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

They are still bullish on US stocks and the continuation of the cyclical bull market. There are two drivers. One is the AI investment cycle where demand is outpacing supply. Data from second quarter earnings show strong demand for industrial building centres. Technology will be transformational to the economy. Also with little indication of rising inflation the expectation is that the feds will cut rates 25 to 50 basis points. The US economy is deteriorating somewhat. Globally we're in a rate cutting cycle.

There were no past picks so he focused on health care in general and specifically. The space has been beaten down with a lot of unloved stocks. There is a hangover from the strong demand during Covid. The Trump administration is making changes on the regulatory front and meaningful reforms. It is a defensive space so there is better growth elsewhere in a bull market, so people move money out of it. 

UNH is affected by the sector. There is cost inflation on the medical device side so stability has gone down. The aging population is a tailwind but at a greater cost to the system.

Regarding Merk if you want to make a certain amount on drugs, a lot will disappear because of drugs coming off patent. He hopes they have more M&A deals or innovate internally. Innovation is positive for the industry. They will still have some valuable assets left when the regulatory picture clears.

In the US, everybody expects a minimum 25 bps cut if not 50 bps. Canada started cutting early, perhaps being the first G7 to cut. He's not sure if we'll keep suit, but we have cover now to keep going along with the US. 

It puts them in a bit of a bind with where we are in the economic picture right now. Some things are softening and supporting expectations of rate cuts, but we're also seeing some inflationary pressures start to build again. The Fed is notoriously late on things, but he thinks Powell is trying to be prudent right now. Thinks the Fed would rather wait, but the clarion sound is so shrill right now, they feel they have to cut.

This all started right after the US election with the threat of tariffs coming. Then early in February, he was looking at the futures, particularly the FX, and the CAD was just getting crushed. The CAD went on to recover.

With the tariff announcements, the prognostications were that we'd be in big trouble. That whole narrative got unwound. So all those people who were worried about it are coming in late to the market. If we look at the structure of the market right now, this is not the best time. Lots of technicals signalling caution -- September/October is historically weak, some indicators are at overbought.

This piling in is missing out on some of the returns we've seen since April and is trying to push in at the last minute.

That said, there's some sort of corrective environment in the offing. Whatever the nature of it is or how long, it's going to be bid at the lows and right after that.

Most of his portfolios are fully invested right now. He has no choice but to follow the firm's rules. So in the seasonal portfolio, it's 30% bonds -- they get in late summer and sell early October, as a routine every year. In the last few days, that bond position has done quite well. 

After 30 years in the business, there are some areas he just avoids because they never seem to make money. Transportation is one, with too many variables that make a positive return challenging. Airlines. Car makers, though modern car makers like TSLA and RIVN are a different kettle of fish, as they're changing the structure of the business.

There is a relationship between the commodity and the producers of commodity. Commodities and producers should go in the same direction. But it's always the producers that lead, because they're the smart people who know what's going on with that commodity, whether gold or oil. 

If producers are high and then start to roll over, but the commodity stays high, then you can bet the commodity will eventually roll over. And vice versa.

Sometimes it's like the advice you get from your mom or your grandma, like put your coat on. Use common sense principles. You've done really well on a stock, so what are you waiting for? If a stock's grown so big in your portfolio, and you're trying to time when to do it, just the fact that you're asking the question means it's probably the moment.

It comes down to portfolio management, rather than a fundamental or technical analysis. 

Generally, a confirming indicator. So when you get a lot of volume but you have bad news, and it holds, that's positive. If you break down on a lot of volume, and there's no place it holds but keeps going down, then that's a negatively confirming indicator. Or if you break out of a congestion area with a lot of volume, it means you have a lot of commitment.

So it's quite imporant.

Very prone to geopolitical stuff. US is pushing hard on India to get them to stop buying Russian oil.

It's been kind of lumpy. So producers don't go out and look for new mines or wells. Any bit of upside out of the lumpiness gives you a positive move. Once the producers (run by in-tune, smart people) start to act a bit better, then you know the commodity will follow.

When Investors Like Dividends: Management Discipline

A company that pays a regular dividend has to have cash flow available for the payout, every single quarter. Knowing that investors are expecting a dividend, executives of the company have to show discipline. They cannot just randomly go on an expansion or acquisition spree without consideration of the cash flow requirements of that dividend, every three months. When an executive team looks at deals, they need to consider the long-term consequences. Any deal needs to be financed properly in order to make sure the current dividend can be paid. Any deal needs to be a good deal so that it does not impair the company’s dividend-paying ability in the future (and, preferably, allows the company to increase its dividend). Sure, non-dividend paying companies may have more capital available for growth, but this doesn’t mean the expected growth is going to pan out. We think this point is particularly valid at economic peaks, when confidence and stock valuations are high. We have seen many executives go on spending sprees at the exact wrong time (in hindsight). Companies paying dividends just seem to have more self control during ebullient times.
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Yes. Over the last 2 quarters, he's been surprised by how much tech capex has driven GDP growth. In the last quarter, it was more important than personal consumption, which is a huge part of the economy. So we have a stock market that depends on tech capex, and an economy with increasing dependence on tech capex. He finds that a bit worrisome.

The one thing that doesn't matter in the short term for markets to go up is valuation. Greenspan talked about "irrational exuberance" in late 1996. Markets continued to go up in 1997, 1998, and 1999, until it all went pear-shaped.

There's been a ton of AI investment. But the poster child for that, OpenAI, makes no money, though there are beneficiaries of that spend. Ultimately there has to be a return on investment. Without that, effectively we're in a bubble. History tells us that roughly 3/4 of innovations over the last 150 years have resulted in some sort of bubble. Why would we expect AI to be any different?

The narrative is still very strong, but we haven't seen a return on investment yet. Companies are throwing money at AI, and that will continue for a time, until it doesn't. At that point it could be quite nasty.

Last he saw, probability of a rate cut was ~80%. Almost a shoo-in for 25 bps cut. Last 3 months have seen a sea change with jobs market very poor and housing market moribund. Inflation seems to be under control.

This would be alongside the Fed Reserve doing the same, or maybe even more.