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

Believes Canadian energy & software are presenting value and buying opportunities. USA financials also presenting opportunity. Has increase equity holdings to approx 65% of portfolio. Good time to be buying undervalued stocks.

Recession? Either we enter a recession or it looks possible in Q3 of this year. Central-bank induced, as they're really talking tough. Very hawkish talk. Fed's not too concerned about the economy. They want to affect demand and get inflation down. Fed has 7 more rate hikes this year. A lot of macro people say no way. A lot of air is coming out of asset valuations like SPACs and high-flying NASDAQ names, and the Fed is quite happy with that.

Has tech hit a bottom? 4200 on the S&P was his line, and we were at 4221 last night, so this is a negative transit of his EBV line. We're now officially in a bear market in US equities. For any stocks, macros, or currency he looks at, his first thought is we're in a bear market. Names with stories, but no real fundamentals, are down 50-70%, which is normal if Fed is going to hike as planned. Stocks really have to prove themselves with earnings and dividend yields. If we have a positive transit of 4221, we're back into a bull market. Central banks depend on the macro picture, and he feels they aren't sad that they're popping the mini-bubbles that have cropped up over the last few years.

Commodities. We've seen the tops in many stocks. The only thing keeping things going is oil. China is the unknown factor. If it hits a recession/depression, commodities won't do well. We're in the 9th inning. Would he load up on commodities in a bear market? No he would not.

EBV explained. Economic Book Value. His definition of book value is different from the accounting definition. He takes the accounting book value and adds a number onto it. There are zones. When there's a positive or negative transit through a zone, it tells you if the fundamentals are improving or deteriorating. He looks at future earnings estimates, adds it to the balance sheet, and looks at the line. Calculations are done nightly and reported on Facebook. Check out his ModelPrice Guy posts.

Story stocks. Again, we're in a bear market. Story stocks do not do well. He'd put EVs as story stocks. He read that back in the early 1900s there were 2300 car companies, and now we're down to 4-5, 10 globally. These companies have caught everyone's imagination, but there's a lot of winnowing to do. We don't know the top of the interest rate cycle. The Fed says they'll go to 4-5% on the short end, but no one believes that because we can't get there with an iffy economy. We need to get the Fed back to where it was, and that's where the story stocks grow. Crypto is a good example. To survive a bear market, you have to have real companies with real earnings and real dividends.

Bullish on materials? Yes, for the longer term, though there are temporary headwinds that are market- and geopolitically- related. We're in the midst of two bull markets in the resources space. One is around precious metals, where politics will drive demand. The other is industrial materials, where geopolitical concerns around supply chains, demographic growth, plus 2.5 decades in under-investment will all lead to material shortages. The caveat to this second bull market is a global, synchronized recession or depression that would cut demand in the face of reduced supply.

Which materials in particular get the nod? For most Canadian investors, gold merits attention. Its tailwinds are pretty strong, and Canada has a nice endowment of companies to invest in. Easy money has been made in oil & gas, yet the sector continues to be very robust. That sector is underpriced given where he sees price of oil & gas over next 5 years. For investors who can take on more risk, look at the sectors out of favour. Coal deserves a look based on valuation. Five years out, in the absence of a recession, copper and nickel will be materially higher. Potash will continue strong as long as Russia-Ukraine concerns are in play. He's intrigued by uranium for the next 3-5 years.

Gold and inflation. Current gold malaise is due to investors knowing about incipient inflation, but not being bitten by it yet. Reminds him of 1968-72 when inflation was on the board, but investors ignored it based on two decades of benign inflation. But then it began to eat away at their living standards. We're in the same position today. It takes about 2-3 years of inflation's bite for people to lose that feeling of security of benign economic times. The decline in the price of gold and equities is a common feature of gold bull markets and, for him, represents a buying opportunity.

Gold price target? A better question is where could the USD or CAD go? Because, over time, gold is a constant. He sees the possibility of prices that are much, much higher. In 5 years, gold at 4-5 thousand USD would not surprise him. You'll see a response in gold equities when gold clears 2,000 USD. The efforts of the Canadian Parliament and US Congress almost guarantee that occurs.

Precious metals vs. streaming companies vs. equities. Depends on the investor. To retain purchasing power, own the precious metals themselves, as they've safeguarded investors for hundreds of years through periods like this. For those who are willing to take on more risk, for the prospect of higher returns, own the higher quality mining companies such as ABX, FNV, and WPM. Those who can stomach volatility and real risk can come further down the quality trail to the junior companies. The latter does not suit all investors and all speculators, as it involves a lot of research and a lot of work. Over the 50 years he's been doing this, the median quality of management teams has improved markedly.

Should I own speculative exploration stocks? He does a lot of homework on this type of stock, and he has access to a great team of geologists. He suggests that if you're not willing to spend an hour per month per exploration stock analyzing filing and geology statements, then you shouldn't own them. An absolutely rewarding sector, but one that will punish you if you don't do the work to understand it.

With earnings about to report, any particular Canadian bank of interest ? He owns TD and RY in his core equity portfolio. Banks tend to be the foundation of an economy. Looking at them can give you insight into how the economy and consumers are doing.

What to watch for during market volatility. Key issue is we're clearly in a bear market in stocks. The economy is, or will be, in a recession in the next little while, though it may be mild. This increases volatility substantially. When SNAP, WM, or TGT post disappointing results, stocks fall precipitously, as people are nervous about being in the stock market. The other difficult part is there's no place to hide, as the debt market is doing poorly as well. Whereas in March 2020, the stock market fell, but the debt market did really well because yields fell. Now, yields are rising. At the same time, this is the opportunity that people always talk about: to do your homework and buy great businesses at a discount, though it's nerve-wracking to do. You really need to have a long-term financial plan, which helps get you through these kind of situations. Otherwise, you get fearful and sell at the wrong time instead of putting your money to work. Over the long term, the stock market will do well and grow your wealth for you.

Time to step into tech? The NASDAQ was trading at 33-34x earnings, and now it's at 22x. The S&P was at 24x, and now it's at 16.7x forward earnings. The market has fallen a lot, and perhaps can fall more. If you like some of these companies, take time to understand their businesses and take the opportunity to invest. It's hard to hit the absolute low, but if you have a long-term approach, you can buy them at a discount. Though stocks have fallen, see if they have a good earnings profile, good free cashflow growth, and strong balance sheets. It's not the end of the world but, rather, a good time to invest.