A Comment -- General Comments From an Expert (A Commentary)
COMMENT
High conviction that we are in multi-year bull market for energy because of lack in supply (end of US shale, OPEC exhaustion etc.)
Entire energy sector is trading at a discount to cash flow right now.
Going forward, expecting 75% of cash flow to be returned to shareholders in the form of share buybacks & dividends.
Question of which energy company has the best catalyst to be re-rated.
Most generalist investors are scared of recession & are avoiding energy stocks.
Generalist investors making a mistake in belief that recession will lead to drastic reduction in energy consumption.
COMMENT
Every company that has invested into has become convinced that share buybacks & increased dividends will cure investor apathy.
Generalist investors are not required in order to raise share prices (share buybacks will accomplish this).
Meaningful return of capital is cure for historic under valuations of energy stocks.
COMMENT
The S&P is approaching its 200-day moving average of 4,326. Only 12 days in, August is the best month for M&A since last November. Growth funds the past week have since the largest inflow since December. Same with equity flows in the past 8 weeks. Taxable fixed-income has reversed 18 weeks of outflows with 2 weeks of inflows.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The US Consumer Price Index (CPI) and the Producer Price Index (PPI) data both came in below economist expectations for July, and this translated into renewed optimism that inflation has finally peaked. The CPI number, the best-known measure for inflation, came in at 8.5% for July against expectations of 8.7%, and the month-over-month change came in at 0.0%, against estimates for an increase of 0.2%. This was the first time in months that the US inflation reading came in below analyst expectations and it has provided investors with a sigh of relief that good news may be on the horizon. Unlock Premium - Try 5i Free
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COMMENT
Inflation. This is a lot like the early 1950s, where there was a mismatch in allocation of capital. Big surge in demand, tight supply, and 2 years of elevated inflation. But fairly quickly, things came back into line. Some rate hikes, mild recession, but it kicked off a great decade in the economy. That was the beginning of the last reflationary cycle. After a couple of years of inflation, things came off the boil, and we had steady growth. Now, transport costs have come down, some commodity prices have come off, and supply chain issues will slowly get fixed. We saw a durable low in June of this year.
COMMENT
Markets interpreting inflation. Some parts of inflation will be a little more sticky. The market cares about the change in the rate of change. When things are accelerating to the upside, inflation scares everybody. When it starts to decelerate, people can start to look beyond it. The market is looking around the corner and sensing that may be the case.
COMMENT
US healthcare. One risk is that economic slowdown is more significant than people expect, so you want defense in your portfolio. One view also is that things will repair more quickly than people think. He has a barbell approach with some defense, including healthcare. Healthcare has been one of the best performers YTD, as it's less economically sensitive, and the biggest industry in the US.
COMMENT
Food retailers and portfolio construction. Fan of the grocers. He owns Loblaw. It's not popular, but when there's inflation, the food retailers tend to take an extra price, which protects them from inflation. He also owns WN. These fit on the defensive side of the barbell. On the other side are the more value-driven, economically sensitive sectors like industrials and materials. Important to have both in your portfolio right now, as there's still some economic uncertainty out there.
COMMENT
What's catching your attention? Inflation numbers. Happy with the numbers today. He thinks inflation peaked in Q2. Today's number confirms that, though there's still more to go. So much will be driven by energy prices, which are hard to forecast. He'd like to see them stay low for a while in terms of the inflation outlook, as that would be really bullish for the market overall.
COMMENT
Supply shortages persist? Yes, but we hit peak shortage in Q1. Semiconductor situation is looking better as we move through the year. Commodity prices have fallen back, perhaps as fear of shortages and political risk dial down. In the auto sector, one of his holdings, LNR, reports tonight, and he expects encouraging news on the supply front that will drive new auto production in the back half of the year. All that will help with shortages going forward.
COMMENT
Focus for an income portfolio? High-yielding opportunities, mostly focused on the Canadian market. There are lots of great small- and mid- cap, Canadian companies yielding 5-6%. Some of those are in energy, like ENB or WCP. Even in financials, POW or BNS, their 5+% dividend yields are attractive given the market.
COMMENT
Oil & gas stocks down - sell or hold? Commodity stocks are volatile, with prices difficult to forecast. They always look their best when the price point is high, but now things are a bit choppier. Oil stocks are still attractive value. Capital spending is much more disciplined, debt's been paid down. He'd stick with them. The economy seems to be a bit more resilient than the pundits predicted. Still good for oil and energy. Worst case would be a big recession, with demand impacted. He doesn't see that scenario. See his Top Picks.
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