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

Investing 101: The Impacts of Inflation

Starting with cash, which in a savings or GIC accounts, can be termed as short-term interest-bearing instruments. As short-term interest rates adjust with expected inflation, such securities can earn a floating real rate. Such-term interest-bearing instruments are considered zero-duration and inflation-protected assets, and therefore are attractive in a rising rate environment.

Moving on to bonds; rising inflation leads to capital losses as bond prices decline. If inflation remains within an expected range, short-term yields rise/fall more than longer-term yields. However, if inflation moves out of the expected range, longer-term yields rise/fall more sharply. The inflation jump recently seen was out of the expected range, but expectations have adjusted quickly.

Coming to our favorite asset class, equities; if inflation stays within the expected cyclical range, there is little effect on stocks as the market prices in expectations fairly quickly and companies can raise prices in-line with inflation to some degree. Unexpectedly high inflation might make central banks take action to slow down the economy by raising interest rates, which is what affects valuations of high-growth and highly leveraged companies. High inflation benefits those companies that can pass on inflation, which generally tend to be of consumer staples, financial and industrial sectors.

Lastly, for real estate assets, if inflation stays within an expected range, rental income and property values rise with inflation. On a positive note, higher than expected inflation leads to high demand for real estate, and vice versa when deflation occurs (opposite of inflation).
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Working out better than expected. But it'll be a bit of a tough road as time goes on. A lot of what Canada does and sells is under pressure and likely to remain that way for some time. 

Tomorrow's the deadline, and he doesn't think we'll have a new deal. Get used to it ;)  Trump seems adamant that there will be no extension, and he seems to be taking a pretty tough stand on Canada.

Definitely uncertainty out there, which is surprising when you see that markets are at all-time highs in both Canada and the US. 

But he looks at the market long distance from an options perspective. So he likes the uncertainty, as it keeps both options prices and implied volatility higher.

He couldn't tell you. His firm has maintained pretty cautious optimism. Businesses have to adapt to whatever the market throws at them. Investors have been more optimistic than he would have thought.

He's out there still trying to find value and maintain the positions that haven't gotten too extended.

He wants companies that are trading at attractive valuations. PE is not the be all and end all, but it's definitely where he starts his analysis. Both META and MSFT had pretty good numbers this quarter and the stocks are doing well today. If you plan to own all of them and want to buy more, then buy the ones trading at cheaper valuations. 

Should always be treated as capital gains if you're selling options, whether in Canada or the US. There will just be some difference in the currency when calculating what those gains and losses are.

There are some strategies you can use, though it might be a longer conversation. His team has recorded some webinars on this topic, which can be found on their website.

If you own a stock and it goes up, you're making money at 1x (if it goes up $1, you make $1). There's something called a 1x2 call spread. With this strategy, you buy a call option as well, and then sell 2 calls at a higher strike. What you can do is pay for the call by selling the other 2, so your net cash outlay can be zero. Between the window of the call that you bought and the 2 that you sold, you actually make money at 2:1. Above that level, you stop making money. This method could, potentially, get you back to break-even more quickly.

It maintains the same downside. If the stock keeps going down, you didn't pay any money to put the trade on, so you're at 1:1 on the downside.

The majority of the time, he starts with PE. You want companies that make money. He doesn't take a lot of chances in speculating where something will get to. 

From there, another thing to look at is growth; doesn't want a company with dwindling earnings. 

Precisely. This has got to be one of the most-hated rallies of all time. Since 2019 we've faced a global pandemic, war, inflation spikes, rates hikes, tariff tantrums, and widespread geopolitical instability. Yet global economies remain resilient and robust, while investors are reluctant to embrace this rally. Strange.

Particularly in Canada, the word "tariff" is hitting home. He believes the skepticism is misplaced, as there are underappreciated tailwinds. We have strong household and corporate balance sheets, and there's potential for a pivot to a dovish monetary policy. These things can surprise to the upside.

Starting to see tariffs work their way through negotiations. The lack of clarity is being cleared up. Layer on top of that the accelerating effect of AI, which can both increase productivity and exert a deflationary force across industries. The long-term case for growth becomes pretty compelling. Odds of a recession are overstated. 

You have pretty unprecedented amounts in money market funds sitting on the sidelines. It's true in Canada, and in the US that amount is $7T. Those funds are collecting the yield, but if yields were to drift lower then those assets would start to flow into risk-on assets rather than risk-off assets. This is where he thinks most people are under-anticipating the opportunity that things might actually work out better than they expect.

It's an under-owned bull market. 

If things start to resolve positively, it would seem that many investors are underexposed. This market has been a lockout market, not letting people get in. Pullbacks have been very short and have prevented folks from buying the dip. This situation is probably going to continue.

In Canada, unless it's a corporate-class-structured ETF, it will distribute the income and capital gains every year.

In the US, there's a different tax structure. They wash the gains out through market-making, and you don't get the capital gains distributions. Instead, the unit value grows; upon sale, you report that capital gain. This is an advantage (not very well understood) that Canadians have in buying an American ETF. In Canada, the corporate-class ETFs tend to do the same thing.

Many times, the fees of an ETF in the US are lower. But not by much anymore, and it's not always the case.

If an estate is very large, owning US securities can subject you to some estate-law rules. But the estate has to be pretty large for that to happen.

Investing 101: Canadian consumer confidence

Canadian consumer confidence measures the personal financial situation and forward six-month financial situation of Canadian consumers as it relates to household or other purchases, job security, ability to invest, and others. An eventual return in consumer confidence would signal positive developments for the economy and financial markets. 
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No, it's stock-specific. AZN reported a beat and raise today, for instance. So is Novartis. Gilead in the US is holding on well.