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

You can't answer the question on the basis of the commodity itself. It depends on how you've constructed your portfolio, what percentage gold is in your portfolio, and how you invest in gold. Talk to your financial adviser.

His firm sees gold as a bit of an enigma. It's not really open to fundamental analysis, you can't really understand the value of gold, and this make them nervous. But they understand that it's driving forward on global macro forces. Central banks around the world are losing faith in fiat currencies, especially the USD. Geopolitical issues favour gold, and put pressure on the US dollar.

His firm owns AEM.

They're very well positioned and much better managed than in past cycles. Extremely interest-rate sensitive. What we need to see with interest rates is an unlocking of mortgages, which gets people to move. Americans refinanced at very low rates, but those mortgages aren't portable.

You could hold a stock like HON until the spinoff, but then you run into that tax issue again. You have to be careful. 

When you're issued new shares, it comes through in the US on a tax-free basis. But Canada often treats it as a dividend, so you're fully taxed on it and it can be quite hurtful. You have to do your research, which is often difficult as the CRA may not have issued a ruling yet.

Markets are temporarily overbought. We are coming into November, which often leads into the better part of the year. Though this summer has not been bad at all, so how do you use seasonality?

Yes, there's some potential short-term risk with the Trump-Xi meeting at the end of the month. That could cause some volatility. Maybe it'll cause a pullback, or maybe it won't. He doesn't know.

He's spent 40 years staring at stock charts. He knows the signs of a bubble, and we're in one. But that doesn't mean that it pops tomorrow. His firm plays the trend, but in the back of their minds is a certain level of caution.

In a nutshell, he looks for breadth getting narrow -- and it did, as AI is all the focus. Volatility gets low -- on the S&P chart, previous wild swings have gotten very tight. He also looks at sentiment indicators -- "the crowd" is becoming too enthusiastic, though not at the levels when bubbles actually pop (though they're getting there).

As long as the Fed is pushing, we're going to keep going up (don't fight the Fed). But at some point, there's going to be a day of reckoning.

For more insight, investors can go to his blog at valuetrend.ca and search for relevant articles.

There are a number of stocks that his firm is in and out of all the time. You can identify a swing pattern of stock moves on a chart in a tight range. Up and down, up and down, all within the range.

We'll see how many government workers were really out there collecting data, or were they guessing on a lot of items. Thinks we'll get a number that's a little bit higher than the FOMC would like to see, but not high enough that it would change their plans to cut interest rates the following week. 

Right now, the equity market is focused on pending rate cuts with the S&P 500 and various averages at all-time highs.

It has to be. We won't get those numbers, yet those are the high-frequency data points that really give us some insight into the faster-paced nature of the US employment numbers. The last survey that was done (before federal workers were furloughed) said that the US economy is growing with AI, and very little everywhere else.

So the whole economy is being pulled up by the building of data centres and capital expenditures in the AI sector, along with the ancillary follow-throughs. The consumer is doing OK at the high end, but at the low end we're seeing consumers really start to struggle.

No doubt that money's rotating. If you look at the quality of the rally in the last few months, the stocks that are going up the most are the ones that were the most heavily shorted. And that's not a high-quality factor.

Earnings are coming in and broadening out a little bit, but still largely concentrated in the leadup from the AI investment.

We're on the eve of a recession here in Canada, yet the TSX is at all-time highs. Hard to justify those 2 things. Depending on what kind of investor you are dictates how aggressive you want to be in moving your money around. It also depends whether your investments are in taxable or registered accounts. All those things are factors in what you do to protect your portfolio.

In this high-valuation era we've been in for some time now, he loves the buffer-style ETFs. They allow you to continue to participate on the upside (if there is upside). But they give you a good degree of protection during a market pullback. BMO has a number that trade in the US, and other providers are coming out with them. Great for people worried about valuations and a recession.

Another method is to put $$ into covered call ETFs -- boost the yield in your portfolio with something like ZPAY. It gives you a much higher income component as a guarantee into your return versus the price volatility of an overvalued equity marketplace.

Could also consider shifting assets into bonds. If we do get a recession, government bond yield will come down. A  lot of that's already reflected in Canada, but we have yet to see it reflected in the US Treasury market. So US Treasury long-duration bonds could be attractive.

But none of these measures are buy-and-hold. You have to be very active in your portfolio when shifting things around, if you're going to worry about a recession and try to time the market. It's the hardest thing to do, even for professionals; he's been doing it for ~40 years now, and hasn't figured out the secret sauce yet ;)

Likes the natural gas space a lot, there's an abundance in NA. It's one of the most efficient ways to generate energy in a less dirty way than burning coal, for example. Likes it as a transitionary, carbon-based fuel to power the world. The world's going to need a lot more energy what with AI and the electrification of the world in the coming decades. Nat gas will be a big part of that.

He wishes the Canadian government had invested better over the last decade so that we could distribute our nat gas resources to somebody other than the US, as the US is becoming increasingly difficult to deal with on trade.

Cockroaches in the Credit Market

Last week during JPM's earnings call, Jamie Dimon used that phrase when referring to some of the fraud that was recently in the auto loan space. There's always been fraud in markets. When he talked about cockroaches, he said that when there's one there's usually many. A lot of the private credit managers spoke up and said that there might be cockroaches in Dimon's neighbourhood, but not in theirs.

At the end of the business cycle everything seems great and wonderful, with markets at all-time highs. Larry brought along some ETF charts to follow along with and see when you need to really worry.

The first chart shows the total return of the high-yield bond ETF, HYG-N. The chart goes back to before the great financial crisis. That same chart also depicts the total return of VTI, the Vanguard ETF that represents the entire US stock market. You can see great gains there. But during the period of recession (whether the GFC or the very brief recession during Covid), you can see the shock to credit markets.

A second, related chart shows a white line representing the yield spread of high-yield (junk) bonds over their government equivalents. When that line rises significantly, it's correlated with weakness in equities. About a year before the GFC, that spread in high-yield bonds started to rise. Based on where it is today, we don't have that same sense of credit risk that we saw back in that period.

So, what does that mean? During Trump's tariff upset in April, the white line jumped towards 5%. So that's 5% above the yield of a government bond. Going back to pre-GFC, it was 15-20%; during Covid, it went north of 10%. So we're nowhere near that level of worry in credit markets. Dimon's comment might be a little bit premature.

He's also brought along a table from Moody's, which shows the average default rate annually all the way from AAA down to non-performing, C-rated bonds. If you add up all the junk bonds (BB, B, and all the C's), it's a little less than 9%. Once a company defaults, the recovery rate is ~40% (so if you lent them $1, you get 40 cents back). When you do the math, on average you could lose about 4-5% in junk bond investments.

One last chart, BIZD, represents the private credit markets. It's at a very important inflection point here. If that line breaks, it's telling you something.