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

Stop losses. See his Twitter posts @SC_FUNDS for how to implement stop losses.

Recession? Numbers are showing a significant slowdown as we're going into a tightening cycle. Higher chance of recession than not.

How to be more defensive? At the beginning of the year, it was easy. You just went to the bond market for protection against a slowing economy and volatile equity markets. But that didn't happen. Both bond and equity markets went down together, by 5-10%. It's been 100 years since a bond market has acted in that way, and it has a lot to do with inflation. He's more confident that the bond market is settling down. Early days, but we're seeing the heights of inflation modelling, though he doesn't have a high conviction on this.

Is there value anywhere? Sounds crazy, but energy and commodities still show significant value. The sectors were starved for capital, but the underlying product is up 4x. When oil is this high, the CAD should outperform, and it is outperforming all other currencies except for the USD. Oil sector has tremendous free cashflow. We're maybe 2/3 done in terms of share price appreciation, with another 1/3 still on the table. So you should still hold those types of assets. With everything else, it's hard. Growth has problems. At this point, some tech stocks are showing terrific value.

REITs vs. Canadian banks Both benefit and get penalized from higher interest rates. Banks generally do better with higher interest rates because of higher net interest margin. Banks are in a good position. Problem is growth potential is being stymied because housing market will slow down. Canadian consumer is leveraged out, and banks will be dealing with defaults. For REITs, being punished by higher rates and valuations make them less attractive. Going forward, he'd rather buy REITs. Banks are vulnerable from a recession and a cooling housing sector. Banks really enjoy a steepened yield curve, but the curve is flat. Banks are down 2.5-5% YTD.

Regarding recession, developments have increased the attention being paid to it e.g. Geo-political, inflation. He hopes for the best but be conservative and invest in high quality companies and maybe have a cash cushion. For the tech group be under-weight or on the sidelines. It has had a great run and may be in a 'pause' mode. There are still good opportunities but be selective. Healthcare and Energy which had fallen behind have re-asserted themselves and it looks like the markets are gravitating to new leadership.

Believes it is too early to determine whether markets have reached a bottom. Predicting a 30% chance of recession. Market will have a soft landing. Thinks most portfolio managers have completed selling off stocks.

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.