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Last week, we saw the ADP (US payroll) come out. ADP cuts paycheques, so is accurate, and ADP claims net job losses in June. Trump can yell at Powell all he likes, but it will do nothing. Interest rates won't move until there is economic clarity. Not today, but markets are growing desensitized to trade news. Today, President TACO is pounding his fist on the bigger numbers. The Big Beautiful Bill was signed into law, and Big Beautiful Deficits are coming, and he's got to pay for them. Deficits are a headwind to long-term growth. Trump needs revenues, so he's pushing tariffs hard. Uncertainty is very high, while markets are priced to perfection at all-time highs. He was supposed to sign 90 trade deals by now, but there are two frameworks for trade deals, instead (UK and Vietnam). Headwinds are building. The BB Bill offers very little net-new stimulus in tax cuts. The bill just continues what he started in his first term. Rather, there's a lot of spending.
Likes it, but the question is, Do you want to be in US banks? If you expect us to go into a hard landing, US banks won't do well. Also, is this ETF taxable or not? Makes sense in a registered account. But after this recent rally be more defensive. Don't add money to banks now. It comes down to timing.
It's about timing. About 18 months ago, he didn't like the valuation in the public markets and so was investing his assets into private equity. Then, he switched back to public markets right before Trump flipped the tariff switch in April. He caught the market bounce of April 8. He likes the lower volatility of private equity, but you give up liquidity.
The U.S. dollar volatility: There's been lots of talk about it. Year to date, the USD is -11%, but in the big picture, this is noise. The USD is basically where it was in the early 1970s. Historically, the USD spiked in the mid-1980s which led to the Plaza Accord to strengthen other currencies which lowered the too-high USD, and in 1999 when the Euro was created. That said, the USD now does matter. The USD's depreciation, plus the inflationary impact of tariffs that's coming will negatively impact inflation. The Fed pausing rates makes complete sense. The positive side: a weakening USD is positive for earnings, particularly for these sectors (many revenues from abroad): tech, materials, communication services and consumer staples. Look for what companies say about inflation and tariffs during earnings season.
PWR is a leading specialty contractor that offers infrastructure solutions for electric power, oil and gas pipelines, and more. It has recently been rising due to increased electricity demand from AI/data center buildouts. It is a $57B market cap, with strong forward sales and earnings growth estimates, and rising analyst estimates. Its margins have been expanding nicely, cash flow generation is strong, and it has a decent buyback policy. Valuations have risen to about 36X forward earnings now, and we might expect some price consolidation in the near-term. Valuations can continue to extend from here, but we would like to see earnings grow at a quicker pace to justify more than 36X earnings. We would be OK buying, and we like it around $360 to $370.
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The acquisition of Novari is on the expensive side, but investors seem comfortable. VHI hopes to see it as a 'strategic' deal, which will expand it expand globally. Margins and other data were not provided, so we can only assume VHI believes in the future prospects here. Novari will add about 15% to VHI's annual revenue, pushing it above $100M. VHI also has a premium multiple so can justify the deal that way. We think it looks OK and would give management the benefit of the doubt here.
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The sector may struggle a bit as the US goes through its current economic transition. Lower interest rates would help here, and so far job numbers have been decent. But depending on tariffs and inflation, there are some risks to consumer spending. SWIM is quite small at less than $1B market cap. Shares are up 156% in the past year and trade now at 76X earnings, certainly on the 'pricey' side of things. But it is well below its $19 2021 IPO price. Debt is very high at 5X cash flow, and it has lost money since inception. A small profit is expected this year. Insiders own 11%, Pamplona Capital owns 45% and the short interest is 11%. The last quarter was solid, but it has missed estimates about 50% of the time. Recent trends are good, but considering its debt, valuation, small size and overall risks, we would not give it a huge endorsement today.
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Market Update:
Canada’s population growth slows in the first quarter of 2025, with almost no growth, marking the sixth consecutive quarter of slower population growth. On the other hand, the U.S. Federal Reserve kept interest rates unchanged in June in the range of 4.25 – 4.5 percent, while keeping a projection for two rate cuts in 2025. The Canadian dollar was 72.85 cents USD. The U.S. S&P 500 ended the week down 0.5%, while the TSX was down 0.2%.
Consumer discretionary and real estate slid by 1.6% and 1.0%, respectively, while industrials and consumer staples gave up 0.7%, each. Materials and financials ended the week mostly flat, while energy edged up by 2.6% and technology gained 0.3%. The most heavily traded shares by volume were National Bank of Canada (NA), Tourmaline Oil Corp (TOU) and Keyera Corp (KEY).
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Tariffs do matter: they raise prices almost immediately. If we slap a 25% tariff on all the autos the US imports from South Korea and Japan, that means about 17% of all cars sold in the US last year. This means a 25% price increase on one-sixth of the US auto market. That's on top of EXISTING tariffs on everything from South Korea and Japan. That means inflation and why the indices fell nearly 1% today. A few months ago, that would have been a deeper decline. Remember that the US has a big, persistent trade deficit with South Korean and Japan. So, 17% of the cars in the US market will be priced out of the market. That's good news from US carmakers Ford and GM, but both their stocks fell today. Even after today's pullback, the market remains overbought. These tariff letters by Trump are feeling like they came from Borat--you aren't sure if they hold up to scrutiny, like he's picking these tariff numbers out of a hat. Do we take them seriously? Even if a US company pledges to shift production to the US, it doesn't protect them from tariffs (i.e. Apple). Who knows what will happen next? He is taking profits on some stocks.
