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

Believes inflation will continue to surprise to the upside, so need to own sectors and themes that will benefit in that world. Very hard for banks to make $$ when long-term rates are at zero. Since 2020, long-term interest rates have continued to tick higher and stay higher. 

When the Fed cut rates last September, long-term rates went up. That's a change in behaviour. The spread the banks are making is getting better. Now the power is in the hands of the lender. Loan demand is going up, and the banks can take advantage of that. Everywhere in the world, banks are doing well. Backdrop is really positive.

Canadian banks are really high quality. Great job growing dividends, even through difficult banking environment. Have to watch mortgage delinquencies, which remain quite low. Lots of refinancing this year. Look at how they're behaving while the markets are a little sloppy. That's a great tell.

His firm has a little over 20% exposure to banks, which is a big percentage for them.

A few things are causing this. 

Markets have had quite a run, and you really need the underlying businesses to catch up with that. And a lot of it is AI and gold. The speculative elements have still been moving in the market, whereas everything else has been flatlining for the last couple of months.

Money has, perhaps, been balancing out to other sectors. But if it is, it's the very first stage. We've been waiting for this for a while. Really, the market has to wring out the excess speculation right now. There are a lot of pricey companies out there and a lot of very pricey assets.

Interesting. Some of those that have disappointed the street (though they may have surpassed what the estimates were) have been severely punished. Even companies that well surpassed analysts' estimates saw their stocks go up only a bit. 

So you can see that expectations are high out there, as well as some nervousness on the street.

What this market reminds him a little of is 1999-2000. Even though the tech bubble crashed and markets went down, probably half the stocks continued to go up for the next 2 years. It's really a two-tiered market between things that are overvalued and things that are correctly or undervalued.

His group is looking for a little more clarity on the tariff side, whether we get it or not. Also looking for some economic indicators -- coming through in Canada, but not so much in the US.

Earnings for NVDA are coming out, and that company's really the bellwether for things that have really been running this year.

He can't forecast the price of oil, it's tough. Right now, it's $60 a barrel. In Canada, with new pipelines being built, the spread between Canadian oil and West Texas Intermediate Brent is narrowing. If you want to own oil, CNQ is the place to be.

The AI buildout needs energy, wherever that comes from. Until they build more reactors and wind turbines, oil and natural gas will supply the need.

In this market we're facing a lot more macro uncertainties, as opposed to company-specific problems that you can get a handle on. It's always hard to commit fresh cash in this type of environment. If the underlying business is OK on a stock he likes, he's content just to hold for the time being.

Starting to see more practical applications with buildouts. The NVDA and Brookfield deal for AI data centres will be a huge thing. There's a lot going on in that area. 

NVDA is clearly a winner, but is it worth its valuation? He doesn't know. But it will survive and be dominant.

Companies have the cash, but $7T in capex is a big number. Some will have to take on debt or raise funds. Will it start to look like vendor financing (think Nortel) again? Remains to be seen. AI is definitely here to stay, but can you make money in these stocks, or is it the tech bubble of 1999-2000 all over again?

His team tries to look 2-3 years into the future, to see what cash the business can earn. If they find that it gets to be either FMV or expensive, then they jump ship.

Last time he owned a gold company was about 20 years ago. In June, for example, the share price of ABX was still under what it was 25-30 years ago. Now it's soared.

Spot price of gold is up ~50% this year. Some of the reasons for that may be rational, and some not. At these levels, wouldn't touch it with a 10-foot pole.

If gold stocks keep running, and he misses out, he's OK with that. We've seen this story before. The gold index over 20-30 years looks pretty ugly -- peaks and valleys, but doesn't really go up that much.

Please note that there were no Past Top Picks today.

Leverage and credit expansion

Leverage is often blamed for the 1987 stock market crash, about 38 years ago. Rising use of borrowed money, such as margin debt in equities or high loan-to-value ratios in real estate, amplifies gains during bull phases and magnifies losses afterward. Easy credit or relaxed lending standards frequently accompany bubbles. Currently, there is a lot of concern about margin debt. According to the U.S. Financial Industry Regulatory Authority (FINRA), margin debt is at about US$1.1 trillion. Sure, it is a big number, and is at a record. It represents two per cent of total S&P 500 market value, and is up 35 per cent in the past year. But again, it may not be as bad as it sounds. The S&P 500 is up about 15 per cent in the past year so some margin expansion is expected. Lower interest rates also help investors manage their debt exposure. And, two per cent of the S&P 500 does not sound like a lot, considering expected earnings growth forecasts in the 10 per cent or more range for next year. Still, margin debt is certainly something to watch, and may be a sign of future troubles.
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We're in a correction now with a broad-based sell-off and overdue. The six-month period this year was incredibly strong, including October when it's traditionally weak. Seasonality has gone off. The US government shutdown and earnings season are over, so not unusual to see a correction now. Earnings were pretty good, but investors now see valuations a little stretched, so they're lightening up their holdings. Utilities have been volatile both ways, rallying on the data centre spend, but now softening. Similar story with precious metals, though tied to the USD's moves and whether the US Fed will cut next month, which is looking less likely.

Absolutely. We're in a structural bull market for natural gas, and AI is certainly part of the reason. There's massive demand by the hyperscalers for power needs today. Certainly nuclear will be part of the mix, and that rollout will be measured in decades.

Natural gas has really gone from being a bridge fuel to the fuel. Not just for data centres and AI, which he thinks will be about 10B cubic feet a day of increasing demand by 2030. What really excites his team in the here and now is the meaningful increase in LNG demand both in Canada and in the US. It's a very visible, measurable, high-confidence increase in demand.

At the same time, the cost of supply has gone up over recent years. It's roughly $4. At this price, companies are trading at 11-14% free cashflow yield. Natural gas is very attractive right now. He has roughly 70% equity exposure to nat gas producers.

Yes. It took us longer to build our first LNG facility than it took the US to land a man on the moon. Things take longer in Canada than in almost any other investible jurisdiction in the world.

No. The budget was nonsense. It was a lot of talk, and we have yet to see action. Still waiting for this government to recognize the importance of even just the oil industry to Canada. It's 20% of all of Canadian exports, by far our biggest product at $100B.

We'll run out of oil pipeline by about 2031. The importance of this is that it will cost producers roughly $12-13B per year. With a trickle-down impact on taxes and royalties. Though there's this grand deal between the feds and the provinces, we really need results very soon. It takes about 8 years to build a new pipeline, though it can be done much faster when there's a national will and urgency to get something done.