual bonds.
COMMENT
Markets. All eyes are on Jackson Hole, with the expectation of higher rates for longer, and the market isn't going to like that. We've already seen a weak market this week. A lot of market participants believe there's going to be a pivot in the tightening cycle, but that's misplaced. There's been a selloff, there's been a retracement, and 2023 could be quite a tough year.
COMMENT
Canadian banks. Yesterday, we saw that BNS had fewer loan loss provisions than in the previous period. By contrast, RY had significantly worse numbers than BNS on a relative basis. Standout issues are that loan loss provisions need to be built, and they're due for a change in CEO leadership, which could prove interesting in the changing macro environment.
COMMENT
Efficient capital deployment? Look at ROIC. You need some fairly advanced software to do this. You can also look at EVA, to see if a company is producing a return over and above its cost of capital. You can perhaps find this analysis on public platforms. Is the company's growth path growing relative to competitors and the market? Look at total return in your currency. Any company that's providing a solid total return, and whose needs are growing, could be interesting to look at.
COMMENT
Does paper trading of oil increase volatility, or is it just background noise? Saudis commented on the disconnect between liquidity in the market and the physical product. There has to be somewhat of an equilibrium to maintain a normalized market. Supply constraint coming out of Russia is causing issues. How much higher does the physical price need to move to stimulate an equilibrium in terms of supply constraint? You need to make a projection in terms of Europe. Without a combination of these two factors, you will have a pricing impact, and that will be detrimental.
COMMENT
Play gold via the commodity or producers? Doesn't particularly like it. It's important during macro shocks. Does provide an inflation hedge, but so do many other categories, and you don't get a dividend just by holding it. He'd prefer to look at the streaming companies such as FNV or WPM. He doesn't own any gold, and doesn't plan to.
COMMENT
He's calling a bottom. True, they have recovered a lot since mid-June, the last bottom. But why is no one calling one? Because no one wants to stick their neck out and wound up on YouTube to be forever known as a fool. Yes, the market will test new lows ahead, but it will bend, not break. He's calling a bottom because so many people capitulated and so many hedge funds shorted.
COMMENT
He's calling a bottom. True, they have recovered a lot since mid-June, the last bottom. But why is no one calling one? Because no one wants to stick their neck out and wound up on YouTube to be forever known as a fool. Yes, the market will test new lows ahead, but it will bend, not break. He's calling a bottom because so many people capitulated and so many hedge funds shorted.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Deferring Consumption. Sometimes we have heard individuals say that investing in the market (maybe less so this year) is like getting money for free, but in reality, the trade-off is time. When an individual invests in a company expecting to share in the profits and economic value add from that company, they risk losing both their capital and their time, but they take part in an opportunity to safeguard their wealth against inflation. Whereas, if an individual decides to avoid investing in the financial markets and instead chooses to immediately consume their dollars via goods or services, they do not risk their time or capital, but they forego the opportunity to increase their wealth against inflation. By investing in the financial markets and choosing to have a low time preference, an individual can earn a return that allows them to consume more goods and services into the future, above the rate of inflation. This is at the core of investing. Unlock Premium - Try 5i Free
COMMENT
The latest numbers in July indicate that inflation may have peaked in June, namely crude oil data. Also, mass retailers are getting rid of inventory, so pricing of appliances for instance will start to moderate. Hard to say where stocks go from here. But Q2 earnings were good with expectations to grow this and next year. That said, inflation at 8% remains far too high and interest rates will go up. How high, we'll see. The yield curve is inverted, which likely predicts a recession, but that could happen in 6-24 months later. And there's a chance the Fed can steer the economy away from recession with a soft landing.
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