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

Pretty much every time he's been on during the course of this year, he's talked about how his firm has been reducing its tech weight because there are other things to do. Technology represents about 11% of his firm's assets, which is a pretty significant underweight. 

There are some great companies and great opportunities still there, but there's a lot of great risk/reward in other parts of the market. Relative price performance has been better in other sectors.

Long-term risk right now is inflation. Every government around the world is erring on the side of fiscal stimulus and fairly easy monetary policy. He wants to protect against that risk.

Certain sectors do better in that world. Financials are a classic -- low short-term rates and higher long-term rates give a nice net interest margin. Great inflation protection built in, power's in the hands of the lender. Materials and industrials are also good places to be. 

International stocks are relatively inexpensive and are heavy in those sectors -- as a result, they're outperforming the US market this year. A typical client account would be 15-10% international (ex-US), so that's Europe and Asia and Latin America. The MSCI All-World Ex-US Index has about 30% financials, a big materials weight, and a big industrials weight. Lots of great opportunities in those markets.

A stock where there's a very tight supply/demand relationship (there are buyers right under the surface) shouldn't be trading in a wide band. The wide band means that sellers have to push further, lower to get out. He likes to see companies trade in a very narrow, tight band.

Secondly, he wants to see the technical picture get better. Wants to see relative price improvement. See if a stock's trading better or worse than stocks in the S&P over the past year. Focus on areas of leadership in the market. There could be a ton of companies performing better. Sector might need a bit more momentum before you put $$ to work. You may pay a bit higher price, but you'll know that you're in a leadership part of the market.

He's going to pull the lens back, as he likes to look at things from a macro perspective. In 2020, we went from falling interest rates for 40 years to what is likely rising long-term interest rates for the next 25-30 years. That benefits banks in particular.

If you look at the XLF in the US, after going nowhere from 2008-2021, it finally made a new high. Beginning of a new long-term bull market that probably goes on 10-12 years. During that time, earnings go up and so do dividends. The multiple expands.

95% of global banks are trading above a rising 200-day MA. Don't be afraid of a bull market. These are dividend growth stocks, and when there's inflation a rising stream of income is pretty attractive to offset the rising cost of living.

Precious metals bull markets tend to go on for 8-10 years -- they happen in phases, with 2 or 3 good-sized corrections along the way. The correction in early fall was shallower and lasted less time than he expected. He's fully positioned in precious metals.

Once a bull market starts to really mature, silver has a tendency to outperform. It's now doing that. It's famously volatile. Always stay with the best-in-class operators and the best assets. Take a look at PAAS.

Classic inflation hedge if you think one of the biggest risks to portfolios is inflation.

The actual definition of a Santa Claus rally applies to the last 5 trading days of the year. We're there, and he thinks we're into it now. General breadth has been improving since late November in US, Canada, and internationally. So the conditions are pretty good. There's some pretty clear leadership.

Today, after some pause, looks like some strength is resuming. So we're probably in the Santa Claus rally.

No. He'd characterize what's going on as kind of a tug-of-war. You have your dyed-in-the-wool, true believers, "AI to infinity" crowd, and then the skeptics or pragmatists who are coming out of the woodwork. That's causing a bit of churn and rotation in both sector and style in the marketplace. 

It's been very much an AI theme-driven rally since ChatGPT was born just over 3 years ago, but with fits and starts. Over the last 3-4 weeks, it's been in one of those "fits" with a bit of resurgence today. The probable cause is that MU reported better-than-expected earnings yesterday after the close.

We also got a little bit more rocket fuel to pour on the fire of the Santa Clause rally with the CPI numbers coming in a bit lower in the US. So we have a pretty strong tape out there today.

His firm are fervent believers in the transformative potential of AI. It's a generational event in technology. So they've been invested in it and remain invested throughout the value chain. That chain spans foundries that make the chips to designers to switches/routers. And upstream of those they're positioned in power producers. And even above that, natural gas and uranium producers.

They have partially trimmed some exposure in the last month or so, but only very lightly. Proceeds have been invested in more mundane businesses -- not hyperscalers per se, but companies that are realizing major efficiency gains for the end user.

Absolutely. Stay tuned for today's Top Picks for names that are poster children for realizing commercial benefits from their use of AI. They're not Johnny-come-latelies to the AI game either.

Yes. The one thing they alluded to in their commentary was the risk to the job market. With the government shutdown, a lot of the data was lagging and not available. We found out yesterday that the unemployment picture has worsened pretty significantly. That gives them some justification for what they did.

He's not exactly sure. With all of these monthly data points, what they typically do is release them and then adjust them over time. We need more of the points in sequence and then more robustness in different types of data.

Really, it was the federal government layoffs and early packages taken that spiked the number. If that's more of a one-off event, then things will tick back down. If there are more things in the pipeline, or more things happen in the private sector, then we'll see that number tick up.

One clear effect is that government spending and debt will increase significantly. This sort of plays into what the Fed is doing.

One thing that wasn't really highlighted was the quantitative tightening/easing cycle. They stopped tightening on December 1, it hasn't even been a month, and they're already easing. If you look at the magnitude of that easing ($25-30B a month) and where that gets you to over the next 24-36 months, it's a pretty significant injection of liquidity into the markets.

It will essentially help finance a portion of the government debt. Even if they maintain their same ratio of debt to total assets, they still need to be doing some easing just to maintain that ratio. If they don't, they are actually tightening (albeit indirectly). There's a huge mindset that they don't want to indirectly tighten, so what you could look for at a minimum is that they'll maintain a similar ratio of debt to total assets. 

That should bode well for liquidity in the markets. If there are hiccups along the way, you can expect that injections of liquidity would be turbo-charged.

Weighting is always a difficult thing. When you have a high-weight position and it works, it's great. Not so much when it doesn't work. Tough for him to comment without knowing an investor's particular situation, but this particular investor seemed to know a lot about the company. That knowledge and insight help mitigate the risk when having a concentrated position. You have to know your stock well, otherwise you get hit by something.

For investment success in any stock, you really need to get earnings growth and multiple expansion. Those are the twin engines of your compounding. If you get earnings growth but it's less than expected, the multiple can contract and your gain is zero.