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

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. 

Sees $80 oil before too long. Demand coming in much stronger than consensus believes. Everyone's expecting the largest supply-driven glut in history, but he doesn't see that. Marginal increase in barrels from US shale is coming to an end. Believes OPEC has fully normalized its spare capacity.

Sentiment is uncertain in the short term. At some point in 2026, people will look beyond that to a world where we've run out of OPEC's spare capacity, we've lost the largest source of incremental barrels, and the IEA just revised peak demand to 2050 and beyond.

It's something he's watching. It's the biggest competitive threat to Canadian oil. The US gulf coast was geared to produce our oil; but if there are substitutes, you could argue for a wider differential. 

It behooves us as a country, for our largest export, to build out more pipelines as a strategic imperative. It's a product that everyone on earth uses, and increasing capacity would benefit hundreds of thousands of Canadians. How did this ever become so controversial?

Not really. But perhaps it might be if we can rely on it, and he doesn't know that we can. It'll be  an incomplete set of data. Might be useful to confirm some of the other anecdotal data we've seen from ADP payrolls every week, for example. Numbers from ADP suggest the labour market's still soft. 

Optimism recently about an uptick in the US economy. Look at the Atlanta Fed GDPNow forecast, which has Q3 running pretty hot right now. A lot of people are starting to forecast into the end of 2026.

A number of factors are at play. See today's Educational Segment.

Investors at home aren't going to run out and sell their portfolios because some hedge fund or private equity manager sold some stock. It won't be until they feel some pain, but that's always too late. Market's already down 15-20% from the high, and that's when they feel they need to do something about it.

This speaks to the fact that it's impossible to time markets with any precision. Typically we react the wrong way at the wrong time -- buying when you should be selling, and selling when you should be buying. The euphoria in markets today, based on sentiment surveys out there, is pretty astronomical. It's probably the wrong time to be that optimistic.

Absolutely. Still in very early innings of what AI means for the marketplace. NVDA's not a $25 stock anymore. Many of the plays that are ancillary to the AI space have gone up 10x, 20x, 50x YTD. Very vulnerable to a shock of bad news. 

Seeing a bit of concern creep into markets today. But by no means is it widespread at the moment.

Over the past 10-15 years, with the 0% interest rate policy, there was a growing dialogue in the marketplace that multiples should be higher because of the cheaper cost of capital. That argument was valid.

You'd argue today that if inflation is more of a consideration than it has been for the last number of decades, and wage pressures are up, then the cost of capital should be higher. And so the multiples should be lower.

Is AI disinflationary? Will it add to productivity so we get better and more robust economic growth? The answer is a little bit yes, and a little bit no. Productivity means that perhaps fewer people are working, which means lower aggregate income for everybody.

He'd argue that valuations today should be somewhat higher than historical norms. If the historical norm is 16-18x, and we're trading at 25x, that's a significant multiple above where fair value would be. At an index level, with tech being a bigger component, the multiple for the index should be higher. But not as high as we're trading at today.

If you look at the risk of a correction, and we're trading at 25x, but you say fair value might be 20-21x, then that's 1000+ points lower on the S&P from where we're trading at today.

He's been concerned about valuation, but valuation alone is a terrible timing tool. He's worries about a weaker economy, less globalization being inflationary. Lots of considerations that tell him to be very cautious at the moment.

Will a correction be a month from now? Three months? A year? That's the part that's hard. Can't time markets with precision. We're in an environment where a more material correction can definitely take place. For most people, staying fully invested with the right asset mix is the right long-term thing to do to remove the emotional part of selling at the wrong time.

Through his lens, prudent to have some reserves at this point. Look at Berkshire Hathaway, which has record cash positions on hand probably so they can take advantage of a correction when it eventually happens.