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

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Debt Can Kill a Company. Endo International PLC filed for bankruptcy protection this week. This is the company that took over Canada’s Paladin Labs Inc. about a decade ago. Endo shares are down 91 per cent this year. The problem? Very high debt. Endo has US$8 billion in debt after a large acquisition spree. Cash flow in the past 12 months? Just US$80 million. It paid US$560 million in interest charges in the past 12 months. The lesson here: Debt can kill a company, sometimes quickly. Make sure the companies you own can service their debt. Times are not always great, and a company must be able to survive before it can prosper.

Regarding the latest news concerning the Bank of Nova Scotia, it is unusual to see an external hire of a CEO in the banking space. Overall it is a tricky market. It had rallied off the June lows but the Fed has declared that it is going to keep raising rates and will do so for longer than anticipated. Investors are concerned that this is a mistake and will lead to a hard landing. He uses stop losses on all positions and has built up a sizeable cash position.

The question was on averaging down on dividend paying ETF's. The answer is no - there are 60 000 securities across the globe to choose from and he only needs 20 to 40 in the portfolio. A stock can be down for a long time. You want to see the technical situation improve both for the market and specific company. Ideally the 200 day moving average should be rising and the stock should be trading above it. Even better if the same is happening with the 50 day moving average. Look at companies in an uptrend.

The question was on oil stocks. There has been some technical damage in oil stocks lately. Oil should not drop too much from here since the U.S. which has been selling reserves may soon be at the point where they may start building reserves again. Perhaps try Vermilion which is exposed to Europe. Start with a partial position and add on strength.

The question was on accumulating cash and where might be the near term low. The simplest way (not too technical) is to look for a strong day (plus 2% or more) with heavy volume involving many stocks. Then within the next five trading days look for the same thing on one of those days. It means something is happening.

There are growth opportunities in alternative energy and utility companies that are expanding in this area. Two examples are Nextera and Northland Power. An investor should focus on companies that are predictable and that have little economic sensitivity. Watch for when the market rallies and then what holds up and what pulls back.

Sitting on the sidelines is the best action today as the markets selloff. Optimistic investors could start an entry point. Thinks inflation has reached its highest point. ~7% inflation is much higher than 2% goal outlined by Central Banks around the world.

First stage in market decline is valuation multiple decrease (expect that to keep going). Earnings growth will be lower than previous years. Economic growth numbers will be reflected in share prices (influenced by increasing interest rates).

The economy has to move to several million becoming unemployed to meet the economic pain that the US Fed is willing to inflict. Is the Fed data-dependent or totally locked in so there will be no deviation from their plan in 2023?

The Fed has already extracted massive pain. That pain isn't coming. It's here. Also, will we see a broad-based recession, or a recession in only employment or housing? Nobody knows. We're working through it. She expects the Fed to remain data-dependent and adjustable. The S&P multiple has slid, and $3 trillion from five stocks has already exited the overall market cap. That's the pain. The worst is probably behind us. Not everything bottoms at once; there are always pockets of great stocks to buy.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Dividends Rule. We discussed in a prior column how many companies are increasing their dividends, even with a possible recession ahead. That’s great, but even better is that dividends provide a big part of an investor’s return over time. The amount can vary depending on who is doing the academic study and the timeframe chosen, but BlackRock Inc.’s global equity team not that long-ago suggested 90 per cent of equity returns in the United States over the past century have been a result of dividends and dividend growth. We do not think it is that high, and S&P Global Inc. claims it is around 30 per cent. Regardless, dividends certainly help investors grow their portfolios. What’s more, a dividend helps you keep your stocks during rough market periods. Of course, the longer you hold an investment, the greater its potential compounding impact on your portfolio. The lesson: Own some dividend stocks.

Interest rate hikes. Part of the cocktail of a poor market. 10-year in the US just broke 3.60%, and that's never good for valuation of equity markets. Compounded with weak European and Japanese foreign exchange, it makes it hard for trade to flourish, as there are such distortions in the FX market that make planning difficult. War in Ukraine, supply chain issues, after-effects of Covid. Never great for the stock market to have all these unknowns.

Asset allocation right now. Tough the last few years, as the bond market didn't give you, really, any rate of return. Bonds are now safe to enter. Despite roaring inflation, we've discounted quite a bit of it doing about 2/3 of the tightening. The yield curve's inverting, so the long end is outperforming the short end, as central banks can't influence the long end. Even at 6%, you're losing money on an inflation-adjusted basis, but the bond market is poised to do better in 2023-24 as a recession most probably hits. Central banks will probably pivot and lower rates in the second half of 2023.

Banks. He's lightened up on financials. Valuations are compelling, but margin and loan growth will be stagnant. Banks don't do well in recessions. No tailwinds right now. The only thing that saves them is that Canadian banks are trading 1.5x book, PEs are 8x. Cheap. Cousins in US are even cheaper, but they're struggling too. TD has expanded its NIM in the US, so last quarter they benefited the most out of all the banks. His preferences are TD and RY, as they're best in class.