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

He likes the energy space because it's a large business and generates a lot of cash, but all natural resources offer value. Short-term he sees why some people expect weakness out of fears of a recession, which he feels may or may not occur. Countries like China are securing their own sources of resources, which is normal and natural and happened in the past in the West and Japan. Consider that Panama forced the closure of a mine despite that operation means over 5% of GDP and could face penalties.

Believes upcoming inflation data won't alter US Fed policy going forward. Huge dislocation between market pricing and US Fed communications (markets don't believe Fed). Thinks US Fed needs to take a hawkish position. If US Fed continues to lose credibility, it will have destabilizing effect on markets. Doesn't think US consumers are as resilient as media narrative is telling (sales volumes are down). Bottom end consumers are struggling (delinquencies are up). Due to consumer struggles, is a matter of time when interest rates are cut. Does not expect any more rate hikes. 

Expecting US Fed to nudge rates lower. US Fed facing difficult problem of trying to navigate a "soft landing" of the economy. Believes most aggressive tightening cycle in history will make it very hard for markets to land softly. Easier financial conditions do not make it easier for Fed to navigate economy. Would rather a hawkish position to stabilize economy. Historically, US Fed not able to handle inflation very well. 

Basic Investing Metrics: Price-to-Book (P/B):

P/B measures price-to-book value of equity. The calculation for P/B is the current market cap divided by the book value of equity. To derive book value of equity, investors must look to the balance sheet to determine the difference between assets minus liabilities. P/B has a slightly different interpretation, as it focuses more internally, on how the company is being priced by the market relative to its assets. A P/B ratio of less than 1.0 indicates that the company is being valued less than its equity and can be an indicator of undervaluation. A P/B ratio of 1.0, indicates that the stock is being priced at a fair value compared to the book value of the company.

P/B can be useful in identifying high growth stocks that are severely undervalued due to the company’s early stages. P/B can also be useful in analyzing capital intensive industries such as real estate and energy where earnings are not the primary indicator of current or future success.
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The Nasdaq was down 30% last year with no capitulation. It is now back to its 2021 levels on the strength of the Magnificent 7 and the rush of big techs to get into AI. It is up 4 times in eight years. Retail investors have done well buying what is popular and the Magnificent 7 are now at lofty valuations and more volatile. If you look at the full slate of stocks (not including the Magnificent 7) that represent 30 % of the index now, you will find better opportunities going forward.

Year end performance chase occurring as investors fear mediocrity, and pile into top performing stocks. Appearance of owning high flying tech stocks important to portfolio managers. Upcoming inflation announcement on Tuesday will be interesting to watch. If inflation rates continue to fall, and economy is strong - will be good for general investors. Currently there are lots of small cap names in Canada that present lots of opportunity.

Basic Investing Metrics: Price-to-sales (P/S).

The calculation for P/S takes a company’s market capitalization (number of shares outstanding x share price) and divides by its total revenue. The interpretation of P/S is quite similar to P/E as it tells investors how much the market values every dollar of a company’s sales. Similarly, to P/E investors typically want to target a low P/S ratio.

Although P/E is typically the most widely utilized of the three ratios, P/S displays some advantages. For example, if an investor is analyzing a high growth company that is operating at a loss or has recently suffered a setback in earnings, P/S can provide a better insight.
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Rodman was an exceptionally colourful basketball player, in the Basketball Hall of Fame despite never scoring more than 11 points in any one game. He was compelling as a player, because when you added him to your team, the team got a lot better. He rebounded at a level unseen in the NBA.

Thinking about this through the portfolio lens, you want to have things in your portfolio that are different than your stocks and bonds. Stocks are for when we have good global growth; bonds are for when we have those growth shocks. But we're missing something, as 2022 demonstrated. You need some commodities in there for inflation shocks.

When you add adaptive, non-correlated strategies like managed futures, and you add them in a size where they can impact a portfolio, they often provide returns in those periods that are difficult for traditional asset classes. Gives you a source of funds to sell so that you can buy other things when they're cheap. They say to "buy when there's blood in the streets", but buy with what? This strategy gives you that answer.

The managed futures he's talking about give direct exposure to commodities, not to the commodity-producing companies. Everything from soy beans to meats to gold, silver, oil, gas. You can go long or short.

You don't have to use just one strategy. 
 
Vanguard S&P 500 is a great place to start. If you're adding to a taxable account, consider HXS, which replicates the same index, but does it in a corporate structure, so there aren't expected to be any taxable distributions.

Why not equal weight rather than market-cap weight? Gives you broader exposure and away from the heavy concentration in the 7 largest stocks in the index. The gap between these 2 is very large at the moment, so market cap has outperformed. Might mean that future returns for equal weight are a bit better. But it's not "or", it's "and".

Might also think about ZLU, though it has underperformed the last couple of years. Low volatility was all the rage when we had some corrections. We might have some more corrective action in US stocks, Warren Buffett has a massive cash hoard, Stanley Druckenmiller's calling for 0% growth in US stocks for 10 years. Volatility is tempered with ZLU -- it will go down less in a correction, but up less too. You might decide to stick with this for the long term.

Gold trying to break through all-time highs. Gold exposure is very good. Precious metal provides more of a safe haven than the stocks themselves. Gold exposure gives you diversification in your portfolio if there's a market calamity. 

Writing calls benefits from a market that's slightly rising, flat, or slightly down-trending. In a strong upward-trending market, you're giving away a bit of your upside to get those premiums. In a tremendously downside market, you're not getting a lot of protection, and you don't recover as much on the rebound.

People entered 2023 a bit skittish. Fixed income raked in new assets every single month through the start of the year, which only started to turn this November.

Yields have been going up since March 2022. Some of the long bonds have been on a steep decline, some 40-50%, from the moment that rates started to increase. Despite that, investors have been piling in every month, hoping to catch that bottom in the bond market.

A huge 50% drawdown is something that equity investors are used to, not US or Canadian long-bond ETF investors. And these are fortress-like, ultra-long-term bonds that you'd expect to be the ballast in your portfolio. Problem was that two years ago, with rates at rock bottom, there was really nowhere else for them to go.

Throughout the year, equity ETFs have been pulling in meager amounts of assets month over month. We did see huge inflows into Canadian equities and US equities. A bit of a risk-on atmosphere took hold in November, even crypto was doing well and some tech stocks. It bodes well for 2024.

An oft-repeated question is "Is the 60/40 portfolio dead?" When he assists advisors, a diversified, multi-asset portfolio is the way to start. There are a lot of ETFs that can be used to set it and forget it. 

Normally, the 40% bond part of a portfolio should be a bit of a cushion, but in 2022 for the first time in 100 years, both bonds and equities declined precipitously. Those ETFs had their worst year on record (there weren't ETFs a century ago, but there were the DJIA and US Treasury markets from which to extract data).