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

His team was seeing a lot of inflection points in things like manufacturing vs. services, and rotation from software and the Mag 7 into old-world economy businesses and hard assets. There was trading ahead of the frothy blowoff in gold.

His firm had probably twice the level of activity in their two equity mandates. Volatility means opportunity.

The debate in Silicon Valley and on Wall Street is how disruptive is this next wave of new technology going to be? Here's an example. At his firm, they're looking at software with a bunch of agents that would replace a dozen analysts that would normally be hired to scour stocks and come up with opinions. But then he asks himself if that AI agent tool will replace a Bloomberg Terminal?

There's some disruption definitely coming, and right now the market's debating what that means. There's an ETF named IGV -- a basket of all the software players, from MSFT down to smaller ones. In a thing like CRM (customer relationship management software), is a company owner going to build their own? Or just buy something already out there? It's going to be measured in years, and maybe decades, before it really has an impact.

Last week, he picked up a few names in software whose stock prices have been halved.

Once a year, they go through actual numbers relative to what the models told them. Biggest factor is the birth/death (of companies) model. If, say, permission was granted to open a new retail store, they know that type of business usually employs 10 people. If it employed only 6, then they have to adjust the numbers.

Last year's total was a gain of only about 600k jobs. Revised numbers might show that the US economy actually lost jobs last year. Last week some labour data suggested that labour markets were weakening, and that could have been a catalyst for some weakness last week. 

There's a lot of momentum in the one, big, beautiful bill. Earnings are still OK. But we're starting to see some decay in the labour market.

The follow-up question is whether you're a trader or an investor? If you're an investor, and you're buying once and holding for several years, it almost doesn't matter. 

Look at the company that's issuing it. If it's Vanguard, Blackrock, or any of the big ones, they're not going away and will be around for a long time. If it's an upstart ETF company, there's a viability threshold where it either makes a profit or the company goes out of business. So you have to look at the firm overall, it's not necessarily about the ETF.

But if you're a trader, there's not a lot of $$ in the ETF, and the bid/ask spread is 5 cents in and out, then that's a far bigger cost to a trader than the $10 you pay your discount broker to trade in your account. With Canadian banks, for example, the ETF doesn't have to be huge because the underlying stocks are very liquid.

One of the benefits to a CDR is that it does hedge the currency, though there's a cost to that. It's embedded in the return you get. But that's really no different than owning it in the foreign currency. Another benefit is that you can buy fractional shares, in case you can't afford a full lot of a US share that trades in 100's of US dollars.

There's no tax benefit at all. On the currency side, you'll save $$ if you're an active trader.

BRK.B will give you this compounding without the withholding tax.

Global X has a series of ETFs that are corporate class, done with total return swaps. That means that there's favourable tax treatment because there's no annual distribution. You can get exposure to markets in the US and Europe without having the annual distribution. You get the total return minus fees, and it's more tax-efficient. Take a look at the suite they offer.

Labour Market

Last year, we started talking about the weakness in the labour market. We were worried about the end of the business cycle coming. 

At the end of of the business cycle, the last thing to drop is the employment situation. The Fed Reserve paused rate cuts because they were worried about inflation. At the same time, their dual mandate means they have to balance unemployment with that. Of late, they're saying that the labour market's a bit better. He looks at the numbers and shakes his head. The labour numbers are getting very weak structurally.

The first chart he's brought along is of the JOLTS data. Pretty significant decline in availability of jobs. With immigration trends plus the impact of AI, the size of the labour force isn't going to grow much anymore.

The next chart shows initial claims -- when someone gets laid off and initially applies for benefits. Historically, these are extremely low numbers relative to past cycles. The low 200's is very benign. Company's aren't laying off people, because it's so hard to find qualified workers. 

The last chart he has shows the continuing claims -- once you've been laid off, how long will that last? That number has gotten better. The downtick in the chart means that people are starting to find work and so the claims are coming down. That's good.

Here's what he's looking at from a market perspective. Two ETFs to look at. RTH -- market-cap weighted, with the big names you'd expect (WMT, HD, COST). Chart's ripping very strong, retail stocks are doing very well. When this starts to falter, it means the consumer is starting to falter. The top cohort of earners are not continuing to spend. The second ETF to look at is RSPD -- equal-weight retail. 
 
Keep these two ETFs on your radar. Don't go out and buy them. Instead, use them as warning signs. When these fail and roll over, it tells you the labour market's starting to turn. Consumer stocks and the rest of the market will be going with them.

Some buyers incorrectly thought Bitcoin was a store of value have moved into gold in a massive drawdown. Bitcoin should bounce though.

Anytime there's a massive selloff in 1 or 2 sectors (and we're seeing it in everything from bitcoin to software), all of a sudden those foreign consumer stocks start looking like shiny stars. 

Message for investors:  Diversification should always be part of everyone's portfolio. There's no way investors can react fast enough to reposition themselves when things fall off a cliff the way we've seen happen.

For sure there's value. Anytime the pendulum swings too far in any one direction, opportunities are created. For him, the opportunities are in the best of the best such as MSFT and ADBE. He's looking at other names as well.

The concerns about AI encroaching are overblown, but a lot of these companies are already incorporating AI and are among the leaders in AI. Reality is that the business customers of these companies are going to need an integrated solution; they're not going to do it on their own.

His client portfolios always remain well diversified. 

Right now, financial stocks remain a core component of portfolios. Still sees lots of value there, in both Canada and the US. Lots of value in the consumer sector, which has been beaten up for such a long time -- trading at very low multiples, with healthy and rising dividends. This should drive value over time.

Doesn't think either of these 2 will fall. Really hard to say. They're all spending $$ because they see immediate demand, so they're going to satisfy this demand. But 1-2 years of meeting demand is not going to justify the capex that they're putting out there today.

You have to have the confidence, or make the bet, that the brilliant people at these companies know what they're doing. That they're going to spend wisely enough to get that return. A great question, but it's early days and no one fully has the answer.

A market correction is generally characterized as a 10% decline from any given point. This threshold is fairly arbitrary and doesn't actually indicate whether assets are fairly priced, overpriced, or underpriced—it's merely a label applied when values fall by that percentage. Unlock Premium - Try 5i Free

It's a year of transition. One area on the macro side is with the new Fed chair -- everyone's wondering which way he's going to tilt. Secondly, we spent the last 3 years building out infrastructure for the AI revolution. Now we have to sell it, people have to buy it, and people have to make money. We're going from a technology story to an earnings story. 

The infrastructure players sell the large-language models and all the tools that go with it (agents and so on) to enterprises. Everyone's waiting to see how that will pan out. If you look at some of the big industrial, healthcare, financial, and entertainment companies, they're engaging and employing AI.