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

In this earnings cycle he's specifically looking for the investment in AI and what the capex is for a lot of the companies, not just in cloud development, but throughout their enterprises. 

In a correction phase. Could pull back to somewhere near $3400-3600. That's where he'd want to put fresh money in. Violent move up and correction in the last few weeks tells him that we've likely hit some sort of speculative peak above $4000. He wouldn't be interested in any gold companies, whether junior or senior, until we get more of a correction.

How sustainable and long-term is this play in gold? It could be years. But we've also seen historically where you get these speculative things, they ramp up, and then it's dead money for a decade. That's a real risk to think about for this sector. It's not a no-brainer. 

He missed this last runup, thinking it wasn't sustainable. (So don't listen to him, he was wrong on that ;)  But he is bullish long term, and would buy this type of correction. There are a number of ETFs to play this, and they're all basically the same.

Portfolio Buffers

It's a monster week. FOMC rate decision, Trump and the APEC conference, all these trade deals. But the Fed meeting is this week with another rate cut and, possibly, discussions about the end of their balance sheet rundown. That's a very important liquidity catalyst for the market.

To think that we're not in a speculative bubble here, a lot of the events this week including earnings could boost that bubble. We get $27T worth of reporting in terms of market cap this week on the S&P. Huge week.

The first chart he's brought (courtesy of the Federal Reserve-St. Louis database) shows the outstanding margin debt in the broker-dealer community. We're at a peak that we saw prior to what happened in 2022. Lots of speculative froth in the market right now. We don't have a really bearish catalyst, except extreme valuation. Extreme valuation is never a good reason to sell.

But we do have some bullish tailwinds. One of the newest is depicted in his next chart, which is the size of the Fed balance sheet. For the past couple of years, the Fed's been doing quantitative tightening (running down their balance sheet). The chart shows the Fed balance sheet as a percentage of the economy, with red-shaded areas being previous recessions. Every time there was a recession, the balance sheet expanded as a percentage of GDP. Now the Fed uses the balance sheet as a standard tool.

If they're going to stop selling down their balance sheet, they're going to end up net-neutral or net-slightly-buying assets because of the way the runoff is working. That's really a liquidity boost to the markets. He expects them to talk about this at the upcoming meeting, and give some ideas about when they might end quantitative tightening. A very bullish catalyst.

Next graph supports how it's way too early to call a top, even though the speculative froth and sentiment are both there. The point on the graph marks December 1996 of Greenspan's famous "irrational exuberance" speech. The S&P doubled from that point. So even though Greenspan felt that markets were irrational, he was 3 years early. No one can call a market top.

Though he's extremely cautious on valuation, there are enough catalysts to keep squeezing markets higher.

What you ultimately want to own are these buffer ETFs. When you're concerned about valuation, they still let you participate on the upside. But if markets correct as they did in April, you're going to go down a lot less because of the buffered protection. But if markets go up, you're still participating in the upside rather than going to cash and trying to time the markets (which he doesn't recommend).

Look at ZOCT or ZAPR.

What is Proof-of-Stake?

So, what is Proof-of-Stake? To first understand what Proof-of-Stake means, we must first understand what a consensus algorithm is. No, one does not need to have a Ph.D. in Computer Science to understand what this means as this is simply a voting process used by blockchains (cryptocurrencies) to reach an agreement that transactions on the blockchain have been fair and accurate. Many have heard of the importance of ‘blockchains’ in future technology but are left scratching their heads at the importance of ‘cryptocurrencies’. Blockchain technology is what underpins all cryptocurrencies, but the cryptocurrency token associated with each of these blockchains is what makes it secure and ‘trustless’. A blockchain without a crypto token attached to it is essentially no different from the databases that are used in everyday technology today, but by requiring individuals (miners) to validate the blockchain transactions and giving them crypto tokens as a reward for their efforts, the blockchain becomes secure and trustless (no trust is required as miners are incentivized to be truthful).

Ethereum previously used the same consensus mechanism that Bitcoin uses today, Proof-of-Work (PoW), which requires individuals (miners) to purchase specific computer mining equipment and run the software 24/7. Many of us have heard of ‘bitcoin mining’ before and have seen images of thousands of computer mining rigs operating in large warehouses - this is a Proof-of-Work mechanism. The mining equipment itself is expensive, energy-intensive, and requires a lot of space and infrastructure. Proof-of-Stake, on the other hand, requires a consumer-grade laptop at most, and a financial commitment of ETH (Ethereum crypto tokens). These miners on a Proof-of-Stake consensus algorithm are therefore using significantly less energy and physical space than on a Proof-of-Work mechanism.
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There are several big tech companies reporting this week and he is seeing a Disneyland for investors. Earnings growth is really good - the bar is high and set to go higher. Qualcomm and AMD blew away numbers. The Fed meets this week and a rate cut is expected, but listen to the commentary especially to forward guidance since markets are priced very richly. It looks like a thaw in US/China relations regarding rare earths. Tariffs are maybe not a big concern because they keep getting dialed back. 93% of goods are coming in under the free trade agreement. A rate cut is expected from the Bank of Canada and the forward commentary is dovish. CPI is still 3%.

The question as on the Canadian market. He doesn't think the TSX is overvalued. The growth of earnings per share is still rising for the TSX. As for gold its themes are overall instability, central bank buying and the US dollar. It is not related to supply and demand. At what point is the price of gold overdone - nobody knows. He wouldn't buy gold but would invest in the stocks. Maybe not now though since he thinks they are getting over-valued.

We know that the president is a petulant infant, and there's a long-established fact pattern that supports this. Today it's the Doug Ford/Ronald Reagan ad campaign. Next week it's the World Series. And you can bet dollars to doughnuts that there'll be something else the following week.

As investors, what we want to do is tune in to the signals that the market's giving us and tune out the noise. All this Trumpian sound and fury signifying nothing ... just turn it down or turn it off. Investors are learning that lesson, and markets are trading accordingly.

We've seen a good flurry of earnings out of the US -- about 20% of S&P 500 companies. Notably, we've seen the big money-centre banks, some of the regional banks, and some tech names (though we're waiting for most of the Mag 7 reporting next week).

Early indications from US banks are that things are looking good. Same for other sectors like consumer and industrial names. Just starting to get a trickle of results from Canadian companies. Expectations are high.

It looks pretty good going into year-end.

This is a really important budget (though we always say that). But this particular budget is one where the Canadian government really needs to meet the moment.

Seeing estimates from private-sector economists that are bracing investors to steel themselves for pretty big budget deficits, something in the order of $80-100B. These are levels of deficit we've really not seen outside of those couple of years of Covid.

He'll want to see some indication that the government is realizing efficiencies in the day-to-day business of running the government. There are ambitious plans to make commitments to fund the military and to support NATO. He's hopeful that we're going to see incentives to encourage private-sector investment, which is something Canada desperately needs to enhance our prosperity.

If we have an ambitious and well-thought-out budget, it could alleviate some of the pressure on the BOC to cut rates more aggressively. May shore up some support for the CAD as well; it's up YTD, but lagging all of its G10 peers against the USD.

Investing 101: Understand your investments

Warren Buffett said it best: “I never invest in something I do not understand.” Seriously, how many current cryptocurrency investors do you think actually know what they are doing? We always get customer questions on market-linked guaranteed investment certificates or principal-at-risk notes. Even with 40 years’ investment experience, we can barely get through all the documentation and risk disclosures that come with these products.

There are now leveraged single-stock exchange-traded funds (ETFs). There are leveraged ETFs where you are promised two or three times the return of some specified investment or index. You can buy ETFs that go up when the market goes down, or ones that go up if volatility increases.

If you can’t explain an investment to your 10-year-old, you are probably taking on too much risk.
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Markets are looking forward to the outcome. But we're seeing tensions elevating with US, China, and now Russia, and that will increase the volatility. Historically, the gold bugs like to see a little bit of chaos and global instability. That's what's partially driven the gold price to a record high earlier this week. Anytime you see moves like this in the market, it's normal to see a reversal later on.

If you're in the gold trade, nothing has fundamentally changed to derail that upward trend.

Does expect the year to end strongly. Political instability aside, we're seeing a lot of positives. There's a very strong monetary backdrop with interest rates coming down and inflation seemingly moderating. Also seeing fiscal expansion across many Western governments such as tax cuts in the US. In Canada, a record deficit is expected -- not always great over the long term, but in the short term that liquidity flows into the economy. 

Historically, when we see a strong first 3 quarters of the year it portends well for the fourth quarter (which is easily the strongest in any average year).

Those are the companies that are leading this market higher, and his team still sees it moving up. From the data centre side, we're hearing that leasing activity is accelerating. Some of the new models coming out continue to use more computes, which requires more chips and more data centres. Doesn't see anything derailing that over the next 3-6 months.

It's all about seeing the AI benefits eventually flow through to the corporate sector. We're hearing more and more positive data points on that every day. As adoption becomes a little more widespread, that's a whole new leg up for this trade.

It is always a concern. If there was going to be a repeat of the 2000 bubble, the data centre part is where you'd see that and then in semiconductors and right through the economy. 

But he's most focused on the use-case return on investment, and we're seeing that right across the spectrum. For example, BP credits its large oil discovery off the coast of Brazil to AI's helping them better target exploration. Shows how AI can have positive consequences for companies, and we're going to continue to see adoption increase over the next few years.