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

Most people think that the war in Iran will be relatively short, and let's hope it is.

Bank stocks were down 6% last week, and private credit stocks are down 30-50%. They've been trying to sell these specialty funds to the individual investor network, thinking that buyers don't care about liquidity. There was a lot of lending going on, especially when interest rates were significantly lower than they are today. 

The question is:  Have people lent money to solvent businesses? Will they be able to pay those loans back? When investors do need liquidity, there are no easy buyers for these assets.

Seeing an AI temper tantrum. People are worried about mass job losses. They're worried that job losses will cause the economy to tank. Hysteria that software is going to go away, when there's going to be even more software with more software engineers needed to write code, manage it, and integrate it into people's lives. 

But we're seeing the exact opposite. Increased number of software engineers. Very robust economy, corporate profits, and employment statistics right across America. Lower interest rates, despite the spike from energy prices (which aren't expected to last a long time).

A great deal of value has been created in markets because of panic.

There's lots of talk on the loss of American exceptionalism, and he thinks a lot of that is by people who are angry at America. Those comments are less about businesses and the entrepreneurial spirit. Still seeing pretty dynamic operations in the US.

Revenues for the S&P 500 are about 6% international. He's been in this business for over 40 years, and people are always saying to go international. That might be the investment community just wanting you to do something, since they make a living when you do transactions.

He's somewhat skeptical. Europe is heavily regulated, and America is deregulating. Banks in the States are very well capitalized. You don't necessarily need to go international because someone's telling you to. There have been a lot of false starts.

He said today that it might be a good opportunity to take profits in both gold and oil, because this is probably the peak of uncertainty in supply.

You need oil prices at $75-80 over the long term for energy companies to make significant profits. A very difficult business, expensive, not getting any easier. Global oil market is somewhat over-supplied and, despite today's surge, prices won't be high for an extended period.

Sadly, he predicted regime change in Iran. It's surprising how markets snapped back today and market response will be temporary.

Like Covid or the tariff tantrum, you won't get any protection this way. You will rewrite options and get called away and not recovering the upside if the recovery is quick. Don't use these ETFs if you're bearish the market.

It's more likely to fall to $4,000 than rally to $6,000, but he is bullish good long term. Gold bullion is more defensive, gold stocks aggressive. Underweight both now.

Buy the rumour. Sell the news. The attack on Iran was not a surprise. Covid, though, was. Generally, wars have a short impact on markets. Markets tend to price wars well in advance. Since 2013's fracking boom, the XEG has averaged 5% returns a year and most of that has come in the past year and most recently. Don't chase this rally, but take some profits like he did.

That's the $64k (or $64T ;) question that investors seem to have been grappling with for much of the past 3 months. 

The answer is that we don't exactly know. We do see markets starting to price some 2-way risk around the AI theme. Previously, between its inception (which you can roughly date from when ChatGPT went live) to November of last year (when Michael Burry sounded the alarm about circular financing and an overbuild), it had been all one way on anything that looked, smelled, or felt like AI.

But now starting to see markets parse winners and losers. Since November, we've seen an acceleration in selling everything that could be disrupted by AI -- notably software stocks, but also white collar in all its forms (certainly engineering, construction, and IT consulting).

His team were never really all-in AI cheerleaders, nor were they skeptics. They feel you need to take a case-by-case, company-by-company approach as you price in AI risks and opportunities. They're starting to sniff out opportunities in the "baby thrown out with the bathwater" category.

At the front end of the trade, it was all about the semiconductor, designer, and foundry sectors and names like AVGO, NVDA, and TSM. He's taken partial profits in a couple of those names. It's now time to turn to the picks and shovels.

An example of the baby and the bathwater is SHOP; owned for years, sold off, picked up more a couple of weeks ago for his firm's momentum mandate. 

Some business models are on shaky ground. Other business models will endure, and they're being unduly sold off. The businesses of those companies may actually be enhanced by AI, rather than disrupted by it.

Wouldn't be surprised if there were hostilities in the near term. That's already being priced into the commodity with a significant move in bids. Geopolitical tension is what's moved the price of oil about $10 YTD. Absent geopolitical tension, the oil market is pretty well supplied.

Risk (and opportunity) management is about probability and severity. Probability of a strike seems to be increasing, but we don't know the severity. In particular, we don't know if Iran will respond in a scorched-earth way (which it didn't do after last summer's strike on nuclear sites). Attacks on oil production and infrastructure in the region could disrupt the global oil demand balance, which could cause the price to skyrocket.

Geopolitical tension tends to be sharp and fleeting. US action in Iran shouldn't be the reason you put oil in a portfolio. Any company you choose should have more going for it than just the commodity price. For his firm, that's XOM.

It's bifurcated. You have the asset-light tech side, and then there's the asset-heavy buildout side. AI is moving from code to atoms. First phase was chips and core networking. Next phase is physical -- data centres, power grids, electrification, materials, equipment.

Pretty good diversification opportunities at the moment. An interesting regime shift under the surface -- US indices are treading along, but Canadian indices are breaking out.

Canada has a lot of oil and gas, rocks and trees. It's a heavier-asset-based economy, which has added to its outperformance and makes a nice complement for the tech-heavy indices that most people are exposed to.

Investors should have some tech exposure.

Canada represents a nice opportunity, but so does Latin America. Good to add to your diversification. LA has commodity exposure, light tech exposure, and better valuations. With potential for the USD to keep weakening (stated objective of the US administration), that would give international regions some extra torque.

Now, he wouldn't bet too much on the USD weakening a lot more, simply because most market participants are anticipating that. With that type of saturation, we might be due for more of a counter-trend rally.

The world needs to think about how AI creates an agentic world. The work that needs to be paid for won't run over traditional banking rails, but instead over digital assets. While the price of digital assets has been really difficult over the past 5-6 months, under the surface we're seeing the infrastructure and network underpin more and more assets. You could start a position in this area; remember that volatility is very high, so position size is very important.

Can't locate the ticker, but Picton is one of the premier asset managers in Canada. Generally speaking, does a really great job on their whole lineup. He'd be pretty confident purchasing.