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

Investing in AI -- Bull Case vs. Bear 
He came across a new index put out by a group called Silicon Data, which tracks the cost of LLM tokens. In recent weeks and months, there's a high correlation between the cost of the tokens and cheaper alternatives becoming available. Updated daily. Larry's provided a link to this index in his blog.

In general, buy the dip. We're in the early, early stages of what's going to be a multi-decade bull trend. 

Lots of talk about AI bubbles, so he's gone back to look at three of the stock darlings of the late 1990s. At one point, Nortel was over 35% of the Toronto 60 Index. We know what happened there. CSCO and INTC are still around. Pre-crash returns were in the magnitude of 1000% and 2000%. Today's AI stocks have run up 50% and 80%, so we're nowhere near the intensity of the dot-com bubble.

Lots more to come. Be comfortable buying the dips in AI names, but not sure he'd do that today. Thinks there's more correction risk here. But if we get back to where we were a few months ago on some of these names, it'll probably be a good opportunity (especially if you feel you've missed out).

Nobody knows when the Iran conflict is going to end, but the market tends to overlook these geopolitical events if not the price of oil. Generally speaking, markets have been trending higher and doing very well in light of this geopolitical uncertainty. 

The less stabilizing part of the market is the discussion around AI and how long that trend will persist. When oil moves $30 a barrel seemingly every week, this sector tends to get overlooked.

It'll take a long time to figure out whether companies are overspending or not, and whether they'll be able to monetize those investments. These companies will continue to plow money in, and they don't really have a choice at this time. Time is a big competitor, and North American companies really have to stay ahead of the curve.

The spending is a sustainable factor in the market, and has been lifting a lot of the market recently. There have been a lot of investment flows in a lot of different sectors, and that's been very helpful to capital markets.

Yes, that's what his team sees. One pushback they get is that the bull market's lasted for 3.7-3.8 years now, when is it going to run out? Bull markets tend to last a lot longer than people think (average is ~5.5 years).

There's a very good backdrop right now. The economy's doing quite well, and so are companies. We're getting through Q2 earnings, and the earnings have been very strong. Despite oil prices being all over the map, and being high right now, companies are still performing very well. In that environment, markets can continue to do well for a while.

It can happen, and GOOG is a good example of that. It had a very good quarter on topline and bottom, but it's increasing the capex spend. Investors see some uncertainty around that. Generally speaking, the volatility will come out of the stock and it'll start to move higher again.

No, just certain types. Supply chains and logistics are areas he's avoiding.

Right now with all the uncertainty around interest rates, his firm is short-duration fixed income. Doesn't look as though Canada will raise rates. 

Note that income from fixed income is fully taxable. If you really need to be in fixed income, he advocates corporate bonds at the short end, and probably investment grade. If you're comfortable, some high-quality companies may not be investment grade but give you a slightly higher yield.

Preferred shares are a good way to get income through dividends. Stable, though not as stable as fixed income. Yields of ~5-6% are roughly double what you're getting on fixed income right now, and those yields are tax-advantaged.

Yes, US bonds offer higher interest rates today, as the Fed funds rate is higher than the BOC overnight lending rate. But you're running two risks.

One is that you have currency exposure. The CAD is trading at the low end of the range, and that dynamic might turn. The other thing is that the Fed may be in a better position to raise interest rates, and so the price of your bonds will come down.

He's stayed away from companies he thinks will be potentially threatened by CUSMA negotiations. That includes trucking, Canadian manufacturing, lumber, and rails. Nothing's likely to happen in the near term, but Trump can do anything at any time. 

He uses fixed income as a way to manage risk. He's sticking to the short end of the curve (4.5-5 years max). He doesn't want to buy a long-duration bond and get into a volatility situation, where the component of the portfolio that's supposed to be the stabilizer gets too volatile.

Likes the ladder approach. He buys actual bonds; when that bond matures in 3 years, you know you're going to get your par investment back. The issue you get into with the short-term ETFs is that you never actually get to the maturity date, as the duration is maintained at the 3 year (for example) timeframe. If things go awry, he likes the thought of just holding his bond and getting his $$ back in 3 years.

He doesn't own any of the pure-play oil producers right now (though he does own TOU). The reason is the volatility we're seeing. His team plays energy these days by owning ENB, and some of the smaller midstream companies like PPL and GEI. He likes their stability. 

ETFs are a decent way to play the sector. You get both liquidity and diversification. Look at the MER and make sure you're not paying too much. Good providers are iShares, Global X, and BMO -- go to their websites and look at the suite of offerings. Many of them just passively buy the index.

He owns a little bit, high-quality names plus 1 aspiration company, only 3-5% total. More than 50% of returns for the TSX last year was driven by gold (and, to a certain extent, base metals). He'd put on a small position, and an ETF is the way to do it. Doesn't think central banks are finished buying.

If the Fed raises rates, there might be better options (such as yield) than buying gold. So gold's checked back.