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

Economic data showed that earnings were great in Q4. Revisions were generally better looking out through the course of the year. Near-term PMI economic data has been improving. That's great.

However, when you have events in the Strait and oil prices moving up so sharply, that has a knock-on effect in a whole bunch of different industries. Has the potential to add to inflation, which is already sticky. Recent inflation data came in higher than expected.

Concern that all this could slow economic growth at a time when inflation is higher. Not a great combination. So investors have been thinking about their positioning.

We came into this during a time when people were exceptionally bullish and over their skis. Investors have been hedging and reducing exposure. Technically, the markets are looking a little weaker.

In financials, his positioning is down to 13% from 28%. Fintech has been weak, as have companies like MA, V, and PYPL. The P&C insurance group has been weak. 

Canadian banks have been pretty resilient, and he has some good exposure there. He's watching the real estate market closely. Thankfully, mortgages make up a lot less of earnings than they used to because the banks have diversified.

Coming into February, the whole rail sector across NA was in the process of breaking out from a very large base. Transports also woke up.

Now we're going through some stuff with oil plus some weakness in the market. And these concerns are washing through transportation. They've pulled back to their breakout point. 

Rails are particularly attractive if you think the price of fuel is going to be elevated. Biggest impact so far from rising oil price has been rising diesel prices. Diesel likely to work its way higher the longer the Strait is constricted. Rails are way more competitive in an elevated fuel-cost world.

He likes the rails. See his Top Picks.

Part of the job of money managers is to generate returns. When that's not a high probability, the most important job becomes to play defense. In a sloppy market, it's OK to hold some cash, play defense, and be a disciplined seller. 

One reason people invested in the Mag 7 is that they were capital light -- great cashflow, and not a lot to spend it on. That's completely changed. 

These companies are now major investors in data centres. Remains to be seen what kind of economic value they get out of it. He has no doubt that AI will be a major productivity opportunity, with lots of $$ made. 

From a technical perspective, the MAGS ETF topped in October, making lower highs since then. Now trading below the 200-day MA, with relative RSI weakening. This group is less attractive, and still over-owned.

This private credit sell-off will play itself out. Sure, there will be losses, but the firms that did good underwriting will survive. This will pass. During Covid, BDC was down 30%, didn't see many defaults, then a year and a half later were at a premium to NAV.

It's been encouraging for the price of oil that some vessels that are not American and from friendlier nations are allowed through the Strait of Hormuz. This may dampen the oil price is the war lasts for a long time. The US has more firepower than Iran, but Trump is must be aware of his voters because gas prices have jumped, his popularity rating has plunged and he must consider the November midterm elections. He may be thinking of pulling out sooner than later, but everyone is speculating. Oil and fertilizer prices have risen which will inflate grocery prices. She doesn't own oil producers, but holds pipelines.

When the war began, the US dollar strengthened, which is often negative for gold. Also, gold has had a huge run, so there could be profit taking. She doesn't invest in commodities and wouldn't buy gold now.

The private markets are ideal with people with a 20-30-year objective. He blames the media for blowing things up.  If you read the fine print within these private equity stocks, they explain they're illiquid and a process to redeem your assets, and there will be gating when demand to redeem exceeds supply. None of this is a surprise, and yet the media reports it as the end of the world. These stocks are now trading at a steep discount to NAV. Everyone should own these stocks in their portfolios.

All the banks have ETFs and fine to place short-term money. As for floating rate notes, they work in interest rates rise, but not so well when they fall compared to a short-term bond fund.

Almost half the Nasdaq is made up of the top 10 stocks. That concentration keeps growing. Three major IPOs, including SpaceX, are coming and could be trillion-dollar IPOs. The way Nasdaq is changing its rules is that once these companies go IPO, they will force the natural buying of the index funds. The passive index exposure is very concentrated too,.

The price of oil is sticking due to uncertainty. Until the Strait of Hormuz logjam ends, we will see a geopolitical premium in the energy market. Energy impacts everybody everywhere. The strait is the biggest chokepoint for oil. Trump is pressuring other nations to get involved to open the strait, nations which rely on this oil. It's a big week for central weeks, such as Australia's. Expects them to pause policy decision because of the Mideast war. Of concern is the weak employment number from last Friday--due to AI or the end of the business cycle? Rising oil prices don't help.

The so-called credit crisis in private equity stocks is wrong. The fault lies with private credit funds that are inept at explaining the retail investors how their funds work and can access their capital. These cast majority of these private credit funds have and do work and can pay their debts.  The banks are not hurt at all. These are not like mutual funds, but rather have limited liquidity and are set up to last 6-10 years and pay hefty dividends to investors in the meantime. These are long-term vehicles that lock in your investment. There will not be a private credit bank run.

There are three tipping points for oil prices. The first is the Headwind Zone where oil reaches $120 a barrel. Consumers feel the impact but this is mostly offset by increased revenue and taxes from oil producers in Canada and the US. For example the $9 billion dollar deficit in Alberta was gone two days after the war started in Iran. The second level is called the Recessionary Zone at $150 a barrel. This leads to demand destruction as consumers and businesses drastically curtail spending to cut costs. Spending on oil reaches 5% of GDP which historically has meant recession. The third zone is called Systemic Crisis at $200 per barrel. This leads to a systemic tax at every operational level of commerce which would lead to a global downturn.
The breaking point is higher than a week ago because Canada and the US are much more service oriented and a lot less manufacturing oriented, so are less energy intensive and more efficient with equipment. Also the US produces a lot more oil and gas now than in the 1970's

Since oil stocks have already run up in January and February before the war, it is time to take some profits. Consider selling into your biggest weightings.