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

Fourth straight day of decline in equities. Rally that started after the rout in June is looking more like a bear market rally, unfortunately. We've rolled over and are at least likely to test the lows. Sparked by the Fed. Notion of a pivot was taken off the table. Fed is going to raise rates and hold them there for a time, which has changed the narrative on stocks. Bond market wasn't all that fussed about it, until the last couple of days.

Stagflation. Where inflation is high and sticky, but growth is slowing. Q2 earnings reports didn't show a big degradation in earnings. But the challenge is the outlook is getting worse, and guidance and analysts' estimates are starting to materially decrease. The one good August CPI print at 8.5% came down only because of energy, which is pretty volatile and already seems to be on its way back up. Inflation could just as easily reverse the other way. Stagflation is a very tough environment for equities.

Timeline of a downturn. If we're going into a typical recession, which seems more likely, earnings could decline by 15%, and it takes 18 months for that recession to run its course. Stocks start to discount the end of the recession 6 months earlier. Spring/summer next year could see the market finding a bottom.

Factors for picking stocks. Positive momentum, reasonable valuation, lower volatility or stable. He doesn't have buy or sell targets. It's a matter of is the stock starting a new uptrend, and is it cheap enough? He never picks a bottom or top. He wants cheap, rising, and stable.

Canadian bank earnings. Rougher earnings session for the banks, and some of them came off pretty hard. For the banks, it depends on your thinking. He tends to be more medium-term, so trends do matter. Longer term, banks are fantastic businesses, and an oligopoly in Canada. Depends on what your timeline is. In retirement, you may not want to hold for 10+ years, and you may want to pause until we get some resolution on the economic outlook and the yield curve starts to steepen again. Rising rates is theoretically good for banks, as they can charge higher interest, but they have to fund that at well. The other challenge is trading and investment banking has really suffered. Worst year for IPOs in 35 years, plus economic slowdown has caused these areas to dry up. He's neutral until we get clarity on the economy.

Covering shorts. A stock can attract a short if it has mediocre value, negative trend, negative volatility. Until one of those things changes, a stock will stay on the short side. A trigger would be if a stock declines over 40% in a 6-month window, as then it becomes too dangerous to stay short. Or if the cost to borrow it goes above 10% a year, which is a sign that too many people are shorting a stock. Those types of stocks can become meme stocks or get caught up in a junk rally like the one in July.

Energy sector in the current environment. Energy companies are typically cyclical, mainly because of debt on the balance sheet. When we go into a recession, it's that debt that makes them highly cyclical. Governments are telling them to produce a lot right now, because they don't like the price of oil. But we want you to disappear entirely in 5 years because we're moving to purely renewable sources of fuel. If you're an energy CEO, you want a fortress balance sheet and to hang on to capital. Results in higher prices, lower production, and great cashflow.

Keeping a portfolio tight amongst all the opportunities. He holds quite bit more than just 20 stocks. He might have 100 longs and 100 shorts in a fund. Individual investors can stick to 20 stocks if they look for reasonable price, high quality of earnings, and trending up. Narrow it down to the best 20.

Uranium sector. He's a strong proponent of uranium as being a green fuel. Growing desire to bring uranium back into a green fuel source. Europe is a window into that. Germany has hurt themselves by shutting down nuclear before they were ready. The stocks are very expensive. His preference has been to own HURA.

Caution on analyst estimates. Often when stocks have the highest analyst expectations to target, it typically means the stock has collapsed but the numbers haven't been adjusted yet. If you bought stocks based on the highest return to target, you'd lose money over time. They tend to be stocks that are in downtrends, and price momentum tends to persist. Whereas if you bought stocks with a low return to target, you'd make a lot of money.

Canada's Q2 GDP numbers of 3.3% vs. expectation of 4.4%. Canada's numbers tend to be more lumpy than US numbers. So far growth has been fairly strong, as well as employment. Starting to see more and more evidence that the economy is slowing in Canada and the US. US has been talking about job openings, but that's a lagging indicator. A number of surveys in the US are showing contraction. PMI tomorrow is expected to come in around 52, and below 50 means that we're in a contraction. Time to be cautious in the markets and perhaps lean more towards some of the boring sectors.

Will BOC still raise by 0.75% in September? He thinks so. Central bankers have lost a lot of credibility, and they can't start backing off from what they're doing. They need more evidence to say the economy is substantially slowing, and one GDP number isn't enough for that.

Headwinds for the fall. Weak seasonals at this time of year. Since 1950, September has been the weakest month of the year. Doesn't mean that the market will be negative, but it's a tough backdrop for the market to overcome. Combined with the economic data, it's a time to be cautious. He wants to be optimistic as well. The markets could struggle for the next month or two, but could do very well in the back half of this quarter. Opportunity to be into the cyclical sectors a bit later on, but not just yet, perhaps the end of October. Wait for a month or two for an opportunity to get into the market.

Canadian vs. US banks. Canada's an oligopoly structure. Canadian banks pay out a lot more of their cashflow, so you get a higher dividend, and this makes them more defensive when the market turns down. Composition is different as well. US banks tend to be attractive when the market's really rallying, and when interest rates are moving up. When interest rates move up, US banks outperform Canadian banks. Right now, the Canadian banks are suffering a bit, but he'd be leaning towards them.