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A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Inflation. This is a lot like the early 1950s, where there was a mismatch in allocation of capital. Big surge in demand, tight supply, and 2 years of elevated inflation. But fairly quickly, things came back into line. Some rate hikes, mild recession, but it kicked off a great decade in the economy. That was the beginning of the last reflationary cycle. After a couple of years of inflation, things came off the boil, and we had steady growth. Now, transport costs have come down, some commodity prices have come off, and supply chain issues will slowly get fixed. We saw a durable low in June of this year.
COMMENT
Markets interpreting inflation. Some parts of inflation will be a little more sticky. The market cares about the change in the rate of change. When things are accelerating to the upside, inflation scares everybody. When it starts to decelerate, people can start to look beyond it. The market is looking around the corner and sensing that may be the case.
COMMENT
US healthcare. One risk is that economic slowdown is more significant than people expect, so you want defense in your portfolio. One view also is that things will repair more quickly than people think. He has a barbell approach with some defense, including healthcare. Healthcare has been one of the best performers YTD, as it's less economically sensitive, and the biggest industry in the US.
COMMENT
Food retailers and portfolio construction. Fan of the grocers. He owns Loblaw. It's not popular, but when there's inflation, the food retailers tend to take an extra price, which protects them from inflation. He also owns WN. These fit on the defensive side of the barbell. On the other side are the more value-driven, economically sensitive sectors like industrials and materials. Important to have both in your portfolio right now, as there's still some economic uncertainty out there.
COMMENT
What's catching your attention? Inflation numbers. Happy with the numbers today. He thinks inflation peaked in Q2. Today's number confirms that, though there's still more to go. So much will be driven by energy prices, which are hard to forecast. He'd like to see them stay low for a while in terms of the inflation outlook, as that would be really bullish for the market overall.
COMMENT
Supply shortages persist? Yes, but we hit peak shortage in Q1. Semiconductor situation is looking better as we move through the year. Commodity prices have fallen back, perhaps as fear of shortages and political risk dial down. In the auto sector, one of his holdings, LNR, reports tonight, and he expects encouraging news on the supply front that will drive new auto production in the back half of the year. All that will help with shortages going forward.
COMMENT
Focus for an income portfolio? High-yielding opportunities, mostly focused on the Canadian market. There are lots of great small- and mid- cap, Canadian companies yielding 5-6%. Some of those are in energy, like ENB or WCP. Even in financials, POW or BNS, their 5+% dividend yields are attractive given the market.
COMMENT
Oil & gas stocks down - sell or hold? Commodity stocks are volatile, with prices difficult to forecast. They always look their best when the price point is high, but now things are a bit choppier. Oil stocks are still attractive value. Capital spending is much more disciplined, debt's been paid down. He'd stick with them. The economy seems to be a bit more resilient than the pundits predicted. Still good for oil and energy. Worst case would be a big recession, with demand impacted. He doesn't see that scenario. See his Top Picks.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The Effects of Inflation. Inflation, by definition, can be described both by as an erosion of the purchasing power of the dollar, or as an increase in the price of goods and services. By investing in the financial markets, individuals can earn a return over the long-term that is above the rate of inflation, and thereby having a low time preference and increasing their wealth after the effects of inflation. We can see that if an individual held one US dollar from 1988 until the present, it would provide that individual with ~$0.40 in purchasing power in today’s terms. Similarly, one Canadian dollar held from 1988 would be worth roughly $0.50 today. Conversely, one US dollar invested in the S&P 500 in 1988 would be worth ~$6.0 (after the effects of inflation) in purchasing power today, and one Canadian dollar invested in the TSX in 1988 would be worth ~$3.0 today. Unlock Premium - Try 5i Free
COMMENT
Today is what peak inflation looks like. Today's CPI number of July was lower than expected and the indices roared by 2%. The rally was across the board from Microsoft to Disney. We're at peak inflation because commodity prices have been collapsing, including oil. Also, supply chains are clearing up. In fact, there will be gluts in products from washing machines to houses. But those gluts will lead to layoffs.
COMMENT
Oil analysis by technical analyst Carley Garner Garner predicts a crude oil bust down the road. OIl prices exploded because of the Russian war. But Russia has been able to sell oil elsewhere, namely China. Now, the U.S. rig count is picking up. Crude in the low-90s is back to historic, pre-Covid levels. $60 would be a floor with low-$90s as resistance. Expect a ton of volatility, but long term oil will be lower. That said, there will be a short-term bear-market bounce by $10-12. Large oil speculators have already unloaded their net-long positions. So, Garner sees a short-term bounce, based on historical patterns. The bounce could happen this fall into October. At $87, oil will bounce--and that has just happened--to up to $102. BUT after this bounce, oil will fall. Use this short-term strength to lighten up on your oil holdings.
COMMENT
The commercial software stocks have gotten too cheap. So many are unprofitable, but private equity is starting to buy them out and take them private, so there is something to these companies. They traded at 8x sales in 2015, 19x in Nov 2021, but now only 7.5x. The long software nightmare be over, but stock with companies that make money.
COMMENT
Three things are happening at once: the lingering pandemic, the Russian war, and inflation. He isn't as worried about inflation as some, that it's not as persistent as some fear. Why? Supply chain snarls and commodity panic saw oil and grain prices go to the moon. The commodity push on inflation is over, but will the U.S. employment raise wages so that it prolongs inflation? The Russian-Ukraine war is a total wild card, how it will effect natural gas this winter. It's tragic and who knows when it will end?
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